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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended DECEMBER 31, 1996
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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
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HOLLYWOOD CASINO CORPORATION
HWCC-TUNICA, INC.
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(Exact name of each registrant as specified in its charter)
DELAWARE 75-2352412
TEXAS 75-2513808
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(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
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(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code): (972) 392-7777
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Securities registered pursuant to Section 12(b) of the Act:
NONE NOT APPLICABLE
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Title of each class Name of exchange on which registered
Securities registered pursuant to Section 12(g) of the Act: NONE
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 the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. YES X NO
______ ______
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Hollywood Casino Corporation's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates
of Hollywood Casino Corporation, based on the closing price of such stock on
March 25, 1997, was $45,917,944. For the purposes of this computation, all
officers, directors and 5% beneficial owners of Hollywood Casino Corporation are
deemed to be affiliates. Such determination should not be deemed an admission
that such officer, directors and beneficial owners are in fact, affiliates of
Hollywood Casino Corporation. As of March 25, 1997, 24,759,968 shares of Class
A Common Stock, $.0001 par value per share, were outstanding.
As of March 25, 1997, 1,000 shares of Common Stock of HWCC-Tunica,
Inc., $.01 par value per share, were outstanding, all of which were held by an
affiliate of HWCC-Tunica, Inc.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents are incorporated by reference into
the indicated part or parts of this report.
(1) Definitive proxy statement filed pursuant to Regulation 14A in connection
with the Annual Meeting of Shareholders to be held on May 29, 1997 -- Part
III.
HWCC-Tunica, Inc. meets the conditions set forth in General
Instruction (J)(l)(a) and (b) of Form 10-K and is therefore filing this Form
with the reduced disclosure format.
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PART I
ITEM 1. BUSINESS
GENERAL
Hollywood Casino Corporation ("HCC" or the "Company") develops, owns
and operates distinctively themed 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") approximately 40 miles west of downtown Chicago, and a casino
and hotel complex in Tunica County, Mississippi (the "Tunica Casino") located
approximately 27 miles south of Memphis, Tennessee. Both the Aurora and Tunica
facilities feature the Company's unique theme (the "Hollywood Theme"), which
incorporates the excitement and glamour of the motion picture industry by
utilizing designs inspired by famous movies, displays of motion picture
memorabilia and movie themed gaming, entertainment and dining areas. The
Company is also 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 which owns and operates
the Aurora Casino. HCT is a Texas corporation formed by HCC during 1993 which
owns and operates the Tunica Casino. Prior to December 31, 1996, the Company
also owned approximately 80% of the common stock of Greate Bay Casino
Corporation ("GBCC," formerly known as Pratt Hotel Corporation). 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. GBCC's principal assets were the Sands Hotel and Casino (the "Sands") in
Atlantic City, New Jersey and management and consulting contracts with the
Aurora Casino and Tunica Casino. GBCC's common stock is listed and traded on
the American Stock Exchange under the symbol GBY.
GBCC's subsidiaries were all indirect subsidiaries of HCC prior to the
distribution of GBCC's common stock. PPI Corporation ("PPI"), a wholly owned
subsidiary of GBCC, owns various entities related to GBCC's Atlantic City gaming
operations. Subsidiaries of PPI include: GB Property Funding Corp., the issuer
of $185 million of 10 7/8% First Mortgage Notes, due 2004 (the "10 7/8% First
Mortgage Notes"); PRT Funding Corp., the issuer of $85 million of 11 5/8% senior
notes, due 2004 ("the PRT Funding Notes"); New Jersey Management, Inc. ("NJMI"),
which manages the operations of the Sands; Pratt Management, L.P. ("PML"), which
manages the operations of the Aurora Casino; Pratt Casino Corporation ("PCC"),
which earns consulting fees from the Tunica Casino; and Greate Bay Hotel and
Casino, Inc. ("GBHC"), which owns the Sands. Subject to regulatory approval and
effective as of April 1, 1997, HCC will acquire the general partnership interest
in PML from PPI.
The Company's casinos, as well as the Sands, use casino information
technology developed by Advanced Casino Systems Corporation ("ACSC"), a
subsidiary of GBCC. Such information technology includes ACSC's table game and
slot monitoring systems that provide the casinos with the ability to capture and
maintain information necessary to track and rate patron play through the use of
a casino players' card. These systems provide management with the key
characteristics of patron play as each slot machine and table game pit is
connected with its data base monitoring system. When patrons utilize the casino
players' card at slot machines and table games, the information is immediately
available to management and allows management to implement marketing programs to
recognize and reward patrons during their visits to the
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casino. Such promotions and complimentaries include free food, admissions,
retail merchandise and sweepstakes giveaways. Management believes that its
ability to reward its higher value patrons on a "same-visit" basis is valuable
in implementing its strategy of developing a loyal patron base of premium rated
players. In addition, ACSC's systems allow the casinos to monitor, analyze and
control the granting of gaming credit, promotional expenses and other marketing
costs.
The principal executive offices of HCC are located at Two Galleria
Tower, Suite 2200, 13455 Noel Road, Dallas, Texas 75240, telephone (972) 392-
7777.
THE AURORA CASINO
The Aurora Casino commenced operations on June 17, 1993 and is one of
only four casinos in Illinois now operating within 50 miles of downtown Chicago.
The Aurora Casino currently consists of two multi-level riverboat casinos
containing an aggregate of approximately 32,100 square feet of gaming space with
approximately 975 slot machines and approximately 56 table games. The Aurora
Casino also includes an approximately 64,000 square foot land-based Pavilion
through which patrons board the facility's two riverboat casinos via enclosed
passenger loading ramps. The highly themed Pavilion features a glass-domed,
four-story atrium with two grand staircases, two upscale lounges, two gourmet
restaurants, a large buffet and a diner. Patrons of the Aurora Casino are
offered valet and self-parking in two multi-level parking garages that
accommodate approximately 1,340 cars, as well as other available surface
parking.
Since a majority of the facility's patrons arrive by car, the Company
completed construction during 1996 of a new five-story, approximately 500-space
parking garage directly across the street from the Pavilion designed to enhance
access to the Aurora Casino. The parking garage is connected to the Pavilion
through a climate controlled tunnel. The new structure also contains
approximately 1,500 square feet of retail space, the "Hollywood Casino(R) Studio
Store," a highly themed store selling logo items licensed from motion picture
studios as well as first-run movies on videocassette. See "Properties - The
Aurora Casino".
In order to enhance the operating performance of the Aurora Casino,
the Company completed a major expansion and renovation of the Aurora facility in
1995. The first phase of this project was completed on May 10, 1995 with the
opening of a 10,000 square foot expansion of one of the Aurora Casino's
riverboats. Management believes that prior to the expansion, the Aurora
Casino's gaming facilities were capacity constrained during peak periods, which
limited the property's operating performance. The casino expansion increased
the Aurora Casino's gaming space by approximately 45% to the current 32,100
square feet, allowed the facility to offer patrons the maximum number of gaming
positions permitted by Illinois gaming regulations in a spacious, highly-themed
setting. The Company also completed a renovation of the Aurora Casino's second
riverboat casino in September 1995 which included the installation of new
interior decor more extensively utilizing the Company's Hollywood Theme and the
reconfiguration of gaming areas to provide a more spacious and comfortable
setting.
Business Strategy. The Aurora facility's primary market is the
affluent suburbs north and west of Chicago. Based on a sampling of its patrons,
the Company believes that the casino drew approximately 40% of its patrons from
such suburbs during 1996. Approximately 7.1 million people live within a 40-
mile radius and approximately 11.6 million people live within a 100-mile radius
of the Aurora Casino. The facility is easily accessible from major highways,
can be reached from downtown Chicago in approximately 50 minutes by trains which
average 20 trips a day, and is approximately 30 miles from O'Hare International
Airport. The four operating Chicago-area casinos, including the Aurora Casino,
have approximately 132,000 square feet of combined gaming space. No additional
casinos may be licensed in Illinois without the passage of new state
legislation.
The Aurora Casino's riverboats currently depart from their landings
for as many as 18 cruises daily, commencing at various times from 8:30 a.m.
until 4:30 a.m. This schedule may be varied, based on
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experience and seasonal factors. The use of a staggered cruise schedule with
two vessels significantly reduces the waiting time until the next gaming session
for patrons who miss a cruise departure. Once passengers board, they are
permitted to game during the half hour prior to the time the riverboat departs.
After the excursion, passengers are permitted to game for another half hour
before new passengers board, for a total of two to three hours of gaming per
cruise, depending on the cruising schedule. In addition, Illinois regulations
permit dockside gaming if the riverboat captain reasonably determines that it is
unsafe to cruise due to inclement weather, mechanical or structural problems or
river icing. During dockside gaming, the Aurora riverboats operate on their
normal schedules and passengers may leave the vessels at any time but may board
only during the half hour prior to the regularly scheduled start of the cruise.
The Aurora Casino employs a marketing strategy designed to take
advantage of its proximity to the affluent northern and western suburbs of
Chicago and the large population base of the Chicago metropolitan area.
Management uses a patron data base developed through ACSC's systems to focus its
marketing efforts on patrons who have been identified through the system as
having the characteristics of a higher value patron. Given the limited number
of gaming positions available on each daily casino excursion, management
believes that its process of identifying the premium patron, encouraging
participation in its various casino players' card programs and tailoring
promotions and special events to cater to this market segment will enhance
profitability.
The Aurora Casino also markets to the "mass" casino patron market
segment through various forms of advertising media as well as through group and
bus tour packages. Once new patrons are introduced to the Company's gaming
facility and its casino players' card programs, management uses its data base
capabilities to direct market to these patrons in an attempt to convert them
into higher value patrons.
Management believes that the Aurora Casino's facilities, in particular
its highly themed dockside Pavilion and its close proximity to the Paramount
Theatre, an 1,800-seat art deco theatre in which the Company features headliner
entertainment, are appealing to both the premium and mass casino patron markets.
Entertainers who have appeared include Frank Sinatra, Tom Jones, Ann-Margaret,
the Temptations, Howie Mandel, Willie Nelson and the Bolshoi Ballet.
Casino Credit. Casino operations are conducted on both a credit and a
cash basis. Gaming debts arising in Aurora in accordance with applicable
regulations are enforceable under Illinois law. For the year ended December 31,
1996, gaming credit extended to customers accounted for approximately 13.9% of
overall table game wagering, while table game wagering accounted for
approximately 13.8% of overall casino wagering during the period. At December
31, 1996, gaming receivables amounted to $2.1 million before allowances for
uncollectible gaming receivables which amounted to $690,000. Management of the
Aurora Casino believes that the allowances for uncollectible gaming receivables
are adequate.
Employees and Labor Relations. In Aurora, all casino employees must
be licensed by the Illinois Gaming Board. At December 31, 1996 there were
approximately 1,650 employees at the Aurora Casino, none of whom are represented
under collective bargaining agreements. Management considers its labor
relations to be good.
THE TUNICA CASINO
The Tunica Casino opened on August 8, 1994 and is part of a four
casino cluster located in north Tunica County. The Tunica Casino features a
54,000 square foot casino with approximately 1,370 slot machines and 50 table
games. With the completion of its new hotel tower in 1996, the facility
currently has 506 hotel rooms; other amenities include an entertainment lounge,
themed bar facilities, three restaurants, a large themed buffet, an indoor pool,
banquet and meeting facilities, a showroom, parking for 1,850 cars and a 50-
space recreational vehicle park.
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The Company completed construction in the third quarter of 1996 of an
eight-story, approximately 350-room hotel tower expansion at the Tunica Casino,
including additional banquet and meeting facilities, a themed indoor pool and
atrium and a showroom. In addition to satisfying the existing demand for its
hotel accommodations (the Tunica Casino's hotel experienced overall occupancy
rates in excess of 96% during 1995 with occupancy rates approaching 99% during
weekend and other peak periods), management believes that the additional hotel
capacity will allow the Tunica Casino to more effectively market to and attract
overnight and extended stay patrons. The Tunica hotel expansion cost
approximately $31.8 million. In February 1996, the Tunica Casino opened a themed
gaming area, the "Adventure Slots" attraction, which consists of an
approximately 12,500 square foot, adventure themed gaming and entertainment area
featuring interactive special effects, multimedia displays of memorabilia from
famous adventure motion pictures and approximately 210 slot machines with custom
graphic details. Construction of the Adventure Slots cost approximately $5.1
million.
Business Strategy. Tunica County is currently the closest legalized
gaming jurisdiction to, and is easily accessible from, Memphis. Approximately
4.1 million residents live within a 150 mile radius of Tunica County
(approximately one million of whom live in the greater Memphis metropolitan
area). Memphis also hosts approximately 3.5 million tourists each year. Other
markets within 250 miles of Tunica County include Little Rock, Jonesboro and
Pine Bluff, Arkansas; Nashville and Jackson, Tennessee, and Southeast Missouri.
The Tunica Casino is accessible to its primary geographic market via Highway 61
and Interstate 55. The Tunica Casino is located in a cluster with gaming
facilities operated by Harrah's Entertainment, Inc. ("Harrah's" and "Mardi
Gras") and Boyd Gaming Corporation ("Sam's Town"), which gives potential patrons
a variety of gaming options. The four casinos have named their cluster "Casino
Strip" in order to establish a marketing identity for the cluster and have
entered into a joint billboard campaign promoting the Casino Strip name. These
properties also operate a free shuttle bus service between the four casinos.
Additional joint marketing activities, including radio advertising and joint
special events, are currently being conducted. Management believes that the
critical mass of the four property cluster, together with the ability of
visitors to move freely among these properties and to access the cluster from
the main Tunica highways, generates significant patron traffic to the Tunica
Casino. In November 1996, the Casino Strip resorts announced plans for the
joint construction and operation of an 18-hole championship golf course
scheduled to open in the fall of 1998 on approximately 190 acres of land
adjacent to the Casino Strip. Management believes that the golf course will
help strengthen the Casino Strip as a gaming and convention resort destination.
The Tunica Casino employs a marketing strategy designed to take
advantage of its proximity to the large population base of the greater Memphis
metropolitan area and other major markets by (i) targeting the local day-trip
market and (ii) by utilizing its hotel rooms and recreational vehicle park to
expand its patron mix to include overnight visitors. Management also utilizes
the ACSC developed casino information technology to identify the premium Memphis
area patron; such information is then used to encourage participation in its
casino players' card program and tailor promotions and special events to cater
to this market segment.
Management believes that the Tunica Casino's unique theme (the casino
was constructed to resemble a large Hollywood sound stage set with authentic and
replica movie props presented in multimedia display cases with larger props
suspended from the ceiling) has broad patron appeal and distinguishes the Tunica
Casino from its competitors. Additionally, the nature of the theming will allow
for periodic and cost effective updating which management believes will
stimulate repeat visitors.
Casino Credit. Casino operations are conducted on both a credit and a
cash basis. Gaming debts arising in Tunica in accordance with applicable
regulations are enforceable under Mississippi law. During 1996, gaming credit
extended to customers accounted for approximately 16% of overall wagering. At
December 31, 1996, gaming receivables amounted to $1.6 million before allowances
for uncollectible
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gaming receivables amounting to $621,000. Management of the Tunica Casino
believes that the allowances for uncollectible gaming receivables are adequate.
Employees and Labor Relations. At December 31, 1996, there were
approximately 1,200 employees at the Tunica Casino, none of whom are represented
under collective bargaining agreements. Management considers its labor
relations to be good.
THE SANDS
For a description of the Sands' facilities, please refer to "Item 2. -
Properties - The Sands."
Business Strategy. The Sands' marketing strategy in the highly
competitive Atlantic City market has consisted of seeking higher-value repeat
patrons through its ongoing capital improvements program and its use of
sophisticated casino information technology to monitor and control certain
casino operations and to target marketing efforts toward frequent visitors.
Traditionally, the Sands has been successful in its marketing efforts toward the
high end, frequent table game and slot patron through its offering of private,
limited-access facilities and related amenities to premium patrons. While the
Sands has strived to maintain its position in this segment, the completion of
the Sands' expansion in 1994 has allowed the Sands to broaden its appeal to the
mass drive-in patron for continued growth in this market segment. The Sands
markets to the "mass" casino patron market segment through various forms of
advertising media as well as through group and bus tour packages. Once new
patrons are introduced to the Sands' gaming facilities and the casino player's
card program, management uses its data base capabilities to direct market to
these patrons in an attempt to convert them into higher value patrons.
Industry Developments. A number of significant changes to the
regulations governing the casino industry have been approved by New Jersey
regulators in recent years. Additional deregulation of the industry occurred in
1995 with the enactment of legislation amending the New Jersey Casino Control
Act (the "Casino Act"). The amendments generally lessened regulatory and
licensing requirements and allowed for additional gaming space under certain
conditions. Partly as a result of such regulatory changes, the Atlantic City
gaming industry has continued to grow. Revenues have increased from $3.4
billion in 1994 to $3.7 billion in 1995 (an increase from the previous year of
9.5%) and to $3.8 billion in 1996 (an increase from the previous year of 1.8%).
The 1996 increase resulted primarily from an overall expansion of gaming space
to approximately one million square feet at the end of 1996 from approximately
950,000 square feet at the end of 1995, to an increase in the number of hotel
rooms available in the Atlantic City market and to an intense marketing campaign
undertaken by the industry during most of 1996.
Casino/hotel operators have also benefited in recent years from a
trend toward increased slot play as slot machines have increasingly become more
popular than table games with loyal and frequent patrons, as well as with
recreational and other casual visitors. Casino operators have been catering
increasingly to slot patrons through new forms of promotions and incentives such
as slot machines which are linked between the various casinos to pay out a
pooled jackpot and more attractive gaming machines. As a result, slot machine
revenue growth has significantly outpaced table game revenue growth in recent
years to the point where for 1996 slot win accounted for approximately 68.9% of
total Atlantic City gaming win. Table games remain important, however, in
catering to the higher-end segment of gaming patrons as well as in adding to the
gaming ambience and providing a varied gaming experience.
Casino Credit. Casino operations are conducted on both a credit and a
cash basis. Gaming debts arising in Atlantic City in accordance with applicable
regulations are enforceable under New Jersey law. For the year ended December
31, 1996, gaming credit extended to Sands' customers accounted for approximately
26.1% of overall table game wagering, while table game wagering accounted for
approximately 22.8% of overall casino wagering during the period. At December
31, 1996, gaming receivables amounted to $24.4 million before allowances for
uncollectible gaming receivables amounting
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to $15.5 million. Management of the Sands believes that the allowances for
uncollectible gaming receivables are adequate.
License Agreement. GBCC entered into a 99-year license agreement (the
"Sands License Agreement") during 1987 to use the trade name "Sands" in Atlantic
City, New Jersey . GBHC pays an annual royalty of 3% of gross room charges, as
defined in the Sands License Agreement. Such charges amounted to $283,000
during the year ended December 31, 1996 and $288,000 during each of the years
ended December 31, 1995 and 1994.
Employees and Labor Relations. In Atlantic City, all casino
employees, except certain hotel employees, must be licensed under the Casino
Act. Due to the seasonality of the operations of the Sands, the number of
employees varies during the course of the year. At December 31, 1996, there
were approximately 3,200 employees at the Sands. The Sands has collective
bargaining agreements with two unions that represent approximately 1,000 hotel
employees, substantially all of whom are represented by the Hotel, Restaurant
Employees and Bartenders International Union, AFL-CIO, Local 54. The collective
bargaining agreements expire in September 1999. Management considers its labor
relations to be good.
COMPETITION
The gaming industry is highly fragmented and characterized by a high
degree of competition among a large number of participants, some of which have
greater financial and other resources than the Company. Competitive gaming
activities include land-based casinos, dockside casinos, riverboat casinos,
video lottery terminals, Indian gaming and other forms of legalized gaming in
the United States and other jurisdictions. Casino gaming is currently permitted
in a number of states, including Colorado, Illinois, Indiana, Iowa, Louisiana,
Michigan, Mississippi, Missouri, Montana, Nevada, New Jersey and South Dakota,
and in Windsor, Ontario, Canada, as well as on Native American Indian lands in
certain states. Other jurisdictions may legalize gaming in the near future
through the introduction of proposals to legalize gaming in their state
legislatures. In addition, established gaming jurisdictions could award
additional gaming licenses or permit the expansion of existing gaming
operations. New or expanded operations by other persons can be expected to
increase competition for the Company's present and proposed gaming operations
and could have a material adverse impact on the Company.
THE AURORA CASINO
The Illinois Riverboat Gambling Act and the rules promulgated by the
Illinois Gaming Board thereunder (the "Riverboat Act") authorizes only ten
owner's licenses for riverboat gaming operations in Illinois and permits a
maximum of 1,200 gaming positions (as defined by the Illinois Gaming Board) at
any time for each of the ten licensed sites. All authorized owner's licenses
have been granted and no additional licenses or gaming positions can be
permitted without further state legislation. Four riverboat sites, including
the Aurora Casino, are currently licensed in Illinois within 50 miles of
downtown Chicago. Two of these riverboat sites are in Joliet, approximately 42
miles southwest of downtown Chicago, and a third is in Elgin, Illinois,
approximately 20 miles from Aurora, 45 miles from downtown Chicago and amid the
affluent northern and western suburbs. The Company has also experienced
increased competition from three riverboat operations opened during 1996 in
northwestern Indiana within 25 miles of downtown Chicago. An additional
riverboat operation with approximately 50,000 square feet of gaming space is
anticipated to open in East Chicago, Indiana in May 1997. Increased competition
from casinos in Indiana has resulted in greater competition for patrons from the
downtown Chicago market and from the suburban Chicago market. The next closest
operating casinos are in Milwaukee, Wisconsin, approximately 90 miles from
downtown Chicago, and in Peoria, and Rock Island, Illinois, approximately 160
miles from downtown Chicago. The Company understands that legislation may be
introduced in the Illinois legislature to authorize one or more land-based
and/or riverboat casinos in downtown Chicago and/or the granting of additional
casino licenses elsewhere in Illinois including within the Company's principal
market. In
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addition, the authorization for up to three casinos in Detroit, Michigan was
approved in late 1996. Several major competitors have expressed an interest in
the Detroit market; however, the establishment of a regulatory system and
subsequent licensing have yet to be accomplished. Accordingly, it is not
anticipated that any casino will be operational until late 1997 or 1998. Native
American Indian tribes are seeking to open casino facilities in northwestern
Indiana and Michigan under the Indian Gaming Regulatory Act. The opening of
additional casinos proximate to Chicago could have a material adverse impact on
the Aurora Casino.
THE TUNICA CASINO
The Tunica Casino faces intense competition from the other casinos
operating in north Tunica County. The Mississippi Gaming Control Act does not
limit the number of licenses that may be granted. Any significant increase in
new capacity in Tunica County could negatively impact the operations of the
Tunica Casino. Within the Casino Strip cluster, Sam's Town has 90,000 square
feet of gaming space with approximately 1,900 slot machines and 75 table games
and approximately 850 hotel rooms; Harrah's currently has 24,000 square feet of
gaming space with approximately 930 slot machines and 40 table games; and
Harrah's Mardi Gras which opened in the former Southern Belle facility in April
1996, currently has 55,000 square feet of gaming space with approximately 1,150
slot machines and 56 table games. Harrah's recently announced plans to either
sell or close its smaller facility during 1997.
A three casino cluster consisting of Binion's Horseshoe, ITT Sheraton
and Circus Circus ("Casino Center") is located north of the Casino Strip cluster
and closer to the Memphis market. Bally's, which previously operated a casino
at Mhoon Landing (located approximately 15 miles south of the Tunica Casino),
reopened its casino at the Lady Luck Olympia Hotel site adjacent to, but not
connected with, the Casino Center as part of a joint venture agreement with Lady
Luck. Fitzgeralds is located between Casino Center and the Casino Strip
cluster. Due to increased competition in the Tunica gaming market, all four
casinos that previously operated at Mhoon Landing have ceased operations and
certain other casinos in Tunica County have reduced their work forces. Despite
the recent closings and work force reductions, the number of casinos and gaming
positions in north Tunica County continues to increase. The increase in
competition in the north Tunica County casino market could have a material
adverse effect on the Tunica Casino.
Immediately north of Casino Center, Grand Gaming Corp. has completed
the first phase of a project which, based on plans announced, will include a
casino complex with 140,000 square feet of gaming space with approximately 3,175
slot machines and 160 table games (the largest casino in Mississippi), two
hotels with an aggregate of 800 rooms, a golf course, convention center and
other amenities. The casino opened in July 1996 and was followed by the opening
of 188 hotel rooms in September 1996. An additional 600 hotel rooms are
scheduled to open in March 1997 and the golf course and other amenities are
scheduled for later completion. The opening of this casino space increased
casino capacity in Tunica County by 24%.
The Company believes that the most significant restrictions to the
growth of gaming in the Tunica market are the lack of an effective
infrastructure and the shortage of hotel rooms. The Mississippi Department of
Transportation ("MDOT") embarked on a road widening development program which
expanded the two-lane highway leading to Tunica County from Memphis (Highway 61)
during 1996. Additionally, MDOT plans to improve the highway from eastern
Mississippi (Highway 304) to four lanes. A number of casino operations completed
and opened hotel facilities during 1996. Including the addition of
approximately 350 rooms at the Tunica Casino, the total number of hotel rooms in
Tunica County increased to 3,176 rooms at the end of 1996 from 2,136 at the end
of 1995, an increase of 48.7%.
The Tunica Casino may eventually face competition from the opening of
gaming casinos closer to Memphis including DeSoto County, Mississippi, which is
the only county between Tunica County and the Tennessee border. DeSoto County
has defeated gaming proposals on three separate occasions, most
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recently in November 1996. In addition, gaming has been legalized in Coahoma
County (immediately south of Tunica County and more accessible from Little Rock,
Arkansas) where Lady Luck has relocated its Mhoon Landing casino to the
Mississippi side of the Helena, Arkansas bridge over the Mississippi River.
Farther south, in Greenville, Washington County, two casinos are now operating,
and in Vicksburg, Warren County, there are four casinos open. Casino gaming is
not currently legalized in Tennessee or Arkansas. Although management does not
anticipate such legislation in the near term, the legalization of gaming in
either Tennessee or Arkansas could have a material adverse impact on the Tunica
Casino.
THE SANDS
The Sands faced intense competition from the 11 other existing
Atlantic City casinos. According to reports of the New Jersey Casino Control
Commission (the "Casino Commission"), the twelve Atlantic City casinos currently
offer over one million square feet of gaming space. With the December 31, 1996
distribution by HCC of its GBCC common stock, HCC has exited the Atlantic City
market.
CASINO REGULATION
ILLINOIS
The Riverboat Act authorizes riverboat gaming on navigable streams
within or forming a boundary of the State of Illinois except for Lake Michigan
and any waterway in Cook County, which includes Chicago. The Riverboat Act
strictly regulates the facilities, persons, associations and practices related
to gaming operations pursuant to the police powers of the State of Illinois,
including comprehensive law enforcement supervision. The Riverboat Act grants
the Illinois Gaming Board specific powers and duties, and all other powers
necessary and proper to fully and effectively execute the Riverboat Act for the
purpose of administering, regulating and enforcing the system of riverboat
gaming. The Illinois Gaming Board's jurisdiction extends to every person,
association, corporation, partnership and trust involved in riverboat gaming
operations in the State of Illinois.
Owner's Licenses. The Riverboat Act requires the owner of a riverboat
gaming operation to hold an owner's license issued by the Illinois Gaming Board.
The Illinois Gaming Board is authorized to issue ten owner's licenses statewide.
Each owner's license permits up to two boats as a part of the riverboat gaming
operation. No entity may be licensed as the owner of more than one riverboat
gaming operation in Illinois, although a licensed owner may hold up to 10% of a
second riverboat gaming operation in Illinois. In addition to the ten owner's
licenses which may be authorized under the Riverboat Act, the Illinois Gaming
Board may issue special event licenses allowing persons who are not otherwise
licensed to conduct riverboat gaming to conduct such gaming on a specified date
or series of dates. Riverboat gaming under such a license may take place on a
riverboat not normally used for riverboat gaming.
An owner's license is issued for an initial period of three years and
must be renewed annually thereafter. An owner's license is eligible for renewal
upon payment of the applicable fee and a determination by the Illinois Gaming
Board that the licensee continues to meet all of the requirements of the
Riverboat Act. The Illinois Gaming Board also requires that officers, directors
and employees of a gaming operation and suppliers of gaming equipment, devices
and supplies and certain other suppliers be licensed. Licenses issued by the
Illinois Gaming Board may not be transferred to another person or entity. All
licensees must maintain their suitability for licensure and have a continuing
duty to disclose any material changes in information provided to the Illinois
Gaming Board.
Applicants for and holders of an owner's license are required to
obtain formal approval from the Illinois Gaming Board for changes in the
following areas; (i) key persons, (ii) type of entity, (iii) equity and debt
capitalization of the entity, (iv) investors and/or debt holders, (v) source of
funds, (vi) applicant's
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economic development plan, (vii) riverboat capacity or significant design
change, (viii) gaming positions, (ix) anticipated economic impact, or (x) pro
forma budgets and financial statements. A holder of an owner's license is
allowed to make distributions to its partners, stockholders or itself only to
the extent that such distribution would not impair the financial viability of
the gaming operation. Factors to be considered by the licensee include, but are
not limited to, the following: (i) working capital requirements, (ii) debt
service requirements, (iii) requirements for repairs and maintenance, and (iv)
capital expenditure requirements.
The Illinois Gaming Board will require a personal disclosure from any
person or entity (unless such person or entity qualifies as an institutional
investor) who or which, individually or in association with others, acquires,
directly or indirectly, beneficial ownership of more than 5% of any class of
voting securities or non-voting securities convertible into voting securities of
a publicly traded corporation which holds an ownership interest or a beneficial
interest in the holder of an owner's license. If the Illinois Gaming Board
denies an application for such an acquisition, commencing as of the date the
Illinois Gaming Board issues a notice that it denies such application, it will
be unlawful for such applicant to receive any dividends or interest on his or
its securities, to exercise, directly or indirectly, any right conferred by such
securities, or to receive any remuneration in any form from any person or entity
holding any license under the Riverboat Act for services rendered or otherwise.
If the Illinois Gaming Board denies an application for such a transfer and if no
hearing is requested or if the Illinois Gaming Board issues a final order of
disqualification, the holder of the affected owner's license shall purchase all
of the disqualified person's or entity's securities at the lesser of either the
market price or the purchase price of such securities.
An ownership interest in a holder of an owner's license may be
transferred or pledged as collateral only with the consent of the Illinois
Gaming Board.
Regulation of Gaming Operations. The Riverboat Act does not limit the
maximum bet or per patron loss and licensees may set any maximum or minimum
limits on wagering. Vessels must have the capacity to hold a minimum of 500
persons if operating on the Mississippi River or the Illinois River south of
Marshall County, and a minimum of 400 persons on any other waterway. The number
of gaming positions is limited to a maximum of 1,200 per license. Gaming
sessions are limited to a four hour duration; however, special event extended
cruises may be authorized by the Illinois Gaming Board.
If a riverboat captain reasonably determines for reasons of safety
that although seaworthy, the riverboat should not leave the dock or should
return immediately thereto, due to inclement weather, river icing, or
mechanical or structural difficulties, a gaming excursion may commence or
continue while the gangplank or its equivalent is raised and remains raised, in
which event the riverboat is not considered docked. Recently, the Illinois
Gaming Board amended its rules to clarify the circumstances under which dockside
gaming will be permitted and to require the imposition of a fine for violations
of the cruising requirements.
A $2 per person admission tax is imposed on the owner of a riverboat
operation. Such admission tax for the Aurora Casino amounted to $6.4 million,
$5.4 million and $4.7 million , respectively, during 1996, 1995 and 1994.
Additionally, a wagering tax is imposed on the adjusted gross receipts, as
defined in the Riverboat Act, of a riverboat operation at the rate of 20%. The
licensee is required to wire transfer all such gaming tax payments to the
Illinois Gaming Board. Such wagering tax for the Aurora Casino amounted to
$31.3 million, $29.3 million and $27.9 million, respectively, for the years
1996, 1995 and 1994.
The Illinois Gaming Board is authorized to conduct investigations into
the conduct of gaming and into alleged violations of the Riverboat Act and to
take such disciplinary and enforcement action as it may deem necessary and
proper. Employees and agents of the Illinois Gaming Board have access to and
may inspect any facilities relating to the riverboat gaming operations at all
times.
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A holder of any license is subject to imposition of penalties and
fines, suspension or revocation of such license, or other action for any act or
failure to act by such holder or his or her agents or employees, that is
injurious to the public health, safety, morals, good order and general welfare
of the people of the State of Illinois, or that would discredit or tend to
discredit the Illinois gaming industry or the State of Illinois. Any riverboat
operation not conducted in compliance with the Riverboat Act may constitute an
illegal gaming place and consequently may be subject to criminal penalties,
which penalties include possible seizure, confiscation and destruction of
illegal gaming devices and seizure and sale of riverboats and dock facilities to
pay any unsatisfied judgment that may be recovered and any unsatisfied fine that
may be levied. The Riverboat Act also provides for civil penalties equal to the
amount of gross receipts derived from wagering on the gaming, whether
unauthorized or authorized, conducted on the day of any violation. The
Illinois Gaming Board may revoke or suspend licenses, as the Board may see fit
and in compliance with applicable laws of Illinois regarding administrative
procedures, and may suspend an owner's license, without notice or hearing, upon
a determination that the safety or health of patrons or employees is jeopardized
by continuing a riverboat's operation. The suspension may remain in effect
until the Illinois Gaming Board determines that the cause for suspension has
been abated and it may revoke the owner's license upon a determination that the
owner has not made satisfactory progress toward abating the hazard.
The Illinois Gaming Board may waive any licensing requirement or
procedure provided by rule if it determines that such waiver is in the best
interests of the public and the gaming industry.
MISSISSIPPI
The ownership and operation of casino gaming facilities in Mississippi
are subject to extensive state and local regulation including the Mississippi
Gaming Control Act ( the "Mississippi Act"). Gaming in Mississippi can be
legally conducted only on vessels of a certain minimum size in navigable waters
of counties bordering the Mississippi River or in waters of the State of
Mississippi which lie adjacent to the coastline of the three counties bordering
the Gulf of Mexico. Mississippi's gaming operations are subject to the
licensing and regulatory control of the Mississippi Gaming Commission (the
"Mississippi Commission") and various federal, state, and county regulatory
agencies.
The Mississippi Act does not restrict the amount or percentage of
space on a vessel that may be utilized for gaming nor does it limit the number
of licenses that the Mississippi Commission can grant for a particular area.
Each of HCT's directors, officers and certain key employees who are
actively and directly engaged in the administration or supervision of gaming in
Mississippi, or who have any other significant involvement with the gaming
activities of the Tunica Casino, must be found suitable therefor and may be
required to be licensed by the Mississippi Commission. All personnel
responsible for the direction and management of the Tunica Casino have been
found suitable by the Mississippi Commission. The finding of suitability is
comparable to licensing, and both require submission of detailed personal
financial information followed by a thorough investigation. An application for
licensing may be denied for any cause deemed reasonable by the issuing agency.
Changes in licensed positions must be reported to the issuing agency and the
Mississippi Commission has jurisdiction to disapprove a change in licensed
positions. If the Mississippi Commission were to find a director, officer or
key employee unsuitable for licensing or unsuitable to continue having a
relationship with HCT, HCT would have to suspend, dismiss and sever all
relationships with such person or lose its license. HCT would have similar
obligations with regard to any person who refuses to file appropriate
applications. Each gaming employee must obtain a work permit.
The licenses obtained by HCT are not transferable and will need to be
renewed periodically. Presently, the policy of the Mississippi Commission is to
award casino licenses for two-year periods, subject to renewal. The Mississippi
Commission has the power to deny, limit, condition, revoke and
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suspend any license, finding of suitability or registration, and to fine any
person as it deems reasonable and in the public interest, subject to an
opportunity for a hearing.
Any individual who is found to have a material relationship to, or
material involvement with, HCT may be required to be investigated in order to be
found suitable or to be licensed as a business associate of HCT. Key employees,
controlling persons or others who exercise significant influence upon the
management or affairs of HCT may also be deemed to have such a relationship or
involvement. Additionally, certain beneficial owners, lenders and landlords of
HCT may be required to be licensed. The landlord under the ground lease for the
Tunica Casino has been found suitable by the Mississippi Commission.
The statutes and regulations give the Mississippi Commission the
discretion to require a suitability finding with respect to anyone who acquires
any debt or equity security of HCT regardless of the percentage of ownership.
In addition, the Mississippi Commission has discretionary authority to require a
holder of any debt to file an application, to be investigated and to be found
suitable. While the Mississippi Commission generally does not require the
individual holders of obligations to be investigated and found suitable, the
Mississippi Commission retains the discretion to do so for any reason, including
but not limited to a default or where the holder of a debt instrument exercises
a material influence over the gaming operations of the entity in question. The
applicant is required to pay all costs of investigation.
Any owner of debt or equity securities found unsuitable and who holds,
directly or indirectly, any beneficial ownership of debt or equity interests in
HCT beyond such period of time as may be prescribed by the Mississippi
Commission may be guilty of a misdemeanor. Any person who fails or refuses to
apply for a finding of suitability or a license within 30 days after being
ordered to do so by the Mississippi Commission may be found unsuitable. HCT is
subject to disciplinary action if, after it receives notice that a person is
unsuitable to be an owner of its debt or equity securities or to have any other
relationship with it, HCT (i) pays the unsuitable person any distributions or
interest upon any securities of HCT or any payments or distribution of any kind
whatsoever (ii) recognizes the exercise, directly or indirectly, of any voting
rights in its securities by the unsuitable person, or (iii) pays the unsuitable
person any remuneration in any form for services rendered or otherwise, except
in certain limited and specific circumstances. In addition, if the Mississippi
Commission finds any owner unsuitable, such owner must immediately offer all of
such owner's securities in HCT for purchase, and HCT shall, in turn, purchase
the securities so offered, for cash at fair market value, within 10 days of the
date of such offer.
The Mississippi Commission has the power to impose additional
restrictions on the holders of HCT's securities at any time through its power to
regulate licensees.
Mississippi gaming regulations provide that a change in control of HCT
may not occur without the prior approval of the Mississippi Commission.
Mississippi law prohibits HCT from making a public offering of its securities
without the approval of the Mississippi Commission if any part of the proceeds
of the offering is to be used to finance the construction, acquisition or
operation of gaming facilities in Mississippi, or to retire or extend
obligations incurred for one or more of such purposes.
Because HCT is licensed to conduct gaming in Mississippi, neither HCT
nor any affiliates may engage in gaming activities outside of Mississippi
without the prior approval of the Mississippi Commission. The Mississippi
Commission has adopted regulations related to foreign gaming approval, and HCT
has been approved by the Mississippi Commission under its regulations to engage
in gaming activities in certain jurisdictions outside of Mississippi.
License fees and taxes are based upon a percentage of the gross gaming
revenues received by a casino operation, or the number of slot machines operated
by such casino, or the number of table games operated by such casino. In
particular, gaming licensees must pay an annual $5,000 license fee and an
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additional fee based on the number of table games. A state gross revenues fee
of 8% is due on adjusted gross gaming revenues. Several local governments have
been authorized to impose additional gross fees on adjusted gross gaming
revenues of up to 4% or, alternatively, per person boarding fees, and annual
license fees based on the number of gaming devices on board. The City of Tunica
and Tunica County impose a combined fee of 4% on adjusted gross gaming revenues.
Such gaming taxes for the Tunica Casino amounted to $10.7 million, $10.7 million
and $3.7 million during 1996, 1995 and 1994, respectively. Gross gaming taxes
paid to the state are allowed as a credit against Mississippi state income tax
liability.
NEW JERSEY
Casino gaming is strictly regulated in Atlantic City under the Casino
Act and the rules and regulations of the Casino Commission, which affect
virtually all aspects of the operations of the Sands. The laws, rules and
regulations affecting Atlantic City gaming operations concern primarily the
financial stability, integrity and character of casino operators, their
employees, their debt and equity security holders and others financially
interested in casino operations; the nature of casino/hotel facilities; the
operation methods (including rules of games and credit granting procedures); and
financial and accounting practices used in connection with casino operations.
Casino Licenses. The Casino Act requires that all casino operations
be licensed by the Casino Commission and that all employees (except for certain
non-casino job positions), major shareholders and other persons or entities
financially interested in the casino operation be either licensed or approved by
the Casino Commission. A license is not transferable and may be revoked or
suspended under certain circumstances by the Casino Commission. A plenary
license authorizes the operation of a casino with the games authorized in an
operation certificate issued by the Casino Commission, and the operation
certificate may be issued only on a finding that the casino conforms to the
requirements of the Casino Act and applicable regulations and that the casino is
prepared to entertain the public. Under such determination, GBHC and NJMI were
issued plenary casino licenses, and GBCC was approved as a holding company of a
casino licensee.
The Casino Act provides for a casino license fee of not less than
$200,000 based upon the cost of the investigation and consideration of the
license application, and a renewal fee of not less than $100,000 or $200,000 for
a one year or four year renewal, respectively, based upon the cost of
maintaining control and regulatory activities. In addition, a licensee must pay
annual taxes of 8% of casino win (as defined in the Casino Act), net of a
provision for uncollectible accounts of up to 4% of casino win. During the
years ended December 31, 1996, 1995 and 1994, the taxes assessed by, and the
license and other fees paid by the Sands to the Casino Commission amounted to
$23.5 million, $25 million and $24.5 million, respectively.
The Casino Act also requires a casino licensee to make certain
approved investments in New Jersey, of at least 1.25% of its gross casino
revenues (as defined in the Casino Act) or pay an investment alternative tax of
2.5% of its gross casino revenues. Approved investments include the purchase of
bonds issued by the Casino Reinvestment Development Authority ("CRDA"), a
governmental agency which administers the statutorily mandated investments made
by casino licenses.
GBHC has, from time to time, contributed certain amounts held in
escrow to the CRDA. In return, the CRDA granted GBHC waivers of certain of its
investment obligations in future periods. GBHC made such contributions during
the years ended December 31, 1996, 1995 and 1994 totaling $1.5 million, $250,000
and $2.5 million , respectively, resulting in waivers granted by the CRDA during
1995 totaling $128,000. No such waivers were granted during 1996 and 1994;
however, the contributions have been designated for projects expected to benefit
the community and the Sands facility.
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NON-GAMING REGULATION
The Company is subject to certain federal, state and local safety and
health laws, regulations and ordinances that apply to non-gaming businesses
generally, such as the Clean Air Act, Clean Water Act, Occupational Safety and
Health Act, Resource Conservation Recovery Act and the Comprehensive
Environmental Response, Compensation and Liability Act. The Company has not
made, and does not anticipate making, material expenditures with respect to such
environmental laws and regulations. However, the coverage and attendant
compliance costs associated with such laws, regulations and ordinances may
result in future additional costs to the Company's operations. For example, in
1990 the U.S. Congress enacted the Oil Pollution Act to consolidate and
rationalize mechanisms under various oil spill response laws. The Department of
Transportation has proposed regulations requiring owners and operators of
certain vessels to establish through the U.S. Coast Guard evidence of financial
responsibility in the amount of $5.5 million for clean-up of oil pollution.
This requirement would be satisfied by either proof of adequate insurance
(including self-insurance) or the posting of a surety bond or guaranty.
The riverboats operated by the Company must comply with U.S. Coast
Guard requirements as to boat design, on-board facilities, equipment, personnel
and safety. Each of them must hold a Certificate of Seaworthiness or must be
approved by the American Bureau of Shipping ("ABS") for stabilization and
flotation, and may also be subject to local zoning and building codes. The U.S.
Coast Guard requirements establish design standards, set limits on the operation
of the vessels and require individual licensing of all personnel involved with
the operation of the vessels. Loss of a vessel's Certificate of Seaworthiness
or ABS approval would preclude its use as a floating casino.
All shipboard employees of the Company, even those who have nothing to
do with the marine operations of the vessel (such as dealers, waiters and
security personnel), may be subject to the Jones Act which, among other things,
exempts those employees from state limits on workers' compensation awards.
TRADEMARKS
The Company uses the service mark "Hollywood Casino" which is
registered with the United States Patent and Trademark Office. The Company
considers its rights to the "Hollywood Casino" service mark to be well
established and to have significant competitive value to the Company's business.
The loss of its right to use the "Hollywood Casino" service mark and to prevent
others from using the same or a deceptively similar mark could have a material
adverse effect on the Company.
The Company also uses the service mark "Hollywood" and other
"Hollywood-formative" marks to promote its casino and related services. These
marks are either registered or are the subject of pending registration
applications with the United States Patent and Trademark Office.
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DEVELOPMENT ACTIVITIES
On March 13, 1997, the Louisiana Gaming Control Board voted
unanimously to grant the fifteenth and final riverboat license in Louisiana to
Hollywood/DeBartolo Entertainment Louisiana, L.L.C. ("Hollywood/DeBartolo"), a
company owned 50% by a subsidiary of HCC. Subject to receiving certain
remaining approvals, Hollywood/DeBartolo has announced plans to construct a $194
million resort complex in Bossier City, Louisiana, approximately 200 miles east
of Dallas, Texas. As presently planned, the complex will include a riverboat
gaming facility with 30,000 square feet of gaming space; a 400-room hotel with a
30,000 square foot convention facility; an 80,000 square foot, themed pavilion;
an 18-hole golf course and a highly themed, retail entertainment center. A
subsidiary of HCC will operate the complex, other than the retail entertainment
center, under a long-term management contract.
Management believes that a proactive business development strategy is
critical to the Company's long-term growth and continued success, and is
committed to a development program that will maximize the Company's future
opportunities. Accordingly, the Company will continue to actively pursue
development of new casino entertainment venues by promoting the expansion of
legalized gaming and by exploring opportunities where gaming is already
sanctioned.
OTHER OPERATIONS
During 1996 and early 1997, GBCC disposed of its remaining non-casino
hotel operations. GBCC managed and had an ownership interest (but no obligation
to fund losses) in the hotel operations of the Sands Hotel and Casino in San
Juan, Puerto Rico. GBCC also managed two non-casino hotels and had an ownership
interest in one of the hotels. For the year ended December 31, 1996, earnings
before interest, taxes, depreciation and amortization attributable to such
operations amounted to $1.2 million. As of December 31, 1996, all of GBCC's
non-casino hotel related indebtedness was extinguished.
ITEM 2. PROPERTIES
THE AURORA CASINO
The Aurora Casino consists of two, four-level riverboats, City of
Lights I and II, which have combined casino space of approximately 32,100 square
feet and approximately 1,200 gaming positions. The complex also includes the
four-story, approximately 64,000 square foot land based Pavilion and two parking
garages.
The first parking garage contains approximately 18,000 square feet of
office space for administrative offices and approximately 13,000 square feet of
office space. HCA leases the parking garage, including the office and retail
space, from the City of Aurora under a 30 year lease ending June 2023, with HCA
having the right to extend the term to a maximum of 99 years.
In September 1996, HCA and the Aurora Metropolitan Exposition,
Auditorium and Office Building Authority ("ACCA"), a governmental agency,
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 new garage provides
additional parking for casino patrons and includes approximately 1,500 square
feet of retail space. ACCA financed a portion of the construction costs through
an $11.5 million, 7.5% industrial revenue bond issue which yielded proceeds of
approximately $10.5 million. HCA funded all remaining construction costs. 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
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Island Center banquet and meeting facilities. HCA is also responsible for
additional rent, consisting of costs such as any real estate taxes, maintenance
costs, insurance premiums and utilities arising out of its operation of the
garage. The lease is treated as a capital lease for financial reporting
purposes.
The Aurora Casino is pledged as collateral to the extent of $39
million, for $210 million face amount of senior secured notes, due November 1,
2003 (the "Senior Secured Notes") issued by HCC on October 17, 1995. The Senior
Secured Notes bear interest, payable semiannually, at the rate of 12 3/4%
discounted to yield 13 3/4% per annum. 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.
THE TUNICA CASINO
The Tunica Casino currently consists of a one-story, 60,000 square
foot casino, including 54,000 square feet of gaming space, 506 hotel rooms and
suites and support facilities that includes three restaurants, a buffet, an
arcade and a gift shop, banquet space, an enclosed pool and atrium, a showroom
and administrative offices. The 1996 construction on an eight-story,
approximately 350-room hotel tower was completed with a portion of the proceeds
from the Senior Secured Notes discussed above. The Tunica facility also
includes a 50-space recreational vehicle park and a 1,850-space surface parking
area.
The ground lease for the Tunica site has an initial term of five years
from the date gaming operations commence, and an option to extend the lease for
nine successive five-year terms. Rent during the initial term is equal to the
greater of 4% of Gross Revenues (as defined in the lease) or $1.1 million per
year. Because the ground lease for the Tunica site covers approximately 70
acres, there is sufficient land for future expansion should circumstances
warrant.
Substantially all of the assets of the Tunica Casino are pledged as
collateral for the Senior Secured Notes discussed above.
THE SANDS
As of December 31, 1996, the entity which owns the Sands is no longer
an indirect subsidiary of HCC. The Sands is located in Atlantic City, New
Jersey on approximately 4.8 acres of land one-half block from the boardwalk at
Brighton Park between Indiana Avenue and Dr. Martin Luther King, Jr. Boulevard.
The Sands facility consists of a casino and simulcasting facility with
approximately 76,000 square feet of gaming space containing approximately 2,000
slot machines and 125 table games; a hotel with 532 rooms (including 58 suites);
six restaurants; a cocktail lounge; two private lounges for invited guests (the
Plaza Club and the Island Club); an 800-seat cabaret theater; retail space; an
adjacent nine-story executive office building with 77,000 square feet of office
space for its executive, financial and administrative personnel; the "People
Mover", an elevated, enclosed, one-way moving sidewalk connecting the Sands to
the Boardwalk; and parking for approximately 1,900 vehicles. In addition, a
warehouse near Atlantic City and
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a building located in Atlantic City that houses a print shop and auto shop
support the operations of the Sands.
DEVELOPMENT SITES
The Company holds options to purchase approximately 86 acres of land
in Bossier City, Louisiana for its planned development of a resort complex as
described under "Item 1. Business - Development Activities" above.
The Company acquired two sites in the Houston, Texas area, one on
Clear Lake in the City of Seabrook and the other on Lake Houston, as well as one
lakeside site in the Dallas, Texas area in the north Dallas suburb of Farmers
Branch, for development in the event that Texas passed enabling legislation to
legalize gaming. Such legislation failed to pass in 1995, and although it is
expected to be reintroduced during the 1997 legislative session, passage is
believed to be highly doubtful. During 1996, management concluded that the
properties should be offered for sale. An evaluation of net realizable value
resulted in the Company recognizing an anticipated loss from the disposition of
such properties of approximately $3.4 million.
OTHER OPERATIONS
Prior to sale of the property in November 1996, GBCC had a 50%
partnership interest with an unrelated third party in the Sheraton Plaza, a 496-
room hotel located in Orlando, Florida. GBCC agreed to contribute up to $3.9
million as an additional investment in the Sheraton Plaza hotel partnership to
refurbish the hotel facility. GBCC contributed $2.5 million toward such
commitment through 1996. Such contributions were in recognition of GBCC's
partner having agreed to make $5 million in principal reductions on the
underlying mortgage note on the facility of which $4 million were made through
1996. GBCC was required to pay approximately $2.9 million to retire its share of
the underlying indebtedness on the property in connection with the sale.
Prior to sale of the property in September 1996, GBCC operated the
Holiday Inn located at the north entrance of the Dallas/Fort Worth Airport ("DFW
North") which was owned by Metroplex Hotel Limited ("Metroplex"), a partnership
controlled by certain members of the Pratt Family. During 1996 and 1995, GBCC
made capital expenditures under the hotel operating agreement totaling
approximately $2.6 million toward property improvements. GBCC was also
obligated by the hotel operating agreement to make minimum rental payments equal
to Metroplex's principal and interest payments on the underlying indebtedness of
this hotel. During February 1994, GBCC utilized funds borrowed from HCC to
purchase such underlying indebtedness with a principal balance of $13.8 million
from third parties at a cost of $6.8 million and subject to third party
indebtedness amounting to $2.7 million. The required minimum rental payments
(net of debt service receipts since the February 1994 note acquisition date)
amounted to $397,000, $530,000 and $678,000, respectively, during the years
ended December 31, 1996, 1995 and 1994. GBCC recorded the note receivable from
Metroplex, which accrued interest at the rate of 9 1/2% per annum, at
acquisition cost. Upon the sale of the hotel by Metroplex, GBCC received
proceeds sufficient to repay the third party indebtedness of $1.9 million,
recover its $6.8 million acquisition cost of the underlying indebtedness,
recover $2.6 million of its total investment in property improvements and
receive additional cash of approximately $770,000.
GBCC also had a 46% interest in Southmark San Juan, Inc. ("Southmark
San Juan"), a subsidiary of Southmark Corporation ("Southmark") which owned the
420-room Sands Hotel and Casino located in San Juan, Puerto Rico (the "Sands San
Juan") prior to its sale in February 1997. GBCC operated this facility under a
management agreement with Southmark San Juan and earned management fees of
$504,000, $513,000 and $488,000 during the years ended December 31, 1996, 1995
and 1994, respectively. GBCC received a termination fee of approximately $1.5
million in connection with the sale
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and has agreed to continue to provide management services on a month to month
basis through October 1997 subject to cancellation by the new owners. GBCC had
not recognized losses incurred by Southmark San Juan since 1990 as its
investment was eliminated through the recognition of prior years' losses.
ITEM 3. LEGAL PROCEEDINGS
PLANET HOLLYWOOD LITIGATION
Planet Hollywood International, Inc., a Delaware corporation, and
Planet Hollywood (Region IV), Inc., a Minnesota corporation (collectively,
"PHII"), filed a complaint in the United States District Court for the Northern
District of Illinois, Eastern Division on July 29, 1996 against HCC, HCA and a
member of the Pratt Family (collectively, the "Original Hollywood Defendants").
The Original Hollywood Defendants filed with the Court on September 18, 1996 an
answer to PHII's lawsuit, along with numerous counterclaims against PHII, Robert
Earl and Keith Barish (collectively, the "PHII Defendants"). PHII filed with
the Court on January 21, 1997, an amendment to their complaint which, among
other things, added HCT (together with the Original Hollywood Defendants, the
"Hollywood Defendants") and GBCC as defendants. The Original Hollywood
Defendants filed with the Court on February 4, 1997, and GBCC and HCT filed with
the Court on February 20, 1997, answers and counterclaims to such amended
complaint.
In its lawsuit, PHII alleges, among other things, that the Hollywood
Defendants and GBCC have, in opening and operating the Hollywood Casino concept,
infringed on PHII's trademark, service mark and trade dress and have engaged in
unfair competition and deceptive trade practices. In their counterclaims, the
Hollywood Defendants and GBCC allege, among other things, that the PHII
Defendants have, through their planned use of their mark in connection with
casino services, infringed on certain of HCC's service marks and trade dress and
have engaged in unfair competition.
Given the uncertainties inherent in litigation, no assurance can be
given that the Hollywood Defendants will prevail in this litigation; however,
the Hollywood Defendants believe that PHII's claims are without merit and intend
to defend their position and pursue their counterclaims vigorously. The
accompanying consolidated financial statements do not include any adjustments
that might result from the outcome of the uncertainties described above.
OTHER LITIGATION
HCC and its subsidiaries are also parties in various other 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of 1996, no matter was submitted to a vote
of security holders through the solicitation of proxies or otherwise.
18
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
HCC's Class A common stock, 50,000,000 shares at $.0001 par value per
share, is HCC's sole voting security. Since May 28, 1993, HCC's common stock
has traded on the Nasdaq National Market tier of the Nasdaq Stock Market under
the symbol HWCC. The prices set forth in the following table represent actual
transactions.
<TABLE>
<CAPTION>
PERIOD High Low
- ------------------- ------ -----
<S> <C> <C>
1996
First Quarter $ 4.63 $3.13
Second Quarter 8.50 3.38
Third Quarter 10.75 4.63
Fourth Quarter 6.13 2.88
1995
First Quarter $ 6.75 $4.75
Second Quarter 10.25 5.88
Third Quarter 10.13 6.63
Fourth Quarter 7.00 3.63
</TABLE>
As of March 25, 1997, there were approximately 500 holders of record
of HCC's voting common stock.
No cash dividends have been paid on HCC's common stock in the past and
HCC has no plans to pay cash dividends on its common stock in the foreseeable
future. See Note 4 of "Notes to Consolidated Financial Statements" for a
description of certain agreements that impose specified restrictions on the
transfer of funds between certain subsidiaries.
HCT's common stock, 1,000 shares with par value of $.01 per share, is
its sole voting security; all of the 1,000 shares outstanding are owned by HCC.
HCT has not paid dividends in the past and has no plans to pay any
dividends in the foreseeable future.
19
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
The following tables present selected financial data for HCC and are
qualified in their entirety by the consolidated financial statements, including
the notes thereto, appearing elsewhere herein. The selected financial data for
HCC has been presented as though HCC, which was incorporated during November
1990, owned its subsidiaries for all periods presented. See Note 1 to Notes to
the Consolidated Financial Statements of HCC appearing elsewhere herein. The
data as of December 31, 1996 and 1995, and for the years ended December 31,
1996, 1995 and 1994, have been derived from the audited consolidated financial
statements of HCC contained elsewhere in Item 8.
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS DATA: YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1996 1995 1994 1993 1992
--------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Net revenues............................................................. $530,580 $539,943 $464,384 $343,340 $275,584
-------- -------- -------- -------- --------
Expenses:
Departmental........................................................... 426,769 396,157 338,776 249,139 209,268
General and administrative............................................. 37,169 36,914 33,189 31,989 30,507
Depreciation and amortization.......................................... 40,836 40,955 30,960 25,003 21,064
Amortization of preopening costs....................................... - 11,002 2,120 -
Development............................................................ 1,065 6,765 5,154 1,926 -
Write down of properties held for
sale.................................................................. 3,400 - - - -
-------- -------- -------- -------- --------
Total expenses....................................................... 509,239 480,791 419,081 310,177 260,839
-------- -------- -------- -------- --------
Income from operations................................................... 21,341 59,152 45,303 33,163 14,745
-------- -------- -------- -------- --------
Nonoperating income (expenses):
Interest income........................................................ 3,101 3,708 4,227 3,437 3,800
Interest expense....................................................... (59,090) (55,558) (46,233) (43,141) (40,924)
Write-off deferred pre-acquisition costs............................... - - - - (13,086)
Loss on disposition of assets.......................................... (1,841) (514) (26) - -
-------- -------- -------- -------- --------
Total nonoperating expenses, net..................................... (57,830) (52,364) (42,032) (39,704) (50,210)
-------- -------- -------- -------- --------
(Loss) income before income taxes, nonrecurring
and extraordinary items............................................... (36,489) 6,788 3,271 (6,541) (35,465)
Valuation provision on affiliate receivables............................. (18,741) - - - -
-------- -------- -------- -------- --------
(Loss) income before income taxes and
extraordinary item.................................................... (55,230) 6,788 3,271 (6,541) (35,465)
Income tax (provision) benefit........................................... (63) (268) (1,527) 7,069 (657)
-------- -------- -------- -------- --------
(Loss) income before extraordinary item.................................. (55,293) 6,520 1,744 528 (36,122)
Extraordinary item:
Early extinguishment of debt,
net of related tax benefits (1)...................................... - (23,808) 126 (13,069) -
-------- -------- -------- -------- --------
Net (loss) income........................................................ $(55,293) $(17,288) $ 1,870 $(12,541) $(36,122)
======== ======== ======== ======== ========
Per common share:
(Loss) income before extraordinary item................................ $ (2.24) $ .26 $ .07 $ .02 $ (1.81)
Extraordinary item..................................................... - (.96) .01 (.57) -
-------- -------- -------- -------- --------
Net (loss) income.................................................... $ (2.24) $ (.70) $ .08 $ (.55) $ (1.81)
======== ======== ======== ======== ========
BALANCE SHEET DATA: DECEMBER 31,
----------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
(IN THOUSANDS)
Total assets............................................................. $308,085 $514,463 $464,135 $369,255 $279,547
Total debt, including capital
lease obligations...................................................... 232,046 496,847 432,117 345,451 328,555
Shareholders' equity (deficit)........................................... 45,144 (57,233) (39,947) (41,818) (97,538)
</TABLE>
- --------------------
(1) Includes the following items: (i) for 1995, costs associated with the
October 1995 issuance of the Senior Secured Notes by HCC and (ii) for 1993,
the accrual of $14 million of costs associated with a 1994 recapitalization
of GBCC, net of related tax benefit.
20
<PAGE>
HOLLYWOOD CASINO-AURORA, INC. AND HWCC-TUNICA, INC.
The following tables set forth selected financial information for HCA
and HCT and are qualified in their entirety by, and should be read in
conjunction with, HCA and HCT's Financial Statements and notes thereto contained
elsewhere herein. HCA and HCT commenced operations on June 17, 1993 and August
8, 1994, respectively. The data as of December 31, 1996 and 1995 and for the
years ended December 31, 1996, 1995 and 1994 have been derived from the audited
financial statements of HCA and HCT contained elsewhere in Item 8.
HOLLYWOOD CASINO-AURORA, INC.
STATEMENT OF OPERATIONS DATA:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1996 1995 1994 1993(1) 1992
--------- --------- --------- ---------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net revenues....................................... $163,391 $152,508 $148,000 $71,628 $ -
-------- -------- -------- ------- -------
Expenses:
Departmental.................................... 114,006 102,780 95,495 45,047 -
General and administrative...................... 14,645 14,406 11,926 8,200 -
Depreciation and amortization................... 8,834 9,172 7,121 3,582 494
Amortization of preopening costs................ - - 5,863 2,120 -
-------- -------- -------- ------- -------
Total expenses................................. 137,485 126,358 120,405 58,949 494
-------- -------- -------- ------- -------
Income from operations.......................... 25,906 26,150 27,595 12,679 (494)
-------- -------- -------- ------- -------
Non-operating income (expense):
Interest income................................. 205 306 458 432 -
Interest expense................................ (6,704) (6,493) (6,654) (3,930) -
-------- -------- -------- ------- -------
Total non-operating expenses, net.............. (6,499) (6,187) (6,196) (3,498) -
-------- -------- -------- ------- -------
Income before income taxes......................... 19,407 19,963 21,399 9,181 (494)
Income tax provision............................... (6,883) (7,554) (7,557) (3,567) -
-------- -------- -------- ------- -------
Income before extraordinary item................... 12,524 12,409 13,842 5,614 (494)
Extraordinary item................................. - (989) - - -
-------- -------- -------- ------- -------
Net income......................................... $ 12,524 $ 11,420 $ 13,842 $ 5,614 $ (494)
======== ======== ======== ======= =======
BALANCE SHEET DATA:
DECEMBER 31,
----------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- ------- -------
Total assets....................................... $107,449 $ 93,196 $ 73,356 $77,113 $17,716
Total debt, including capital lease obligations.... 65,430 55,829 50,141 54,624 13,767
Shareholder's equity............................... 28,033 25,549 14,071 10,659 1,507
</TABLE>
(1) The Aurora Casino commenced operations on June 17, 1993.
21
<PAGE>
HWCC-TUNICA, INC.
STATEMENT OF OPERATIONS DATA:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1996 1995 1994(1)
--------- --------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Net revenues.............................................. $ 94,524 $ 94,416 $32,413
-------- -------- -------
Expenses:
Departmental............................................. 72,602 63,842 22,623
General and administrative............................... 5,962 5,711 2,425
Depreciation and amortization............................ 10,906 10,356 3,610
Amortization of preopening costs......................... - - 5,939
-------- -------- -------
Total expenses.......................................... 89,470 79,909 34,597
-------- -------- -------
Income (loss) from operations............................ 5,054 14,507 (2,184)
-------- -------- -------
Non-operating income (expenses):..........................
Interest income.......................................... 835 637 374
Interest expense......................................... (10,060) (10,792) (4,454)
Loss on sale of assets................................... (45) (505) -
-------- -------- -------
Total non-operating expenses, net....................... (9,270) (10,660) (4,080)
-------- -------- -------
(Loss) income before income taxes and extraordinary item.. (4,216) 3,847 (6,264)
Income tax benefit........................................ - 694 -
-------- -------- -------
(Loss) income before extraordinary item................... (4,216) 4,541 (6,264)
Extraordinary item........................................ - (9,614) 126
-------- -------- -------
Net loss.................................................. $ (4,216) $ (5,073) $(6,138)
======== ======== =======
BALANCE SHEET DATA:
DECEMBER 31,
------------------------------
1996 1995 1994
--------- -------- --------
Total assets.............................................. $116,620 $122,240 $99,889
Total debt, including capital lease obligations........... 86,645 88,340 61,789
Shareholder's equity...................................... 19,210 23,426 28,499
</TABLE>
(1) The Tunica Casino commenced operations on August 8, 1994.
22
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Annual Report on Form 10-K 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 Annual Report on Form 10-K, the words
"believes", "estimates", "anticipates" and similar expressions as they relate to
the Company or its management are intended to identify forward-looking
statements.
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 years ended December 31, 1996, 1995 and 1994,
however, the operations of GBCC are included in the consolidated results of
operations of HCC. In future periods, HCC's results of operations will not
include the operations of GBCC and its subsidiaries. Because HCC and the HCC
subsidiaries that own and operate the Aurora Casino and the Tunica Casino are
not obligated for GBCC's indebtedness and because GBCC and its subsidiaries are
restricted in their ability to pay or advance funds to HCC and its subsidiaries,
management's discussion and analysis of HCC's financial condition and results of
operations is divided into separate analyses of: (i) HCC, including all of its
subsidiaries other than GBCC and its subsidiaries (the "HCC Group") and (ii)
GBCC and its subsidiaries which include the Sands (the "GBCC Group").
The following table sets forth the pro forma results of operations of
HCC for the year ended December 31, 1996 as if the distribution of GBCC common
stock had occurred at December 31, 1995 and, as a result, the GBCC Group had not
been consolidated with HCC. Such pro forma information for years prior to 1996
is not believed to be relevant as the operations of the Tunica Casino and the
Aurora Casino would be for less than full years.
Net revenues $ 258,487,000
Total expenses (241,545,000)
------------
Income from operations 16,942,000
------------
Non-operating expenses:
Interest expense, net (26,563,000)
Loss on disposal of assets (46,000)
------------
Total non-operating expenses (26,609,000)
------------
Loss before income taxes (9,667,000)
Income tax provision (695,000)
------------
Net loss $(10,362,000)
============
Net loss per common share $(0.42)
============
23
<PAGE>
RESULTS OF OPERATIONS
HCC GROUP
Selected financial information of the HCC Group is presented below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1996 1995 1994
------------ ------------ ------------
(in thousands)
<S> <C> <C> <C>
Casino revenues................................................ $ 244,485 $ 234,570 $ 169,877
Other departmental revenues.................................... 36,660 30,915 29,739
Less - promotional allowances.................................. (22,658) (18,226) (19,067)
------------ ------------ ------------
Net revenues................................................. 258,487 247,259 180,549
------------ ------------ ------------
Casino expenses................................................ 174,032 154,584 109,256
Other departmental expenses.................................... 12,716 11,907 8,670
General and administrative expenses............................ 29,326 26,523 21,654
Depreciation and amortization.................................. 21,006 20,432 11,413
Amortization of preopening costs............................... - - 11,802
Development expenses........................................... 1,065 6,765 5,154
Write down of properties held for sale......................... 3,400 - -
------------ ------------ ------------
Total expenses............................................... 241,545 220,211 167,949
------------ ------------ ------------
Income from operations....................................... $ 16,942 $ 27,048 $ 12,600
============ ============ ============
</TABLE>
Net revenues of the HCC Group for the year ended December 31, 1996
were $258.5 million, an increase of 4.5% from net revenues of $247.3 million in
1995. The 1995 net revenues reflected an increase of $66.7 million (36.9%) from
the $180.5 million earned during 1994. Most of the 1996 increase was realized
by improved net revenues at the Aurora Casino; net revenues at the Tunica Casino
were virtually unchanged in 1996 compared to 1995. The Tunica Casino, which
opened in August 1994, provided incremental net revenues of $62 million during
1995, accounting for substantially all of the HCC Group's increase. The 1995
increased revenues also included an increase in net revenues at the Aurora
Casino of $4.5 million compared to 1994. As explained below, an expansion
project at the Aurora Casino, which commenced during the first quarter of 1995
and required the removal from service of one of the Aurora Casino's two
riverboats for a period of 30 days during the second quarter of 1995, resulted
in a decline in revenues during the second quarter of 1995.
As explained in greater detail below, the 4.5% increase in 1996 net
revenues was offset by a $21.3 million (9.7%) increase in operating expenses,
resulting in a decline in income from operations of $10.1 million (37.4%) in
1996 compared to 1995. The increase in operating expenses primarily resulted
from higher marketing and promotional expenses in response to increased
competition at both the Aurora Casino and the Tunica Casino. The 1995 increase
in revenues over the prior year enabled the HCC Group's income from operations
to improve $14.4 million to $27 million in 1995 from $12.6 million in 1994. The
Tunica Casino contributed an incremental $16.7 million in income from operations
after consulting fees; as a result of the aforementioned construction and the
advent of additional competition in its market area, income from operations at
the Aurora Casino declined by $1.4 million during 1995 compared with 1994.
24
<PAGE>
AURORA CASINO
GENERAL
Income from operations at the Aurora Casino, adjusted to exclude
management fees payable to a subsidiary of GBCC, amounted to $35.3 million for
the year ended December 31, 1996 compared to $35.6 million and $37.6 million,
respectively, during 1995 and 1994. During the second quarter of 1995, the
expansion of one of the Aurora Casino's two riverboats was completed, increasing
gaming capacity by 10,000 square feet and slot machine capacity by 34%. The
increase in space generated significant increases in gross wagering and gaming
revenues during the first half of 1996 compared to the first half of 1995.
Operating results during the last half of 1996 were negatively impacted by the
opening of three gaming facilities in northern Indiana during June and severe
local flooding in July. During the period of their operations in 1996, the
northern Indiana casinos generated nearly $3 billion of gross wagering and $230
million of casino revenues. While the flooding caused only minor damage to the
Aurora Casino, several cruises had to be cancelled and the surrounding area
suffered extensive damage which reduced casino volume for the remainder of the
third quarter. During the 1995 expansion one riverboat was out of service for
30 days prior to completion of the construction in May; however, through a
combination of cruise schedule revisions and special marketing efforts, casino
revenues during this period approximated 72% of those earned during the same
period in 1994. Such performance was achieved despite a 48% reduction in
gaming positions and the additional competition in 1995 from a riverboat
operation in nearby Elgin, which opened in October 1994.
GAMING OPERATIONS
The following table sets forth certain unaudited financial and
operating data for the Aurora Casino's operations for the years ended December
31, 1996, 1995 and 1994.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1996 1995 1994
----------- ----------- -----------
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C>
REVENUES:
Table games................. $ 51,230 $ 57,008 $ 64,763
Slot machines............... 105,894 89,273 74,674
---------- ---------- ----------
Total...................... $ 157,124 $ 146,281 $ 139,437
========== ========== ==========
TABLE GAMES:
Gross wagering (drop) (1)... $ 304,851 $ 320,822 $ 356,381
Hold percentages (2):
HCA........................ 16.8% 17.8% 18.2%
Other Chicago-area (3)..... 18.8% 19.0% 18.4%
SLOT MACHINES:
Gross wagering (handle) (1). $1,902,642 $1,499,768 $1,182,594
Hold percentages (2):
HCA........................ 5.6% 6.0% 6.3%
Other Chicago-area (3)..... 5.7% 5.9% 6.3%
</TABLE>
_______________________
25
<PAGE>
(1) Gross wagering consists of the total value of chips purchased for table
games ("drop") and coins wagered in slot machines ("handle").
(2) Casino revenues consist of the portion of gross wagering that a casino
retains and, as a percentage of gross wagering, is referred to as the "hold
percentage".
(3) Comprised of Empress and DPD/Harrah's Casinos located in Joliet, Illinois
and Grand Victoria's Casino located in Elgin, Illinois (which opened
October 6, 1994). Percentages have been calculated based on information
published by the Illinois Gaming Board.
Total gross wagering at the Aurora Casino as measured by table drop
and slot machine handle increased by $386.9 million during 1996 compared to 1995
primarily due to the expansion of gaming space in 1995 which increased slot
machine capacity by 34%. Slot machine handle during 1996 increased $402.9
million (26.9%) while table drop decreased slightly. The increase in slot
machine handle during the first four months of 1996 was 76.3% compared to the
pre-expansion and construction periods in 1995; however, as a result of flooding
and the competition from new boats in Indiana, slot machine handle during the
last six months of 1996 was only 2% above the 1995 comparable period.
The 26.9% increase in slot machine handle during 1996 compares
favorably to the 3.4% increase experienced by other Chicago-area riverboat
operators. Other Chicago-area operators also experienced a decrease in table
game wagering of 10.8% compared to a 5% decrease at the Aurora Casino.
Accordingly, the Aurora Casino increased both its slot machine and table games
market share during 1996 as the additional competition from Indiana riverboats
had a greater negative impact on Chicago-area operators closer to Indiana than
on the Aurora Casino.
Total gross wagering increased $281.6 million during 1995 compared to
1994 in spite of the removal of one of the facility's two riverboats from
service for 30 days as discussed previously. The overall increase in casino
wagering reflects the expanded gaming space, as well as the continuing
refinement of the Aurora Casino's marketing strategy, including the growth of
its data base of Chicago area patrons and the growth in membership of its patron
recognition casino players' card programs which identify higher value patrons.
The Aurora Casino's decrease in table drop of 10% during the year
ended December 31, 1995 (a decrease of 3.3% during the six month period ended
December 31, 1995 subsequent to the expansion of gaming space) compares with an
increase in table drop for other Chicago-area riverboat operators of 39.9%. The
significant Chicago market increase and the resulting decrease in table games
market share for the Aurora Casino is primarily due to increased competition
from the Elgin facility, which was able to provide more spacious surroundings
for its table game patrons. Exclusive of the Elgin facility, table drop for
the other Chicago-area riverboat operators increased by only 2.5%. Slot machine
handle at the Aurora Casino increased 26.8% overall during 1995 compared to 1994
and 38.4% during the last six months of 1995 compared to the same period in
1994. The 1995 increase compares unfavorably to the 62.8% increase experienced
by other Chicago-area riverboat operators; however, excluding the increase
resulting from the Elgin facility's opening in October 1994, the other Chicago-
area increase in slot machine handle was only 20.2%.
REVENUES
Casino revenues increased $10.8 million (7.4%) during the year ended
December 31, 1996 compared to 1995. Such increase resulted from a $16.6 million
increase in slot machine revenues offset, in part, by a $5.8 million decline in
table game revenues. The 26.9% increase in slot machine handle during 1996 was
partially offset by a decrease in the slot machine hold percentage to 5.6% from
6%, resulting in a slot machine revenue increase of $16.6 million (18.6%). The
slight decline in table game wagering discussed
26
<PAGE>
previously was further compounded by a decline in the table game hold percentage
to 16.8% in 1996 from 17.8% in 1995. These factors combined to bring about a
decrease in table game revenues of $5.8 million (10.1%).
Total casino revenues increased $6.8 million (4.9%) during 1995
compared to 1994. Table games revenue decreased $7.8 million (12%) during 1995
compared to 1994. The aforementioned 10% decrease in drop during 1995 compared
to 1994 was compounded by the decrease in the table game hold percentage to
17.8% in 1995 from 18% in 1994. The 26.8% increase in slot machine handle
during 1995 was partially offset by a decline in the slot hold percentage,
resulting in a 1995 slot machine revenue increase of $14.6 million (19.6%)
compared to 1994.
Food and beverage revenues increased $2.1 million (17.7%) during 1996
compared to 1995 as a result of increased complimentaries resulting from
marketing programs. Food and beverage revenues at the Aurora Casino increased
by $728,000 (6.6%) during 1995 compared to 1994 due to increases in patron
volume and enhancements at the Epic Buffet and other banquet facilities.
Other revenues decreased $1 million (21%) during 1996 compared to 1995
due to reductions in parking fees generated in response to competitive
pressures. Admission and other revenues decreased by $8.9 million (64.3%)
during 1995 compared to 1994 primarily as the result of admission fees being
discontinued in response to competitive pressures in the Chicago area together
with decreases in retail revenue resulting from changes in certain retail-
oriented promotional activities.
Promotional allowances represent the estimated value of goods and
services provided free of charge to casino customers under various marketing
programs. These allowances, as a percentage of food and beverage and other
revenues at the Aurora Casino, were 64.5%, 62.6% and 65.5%, respectively, during
the years ended December 31, 1996, 1995 and 1994. The 1996 increase reflects
the increase in dining promotional activities partially offset by the
elimination of complimentary parking fees. The 1995 decrease from the prior
year reflects (i) the discontinuance of admission fees and, consequently,
complimentary admissions, and (ii) the elimination of complimentary beverages to
conform to a clarification of existing liquor laws.
DEPARTMENTAL EXPENSES
Casino expenses increased by $10.8 million (11.2%) in 1996 compared to
1995 primarily due to the increases in casino wagering noted above together with
increased promotional activity. Casino expenses increased by $8.6 million
(9.7%) during 1995 over 1994. Such increase exceeded the corresponding increase
in casino revenues and is primarily due to additional costs associated with the
opening of the expanded riverboat in May 1995 and to the implementation of new
marketing programs and expansion of existing programs.
Food and beverage expenses increased slightly during 1996 as increases
in payroll and food costs were virtually offset by increased allocations to the
casino department as a result of promotional activities. Food and beverage
expenses decreased $721,000 (12.9%) during 1995 compared to 1994. Such decrease
was a result of an increase in food complimentaries charged to casino expenses
and was partially offset by higher food costs primarily due to increased
patronage and the Aurora Casino's efforts to upgrade the quality of its Epic
Buffet food service. Food and beverage 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.
Other expenses increased $324,000 (43.7%) in 1996 compared to 1995 as
fewer expenses were allocated to the casino department, primarily as a result of
reduced parking costs. Other expenses
27
<PAGE>
decreased $577,000 (43.7%) during 1995 as compared to 1994 primarily due to
increased allocations to the casino department.
TUNICA CASINO
GENERAL
The Tunica Casino earned income from operations, adjusted to exclude
consulting fees payable to a subsidiary of GBCC, of $6.3 million in 1996
compared to $15.7 million in 1995 and a loss of $1.8 million for 1994 (the
Tunica Casino opened on August 8, 1994). The 1996 decrease results primarily
from increased competition in the Tunica market as evidenced by the opening of
new casinos in December 1995 and April and July 1996. The additional
competition resulted in increased marketing and promotional expenditures to
protect market share.
GAMING OPERATIONS
The following table sets forth certain unaudited financial and operating
data relating to the operations of the Tunica facility for the years ended
December 31, 1996 and 1995 and for the period from opening on August 8, 1994
through December 31, 1994. Published local and state-wide industry information
is limited in both detail and availability. Accordingly, relevant comparisons
between the Tunica Casino and its market competitors can not be presented.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, PERIOD FROM
-------------------------- OPENING THROUGH
1996 1995 DECEMBER 31, 1994
----------- ------------- ------------------
(in thousands, except percentages)
<S> <C> <C> <C>
CASINO REVENUES:
Table games............................. $ 16,650 $ 17,782 $ 7,384
Slot machines........................... 69,644 69,256 22,521
Poker revenues.......................... 1,067 1,251 535
---------- ---------- --------
Total.......................... $ 87,361 $ 88,289 $ 30,440
========== ========== ========
TABLE GAMES:
Gross wagering (drop) (1)............... $ 82,350 $ 80,348 $ 38,039
Hold percentage (2)..................... 20.2% 22.1% 19.4%
SLOT MACHINES:
Gross wagering (handle) (1)............. $1,332,949 $1,345,983 $409,938
Hold percentage (2)..................... 5.2% 5.1% 5.5%
</TABLE>
- --------------
(1)(2) See corresponding notes to the table at "Aurora Casino - Gaming
Operations" above.
Total gross wagering at the Tunica Casino as measured by table game
drop and slot machine handle decreased slightly (less than 1%) during 1996 as
compared to 1995. Table game wagering increased $2 million (2.5%); however,
slot machine handle decreased $13 million (1%), more than offsetting the table
game increase.
28
<PAGE>
During the first quarter of 1996, the Tunica Casino opened its new
"Adventure Slots" attraction, a highly themed area of the casino floor which
features interactive memorabilia displays and entertainment. Although a
significant portion of the casino's slot machine capacity was removed from the
casino floor during the first six weeks of 1996 for construction of this new
attraction, increased patron volume subsequent to its mid-February opening
resulted in an overall increase in slot machine handle of 6% for the first
quarter of 1996 compared to the same period of 1995. Such increase was offset
during the remainder of 1996 by the opening in April 1996 of a fourth casino in
the Casino Strip cluster and the opening in July 1996 of the largest casino in
Tunica County, Grand Casino, which is located north of the Casino Strip and
closer to the primary gaming market of Memphis, Tennessee.
REVENUES
Total casino revenues decreased slightly by $928,000 (1.1%) during
1996 compared to 1995. The increase in table game wagering was offset by a
decrease in the table hold percentage to 20.2% from 22.1%, resulting in a
decrease in table game revenues of $1.1 million (6.4%). Although slot machine
wagering showed a decrease in 1996, the hold percentage improved to 5.2% from
5.1%, resulting in a slight increase in slot machine revenues of $388,000 (less
than 1%).
Casino revenues increased $57.9 million (190%) during the year ended
December 31, 1995 compared to the period of time the Tunica Casino was in
operation during 1994. On a more comparable basis, annualization of the
reported amounts of revenues during the 1994 period of operations indicates that
table revenues declined and slot machine revenues increased during 1995 in
comparison to 1994. The Tunica Casino reduced the number of table games by
approximately 10% and slightly increased the number of slot machines compared to
the initial period of its operations in 1994 reflecting changes in the table
game and slot machine components of its customer mix. Such changes resulted, in
part, from the opening in February 1995 of an additional casino which heavily
promotes its table game business, from the introduction by the Tunica Casino of
additional marketing programs geared toward slot patrons and to refinements in
the type of slot machines offered to meet customers' preferences. Table game
revenues also benefitted from an increase in the hold percentage for table games
to 22.1% during 1995 compared to 19.4% during the period from opening to
December 31, 1994. Slot machine revenue growth in 1995 was a result of
significant increases in slot machine gross wagering, partially offset by a
decline in the slot machine hold percentage to 5.1% during 1995 compared to 5.5%
during the period from opening to December 31, 1994.
Rooms revenues increased $2.1 million (67.2%) during 1996 compared to
1995. This increase results from the opening of the Tunica Casino's new 352-
room hotel tower during the third quarter of 1996, increasing the number of
guest rooms by almost 130%. Hotel occupancy rates have decreased slightly as a
result of the additional rooms, declining to an average of 88% for the period
from August through December 1996 from an average of 99.7% from January through
July 1996 and an average of 96% in 1995. Hotel room revenues increased $2.3
million (152.5%) in 1995 compared to 1994 primarily as a result of the hotel
facility opening approximately one month after the casino opened in the third
quarter of 1994 and to improved occupancy rates, which have increased from an
average of approximately 86% in 1994 to approximately 96% in 1995.
Food and beverage revenues increased $2.3 million (24.1%) during 1996
compared to 1995 as a result of increased overnight patron volume from the newly
completed hotel tower, the opening of a new dining outlet and increased
promotional activities. The $6.1 million (174.3%) increase in food and beverage
revenues during 1995 compared to the partial year in 1994 is comparable to the
increases noted in casino revenues and reflects additional patron volume.
Promotional allowances represent the estimated value of goods and
services provided free of charge to casino customers under various marketing
programs. These allowances, as a percentage of rooms, food
29
<PAGE>
and beverage and other revenues, increased to 61.1% from 56% during 1995 and
58.9% during the period from opening to December 31, 1994. The 1996 increase
results from the increased use of hotel and food and beverage complimentaries as
part of the Tunica Casino's promotional programs. The 1995 decrease from the
prior period primarily resulted from decreased utilization of complimentaries
compared with the initial period of operations, during which more
complimentaries were used to attract new casino patrons.
DEPARTMENTAL EXPENSES
Casino expenses increased $8.6 million (15%) in 1996 compared to 1995
primarily due to increases in advertising and marketing costs and other
promotional activities. Such costs increased in 1996 with the advent of
additional competition as discussed under "Gaming Operations" above and the
opening of the new hotel tower and the "Adventure Slots" attraction. Additional
promotional activities also resulted in increased allocations of rooms and food
and beverage costs to the casino department. Casino expenses increased $36.7
million (177.8%) in 1995 compared to the partial year of operations in 1994.
Such increase is comparable to the increase in casino revenues and reflects
increased patron volume.
Rooms expenses decreased $314,000 (16.6%) in 1996 compared to 1995 in
spite of the addition of the new hotel tower. The decrease is primarily due to
increases in promotional activities resulting in increased allocations of room
costs to the casino department. Rooms expenses increased $1.4 million (281.2%)
in 1995 compared to the partial year of operations in 1994. In addition to the
increase resulting from increased patron volume, the near capacity hotel
occupancy rate of 96% in 1995 allowed for less hotel room promotional activity,
thus reducing the allocation of such costs to the casino department.
The increase in other expenses of $72,000 (6.1%) during 1996 compared
to 1995 results from increased merchandise costs with respect to retail sales,
to increases in entertainment expenses and to increased public area maintenance
costs. The $826,000 (228.8%) increase in other expenses in 1995 compared to the
period from opening in 1994 reflects the additional casino volume and a decrease
in promotional activities after the initial start up period.
GBCC GROUP
Selected financial information of the GBCC Group is presented below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
(in thousands)
Casino revenues.................................... $242,889 $264,048 $256,207
Other departmental revenues........................ 68,680 67,372 64,653
Less - promotional allowances...................... (27,929) (27,083) (24,943)
-------- -------- --------
Net revenues...................................... 283,640 304,337 295,917
-------- -------- --------
Casino expenses.................................... 218,990 209,282 198,270
Other departmental expenses........................ 21,031 20,384 22,482
General and administrative expenses................ 19,363 21,983 22,916
Depreciation and amortization...................... 19,868 20,553 19,547
-------- -------- --------
Total expenses.................................... 279,252 272,202 263,215
-------- -------- --------
Income from operations............................ $ 4,388 $ 32,135 $ 32,702
======== ======== ========
</TABLE>
30
<PAGE>
The GBCC Group's primary sources of revenues are the operations of the
Sands and management and consulting fees earned from the Aurora Casino and the
Tunica Casino. Results of operations for the Aurora Casino, on which such
management fees are based, were discussed above as part of the HCC Group. Since
January 1994, the GBCC Group has earned a fixed consulting fee from the Tunica
Casino of $100,000 per month. The GBCC Group has reduced its losses from
noncasino hotels during recent years through the sale of certain owned
properties and the termination of management contracts on certain managed
properties.
The GBCC Group's consolidated net revenues declined to $283.6 million
during 1996 from $304.3 million for 1995 which, combined with higher operating
costs at the Sands, resulted in a decline in income from operations to $4.4
million in 1996 from $32.1 million in 1995. Operating results have been
adversely affected in 1996 by the advent of unprecedented and highly aggressive
marketing programs instituted by certain other Atlantic City casinos seeking to
increase their market share and to a lesser degree by severe winter snowstorms
in January and February. These factors, as well as declines in both the table
games and slot machine hold percentages, resulted in a decline in net revenues
at the Sands of 6.8% (to $264.8 million in 1996 from $284 million in 1995). In
addition, marketing and advertising costs increased by $10.9 million (17.3%)
during 1996 compared to 1995 in response to competitive pressures.
GAMING OPERATIONS
The following table sets forth certain unaudited financial and
operating data relating to the Sands' operations:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1996 1995 1994
----------- ----------- -----------
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C>
REVENUES:
Table games........... $ 79,127 $ 95,835 $ 96,485
Slot machines......... 159,972 163,821 155,381
Other (1)............. 3,790 4,392 4,341
---------- ---------- ----------
Total................ $ 242,889 $ 264,048 $ 256,207
========== ========== ==========
TABLE GAMES:
Gross Wagering
(Drop) (2)........... $ 576,577 $ 606,283 $ 605,854
========== ========== ==========
Hold Percentages: (3)
Sands................ 13.7% 15.8% 15.9%
Atlantic City Casino
Gaming Industry..... 15.5% 15.9% 15.8%
SLOT MACHINES:
Gross Wagering
(Handle) (2)......... $1,954,612 $1,892,159 $1,760,279
========== ========== ==========
Hold Percentage:(3)
Sands (4)............ 8.2% 8.7% 8.8%
</TABLE>
____________________________
31
<PAGE>
(1) Consists of revenues from poker and simulcast horse racing wagering.
(2) Gross wagering consists of the total value of chips purchased for table
games (excluding poker) and keno wagering (collectively, the "drop") and
coins wagered in slot machines ("handle").
(3) Casino revenues consist of the portion of gross wagering that a casino
retains and, as a percentage of gross wagering, is referred to as the "hold
percentage".
(4) The Sands' hold percentage with respect to slot machines is reflected on an
accrual basis. Comparable data for the Atlantic City gaming industry is not
available. The 1994 hold percentage calculations for the Sands have been
adjusted to exclude the recognition of approximately $1 million, in slot
machine revenues resulting from the reversal of certain progressive jackpot
liabilities (see "Revenues" below).
Table games drop at the Sands declined $29.7 million (4.9%) during 1996
compared with 1995 and did not change significantly during 1995 compared with
1994. The Sands' 1996 decrease in table drop compares with an increase of 5% in
table drop for all other Atlantic City casinos during the same period. As a
result, the Sands' 1996 table game market share (expressed as a percentage of
the Atlantic City industry aggregate table game drop) declined to 7.7% from 8.5%
during 1995. Table game drop throughout 1996 was adversely impacted by the
increase in competitive pressures in the rated table market segment, of which a
significant portion was in the "high end" and midmarket segments. The second
half of 1996 also saw a decline in the unrated table market segment as
expansions at competing properties, construction on roadways into the city and
other factors all served to reduce unrated table play at the Sands. The Sands'
slight decrease in drop during 1995 compares with an increase of 4.7% in table
drop for all other Atlantic City casinos during the same period. As a result,
the Sands' table game market share decreased to 8.5% during 1995 from 8.8% in
1994. The Sands' table game drop decrease was again largely attributable to
competitive pressures in the rated table market segment; however, such decreases
were partially offset by increases in the unrated table segment. As a result of
the Grand Opening on July 1, 1994, the number of table games, excluding poker,
increased significantly and table games were made more accessible to casino
patrons boosting table drop during the second half of 1994. However, a number
of factors adversely affected the 1994 first six months' table games performance
including: (i) the relocation of many blackjack tables to a less accessible
temporary gaming space during construction and the periodic closing of selected
tables on the main casino floor as construction neared completion; (ii) the
severe winter weather during the first quarter, particularly on weekend periods
which generally affect the Sands to a greater degree than its competitors since
the Sands caters to premium table players who concentrate their visits over
weekend periods; (iii) the overall trend in the Atlantic City marketplace
towards slot machine play and (iv) competitive pressures, particularly in the
high-end table patron segment.
Slot machine handle increased $62.5 million (3.3%) and $131.9 million (7.5%)
for the years ended December 31, 1996 and 1995, respectively, compared with the
previous years. The Sands' slot machine handle increases compare with 4.9% and
15.7% increases, respectively, in slot machine handle for all other Atlantic
City casinos during the same periods. As a result, the Sands' market share
decreased to 6.1% in 1996 from 6.2% during 1995 and 6.7% during 1994. The
increases in slot machine handle are largely attributable to increases in
marketing programs, such as coin incentive and direct marketing programs, which
resulted in significant increases in the number of bus patrons for 1996
compared to 1995. The Sands' average number of slot machines increased by less
than 1% during 1996 compared to an increase of 11.3% for all other Atlantic City
casinos. The greater percentage increase in the number of slot machines for
other Atlantic City casinos reflects, in part, expansions of certain facilities
during 1996 which resulted in an overall increase of approximately 121,000
square feet of casino space and further contributed to the Sands' decline in
market share. Although the Sands' increase in the average number of slot
machines during 1995 was comparable to the overall Atlantic City industry
increase, the Sands' increase in slot machine handle lagged the 15.7% increase
in handle for all other Atlantic City casinos. During the
32
<PAGE>
second quarter of 1995, the Sands discontinued certain marketing programs and
promotions (particularly slot promotions which included cash giveaways) which
management deemed to be only marginally profitable. This strategy worked well
during the 1995 second quarter; however, entering the peak summer season, many
of the Sands' competitors increased such spending programs and the Sands lost
market share in the highly profitable mass market segment.
REVENUES
Casino revenues at the Sands decreased by $21.2 million (8%) during 1996
compared with 1995. Most of the decline in casino revenues is attributable to
table games which were impacted by both a decline in gross wagering as discussed
previously and by a significant and unusual decrease in table games hold
percentage at the Sands to 13.7% during 1996 compared to 15.8% during 1995. The
3.3% increase in slot machine wagering at the Sands during 1996 compared to 1995
was more than offset by a decline in the slot machine hold percentage to 8.2%
from 8.7%.
During 1995, casino revenues at the Sands increased by $7.8 million (3.1%)
compared with 1994. Casino revenues during the second quarter of 1994 included
the recognition of approximately $1 million resulting from the reversal of
certain progressive jackpot liabilities; the exclusion of such amount from 1994
revenues results in a 1995 increase in casino revenues of 3.5%. Casino revenues
were also negatively impacted by decreases in both the table games and slot
machine hold percentages at the Sands during 1995 compared to 1994.
Rooms revenues decreased $1.3 million (8.5%) during 1996 compared with 1995,
but did not change significantly during 1995 compared with 1994. The 1996
decrease reflects the sale in September 1996 of a hotel property operated by the
GBCC Group under a joint operating agreement. Room revenues for such property
were $1.4 million during the fourth quarter of 1995. Food and beverage revenues
increased by $1 million (2.9%) and by $3.3 million (10.6%), respectively, during
1996 and 1995 compared with the prior years. These increases were primarily the
result of the opening of the Epic Buffet at the Sands during the third quarter
of 1995, partially offset in 1996 by the aforementioned sale of a hotel
property. Other revenues increased $1.6 million (8.8%) during 1996 compared to
1995 primarily due to increases in theater entertainment revenue at the Sands.
Other revenues decreased $1.1 million (5.8%) during 1995 compared to 1994
primarily due to decreased revenues from GBCC's computer services subsidiary.
Promotional allowances represent the estimated value of goods and services
provided free of charge to casino customers under various marketing programs.
As a percentage of rooms, food and beverage and other revenues at the Sands,
these allowances decreased to 56.1% in 1996 from 57.6% in 1995 and 56.9% in
1994. The 1996 decrease is primarily attributable to increases in other types
of marketing programs in lieu of promotional allowances. The 1995 increase is
primarily attributable to promotional activity associated with the 1995 opening
of the Epic Buffet.
DEPARTMENTAL EXPENSES
Casino expenses at the Sands increased $9.7 million (4.6%) during 1996 and $11
million (5.6%) during 1995 compared with the prior years. The 1996 increase is
primarily due to the expansion of various marketing programs in response to
competitive pressures. During much of 1996, an unprecedented and highly
aggressive industry wide attempt to increase market share resulted in
significantly higher costs with respect to coin incentive packages offered to
bus patrons. The additional costs of such programs result in greater allocation
of rooms, food and beverage and other expenses to casino expense. The 1995
increase results from higher operating costs during the first half of 1995 due
to increased casino patronage at the expanded Sands facility. The increased
costs were most apparent during the first quarter of 1995, which saw a $7.4
million increase (17.1%) compared to the first quarter of 1994. Higher
operating costs were
33
<PAGE>
substantially offset during the remainder of 1995 by decreases in marketing
programs as previously discussed and by other cost containment measures
implemented by management.
Rooms expense decreased $529,000 (10.6%) during 1996 compared to 1995, but did
not change significantly during 1995 compared with the prior year. The 1996
decrease reflects the sale of a hotel property in September 1996 and is
comparable to the decline in associated rooms revenues.
Food and beverage expense did not change significantly during 1996 compared
with 1995 or during 1995 compared with 1994. Increased costs associated with
the 1995 third quarter opening of the Epic Buffet were offset by increases in
food and beverage complimentaries allocated to the casino department.
Other expenses increased $808,000 (21.6%) during 1996 compared with 1995 as
increases in theater entertainment costs at the Sands were partially offset by
increased allocations to the casino department. Other expenses decreased $1.5
million (29.3%) during 1995 compared with 1994 primarily due to reductions in
entertainment costs associated with headliner entertainment at the Sands.
OTHER CONSOLIDATED ITEMS
The operating expenses of HCC, exclusive of the Aurora Casino, the Tunica
Casino and the Sands, consist primarily of general and administrative expenses
and expenses incurred in connection with the pursuit of additional gaming
venues.
GENERAL AND ADMINISTRATIVE
General and administrative expenses did not increase significantly during 1996
compared to 1995 and increased $3.7 million (11.2%) during 1995 compared to
1994. As a result of the Tunica Casino only operating for a partial year in
1994, HCC's incremental general and administrative expenses were $3.3 million
during 1995.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense did not change significantly during 1996
compared to 1995 following an increase of $10 million (32.3%) during 1995
compared to 1994. Although the addition of a valet parking garage at the Aurora
Casino in August 1996 and a hotel tower at the Tunica Casino in September 1996
resulted in more depreciable assets, the revision of estimated economic lives of
existing assets as explained in Note 2 of the Notes to Consolidated Financial
Statements offset any increase in depreciation and amortization attributable to
property additions. The 1995 increase was primarily due to increased
depreciation and amortization resulting from the opening of the Tunica Casino.
Such opening resulted in an additional $6.7 million of depreciation and
amortization during 1995 compared to 1994.
AMORTIZATION OF PREOPENING COSTS
Amortization of deferred preopening costs represents the amortization of costs
incurred in connection with the openings of the Aurora Casino and the Tunica
Casino. Such costs, which include preopening training and general and
administrative costs, were fully amortized in 1994.
34
<PAGE>
DEVELOPMENT EXPENSES
Development expenses represent costs incurred in connection with HCC's pursuit
of potential gaming opportunities in jurisdictions where additional gaming
licenses may be available as well as those where gaming has not been legalized.
Such costs decreased $5.7 million (84.3%) in 1996 compared to 1995 primarily as
a result of an overall decrease in prospective venues and projects. Development
expenses increased by $1.6 million (31.3%) in 1995 compared to 1994 primarily as
a result of the 1995 abandonment and write off of $1.7 million of costs deferred
during 1994 for certain development projects which proved infeasible.
Additional 1995 project costs written off amounted to approximately $1.1
million. Excluding the effect of such write offs, development expenses
decreased by approximately $1.2 million in 1995 as a result of an overall
decrease in suitable venues and projects.
WRITE DOWN OF PROPERTIES HELD FOR SALE
During 1996, management determined that certain properties in Texas acquired
as potential sites for future development should be offered for sale. An
evaluation of net realizable value for such sites resulted in a write down for
the anticipated loss on disposal of the properties of $3.4 million.
INTEREST
Interest income decreased $607,000 (16.4%) for the year ended December 31,
1996 compared with 1995 and $519,000 (12.3%) for the year ended December 31,
1995 compared with 1994. The 1996 decrease in interest income is primarily due
to the expenditure of cash on construction projects from funds reserved for such
purposes and the overall decline in cash generated from operations at the Sands,
both of which reduced the amount of cash available for temporary cash
investments. The 1995 decrease results from comparison to an unusually high
level of interest income in 1994.
Interest expense increased $3.5 million (6.4%) and $9.3 million (20.2%),
respectively, during 1996 and 1995 compared to the prior years. Substantially
all of the 1996 interest expense increase was experienced by the HCC Group and
is attributable to interest incurred on $210 million of Senior Secured Notes
issued during October 1995, partially offset by the elimination of interest from
the retirement of previously outstanding debt. Such increases were partially
offset by the increased capitalization of interest on construction projects.
Substantially all of the 1995 interest expense increase was again experienced by
the HCC Group and is attributable to incremental interest incurred on certain
debt issued in June 1994 in connection with construction of the Tunica Casino
and the Senior Secured Notes, partially offset by reductions of interest from
the retirement of previously outstanding debt. The 1995 increase was compounded
by the 1994 capitalization of interest expense associated with the construction
of the Tunica Casino ($3.3 million).
LOSS ON DISPOSAL OF ASSETS
During 1996, GBCC experienced a loss on disposal of assets amounting to $1.8
million resulting from the write off of deferred option costs with respect to
the planned purchase of a site for future expansion. Loss on disposal of assets
during 1995 includes the sale of excess barges by HCT which were acquired in
January 1994 together with other assets of the partially completed Tunica
project from the project's previous owner. The barges were sold to third
parties at a price below management's estimate of net realizable value,
resulting in a loss on the sale.
WRITE DOWN OF AFFILIATE RECEIVABLES
In connection with a refinancing of its indebtedness in 1994, GBCC issued
$40.5 million discounted principal amount of deferred interest notes (the "PPI
Funding Notes") to HCC in exchange for
35
<PAGE>
$38.8 million principal amount of 15 1/2% notes issued by another GBCC
subsidiary and held by HCC. It was anticipated that HCC's primary method of
collection with respect to the new notes would be through the utilization of
existing tax net operating losses of the GBCC Group. As a result of HCC's
distribution of GBCC stock, GBCC's tax net operating losses will no longer be
available for utilization in HCC's consolidated tax returns; accordingly, HCC
evaluated the collectability of the $54.3 million PPI Funding Notes outstanding
at December 31, 1996. Based on (i) the planned utilization of $7.6 million of
such notes in connection with the acquisition from GBCC of the general
partnership interest in the limited partnership which holds the Aurora
Management contract (see "Liquidity and Capital Resources - HCC Group -Financing
Activities" below); (ii) management's intention, subject to the approval of the
independent directors of GBCC, to utilize additional notes to acquire other
assets from GBCC; and (iii) an evaluation of the future prospects for repayment
based on cash flow projections and other available information, HCC established
a valuation allowance in the amount of $18.7 million at December 31, 1996 to
adjust the carrying amount of the PPI Funding Notes to their estimated
realizable value.
INCOME TAX (PROVISION) BENEFIT
HCC and its subsidiaries have tax net operating loss carryforwards ("NOL's")
totaling approximately $20 million, none of which begin to expire until the year
2007. Additionally, HCC and its subsidiaries have various tax credits available
totaling approximately $200,000 which do not begin to expire until the year
2008.
Based on the operating results of the Aurora Casino and the Tunica Casino
since commencement of their operations, management believes that it is more
likely than not that future consolidated taxable income will be sufficient to
utilize at least a portion of the NOL's, tax credits and other deferred tax
assets resulting from temporary differences. Accordingly, under the provisions
of Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes", the consolidated balance sheets reflect the recording of a net deferred
tax asset of $6.5 million as of December 31, 1996. Subject to a "change of
control" as discussed below not occurring, the ultimate recognition of this
amount of deferred tax assets will be dependent on HCC and its subsidiaries'
ability to generate approximately $19 million of taxable income for federal tax
purposes prior to the expiration dates of the NOL's and tax credit carryforwards
and the reversal of other temporary differences.
NET OPERATING LOSS CARRYFORWARDS
Sales by HCC or existing stockholders of common stock by a five percent
stockholder, as defined in the Internal Revenue Code of 1986, as amended (the
"Code"), can cause a "change of control", as defined in Section 382 of the Code,
which would limit the ability of HCC or its subsidiaries to utilize these loss
carryforwards in later tax periods. Should such a change of control occur, the
amount of loss carryforwards available for use in any one year would most likely
be substantially reduced. Future treasury regulations, administrative rulings
or court decisions may also effect HCC's future utilization of its loss
carryforwards.
36
<PAGE>
EXTRAORDINARY ITEM
During October 1995, HCC completed the refinancing of $90 million of 14%
Senior Notes as well as other debt incurred in connection with the construction
of the Tunica Casino. As a result, costs and fees incurred, together with the
write off of unamortized transaction costs, resulted in the recording of an
extraordinary item in the amount of $23.8 million in 1995.
INFLATION
Management believes that in the near term, modest inflation, together with
increased competition within the gaming industry for qualified and experienced
personnel, will continue to cause increases in operating expenses, particularly
labor and employee benefits costs.
SEASONALITY
Historically, the Sands' operations have been highly seasonal in nature, with
the peak activity occurring from May to September. Consequently, the results of
HCC's operations for the first and fourth quarters have traditionally been less
profitable than the other quarters of the fiscal year. Furthermore, the Aurora
Casino has also experienced seasonality, but to a lesser degree than the Sands,
and management believes that seasonality may also cause fluctuations in reported
results at the Tunica Casino. In addition, the operations of the Aurora Casino,
the Tunica Casino, and the Sands may fluctuate significantly due to a number of
factors, including chance. Such seasonality and fluctuations may materially
affect HCC's casino revenues and overall profitability.
LIQUIDITY AND CAPITAL RESOURCES
Since their openings on June 17, 1993 and August 8, 1994, respectively, the
Aurora Casino and the Tunica Casino have become the principal sources of
liquidity and capital resources for HCC. Prior to the commencement of
operations of the Aurora facility, HCC's principal business activities were
limited to its approximate 80% ownership of GBCC. GBCC's principal sources of
liquidity and capital resources for the last several years have been cash flow
from the Sands, proceeds from debt financings and proceeds from asset sales.
HCC GROUP
OPERATING ACTIVITIES
The operations of the Aurora Casino continue to be the HCC Group's primary
source of liquidity and capital resources, having contributed approximately
$21.8 million of cash flow from operations during 1996 after deducting the
payment of $9.4 million of management fees to the GBCC Group. The Tunica Casino
provided $6.5 million of cash from operations during 1996 after deducting the
payment of $1.2 million of consulting fees to the GBCC Group. The HCC Group's
other sources of funds have included the repayment of principal and interest on
intercompany loans made to the GBCC Group 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 the HCC Group included interest
payments on the 14% Senior Notes ($27.8 million), costs to pursue development
opportunities ($1 million) and corporate overhead costs ($8.7 million).
During 1995, cash flow from operations, together with existing cash, $5
million in debt financing and the repayment of $5.5 million of indebtedness from
the GBCC Group were used by the HCC Group to fund capital expenditures of
approximately $45.2 million, to repay third party indebtedness of approximately
$4 million and to make payments under capital lease obligations of $2.4 million.
37
<PAGE>
Subsequent to its distribution of GBCC common stock, the HCC Group has tax net
operating loss carryforwards totaling approximately $20 million and tax credits
available totaling approximately $200,000. Due to the availability of such net
operating loss and tax credit carryforwards, management presently does not
anticipate HCC and its subsidiaries being required to make significant tax
payments in the near future.
FINANCING ACTIVITIES
During October 1995, the HCC Group completed the refinancing of its 14% Senior
Notes and 13 1/2% First Mortgage Notes through a public offering of $210 million
of 12 3/4% Senior Secured Notes due November 1, 2003, discounted to yield
13 3/4% per annum (the "HCC Refinancing"). In addition to refinancing existing
debt, proceeds from the HCC Refinancing were used to finance construction of a
352-room hotel tower and related amenities and to fund development and
construction of the "Adventure Slots" attraction, a themed gaming area, at the
Tunica Casino; to fund HCA's required contribution of $4 million for
construction of a new 500-space parking garage; and, to the extent available,
for working capital purposes. Interest on the Senior Secured Notes is payable
semiannually on May 1 and November 1 of each year commencing on May 1, 1996.
The Senior Secured Notes are unconditionally guaranteed on a senior secured
basis by HCT and by certain future subsidiaries of HCC. Neither HCA nor GBCC
and its subsidiaries are guarantors. The Senior Secured Notes and related
guarantees are secured by, among other things, (i) substantially all of the
assets of HCT and future guarantors, (ii) a first mortgage limited to
approximately $39 million on substantially all of the assets of HCA, (iii) a
pledge of the capital stock of certain subsidiaries of HCC and (iv) the
collateral assignment of any future management contracts entered into by HCC.
The Senior Secured Notes are redeemable at the option of HCC any time on or
after November 1, 1999 at 106.375% of the then outstanding principal amount,
decreasing to 103.1875% and 100%, respectively, on November 1, 2000 and 2001.
Commencing with the November 1, 1997 interest payment date and at each
subsequent interest payment date, HCC will be required to make an offer to
purchase not more than $2.5 million in principal amount of the Senior Secured
Notes at a price of 106.375% of the principal amount tendered.
The indenture to the Senior Secured Notes contains various provisions limiting
the ability of HCC and certain defined subsidiaries to, among other things, pay
dividends or make other restricted payments; incur additional indebtedness or
issue preferred stock; create liens; create dividend or other payment
restrictions affecting certain defined subsidiaries; enter into mergers or
consolidations or make sales of all or substantially all assets of HCC, HCT or
any future guarantor; and enter into transactions with certain affiliates.
During 1995, HCA obtained a $5 million unsecured bank promissory note with
respect to its riverboat expansion project. Principal payments are based on a
30-month amortization with the final payment due in February 1998.
At December 31, 1996, HCT had a $1 million bank credit facility available
through August 15, 1997. Borrowings on the line of credit accrue interest at
the rate of prime plus 1 1/2% per annum. During the first quarter of 1997, HCT
borrowed $1 million on this credit facility.
Subject to regulatory approval and effective as of April 1, 1997, HCC will
acquire from the GBCC Group the general partnership interest in the limited
partnership which holds the Aurora Management contract. The acquisition price
for the general partnership interest will include a note in the amount of $3.8
million and the assignment of $7.6 million of PPI Funding Notes to the GBCC
Group. Annual principal and interest payments by HCC on the $3.8 million note
will approximate the general partner's share of annual partnership distributions
which will now be made to HCC.
38
<PAGE>
In connection with the GBCC Group recapitalization discussed below, HCC loaned
$15 million on a junior subordinated basis to the GBCC Group at 14 5/8% interest
(the "Junior Subordinated Notes"); payment of principle and interest on this
loan is subject to certain members of the GBCC Group meeting certain financial
coverage and other payment restriction tests. As of December 31, 1996, HCC had
assigned the entire principal amount of the Junior Subordinated Notes together
with accrued interest thereon to the GBCC Group in consideration for tax net
operating losses of the GBCC Group utilized by the HCC Group in 1994 ($6.3
million principal and $1.9 million interest) and as a capital contribution in
connection with the distribution of GBCC stock to HCC's shareholders ($8.7
million principal and $1.8 million interest).
As of December 31, 1996, the HCC Group's scheduled maturities of long-term
debt and payments under capital leases during 1997 are approximately $6.3
million and $3.7 million, respectively.
CAPITAL EXPENDITURES AND OTHER INVESTING ACTIVITIES
In September 1996, HCA and the Aurora Metropolitan Exposition, Auditorium and
Office Building Authority ("ACCA") completed the joint construction of a new
five-story, approximately 500-space parking garage directly across the street
from, and connected by a climate-controlled tunnel to, the Aurora Casino's
Pavilion. The garage provides additional parking for patrons of the Aurora
Casino and contains approximately 1,500 square feet of retail space. ACCA
financed a portion of the construction costs through an $11.5 million, 7.5%
industrial revenue bond issue which yielded proceeds of approximately $10.5
million. HCA funded all remaining construction costs and escrowed $3,500,000 at
the rate of $400,000 per month towards satisfaction of its obligations under the
agreement. HCA also agreed to make payments to ACCA equal to the financing
costs relating to the ACCA industrial revenue bond issue due in July 1996.
Other capital expenditures at the Aurora Casino during 1996 were approximately
$5.8 million, including $1.8 million for construction of a pedestrian bridge to
improve access from the existing self park garage to the Pavillion, $1.3 million
for new slot machines, $300,000 for a new dining outlet and other departmental
expenditures. Management anticipates spending $3.1 million during 1997
primarily for its ongoing capital improvements program with no major projects
currently scheduled.
Capital expenditures at the Tunica Casino for 1996 amounted to $35 million.
Of such expenditures, $31.1 million was spent toward the construction of an
adjacent eight-story hotel tower, including 352 additional rooms, additional
banquet space, an enclosed pool/atrium and a showroom and $2.1 million was spent
on construction of the "Adventure Slots" attraction. Additional expenditures
included approximately $1 million for new signage and other departmental
expenditures. Management anticipates spending $2.5 million in 1997 primarily
for its ongoing program of capital improvements.
HCT has entered into a partnership agreement providing for the joint
construction and ownership of a golf course in conjunction with two other casino
operators. Management estimates that its contributions to the partnership will
aggregate $2 million.
During November 1995, HCC loaned $10 million of the proceeds from the HCC
Refinancing to an unaffiliated gaming company in the form of two $5 million
notes (Series A and Series B). The loans earn interest at the rate of prime
plus one percent per annum and are payable in quarterly installments of
principal and interest commencing in November 1997 with the final payment due in
August 2000. All principal payments received are to be applied first to the
Series A note. In connection with the loans, HCC received warrants to acquire
up to a 10% equity interest in the gaming company at any time between November
15, 1998 and November 15, 2000 at an exercise price of $500,000 per 1/2%
interest. Under the terms of the loan agreement, the gaming company may require
HCC to exercise warrants to acquire a 5% equity interest on November 15, 1998 at
a cost not to exceed $5 million, payable through the
39
<PAGE>
reduction of the outstanding principal balance and, to the extent applicable,
the forgiveness of accrued interest on the Series B note.
HCC is pursuing several potential gaming opportunities. HCC intends to
finance any future ventures with cash flow from operations, together with
private, public or bank financing, which might include non-recourse project
financing.
SUMMARY
As a result of the distribution to its shareholders of GBCC stock, HCC's
funding requirements for 1997 will consist of those required for the HCC Group,
as previously defined. Management anticipates that the HCC Group's funding
requirements for the next twelve months will be satisfied by existing cash and
cash generated by the Aurora and Tunica Casinos.
THE GBCC GROUP
OPERATING ACTIVITIES
The GBCC Group receives a base management fee equal to 5% of operating
revenues (as defined in the management agreement) subject to a maximum of $5.5
million annually, and an incentive fee equal to 10% of gross operating profit
(as defined in the management agreement) from the operation of the Aurora
Casino. Management fees received during 1996 amounted to $9.4 million. During
1994, the GBCC Group entered into a consulting agreement with HCT with respect
to the Tunica Casino which provides for the payment of $1.2 million annually by
the Tunica Casino for consulting services and for reimbursement of direct costs
and expenses incurred.
Prior to 1996, the Sands' earnings before depreciation, interest,
amortization, taxes and intercompany management fees were sufficient to meet its
debt service obligations (other than certain maturities of principal that have
been refinanced) and to fund a substantial portion of its capital expenditures.
Historically, the Sands has also utilized borrowings to fund seasonal cash needs
and for certain capital projects.
During 1996, the GBCC Group's net cash used in operating activities (after
net interest expense and income taxes) amounted to $3 million compared with cash
provided by operating activities of $29.2 million during 1995. The change in
net cash from operating activities compared to 1995 results primarily from a
substantial decline in operating cash flow generated by the Sands. The Sands
sustained an operating cash flow deficit of $6.1 million during 1996 compared to
net cash generated from operations of $20.7 million during 1995, resulting in an
aggregate decline in operating cash flow of $26.8 million and a decline in
working capital of $28.2 million compared to December 31, 1995. The GBCC Group
utilized existing cash together with proceeds from the repayment of an
outstanding note receivable, borrowings on GBHC's short-term credit facility and
net borrowings from HCC during 1996 to meet its operating needs, to fund capital
additions ($8.1 million), to make obligatory investments at the Sands ($3.1
million) and to retire its share of the underlying indebtedness of an
unconsolidated partnership in connection with the sale of a Florida hotel
property ($2.9 million).
In prior years GBCC's hotel operations required substantial infusions of
operating funds; however, the disposition of substantially all of its hotel
properties has greatly reduced the cash required to fund hotel operations (see
"Capital Expenditures and Other Investments" below).
40
<PAGE>
FINANCING ACTIVITIES
During February 1994, the GBCC Group completed the refinancing of virtually
all of its casino-related outstanding debt. The refinancing was completed
through a public offering of $270 million of debt securities consisting of $185
million of 10 7/8% First Mortgage Notes due January 15, 2004 and $85 million of
11 5/8% PRT Funding Notes due April 15, 2004. Proceeds from the debt offerings
were used, in part, to refinance outstanding mortgage notes on the Sands and
other indebtedness scheduled to mature in 1994, to repay $58.4 million of
publicly held PCPI Notes and to provide partial funding for an expansion of
gaming space at the Sands. During 1996, the GBCC Group repaid long-term
indebtedness of $2.4 million.
As of April 30, 1996, GBHC extended $2 million of its bank line of credit
until April 30, 1997. As of December 31, 1996, $2 million was outstanding under
the line of credit; the outstanding balance was repaid in January 1997 and the
line of credit was cancelled.
During the third quarter of 1996, the GBCC Group borrowed $6.5 million from
HCC which accrues interest at the rate of 13 3/4% per annum payable quarterly
commencing October 1, 1996. GBCC loaned such funds to GBHC on similar terms.
Also during the third quarter of 1996, the GBCC Group repaid $4.8 million it
previously borrowed from HCC with respect to the purchase of the underlying
indebtedness of a non-casino hotel property it operated (see below).
CAPITAL EXPENDITURES AND OTHER INVESTMENTS
Property and equipment additions during 1996 totaled $8.1 million, of which
capital expenditures at the Sands amounted to approximately $5.5 million.
Additional capital expenditures by the GBCC Group during 1996 included
approximately $2.6 million of property improvements at a non-casino hotel
property it operated under an agreement with Metroplex Hotel Limited (see Note 8
of Notes to Consolidated Financial Statements).
The Sands is required by the New Jersey Casino Control Act to make certain
investments with the CRDA, a governmental agency which administers the
statutorily mandated investments made by casino licensees. Deposit requirements
for 1996 totaled $3.1 million.
GBCC agreed to contribute up to $3.9 million (approximately $2.5 million of
which was paid) as an additional investment in an unconsolidated hotel
partnership to refurbish the hotel facility in Orlando, Florida. No such
contributions were required during 1996. Such contributions were in recognition
of GBCC's partner having agreed to make $5 million in principal reductions on
the underlying mortgage note on the facility of which $4 million was made.
During November 1996, the Partnership sold the hotel facility; GBCC was required
to pay approximately $2.9 million to retire its share of the underlying
indebtedness of the property.
Also during the fourth quarter of 1996, another unconsolidated partnership in
which a GBCC subsidiary holds a 50% interest entered into a contract for the
sale of a casino/hotel in San Juan, Puerto Rico owned by the partnership and
managed by a GBCC subsidiary. The sale was completed in February 1997; the GBCC
subsidiary received a fee of approximately $1.5 million with respect to the
termination of its management agreement and agreed to provide management
services on a month to month basis through October 1997 subject to cancellation
by the new owners.
41
<PAGE>
SUMMARY
As discussed previously, the GBCC Group is no longer a consolidated subsidiary
of HCC. Accordingly, liquidity and capital resource requirements of the GBCC
Group are no longer relevant to management's discussion and analysis of HCC's
financial condition.
42
<PAGE>
ITEM 8. INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES:
Report of Independent Public Accountants.................... 44
Consolidated Balance Sheets as of December 31, 1996
and 1995................................................... 45
Consolidated Statements of Operations for the Years
Ended December 31, 1996, 1995 and 1994..................... 47
Consolidated Statement of Changes in Shareholders' Equity
(Deficit) for the Three Years Ended December 31, 1996...... 48
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1996, 1995 and 1994..................... 49
Notes to Consolidated Financial Statements.................. 50
HOLLYWOOD CASINO-AURORA, INC.
Report of Independent Public Accountants.................... 74
Balance Sheets as of December 31, 1996 and 1995............. 75
Statements of Operations for the Years Ended
December 31, 1996, 1995 and 1994........................... 77
Statement of Changes in Shareholder's Equity for the
Three Years Ended December 31, 1996........................ 78
Statements of Cash Flows for the Years Ended
December 31, 1996, 1995, and 1994.......................... 79
Notes to Financial Statements............................... 80
HWCC-TUNICA, INC.
Report of Independent Public Accountants.................... 91
Consolidated Balance Sheets as of December 31,
1996 and 1995.............................................. 92
Consolidated Statements of Operations for the Years
Ended December 31, 1996, 1995 and 1994..................... 94
Consolidated Statement of Changes in Shareholder's
Equity for the Three Years Ended December 31, 1996......... 95
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1996, 1995 and 1994........................... 96
Notes to Consolidated Financial Statements.................. 97
</TABLE>
43
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
----------------------------------------
To Hollywood Casino Corporation:
We have audited the accompanying consolidated balance sheets of
Hollywood Casino Corporation (the Company and a Delaware corporation) and
subsidiaries as of December 31, 1996 and 1995, and the related consolidated
statements of operations, changes in shareholders' equity (deficit) and cash
flows for each of the three years in the period ended December 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
Hollywood Casino Corporation and subsidiaries as of December 31, 1996 and 1995,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Roseland, New Jersey
March 21, 1997
44
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (NOTE 1)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1996 1995
------------- --------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents....................... $ 21,488,000 $ 56,538,000
Accounts receivable, net of allowances of
$1,693,000 and $17,675,000, respectively....... 3,140,000 16,410,000
Inventories..................................... 1,620,000 5,837,000
Prepaid expenses................................ 1,363,000 3,530,000
Deferred income taxes........................... 4,271,000 10,585,000
Refundable deposits and other
current assets................................. 328,000 950,000
Due from affiliates............................. 7,641,000 -
------------ -------------
Total current assets........................... 39,851,000 93,850,000
------------ -------------
Property and Equipment:
Land............................................ 20,346,000 61,643,000
Buildings and improvements...................... 119,501,000 255,646,000
Riverboats and barges........................... 69,713,000 39,491,000
Operating equipment............................. 39,494,000 149,051,000
Construction in progress........................ 687,000 7,378,000
------------ -------------
249,741,000 513,209,000
Less - accumulated depreciation
and amortization............................... (49,740,000) (179,073,000)
------------ -------------
Net property and equipment..................... 200,001,000 334,136,000
------------ -------------
Cash Restricted for Construction Projects........ - 29,874,000
------------ -------------
Other Assets:
Obligatory investments.......................... - 5,521,000
Deferred financing costs........................ 6,565,000 16,136,000
Notes receivable................................ 10,000,000 19,222,000
Land rights..................................... 7,658,000 7,962,000
Due from affiliate, net of valuation allowance.. 36,597,000 -
Other assets.................................... 7,413,000 7,762,000
------------ -------------
Total other assets............................. 68,233,000 56,603,000
------------ -------------
$308,085,000 $ 514,463,000
============ =============
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these consolidated balance sheets.
45
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (NOTE 1)
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1996 1995
-------------- --------------
<S> <C> <C>
Current Liabilities:
Current maturities of long-term debt
and capital lease obligations........................ $ 8,282,000 $ 9,325,000
Accounts payable...................................... 5,407,000 14,054,000
Accrued liabilities -
Salaries and wages................................... 3,531,000 9,593,000
Interest............................................. 4,734,000 16,964,000
Insurance............................................ 2,268,000 4,319,000
Other................................................ 5,368,000 10,767,000
Due to affiliates..................................... 2,534,000 -
Other current liabilities............................. 1,550,000 7,331,000
------------- -------------
Total current liabilities............................ 33,674,000 72,353,000
------------- -------------
Long-Term Debt......................................... 202,057,000 476,829,000
------------- -------------
Capital Lease Obligations.............................. 21,707,000 10,693,000
------------- -------------
Other Noncurrent Liabilities........................... 5,503,000 11,821,000
------------- -------------
Commitments and Contingencies
Shareholders' Equity (Deficit):
Common Stock:
Class A common stock, $.0001 par value per share;
50,000,000 shares authorized; 24,760,000 and
24,720,000 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............................ 235,606,000 77,936,000
Accumulated deficit................................... (190,464,000) (135,171,000)
------------- -------------
Total shareholders' equity (deficit)................. 45,144,000 (57,233,000)
------------- -------------
$ 308,085,000 $ 514,463,000
============= =============
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these consolidated balance sheets.
46
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (NOTE 1)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1996 1995 1994
-------------- ------------- -------------
<S> <C> <C> <C>
Revenues:
Casino........................................................... $487,374,000 $498,618,000 $426,084,000
Rooms............................................................ 18,834,000 17,950,000 15,191,000
Food and beverage................................................ 61,620,000 56,225,000 46,022,000
Other............................................................ 13,339,000 12,459,000 21,097,000
------------ ------------ ------------
581,167,000 585,252,000 508,394,000
Less - Promotional allowances.................................... (50,587,000) (45,309,000) (44,010,000)
------------ ------------ ------------
Net revenues.................................................... 530,580,000 539,943,000 464,384,000
------------ ------------ ------------
Expenses:
Casino........................................................... 393,022,000 363,867,000 307,525,000
Rooms............................................................ 6,029,000 6,871,000 5,644,000
Food and beverage................................................ 20,708,000 19,884,000 18,735,000
Other............................................................ 7,010,000 5,535,000 6,872,000
General and administrative....................................... 37,169,000 36,914,000 33,189,000
Depreciation and amortization.................................... 40,836,000 40,955,000 30,960,000
Amortization of preopening costs................................. - - 11,002,000
Development...................................................... 1,065,000 6,765,000 5,154,000
Write down of properties held for sale........................... 3,400,000 - -
------------ ------------ ------------
Total expenses................................................. 509,239,000 480,791,000 419,081,000
------------ ------------ ------------
Income from operations............................................ 21,341,000 59,152,000 45,303,000
------------ ------------ ------------
Non-operating income (expenses):
Interest income.................................................. 3,101,000 3,708,000 4,227,000
Interest expense, net of capitalized interest
of $1,006,000, $354,000 and $4,065,000, respectively............ (59,090,000) (55,558,000) (46,233,000)
Loss on disposal of assets....................................... (1,841,000) (514,000) (26,000)
------------ ------------ ------------
Total non-operating expenses, net............................... (57,830,000) (52,364,000) (42,032,000)
------------ ------------ ------------
(Loss) income before income taxes, nonrecurring and
extraordinary items.............................................. (36,489,000) 6,788,000 3,271,000
Valuation provision on affiliate receivables...................... (18,741,000) - -
------------ ------------ ------------
(Loss) income before income taxes and extraordinary item.......... (55,230,000) 6,788,000 3,271,000
Income tax provision.............................................. (63,000) (268,000) (1,527,000)
------------ ------------ ------------
(Loss) income before extraordinary item.......................... (55,293,000) 6,520,000 1,744,000
Extraordinary item:
(Loss) gain on early extinguishment of debt, net of
related tax benefit............................................. - (23,808,000) 126,000
------------ ------------ ------------
Net (loss) income................................................. $(55,293,000) $(17,288,000) $ 1,870,000
============ ============ ============
Net (loss) income per common share:
(Loss) income before extraordinary item.......................... $(2.24) $.26 $.07
Extraordinary item............................................... - (.96) .01
------------ ------------ ------------
Net (loss) income................................................ $(2.24) $(.70) $.08
============ ============ ============
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these consolidated statements.
47
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT) (NOTE 1)
FOR THE THREE YEARS ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
CLASS A
COMMON STOCK ADDITIONAL
------------------ PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT
---------- ------ ------------ -------------
<S> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1994......................... 22,720,000 $2,000 $ 77,933,000 $(119,753,000)
Exercise of stock warrants.................... 1,140,000 - 1,000 -
Exercise of stock options..................... 532,000 - - -
Net income.................................... - - - 1,870,000
---------- ------ ------------ -------------
BALANCE, DECEMBER 31, 1994....................... 24,392,000 2,000 77,934,000 (117,883,000)
Exercise of stock options..................... 328,000 - 2,000 -
Net loss...................................... - - - (17,288,000)
---------- ------ ------------ -------------
BALANCE, DECEMBER 31, 1995....................... 24,720,000 2,000 77,936,000 (135,171,000)
Distribution of Greate Bay Casino
Corporation common stock.................... - - 157,670,000 -
Exercise of stock options..................... 40,000 - - -
Net loss...................................... - - - (55,293,000)
---------- ------ ------------ -------------
BALANCE, DECEMBER 31, 1996....................... 24,760,000 $2,000 $235,606,000 $(190,464,000)
========== ====== ============ =============
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of this consolidated statement.
48
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (NOTE 1)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------
1996 1995 1994
------------- -------------- --------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net (loss) income.............................................................. $(55,293,000) $ (17,288,000) $ 1,870,000
Adjustments to reconcile net (loss) income to net cash provided by
operating activities:
Extraordinary item............................................................ - 23,808,000 (126,000)
Depreciation and amortization, including accretion of debt discount........... 41,621,000 41,477,000 42,420,000
Valuation provision on affiliate receivables.................................. 18,741,000 - -
Write down of properties held for sale........................................ 3,400,000 - -
Loss on sale of assets........................................................ 1,841,000 514,000 26,000
Provision for doubtful accounts............................................... 3,031,000 3,774,000 3,830,000
Deferred income tax provision (benefit)....................................... 46,000 (419,000) 1,947,000
Increase in accounts receivable............................................... (769,000) (3,890,000) (4,081,000)
Net increase in accounts payable and accrued expenses......................... 649,000 3,008,000 724,000
Net change in other current assets and liabilities............................ (677,000) 2,754,000 (2,111,000)
Net change in other noncurrent assets and liabilities......................... (281,000) (211,000) (4,060,000)
------------ ------------- -------------
Net cash provided by operating activities.................................... 12,309,000 53,527,000 40,439,000
------------ ------------- -------------
INVESTING ACTIVITIES:
Net property and equipment additions........................................... (53,078,000) (55,009,000) (101,729,000)
Collections on notes receivable................................................ 9,361,000 103,000 7,614,000
Issuance of notes receivable................................................... - (10,000,000) -
Proceeds from dispositions of assets........................................... 2,699,000 236,000 73,000
Obligatory investments......................................................... (3,062,000) (2,967,000) (826,000)
Purchase of mortgage note...................................................... - - (5,750,000)
Short-term investments......................................................... (2,000,000) - -
Cost of acquisition, net of cash acquired...................................... - - (8,998,000)
Deferred preopening costs...................................................... - - (5,140,000)
Investments in unconsolidated affiliates....................................... (2,946,000) (1,675,000) (660,000)
Distribution of GBCC cash and cash equivalents................................. (22,991,000) - -
(Increase) decrease in cash restricted for construction projects............... 29,874,000 (29,874,000) -
------------ ------------- -------------
Net cash used in investing activities.......................................... (42,143,000) (99,186,000) (115,416,000)
------------ ------------- -------------
FINANCING ACTIVITIES:
Repayments of short-term debt.................................................. - - (21,000,000)
Proceeds from issuance of long-term debt....................................... 2,203,000 204,939,000 327,500,000
Net borrowings on short-term credit facilities................................. 2,000,000 - -
Cost of early retirement of debt............................................... - (16,635,000) -
Deferred financing costs....................................................... (126,000) (7,634,000) (14,714,000)
Repayments of long-term debt................................................... (6,840,000) (142,554,000) (237,411,000)
Payments on capital lease obligations.......................................... (2,453,000) (2,412,000) (1,559,000)
Issuance of common stock....................................................... - 2,000 1,000
------------ ------------- -------------
Net cash (used in) provided by financing activities........................... (5,216,000) 35,706,000 52,817,000
------------ ------------- -------------
Net decrease in cash and cash equivalents..................................... (35,050,000) (9,953,000) (22,160,000)
Cash and cash equivalents at beginning of year............................... 56,538,000 66,491,000 88,651,000
------------ ------------- -------------
Cash and cash equivalents at end of year..................................... $ 21,488,000 $ 56,538,000 $ 66,491,000
============ ============= =============
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these consolidated statements.
49
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) ORGANIZATION AND BUSINESS
Hollywood Casino Corporation ("HCC" or the "Company"), is a Delaware
corporation which was organized and incorporated on November 5, 1990. On June
4, 1993, HCC completed an initial public offering of 4,800,000 shares of its
Class A Common Stock (the "Stock Offering"). As a result of the Stock Offering
and the subsequent exercise of warrants to purchase common stock, 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") currently own approximately 53% of the issued and outstanding stock of
HCC.
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.
Prior to December 31, 1996, HCC also owned approximately 80% of the common
stock of Greate Bay Casino Corporation ("GBCC", formerly known as Pratt Hotel
Corporation), 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. GBCC's principal
assets were the Sands Hotel and Casino in Atlantic City, New Jersey (the
"Sands") and management and consulting contracts with the Aurora Casino and the
Tunica Casino, respectively. GBCC's other operations in the United States and
Puerto Rico, including various ventures in which GBCC had an interest, were
managed by GBCC or its subsidiaries.
The Company estimates that its gaming operations derive a significant amount
of their gaming revenues from patrons living in areas surrounding the sites
where the Company's gaming operations are located. Competition within the
Company's gaming markets is intense and management believes that this
competition will continue in the future.
The Board of Directors approved the adoption in May 1993 of a Rights
Agreement, which provides that stockholders of HCC receive rights to acquire
Series A Junior Participating Preferred Stock of HCC at an initial price of $60
per one one-hundredth of a share, subject to adjustment, for each share of HCC
Common Stock owned. The rights become exercisable if a person (other than the
Pratt Family) acquires 20% or more, or announces a tender offer for 20% or more,
of the Company's Common Stock. If the Company is acquired in a merger or other
business combination, each right will enable the holder to exercise such right
for Common Stock of the acquiring company at a 50% discount. The rights, which
expire on May 7, 2003, may be redeemed by the Company at its option at a price
of $.0001 per right at any time prior to the earlier of 10 days following the
date after which a person has acquired at least 20% of the Company's outstanding
shares or May 7, 2003. Until such time as it becomes likely that the rights
will be exercised, they are not included as common stock equivalents in the
computation of net (loss) income per common share.
50
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Contined)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies followed in the preparation of the
accompanying consolidated financial statements are discussed below. 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.
PRINCIPLES OF CONSOLIDATION -
The consolidated financial statements include the accounts of HCC and its
wholly owned subsidiaries and, prior to December 31, 1996, GBCC (which was
majority owned) and GBCC's wholly owned subsidiaries. At December 31, 1996,
GBCC is no longer a subsidiary of HCC. The accompanying consolidated financial
statements include GBCC's operations and cash flows through the date of
disposition (December 31, 1996). However, the accompanying consolidated balance
sheet at December 31, 1996 no longer reflects GBCC on a consolidated basis and
reflects the dividend of GBCC's common stock to HCC's shareholders (adjusted for
related transactions) as an adjustment to additional paid-in capital. All
significant intercompany balances and transactions have been eliminated.
Investments in unconsolidated affiliates including joint ventures, that were 50%
or less owned are accounted for by the equity method. To the extent that losses
incurred in prior years by GBCC have exceeded the minority shareholders'
interest associated with such shares, such losses have been allocated to HCC.
CASINO REVENUES, PROMOTIONAL ALLOWANCES AND DEPARTMENTAL EXPENSES -
HCC recognizes the net win from gaming activities (the difference between
gaming wins and losses) as casino revenues. Casino revenues are net of accruals
for anticipated payouts of progressive and certain other slot machine jackpots
and certain progressive table game payouts. Such anticipated jackpots and
payouts are reflected as other accrued liabilities in the accompanying
consolidated balance sheets. During the year ended December 31, 1994, the Sands
removed certain progressive jackpots from the gaming floor, in accordance with
regulations of the New Jersey Casino Control Commission (the "Casino
Commission") resulting in the reduction of $1,035,000 of progressive jackpot
liabilities and the corresponding recognition of an equal amount of slot machine
revenues.
The estimated value of rooms, food and beverage and other items which were
provided to customers without charge has been included in revenues and a
corresponding amount has been deducted as promotional allowances. The costs of
such complimentaries have been included as casino expenses in the accompanying
consolidated statements of operations. Costs of complimentaries allocated from
the rooms,
51
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Contined)
food and beverage and other operating departments to the casino department
during the years ended December 31, 1996, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Rooms.............. $ 7,332,000 $ 6,677,000 $ 6,253,000
Food and beverage.. 49,860,000 45,639,000 35,128,000
Other.............. 5,956,000 6,309,000 6,094,000
----------- ----------- -----------
$63,148,000 $58,625,000 $47,475,000
=========== =========== ===========
</TABLE>
CASH AND CASH EQUIVALENTS -
Cash and cash equivalents are generally comprised of cash and
investments with original maturities of three months or less, such as commercial
paper, certificates of deposit and fixed repurchase agreements.
ALLOWANCE FOR DOUBTFUL ACCOUNTS -
The allowance for doubtful accounts is maintained at a level
considered adequate to provide for possible future losses. Provisions for
doubtful accounts amounting to $3,031,000, $3,774,000 and $3,830,000 were made
during the years ended December 31, 1996, 1995 and 1994, respectively.
INVENTORIES -
Inventories are stated at the lower of cost (on a first-in, first-out
basis) or market.
PROPERTY AND EQUIPMENT -
Property and equipment have been recorded at cost and are being
depreciated utilizing the straight-line method over their estimated useful lives
as follows:
Buildings and improvements 10-40 years
Riverboats and barges 25-40 years
Operating equipment 3-15 years
On October 1, 1996, HCC revised the estimated useful lives of its
buildings, barges and related land rights (see below) from 25 years to 40 years;
of certain parking facilities under a capital lease from 25 years to 30 years;
and of certain operating equipment from three years to five years. Management
believes the changes in estimated lives more appropriately reflect the timing of
the economic benefits to be received from these assets. For the year ended
December 31, 1996, the effect of these changes reduced depreciation and
amortization expense and net loss by approximately $1,893,000 and reduced net
loss per share by $.08.
Interest costs related to property and equipment acquisitions are
capitalized during the acquisition period and amortized over the useful lives of
the related assets.
52
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Contined)
DEFERRED FINANCING COSTS -
The costs of issuing long-term debt, including all underwriting,
licensing, legal and accounting fees, have been capitalized and are being
amortized over the term of the related debt issue. Amortization of such costs
was $2,044,000, $3,016,000 and $2,578,000 for the years ended December 31, 1996,
1995 and 1994, respectively. Deferred financing costs, net of accumulated
amortization, amounting to $5,853,000 and $104,000 were written off during 1995
and 1994, respectively, with respect to the reacquisition of outstanding debt.
LONG-LIVED ASSETS -
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 has recorded an anticipated loss from the disposition of assets held for
sale of $3,400,000 for the year ended December 31, 1996 related to its long-
lived assets.
ACCRUED INSURANCE -
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.
INCOME TAXES -
HCC complies with the provisions of Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"), which utilizes
the liability method and results in the determination of deferred taxes based on
the estimated future tax effects of differences between the financial statement
and tax bases of assets and liabilities.
INTEREST EXPENSE -
Interest expense includes the accretion of debt discount amounting to
$785,000, $522,000 and $458,000 during the years ended December 31, 1996, 1995
and 1994, respectively.
LAND RIGHTS -
Land rights are being amortized on a straight-line basis over the
estimated useful life of the Tunica facility, which is less than the term of the
ground lease including renewals (see Note 13); such amortization commenced with
the opening of the Tunica Casino. The estimated economic benefit of the land
rights was increased from 25 years to 40 years effective on October 1, 1996
consistent with the change in estimated
53
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Contined)
useful life of the Tunica facility as discussed under "Property and Equipment"
above. Management presently intends to renew the ground lease at least through
its currently estimated 40-year useful life of the facility. Accumulated
amortization of such land rights amounted to $787,000 and $483,000,
respectively, at December 31, 1996 and 1995.
EMPLOYEE STOCK OPTIONS -
During 1996, HCC adopted the provisions of statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123"). SFAS 123 requires that an entity account for employee stock compensation
under a fair value based method. However, SFAS 123 also allows an entity to
continue to measure compensation cost for employee stock-based compensation
plans using the intrinsic value based method of accounting prescribed by
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("Opinion 25"). Entities electing to remain with the accounting
under Opinion 25 are required to make pro forma disclosures of net income and
earnings per share as if the fair value based method of accounting under SFAS
123 had been applied. HCC has elected to continue to account for employee
stock-based compensation under Opinion 25 with the requisite additional
disclosures included in Note 7.
NET (LOSS) INCOME PER COMMON SHARE -
Net (loss) income per common share for all periods is calculated by
dividing the net (loss) income by the weighted average number of shares of
common stock and common stock equivalents outstanding. All common stock
equivalents are excluded from the calculation of net loss per share for periods
during which a loss was incurred as the effect of their inclusion would be
antidilutive. Common stock equivalents are included in the calculation of net
income per share for periods during which income was realized. The weighted
average number of shares of common stock and common stock equivalents
outstanding used for earnings per share calculation purposes was 24,721,000 for
the year ended December 31, 1996 and 24,850,000 for each of the years ended
December 31, 1995 and 1994.
The Financial Accounting Standards Board has issued a new standard,
"Earnings per Share" ("SFAS 128"). SFAS 128 provides for revisions to the
current method of calculating earnings per share and for the disclosure of
certain information about the capital structure of the reporting entity. SFAS
128 will become effective on December 15, 1997; early adoption is not permitted.
HCC does not believe the new pronouncement will impact its present calculation
of earnings per share.
RECLASSIFICATIONS -
Certain reclassifications have been made to the prior years'
consolidated financial statements to conform to the 1996 consolidated financial
statement presentation. Such reclassifications include the reallocation of
certain costs among the various operating departments and general and
administrative expenses resulting from the completion of a comprehensive
internal review of departmental allocations. Management believes that such
reclassifications better reflect the matching of costs with the associated
revenues.
54
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(3) SHORT-TERM CREDIT FACILITIES
During June 1994, a subsidiary of GBCC entered into an agreement for a
bank line of credit in the amount of $5,000,000. The agreement, which was
renewed in April 1995, provided for interest on borrowings at the bank's prime
lending rate plus 3/4% per annum. Borrowings under the line of credit were
guaranteed to the extent of $2,000,000 by another subsidiary of GBCC. As of
April 30, 1996, the GBCC subsidiary extended $2,000,000 of the line of credit
until April 30, 1997. Additionally, the guarantor pledged a certificate of
deposit in the face amount of $2,000,000 as collateral for the line of credit.
During 1996, $2,000,000 was borrowed under the line of credit; no borrowings
were outstanding at December 31, 1995.
As of December 31, 1996, HCT had a $1,000,000 bank credit facility
available through August 15, 1997 on which no borrowings had been made.
Borrowings under the line of credit accrue interest at the rate of 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. During the first quarter of 1997, HCT
borrowed $1,000,000 on this credit facility.
(4) LONG-TERM DEBT AND PLEDGE OF ASSETS
Substantially all of HCC's assets are pledged in connection with HCC's
long-term indebtedness; HCC was not obligated for GBCC's indebtedness. The
indenture to HCC's Senior Secured Notes, as defined below, did not contain
cross-default provisions with respect to GBCC's indebtedness. Substantially all
of GBCC's assets were pledged in connection with GBCC's long-term indebtedness.
55
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1996 1995
------------- -------------
<S> <C> <C>
Indebtedness of HCC:
12 3/4% Senior Secured Notes, due 2003, net
of discount of $9,127,000 and $9,912,000, respectively $200,873,000 $200,088,000
Term note, due 1999 2,150,000 2,300,000
------------ ------------
203,023,000 202,388,000
------------ ------------
Indebtedness of HCA:
Promissory note to bank (b) 2,472,000 4,402,000
Equipment loans 1,472,000 2,412,000
------------ ------------
3,944,000 6,814,000
------------ ------------
Indebtedness of HCT for which HCC is
not obligated:
Equipment loans 1,401,000 1,367,000
------------ ------------
1,401,000 1,367,000
------------ ------------
GBCC indebtedness for which HCC was
not obligated:
10 7/8% first mortgage notes, due 2004 (c) - 185,000,000
11 5/8% senior notes, due 2004 (d) - 85,000,000
Other - 3,342,000
------------ ------------
- 273,342,000
------------ ------------
Total indebtedness 208,368,000 483,911,000
Less - current maturities (6,311,000) (7,082,000)
------------ ------------
Total long-term debt $202,057,000 $476,829,000
============ ============
</TABLE>
- --------------------------
(a) During October 1995, HCC completed the refinancing of certain outstanding
indebtedness through a public offering of $210,000,000 of 12 3/4% Senior
Secured Notes (the "Senior Secured Notes") due November 1, 2003, discounted
to yield 13 3/4% per annum (the "HCC Refinancing"). In addition to
refinancing existing debt, proceeds from the HCC Refinancing were used to
finance construction of a 352-room hotel tower and related amenities and to
fund development and construction of the "Adventure Slots" attraction, a
themed gaming area, at the Tunica Casino; to fund HCA's required
contribution of $4,000,000 for construction of a new 500-space parking
garage (see Note 5); and, to the extent available, for working capital
purposes. The unexpended construction funds are included in cash
restricted for construction projects in the accompanying
56
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
consolidated balance sheet at December 31, 1995. Interest on the Senior
Secured Notes is payable semiannually on May 1 and November 1 of each year
commencing on May 1, 1996.
The Senior Secured Notes are unconditionally guaranteed on a senior secured
basis by HCT and may be guaranteed by certain future subsidiaries of HCC.
HCA is not and GBCC and its subsidiaries were not guarantors. The Senior
Secured Notes and related guarantees are secured by, among other things,
(i) substantially all of the assets of HCT and future guarantors, (ii) a
first mortgage limited to approximately $39 million on substantially all of
the assets of HCA, (iii) a pledge of the capital stock of certain
subsidiaries of HCC and (iv) the collateral assignment of any future
management contracts entered into by HCC.
The Senior Secured Notes are redeemable at the option of HCC any time on or
after November 1, 1999 at 106.375% of the then outstanding principal
amount, decreasing to 103.1875% and 100%, respectively, on November 1, 2000
and 2001. Commencing with the November 1, 1997 interest payment date and at
each subsequent interest payment date, HCC will be required to make an
offer to purchase not more than $2,500,000 in principal amount of the
Senior Secured Notes at a price of 106.375% of the principal amount
tendered.
The indenture to the Senior Secured Notes contains various provisions
limiting the ability of HCC and certain defined subsidiaries to, among
other things, pay dividends or make other restricted payments; incur
additional indebtedness or issue preferred stock; create liens; create
dividend or other payment restrictions affecting certain defined
subsidiaries; enter into mergers or consolidations or make sales of all or
substantially all assets of HCC, HCT or any future guarantor; and enter
into transactions with certain affiliates.
(b) During February 1995, HCA entered into a $5,000,000 bank promissory note
agreement. The note accrues interest at the bank's prime lending rate plus
1% per annum. Interest only was payable during the first six months.
Commencing September 1, 1995, principal and interest are payable monthly
based on a 30-month amortization schedule with the final payment due on
February 1, 1998.
(c) On February 17, 1994, a subsidiary of GBCC issued $185,000,000 of non-
recourse first mortgage notes due January 15, 2004 (the "10 7/8% First
Mortgage Notes") and collateralized by a first mortgage on the Sands.
Interest on the notes accrued at the rate of 10 7/8% per annum, payable
semiannually commencing July 15, 1994 with the balance due at maturity.
Interest only was payable during the first three years.
(d) On February 17, 1994, a subsidiary of GBCC issued $85,000,000 of unsecured
senior notes due April 15, 2004 (the "PRT Funding Notes"). Interest on
the PRT Funding Notes accrued at the rate of 11 5/8% per annum, payable
semiannually commencing October 15, 1994.
57
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Scheduled payments of long-term debt as of December 31, 1996 are set
forth below:
1997 $ 6,311,000
1998 6,294,000
1999 7,055,000
2000 5,335,000
2001 5,000,000
Thereafter 187,500,000
------------
Total $217,495,000
============
Interest paid, net of capitalized interest and commitment fees, amounted
to $59,404,000, $58,401,000 and $36,439,000, respectively, during the years
ended December 31, 1996, 1995 and 1994.
(5) 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. Such escrow and financing payments were included in cash
restricted for construction projects in the accompanying consolidated balance
sheet at December 31, 1995. The facility is owned by ACCA and operated by HCA
pursuant to a 30-year lease with the right to extend the lease for up to 20
additional years. Rental payments during the first 15 years equal ACCA's debt
service costs related to the industrial revenue bond issue. In addition, HCA
pays ACCA base rent equal to $15,000 per month, subject to a credit of $615,000
at the rate of $10,000 per month for improvements made to ACCA's North Island
Center banquet and meeting facilities. HCA is also responsible for additional
rent, consisting of costs such as real estate taxes, maintenance costs,
insurance premiums and utilities, arising out of its operation of both parking
garages.
HCA also leases certain equipment under capital lease agreements which
provide for interest at the rate of 11.2% and expire at various dates through
1998. HCT leases certain gaming and other equipment under capital lease
agreements which provide for interest at rates ranging up to 13 1/4% per annum
and which expire during 1997.
58
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The original cost of HCA's parking garages is included in buildings in
the accompanying consolidated balance sheets at December 31, 1996 and 1995 in
the amounts of $27,476,000 and $10,000,000, respectively. Assets under capital
leases with an original cost of $7,143,000 and $7,342,000, are included in
operating equipment in the accompanying consolidated balance sheets at December
31, 1996 and 1995, respectively. Amortization expense with respect to assets
under capital leases amounted to $2,723,000, $2,725,000 and $1,551,000 during
the years ended December 31, 1996, 1995 and 1994, respectively.
Future minimum lease payments under capital lease obligations as of
December 31, 1996 were as follows:
1997 $ 3,744,000
1998 2,494,000
1999 2,457,000
2000 2,483,000
2001 2,532,000
Thereafter 26,719,000
------------
Total minimum lease payments 40,429,000
Less amount representing interest (16,751,000)
------------
Present value of future
minimum lease payments 23,678,000
Current capital lease obligation (1,971,000)
------------
Long-term capital lease obligation $ 21,707,000
============
(6) INCOME TAXES
Components of HCC's provision for income taxes consisted of the
following:
YEAR ENDED DECEMBER 31,
---------------------------------
1996 1995 1994
------ ------ ------
Current:
Federal $ (72,000) $ - $ (36,000)
State 55,000 (687,000) 456,000
Deferred:
Federal - - (450,000)
State (46,000) 419,000 (1,497,000)
------------ --------- -----------
$ (63,000) $(268,000) $(1,527,000)
============ ========= ===========
Total state and federal income taxes paid by HCC for the years ended
December 31, 1996, 1995 and 1994 amounted to $223,000, $522,000 and $1,107,000,
respectively.
59
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
A reconciliation between the calculated tax provision on income before
extraordinary item based on the statutory rates in effect and the effective tax
rates follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Calculated income tax benefit (provision)
at 34% $ 18,778,000 $(2,308,000) $(1,112,000)
SFAS 109 recognition of net
operating loss and tax
credit carryforwards - - (450,000)
Utilization of operating loss carryforwards - 3,716,000 2,341,000
Tax benefit of operating losses
not recognized (17,412,000) - -
Amortization of excess purchase
price (601,000) (803,000) (803,000)
Lobbying costs (306,000) (227,000) (427,000)
Disallowance of meals and
entertainment (404,000) (410,000) (361,000)
State income taxes 6,000 (177,000) (687,000)
Other (124,000) (59,000) (28,000)
------------ ----------- -----------
Tax provision as shown on
consolidated statements of operations $ (63,000) $ (268,000) $(1,527,000)
============ =========== ===========
</TABLE>
At December 31, 1996, HCC and its subsidiaries had tax net operating
loss carryforwards ("NOL's") totaling approximately $20,000,000, none of which
begin to expire until the year 2007. Additionally, HCC and its subsidiaries
have various tax credits available totaling approximately $213,000, which do not
begin to expire until the year 2008. The provisions of SFAS 109 require that
the tax benefit of such NOL's and credit carryforwards be recorded as an asset
and, to the extent that management can not assess that the utilization of all or
a portion of such deferred tax assets is more likely than not, a valuation
allowance should be recorded. At December 31, 1995, HCC and its subsidiaries
(including GBCC and its subsidiaries) had net deferred tax assets arising from
NOL's, tax credits and timing differences amounting to $34,263,000. Continuing
losses of GBCC resulted in management's determination that it was more likely
than not that only a portion of such deferred tax assets would be utilized.
Accordingly, management established a valuation allowance which resulted in a
net deferred tax asset of $8,050,000 at December 31, 1995. As a result of the
distribution by HCC of its 80% ownership of GBCC at December 31, 1996, the
NOL's, tax credits and net deferred tax assets attributable to GBCC are no
longer available to HCC. Management believes that it is more likely than not
that future consolidated taxable income of HCC (primarily from the Aurora Casino
and Tunica Casino) will be sufficient to utilize a portion of the remaining net
deferred tax assets of $12,885,000. Accordingly, a valuation allowance has been
established at December 31, 1996 reducing the net deferred tax asset to
$6,513,000. The ultimate recognition of this amount of NOL's and tax credits is
dependent on HCC and its subsidiaries' ability to generate approximately $19
million of taxable income for federal tax purposes prior to the expiration dates
of the NOL's and tax credit carryforwards. The revaluation of the net deferred
tax asset resulting from the
60
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
distribution of GBCC stock ($1,537,000) has been reflected in the accompanying
consolidated financial statements at December 31, 1996 as an adjustment to
additional paid-in capital.
Sales by HCC or existing shareholders of common stock can cause a
"change of control", as defined in Section 382 of the Internal Revenue Code of
1986, as amended (the "Code"), which would limit the ability of HCC or its
subsidiaries to utilize these loss carryforwards in later tax periods. Should
such a change of control occur, the amount of loss carryforwards available for
use in any one year would most likely be substantially reduced. Future treasury
regulations, administrative rulings or court decisions may also effect HCC's
future utilization of its loss carryforwards.
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.
The components of the net deferred tax asset were as follows:
DECEMBER 31,
---------------------------
1996 1995
------------ -------------
Deferred tax assets:
Net operating loss carryforwards $ 6,746,000 $ 25,316,000
Allowance for doubtful accounts 7,316,000 7,251,000
Investment and jobs tax credits 213,000 4,417,000
Equity losses of unconsolidated
subsidiaries and joint ventures - 3,166,000
Other liabilities and accruals 3,179,000 3,741,000
Benefits accrual 1,704,000 1,479,000
Write off excess of cost of
investment - 1,543,000
Other 750,000 2,276,000
----------- ------------
Total deferred tax assets 19,908,000 49,189,000
----------- ------------
Deferred tax liabilities:
Depreciation and amortization (4,395,000) (10,227,000)
Amortization of note discount (2,628,000) (4,042,000)
Other - (657,000)
----------- ------------
Total deferred tax liabilities (7,023,000) (14,926,000)
----------- ------------
Net deferred tax asset 12,885,000 34,263,000
Valuation allowance (6,372,000) (26,213,000)
----------- ------------
$ 6,513,000 $ 8,050,000
=========== ============
61
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(7) STOCK OPTIONS AND COMPENSATION PLANS
HOLLYWOOD CASINO CORPORATION STOCK OPTION PLANS -
HCC currently has two employee stock option plans in effect: the
Hollywood Casino Corporation 1996 Long-Term Incentive Plan (the "1996 Plan") and
the Hollywood Casino Corporation 1992 Stock Option Plan (the "1992 Plan"). The
1996 Plan and the 1992 Plan provide for the granting of nonqualified stock
options and incentive stock options that are intended to qualify for the special
tax treatment under the Internal Revenue Code; the 1996 Plan also provides for
the granting of restricted stock. The shares to be offered under the 1996 Plan
and the 1992 Plan consist of shares of Class A Common Stock. The 1996 Plan and
the 1992 Plan provide for the granting of 3,000,000 and 1,197,000 shares,
respectively, of Class A Common Stock of which 2,680,000 and 147,006,
respectively, remain available for future grant as of December 31, 1996.
The 1996 Plan and the 1992 Plan are administered by committees of
HCC's Board of Directors. Options granted under the 1996 Plan become vested at
the discretion of the Committee of the Board of Directors (however, vesting for
certain officers, directors and shareholders may not be less than six months)
and may be exercised for a period of not more than ten years (five years in the
case of incentive stock options) from the date of grant. No more than 150,000
shares may be awarded to any individual during any fiscal year and incentive
stock options are subject to a $100,000 calendar year limitation. Options
granted under the 1992 Plan become vested over a three year period, are
exercisable for a term ending not more than seven years (five years in the case
of incentive stock options) from the date of the grant and incentive stock
options are subject to limitations on the quantity exercised in a calendar year.
As of December 31, 1996, options to purchase 320,000 shares remain outstanding
at exercise prices ranging from $3.125 per share to $5.25 per share under the
1996 Plan. Such options have a weighted average exercise price of $3.26 and a
weighted average remaining contractual life of 60 months. None of the options
are currently exercisable. As of December 31, 1996, options to purchase 90,008
shares remain outstanding at an exercise price of $.0006 per share under the
1992 Plan, all of which are currently exercisable and have a remaining
contractual life of 37 months.
The following table lists the combined activity of the 1996 Plan and
the 1992 Plan:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------
1996 1995 1994
--------------------- ---------------- ----------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
--------- -------- --------- ------ --------- ------
<S> <C> <C> <C> <C> <C> <C>
Outstanding options at
beginning of year 150,008 $ .80 478,340 $ .25 989,994 $.0006
Options cancelled (20,000) 6.00 - - - -
Options granted 320,000 3.26 - - 20,000 6.00
Options exercised (40,000) .0006 (328,332) .0006 (531,654) .0006
------- -------- --------
Outstanding options
at end of year 410,008 $ 2.54 150,008 $ .80 478,340 $ .25
======= ======== ========
</TABLE>
62
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
During 1996, HCC also adopted the Hollywood Casino Corporation 1996
Non-Employee Director Stock Plan (the "Directors' Plan") providing for the grant
of non-qualified stock options of Class A common stock of HCC. The Directors'
Plan provides for the granting of 150,000 shares of Class A common stock of
which 130,000 remain available for future grant as of December 31, 1996. An
initial option of 10,000 shares per non-employee director was granted upon
adoption of the plan with any future outside director to also receive an option
of 10,000 shares. In addition, each outside director will receive a grant of
2,500 shares on January 15 of each year. All such grants are at an exercise
price equal to the fair market value as of the date of the grant, vest after six
months and expire no later than ten years from the date of grant. The
Directors' Plan is administered by a Committee of the Board of Directors. As of
December 31, 1996, 20,000 shares remain outstanding and are currently
exercisable at a price of $6.25 per share.
The Company has elected to apply Opinion 25 with respect to accounting
for options. Based on such election, no compensation expense has been
recognized in the accompanying consolidated financial statements as a result of
the granting of stock options. Had compensation expense been determined
consistent with SFAS 123, the net loss for the year ended December 31, 1996
would have increased by approximately $41,000 with no effect on reported loss
per share.
The fair value of each option grant in 1996 was estimated on the date
of grant using a method approximating the Black-Scholes option pricing model
with the following assumptions: risk free interest rate of 5.54%; no dividend
yield; expected life of one year and volatility of 62.1%. The weighted average
fair value of options granted in 1996 was $.91.
COMPENSATION PLAN -
HCC has agreements with certain of its principal shareholders and key
executive officers providing for (1) lifetime pension benefits upon the
expiration of existing employment contracts and subsequent consulting agreements
and (2) death benefits to be paid for a period of ten years. The obligations
under these agreements, which are not funded, are being charged to operations
over the remaining terms of the employment agreements. Amounts charged to
expense under the agreements for the years ended December 31, 1996, 1995 and
1994 were approximately $660,000, $315,000 and $218,000, respectively.
Obligations accrued under the agreements at December 31, 1996 and 1995 amounted
to $5,011,000 and $4,351,000, respectively, and are included in other noncurrent
liabilities in the accompanying consolidated balance sheets.
(8) 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, intercompany
receivables and payables between HCC and GBCC and its subsidiaries which
previously eliminated in consolidation are now considered balances outstanding
with affiliates.
63
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
HCC has advanced funds to GBCC totaling $7,750,000 as of December 31,
1996. Of the amounts advanced, $1,000,000, which is not due until April 1,
1998, is classified as noncurrent in the accompanying consolidated balance sheet
at December 31, 1996. In addition, $250,000 is due on demand, or if no demand
is made, on April 1, 1998. Such borrowings from HCC bear interest at the rate
of 14% per annum, payable semiannually. During the third quarter of 1996, GBCC
borrowed $6,500,000 from HCC on a demand basis with interest at the rate of 13
3/4% per annum payable quarterly commencing October 1, 1996. Interest
receivable amounting to $323,000 is included in due from affiliates in the
accompanying consolidated balance sheet at December 31, 1996. The payment of
principal and interest to HCC on such borrowings is subject to the approval of
the Casino Commission.
On February 17, 1994, PPI Funding Corp., a subsidiary of GBCC, issued
$40,524,000 discounted principal amount of new deferred interest notes (the "PPI
Funding Notes") to HCC in exchange for $38,779,000 principal amount of 15 1/2%
unsecured notes (the "PCPI Notes") held by HCC and issued by PCPI Funding Corp.,
another subsidiary of GBCC. The increased principal amount of the new notes
included a call premium on the exchange ($1,745,000) equal to 4 1/2% of the
principal amount of PCPI Notes exchanged; such premium was also paid to third
party holders of $58,364,000 principal amount of PCPI Notes concurrently
redeemed. The PPI Funding Notes were discounted to yield interest at the rate
of 14 7/8% per annum and had an original face value of $110,636,000. Subsequent
principal payments by PPI Funding Corp. have reduced the maturity value of the
notes to $98,353,000. Payment of interest is deferred through February 17,
2001 at which time interest will become payable semiannually, with the unpaid
principal balance due on February 17, 2006. The PPI Funding Notes are
collateralized by a pledge of all of the common stock of a subsidiary of GBCC.
It was anticipated that HCC's primary method of collection with
respect to the PPI Funding Notes would be through the utilization of NOL's of
GBCC. As GBCC is no longer a consolidated subsidiary for federal income tax
purposes, this means of collection is no longer available to HCC. Accordingly,
at December 31, 1996, HCC established a valuation allowance in the amount of
$18,741,000 to reduce the outstanding principal balance on the PPI Funding Notes
to an estimated realizable value. Management anticipates that the remaining
balance of $35,597,000, which is included in noncurrent due from affiliates on
the accompanying consolidated balance sheet at December 31, 1996 will be
realized through a combination of asset acquisitions from GBCC and its
subsidiaries (see Note 17) and repayments from GBCC.
Pursuant to a management agreement, HCA pays to Pratt Management, L.P.
("PML"), a limited partnership wholly owned through 1996 by GBCC (see Note 17),
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). Unpaid fees amounting to
$2,096,000 are included in amounts due to affiliates in the accompanying
consolidated balance sheet at December 31, 1996. Pursuant to a ten-year
consulting agreement with GBCC, HCT incurs a monthly consulting fee of $100,000.
64
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Various subsidiaries of GBCC provide services to HCC and its
subsidiaries, including certain administrative and marketing services. Unpaid
fees amounting to $203,000 are included in due to affiliates in the accompanying
consolidated balance sheet at December 31, 1996.
HCT and Advanced Casino Systems Corporation ("ACSC"), a subsidiary of
GBCC, entered into a Computer Services Agreement dated as of January 1, 1994.
The term of the agreement was three years with an automatic renewal for an
additional three years becoming effective on January 1, 1997. 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 $30,000 a month ($33,600
effective January 1, 1997). HCT also reimburses ACSC for its direct costs and
expenses incurred under this agreement. Unpaid charges amounting to $30,000 are
included in due to affiliates in the accompanying consolidated balance sheet at
December 31, 1996.
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. Unpaid charges amounting to $51,000 are
included in due to affiliates in the accompanying consolidated balance sheet at
December 31, 1996.
Prior to sale of the property in September 1996, GBCC operated the
Holiday Inn located at the north entrance of the Dallas/Fort Worth Airport ("DFW
North") which was owned by Metroplex Hotel Limited ("Metroplex"), a partnership
controlled by certain members of the Pratt Family. During 1996 and 1995, GBCC
made capital expenditures under the hotel operating agreement totaling
approximately $2,581,000 toward property improvements. GBCC was also obligated
by the hotel operating agreement to make minimum rental payments equal to
Metroplex's principal and interest payments on the underlying indebtedness of
this hotel. During February 1994, GBCC utilized funds borrowed from HCC to
purchase such underlying indebtedness with a principal balance of $13,756,000
from third parties at a cost of $6,750,000 and subject to third party
indebtedness amounting to $2,706,000. The required minimum rental payments (net
of debt service receipts since the February 1994 note acquisition date) amounted
to $397,000, $530,000 and $678,000, respectively, during the years ended
December 31, 1996, 1995 and 1994. GBCC recorded the note receivable from
Metroplex, which accrued interest at the rate of 9 1/2% per annum, at
acquisition cost; such note was included in notes receivable in the accompanying
consolidated balance sheet at December 31, 1995. Upon the sale of the hotel by
Metroplex, GBCC received proceeds sufficient to repay the third party
indebtedness of $1,873,000, recover its $6,750,000 acquisition cost of the
underlying indebtedness, recover $2,581,000 of its total investment in property
improvements and receive additional cash of approximately $770,000.
In September 1994, a subsidiary of HCC entered into an agreement with
an entity owned by a member of the Pratt Family to manage the operation and
maintenance of a Company-owned aircraft and to make such aircraft available for
charters by third parties. Expenses and commissions charged by the management
company under the agreement during 1996, 1995 and 1994 totaled $499,000,
$462,000 and $138,000, respectively.
65
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(9) STATE GAMING REGULATIONS
Riverboat gaming operations in Illinois are subject to regulatory
control by the Illinois Gaming Board. Under the provisions of the Illinois
gaming regulations, HCA is required to maintain its ownership license. Such
license was renewed in 1996 and expires in December 1997. Gaming operations in
Mississippi are subject to regulatory control by the Mississippi Gaming
Commission. Under the provisions of the Mississippi gaming regulations, HCT is
required to maintain all necessary licenses. The ownership license for the
Tunica Casino was renewed on September 25, 1995 until October 17, 1997.
Management intends to file for renewal of each of the licenses enumerated above
in Illinois and Mississippi and anticipates that such renewals will be approved
by the applicable regulatory agencies during 1997.
If it were determined that gaming laws were violated by a licensee,
the gaming licenses held by each licensee could be limited, conditioned,
suspended or revoked. In addition, the licensees and other persons involved
could be subject to substantial fines.
(10) OBLIGATORY INVESTMENTS
The New Jersey Casino Control Act requires casino licensees to make
certain approved investments in New Jersey or to pay an investment alternative
tax. Casino licensees may obtain investment credits, which amount to 1.25% of
casino revenues, by purchasing bonds at below-market interest rates from the
Casino Reinvestment Development Authority (the "CRDA") or by making qualified
investments approved by the CRDA. This governmental agency administers the
statutorily mandated investments made by casino licensees and is required to
expend the monies received by it for the eligible projects defined in the
statute. The investment alternative tax amounts to 2.5% of casino revenues.
Payments of the investment obligations must be made quarterly. The Sands has
elected to comply with the requirements by obtaining investment credits or by
making qualified investments.
As of December 31, 1995, the Sands had purchased bonds totaling
$4,630,000. In addition, the Sands had remaining funds on deposit and held in
escrow by the CRDA at December 31, 1995 of $4,683,000. The bonds purchased and
the amounts on deposit and held in escrow are collectively referred to as
"obligatory investments" in the accompanying consolidated financial statements.
Obligatory investments at December 31, 1995 are net of an accumulated
valuation allowance of $3,792,000 based upon the estimated realizable value of
the investments. Provisions for valuation allowances during the years ended
December 31, 1996, 1995 and 1994 amounted to $1,344,000, $1,457,000 and
$617,000, respectively.
The Sands has, from time to time, contributed certain amounts held in
escrow to the CRDA. In consideration thereof, the CRDA granted the Sands
waivers of certain of its investment obligations in future periods. The Sands
made such contributions of obligatory investments during the years ended
December 31, 1996, 1995 and 1994 totaling $1,500,000, $250,000 and $2,500,000,
respectively, resulting in waivers granted by the CRDA during 1995 totaling
$128,000. No such waivers were granted by the CRDA during 1996 and 1994;
however, the contributions have been designated for projects expected to
66
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
benefit the community and the Sands facility. Accordingly, intangible assets of
$1,275,000 were included in other assets on the accompanying consolidated
balance sheet at December 31, 1995. Amortization of waivers granted in prior
years totaled $128,000 and $1,727,000, respectively, during 1995 and 1994. At
December 31, 1995, all waivers were fully amortized.
(11) SUMMARIZED COMBINED FINANCIAL INFORMATION OF AND TRANSACTIONS WITH
UNCONSOLIDATED AFFILIATES
Certain summarized combined financial information of GBCC's unconsolidated
affiliates, which include joint ventures, is presented below.
YEAR ENDED DECEMBER 31,
-------------------------------------------
1996 1995 1994
------------- ------------- -------------
Net revenues $ 39,314,000 $ 40,005,000 $ 38,897,000
Expenses (41,524,000) (43,144,000) (42,154,000)
------------ ------------ ------------
Net loss $ (2,210,000) $ (3,139,000) $ (3,257,000)
============ ============ ============
DECEMBER 31,
1995
------------
Current assets $ 5,410,000
============
Noncurrent assets $ 58,011,000
============
Current liabilities $ 7,398,000
============
Noncurrent liabilities $ 77,877,000
============
Income and losses of GBCC's unconsolidated affiliates have not been
reflected in the accompanying consolidated statements of operations for the
years ended December 31, 1996, 1995 or 1994 as GBCC's investments in such
affiliates were previously eliminated through the recognition of prior years'
losses.
Prior to sale of the property in November 1996, GBCC had an ongoing
commitment to fund its proportionate share of operating cash deficits with
respect to its 50% ownership interest in the Sheraton Plaza located in Orlando,
Florida; GBCC was not required to make any such payments during 1996, 1995 and
1994. GBCC also agreed to contribute up to $3,900,000 as an additional
investment in the Sheraton Plaza hotel partnership to refurbish the hotel
facility. No such commitments were required during 1996; GBCC contributed
$1,675,000 and $660,000 during 1995 and 1994, respectively, toward such
commitment. Such contributions were in recognition of GBCC's partner having
agreed to make $5,000,000 in principal reductions on the underlying mortgage
note on the facility. GBCC was required to pay approximately $2,946,000 to
retire its share of the underlying indebtedness on the property in connection
with the sale.
67
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
GBCC earned management and project fees from unconsolidated affiliates
for the management and project supervision of certain hotel facilities. During
the years ended December 31, 1996, 1995 and 1994, such fees amounted to
$1,167,000, $1,139,000 and $977,000, respectively.
(12) 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 31, 1997, an amendment to their complaint which, among
other things, added HCT (together with the Original Hollywood Defendants, the
"Hollywood Defendants") and GBCC as defendants. The Original Hollywood
Defendants filed with the Court on February 4, 1997, and GBCC and HCT filed with
the Court on February 20, 1997, answers and counterclaims to such amended
complaint.
In its lawsuit, PHII alleges, among other things, that the Hollywood
Defendants and GBCC have, in opening and operating the Hollywood Casino concept,
infringed on PHII's trademark, service mark and trade dress and have engaged in
unfair competition and deceptive trade practices. In their counterclaims, the
Hollywood Defendants and GBCC allege, among other things, that the PHII
Defendants have, through their planned use of their mark in connection with
casino services, infringed on certain of HCC's service marks and trade dress and
have engaged in unfair competition.
Given the uncertainties inherent in litigation, no assurance can be
given that the Hollywood Defendants will prevail in this litigation; however,
the Hollywood Defendants believe that PHII's claims are without merit and intend
to defend their position and pursue their counterclaims vigorously. The
accompanying consolidated financial statements do not include any adjustments
that might result from the outcome of the uncertainties described above.
OTHER LITIGATION -
HCC and its subsidiaries are also parties in various other 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.
68
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(13) COMMITMENTS AND CONTINGENCIES
HCT entered into a ground lease covering 70 acres of land on which the
Tunica Casino was constructed. The ground lease is for an initial term of five
years from the opening date of the facility and, at the option of HCT, may be
renewed for nine additional five-year periods. Obligations under the ground
lease during the initial term include both minimum monthly fixed payments and
percentage rent, which in the aggregate will be the greater of 4% of Gross
Revenues, as defined, or $1,100,000 per year. HCT is responsible for all
operating and other expenses of the property in accordance with the lease terms.
HCT prepaid the first year fixed rental payments; such amount, together with all
rental payments made during the construction period, were taken as a credit
against rent payments as they became due during the first year of operations.
During 1996, 1995 and 1994, HCT expensed $3,486,000, $3,608,000 and $1,210,000,
respectively, in connection with the ground lease.
(14) THIRD PARTY NOTES RECEIVABLE
During November 1995, HCC loaned $10,000,000 of the proceeds from the
HCC Refinancing to an unaffiliated gaming company in the form of two $5,000,000
notes (Series A and Series B). The loans earn interest at the rate of prime
plus one percent per annum and are payable in quarterly installments of
principal and interest commencing in November 1997 with the final payment due in
August 2000. All principal payments received are to be applied first to the
Series A note. In connection with the loans, HCC received warrants to acquire
up to a 10% equity interest in the gaming company at any time between November
15, 1998 and November 15, 2000 at an exercise price of $500,000 per 1/2%
interest. Under the terms of the loan agreement, the gaming company may require
HCC to exercise warrants to acquire a 5% equity interest on November 15, 1998 at
a cost not to exceed $5,000,000 payable through the reduction of the outstanding
principal balance and, to the extent applicable, the forgiveness of accrued
interest on the Series B note.
(15) SUPPLEMENTAL CASH FLOW INFORMATION
During 1996, HCA entered into a capital lease obligation in the
original amount of $13,195,000 with respect to a second parking garage (see Note
5). Additional escrowed construction and financing costs totaling $4,281,000
were capitalized as part of the cost of the facility.
At December 31, 1996, HCC contributed certain receivables from GBCC
and its subsidiaries to GBCC. Notes receivable amounting to $8,738,000 together
with accrued interest thereon totaling $1,753,000 and other receivables of
$4,283,000 with respect to pension obligations assumed during 1995 were
contributed to GBCC.
69
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
At December 31, 1996, HCC distributed the common stock of GBCC it
owned to its shareholders. The following net liabilities were distributed to
HCC's shareholders in the form of a dividend:
Long-term debt............................................... $ 326,024,000
Short-term borrowings........................................ 8,750,000
Other current liabilities.................................... 41,186,000
Other noncurrent liabilities................................. 4,592,000
Net property and equipment................................... (156,887,000)
Accounts receivable, net of allowance........................ (10,656,000)
Net book value of other assets distributed (excluding cash).. (30,811,000)
-------------
Net liabilities distributed................................. $ 182,198,000
=============
During 1995, HCA acquired certain equipment at a cost of $2,985,000
under financing agreements with a third party vendor.
During 1994, HCT entered into capital lease obligations totaling
$5,013,000 for new equipment (see Note 5).
During 1994, HCT acquired certain equipment at a cost of $5,169,000
under financing agreements with certain third party vendors.
In connection with the acquisition of the Tunica Casino site by HCT
during January 1994, liabilities were assumed as follows:
Fair value of assets acquired................................... $10,577,000
Land rights..................................................... 8,445,000
Cash paid for capital stock and
limited partnership interest.................................... (7,986,000)
Notes issued for capital stock and
limited partnership interest.................................... (6,000,000)
-----------
Liabilities assumed............................................. $ 5,036,000
===========
During 1994, GBCC acquired the underlying indebtedness of the DFW
North Holiday Inn subject to third party indebtedness totaling $2,706,000 (see
Note 8).
(16) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments for which it is practicable to
estimate that value:
CASH, CASH EQUIVALENTS AND CASH RESTRICTED FOR CONSTRUCTION PROJECTS -
The carrying amounts approximate fair value because of the short maturity of
these instruments.
70
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
OBLIGATORY INVESTMENTS - The carrying amount of obligatory investments
approximates its fair value as a result of an allowance reflecting the below
market interest rate associated with such investments.
NOTES RECEIVABLE - The fair value of notes receivable is estimated
based on the discounting of net cash flows at current market rates for notes of
similar remaining maturities and collateral or on the estimated realizable
value.
INTEREST PAYABLE - The carrying amount of interest payable
approximates fair value because of the short maturity of the obligation.
LONG-TERM DEBT - The fair value of HCC's long-term debt is estimated
based on either the quoted market prices of the issue or on the discounted cash
flow of future payments utilizing current rates available to HCC for debt of
similar remaining maturities. Debt obligations with a short remaining maturity
are valued at the carrying amount.
The estimated carrying amounts and fair values of HCC's financial
instruments are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
------------------------- -------------------------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
------------ ------------ ----------------- -----------------
<S> <C> <C> <C> <C>
Financial Assets
Cash and cash equivalents...... $ 21,488,000 $ 21,488,000 $ 56,538,000 $ 56,538,000
Restricted cash................ - - 29,874,000 29,874,000
Notes receivable............... 10,000,000 10,000,000 19,222,000 19,222,000
Notes receivable - affiliates.. 7,750,000 7,750,000 - -
PPI Funding Notes.............. 35,597,000 35,597,000 - -
Obligatory investments......... - - 5,521,000 5,521,000
Financial Liabilities
Interest payable............... $ 4,734,000 $ 4,734,000 $ 16,964,000 $ 16,964,000
12 3/4% Senior Secured Notes... 210,000,000 201,600,000 210,000,000 191,100,000
10 7/8% First Mortgage Notes... - - 185,000,000 160,950,000
11 5/8% PRT Funding Notes...... - - 85,000,000 62,900,000
Equipment loans................ 2,873,000 2,879,000 3,779,000 3,785,000
Note payable................... 2,150,000 2,150,000 2,300,000 2,300,000
Other.......................... 2,472,000 2,472,000 7,744,000 7,596,000
</TABLE>
71
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(17) SUBSEQUENT EVENT
Subject to regulatory approval and effective as of April 1, 1997, HCC
will acquire the general partnership interest in Pratt Management, L.P. ("PML"),
the limited partnership owned by subsidiaries of GBCC which holds the management
contract on the Aurora Casino. PML earns management fees from the Aurora Casino
and incurs operating and other expenses with respect to its management thereof.
As general partner, HCC will receive 99% of the first $84,000 of net income
earned by the partnership each month and 1% of any income earned above such
amount. HCC will issue a five-year note in the original amount of $3,800,000,
and assign $7,597,000 principal amount of PPI Funding Notes (see Note 8) to a
GBCC subsidiary in exchange for the general partnership interest.
HCC further intends to enter into negotiations during 1997 to acquire
the capital stock of ACSC, a company engaged in the development, installation
and servicing of computer software related to the gaming industry, which is
currently wholly-owned by a subsidiary of GBCC. ACSC installed and continues to
service certain gaming software applications at the Company's Aurora and Tunica
casinos (see Note 8).
(18) SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
QUARTER
----------------------------------------------------------
FIRST SECOND THIRD FOURTH
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1996:
Net revenues, as previously reported.. $132,980,000 $138,109,000 $136,244,000 $122,960,000
Reclassifications..................... 135,000 152,000 - -
------------ ------------ ------------ ------------
Net revenues.......................... $133,115,000 $138,261,000 $136,244,000 $122,960,000
============ ============ ============ ============
Net loss.............................. $ (6,660,000) $ (8,250,000) $ (8,421,000) $(31,962,000)
============ ============ ============ ============
Net loss per
common share (1).................... $ (.27) $ (.33) $ (.34) $ (1.29)
============ ============ ============ ============
YEAR ENDED DECEMBER 31, 1995:
Net revenues, as previously reported.. $128,668,000 $131,520,000 $147,304,000 $131,907,000
Reclassifications..................... 150,000 150,000 94,000 150,000
------------ ------------ ------------ ------------
Net revenues.......................... $128,818,000 $131,670,000 $147,398,000 $132,057,000
============ ============ ============ ============
Net income (loss)..................... $ 1,243,000 $ 3,126,000 $ 7,144,000 $(28,801,000)
============ ============ ============ ============
Net income (loss) per
common share (1).................... $ .05 $ .13 $ .29 $ (1.17)
============ ============ ============ ============
</TABLE>
72
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(1) In accordance with the provisions of APB Opinion No. 15, earnings per share
are calculated separately for each quarter and the full year. Accordingly,
annual earnings per share will not necessarily equal the total of the
interim periods.
73
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Hollywood Casino - Aurora, Inc.:
We have audited the accompanying balance sheets of Hollywood Casino - Aurora,
Inc. (the Company and an Illinois corporation) as of December 31, 1996 and 1995,
and the related statements of operations, changes in shareholder's equity and
cash flows for each of the three years in the period ended December 31, 1996.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Hollywood Casino - Aurora, Inc.
as of December 31, 1996 and 1995, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1996, in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Roseland, New Jersey
March 21, 1997
74
<PAGE>
HOLLYWOOD CASINO - AURORA, INC.
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
BALANCE SHEETS
ASSETS
DECEMBER 31,
---------------------------
1996 1995
------------- ------------
Current Assets:
Cash and cash equivalents......................... $ 9,034,000 $ 8,996,000
Accounts receivable, net of allowances
of $1,071,000 and $866,000, respectively......... 1,895,000 2,613,000
Inventories....................................... 948,000 482,000
Deferred income taxes............................. 1,421,000 765,000
Due from affiliates............................... 1,046,000 322,000
Prepaid expenses and other current assets......... 854,000 719,000
------------ ------------
Total current assets............................. 15,198,000 13,897,000
------------ ------------
Property and Equipment:
Land improvements................................. 2,786,000 2,756,000
Buildings and improvements........................ 46,247,000 26,615,000
Riverboats........................................ 36,970,000 36,967,000
Operating equipment............................... 30,766,000 27,114,000
Construction in progress.......................... 276,000 294,000
------------ ------------
117,045,000 93,746,000
Less - accumulated depreciation and amortization.. (26,814,000) (17,980,000)
------------ ------------
Net property and equipment....................... 90,231,000 75,766,000
------------ ------------
Cash Restricted for Construction Project........... - 1,955,000
------------ ------------
Other Assets....................................... 2,020,000 1,578,000
------------ ------------
$107,449,000 $ 93,196,000
============ ============
The accompanying notes to financial statements are an
integral part of these balance sheets.
75
<PAGE>
HOLLYWOOD CASINO - AURORA, INC.
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
BALANCE SHEETS
LIABILITIES AND SHAREHOLDER'S EQUITY
DECEMBER 31,
-------------------------
1996 1995
------------ -----------
Current Liabilities:
Current maturities of long-term debt
and capital lease obligations.......... $ 6,456,000 $ 3,376,000
Accounts payable........................ 2,131,000 2,288,000
Accrued liabilities -
Salaries and wages..................... 2,117,000 1,868,000
Interest............................... 1,315,000 1,120,000
Gaming and other taxes................. 497,000 920,000
Insurance.............................. 1,393,000 773,000
Other.................................. 1,351,000 881,000
Due to affiliates....................... 2,278,000 2,324,000
Other current liabilities............... 861,000 1,315,000
------------ -----------
Total current liabilities.............. 18,399,000 14,865,000
------------ -----------
Long-Term Debt........................... 37,267,000 42,959,000
------------ -----------
Capital Lease Obligations................ 21,707,000 9,494,000
------------ -----------
Deferred Income Taxes.................... 2,043,000 329,000
------------ -----------
Commitments and Contingencies
Shareholder's Equity:
Common stock, $.01 par value per share;
2,000,000 shares authorized; 1,501,000
shares issued and outstanding.......... 15,000 15,000
Additional paid-in capital.............. 24,541,000 24,541,000
Retained earnings....................... 3,477,000 993,000
------------ -----------
Total shareholder's equity............. 28,033,000 25,549,000
------------ -----------
$107,449,000 $93,196,000
============ ===========
The accompanying notes to financial statements are an
integral part of these balance sheets.
76
<PAGE>
HOLLYWOOD CASINO - AURORA, INC.
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
Revenues:
Casino................................... $157,124,000 $146,281,000 $139,437,000
Food and beverage........................ 13,780,000 11,712,000 10,984,000
Admissions............................... - - 7,855,000
Other.................................... 3,895,000 4,933,000 5,964,000
------------ ------------ ------------
174,799,000 162,926,000 164,240,000
Less - promotional allowances............ (11,408,000) (10,418,000) (16,240,000)
------------ ------------ ------------
Net revenues............................. 163,391,000 152,508,000 148,000,000
------------ ------------ ------------
Expenses:
Casino................................... 108,014,000 97,173,000 88,590,000
Food and beverage........................ 4,926,000 4,865,000 5,586,000
Other.................................... 1,066,000 742,000 1,319,000
General and administrative............... 14,645,000 14,406,000 11,926,000
Depreciation and amortization............ 8,834,000 9,172,000 7,121,000
Amortization of preopening costs......... - - 5,863,000
------------ ------------ ------------
Total expenses.......................... 137,485,000 126,358,000 120,405,000
------------ ------------ ------------
Income from operations.................... 25,906,000 26,150,000 27,595,000
------------ ------------ ------------
Non-operating income (expense):
Interest income.......................... 205,000 306,000 458,000
Interest expense, net of capitalized
interest of $354,000 in 1995............ (6,704,000) (6,493,000) (6,654,000)
------------ ------------ ------------
Total non-operating expenses, net....... (6,499,000) (6,187,000) (6,196,000)
------------ ------------ ------------
Income before income taxes and
extraordinary item....................... 19,407,000 19,963,000 21,399,000
Income tax provision...................... (6,883,000) (7,554,000) (7,557,000)
------------ ------------ ------------
Income before extraordinary item.......... 12,524,000 12,409,000 13,842,000
Extraordinary item:
Loss on early extinguishment of debt, net
of related tax benefit................... - (989,000) -
------------ ------------ ------------
Net income................................ $ 12,524,000 $ 11,420,000 $ 13,842,000
============ ============ ============
</TABLE>
The accompanying notes to financial statements are an
integral part of these financial statements.
77
<PAGE>
HOLLYWOOD CASINO - AURORA, INC.
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
STATEMENT OF CHANGES IN SHAREHOLDER'S EQUITY
FOR THE THREE YEARS ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
(ACCUMULATED
COMMON STOCK ADDITIONAL DEFICIT)
---------------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS
------------ -------- ----------- -------------
<S> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1994......... 1,501,000 $15,000 $ 9,986,000 $ 658,000
Capital contributions.......... - - 4,555,000 -
Net income..................... - - - 13,842,000
Dividends...................... - - - (14,985,000)
------------ ------- ----------- ------------
BALANCE, DECEMBER 31, 1994....... 1,501,000 15,000 14,541,000 (485,000)
Capital contributions.......... - - 10,000,000 -
Net income..................... - - - 11,420,000
Dividends...................... - - - (9,942,000)
------------ ------- ----------- ------------
BALANCE, DECEMBER 31, 1995....... 1,501,000 15,000 24,541,000 993,000
Net income..................... - - - 12,524,000
Dividends...................... - - - (10,040,000)
------------ ------- ----------- ------------
BALANCE, DECEMBER 31, 1996....... 1,501,000 $15,000 $24,541,000 $ 3,477,000
============ ======= =========== ============
</TABLE>
The accompanying notes to financial statements are an
integral part of this financial statement.
78
<PAGE>
HOLLYWOOD CASINO - AURORA, INC.
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------
1996 1995 1994
------------------------ ------------- -------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income........................................................... $ 12,524,000 $ 11,420,000 $ 13,842,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Extraordinary item.................................................. - 989,000 -
Depreciation and amortization....................................... 8,834,000 9,172,000 12,984,000
Provision for doubtful accounts..................................... 325,000 337,000 441,000
Deferred income tax provision (benefit)............................. 1,119,000 1,095,000 (1,444,000)
Decrease (increase) in receivables.................................. 393,000 (1,309,000) (402,000)
Increase in accounts payable and accrued liabilities................ 954,000 2,537,000 419,000
Decrease in due to affiliates....................................... (770,000) (47,000) (1,979,000)
Net change in other current assets and liabilities.................. (1,116,000) 1,426,000 (2,137,000)
Net change in other assets and liabilities.......................... (442,000) (784,000) (702,000)
------------ ------------ ------------
Net cash provided by operating activities............................ 21,821,000 24,836,000 21,022,000
------------ ------------ ------------
INVESTING ACTIVITIES:
Net property and equipment additions................................. (10,104,000) (27,633,000) (9,499,000)
Decrease (increase) in cash restricted for construction projects..... 1,955,000 (1,955,000) -
------------ ------------ ------------
Net cash used in investing activities................................ (8,149,000) (29,588,000) (9,499,000)
------------ ------------ ------------
FINANCING ACTIVITIES:
Proceeds from issuance of debt....................................... - 5,000,000 -
Repayments of debt................................................... (2,870,000) (1,287,000) (3,606,000)
Payments on capital lease obligations................................ (724,000) (1,010,000) (877,000)
Capital contributions................................................ - 10,000,000 4,000,000
Dividends............................................................ (10,040,000) (9,942,000) (14,985,000)
------------ ------------ ------------
Net cash (used in) provided by financing activities.................. (13,634,000) 2,761,000 (15,468,000)
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents................. 38,000 (1,991,000) (3,945,000)
Cash and cash equivalents at beginning of year....................... 8,996,000 10,987,000 14,932,000
------------ ------------ ------------
Cash and cash equivalents at end of year............................. $ 9,034,000 $ 8,996,000 $ 10,987,000
============ ============ ============
</TABLE>
The accompanying notes to financial statements are an
integral part of these financial statements.
79
<PAGE>
HOLLYWOOD CASINO - AURORA, INC.
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
NOTES TO FINANCIAL STATEMENTS
(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," formerly known as
Pratt Hotel Corporation), a Delaware corporation which owns the entity with
which HCA has a management services contract.
Under the provisions of an agreement between the city of Aurora,
Illinois (the "City") and HCA dated June 4, 1991, the City granted HCA the
exclusive right to develop the Aurora Casino on the Fox River. 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 1,350 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 5).
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 northern Indiana and
management believes that this competition will continue in the future.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies followed in the preparation of the
accompanying financial statements are discussed below. 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.
CASINO REVENUES, PROMOTIONAL ALLOWANCES AND DEPARTMENTAL EXPENSES -
HCA recognizes the net win from gaming activities (the difference
between gaming wins and losses) as casino revenues. Casino revenues are net of
accruals for anticipated payouts of progressive jackpots. Such anticipated
jackpot payouts are reflected as current liabilities in the accompanying balance
sheets.
The estimated value of food and beverage, admissions and other items
which were provided to customers without charge has been included in revenues
and a corresponding amount has been deducted as promotional allowances. The
costs of such complimentaries have been included as casino expenses in
80
<PAGE>
HOLLYWOOD CASINO - AURORA, INC.
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
the accompanying statements of operations. Costs of complimentaries allocated
from the food and beverage, admissions and other operating departments to the
casino department during the years ended December 31, 1996, 1995 and 1994 are as
follows:
1996 1995 1994
----------- ----------- ----------
Food and beverage................. $ 10,280,000 $ 8,777,000 $ 7,535,000
Admissions........................ - 5,446,000 3,986,000
Other............................. 1,318,000 2,569,000 2,661,000
----------- ----------- ----------
$ 11,598,000 $ 16,792,000 $ 14,182,000
=========== =========== ===========
CASH AND CASH EQUIVALENTS -
Cash and cash equivalents are generally comprised of cash and
investments with original maturities of three months or less, such as treasury
bills and fixed repurchase agreements.
ALLOWANCE FOR DOUBTFUL ACCOUNTS -
The allowance for doubtful accounts is maintained at a level
considered adequate to provide for possible future losses. Provisions for
doubtful accounts amounting to $325,000, $337,000 and $441,000, respectively,
were made during the years ended December 31, 1996, 1995 and 1994.
INVENTORIES -
Inventories are stated at the lower of cost (on a first-in, first-out
basis) or market.
PROPERTY AND EQUIPMENT -
Property and equipment have been recorded at cost and are being
depreciated over their estimated useful lives utilizing the straight-line method
based on the following lives:
Land improvements 20 years
Buildings, riverboats and improvements 25-40 years
Operating equipment 3-7 years
On October 1, 1996, HCA revised the estimated useful life of its
pavilion from 25 years to 40 years, the estimated life of one of its parking
garages under a capital lease from 25 years to 30 years and the estimated life
of its slot machines from three years to five years. Management believes the
changes in estimated lives more appropriately reflect the timing of the economic
benefits to be received from these assets. For the year ended December 31,
1996, the effect of these changes reduced depreciation and amortization expense
and increased net income by approximately $274,000.
81
<PAGE>
HOLLYWOOD CASINO - AURORA, INC.
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DEFERRED FINANCING COSTS -
The costs of issuing long-term debt, including all underwriting,
licensing, legal and accounting fees, are capitalized and are amortized over the
term of the related debt issue. Amortization of such costs was $509,000 and
$643,000 for the years ended December 31, 1995 and 1994, respectively.
LONG-LIVED ASSETS -
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, HCA does
not believe that any material impairment currently exists related to its long-
lived assets.
ACCRUED INSURANCE -
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.
INTEREST EXPENSE -
Interest costs of $2,247,000 were capitalized during the initial
construction period together with capitalized interest of $555,000 contributed
by HCC in 1994 (see Note 10). Interest costs totaling $354,000 were capitalized
during 1995 with respect to the expansion of one of the Aurora Casino's
riverboats. Such capitalized interest costs are amortized over the useful lives
of the related assets.
INCOME TAXES -
HCA is included in HCC's consolidated federal income tax return.
Pursuant to agreements between HCC and HCA, HCA'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. HCA paid $6,774,000, $5,726,000 and
$10,293,000 to HCC in connection with its current federal tax provisions for the
years ended December 31, 1996, 1995 and 1994, respectively. For the years ended
December 31, 1996, 1995 and 1994, HCA paid state income taxes of $28,000,
$100,000 and $641,000, respectively.
RECLASSIFICATIONS -
Certain reclassifications have been made to the prior years' financial
statements to conform such statements to the 1996 presentation. Such
reclassifications include the reallocation of certain costs among the various
operating departments and general and administrative expenses resulting from the
completion of a comprehensive internal review of department allocations.
Management believes that such reclassifications better reflect the matching of
costs with the associated revenues.
82
<PAGE>
HOLLYWOOD CASINO - AURORA, INC.
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(3) BORROWINGS FROM AFFILIATE
During 1994, HCA repaid outstanding borrowings from HCC of $2,000,000.
Such borrowings were due on demand and accrued interest at the rate of 14% per
annum. Interest incurred on such loans amounted to $82,000 for the year ended
December 31, 1994.
(4) LONG-TERM DEBT AND PLEDGE OF ASSETS
HCA's long-term indebtedness consists of the following:
DECEMBER 31,
--------------------------
1996 1995
------------ ------------
12 3/4% Promissory Note to HCC, due on
November 1, 2003 (a).................. $39,007,000 $39,007,000
Promissory note to bank (b)............. 2,472,000 4,402,000
Equipment loans (c)..................... 1,472,000 2,412,000
----------- -----------
Total indebtedness...................... 42,951,000 45,821,000
Less - current maturities............... (5,684,000) (2,862,000)
----------- -----------
Total long-term debt.................... $37,267,000 $42,959,000
=========== ===========
_____________________
(a) The intercompany note accrues interest at the rate of 12 3/4% per annum
payable semiannually on October 15 and April 15 of each year and requires
semiannual principal repayments of $2,500,000 commencing October 15, 1997
with the balance of the note due November 1, 2003. The note is pledged as
security with respect to HCC's 12 3/4% Senior Secured Notes due in 2003.
HCA is not a guarantor of HCC's indebtedness; however, the indebtedness is
secured, in part, by a first mortgage limited to approximately $39 million
on substantially all of the assets of HCA and by a pledge of the capital
stock of HCA. The 12 3/4% intercompany note replaced a previous 14%
intercompany note to HCC as a result of HCC's refinancing of its
outstanding indebtedness during October 1995.
(b) During February 1995, HCA entered into a $5,000,000 bank promissory note
agreement. The note accrues interest at the bank's prime lending rate plus
1% per annum. Interest only was payable during the first six months.
Principal and interest are payable monthly with the final payment due on
February 1, 1998.
(c) HCA financed the purchase of certain equipment from vendors through the
issuance of promissory notes 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.
83
<PAGE>
HOLLYWOOD CASINO - AURORA, INC.
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
As of December 31, 1996, future maturities of long-term debt are as
follows:
1997...................................$5,684,000
1998................................... 5,760,000
1999................................... 5,000,000
2000................................... 5,000,000
2001................................... 5,000,000
Thereafter.............................16,507,000
-----------
$42,951,000
===========
Interest paid, net of amounts capitalized, for the years ended
December 31, 1996, 1995 and 1994 amounted to $6,509,000, $5,578,000 and
$6,666,000, respectively.
(5) 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 $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. Such escrow and financing payments were included in cash restricted for
construction projects in the accompanying balance sheet at December 31, 1995.
The facility is owned by ACCA and operated by HCA pursuant to a 30-year lease
with the right to extend the lease for up to 20 additional years. Rental
payments during the first 15 years 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.
The original cost of HCA's parking garages is included in buildings
and improvements in the accompanying balance sheets at December 31, 1996 and
1995 in the amounts of $27,476,000 and
84
<PAGE>
HOLLYWOOD CASINO - AURORA, INC.
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
$10,000,000, respectively. Assets under capital leases with an original cost of
$2,329,000 are included in operating equipment in the accompanying balance
sheets at December 31, 1996 and 1995. Amortization expense with respect to
assets under capital leases amounted to $1,223,000 during the year ended
December 31, 1996 and $1,051,000 during each of the years ended December 31,
1995 and 1994.
Future minimum lease payments under capital lease obligations as of
December 31, 1996 are as follows:
1997................................................... $ 2,489,000
1998................................................... 2,494,000
1999................................................... 2,457,000
2000................................................... 2,483,000
2001................................................... 2,532,000
Thereafter............................................. 26,719,000
-----------
Total minimum lease payments........................... 39,174,000
Less - amount representing interest.................... (16,695,000)
------------
Present value of future minimum lease payments......... 22,479,000
Current capital lease obligation....................... (772,000)
------------
Long-term capital lease obligation $ 21,707,000
============
(6) INCOME TAXES
Components of HCA's (provision) benefit for income taxes consist of the
following:
YEAR ENDED DECEMBER 31,
-----------------------------------------
1996 1995 1994
------------ ------------ -----------
Current:
Federal.......................... $ (5,927,000) $ (6,121,000) $(8,957,000)
State............................ 163,000 (338,000) (44,000)
Deferred:
Federal.......................... (1,125,000) (1,034,000) 1,366,000
State............................ 6,000 (61,000) 78,000
------------ ------------ -----------
$ (6,883,000) $ (7,554,000) $(7,557,000)
============ ============ ===========
The tax benefit related to the extraordinary loss on early extinguishment of
debt was $564,000 in 1995.
85
<PAGE>
HOLLYWOOD CASINO - AURORA, INC.
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
A reconciliation between the calculated tax provision on income before
extraordinary item based on the statutory rates in effect and the effective tax
rates for the years ended December 31, 1996, 1995 and 1994 follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------
1996 1995 1994
--------------- -------------- ------------
<S> <C> <C> <C>
Calculated income tax provision
at statutory rate......................... $(6,792,000) $(6,987,000) $(7,490,000)
State income taxes......................... 110,000 (259,000) (283,000)
Adjustment to prior year income taxes..... (81,000) (214,000) 305,000
Political contributions and lobbying costs. (89,000) (65,000) (70,000)
Other...................................... (31,000) (29,000) (19,000)
----------- ------------ -----------
Tax provision as shown on statements
of operations............................. $(6,883,000) $(7,554,000) $(7,557,000)
=========== =========== ===========
</TABLE>
Deferred taxes are computed based on the expected future tax
consequences of temporary differences between the carrying amounts and tax bases
of assets and liabilities, using enacted tax rates. Deferred income taxes
result primarily from the use of the allowance method rather than the direct
write-off method for doubtful accounts, the use of accelerated methods of
depreciation for federal income tax purposes and differences in the timing of
deductions taken between tax and financial reporting purposes for the
amortization of preopening costs and other accruals.
The components of HCA's net deferred tax (liability) asset at December
31, 1996 and 1995 are as follows:
DECEMBER 31,
------------------------
1996 1995
------------ ----------
Deferred tax assets:
Allowance for doubtful accounts.... $ 375,000 $ 314,000
Other liabilities and reserves..... 1,130,000 451,000
----------- ---------
Total deferred tax assets......... 1,505,000 765,000
----------- ---------
Deferred tax liabilities:
Depreciation and amortization...... (2,127,000) (329,000)
----------- ---------
Net deferred tax (liability) asset.. $ (622,000) $ 436,000
=========== =========
86
<PAGE>
HOLLYWOOD CASINO - AURORA, INC.
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Receivables and payables in connection with the aforementioned tax
allocation agreements at December 31, 1996 and 1995 are as follows:
DECEMBER 31,
------------------------
1996 1995
------------ ----------
Deferred tax assets....... $ 1,421,000 $ 739,000
Due from affiliates....... 1,002,000 237,000
Deferred tax liabilities.. (2,043,000) (311,000)
(7) TRANSACTIONS WITH RELATED PARTIES
Pursuant to a management services contract, HCA pays base management
and incentive fees to Pratt Management, L.P. ("PML"), a limited partnership
wholly owned by GBCC. The base management fee is equal to 5% of operating
revenues (as defined in the management services contract) subject to a maximum
of $5,500,000 in any consecutive twelve month period. The incentive fee is
equal to 10% of gross operating profit (as defined in the management services
agreement to generally include all revenues less expenses other than
depreciation, interest, amortization and taxes). HCA incurred such fees
totaling $9,360,000, $9,432,000 and $10,009,000, respectively, during the years
ended December 31, 1996, 1995 and 1994. Management and incentive fees payable
at December 31, 1996 and 1995 were $2,096,000 and $2,177,000, respectively.
HCA incurred interest with respect to its promissory note payable to
HCC (see Note 4). Such interest amounted to $4,973,000, $5,406,000 and
$5,537,000, respectively, for the years ended December 31, 1996, 1995 and 1994.
Interest payable to HCC on such notes amounted to $1,050,000 and $1,022,000,
respectively, at December 31, 1996 and 1995 and is included in accrued interest
payable in the accompanying balance sheets.
HCA has acquired computer software and hardware and has been allocated
certain expenses, including legal, financing and payroll expenses from HCC and
its subsidiaries. During the years ended December 31, 1996, 1995 and 1994, such
transactions totaled $720,000, $1,562,000 and $888,000, respectively. At
December 31, 1996 and 1995, HCA had payables amounting to $138,000 and $130,000,
respectively, in connection with such charges.
(8) ILLINOIS REGULATORY MATTERS
Riverboat gaming operations in Illinois are subject to regulatory
control by the Illinois Gaming Board (the "IGB"). Under the provisions of the
Illinois gaming regulations, HCA and PML are required to maintain their
respective owner's and supplier's licenses. HCA's owner's license expires in
July 1997 and PML's supplier's license expires in December 1997. Management
intends to file for renewal of HCA's owner's license and PML's supplier's
license and anticipates that such renewals will be approved by the IGB during
1997. If it were determined that gaming laws were violated by a licensee, the
gaming licenses held by each licensee could be limited, conditioned, suspended,
or revoked. In addition, the licensees and
87
<PAGE>
HOLLYWOOD CASINO - AURORA, INC.
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
other persons involved could be subject to substantial fines. Limitation or
conditioning or suspension of any gaming license could, and revocation would,
have a materially adverse affect on the operations of HCA.
(9) COMMITMENTS AND CONTINGENCIES
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, 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 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.
88
<PAGE>
HOLLYWOOD CASINO - AURORA, INC.
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(10) SUPPLEMENTAL CASH FLOW INFORMATION
During 1996, HCA entered into a capital lease obligation in the
original amount of $13,195,000 with respect to a second parking garage (see Note
5). Additional escrowed construction and financing costs totaling $4,281,000
were capitalized as part of the cost of the facility.
During 1995, HCA acquired certain equipment at a cost of $2,985,000
under financing agreements with a third party vendor (see Note 4).
During 1994, HCA incurred interest charges from HCC amounting to
$555,000 with respect to funding provided by HCC in connection with construction
of the Aurora Casino. The resulting liability was subsequently contributed as
additional paid-in capital by HCC.
(11) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments for which it is practicable to
estimate that value:
CASH, CASH EQUIVALENTS AND CASH RESTRICTED FOR CONSTRUCTION PROJECTS -
The carrying amounts approximate fair value because of the short maturity of
these instruments.
INTEREST PAYABLE - The carrying amount of interest payable
approximates fair value because of the short maturity of the obligation.
LONG-TERM DEBT - The fair value of HCA's long-term debt is estimated
based on either the quoted market prices of the issue or on the discounted cash
flow of future payments utilizing current rates available to HCA for debt of
similar remaining maturities. Debt obligations with a short remaining maturity
are valued at the carrying amount.
89
<PAGE>
HOLLYWOOD CASINO - AURORA, INC.
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The estimated carrying amounts and fair values of HCA's financial
instruments are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
------------------------ ------------------------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
----------- ----------- ----------------- -----------------
<S> <C> <C> <C> <C>
Financial Assets:
Cash and cash
equivalents............ $ 9,034,000 $ 9,034,000 $ 8,996,000 $ 8,996,000
Cash restricted for
construction projects.. - - 1,955,000 1,955,000
Financial Liabilities:
Interest payable........ $ 1,315,000 $ 1,315,000 $ 1,120,000 $ 1,120,000
12 3/4% promissory note. 39,007,000 37,447,000 39,007,000 35,496,000
Promissory note to bank. 2,472,000 2,472,000 4,402,000 4,402,000
Equipment loans......... 1,472,000 1,478,000 2,412,000 2,418,000
</TABLE>
(12) SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
QUARTER
-------------------------------------------------
FIRST SECOND THIRD FOURTH
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Year Ended December 31, 1996
Net revenues................. $43,715,000 $43,039,000 $39,332,000 $37,305,000
=========== =========== =========== ===========
Net income................... $ 4,436,000 $ 4,138,000 $ 1,908,000 $ 2,042,000
=========== =========== =========== ===========
Year Ended December 31, 1995
Net revenues................. $35,111,000 $35,206,000 $41,965,000 $40,226,000
=========== =========== =========== ===========
Net income................... $ 3,163,000 $ 2,694,000 $ 3,513,000 $ 2,050,000
=========== =========== =========== ===========
</TABLE>
90
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To HWCC - Tunica, Inc.:
We have audited the accompanying consolidated balance sheets of HWCC -
Tunica, Inc. and subsidiary (the Company and a Texas corporation) as of December
31, 1996 and 1995, and the related consolidated statements of operations,
changes in shareholder's equity and cash flows for each of the three years in
the period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of HWCC - Tunica, Inc.
and subsidiary as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Roseland, New Jersey
March 21, 1997
91
<PAGE>
HWCC - TUNICA, INC. AND SUBSIDIARY
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
CONSOLIDATED BALANCE SHEETS
ASSETS
DECEMBER 31,
----------------------------
1996 1995
------------- -------------
Current Assets:
Cash and cash equivalents........................ $ 9,321,000 $ 11,529,000
Accounts receivable, net of allowances of
$622,000 and $313,000, respectively............... 1,363,000 1,428,000
Inventories...................................... 672,000 883,000
Deferred income taxes............................ 953,000 488,000
Prepaid expenses and other current assets........ 854,000 705,000
------------ ------------
Total current assets.............................. 13,163,000 15,033,000
------------ ------------
Property and Equipment:
Land and improvements............................ 3,060,000 3,037,000
Buildings........................................ 73,348,000 44,048,000
Barges........................................... 2,524,000 2,524,000
Operating equipment.............................. 35,724,000 26,360,000
Construction in progress......................... 412,000 4,504,000
------------ ------------
115,068,000 80,473,000
Less - accumulated depreciation and amortization (22,275,000) (12,178,000)
------------ ------------
Net property and equipment....................... 92,793,000 68,295,000
------------ ------------
Cash Restricted for Construction Project.......... - 27,919,000
------------ ------------
Other Assets:
Land rights...................................... 7,658,000 7,962,000
Other assets..................................... 3,006,000 3,031,000
------------ ------------
Total other assets................................ 10,664,000 10,993,000
------------ ------------
$116,620,000 $122,240,000
============ ============
The accompanying notes to consolidated financial statements
are an integral part of these consolidated balance sheets.
92
<PAGE>
HWCC - TUNICA, INC. AND SUBSIDIARY
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDER'S EQUITY
DECEMBER 31,
----------------------------
1996 1995
------------- -------------
Current Liabilities:
Current maturities of long-term debt
and capital lease obligations........... $ 1,511,000 $ 3,096,000
Accounts payable...................... 2,797,000 2,128,000
Accrued liabilities -
Salaries and wages...................... 1,254,000 1,630,000
Interest................................ 2,262,000 2,203,000
Gaming and other taxes.................. 813,000 519,000
Insurance............................... 875,000 1,207,000
Other................................... 2,012,000 1,605,000
Other current liabilities............. 752,000 1,094,000
------------ ------------
Total current liabilities............. 12,276,000 13,482,000
------------ ------------
Long-Term Debt.......................... 85,134,000 84,045,000
------------ ------------
Capital Lease Obligations............... - 1,199,000
------------ ------------
Other Noncurrent Liabilities............ - 88,000
------------ ------------
Commitments and Contingencies
Shareholder's Equity:
Common stock, $.01 par value
per share; 100,000 shares authorized;
1,000 shares issued and outstanding .... - -
Additional paid-in capital............ 34,637,000 34,637,000
Accumulated deficit................... (15,427,000) (11,211,000)
------------ ------------
Total shareholder's equity.............. 19,210,000 23,426,000
------------ ------------
$116,620,000 $122,240,000
============ ============
The accompanying notes to consolidated financial statements
are an integral part of these consolidated balance sheets.
93
<PAGE>
HWCC - TUNICA, INC. AND SUBSIDIARY
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1996 1995 1994
--------------- ------------- ------------
<S> <C> <C> <C>
Revenues:
Casino.......................................... $ 87,361,000 $ 88,289,000 $30,440,000
Rooms........................................... 5,329,000 3,187,000 904,000
Food and beverage............................... 11,987,000 9,657,000 3,520,000
Other........................................... 1,097,000 1,091,000 376,000
------------ ------------ -----------
105,774,000 102,224,000 35,240,000
Less - promotional allowances................... (11,250,000) (7,808,000) (2,827,000)
------------ ------------ -----------
Net revenues................................ 94,524,000 94,416,000 32,413,000
------------ ------------ -----------
Expenses:
Casino.......................................... 66,018,000 57,411,000 20,666,000
Rooms........................................... 1,573,000 1,887,000 495,000
Food and beverage............................... 3,752,000 3,357,000 1,101,000
Other........................................... 1,259,000 1,187,000 361,000
General and administrative...................... 5,962,000 5,711,000 2,425,000
Depreciation and amortization................... 10,906,000 10,356,000 3,610,000
Amortization of preopening costs................ - - 5,939,000
------------ ------------ -----------
Total expenses.............................. 89,470,000 79,909,000 34,597,000
------------ ------------ -----------
Income (loss) from operations.................... 5,054,000 14,507,000 (2,184,000)
------------ ------------ -----------
Non-operating income (expenses):
Interest income................................. 835,000 637,000 374,000
Interest expense, net of capitalized
interest of $1,006,000 and
$1,667,000 in 1996 and 1994,
respectively................................... (10,060,000) (10,792,000) (4,454,000)
Loss on assets held for sale.................... (45,000) (505,000) -
------------ ------------ -----------
Total non-operating expenses, net.............. (9,270,000) (10,660,000) (4,080,000)
------------ ------------ -----------
(Loss) income before income taxes and
extraordinary item.............................. (4,216,000) 3,847,000 (6,264,000)
Income tax benefit............................... - 694,000 -
------------ ------------ -----------
(Loss) income before extraordinary item.......... (4,216,000) 4,541,000 (6,264,000)
Extraordinary item:
(Loss) gain on early extinguishment
of debt, net of taxes.......................... - (9,614,000) 126,000
------------ ------------ -----------
Net loss......................................... $ (4,216,000) $ (5,073,000) $(6,138,000)
============ ============ ===========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
94
<PAGE>
HWCC - TUNICA, INC. AND SUBSIDIARY
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDER'S EQUITY (NOTE 1)
FOR THE THREE YEARS ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
----------------- PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT
------ ------ --------- ----------
<S> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1994.............. 1,000 $ - $ 1,000 $ -
Capital contributions................ - - 34,636,000 -
Net loss............................. - - - (6,138,000)
------ ------ ---------- ----------
BALANCE, DECEMBER 31, 1994............ 1,000 - 34,637,000 (6,138,000)
Net loss............................. - - - (5,073,000)
------ ------ ---------- ----------
BALANCE, DECEMBER 31, 1995............ 1,000 - 34,637,000 (11,211,000)
Net loss............................. - - - (4,216,000)
------ ------ ---------- ----------
BALANCE, DECEMBER 31, 1996............ 1,000 $ - $34,637,000 $(15,427,000)
====== ====== ========== ==========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of this consolidated statement.
95
<PAGE>
HWCC - TUNICA, INC. AND SUBSIDIARY
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------
1996 1995 1994
------------------- ------------- ------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss............................................... $ (4,216,000) $ (5,073,000) $ (6,138,000)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Extraordinary item .................................. - 9,614,000 (126,000)
Depreciation and amortization........................ 10,906,000 10,356,000 9,549,000
Deferred income tax benefit.......................... - (626,000) (68,000)
Loss on assets held for sale......................... 45,000 505,000 -
Provision for doubtful accounts...................... 539,000 449,000 106,000
Increase in accounts receivable...................... (474,000) (1,159,000) (824,000)
Increase in accounts payable and accrued
expenses........................................... 721,000 1,469,000 3,116,000
Net change in other current assets and
liabilities........................................ (280,000) (127,000) 911,000
Net change in other noncurrent assets
and liabilities................................... (740,000) (939,000) (1,167,000)
------------ ------------ ------------
Net cash provided by operating
activities....................................... 6,501,000 14,469,000 5,359,000
------------ ------------ ------------
INVESTING ACTIVITIES:
Net property and equipment additions................. (35,038,000) (7,228,000) (52,327,000)
Proceeds from sale of assets......................... 105,000 180,000 -
Decrease (increase) in cash restricted for
construction projects............................... 27,919,000 (27,919,000) -
Cost of acquisition, net of cash acquired............ - - (8,998,000)
Deferred pre opening costs........................... - - (5,939,000)
------------ ------------ ------------
Net cash used in investing activities............... (7,014,000) (34,967,000) (67,264,000)
------------ ------------ ------------
FINANCING ACTIVITIES:
Issuance of long-term debt........................... 1,503,000 84,045,000 55,000,000
Deferred financing costs............................. - - (4,253,000)
Repayments of long-term debt......................... (1,469,000) (55,862,000) (8,500,000)
Payments on capital lease obligations................ (1,729,000) (1,402,000) (683,000)
Costs of early retirement of debt.................... - (7,414,000) -
Capital contribution................................. - - 33,000,000
------------ ------------ ------------
Net cash (used in) provided by
financing activities.............................. (1,695,000) 19,367,000 74,564,000
------------ ------------ ------------
Net (decrease) increase in cash and
cash equivalents................................... (2,208,000) (1,131,000) 12,659,000
Cash and cash equivalents at
beginning of year................................ 11,529,000 12,660,000 1,000
------------ ------------ ------------
Cash and cash equivalents at
end of year...................................... $ 9,321,000 $ 11,529,000 $ 12,660,000
============ ============ ============
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
96
<PAGE>
HWCC - TUNICA, INC. AND SUBSIDIARY
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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. In January 1994, HCC acquired from unrelated
third parties all of the common stock of Summit Riverboat Casinos - Tunica, Inc.
("SRCT") and all of the limited partnership interests of Summit Tunica
Partnership ("STP"), a Mississippi limited partnership. STP completed
construction of the Tunica Casino at a cost of approximately $92.6 million.
Capital contributions from HCC totaling approximately $33 million provided the
initial funding for the project. On June 3, 1994, HCT issued $55 million of
first mortgage notes, the net proceeds of which (approximately $51.3 million),
together with equipment financing, were used to complete construction of the
facility. 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).
On October 17, 1995, in connection with the HCC Refinancing (see Note
3), STP was dissolved and distributed all of its assets and liabilities to SRCT,
the general partner, and HCT, the sole limited partner. In addition, SRCT
merged with and into HCT, which now owns and operates the Tunica Casino. As the
above entities were under common control, the merger was accounted for similar
to a pooling of interests; accordingly, the accompanying 1995 and 1994
consolidated financial statements have been presented as if the companies had
always been combined.
The accompanying consolidated financial statements include the
accounts of HCT and its wholly owned subsidiary, HWCC-Golf Course Partners, Inc.
("Golf"). Golf, a Delaware corporation, was formed in 1996 to own an interest
in an as yet undeveloped golf course to be used by patrons of the Tunica Casino
and other participating casino/hotel properties. All significant intercompany
balances have been eliminated in consolidation.
HCT estimates that a significant amount of the Tunica Casino's
revenues are derived from patrons living in the Memphis, Tennessee area,
northern Mississippi and Arkansas. The Tunica Casino faces intense competition
from other casinos operating in northern Tunica County and management believes
that competition will continue in the future.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies followed in the preparation of the
accompanying consolidated financial statements are discussed below. 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.
97
<PAGE>
HWCC - TUNICA, INC. AND SUBSIDIARY
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMEMENTS (CONTINUED)
CASINO REVENUES, PROMOTIONAL ALLOWANCES AND DEPARTMENTAL EXPENSES -
The Tunica Casino recognizes the net win from gaming activities (the
difference between gaming wins and losses) as casino revenues. Casino revenues
are net of accruals for anticipated payouts of progressive slot machine jackpots
and certain progressive table game payouts. Such anticipated jackpots and
payouts are included in other accrued liabilities in the accompanying
consolidated balance sheets at December 31, 1996 and 1995.
The estimated value of rooms, food and beverage and other items which
are provided to customers without charge has been included in revenues and a
corresponding amount has been deducted as promotional allowances. The costs of
such complimentaries have been included as casino expenses in the accompanying
consolidated statements of operations.
Costs of complimentaries allocated from the rooms, food and beverage
and other operating departments to the casino department during the years ended
December 31, 1996 and 1995 and from the commencement of operations through
December 31, 1994 were as follows:
1996 1995 1994
----------- ---------- ----------
Rooms......... ...... $ 1,162,000 $ 654,000 $ 173,000
Food and beverage.... 10,223,000 8,603,000 2,982,000
Other................ 203,000 109,000 40,000
----------- ---------- ----------
$11,588,000 $9,366,000 $3,195,000
========== ========== ==========
CASH AND CASH EQUIVALENTS -
Cash and cash equivalents are generally comprised of cash and investments with
original maturities of three months or less, such as commercial paper,
certificates of deposit and fixed repurchase agreements.
ALLOWANCE FOR DOUBTFUL ACCOUNTS -
The allowance for doubtful accounts is maintained at a level considered
adequate to provide for possible future losses. Provisions for doubtful
accounts amounting to $539,000, $449,000 and $106,000, respectively, were made
during the years ended December 31, 1996 and 1995 and during the period from the
commencement of operations through December 31, 1994.
INVENTORIES -
Inventories are stated at the lower of cost (on a first-in, first-out basis)
or market.
98
<PAGE>
HWCC - TUNICA, INC. AND SUBSIDIARY
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMEMENTS (CONTINUED)
PROPERTY AND EQUIPMENT -
Property and equipment have been recorded at cost and are being
depreciated utilizing the straight-line method over the estimated useful lives
of the assets as follows:
Hotel, dockside facilities and improvements......... 25-40 years
Barges.............................................. 25-40 years
Operating equipment..................................3 - 7 years
On October 1, 1996, HCT revised the estimated useful lives of its
buildings, barges and related land rights (see below) from 25 years to 40 years
and the estimated useful life of its slot machines from three years to five
years. Management believes the changes in estimated lives more appropriately
reflect the timing of the economic benefits to be received from these assets.
For the year ended December 31, 1996, the effect of these changes reduced
depreciation and amortization expense and net loss by approximately $858,000.
Interest incurred in connection with property and equipment
acquisitions totalling $1,006,000 in 1996 and $1,667,000 in 1994 has been
capitalized during the acquisition period and, together with $1,636,000 of
capitalized interest contributed by HCC during 1994 (see Note 10), is being
amortized over the useful lives of the related assets.
DEFERRED FINANCING COSTS -
Costs associated with issuing long-term debt, including all
underwriting, legal and accounting fees, are capitalized and are amortized over
the term of the related debt issue. Deferred financing costs, net of
accumulated amortization, amounting to $2,954,000 and $104,000, respectively,
were written off during 1995 and 1994 with respect to the early extinguishment
of debt (see Note 3).
LAND RIGHTS -
Land rights are being amortized on a straight-line basis over the
estimated useful life of the facility, which is less than the term of the ground
lease including renewals (see Note 8); such amortization commenced with the
opening of the Tunica Casino. The estimated economic benefit of the land rights
was increased from 25 years to 40 years effective on October 1, 1996 consistent
with the change in estimated useful life of the Tunica facility as discussed
under "Property and Equipment" above. Management presently intends to renew the
ground lease at least through its currently estimated 40-year useful life of the
facility. Accumulated amortization of such land rights amounted to $787,000 and
$483,000, respectively, at December 31, 1996 and 1995.
LONG-LIVED ASSETS -
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
99
<PAGE>
HWCC - TUNICA, INC. AND SUBSIDIARY
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMEMENTS (CONTINUED)
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.
ACCRUED INSURANCE -
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.
INCOME TAXES -
HCT is included in HCC's consolidated federal income tax return.
HCT's provision for federal income taxes is based on the amount of tax which
would be provided if a separate federal income tax return were filed. HCT paid
no state or federal income taxes during the years ended December 31, 1996, 1995
and 1994.
RECLASSIFICATIONS -
Certain reclassifications have been made to the prior years'
consolidated financial statements to conform to the 1996 consolidated financial
statement presentation. Such reclassifications include the reallocation of
certain costs among the various operating departments and general and
administrative expenses resulting from the completion of a comprehensive
internal review of departmental allocations. Management believes that such
reclassifications better reflect the matching of costs with the associated
revenues.
(3) 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:
DECEMBER 31,
----------------------------
1996 1995
------------- --------------
Promissory notes to HCC (a) $ 84,045,000 $ 84,045,000
Equipment loans (b) 1,401,000 1,367,000
----------- -----------
Total indebtedness 85,446,000 85,412,000
Less - current maturities (312,000) (1,367,000)
----------- -----------
Total long-term debt $ 85,134,000 $ 84,045,000
=========== ===========
_____________________
100
<PAGE>
HWCC - TUNICA, INC. AND SUBSIDIARY
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMEMENTS (CONTINUED)
(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. The unexpended portion of the construction loan was
included in cash restricted for construction projects in the accompanying
consolidated balance sheet at December 31, 1995. Interest on the loans
from HCC accrues at the rate of 12 3/4% per annum and is payable
semiannually on April 15 and October 15 of each year. The Senior Secured
Notes are unconditionally guaranteed on a senior secured basis by HCT and
by certain future subsidiaries of HCC. The Senior Secured Notes and
related guarantees are secured by, among other things, (i) substantially
all of the assets of HCT and other future guarantors, (ii) a first mortgage
limited to approximately $39 million on substantially all of the assets of
another gaming facility operated by a wholly owned subsidiary of HCC, (iii)
a pledge of the capital stock of HCT and certain other subsidiaries of HCC
and (iv) the collateral assignment of any future management contracts
entered into by HCC.
The indenture to the Senior Secured Notes contains various provisions
limiting the ability of HCC, HCT and certain defined subsidiaries to, among
other things, pay dividends or make other restricted payments; incur
additional indebtedness or issue preferred stock; create liens; create
dividend or other payment restrictions affecting certain defined
subsidiaries; enter into mergers or consolidations or make sales of all or
substantially all assets of HCC, HCT or any future guarantor; and enter
into transactions with certain affiliates.
(b) The loans outstanding at December 31, 1996 are payable monthly including
interest at rates ranging from 11 1/4% to 12 3/8% per annum and are due in
2000. The loans outstanding at December 31, 1995 accrued interest at rates
ranging from 12 1/2% to 12 3/4% and were repaid in 1996.
Scheduled payments of long-term debt as of December 31, 1996 are set forth
below:
1997............................. $ 312,000
1998............................. 354,000
1999............................. 400,000
2000............................. 335,000
2001............................. -
Thereafter....................... 84,045,000
-----------
Total $85,446,000
===========
Interest paid, net of amounts capitalized, amounted to $10,000,000,
$11,344,000 and $1,519,000, respectively, during the years ended December 31,
1996, 1995 and 1994.
101
<PAGE>
HWCC - TUNICA, INC. AND SUBSIDIARY
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMEMENTS (CONTINUED)
(4) CAPITAL LEASES
HCT leases certain gaming and other equipment under capital lease
agreements which provide for interest at rates ranging up to 13 1/4% per annum
and which expire during 1997. Assets under capital leases with an original cost
of $4,814,000 and $5,013,000 are included in operating equipment in the
accompanying consolidated balance sheets at December 31, 1996 and 1995.
Amortization expense for the years ended December 31, 1996, 1995 and 1994 was
$1,500,000, $1,674,000 and $500,000, respectively. Accumulated amortization at
December 31, 1996 and 1995 with respect to these assets amounted to $3,571,000
and $2,174,000, respectively.
Future minimum lease payments under capital lease obligations as of
December 31, 1996 are $1,255,000 in 1997 of which $56,000 represents interest,
resulting in a current capital lease obligation of $1,199,000.
(5) INCOME TAXES
Components of HCT's benefit for income taxes for the years ended December
31, 1996, 1995 and 1994 consist of the following:
YEARS ENDED
DECEMBER 31,
--------------------------------
1996 1995 1994
-------- -------- ------------
Benefit in lieu of federal income taxes:
Current................................. $ - $ 68,000 $(68,000)
Deferred................................ - 626,000 68,000
-------- -------- --------
$ - $694,000 $ -
======== ======== ========
The deferred tax benefit related to the extraordinary loss on early
extinguishment of debt was $343,000 in 1995.
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.
102
<PAGE>
HWCC - TUNICA, INC. AND SUBSIDIARY
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMEMENTS (CONTINUED)
A reconciliation between the calculated tax benefit on (loss) income
before extraordinary item based on the statutory rates in effect and the
effective tax rates for the years ended December 31, 1996, 1995 and 1994
follows:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
---------------------------------------
1996 1995 1994
----------- ----------- ------------
<S> <C> <C> <C>
Calculated income tax benefit at 34%............ $ 1,433,000 $(1,308,000) $ 2,087,000
Utilization of operating loss carryforward...... - 2,028,000 -
Tax benefit of operating loss not utilized...... (1,400,000) - (2,028,000)
Lobbying costs.................................. (3,000) (6,000) (56,000)
Disallowance of meals and entertainment......... (25,000) (20,000) (3,000)
Other........................................... (5,000) - -
----------- ----------- -----------
Tax benefit as shown on statement of operations. $ - $ 694,000 $ -
=========== =========== ===========
</TABLE>
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.
At December 31, 1996, HCT had net operating loss carryforwards
("NOL's") totaling approximately $18,000,000, which do not begin to expire until
the year 2009. Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes", requires that the tax benefit of such NOL's, together with
the tax benefit of deferred tax assets resulting from temporary differences be
recorded as an asset and, to the extent that management can not assess that the
utilization of all or a portion of such deferred tax assets is more likely than
not, a valuation allowance should be recorded. Based on the anticipation of
taxable income in the near future, management believes that it is more likely
than not that future taxable income will be sufficient to utilize at least a
portion of the NOL's and deferred tax assets. Accordingly, a valuation
allowance has been established which has resulted in the recording of net
deferred tax assets of $1,037,000 at both December 31, 1996 and 1995. The
ultimate recognition of this amount of deferred tax assets is dependent on HCT's
ability to generate approximately $3 million of taxable income for federal
income tax purposes prior to the expiration dates of the NOL's and the reversal
of other temporary differences.
103
<PAGE>
HWCC - TUNICA, INC. AND SUBSIDIARY
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMEMENTS (CONTINUED)
The components of the deferred tax asset are as follows:
DECEMBER 31,
--------------------------
1996 1995
------------ ------------
Deferred tax assets:
Net operating loss carryforwards......... $ 6,138,000 $ 3,884,000
Allowance for doubtful accounts.......... 211,000 106,000
Other liabilities and accruals........... 809,000 758,000
----------- -----------
Total deferred tax assets.......... 7,158,000 4,748,000
Deferred tax liabilities:
Depreciation and amortization............ (1,668,000) (711,000)
----------- -----------
Net deferred tax asset..................... 5,490,000 4,037,000
Valuation allowance........................ (4,453,000) (3,000,000)
----------- -----------
$ 1,037,000 $ 1,037,000
=========== ===========
Receivables and payables in connection with HCT's federal income taxes
are included in the accompanying consolidated financial statements as follows:
DECEMBER 31,
----------------------
1996 1995
--------- --------
Deferred income taxes...................... $953,000 $488,000
Other noncurrent assets.................... 84,000 549,000
(6) 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 $1,200,000 during each of the years ended
December 31, 1996, 1995 and 1994.
HCT and Advanced Casino Systems Corporation ("ACSC"), an affiliated
company, entered into a Computer Services Agreement dated as of January 1, 1994.
The term of the agreement was three years with an automatic renewal for an
additional three years becoming effective on January 1, 1997. 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 $30,000 a month ($33,600
effective January 1, 1997). HCT also reimburses ACSC for its direct costs and
expenses incurred under this agreement. Total charges incurred
104
<PAGE>
HWCC - TUNICA, INC. AND SUBSIDIARY
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
under such agreement amounted to $511,000, $532,000 and $763,000, respectively,
for the years ended December 31, 1996, 1995 and 1994.
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 years ended December 31, 1996, 1995 and 1994, fees charged to HCT by GBHC
totaled $653,000, $298,000 and $196,000, respectively.
HCT is charged for certain legal, accounting, and other expenses
incurred by HCC and its subsidiaries that relate to HCT's business. For the
years ended December 31, 1996, 1995 and 1994, such charges amounted to $509,000,
$241,000 and $506,000, respectively.
(7) MISSISSIPPI REGULATORY MATTERS
Gaming operations in Mississippi are subject to regulatory control by
the Mississippi Gaming Commission. Under the provisions of the Mississippi
gaming regulations, HCT is required to maintain all necessary licenses. The
ownership license for the Tunica Casino has been renewed through October 17,
1997. Management intends to file for renewal of HCT's ownership license and
anticipates that such renewal will be approved by the Mississippi Gaming
Commission during 1997. If it were determined that gaming laws were violated by
a licensee, the gaming licenses held by each licensee could be limited,
conditioned, suspended or revoked. In addition, the licensees and other persons
involved could be subject to substantial fines.
(8) COMMITMENTS AND CONTINGENCIES
GROUND LEASE
- ------------
HCT entered into a ground lease covering 70 acres of land on which the
Tunica Casino was constructed. The ground lease is for an initial term of five
years from the opening date of the facility and, at HCT's option, may be renewed
for nine additional five-year periods. Obligations under the ground lease
during the initial term include both minimum monthly fixed payments and
percentage rent, which in the aggregate will be the greater of 4% of Gross
Revenues, as defined, or $1,100,000 per year. HCT is responsible for all
operating and other expenses of the property in accordance with the lease terms.
For the years ended December 31, 1996, 1995 and 1994, HCT expensed $3,486,000,
$3,608,000 and $1,210,000, respectively, in connection with the ground lease.
CREDIT FACILITY
- ---------------
As of December 31, 1996, HCT had a $1,000,000 bank credit facility
available through August 15, 1997 on which no borrowings had been made.
Borrowings under the line of credit accrue interest at the rate of 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. During the first quarter of 1997, HCT
borrowed $1,000,000 on the bank credit facility.
105
<PAGE>
HWCC - TUNICA, INC. AND SUBSIDIARY
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PLANET HOLLYWOOD LITIGATION
- ---------------------------
Planet Hollywood International, Inc., a Delaware corporation, and
Planet Hollywood (Region IV), Inc., a Minnesota corporation (collectively,
"PHII"), filed a complaint in the United States District Court for the Northern
District of Illinois, Eastern Division on July 29, 1996 against HCC, the wholly
owned subsidiary of HCC which owns and operates a casino in Aurora, Illinois and
a member of the Pratt Family (collectively, the "Original Hollywood
Defendants"). The Original Hollywood Defendants filed with the Court on
September 18, 1996 an answer to PHII's lawsuit, along with numerous
counterclaims against PHII, Robert Earl and Keith Barish (collectively, the
"PHII Defendants"). PHII filed with the Court on January 21, 1997, an amendment
to their complaint which, among other things, added HCT (together with the
Original Hollywood Defendants, the "Hollywood Defendants") and Greate Bay Casino
Corporation ("GBCC"), an affiliated company, as defendants. The Original
Hollywood Defendants filed with the Court on February 4, 1997, and GBCC and HCT
filed with the Court on February 20, 1997, answers and counterclaims to such
amended complaint.
In its lawsuit, PHII alleges, among other things, that the Hollywood
Defendants and GBCC have, in opening and operating the Hollywood Casino concept,
infringed on PHII's trademark, service mark and trade dress and have engaged in
unfair competition and deceptive trade practices. In their counterclaims, the
Hollywood Defendants and GBCC allege, among other things, that the PHII
Defendants have, through their planned use of their mark in connection with
casino services, infringed on certain of HCC's service marks and trade dress and
have engaged in unfair competition.
Given the uncertainties inherent in litigation, no assurance can be
given that the Hollywood Defendants will prevail in this litigation; however,
the Hollywood Defendants believe that PHII's claims are without merit and intend
to defend their position and pursue their counterclaims vigorously. The
accompanying consolidated financial statements do not include any adjustments
that might result from the outcome of the uncertainties described above.
OTHER
- -----
HCT is a party in various legal proceedings with respect to the conduct
of casino and hotel operations. Although a possible range of loss can not be
estimated, in the opinion of management, based upon the advice of counsel,
settlement or resolution of the proceedings should not have a material adverse
impact on the consolidated financial position or results of operations of HCT.
(10) SUPPLEMENTAL CASH FLOW INFORMATION
During 1994, HCT acquired certain equipment at a cost of $5,169,000
under financing agreements with third party vendors.
During 1994, HCT entered into capital lease obligations totaling
$5,013,000 for new equipment (see Note 4).
106
<PAGE>
HWCC - TUNICA, INC. AND SUBSIDIARY
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
During the third quarter of 1994, HCC contributed interest capitalized
in connection with the construction of the Tunica Casino to HCT. The
contribution, which totaled $1,636,000, has been excluded from the accompanying
consolidated statement of cash flows as a noncash transaction.
In connection with the acquisition of SRCT and STP by HCT during
January 1994, liabilities were assumed as follows:
Fair value of assets acquired............................ $10,577,000
Land rights.............................................. 8,445,000
Cash paid for capital stock and
limited partnership interest........................... (7,986,000)
Notes issued for capital stock and
limited partnership interest........................... (6,000,000)
-----------
Liabilities assumed.................................. $ 5,036,000
===========
(11) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value:
CASH, CASH EQUIVALENTS AND CASH RESTRICTED FOR CONSTRUCTION PROJECTS - The
carrying amounts approximate fair value because of the short maturity of these
instruments.
INTEREST PAYABLE - The carrying amount of interest payable approximates fair
value because of the short maturity of the obligation.
LONG-TERM DEBT - The fair value of HCT's long-term debt is estimated based on
either the quoted market prices of the issue or on the discounted cash flow of
future payments utilizing current rates available to HCT for debt of similar
remaining maturities. Debt obligations with a short remaining maturity are
valued at the carrying amount.
107
<PAGE>
HWCC - TUNICA, INC. AND SUBSIDIARY
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The estimated carrying amounts and fair values of HCT's financial
instruments at December 31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
------------------------------ -------------------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
----------- ----------------- ------------ -----------------
<S> <C> <C> <C> <C>
Financial Assets
Cash and cash equivalents...................... $ 9,321,000 $ 9,321,000 $11,529,0000 $11,529,000
Cash restricted for construction project....... - - 27,919,000 27,919,000
Financial Liabilities
Interest payable............................... $ 2,262,000 $ 2,262,000 $ 2,203,000 $ 2,203,000
Promissory notes to HCC........................ 84,045,000 80,683,000 84,045,000 76,481,000
Equipment loans................................ 1,401,000 1,401,000 1,367,000 1,367,000
</TABLE>
(12) SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
QUARTER
------------------------------------------------------
FIRST SECOND THIRD FOURTH
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1996:
Net revenues $24,230,000 $21,907,000 $23,209,000 $25,178,000
=========== =========== =========== ===========
Net (loss) income $ (417,000) $(3,158,000) $ (769,000) $ 128,000
=========== =========== =========== ===========
YEAR ENDED DECEMBER 31, 1995:
Net revenues $23,420,000 $23,207,000 $25,217,000 $22,572,000
=========== =========== =========== ===========
Net income (loss) $ 1,620,000 $ 791,000 $ 1,325,000 $(8,809.000)
=========== =========== =========== ===========
</TABLE>
108
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
HCC and HCT had no disagreements with their independent accountants to
report under this item.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information called for by this item is incorporated herein by
reference from HCC's definitive proxy statement filed with the Securities and
Exchange Commission relating to its Annual Meeting of Shareholders to be held on
May 29, 1997 (the "Definitive Proxy Statement") under the caption "Election of
Directors" and "Management."
ITEM 11. EXECUTIVE COMPENSATION
The information called for by this item is incorporated herein by
reference from HCC's Definitive Proxy Statement under the caption "Remuneration
of Directors and Executive Officers."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information called for by this item is incorporated herein by
reference from the HCC's Definitive Proxy Statement under the caption "Voting
Rights and Principal Stockholders".
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information called for by this item is incorporated herein by
reference from HCC's Definitive Proxy Statement under the caption "Certain
Transactions with Management."
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this report:
1. FINANCIAL STATEMENTS
The financial statements filed as part of this report are listed on the
Index to Financial Statements on page 43.
2. FINANCIAL STATEMENT SCHEDULES
Hollywood Casino Corporation and Subsidiaries
-- Report of Independent Public Accountants
-- Schedule I; Condensed Financial Information of Registrant, Hollywood
Casino Corporation (Parent Company):
-- Balance Sheets
-- Statements of Operations
-- Statements of Cash Flows
-- Notes to Parent Company Financial Statements
-- Schedule II; Valuation and Qualifying Accounts
109
<PAGE>
Hollywood Casino - Aurora, Inc.
-- Report of Independent Public Accountants
-- Schedule II; Valuation and Qualifying Accounts
HWCC-Tunica, Inc.
-- Report of Independent Public Accountants
-- Schedule II; Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable and therefore
have been omitted.
3. EXHIBITS
**2.1 -- Agreement of Merger dated as of May 15, 1992, of Correction of
Agreement of Merger dated as of between PBC, Inc. and HCC and
Certificate June 16, 1992. (Exhibit 2.1)
+3.1 -- Certificate of Incorporation of HCC, as amended. (Exhibit 3.1)
+3.2 -- Amended Bylaws of HCC. (Exhibit 3.2)
@@3.3 -- Articles of Incorporation of HCT. (Exhibit 3.1).
@@3.4 -- Bylaws of HCT. (Exhibit 3.2)
++4.1 -- Indenture among the Company as Issuer, HCT as Guarantor and
Shawmut Bank, National Association, as Trustee (including form
of Note) dated as of October 17, 1995. (Exhibit 4.1)
++4.2 -- Mortgage, Leasehold Mortgage, Security Agreement, Fixture
Filing and Financing Statement made by HCA, as Mortgagor, for
the benefit of the Company, as assigned to Shawmut Bank,
National Association, as Trustee and Mortgagee. (Exhibit 4.2)
++4.3 -- Leasehold Deed of Trust, Security Agreement, Fixture Filing and
Financing Statement made by HCT, as Grantor, to Jim B. Tohill,
as Deed Trustee, for the benefit of Shawmut Bank, National
Association, as Trustee and Beneficiary (relating to a first-
lien Deed of Trust securing the Indenture). (Exhibit 4.3)
++4.4 -- Leasehold Deed of Trust, Security Agreement, by HCT, as
Grantor, to Jim B. Tohill, as Deed Trustee, for the benefit of
the Company, as assigned to Shawmut Bank, National Association,
as Trustee and Beneficiary (relating to a second-lien Leasehold
Deed of Trust securing the Intercompany Notes executed by HCT).
(Exhibit 4.4)
++4.5 -- First Preferred Fleet Mortgage made and given assigned to
Shawmut Bank, National Association, as Trustee and Mortgagee
(relating to Vessel Nos. 993836, 993837, and 1029229) dated as
of October 17, 1995. (Exhibit 4.5)
++4.6 -- First Preferred Ship Mortgage made and given by HCT, as
Mortgagor, to Shawmut Bank, National Association, as Trustee and
Mortgagee (relating to Vessel No. 534006) dated as of October
17, 1995. (Exhibit 4.6)
++4.7 -- Second Preferred Ship Mortgage made and given by HCT, as
Mortgagor, to the Company, as assigned to Shawmut Bank, National
Association, as Trustee and Mortgagee (relating to Vessel No.
534006) dated as of October 17, 1995. (Exhibit 4.7)
++4.8 -- Security Agreement (Stock Pledge) made by the Company, as
Pledgor, in favor of Shawmut Bank, National Association, as
Trustee and Secured Party dated October 17, 1995. (Exhibit 4.8)
++4.9 -- Security Agreement between the Company, as Debtor, and Shawmut
Bank, National Association, as Trustee and Secured Party dated
October 17, 1995. (Exhibit 4.9)
++4.10 -- First Amendment and Supplement to Security Agreement between the
Company, as debtor, and Shawmut Bank, National Association, as
Trustee, dated as of November 15, 1995. (Exhibit 4.10)
++4.11 -- Security Agreement between HCT, as Debtor, and Shawmut Bank,
National Association, as Trustee and Secured Party dated October
17, 1995. (Exhibit 4.11)
++4.12 -- Intercompany Security Agreement between HCT, as Debtor, and the
Company, as assigned to Shawmut Bank, National Association, as
Trustee and Secured Party (relating to a second-lien
110
<PAGE>
security agreement for HCT securing the Intercompany Note
executed by it) dated October 17, 1995. (Exhibit 4.12)
++4.13 -- Intercompany Security Agreement between HCA, as Debtor, and the
Company, as assigned to Shawmut Bank, National Association, as
Trustee and Secured Party (relating to a first-lien security
agreement for HCA securing the Intercompany Note executed by it)
dated October 17, 1995. (Exhibit 4.13)
++4.14 -- Assignment made and given by the Company, as Assignor, of First
Preferred Fleet Mortgage made and given by HCA, as Mortgagor, to
the Company, in favor of Shawmut Bank, National Association, as
Trustee and Mortgagee (relating to Vessel Nos. 993836, 993837,
and 1029229), dated October 17, 1995. (Exhibit 4.14).
++4.15 -- Assignment made and given by the Company, as Assignor, of Second
Preferred Ship Mortgage made and given by HCT, as Mortgagor, to
the Company, in favor of Shawmut Bank, National Association, as
Trustee and Mortgagee (relating to Vessel No. 534006), dated
October 17, 1995. (Exhibit 4.15)
++4.16 -- Promissory Note in the aggregate principal amount of $54,045,000
issued by HCT to the Company, endorsed by the Company, dated
October 17, 1995. (Exhibit 4.16)
++4.17 -- Promissory Note in the aggregate principal amount of $30 million
issued by HCT to the Company, endorsed by the Company, dated
October 17, 1995. (Exhibit 4.17)
++4.18 -- Amended and Restated Promissory Note in the aggregate principal
amount of $39,006,818 issued by HCA to the Company, endorsed by
the Company, dated October 17, 1995. (Exhibit 4.18)
++4.19 -- Assignment of Mortgage, Leasehold Mortgage, Security Agreement,
Fixture Filing and Financing Statement made and given by the
Company, as Assignor, in favor of Shawmut Bank, National
Association, as Trustee and Assignee, dated October 17, 1995.
(Exhibit 4.19)
++4.20 -- Assignment of Second Leasehold Deed of Trust, Security
Agreement, Fixture Filing and Financing Statement made and given
by the Company, as Assignor, in favor of Shawmut Bank, National
Association, as Trustee and Assignee, dated October 17, 1995.
(Exhibit 4.20)
10.1 -- Fifth Amendment to Employment Agreement dated January 1, 1997,
between HCC and Jack E. Pratt.
10.2 -- Fifth Amendment to Employment Agreement dated January 1, 1997,
between HCC and Edward T. Pratt, Jr.
10.3 -- Fifth Amendment to Employment Agreement dated January 1, 1997,
between HCC and William D. Pratt .
10.4 -- Employment Agreement dated May 1, 1996, between HCC and Edward
T. Pratt III.
++10.5 -- Employment Agreement dated as of June 1, 1992, between Greate
Bay Casino Corporation and Richard D. Knight, as amended by HCC
as of May 22, 1995. (Exhibit 10.17)
*10.6 -- Development Agreement dated as of June 4, 1991, between the City
of Aurora, Illinois and HCA. (Exhibit 10.3)
*10.7 -- Management Services Agreement dated as of June 21, 1991, between
HCA and Greate Bay Casino Corporation (the "Management Services
Agreement"). (Exhibit 10.34)
*10.8 -- First Amendment to the Management Services Agreement dated as of
May 14, 1992. (Exhibit 10.35)
*10.9 -- Tax Sharing Agreement dated May 13, 1992, by and among HCC, HCA
and Pratt Hotel Corporation ("PHC", now known as GBCC). (Exhibit
10.36)
*10.10 -- Parking lease Agreement June 4, 1991, between the City of
Aurora, Illinois and HCA. (Exhibit 10.39)
*10.11 -- Purchase and Sale Agreement dated June 4, 1991, between the City
of Aurora, Illinois and HCA. (Exhibit 10.40)
*10.12 -- Technical Services Agreement dated February 21, 1992, between
HCA and PHC (the "Technical Services Agreement"). (Exhibit
10.42)
*10.13 -- First Amendment to the Technical Services Agreement dated May
14, 1992. (Exhibit 10.43)
@10.14 -- Rights Agreement, dated as of May 7, 1993 between HCC and
Continental Stock Transfer & Trust Company, as Rights Agent.
(Exhibit 10.45)
+10.15 -- Hollywood Casino Corporation Stock Option Plan.
@10.16 -- Agreement of Limited Partnership of Pratt Management, L.P.
(Exhibit 10.55)
@@10.17 -- Ground Lease dated as of October 11, 1993 between R.M.
Leatherman and Hugh M. Mageveney, III, as Landlord, and SRCT, as
Tenant. (Exhibit 10.4)
111
<PAGE>
@@10.18 -- Letter Agreement dated as of October 11, 1993 between R.M.
Leatherman and Hugh M. Mageveney, III, as Landlord, and SRCT, as
Tenant (relating to Ground Lease). (Exhibit 10.5)
@@10.19 -- Blanket Conveyance, Bill of Sale and Assignment and Assumption
Agreement dated as of May 31, 1994 between SRCT and STP.
(Exhibit 10.6)
@@10.20 -- Assignment of Lease and Assumption Agreement dated as of May 31,
1994 between SRCT and STP (relating to Ground Lease). (Exhibit
10.7)
@@10.21 -- Consulting Agreement dated as of January 1, 1994 between PCC, as
the Consultant, and HCT (Exhibit 10.8)
@@10.22 -- Computer Services Agreement dated as of January 1, 1994 between
STP and Advanced Casino Systems Corporation. (Exhibit 10.11)
++10.23 -- North Island Center Expansion and Redevelopment Agreement dated
June 12, 1995 between HCA, the Aurora Metropolitan Exposition,
Auditorium and Office Building Authority and the City of Aurora.
(Exhibit 10.36)
++10.24 -- Note and Warrant Purchase Agreement dated November 16, 1995
between Golden Gate Gaming, L.L.C., Edward J. DeBartolo, Jr.,
Cynthia R. DeBartolo and HCC. (Exhibit 10.37)
++10.25 -- Promissory Notes (Series A and Series B), each in the aggregate
amount of $5,000,000, issued by Golden Gate Gaming, LLC to the
Company, dated November 16, 1995. (Exhibit 10.38)
++10.26 -- Warrant Certificates (Series A and Series B) by and between
Golden Gate Gaming, LLC, Edward J. DeBartolo, Jr., Cynthia R.
DeBartolo and the Company, dated November 16, 1995. (Exhibit
10.39)
10.27 -- Joint Venture Agreement dated August 1, 1996 by and between
HWCC-Louisiana, Inc. and DeBartolo Entertainment Louisiana
Gaming, Inc.
10.28 -- Hollywood Casino Corporation 1996 Long-Term
10.29 -- Hollywood Casino Corporation 1996 Non-Employee Director Stock
Plan.
11.1 -- Statement regarding Computation of Per Share Losses.
21.1 -- Subsidiaries of HCC.
23.1 -- Consent of Arthur Andersen LLP
27.1 -- Financial Disclosure Schedule - Hollywood Casino Corporation and
Subsidiaries
27.2 -- Financial Disclosure Schedule - HWCC-Tunica, Inc. and Subsidiary
- -----------------------
+ Incorporated by reference from the exhibit shown in parenthesis to Form S-
1 Registration Statement (Registration No. 33-58732) for Hollywood Casino
Corporation as filed with the SEC on May 27, 1993.
++ Incorporated by reference from the exhibit shown in parenthesis filed in
HCC's Annual Report on Form 10-K for the fiscal year ended December 31,
1995.
* Incorporated by reference from the exhibit shown in parenthesis to that
Registration Statement on Form 10 filed with the SEC on May 28, 1992 by
PRT Corporation (now know as HCC).
** Incorporated by reference from the exhibit shown in parenthesis to that
Registration Statement on Form 10, as amended, filed with the SEC on
August 13, 1992 by HCC.
@ Incorporated by reference from the exhibit shown in parenthesis to Form S-
1 Registration Statement (Registration No. 33-77502) for Hollywood Casino
Corporation as filed with the SEC on April 8, 1994.
@@ Incorporated by reference from the exhibit shown in parenthesis to Form S-
1 Registration Statement (Registration No. 33-82182) for HWCC - Tunica,
Inc. as filed with the SEC on September 29, 1994.
112
<PAGE>
(B) REPORTS ON FORM 8-K.
Neither HCC nor HCT filed any reports on Form 8-K during the quarter ended
December 31, 1996.
On January 15, 1996, HCC filed a Form 8-K with the Securities and
Exchange Commission with respect to the distribution of its stock in GBCC to
HCC's shareholders.
113
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Dallas,
State of Texas on March 27, 1997.
HOLLYWOOD CASINO CORPORATION
By: /s/ Jack E. Pratt
---------------------
Jack E. Pratt
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the Registrant
in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ Jack E. Pratt Chief Executive March 27, 1997
- ---------------------------------- ---------------------
Jack E. Pratt Officer and Director
/s/ Edward T. Pratt, Jr. Vice President, Treasurer March 27, 1997
- ---------------------------------- ---------------------
Edward T. Pratt, Jr. and Director
/s/ William D. Pratt Executive Vice President, March 27, 1997
- ---------------------------------- ---------------------
William D. Pratt Secretary, General Counsel
and Director
/s/ Edward T. Pratt III President, Chief Operating March 27, 1997
- ---------------------------------- ---------------------
Edward T. Pratt III Officer and Director
/s/ Richard D. Knight Executive Vice President - March 27, 1997
- ---------------------------------- ---------------------
Richard D. Knight Operations
/s/ Charles F. LaFrano III Vice President - Finance March 27, 1997
- ---------------------------------- ---------------------
Charles F. LaFrano III
/s/ John C. Hull Corporate Controller and March 27, 1997
- ---------------------------------- ---------------------
John C. Hull Principal Accounting
Officer
/s/ James A. Colquitt Director March 27, 1997
- ---------------------------------- ---------------------
James A. Colquitt
/s/ Theodore H. Strauss Director March 27, 1997
- ---------------------------------- ---------------------
Theodore H. Strauss
</TABLE>
114
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of Dallas,
State of Texas on March 27, 1997.
HWCC - TUNICA, INC.
By: /s/ Jack E. Pratt
------------------------
Jack E. Pratt
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the Registrant
in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Jack E. Pratt Chief Executive March 27, 1997
- ---------------------------------- ---------------------
Jack E. Pratt Officer and Director
/s/ Edward T. Pratt, Jr. Director March 27, 1997
- ---------------------------------- ---------------------
Edward T. Pratt, Jr.
/s/ William D. Pratt Executive Vice President, March 27, 1997
- ---------------------------------- ---------------------
William D. Pratt Secretary, General Counsel
and Director
/s/ Edward T. Pratt III President and Director March 27, 1997
- ---------------------------------- ---------------------
Edward T. Pratt III
/s/ Richard D. Knight Executive Vice President March 27, 1997
- ---------------------------------- ---------------------
Richard D. Knight
/s/ John R. Osborne Vice President - Finance March 27, 1997
- ---------------------------------- ---------------------
John R. Osborne
/s/ John C. Hull Corporate Controller and March 27, 1997
- ---------------------------------- ---------------------
John C. Hull Principal Accounting
Officer
</TABLE>
115
<PAGE>
INDEX TO FINANCIAL STATEMENT SCHEDULES
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
-- Report of Independent Public Accountants
-- Schedule I; Condensed Financial Information of Registrant:
-- Balance Sheets
-- Statements of Operations
-- Statements of Cash Flows
-- Notes to Parent Company Financial Statements
-- Schedule II; Valuation and Qualifying Accounts
HOLLYWOOD CASINO-AURORA, INC.
-- Report of Independent Public Accountants
-- Schedule II; Valuation and Qualifying Accounts
HWCC-TUNICA, INC.
-- Report of Independent Public Accountants
-- Schedule II; Valuation and Qualifying Accounts
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Hollywood Casino Corporation:
We have audited in accordance with generally accepted auditing standards, the
consolidated financial statements of Hollywood Casino Corporation and
subsidiaries included in this Form 10-K and have issued our report thereon dated
March 21, 1997. Our audit was made for the purpose of forming an opinion on the
basic financial statements taken as a whole. The schedules listed in the index
to financial statement schedules are the responsibility of the Company's
management and are presented for purposes of complying with the Securities and
Exchange Commission's rules and are not part of the basic financial statements.
These schedules have been subjected to the auditing procedures applied in the
audit of the basic financial statements and, in our opinion, fairly state in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Roseland, New Jersey
March 21, 1997
<PAGE>
SCHEDULE I
PAGE 1
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
HOLLYWOOD CASINO CORPORATION
(PARENT COMPANY)
BALANCE SHEETS (NOTE 1)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1996 1995
------------ ------------
<S> <C> <C>
Cash and cash equivalents $ 2,897,000 $ 7,483,000
Accounts receivable 8,000 333,000
Due from affiliates 14,079,000 11,620,000
Deferred federal income taxes 4,271,000 8,443,000
Other current assets 101,000 178,000
------------ ------------
Total current assets 21,356,000 28,057,000
------------ ------------
Investment in and advances to affiliates 46,633,000 47,853,000
Property and equipment, net 14,836,000 18,436,000
Due from affiliates 158,984,000 184,116,000
Notes receivable 10,000,000 10,000,000
Other assets 8,836,000 7,451,000
------------ ------------
$260,645,000 $295,913,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current maturities of long-term debt $ 2,815,000 $ 2,300,000
Accounts payable and accrued liabilities 2,361,000 1,759,000
Accrued interest payable 4,469,000 5,509,000
------------ ------------
Total current liabilities 9,645,000 9,568,000
------------ ------------
Long-term debt, net of discount 200,208,000 200,088,000
------------ ------------
Other noncurrent liabilities 5,503,000 4,919,000
------------ ------------
Shareholders' equity:
Class A common stock, $.0001 par
value per share, 50,000,000
shares authorized, 24,760,000 and
24,720,000 shares issued and outstanding,
respectively 2,000 2,000
Class B common stock, non-voting, $.01
par value per share; 10,000,000 authorized;
no shares issued - -
Additional paid-in capital 61,625,000 77,936,000
Retained earnings (16,338,000) 3,400,000
------------ ------------
Total shareholders' equity 45,289,000 81,338,000
------------ ------------
$260,645,000 $295,913,000
============ ============
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of this schedule.
<PAGE>
SCHEDULE I
PAGE 2
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
HOLLYWOOD CASINO CORPORATION
(PARENT COMPANY)
STATEMENTS OF OPERATIONS (NOTE 1)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1996 1995 1994
----------- ------------ -----------
<S> <C> <C> <C>
REVENUES:
Interest income $ 25,725,000 $ 17,015,000 $15,490,000
Other income 60,000 66,000 93,000
------------ ------------ -----------
25,785,000 17,081,000 15,583,000
------------ ------------ -----------
EXPENSES:
General and administrative 7,376,000 5,063,000 6,558,000
Interest 27,786,000 15,704,000 10,175,000
Depreciation and amortization 1,106,000 743,000 622,000
Write down of properties held for sale 3,400,000 - -
Other - 541,000 -
------------ ------------ -----------
Total expenses 39,668,000 22,051,000 17,355,000
------------ ------------ -----------
Loss before income taxes, nonrecurring,
extraordinary and other items (13,883,000) (4,970,000) (1,772,000)
Write down of affiliate receivables (18,741,000) - -
------------ ------------ -----------
Loss before income taxes, extraordinary
and other items (32,624,000) - -
Income tax provision (72,000) - (486,000)
------------ ------------ -----------
Loss before extraordinary
and other items (32,696,000) (4,970,000) (2,258,000)
Extraordinary item:
(Loss) gain on early extinguishment of debt - (12,298,000) 18,409,000
------------ ------------ -----------
Loss before other item (32,696,000) (17,268,000) 16,151,000
Equity in income of consolidated
subsidiaries 12,958,000 4,353,000 1,273,000
------------ ------------ -----------
Net (loss) income $(19,738,000) $(12,915,000) $17,424,000
============ ============ ===========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of this schedule.
<PAGE>
SCHEDULE I
PAGE 3
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
HOLLYWOOD CASINO CORPORATION
(PARENT COMPANY)
STATEMENTS OF CASH FLOWS (NOTE 1)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1996 1995 1994
------------ ------------- -------------
<S> <C> <C> <C>
NET CASH (USED IN) PROVIDED BY
OPERATING ACTIVITIES $ (150,000) $ (4,234,000) $ 8,382,000
----------- ------------ ------------
INVESTING ACTIVITIES:
Net property and equipment additions (91,000) (161,000) (16,047,000)
Proceeds from sale of assets 142,000 - -
Issuance of notes receivable - (10,000,000) -
Investments in consolidated affiliates (2,621,000) (16,974,000) (51,384,000)
Net repayments (advances to) from affiliates (1,600,000) (72,647,000) 12,292,000
----------- ------------ ------------
Net cash provided by (used in) investing activities (4,170,000) (99,782,000) (55,139,000)
----------- ------------ ------------
FINANCING ACTIVITIES:
Net proceeds from issuance of long-term debt - 199,939,000 2,500,000
Repayments of long-term debt (150,000) (84,907,000) (50,000)
Cost of early retirement of debt - (9,221,000) -
Issuance of common stock - 2,000 1,000
Deferred financing costs (116,000) (7,602,000) -
----------- ------------ ------------
Net cash (used in) provided by financing activities (266,000) 98,211,000 2,451,000
----------- ------------ ------------
Net decrease in cash and cash equivalents (4,586,000) (5,805,000) (44,306,000)
Cash and cash equivalents at beginning of year 7,483,000 13,288,000 57,594,000
----------- ------------ ------------
Cash and cash equivalents at end of year $ 2,897,000 $ 7,483,000 $ 13,288,000
=========== ============ ============
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of this schedule.
<PAGE>
SCHEDULE I
PAGE 4
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
HOLLYWOOD CASINO CORPORATION
(PARENT COMPANY)
NOTES TO PARENT COMPANY FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
During October 1995, HWCC - Lake Houston, Inc., HWCC - Clearklake, Inc. and
HWCC -Farmer's Branch, Inc., all wholly owned subsidiaries of Hollywood Casino
Corporation ("HCC"), merged with and into the parent company. Such transaction
was reflected in the accompanying parent company financial statements as a
combination of entities under common control, a method of accounting similar to
a pooling of interests. Accordingly, the parent company 1995 and 1994 financial
statements have been adjusted to reflect the accounts and operations of these
entities as if they had always been combined.
(2) GUARANTEES OF REGISTRANT
As of December 31, 1996, HCC had not guaranteed any obligations of its
subsidiaries or unconsolidated affiliates .
(3) SCHEDULED PAYMENTS OF LONG-TERM DEBT OF THE REGISTRANT
Scheduled payments of long-term debt outstanding at December 31, 1996 are
set forth below:
<TABLE>
<CAPTION>
<S> <C>
1997 $ 2,815,000
1998 5,180,000
1999 6,655,000
2000 5,000,000
2001 5,000,000
Thereafter 187,500,000
------------
Total $212,150,000
============
</TABLE>
(4) DIVIDENDS AND DISTRIBUTIONS
HCC received dividends from its consolidated subsidiaries amounting to
$10,040,000, $9,942,000 and $14,985,000, respectively, during the years ended
December 31, 1996, 1995 and 1994.
On December 31, 1996, HCC distributed to its shareholders the common stock
of Greate Bay Casino Corporation ("GBCC", formerly known as Pratt Hotel
Corporation) owned by HCC. Prior to the distribution, HCC owned approximately
80% of GBCC's outstanding common stock.
<PAGE>
SCHEDULE I
PAGE 5
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
HOLLYWOOD CASINO CORPORATION
(PARENT COMPANY)
NOTES TO PARENT COMPANY FINANCIAL STATEMENTS (CONTINUED)
(5) SUPPLEMENTAL CASH FLOW INFORMATION
At December 31, 1996, HCC contributed certain receivables from GBCC and its
subsidiaries to GBCC. Notes receivable amounting to $8,738,000 together with
accrued interest thereon totaling $1,753,000 and other receivables of $4,283,000
with respect to pension obligations assumed during 1995 were contributed to
GBCC.
(6) RECLASSIFICATIONS
Certain reclassifications have been made to the prior years' parent company
financial statements to conform to the 1996 financial statement presentation.
The accompanying notes to consolidated financial statements
are an integral part of this schedule.
<PAGE>
SCHEDULE II
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
AMOUNTS
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND OTHER AT END
OF PERIOD EXPENSES DEDUCTIONS CHARGES OF PERIOD
----------- ---------- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1996:
Allowance for doubtful
accounts receivable $17,675,000 $3,031,000 $(3,489,000)(1) $(15,524,000)(3) $ 1,693,000
Allowance for obligatory
investments 3,792,000 1,344,000 (735,000)(2) (4,401,000)(3) -
----------- ---------- ----------- ------------ -----------
$21,467,000 $4,375,000 $(4,224,000) $(19,925,000) $ 1,693,000
=========== ========== =========== ============ ===========
YEAR ENDED DECEMBER 31, 1995:
Allowance for doubtful
accounts receivable $16,119,000 $3,774,000 $(2,218,000)(1) $ - $17,675,000
Allowance for obligatory
investments 2,458,000 1,457,000 (123,000)(2) - 3,792,000
----------- ---------- ----------- ------------ -----------
$18,577,000 $5,231,000 $(2,341,000) $ - $21,467,000
=========== ========== =========== ============ ===========
YEAR ENDED DECEMBER 31, 1994:
Allowance for doubtful
accounts receivable $15,089,000 $3,830,000 $(2,800,000)(1) $ - $16,119,000
Allowance for obligatory
investments 3,065,000 617,000 (1,224,000)(2) - 2,458,000
----------- ---------- ----------- ------------ -----------
$18,154,000 $4,447,000 $(4,024,000) $ - $18,577,000
=========== ========== =========== ============ ===========
</TABLE>
________________________
(1) Represents net write-offs of uncollectible accounts.
(2) Represents write-offs of obligatory investments in connection with the
contribution of certain obligatory investments to the Casino Reinvestment
Development Authority.
(3) Related asset, net of valuation allowance set forth above, was distributed
to shareholders in connection with Hollywood Casino Corporation's
distribution of its ownership of the common stock of Greate Bay Casino
Corporation on December 31, 1996.
The accompanying notes to consolidated financial statements
are an integral part of this schedule.
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
----------------------------------------
To Hollywood Casino-Aurora, Inc.:
We have audited in accordance with generally accepted auditing standards, the
financial statements of Hollywood Casino-Aurora, Inc. included in this Form 10-K
and have issued our report thereon dated March 21, 1997. Our audit was made for
the purpose of forming an opinion on the basic financial statements taken as a
whole. The schedule listed in the index to financial statement schedules is the
responsibility of the Company's management and is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic financial statements. This schedule has been subjected to the
auditing procedures applied in the audit of the basic financial statements and,
in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.
ARTHUR ANDERSEN LLP
Roseland, New Jersey
March 21, 1997
<PAGE>
SCHEDULE II
HOLLYWOOD CASINO-AURORA, INC.
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
AMOUNTS
BALANCE AT CHARGED TO BALANCE
BEGINNING COSTS AND AT END
OF PERIOD EXPENSES DEDUCTIONS OF PERIOD
---------- ---------- -------------- ----------
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1996:
Allowance for doubtful
accounts receivable $866,000 $325,000 $(120,000)(1) $1,071,000
======== ======== ========== ==========
YEAR ENDED DECEMBER 31, 1995:
Allowance for doubtful
accounts receivable $715,000 $337,000 $(186,000)(1) $ 866,000
======== ======== ========== ==========
YEAR ENDED DECEMBER 31, 1994:
Allowance for doubtful
accounts receivable $274,000 $441,000 $ - $ 715,000
======== ======== ========== ==========
</TABLE>
________________________
(1) Represents net write-offs of uncollectible accounts.
The accompanying notes to consolidated financial statements
are an integral part of this schedule.
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
----------------------------------------
To HWCC-Tunica, Inc.:
We have audited in accordance with generally accepted auditing standards, the
consolidated financial statements of HWCC-Tunica, Inc. and subsidiary included
in this Form 10-K and have issued our report thereon dated March 21, 1997. Our
audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The schedule listed in the index to financial
statement schedules is the responsibility of the Company's management and is
presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in the audit of
the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Roseland, New Jersey
March 21, 1997
<PAGE>
SCHEDULE II
HWCC-TUNICA, INC. AND SUBSIDIARY
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
AMOUNTS
BALANCE AT CHARGED TO BALANCE
BEGINNING COSTS AND AT END
OF PERIOD EXPENSES DEDUCTIONS OF PERIOD
---------- ---------- -------------- ---------
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1996:
Allowance for doubtful
accounts receivable $313,000 $539,000 $(230,000)(1) $622,000
======== ======== ========== ========
YEAR ENDED DECEMBER 31, 1995:
Allowance for doubtful
accounts receivable $106,000 $449,000 $(242,000)(1) $313,000
======== ======== ========== ========
YEAR ENDED DECEMBER 31, 1994:
Allowance for doubtful
accounts receivable $ - $106,000 $ - $106,000
======== ======== ========== ========
</TABLE>
________________________________
(1) Represents net write-offs of uncollectible accounts.
The accompanying notes to consolidated financial statements
are an integral part of this schedule.
<PAGE>
EXHIBIT 10.1
FIFTH AMENDMENT TO EMPLOYMENT AGREEMENT
THIS FIFTH AMENDMENT TO EMPLOYMENT AGREEMENT (the "Fifth Amendment") is made
and entered into to be effective as of the 1st day of January, 1997, among
HOLLYWOOD CASINO CORPORATION, a Delaware corporation (the "Employer"), and JACK
E. PRATT (the "Employee") with reference to the foregoing.
RECITALS
A. Pratt Hotel Corporation (nka Greate Bay Casino Corporation), a Delaware
corporation ("PHC") which was a direct approximately 80% owned subsidiary of
Employer prior to December 31, 1996, and Employee entered into that certain
Employment Agreement dated as of September 21, 1989;
B. PHC and Employee subsequently entered into that certain First Amendment to
Employment Agreement dated as of January 1, 1991;
C. PHC and Employee subsequently entered into that certain Second Amendment
to Employment Agreement dated as of September 30, 1992;
D. PHC and Employee subsequently entered into that certain Third Amendment to
Employment Agreement dated as of January 1, 1994;
E. PHC assigned to Employer the right, title and interest of PHC in, to and
under, and Employer assumed the obligations of PHC under, the Employment
Agreement, as amended by the First Amendment to Employment Agreement, the Second
Amendment to Employment Agreement and the Third Amendment to Employment
Agreement, pursuant to that certain Assignment of Pratt Brother Employment
Contracts and Assumption Agreement dated as of October 16, 1995;
F. Employer and Employee subsequently entered into that certain Fourth
Amendment to Employment Agreement dated as of January 1, 1996;
G. The Employment Agreement, as amended by the First Amendment to Employment
Agreement, the Second Amendment to Employment Agreement, the Third Amendment to
Employment Agreement and the Fourth Amendment to Employment Agreement, are
hereinafter collectively called the "Existing Employment Agreement"; and
H. Employer and Employee now desire to further amend the Existing Employment
Agreement as provided below.
<PAGE>
AGREEMENTS
----------
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
1. Paragraph 2 of the Existing Employment Agreement is hereby amended in its
entirety to read as follows:
"2. Term of Employment. The term of employment of the Executive under this
Agreement shall expire on December 31, 2000; subject, however, to the
provisions of Section 5 of this Agreement."
2. This Fifth Amendment may be executed in multiple counterparts, each of which
shall be deemed an original but all of which together shall constitute one and
the same instrument.
3. If any provision of this Fifth Amendment or the application hereof to any
person or circumstances shall to any extent be held void, unenforceable or
invalid, then the remainder of this Fifth Amendment or the application of such
provision to persons or circumstances other than those as to which it is held
void, unenforceable or invalid shall not be affected thereby, and each provision
of this Fifth Amendment shall be valid and enforced to the fullest extent
permitted by law.
4. THIS FIFTH AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER
SHALL BE GOVERNED BY THE LAWS OF THE STATE OF TEXAS, WITHOUT REGARD TO ANY OF
SUCH STATE'S DOCTRINES REGARD CONFLICTS OF LAWS.
5. Except as amended hereby, the Existing Employment Agreement shall continue
in full force and effect without any further action by the parties thereto. On
or after the effective date of this Fifth Amendment, references to the
"Employment Agreement" in the Existing Employment Agreement, as amended hereby,
shall be deemed to mean, for purposes of determining the rights, remedies,
obligations and liabilities of the parties thereto and all other purposes, the
Existing Employment Agreement, as amended by this Fifth Amendment.
* * *
2
<PAGE>
IN WITNESS WHEREOF, the parties to this Fifth Amendment have executed such
Fifth Amendment effective as of the date first set forth above.
/S/ JACK E. PRATT
----------------------
JACK E. PRATT
HOLLYWOOD CASINO CORPORATION
By: /s/ Charles F. LaFrano III
-----------------------------
Name: Charles F. LaFrano III
Title: Vice President of Finance
3
<PAGE>
EXHIBIT 10.2
FIFTH AMENDMENT TO EMPLOYMENT AGREEMENT
---------------------------------------
THIS FIFTH AMENDMENT TO EMPLOYMENT AGREEMENT (the "Fifth Amendment") is
made and entered into to be effective as of the 1st day of January, 1997, among
HOLLYWOOD CASINO CORPORATION, a Delaware corporation (the "Employer"), and
EDWARD T. PRATT, JR. (the "Employee") with reference to the foregoing.
RECITALS
--------
A. Pratt Hotel Corporation (nka Greate Bay Casino Corporation), a
Delaware corporation ("PHC") which was a direct approximately 80% owned
subsidiary of Employer prior to December 31, 1996, and Employee entered into
that certain Employment Agreement dated as of September 21, 1989;
B. PHC and Employee subsequently entered into that certain First
Amendment to Employment Agreement dated as of January 1, 1991;
C. PHC and Employee subsequently entered into that certain Second
Amendment to Employment Agreement dated as of September 30, 1992;
D. PHC and Employee subsequently entered into that certain Third
Amendment to Employment Agreement dated as of February 23, 1995;
E. PHC assigned to Employer the right, title and interest of PHC in, to
and under, and Employer assumed the obligations of PHC under, the Employment
Agreement, as amended by the First Amendment to Employment Agreement, the Second
Amendment to Employment Agreement and the Third Amendment to Employment
Agreement, pursuant to that certain Assignment of Pratt Brother Employment
Contracts and Assumption Agreement dated as of October 16, 1995; and
F. Employer and Employee subsequently entered into that certain Fourth
Amendment to Employment Agreement dated as of January 1, 1996;
G. The Employment Agreement, as amended by the First Amendment to
Employment Agreement, the Second Amendment to Employment Agreement, the Third
Amendment to Employment Agreement and the Fourth Amendment to Employment
Agreement, are hereinafter collectively called the "Existing Employment
Agreement"; and
H. Employer and Employee now desire to further amend the Existing
Employment Agreement as provided below.
<PAGE>
AGREEMENTS
----------
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
1. Paragraph 2 of the Existing Employment Agreement is hereby amended in its
entirety to read as follows:
"2. Term of Employment. The term of employment of the Executive under this
Agreement shall expire on December 31, 1999; subject, however, to the
provisions of Section 5 of this Agreement."
2. This Fifth Amendment may be executed in multiple counterparts, each of
which shall be deemed an original but all of which together shall constitute one
and the same instrument.
3. If any provision of this Fifth Amendment or the application hereof to any
person or circumstances shall to any extent be held void, unenforceable or
invalid, then the remainder of this Fifth Amendment or the application of such
provision to persons or circumstances other than those as to which it is held
void, unenforceable or invalid shall not be affected thereby, and each provision
of this Fifth Amendment shall be valid and enforced to the fullest extent
permitted by law.
4. THIS FIFTH AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES
HEREUNDER SHALL BE GOVERNED BY THE LAWS OF THE STATE OF TEXAS, WITHOUT REGARD TO
ANY OF SUCH STATE'S DOCTRINES REGARD CONFLICTS OF LAWS.
5. Except as amended hereby, the Existing Employment Agreement shall continue
in full force and effect without any further action by the parties thereto. On
or after the effective date of this Fifth Amendment, references to the
"Employment Agreement" in the Existing Employment Agreement, as amended hereby,
shall be deemed to mean, for purposes of determining the rights, remedies,
obligations and liabilities of the parties thereto and all other purposes, the
Existing Employment Agreement, as amended by this Fifth Amendment.
* * *
2
<PAGE>
IN WITNESS WHEREOF, the parties to this Fifth Amendment have executed such
Fifth Amendment effective as of the date first set forth above.
/S/ EDWARD T. PRATT, JR.
-------------------------------------
EDWARD T. PRATT, JR.
HOLLYWOOD CASINO CORPORATION
By: /s/ Charles F. LaFrano III
-----------------------------------
Name: Charles F. LaFrano III
Title: Vice President of Finance
3
<PAGE>
EXHIBIT 10.3
FIFTH AMENDMENT TO EMPLOYMENT AGREEMENT
---------------------------------------
THIS FIFTH AMENDMENT TO EMPLOYMENT AGREEMENT (the "Fifth Amendment") is
made and entered into to be effective as of the 1st day of January, 1997, among
HOLLYWOOD CASINO CORPORATION, a Delaware corporation (the "Employer"), and
WILLIAM D. PRATT (the "Employee") with reference to the foregoing.
RECITALS
--------
A. Pratt Hotel Corporation (nka Greate Bay Casino Corporation), a
Delaware corporation ("PHC") which was a direct approximately 80% owned
subsidiary of Employer prior to December 31, 1996, and Employee entered into
that certain Employment Agreement dated as of September 21, 1989;
B. PHC and Employee subsequently entered into that certain First
Amendment to Employment Agreement dated as of January 1, 1991;
C. PHC and Employee subsequently entered into that certain Second
Amendment to Employment Agreement dated as of September 30, 1992;
D. PHC and Employee subsequently entered into that certain Third
Amendment to Employment Agreement dated as of February 23, 1995;
E. PHC assigned to Employer the right, title and interest of PHC in, to
and under, and Employer assumed the obligations of PHC under, the Employment
Agreement, as amended by the First Amendment to Employment Agreement, the Second
Amendment to Employment Agreement and the Third Amendment to Employment
Agreement, pursuant to that certain Assignment of Pratt Brother Employment
Contracts and Assumption Agreement dated as of October 16, 1995; and
F. Employer and Employee subsequently entered into that certain Fourth
Amendment to Employment Agreement dated as of January 1, 1996;
G. The Employment Agreement, as amended by the First Amendment to
Employment Agreement, the Second Amendment to Employment Agreement, the Third
Amendment to Employment Agreement and the Fourth Amendment to Employment
Agreement, are hereinafter collectively called the "Existing Employment
Agreement"; and
H. Employer and Employee now desire to further amend the Existing
Employment Agreement as provided below.
<PAGE>
AGREEMENTS
----------
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
1. Paragraph 2 of the Existing Employment Agreement is hereby amended in its
entirety to read as follows:
"2. Term of Employment. The term of employment of the Executive under this
Agreement shall expire on December 31, 1999; subject, however, to the
provisions of Section 5 of this Agreement."
2. This Fifth Amendment may be executed in multiple counterparts, each of
which shall be deemed an original but all of which together shall constitute one
and the same instrument.
3. If any provision of this Fifth Amendment or the application hereof to any
person or circumstances shall to any extent be held void, unenforceable or
invalid, then the remainder of this Fifth Amendment or the application of such
provision to persons or circumstances other than those as to which it is held
void, unenforceable or invalid shall not be affected thereby, and each provision
of this Fifth Amendment shall be valid and enforced to the fullest extent
permitted by law.
4. THIS FIFTH AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES
HEREUNDER SHALL BE GOVERNED BY THE LAWS OF THE STATE OF TEXAS, WITHOUT REGARD TO
ANY OF SUCH STATE'S DOCTRINES REGARD CONFLICTS OF LAWS.
5. Except as amended hereby, the Existing Employment Agreement shall continue
in full force and effect without any further action by the parties thereto. On
or after the effective date of this Fifth Amendment, references to the
"Employment Agreement" in the Existing Employment Agreement, as amended hereby,
shall be deemed to mean, for purposes of determining the rights, remedies,
obligations and liabilities of the parties thereto and all other purposes, the
Existing Employment Agreement, as amended by this Fifth Amendment.
* * *
2
<PAGE>
IN WITNESS WHEREOF, the parties to this Fifth Amendment have executed such
Fifth Amendment effective as of the date first set forth above.
/S/ WILLIAM D. PRATT
-------------------------------------
WILLIAM D. PRATT
HOLLYWOOD CASINO CORPORATION
By: /s/ Charles F. LaFrano III
-----------------------------------
Name: Charles F. LaFrano III
Title: Vice President of Finance
3
<PAGE>
EXHIBIT 10.4
- --------------------------------------------------------------------------------
Dated: May 1, 1996
- --------------------------------------------------------------------------------
EMPLOYMENT AGREEMENT
- by and between -
HOLLYWOOD CASINO CORPORATION
- and -
EDWARD T. PRATT III
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
Page
----
RECITALS 1
1. DEFINITIONS 2
2. PRIOR EMPLOYMENT 4
3. BASIC EMPLOYMENT AGREEMENT 4
4. DUTIES OF EMPLOYEE 4
5. ACCEPTANCE OF EMPLOYMENT 5
6. TERM 5
7. SPECIAL TERMINATION PROVISIONS 5
8. COMPENSATION TO EMPLOYEE 7
(a) Base Salary 7
(b) Base Salary Adjustment 7
(c) Incentive Bonus 8
(d) Employee Benefit Plans 8
(e) Expense Reimbursement 9
(f) Licensing Expenses 9
(g) Vacations and Holidays 9
9. LICENSING REQUIREMENTS 10
10. CONFIDENTIALITY 11
11. RESTRICTIVE COVENANT 12
12. BEST EVIDENCE 13
13. SUCCESSION 13
14. ASSIGNMENT 13
15. AMENDMENT OR MODIFICATION 14
16. GOVERNING LAW 14
17. NOTICES 14
18. INTERPRETATION 15
i
<PAGE>
19. SEVERABILITY 15
20. DISPUTE RESOLUTION 15
21. WAIVER 15
22. PAROL 16
EXECUTION PAGE 17
ii
<PAGE>
-----------------------------------
EMPLOYMENT AGREEMENT
-----------------------------------
THIS EMPLOYMENT AGREEMENT (the "Agreement") is made and entered into as of
the 1st day of May, 1996, by and between HOLLYWOOD CASINO CORPORATION, a
Delaware corporation ("Employer"), and EDWARD T. PRATT III ("Employee").
W I T N E S S E T H:
-------------------
WHEREAS, Employer is a corporation, duly organized and existing under the
laws of the State of Delaware, which develops and/or operates land-based,
riverboat and dockside casinos and related support facilities in emerging and
established gaming jurisdictions and which has a need for qualified,
experienced personnel;
WHEREAS, Employee is an adult individual currently residing at 17423 Woods
Edge Drive, Dallas, Texas 75287;
WHEREAS, Employee has represented and warranted to Employer that Employee
possesses sufficient qualifications and expertise in order to fulfill the
terms of the employment stated in this Agreement; and
WHEREAS, Employer is willing to employ Employee, and Employee is desirous
of accepting employment from Employer, under the terms and pursuant to the
conditions set forth herein.
NOW, THEREFORE, for and in consideration of the foregoing recitals, and in
consideration of the mutual covenants, agreements, understandings,
undertakings, representations,
1
<PAGE>
warranties and promises hereinafter set forth, and intending to be legally
bound thereby, Employer and Employee do hereby covenant and agree as follows:
1. DEFINITIONS. As used in this Agreement, the words and terms
hereinafter defined have the respective meanings ascribed to them herein,
unless a different meaning clearly appears from the context:
(a) "Cause" - means (i) the conviction of Employee of
a felony by a court of competent jurisdiction; (ii) the indictment
of Employee by a state or federal grand jury of competent
jurisdiction for embezzlement or misappropriation of Employer's
funds or for any act of dishonesty or lack of fidelity towards
Employer; (iii) a decree of a court of competent jurisdiction that
Employee is not mentally competent or is unable to handle his own
affairs; (iv) the written confession by Employee of any act of
dishonesty towards Employer or any embezzlement or misappropriation
of Employer's funds; (v) the payment (or, by the operation solely of
the effect of a deductible, the failure of payment) by a surety or
insurer of a claim under a fidelity bond issued to the benefit of
Employer reimbursing Employer for a loss due to the wrongful act or
wrongful omission to act of Employee (the occurrence of which shall
cause Employee to be indebted to Employer for the greater of either
(A) the loss incurred by Employer or (B) the sums paid by Employer
to Employee pursuant to this Agreement); (vi) Employee's breach of
the restrictive covenant set forth in Paragraph 11 of this
Agreement, or (vii) Employee's failure to maintain in force and in
good standing any and all licenses, permits and/or approvals
required of Employee by the relevant governmental authorities for
the discharge of the obligations of Employee under this Agreement,
provided that should Employee's required licenses, permits and/or
approvals be suspended pending a final license, permit or approval
revocation determination, this Agreement shall not terminate but any
compensation which would otherwise be paid by Employer to Employee
under Paragraph 8 of this Agreement shall be suspended and accrued
pending the final resolution of such final license, permit and/or
approval revocation determination, and, in the event such final
resolution of such final license, permit and/or approval revocation
determination does not revoke Employee's licenses, permits and/or
approvals, any compensation which has been so suspended and accrued
shall be paid by Employer to Employee, provided, however, that
Employee's disability due to illness or accident or any other mental
or physical incapacity shall not constitute "Cause" as defined
herein.
2
<PAGE>
(b) "Complete Disability" - means the inability of Employee, due to
illness or accident or other mental or physical incapacity, to
perform his obligations under this Agreement for a period of three
hundred sixty (360) calendar days in the aggregate over a period of
five hundred (500) consecutive calendar days, such "Complete
Disability" to become effective upon the expiration of such three
hundred sixtieth (360th) day.
(c) "Confidential Information" - means any information in any form,
regardless of the medium or media by which such information is
recorded or communicated, that is in the possession of Employer
being neither in the public domain nor routinely available to third
parties, and if directly or indirectly disclosed to Employer's
competitors (i) would assist such competitors in competing against
Employer, (ii) would diminish or eliminate any competitive advantage
now enjoyed by Employer,(iii) would cause financial injury or loss
to Employer, or (iv) would reveal proprietary information or trade
secrets of Employer.
(d) "Effective Date" - means May 1, 1996.
(e) "Employee" - means Edward T. Pratt III.
(f) "Employer" - means Hollywood Casino Corporation, a Delaware
corporation.
3
<PAGE>
(g) "Employer's Affiliates" - means any parent, subsidiary,
affiliate or other legal entity of Employer.
(h) "Prior Employment" - means any prior employment Employee has had
with either Employer or Employer's Affiliates.
2. PRIOR EMPLOYMENT. This Agreement supersedes and replaces any and
all prior employment agreements, whether written or oral, by and between
Employee, on the one side, and Employer or Employer's Affiliates, on the other
side. From and after the Effective Date, Employee shall be the employee of
Employer under the terms and pursuant to the conditions set forth in this
Agreement.
3. BASIC EMPLOYMENT AGREEMENT. Subject to the terms and pursuant to
the conditions hereinafter set forth, Employer hereby employs Employee during
the Term hereinafter specified to serve in a managerial or executive capacity,
under a title and with such duties not inconsistent with those set forth in
Paragraph 4 of this Agreement, as the same may be modified and/or assigned to
Employee by Employer from time to time. Notwithstanding the foregoing,
Employer and Employee hereby covenant and agree that, in the absence of mutual
consent of both Employer and Employee, Employee shall not be assigned duties
by Employer which would require that Employee maintain his principal place of
residence or primary place of employment outside of the greater metropolitan
area of Dallas, Texas.
4. DUTIES OF EMPLOYEE. Employee shall perform such duties assigned to
Employee by Employer as are generally associated with the duties of President
and Chief Operating Officer of Employer, or
4
<PAGE>
such similar duties as may be assigned to Employee by the Chairman of the
Board of Directors of Employer, including but not limited to (i) the efficient
and continuous operation of Employer and Employer's Affiliates; (ii) the
preparation of relevant budgets and allocation of relevant funds; (iii) the
selection and delegation of duties and responsibilities of subordinates; (iv)
the direction, review and oversight of all operations and programs under
Employee's supervision; and (v) such other and further duties specifically
related to such duties as assigned by Employer to Employee. In the
performance of his duties hereunder, Employee shall report directly to the
Chairman of the Board/Chief Executive Officer and the Board of Directors of
Employer. Notwithstanding the foregoing, Employee shall devote such time to
Employer's Affiliates as required by Employer, provided such duties are not
inconsistent with Employee's primary duties to Employer hereunder.
5. ACCEPTANCE OF EMPLOYMENT. Employee hereby unconditionally accepts
the employment set forth hereunder, under the terms and pursuant to the
conditions set forth in this Agreement. Employee hereby covenants and agrees
that, during the Term of this Agreement, Employee will devote the whole of his
normal and customary working time and best efforts solely to the performance
of Employee's duties under this Agreement.
6. TERM. The term of this Agreement shall commence on May 1, 1996 and
expire on 12:00 p.m. on April 30, 2000 (the "Term"), unless sooner terminated
as provided herein.
7. SPECIAL TERMINATION PROVISIONS. Notwithstanding the provisions of
Paragraph 6 above, this Agreement and all parties'
5
<PAGE>
rights and obligations hereunder shall terminate upon the occurrence of any of
the following events:
(a) the death of Employee; provided, however, that any and all
employee benefits due and owing to Employee shall be paid to the
spouse of Employee in the event of such death;
(b) the giving of written notice from Employer to Employee of the
termination of this Agreement upon the Complete Disability of
Employee; provided, however, that a termination pursuant to this
Paragraph 7(b) shall not affect Employee's vesting or continued
rights in any stock option plan set forth in Paragraph 8(c) of this
Agreement;
(c) the giving of written notice by Employer to Employee of the
termination of this Agreement upon the discharge of Employee for
Cause;
(d) the giving of written notice by Employer to Employee of the
termination of this Agreement without Cause; provided, however,
that, if Employer gives Employee written notice of termination of
this Agreement without Cause, such notice must be accompanied by
Employer's written tender to Employee of Employer's commitment to
continue to pay to Employee the compensation set forth in Paragraph
8(a) of this Agreement; and/or
(e) a Change of Control (as defined in that certain Indenture dated
as of October 17, 1995, among Employer, HWCC-Tunica, Inc. and
Shawmut Bank, National Association (now Fleet National Bank) as
Trustee); provided, however, that, in the event of such Change of
Control, Employer shall be obligated to pay to Employee an amount
(the "Severance Amount") equal to the aggregate compensation which
would have been paid by Employer to Employee under Paragraph 8(a) of
this Agreement during the period (the "Severance Period") from the
date of termination to the later to occur of the expiration date of
this Agreement or thirty-six (36) months from the date of
termination assuming that such termination had not occurred.
Employee shall have the right, exercisable by written notice to
Employer, to elect to have the Severance Amount paid by
6
<PAGE>
Employer to Employee in (i) a lump sum payment not later than the
date of occurrence of the Change of Control or (ii) equal monthly
installments during the Severance Period.
8. COMPENSATION TO EMPLOYEE. For and in complete consideration for
Employee's full and faithful performance of his duties under this Agreement,
Employer hereby covenants and agrees to pay to Employee, and Employee hereby
covenants and agrees to accept from Employer, the following items of
compensation:
(a) Base Salary. Employer hereby covenants and agrees to pay to
Employee, and Employee hereby covenants and agrees to accept from Employer, an
annual base salary of Four Hundred Twenty-Five Thousand and No/100 Dollars
($425,000.00), effective January 1, 1996, payable in such equal regular
installments as is Employer's custom and usage. Such base salary shall be
exclusive of and in addition to any other benefits which Employer, in its sole
discretion, may make available to Employee, including, but not limited to, any
pension plans, bonus plans, retirement plans, company life insurance plan,
medical and/or hospitalization plans, or any and all other benefit plans which
may from time to time be in available to executive officers of Employer
generally during the Term of this Agreement.
(b) Base Salary Adjustment. The base salary prescribed in Paragraph
8(a) above may be adjusted at such time and in such manner as the Compensation
Committee of the Board of Directors of Employer may determine in accordance
with the executive
7
<PAGE>
compensation policy of Employer then in effect; provided, however, that such
base salary shall never be less than $425,000 per annum.
(c) Incentive Bonus. Employee shall be eligible to receive one or
more incentive compensation bonuses based upon such performance and other
criteria as Employer shall determine in its sole discretion. After the
Effective Date of this Agreement, Employer will implement an incentive bonus
program in which Employee will participate and which will be used to determine
Employee's incentive bonus. The incentive bonus shall be payable by Employer
to Employee no later than the first day of March of the year following the
calendar year for which the incentive bonus is accrued (or in accordance with
the terms of any applicable incentive bonus program), and, where applicable,
shall be prorated based upon the number of days Employee was employed by
Employer during such calendar year. Any incentive bonus shall be in addition
to Employee's participation in any and all profit sharing plans, bonus
participation plans, stock options or other incentive compensation to which
Employee is entitled to participate or receive.
(d) Employee Benefit Plans. Employer hereby covenants and agrees
that it shall include Employee, if otherwise eligible, in any pension plans,
retirement plans, company life insurance plans, medical and/or hospitalization
plans, and/or any and all other benefit plans which may be placed in effect by
Employer during the Term of this Agreement.
(e) Expense Reimbursement. During the Term of this Agreement,
Employer shall either pay directly or reimburse Employee
8
<PAGE>
for Employee's reasonable expenses incurred for the benefit of Employer in
accordance with Employer's general policy regarding reimbursement, as the same
may be amended, modified or changed from time to time. Such reimbursable
expenses shall include, but are not limited to, reasonable entertainment and
promotional expenses, gift and travel expenses, dues and expenses of
membership in clubs, professional societies and fraternal organizations, and
the like. Prior to reimbursement, Employee shall provide Employer with
sufficient detailed invoices of such expenses in accordance with the then
applicable guidelines of the Internal Revenue Service so as to permit Employer
to claim a deduction of such expenses.
(f) Licensing Expenses. Employer hereby covenants and agrees that
Employer shall pay all licensing fees and expenses incurred by Employee in
securing and maintaining such licenses and permits required of Employee in
order to perform his duties under this Agreement.
(g) Vacations and Holidays. Commencing as of the Effective Date of
this Agreement, Employee shall be entitled to (i) annual paid vacation leave
in accordance with Employer's standard policy therefor, to be taken at such
times as selected by Employee and approved by Employer, and (ii) the following
paid holidays (or, at Employer's option, an equivalent number of paid days
off): New Year's Day, Dr. Martin Luther King, Jr.'s Birthday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
9. LICENSING REQUIREMENTS. (a) Employer and Employee hereby
covenant and agree that this Agreement may be subject to the approval of (i)
the New Jersey Casino Control
9
<PAGE>
Commission (the "CCC") pursuant to the provisions of the New Jersey Casino
Control Act, as amended (the "New Jersey Gaming Act"), and the regulations
promulgated thereunder, (ii) the Illinois Gaming Board (the "IGB") pursuant to
the provisions of the Illinois Riverboat Gambling Act, as amended (the
"Illinois Gaming Act"), and the regulations promulgated thereunder and/or
(iii) the Mississippi Gaming Commission (the "MGC") pursuant to the provisions
of the Mississippi Gaming Control Act, as amended (the "Mississippi Gaming
Act"), and the regulations promulgated thereunder. If this Agreement is
required by the New Jersey Gaming Act, the Illinois Gaming Act and/or the
Mississippi Gaming Act and the regulations promulgated thereunder to be
approved by the CCC, the IGB and/or the MGC, as applicable, but is not so
approved by any such gaming regulatory authority, this Agreement shall
immediately terminate and shall be null and void and of no further force or
effect; provided, however, should this Agreement be required to be approved
but is not so approved by the CCC, the IGB and/or the MGC, Employer and
Employee hereby covenant and agree that, with the exception of the provisions
of Paragraph 8 of this Agreement, this Agreement shall be modified and amended
so as to receive the appropriate approval from the CCC, the IGB and/or the
MGC.
(b) Employer and Employee hereby covenant and agree that, in order for
Employee to discharge the duties required under this Agreement, Employee shall
hold any necessary and appropriate casino key employee license (the "License")
in gaming jurisdictions in which Employer or Employer's Affiliates may now or
hereafter maintain casino operations. In the event that any applicable
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gaming regulatory authority (the "Authority") objects to the renewal of
Employee's License or refuses to renew Employee's License, Employer, at
Employer's sole cost and expense, shall promptly defend such action and shall
take such reasonable steps as may be required to either remove the Authority's
objections or secure the Authority's approval. Notwithstanding the foregoing,
if the source of the Authority's objections or the Authority's refusal to
renew Employee's License arise as a result of any of the events described in
Paragraph 1(a) of this Agreement, Employer's obligations under this Paragraph
9 shall not be operative and Employee shall promptly reimburse Employer upon
demand for any expenses incurred by Employer pursuant to this Paragraph 9.
10. CONFIDENTIALITY. Employee hereby warrants, covenants and agrees
that, without the prior express written approval of Employer, Employee shall
hold in the strictest confidence and shall not disclose to any person, firm,
corporation or other entity, any and all of Employer's Confidential
Information, including, but not limited to, (i) information, letters,
photographs, graphs, samples, or computer software of a confidential nature;
(ii) information or other documents concerning Employer's business, customers
or suppliers; (iii) Employer's marketing methods, files and credit and
collection techniques and files; or (iv) Employer's trade secrets, technical
information, design, process, procedure, improvement and other "know-how" or
information not of a public nature, regardless of how such information came
into the custody of Employee. The warranty, covenant and agreement set forth
in this
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Paragraph 10 shall not expire, shall survive this Agreement and shall be
binding upon Employee without regard to the passage of time or other events.
11. RESTRICTIVE COVENANT. Employee hereby covenants and agrees that,
during the Term of this Agreement or until April 30, 2000, if Employer
terminates Employee pursuant to Paragraph 7(d) above and is continuing to make
payments to Employee as provided therein, Employee shall not directly or
indirectly, either as a principal, agent, employee, employer, consultant,
partner, shareholder of a closely held corporation or shareholder in excess of
five percent (5%) of a publicly traded corporation, corporate officer or
director, or in any other individual or representative capacity, engage or
otherwise participate in any manner or fashion in any business that is in
competition in any manner whatsoever with the principal business activity of
Employer or Employer's Affiliates, in or about any state in which Employer or
Employer's Affiliates are licensed to conduct casino operations (the
"Operating States"), including without limitation any waterways which are
wholly within the Operating States, which are partly within the Operating
States and partly without the Operating States, or which form a boundary
between the Operating States and any other state or body public. Employee
hereby further acknowledges and agrees that the restrictive covenant contained
in this Paragraph 11 is reasonable as to duration, terms and geographical area
and that the same protects the legitimate interests of Employer and Employer's
Affiliates, imposes no undue hardship on Employee and is not injurious to the
public. Notwithstanding anything express or implied herein to the contrary,
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the restrictive covenant contained in this Paragraph 11 shall not apply in the
event of the termination of this Agreement due to a Change of Control.
12. BEST EVIDENCE. This Agreement shall be executed in original and
"Xerox" or photostatic copies and each copy bearing original signatures in ink
shall be deemed an original.
13. SUCCESSION. This Agreement shall be binding upon and inure to the
benefit of Employer and Employee and their respective successors and assigns.
14. ASSIGNMENT. Employee shall not assign this Agreement or delegate
his duties hereunder without the express written prior consent of Employer
thereto. Any purported assignment by Employee in violation of this Paragraph
14 shall be null and void and of no force or effect. Employer shall have the
right to assign this Agreement freely; provided, however, that in the event of
such an assignment by Employer and the assignee subsequently defaults under
the terms of this Agreement, Employer shall remain liable for compliance with
the terms of Paragraph 8 of this Agreement.
15. AMENDMENT OR MODIFICATION. This Agreement may not be amended,
modified, changed or altered except by a writing signed by both Employer and
Employee.
16. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of Texas in effect on the Effective Date
of this Agreement.
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17. NOTICES. Any and all notices required under this Agreement shall be
in writing and shall either hand-delivered; mailed by certified mail, return
receipt requested; or sent via telecopier addressed to:
TO EMPLOYER: Chairman of the Board
Hollywood Casino Corporation
Two Galleria Tower, Suite 2200
13455 Noel Road, LB 48
Dallas, Texas 75240
WITH COPY TO: General Counsel
Hollywood Casino Corporation
Two Galleria Tower, Suite 2200
13455 Noel Road, LB 48
Dallas, Texas 75240
TO EMPLOYEE: Edward T. Pratt III
17423 Woods Edge Drive
Dallas, Texas 75287
All notices hand-delivered shall be deemed delivered as of the date actually
delivered. All notices mailed shall be deemed delivered as of three (3)
business days after the date postmarked. All notices sent via telecopier
shall be deemed delivered as of the next business day following the date of
the confirmation of delivery. Any changes in any of the addresses listed
herein shall be made by notice as provided in this Paragraph 17.
18. INTERPRETATION. The preamble recitals to this Agreement are
incorporated into and made a part of this Agreement. Titles of paragraphs are
for convenience only and are not to be considered a part of this Agreement.
19. SEVERABILITY. In the event any one or more provisions of this
Agreement is declared judicially void or otherwise unenforceable, the
remainder of this Agreement shall survive and such provision(s) shall be
deemed modified or amended so as to fulfill the intent of the parties hereto.
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20. DISPUTE RESOLUTION. Except for equitable actions seeking to enforce
the provisions of Paragraphs 10 and 11 of this Agreement, jurisdiction and
venue for which is hereby granted to Dallas County, Texas, any and all claims,
disputes or controversies arising between the parties hereto regarding any of
the terms of this Agreement or the breach thereof, on the written demand of
either of the parties hereto, shall be submitted to and be determined by final
and binding arbitration held in Dallas, Texas, in accordance with the
Employment Dispute Resolution Rules of the American Arbitration Association.
This Agreement to arbitrate shall be specifically enforceable in any court of
competent jurisdiction.
21. WAIVER. None of the terms of this Agreement, including this
Paragraph 21, or any term, right or remedy hereunder shall be deemed waived
unless such waiver is in writing and signed by the party to be charged
therewith and in no event by reason of any failure to assert or delay in
asserting any such term, right or remedy or similar term, right or remedy
hereunder.
22. PAROL. This Agreement constitutes the entire agreement between
Employer and Employee with respect to the subject matter hereto and this
Agreement supersedes any prior understandings, agreements or undertakings by
and between Employer and Employee with respect to the subject matter hereof.
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IN WITNESS WHERE AND INTENDING TO BE LEGALLY BOUND THEREBY, the parties hereto
have executed and delivered this Agreement as of the year and date first above
written.
EMPLOYER:
ATTEST: HOLLYWOOD CASINO CORPORATION, a
Delaware corporation
/s/ William D. Pratt By:/s/ Jack E. Pratt
----------------------- ------------------------------
Name: William D. Pratt Name: Jack E. Pratt
Title: Secretary Title: Chairman of the Board
& Chief Executive Officer
EMPLOYEE:
/s/ Edward T. Pratt III
---------------------------------
EDWARD T. PRATT III
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EXHIBIT 10.27
AGREEMENT
This Agreement (this "AGREEMENT") is entered into this 1st day of
August, 1996, by and between HWCC-LOUISIANA, INC., a Louisiana corporation
("HWCC-LOUISIANA"), and DEBARTOLO ENTERTAINMENT LOUISIANA GAMING, INC., a
Louisiana corporation ("DEBARTOLO").
RECITALS
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1. Pursuant to the terms of that certain (a) Option Agreement dated
June 16, 1995, between H&H Contracting Co., Inc. ("H&H") and Jones
Environmental, Inc. (whose interest in such Option Agreement has been assigned
to HWCC-Louisiana), as amended by that certain First Amendment to Option
Agreement dated March 29, 1996 (as amended, "OPTION AGREEMENT #1"), and (b)
Option Agreement No. 2 dated October 3, 1995, between H&H and HWCC-Louisiana,
as amended by that certain First Amendment to Option Agreement No. 2 dated
March 29, 1996 (as amended, "OPTION AGREEMENT #2") (Option Agreement #1 and
Option Agreement #2 are collectively referred to herein as the "OPTION
AGREEMENTS"), HWCC-Louisiana possesses the right to acquire certain real
property described in the Option Agreements (the "HWCC PROPERTY") upon terms
and conditions described in the Option Agreements.
2. On August 28, 1995, HWCC-Louisiana filed (a) an Amended and
Restated Level I Riverboat License Application Part A (the "DIVISION
APPLICATION") with the Riverboat Gaming Enforcement Division of the Gaming
Enforcement Section of the Office of the Louisiana State Police, Department of
Public Safety and Corrections (the "DIVISION") and (b) an Amended and Restated
Application for Certificate of Preliminary Approval (the "COMMISSION
APPLICATION") (the Division Application and the Commission Application are
collectively referred to as the "APPLICATIONS") with the Gaming Division of
the Louisiana Department of Justice (the "DEPARTMENT OF JUSTICE") for review
by the Louisiana Riverboat Gaming Commission.
3. The Department of Justice has issued formal notice that all
previous applicants for the remaining riverboat license in Louisiana must
submit amendments to any application for such license by no later than August
2, 1996 (the "APPLICATION DEADLINE").
4. HWCC-Louisiana and DeBartolo (collectively the "PARTIES" and
individually a "PARTY") desire to enter into this Agreement in order to
jointly develop, own and operate a world-class casino and entertainment
project on the Property (as defined in Section 1.03(b)), subject to the terms
and conditions contained in this Agreement.
NOW THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, and in consideration of the
covenants and agreements set forth below, HWCC-Louisiana and DeBartolo agree
as follows:
<PAGE>
AGREEMENT
---------
ARTICLE I
PREDEVELOPMENT ACTIVITY AND FORMATION OF LLC
1.01 PRE-DEVELOPMENT ACTIVITY. Commencing immediately upon the
execution of this Agreement, the Parties will act in good faith and use all
commercially reasonable efforts to promote the granting of the Licenses (as
defined in Section 1.03(b)). In connection therewith, the Parties agree to
work together to file by no later than the Application Deadline any amendments
to the Applications (the "APPLICATION AMENDMENTS") or any other documentation
or materials necessitated by the Parties entering into this Agreement or
otherwise mandated by the Division, the State of Louisiana Gaming Control
Board, the Department of Justice or any other applicable authority (the
"APPLICABLE AUTHORITIES"). Except as otherwise set forth in Sections 9.02 and
10.04, all other expenses incurred by either of the Parties or the LLC (as
defined in Section 1.02) in connection with such pre-development activity
(including all such expenses incurred by HWCC-Louisiana prior to the date of
this Agreement) (the "SHARED EXPENSES") shall be borne (a) prior to the
Closing (as defined in Section 4.01) equally by the Parties and (b) after the
Closing, by the LLC. Simultaneous with the execution of this Agreement,
DeBartolo shall remit to HWCC-Louisiana cash in an amount equal to one-half of
the Shared Expenses incurred by HWCC-Louisiana prior to the date of this
Agreement and that have been capitalized by HWCC-Louisiana. That portion of
the Shared Expenses incurred by HWCC-Louisiana prior to the date of this
Agreement and not capitalized by HWCC-Louisiana shall constitute a portion of
HWCC-Louisiana's capital contribution to the LLC.
1.02 FORMATION OF LLC. Commencing immediately upon execution of
this Agreement, the Parties shall take any and all action necessary to form a
Louisiana limited liability company to be owned on a 50-50 basis by each of
HWCC-Louisiana and DeBartolo (the "LLC"). In the event that any Applicable
Authority or any law, rule or regulation prevents, or fails to consent to,
formation of the LLC and/or the granting of the Licenses to the LLC, the
Parties hereby agree to work in good faith and to use their best efforts to
develop a structure or organizational form that will lawfully achieve the
terms and conditions of this Agreement.
1.03 CAPITAL CONTRIBUTIONS TO THE LLC; PROJECT FINANCING.
(a) The LLC will be initially capitalized with the minimum capital
required to capitalize the LLC. Each of the Parties will contribute its fifty
percent (50%) share of such minimum required capital. In addition, HWCC-
Louisiana will contribute any and all of its rights to, and the LLC will
expressly assume, indemnify and release HWCC-Louisiana from any of its
obligations under, the Option Agreements.
(b) Commencing immediately upon the issuance of all licenses and
permits required for the LLC to legally conduct casino gaming on the Property
("LICENSES"), each of the Parties and their affiliates will use their contacts
in the capital markets and their respective experience in raising capital to
enable the LLC to obtain a long-term credit facility (the "PROJECT FINANCING")
on the most favorable terms available to the LLC in an amount adequate to
provide the LLC with sufficient funds for the development of a world-class
casino entertainment project (the "PROJECT") consisting of (i) a riverboat,
(ii) a pavilion situated on the HWCC Property at which the riverboat will be
docked, (iii) an 18-hole golf course, a portion of which shall be on the HWCC
Property and the remainder of which shall be on property owned by the City of
Bossier City (the "BOSSIER CITY PROPERTY") (the HWCC Property and the Bossier
City Property are collectively referred to herein as the "PROPERTY"), (iv) a
retail mall built, and operated by the Simon/DeBartolo REIT on a portion of
the HWCC Property leased to it by the LLC, and (v) related surface and
structured parking, hotel, dining,
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retail and entertainment facilities also located on the Property. The Parties
estimate that the total development cost of the Project will be in the range
of $200 million. The ultimate nature, scope and size of the Project will be
determined in good faith by mutual agreement of the Parties based upon the
then-prevailing physical, financial, economic, zoning and competitive
constraints and considerations.
(c) Notwithstanding anything to the contrary in this Agreement
providing for a different capital structure, to the extent that the lenders
under the Project Financing require HWCC-Louisiana and DeBartolo to contribute
additional equity into the LLC in order to obtain the Project Financing, each
of HWCC-Louisiana and DeBartolo agrees to contribute such equity on a 50-50
basis.
ARTICLE II
MANAGEMENT
2.01 EXECUTIVE COMMITTEE. The LLC will be managed by an Executive
Committee (the "EXECUTIVE COMMITTEE") comprised of four (4) managers. The
authority of the Executive Committee will be specified in the organizational
documentation for the LLC (the "LLC DOCUMENTATION"). No member of the LLC
will have the right to bind the LLC or to incur any obligation on behalf of
the LLC unless approved by the Executive Committee. HWCC-Louisiana will
appoint two (2) members to the Executive Committee who will represent HWCC-
Louisiana, and DeBartolo will appoint two (2) members to the Executive
Committee who will represent DeBartolo. The LLC Documentation will contain
mandatory (but nonbinding) mediation procedures to resolve management
stalemates in a manner acceptable to both Parties, with mutually acceptable
buy/sell procedures in the event a stalemate cannot be resolved through
mediation.
2.02 CASINO AND HOTEL MANAGEMENT. All facilities and amenities
owned by the LLC with respect to the Project will be operated and managed by
one or more affiliates of HWCC-Louisiana (the "MANAGER"), pursuant to a
management contract with a term coterminous with the Licenses (including any
renewals thereof); provided, however, the HWCC-Louisiana-affiliate may retain
a third-party to conduct such services with respect to the proposed golf
course. The management contract will provide for (a) an initial term of 20
years, with 3 successive 10-year renewal periods, (b) the LLC's payment to the
managing entity of a management fee (the "MANAGEMENT FEE") equal to 4% of the
sum of (i) the net gaming revenues from the casino operations (i.e., gross
casino revenues less promotional allowances) and (ii) the gross revenues of
the hotel operations and all other facilities and amenities managed by the
Manager, each calculated in accordance with custom in their respective
industry, and (c) such other terms and conditions substantially similar to
those set forth in Exhibit "A" attached to this Agreement. As part of the
management service package to be provided by HWCC-Louisiana or its affiliates,
the LLC will benefit from the use of certain accounting and proprietary
marketing software systems provided by Advanced Casino Systems Corporation
("ACSC") and trademarks and other intellectual property rights necessary to
operate under the "Hollywood Casino" name. The applicable royalties for use
of the ACSC software or related to the intellectual property rights will be
deemed to be included in the Management Fee; provided, however, the direct
costs incurred by ACSC in providing such software to the LLC will be an
additional responsibility of the LLC.
2.03 INDEMNIFICATION. The LLC will indemnify any person who was or
is a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative
or investigative (other than an action by or in the right of the LLC) by
reason of the fact that such person is or was an Executive Committee member or
officer of the LLC, against expenses (including attorney's fee), judgments,
fines and amounts paid in settlement actually and reasonably incurred by such
person in connection with such action, suit and/or proceeding. The
termination of any action,
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suit or proceeding by judgment, order, settlement or conviction will not, of
itself, create a presumption that the person did not act in good faith and in
a manner which such person reasonably believed to be in or not opposed to the
best interests of the LLC, and, with respect to any criminal action or
proceeding, that such person had reasonable cause to believe that his or her
conduct was unlawful. Expenses incurred by a director or officer in defending
a civil or criminal action, suit or proceeding may be paid by the LLC in
advance of the final disposition of such action, suit or proceeding upon
receipt of an undertaking by or on behalf of such director or officer to repay
such amount if it is ultimately determined that such person is not entitled to
be indemnified by the LLC. Such expenses incurred by other officers,
employees and agents may be so paid upon such terms and conditions, if any, as
the Executive Committee deems appropriate.
ARTICLE III
DISTRIBUTIONS AND FINANCIAL MATTERS
3.01 Distribution Policy. The distribution policy of the LLC will
be established by the Executive Committee taking into account (a) the
requirements of applicable law, (b) the terms and conditions of the Project
Financing, and (c) the capital and operating needs of the LLC.
3.02 Additional Capital. To the extent that capital in addition to
the Project Financing is needed to operate the LLC or fund certain maintenance
or expansion of the Project, the LLC will raise such funds according to the
following priorities; first, the LLC will seek to borrow such funds; second,
the Parties may loan such funds to the LLC, with appropriate dilution of the
non-lending Parties' membership interest in the LLC should the funds not be
repaid within an appropriate period of time; and third, equity contributions
will be made by each of the Parties on a pro rata basis in accordance with
such Parties' membership interest in the LLC.
3.03 Financial and Accounting Matters. The Parties will cause the
LLC to perform the following.
(a) Keep true and accurate books of account and records in
accordance with usual accounting practices and procedures and cause the books
and records of the LLC to be audited as soon as possible after the end of each
fiscal year by a recognized accounting firm acceptable to the Parties.
(b) Allow the members of the LLC and their authorized
representatives to inspect, during normal business hours, the books and
accounting records of the LLC to make extracts and copies therefrom at their
own expense, and to have full access to all the property and assets of the
LLC.
(c) Supply to the members of the LLC any financial information they
may from time to time reasonably require.
ARTICLE IV
CLOSING AND CONDITIONS TO CLOSING
4.01 THE CLOSING. The transactions prescribed in Section 1.02
shall be consummated at the earliest practicable date after the satisfaction
of all conditions to the Parties' respective obligations, or at such other
time as the Parties mutually agree (the "CLOSING"). The Closing will occur at
the executive offices of HWCC-Louisiana, or at such other location as the
Parties mutually agree.
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4.02 CONDITIONS OF DEBARTOLO'S OBLIGATIONS TO CLOSE. The
obligation of DeBartolo to consummate the transactions prescribed in Section
1.02 shall be subject to the satisfaction of the following conditions:
(a) The representations and warranties of HWCC-Louisiana set forth
in Article VII shall be true and correct in all material respects at and as of
the Closing, as though made as of such date.
(b) HWCC-Louisiana shall have performed and complied with all of its
covenants hereunder in all material respects through the Closing.
(c) There shall not be any injunction, judgment, order, decree,
ruling or charge issued by any court or governmental entity with jurisdiction
over any of the Parties in effect preventing consummation of any of the
transactions contemplated by this Agreement.
4.03 CONDITIONS TO HWCC-LOUISIANA'S OBLIGATIONS TO CLOSE. The
obligation of HWCC-Louisiana to consummate the transactions prescribed in
Section 1.02 shall be subject to the satisfaction of the following conditions:
(a) The representations and warranties of DeBartolo set forth in
Article VII shall be true and correct in all material respects at and as of
the Closing, as though made as of such date.
(b) DeBartolo shall have performed and complied with all of its
covenants hereunder in all material respects through the Closing.
(c) There shall not be any injunction, judgment, order, decree,
ruling or charge issued by any court or governmental entity with jurisdiction
over any of the Parties in effect preventing consummation of any of the
transactions contemplated by this Agreement.
ARTICLE V
SALE OF MEMBERSHIP INTERESTS
5.01 PRIOR WRITTEN CONSENT REQUIRED FOR THE SALE OF MEMBERSHIP
INTERESTS
(a) Commencing immediately upon consummation of the Closing, no LLC
member may sell, transfer or otherwise dispose of all or any its membership
interest in the LLC without either (i) obtaining the prior written consent of
the other LLC members, which consent will not be unreasonably withheld, or
(ii) in the case of a proposed sale, transfer or disposition by DeBartolo,
complying with the provisions of Section 5.01(b), and in the case of a
proposed sale, transfer or disposition by HWCC-Louisiana, complying with the
provisions of Section 5.01(c). Notwithstanding the foregoing, no written
consent of the other LLC members or compliance with Section 5.01(b) or Section
5.01(c) will be required in the event of (x) an assignment or transfer of any
membership interest in the LLC from an LLC member to its parent corporation or
to another directly or indirectly wholly-owned subsidiary or holding company
of the LLC member or its parent company or to an affiliate or subsidiary of
such holding company or (y) a collateral pledge of or grant of a security
interest in a membership interest in the LLC in order to secure indebtedness.
Any sale, transfer or other disposal of any membership interest in the LLC
(whether or not requiring the prior written consent of the other LLC members)
will not be or become effective until the assignee or transferee has executed
appropriate documentation in favor of the other LLC members and to the LLC
whereby such assignee or transferee agrees to be bound by the terms and
conditions of this Agreement and any other third party contracts entered into
by the Parties.
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(b) As a condition to DeBartolo's right to sell, transfer or
otherwise dispose of all or a portion of its membership interest in the LLC
(other than as permitted in Section 5.01(a)), DeBartolo will first comply with
the following conditions:
(i) DeBartolo will first inform HWCC-Louisiana in writing (the
"DEBARTOLO NOTICE OF SALE") of the prices, terms and conditions upon which it
proposes to sell, transfer or otherwise dispose of all or any of its
membership interest in the LLC, will identify the prospective purchaser or
transferee of such membership interest, and will offer HWCC-Louisiana the
opportunity to irrevocably elect to either (x) in the event that HWCC-
Louisiana's membership interest in the LLC constitutes less than 50%,
participate in such sale, transfer, or other disposition to the extent of
HWCC-Louisiana's membership interest in the LLC (the "HWCC TAG-A-LONG RIGHTS")
or (y) acquire DeBartolo's membership interest in the LLC (the "HWCC ROFR
RIGHTS"). HWCC-Louisiana will have the preferential right to exercise either
its HWCC Tag-a-Long Rights or its HWCC ROFR Rights as of the date of the
DeBartolo Notice of Sale.
(ii) In the event that HWCC-Louisiana exercises its HWCC Tag-a-Long
Rights, DeBartolo will use its best efforts to cause the prospective purchaser
or transferee to purchase both its and HWCC-Louisiana's membership interest in
the LLC according to the terms set forth in the DeBartolo Notice of Sale so
that HWCC-Louisiana would be entitled to receive the same value and nature of
consideration for its proportionate membership interest in the LLC as is
received by DeBartolo with respect to its membership interest in the LLC . If
after giving effect to the proposed sale, the proposed purchaser intends to
terminate, or replace the manager under, the management agreement referred to
in Section 2.02 with someone other than an affiliate of HCC, then (I) HWCC-
Louisiana will first be entitled to that portion of the proceeds of such sale
that equals the fair market value of the management fee paid or to be paid
under the management agreement and (II) DeBartolo and HWCC-Louisiana each
would then be entitled to for their respective membership interests in the LLC
an amount equal to the product of (A) the remainder of (1) the price in such
DeBartolo Notice of Sale divided by DeBartolo's membership interest in the LLC
minus (2) the fair market value of the management fee paid or to be paid under
such management agreement, multiplied by (B) the respective Party's membership
interest in the LLC. If an affiliate of HCC would continue as manager
according to terms substantially similar to those set forth in Exhibit "A",
then DeBartolo and HWCC-Louisiana would be entitled to for their respective
membership interests in the LLC an amount equal to the product of (aa) the
price in such DeBartolo Notice of Sale divided by DeBartolo's membership
interest in the LLC, multiplied by (bb) the respective Party's membership
interest in the LLC. In the event that such prospective purchaser or
transferee will not agree to purchase all such membership interests in the LLC
in accordance with the foregoing, DeBartolo may not proceed with such sale
without the prior written consent of HWCC-Louisiana, which consent may be
withheld by HWCC-Louisiana in its sole discretion.
(iii) It will be deemed that the HWCC Tag-a-Long Rights and the
HWCC ROFR Rights have been waived if such rights have not been exercised in
writing within thirty (30) calendar days after receipt of the DeBartolo Notice
of Sale.
(iv) DeBartolo may, within a period of sixty (60) calendar days after
the HWCC Tag-a-Long Rights and the HWCC ROFR Rights have been refused or
waived by HWCC-Louisiana, sell, transfer or otherwise dispose of such
membership interest to the prospective purchaser or transferee previously
identified in the DeBartolo Notice of Sale, but not at a price less than nor
upon terms and conditions more favorable to the purchaser or transferee than
the price, terms and conditions first offered to HWCC-Louisiana.
(v) If no such transaction of DeBartolo's membership interest in the
LLC is consummated by DeBartolo within the same period of sixty (60) calendar
days, DeBartolo will
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not thereafter make any sale, transfer or other disposal without again
offering the same to HWCC-Louisiana in accordance with the provisions of this
Section 5.01(b).
(c) As a condition to HWCC-Louisiana's right to sell, transfer or
otherwise dispose of all or a portion of its membership interest in the LLC
(other than as permitted in Section 5.01(a)), HWCC-Louisiana will first comply
with the following conditions:
(i) HWCC-Louisiana will first inform DeBartolo in writing (the "HWCC
NOTICE OF SALE") of the prices, terms and conditions upon which it proposes to
sell, transfer or otherwise dispose of all or any of its membership interest
in the LLC, will identify the prospective purchaser or transferee of such
membership interest, and will offer DeBartolo the opportunity to irrevocably
elect to either (x) participate in such sale, transfer, or other disposition
to the extent of DeBartolo's membership interest in the LLC (the "DEBARTOLO
TAG-A-LONG RIGHTS") or (y) acquire HWCC-Louisiana's membership interest in the
LLC (the "DEBARTOLO ROFR RIGHTS"). DeBartolo will have the preferential right
to exercise either its DeBartolo Tag-a-Long Rights or its DeBartolo ROFR
Rights as of the date of the HWCC Notice of Sale.
(ii) In the event that DeBartolo exercises its DeBartolo Tag-a-Long
Rights, HWCC-Louisiana will use its best efforts to cause the prospective
purchaser or transferee to purchase both its and DeBartolo's membership
interest in the LLC according to the terms set forth in the HWCC Notice of
Sale so that DeBartolo would be entitled to receive the same value and nature
of consideration for its proportionate membership interest in the LLC as is
received by HWCC-Louisiana with respect to its membership interest in the LLC.
If after giving effect to the proposed sale the proposed purchaser intends to
terminate, or replace the manager under, the management agreement referred to
in Section 2.02 with someone other than an affiliate of HCC, then such amount
that DeBartolo would be entitled to would be equal to the product of (x) the
remainder of (I) the price in such HWCC Notice of Sale divided by HWCC-
Louisiana's membership interest in the LLC minus (II) the fair market value of
the management fee paid or to be paid under such management agreement,
multiplied by (y) DeBartolo's membership interest in the LLC. If an affiliate
of HCC would continue as manager according to terms substantially similar to
those set forth in Exhibit "A", then such amount that DeBartolo would be
entitled to would be equal to the product of (aa) the price in such HWCC
Notice of Sale divided by HWCC-Louisiana's membership interest in the LLC,
multiplied by (bb) DeBartolo's membership interest in the LLC. In the event
that such prospective purchaser or transferee will not agree to purchase all
such membership interests in the LLC in accordance with the foregoing, HWCC-
Louisiana may not proceed with such sale without the prior written consent of
DeBartolo, which consent may be withheld by DeBartolo in its sole discretion.
(iii) It will be deemed that the DeBartolo Tag-a-Long Rights and
the DeBartolo ROFR Rights have been waived if such rights have not been
exercised in writing within thirty (30) calendar days after receipt of the
HWCC Notice of Sale.
(iv) HWCC-Louisiana may, within a period of sixty (60) calendar days
after the DeBartolo Tag-a-Long Rights and the DeBartolo ROFR Rights have been
refused or waived by DeBartolo, sell, transfer or otherwise dispose of such
membership interest to the prospective purchaser or transferee previously
identified in the HWCC Notice of Sale, but not at a price less than nor upon
terms and conditions more favorable to the purchaser or transferee than the
price, terms and conditions first offered to DeBartolo.
(v) If no such transaction of HWCC-Louisiana's membership interest in
the LLC is consummated by HWCC-Louisiana within the same period of sixty (60)
calendar days, HWCC-Louisiana will not thereafter make any sale, transfer or
other disposal without again offering the same to DeBartolo in accordance with
the provisions of this Section 5.01(c).
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(d) Notwithstanding any of the provisions of this Article V, no LLC member
may sell, transfer or otherwise dispose of all or any of its membership
interest in the LLC, and no non-offering LLC member will be required to
purchase such membership interest pursuant to Section 5.01(b) and Section
5.01(c), until the person, entity, group or other recipient which will
purchase, receive or otherwise obtain such membership interest (i) satisfies
the applicable provisions of Section 5.01 and (ii) complies with and satisfies
any and all regulatory requirements provided under Section 9.02 of this
Agreement.
5.02 CHANGE OF CONTROL. In the event of a change in control (as
defined below) of HWCC-Louisiana or Hollywood Casino Corporation ("HCC"), then
DeBartolo shall have the right to require that HWCC-Louisiana purchase from
DeBartolo all of the right, title and interest held by DeBartolo in the LLC in
accordance with the terms set forth herein. A change in control with respect
to HWCC-Louisiana shall be deemed to occur upon any loss of voting control of
HWCC-Louisiana by HCC (or a wholly-owned subsidiary of HCC), including without
limitation, the failure of HCC (or a wholly-owned subsidiary of HCC) to hold a
majority of the outstanding stock of HWCC-Louisiana. A change in control with
respect to HCC shall be deemed to occur in the event that HCC becomes aware of
(by way of a report or any other filing pursuant to Section 13(d) of the
Securities Exchange Act of 1934 (as amended, the "EXCHANGE ACT"), proxy vote,
written notice or otherwise) the acquisition by any person or related group
(within the meaning of Section 13(d)(3) or Section 14(d)(2) of the Exchange
Act, or any successor provision to either of the foregoing, including any
"group" acting for the purpose of acquiring, holding or disposing of
securities within the meaning of Rule 13d-5(b)(1) under the Exchange Act),
other than the Pratt Holders (as defined below), in a single transaction or in
a related series of transactions, by way of merger, consolidation or other
business combination or purchase of beneficial ownership (within the meaning
of Rule 13d-3 under the Exchange Act, or any successor provision) of 30% or
more of the total voting power entitled to vote in the election of the Board
of Directors of HCC or such other person surviving the transaction and, at
such time, the Pratt Holders collectively shall fail to beneficially own,
directly or indirectly, securities representing greater than the combined
voting power of HCC's or such other person's voting stock as is beneficially
owned by such person or group. "PRATT HOLDERS" means (a) Jack E. Pratt,
Edward T. Pratt, Jr., William D. Pratt, Crystal A. Pratt, Maria A. Pratt and
Edward T. Pratt III, their respective estates and members of the immediate
family (including adopted children) of any such individuals who acquire voting
stock of HCC from any such estates, (b) J.E. Pratt Co. No. 1, E.T. Pratt Co.
No. 1, W.D. Pratt Co. No. 1, each a Texas general partnership, (c) C.A. Pratt
Partners, Ltd., a Texas limited partnership, and (d) J.E. Pratt Family Trust,
E. Pratt Family Trust and W.D. Pratt Family Trust. HWCC-Louisiana shall
promptly give written notice to DeBartolo of the occurrence of any change in
control described in this Section 5.02. DeBartolo will have a period of sixty
(60) days following the date on which such notice is deemed given, within
which to exercise the rights given to it hereunder by written notice ("PUT
NOTICE") given to HWCC-Louisiana. Payment of the entire purchase price for
DeBartolo's interest in the LLC shall be made within one hundred fifty (150)
days after the date on which the Put Notice is deemed given by wire transfer
to an account designated by DeBartolo. The purchase price for the interest in
the LLC purchased hereunder shall be equal to the fair market value of the LLC
(including the management agreement referred to in Section 2.02 but deducting
therefrom the fair market value of the management fees paid or to be paid
thereunder) multiplied by DeBartolo's membership interest in the LLC. The
fair market value of the LLC shall be determined by an independent United
States investment banking firm of national standing as selected by the mutual
agreement of HWCC-Louisiana and DeBartolo or, if they cannot agree, then each
of DeBartolo and HWCC-Louisiana shall select an independent United States
investment banking firm to establish a good faith valuation of the LLC
hereunder and the value of the LLC for purposes of this Section 5.02 shall
equal the average of the two values. All costs attributable to obtaining any
valuation under this Section 5.02 shall be borne equally by HWCC-Louisiana and
DeBartolo.
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ARTICLE VI
TERMINATION
6.01 GENERAL. This Agreement will continue in effect until terminated
pursuant to this Article VI. The Parties agree that the LLC Documentation
will contain provisions similar to the provisions in this Article VI.
6.02 TERMINATION BY NOTICE. Either Party may give written notice of
termination of this Agreement to the other Party upon the happening of any of
the following:
(a) If the Parties, for whatever reason, lose the Licenses and the LLC
is no longer able to commercially operate the Project as a gaming and casino
establishment; or
(b) If either Party in good faith determines that by entering into this
Agreement and consummating the transactions described herein the review and
analysis of the Applications has been or will be delayed or the chances of
HWCC-Louisiana or the LLC being granted the Licenses has been or will be
impaired; or
(c) If the Licenses have not been granted to the LLC by December 31,
1997.
6.03 Responsibility for Expenses. In the event either Party terminates this
Agreement pursuant to Section 6.02 prior to the Closing, each of the Parties
shall remain responsible for one-half of the Shared Expenses.
ARTICLE VII
REPRESENTATIONS AND WARRANTIES
Each Party (and its respective permitted successors and assignees)
hereunder represents and warrants the matters set forth below to the other
Party as of the date hereof.
7.01 AUTHORITY. It is validly existing and duly organized under the laws of
the jurisdiction of its formation, and it (and the persons acting in its
behalf) have all the requisite power and authority to execute, deliver and
comply with the terms and provisions hereof and consummate the transactions
contemplated herein.
7.02 APPROVALS AND ENFORCEABILITY. Its execution, delivery and performance
of this Agreement do not require the consent or approval of any governmental
body or regulatory authority or other entity; is not in material contravention
of or in material conflict with any applicable law or regulation; and, this
Agreement is the valid, binding and legally enforceable obligation of such
Party in accordance with its terms, except as the enforceability thereof may
be limited by the effect of any bankruptcy or similar laws affecting
creditors' rights generally.
7.03 COMPLIANCE WITH LAWS. It is not in violation or default under any
agreement with any person, or under any law, judgement, order, decree,
license, permit, approval, rule or regulation of any court, arbitrator,
administrator, administrative agency or other governmental authority to which
it may be subject which might have a material adverse impact on its ability to
perform its obligations hereunder, or on the other Party.
7.04 EXCLUSIVITY. It is not now pursuing any activity that would violate
the provisions of Section 8.01, except as otherwise described in Section 8.01.
Neither Party has any existing or prospective business relationship in the
State of Louisiana in connection with the subject matter of this Agreement.
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7.05 SUITABILITY. Neither it nor any of its affiliates is likely to be
determined by any applicable regulatory authority to be unsuitable to conduct
the operation of a casino gaming enterprise, has had any application for any
gaming license or permit rejected, or has had any gaming license or permit,
once having been issued, rescinded, suspended, revoked or not renewed or
reinstated, and such Party has no knowledge that its affiliation with any
person or entity will threaten or adversely affect the plans of the Parties'
to obtain any requisite license or that could otherwise threaten or cause a
possible revocation of such license.
7.06 ACCURACY OF INFORMATION. All of the factual information regarding such
Party contained herein (including all information set forth in the Recitals to
this Agreement) or provided during the course of the Parties' negotiation is
true, complete and accurate in all materials respects, and such Party has not
omitted to disclose any material fact or detail pertinent to itself or the
transactions contemplated hereunder which, in light of all of the facts and
circumstances involved in the negotiation hereof, should have been disclosed
to prevent any other information from being untrue, incomplete or inaccurate.
ARTICLE VIII
SPECIAL COVENANTS
8.01 EXCLUSIVE AGREEMENT. The Parties hereby agree that this Agreement will
encompass their exclusive arrangements for pursuing and conducting riverboat
casino gaming activities (exclusive of any existing arrangements between
affiliates of DeBartolo and Casino America which are exempted from this
Section 8.01) in either Bossier Parish or Caddo Parish, Louisiana (the
"VENTURE AREA"). In this regard, each of the Parties covenants on behalf of
itself and its owners, officers, members, partners, agents, family members
(excluding, with respect to DeBartolo, Denise York) and affiliates that,
regardless of whether or not the Parties form or own the LLC, and
notwithstanding any termination of this Agreement, for a period of twelve (12)
months from the date of termination of this Agreement no Party or any owner,
officer, member, partner, agent, family member or affiliate thereof will
pursue or possess (either directly or indirectly through affiliates,
associates or family members) any pecuniary, proprietary, operational or
financial interest in any business or entity engaged in riverboat casino
gaming in the Venture Area other than with the other Party hereto on terms
substantially similar to those set forth in this Agreement.
8.02 CONFIDENTIALITY. All information designated in writing by any Party as
confidential and proprietary at the time it is disclosed to the other Party
(or such other Party's representatives and agents) during the term of this
Agreement will be deemed to be confidential and proprietary (provided that for
purposes hereof, any information provided by any Party pursuant to this
Agreement which is generally available or was available to such other Party on
a non-confidential basis prior to its disclosure in connection with this
Agreement will not be deemed to be "confidential and proprietary") and will be
treated as such. The Parties agree not to disclose any of the confidential
and proprietary information (except as required by law) to any third party or
use or permit the use of any such information in a manner detrimental to the
other. Upon termination of this Agreement, each Party will promptly return to
the other such materials (including all documents, memoranda, notes, any other
writings whatsoever and electronic data prepared by the Parties or their
advisors based on such materials) furnished to the other without retaining any
copies thereof (except as otherwise required by law). This obligation will
survive the termination of this Agreement for two (2) years from the date of
termination. Notwithstanding the foregoing, such Party will be permitted to
make use of or disclose confidential and proprietary information (a) which is
in or comes into the public domain otherwise than through the default of
either of the Parties, (b) which was already in the possession of such Party
prior to the negotiations between the Parties leading to the execution of this
Agreement as evidence by documentation in such Parties' possession at the date
hereof, (c) as is required by law, (d) that is required to be disclosed by a
court or governmental agency, (e) as may be authorized by both Parties in
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writing, and (f) to its financial advisors, attorneys and accountants to the
extent necessary to effect the purpose and intent of this Agreement. Each
Party will cause its subsidiaries and affiliates to observe the restrictions
contained in the foregoing provisions.
ARTICLE IX
REGULATORY MATTERS
9.01 REGULATORY INFORMATION. Each Party shall provide all information
pertaining to its organization, business, ownership, assets, management,
financial sources and associations as shall be required by any federal or
state regulatory authority with jurisdiction over the LLC or one or more of
the Parties, including without limitation regulatory authorities in the States
of Louisiana, Illinois, New Jersey and Mississippi.
9.02 REGULATORY COMPLIANCE. The Parties must each independently comply with
all regulations promulgated by any regulatory authority with jurisdiction over
the LLC or one or more of the Parties. Without limiting the generality of the
foregoing, the Parties shall submit to and cooperate in any attendant
background investigations required by any of the foregoing jurisdictions by
virtue of the Party's participation in the LLC. The Parties will each bear
all of their own costs which they incur in connection with such compliance.
9.03 EFFECT OF UNSUITABILITY DETERMINATION. If the applicable casino
regulatory organization in any jurisdiction in which either Party to this
Agreement (or any of its affiliates) holds a license to own or operate a
casino compels such Party (the "AFFECTED PARTY") to discontinue its
relationship with such other Party (the "UNSUITABLE PARTY") hereto for any
reason whatsoever relating to the unsuitability of the Unsuitable Party or its
affiliates, then the Parties agree to negotiate with such casino regulatory
organization in an attempt to rescind or stay such order or otherwise afford
the Unsuitable Party relief from such order. If the Parties are unsuccessful
in obtaining the rescission, stay or other relief within ninety (90) days of
such occurrence (or other shorter period mandated by the casino regulatory
organization), then the Unsuitable Party's rights in the LLC shall immediately
cease, and the Affected Party shall have the right to acquire all of the
Unsuitable Party's right, title and interest in and to the Unsuitable Party's
interest in the LLC and any projects developed by the LLC for the one-time
termination payment set forth below:
(a) The amount of the termination payment shall be the lesser of (i) 75
percent of the Appraised Value (as defined below), and (ii) that amount
approved by the applicable casino regulatory organization.
(b) Payment of the termination payment shall be made by wire transfer to
an account designated by the Unsuitable Party within 120 days after the
cessation of the Unsuitable Party's rights in the LLC.
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(c) The "APPRAISED VALUE" shall be the net present value of all future
distributions attributable to the Unsuitable Party's interest in the LLC, as
determined by an independent United States investment banking firm of national
standing chosen by the Affected Party. All costs (including investment
banking fees) attributable to obtaining the foregoing investment banking
valuation shall reduce the termination payment. If either Party disputes the
Appraised Value as determined above, such Party may retain a second
independent investment banking firm of national standing to perform a second
valuation of the Unsuitable Party's interest. The average of the initial
valuation and any such subsequent valuation shall be the Appraised Value and
shall be binding on all Parties. All costs (including investment banking
fees) attributable to obtaining any subsequent investment banking valuation
shall be paid solely by the Party disputing the initial valuation.
9.04 INCLUSION IN ARTICLES AND BYLAWS. The Parties hereby agree to cause
the LLC Documentation to include provisions that are equivalent to the
provisions set forth in Sections 9.01, 9.02 and 9.03 of this Agreement.
ARTICLE X
MISCELLANEOUS PROVISIONS
10.01 BOARD APPROVAL. Each of the Parties represents and warrants
that it is duly authorized and empowered to enter into and perform its
obligations under this Agreement.
10.02 FURTHER ACTIONS. The Parties to this Agreement will take
any and all further actions and execute and deliver any and all documents that
may be necessary to give full effect to the terms and intent of this
Agreement.
10.03 COOPERATION. Each of the Parties acknowledges that this
Agreement is entered into between them and will be performed in a spirit of
mutual cooperation, trust and confidence and that its intention is that the
business, profitability and reputation of the LLC will be maximized by all
reasonable and proper means. Each of the Parties undertakes to use all
reasonable commercial efforts to promote the business undertaken in this joint
venture.
10.04 FEES AND EXPENSES. Each Party to this Agreement will pay
its own fees and expenses incurred in connection with the negotiation and
execution of this Agreement and the LLC Documentation, including, without
limitation, attorneys' fees.
10.05 NOTICES. Unless otherwise provided in this Agreement, all
notices, approvals, consents, or other communications purporting to affect the
rights of the Parties hereunder will be in writing and will be given
personally or by facsimile or express overnight courier to the other Party
entitled thereto at the proper address as set forth below or at such other
address as such Party will notify to the other Party to this Agreement.
If to HWCC-Louisiana: HWCC-Louisiana, Inc.
Two Galleria Tower, Suite 2200
13455 Noel Road
Dallas, Texas 75240
Attention: Jack E. Pratt
Copy to: General Counsel
Telecopy Number: 214-386-7411
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If to DeBartolo: DeBartolo Entertainment Louisiana
Gaming, Inc.
999 Baker Way, Suite 420
San Mateo, California 94404
Attention: Edward J. DeBartolo, Jr.
Telecopy Number: 415-286-9636
Any such notice or communication (a) sent by express overnight courier or
facsimile will be considered given on the first business day following the
date of dispatch and (b) delivered personally will be considered given on the
date of such delivery. Nothing contained in this Section 10.05 will excuse
failure to give prompt or immediate oral notice for purposes of informing the
other Party of an event that requires such notice, but such oral notice will
not satisfy the requirements of written notice set forth in this Section
10.05.
10.06 WAIVER. No failure or delay by any Party in exercising any
right, power or remedy under this Agreement will operate as a waiver thereof,
nor will any single or partial exercise of the same preclude any further
exercise thereof or the exercise of any other right, power or remedy. No
waiver by any Party of any breach of any provision hereof will be deemed to be
a waiver of any subsequent breach of that or any other provision thereof. If
at any time any provision of this Agreement is or becomes illegal, invalid or
unenforceable in any respect, the legality, validity and enforceability of the
remaining provisions of this Agreement will not be affected or impaired
thereby.
10.07 AMENDMENTS. No amendment, addition to, or deletion of any
of the provisions of this Agreement will be effective unless made in writing
and signed by an authorized representative of each of the Parties.
10.08 ASSIGNMENT. No Party will assign this Agreement or its
rights or obligations hereunder except as expressly provided herein.
10.09 GOVERNING LAW. This Agreement will be governed by and
construed in accordance with the laws of the State of Louisiana (except for
its conflict of law provisions).
10.10 JURISDICTION. Any legal action or proceeding with respect
to this Agreement must be brought in the state courts of Bossier Parish, State
of Louisiana, or in the federal courts of the United States of America for the
Western District of Louisiana. Each of the Parties accepts and submits to,
for themselves and in respect of their property, generally and
unconditionally, the jurisdiction of the aforesaid courts, and irrevocable
waives, in connection with any such action or proceeding any objection based
upon the laying of venue or forum non conveniens, which they may now or
hereafter have to the bringing of any such action or proceeding in such
respective jurisdictions.
10.11 HEADINGS; SECTION REFERENCES. The headings in this
Agreement are for convenience and reference only and are not part of the
substance of this Agreement. References in this Agreement to Sections and
Articles are references to the Sections and Articles of this Agreement unless
otherwise specified.
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10.12 ATTORNEYS' FEES, ETC. If any action at law or equity is
brought to interpret or enforce this Agreement, the prevailing party or
parties will be entitled to recover reasonable attorneys' fees, costs and
necessary disbursements from the other party or parties in addition to any
other relief to which he or they may be entitled.
10.13 COUNTERPARTS. This Agreement may be executed in any number
of counterparts. Each counterpart shall be deemed to be an original, and all
counterparts together shall constitute one document.
* * * *
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IN WITNESS whereof this Agreement has been executed on the day and year
first above written.
HWCC-LOUISIANA, INC.
By: /s/ Jack E. Pratt
----------------------------
Jack E. Pratt
President
DEBARTOLO ENTERTAINMENT
LOUISIANA GAMING, INC.
By: /s/ Edward J. DeBartolo, Jr.
-----------------------------
Name: Edward J. DeBartolo, Jr.
Title: President
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EXHIBIT "A"
FORM OF MANAGEMENT AGREEMENT
[See attached]
Exhibit "A" - Page 1
<PAGE>
_______________________________________
MANAGEMENT SERVICES AGREEMENT
_______________________________________
THIS MANAGEMENT SERVICES AGREEMENT ("AGREEMENT") is made and entered
into as of the _____ day of __________, 199__, by and between [INSERT NAME OF
HWCC-LOUISIANA/DEBARTOLO JOINT VENTURE], a Louisiana limited liability company
("OWNER") and [INSERT HWCC-LOUISIANA AFFILIATE WHO IS OPERATOR], a
_____________ Corporation ("OPERATOR").
W I T N E S S E T H:
-------------------
WHEREAS, Owner is or will become the owner in fee of those certain
premises located on or adjacent to the Red River commonly known as Cane's
Landing in the City of Bossier City, Parish of Bossier and State of Louisiana
more particularly described on Exhibit "A" which is attached hereto and made a
part hereby by reference (the "PROPERTY"), and that certain riverboat to be
located in a basin on the Property which shall be licensed to conduct gaming
activity thereon (collectively referred to as the "COMPLEX"); and
WHEREAS, Operator has extensive experience in casino operations and
management and has the knowledge and expertise to manage and operate the
Complex on behalf of Owner; and,
WHEREAS, Owner desires to benefit from the Operator's expertise in
the management and operation of the Complex and Operator is willing to manage
and operate the Complex on behalf of Owner, all in accordance with the terms
and pursuant to the conditions set forth in this Agreement;
<PAGE>
NOW, THEREFORE, in consideration of the foregoing recitals and of
the mutual promises, representations, warranties, understandings, undertakings
and covenants herein contained, and intending to be legally bound thereby,
Owner and Operator hereby covenant and agree as follows:
ARTICLE ONE
-----------
APPOINTMENT OF OPERATOR
-----------------------
1.01 APPOINTMENT AND TERM. Owner hereby appoints and employs
Operator to act as its sole and exclusive agent for the supervision, direction
and control of the management of the Complex (or any additions or expansions
thereto) on the Owner's behalf, upon the terms and conditions hereinafter set
forth for a term of twenty (20) years, commencing as of ___________, 199__
(the "COMMENCEMENT DATE") which date shall be the Commencement Date of the
initial term (the "INITIAL TERM") and unless this Agreement is terminated by
either party on not less than [SIX (6) MONTHS] prior written notice to the
other prior to the expiration of the Initial Term of this Agreement, this
Agreement shall be automatically renewed for three (3) consecutive additional
terms of ten (10) years each (the "RENEWAL TERMS"). The Initial Term and the
Renewal Terms are hereinafter referred to as the "TERM". Upon termination of
the Term or any early termination as provided herein, Owner shall forthwith
pay to Operator any and all amounts due to Operator as of such termination
date.
1.02 RELATION OF THE PARTIES. In taking any action pursuant to this
Agreement, Operator will be acting only as the appointed agent or
representative of Owner, and nothing in this Agreement shall be construed as
creating a tenancy, partnership, joint venture or any other relationship
between the parties hereto, except that of principal and agent. All debts and
liabilities properly incurred by Operator in the course of its management and
operation of the Complex hereunder shall be the debts and obligations of the
Owner only, and Operator shall not be liable therefor, except as specifically
stated to the contrary herein.
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ARTICLE TWO
-----------
PRE-OPENING PROGRAM
-------------------
2.01 REFURBISHING OF THE COMPLEX. Owner hereby warrants and
represents that it is presently preparing for the construction of the Complex,
in accordance with those certain plans and specifications tendered by Owner to
Operator. During such construction, and prior to the Commencement Date of
this Agreement, Operator shall perform the following project development
services for Owner, provided Owner separately provides Operator reimbursement
of (i) all expenses incurred by Operator under the provisions of this Section
2.01, and (ii) the compensation (including any and all salaries, expenses,
benefits, and the like) paid to Operator's employees or those employees of
Operator's affiliates assigned to the Complex on a full-time basis for the
purpose of providing the following project development services until the
Commencement Date of this Agreement:
(a) Pre-opening sales office set-up, together with a pre-opening
marketing plan to be approved in advance by Owner, which approval shall
not be unreasonably withheld or unduly delayed; and,
(b) Hiring of personnel in accordance with the provisions of this Agreement;
and,
(c) Coordination of initial inventories purchases; and,
(d) Establishment of operating policies and procedures for the entire
Complex; and,
(e) Establishment of Complex security systems for assets, personnel and
patrons; and,
(f) Establishment of accounting and internal control systems and
procedures; and,
(g) Establishment of a preventative maintenance program; and,
(h) Establishment of risk management policies and procedures; and,
(i) Training of all staff.
Notwithstanding the foregoing, Operator shall not provide project development
services for Owner at a cost in the aggregate to Owner in excess of the Pre-
Opening Budget described in Section 4.10(a)(i).
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2.02 CONSTRUCTION, FURNISHINGS AND EQUIPMENT OF THE COMPLEX. Owner
warrants and represents:
(a) That the Complex will be constructed of and will consist of those items
specifically set forth in Exhibit "B", which is attached hereto and made a
part hereof by reference;
(b) That the Complex will be professionally designed, fully-furnished and
provided with all necessary accessories, including but not limited to casino
equipment and supplies, and will meet all fire, security and alarm
requirements of all applicable building codes; and,
(c) That Owner will provide, initially and throughout the Term, and at
Owner's sole cost and expense, full and adequate initial inventories of food
and beverage and of consumable items utilized in operating the Complex, such
as soap, cleaning materials, matches, stationery and all other similar items;
and,
(d) That Owner will provide, initially and throughout the Term, and at
Owner's sole cost and expense, sufficient working capital, as contemplated in
Section 4.09 for the operation of the Complex.
2.03 TITLE TO COMPLEX. Owner covenants and agrees that it has and
throughout the Term of this Agreement it will maintain:
(a) Full fee simple absolute possessory interest in the Property and full
ownership of and title to the improvements of the Complex, except for such
mortgages or other encumbrances related to Owner's financing of the purchase
and refurbishment of the Complex and the retail mall to be constructed on the
Property; and,
(b) Full ownership of the furnishings, fixtures and equipment located on
the Property ("FF&E"), free and clear of any liens, encumbrances, covenants,
charges, burdens or claims, except: (i) such as do not materially and
adversely affect the use thereof by Operator; (ii) mortgages or other
encumbrances related to the financing of the Complex; (iii) leases of personal
property and equipment; and (iv) purchase money mortgages. This Agreement
shall not be subject to forfeiture or termination under any financing
documents relating to the Complex, except in accordance with the provisions of
this Agreement, notwithstanding that there shall be a default under such
financing documents. Owner further covenants and agrees to pay and
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discharge any ground rents, any other rental payments, concession charges or
any other charges payable by Owner in respect of the Complex, and, at its own
expense, to undertake and prosecute all appropriate actions, judicial or
otherwise, required to assure the quiet and peaceable operation of the Complex
by Operator. Owner also agrees to pay, prior to delinquency, all taxes and
assessments of whatever type which may become a lien on the Complex and which
may be due and payable during the Term, unless (i) payment thereof is in good
faith being contested by Owner, (ii) enforcement of any purported lien is
stayed, and (iii) Owner maintains adequate reserves in a separate account with
a reputable financial institution in order to discharge any such lien upon
five (5) days notice of the existence of such lien.
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<PAGE>
ARTICLE THREE
-------------
NOTICES
-------
Any and all written notices required by this Agreement shall be either
hand-delivered or mailed, certified mail, return receipt requested, telexed,
telecopied, or sent via commercial courier, addressed to:
TO OPERATOR:
---------------------------
---------------------------
---------------------------
---------------------------
---------------------------
Telecopier No.
------------
WITH COPY TO:
---------------------------
---------------------------
---------------------------
---------------------------
---------------------------
Telecopier No.
------------
TO OWNER:
---------------------------
---------------------------
---------------------------
---------------------------
---------------------------
Telecopier No.
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WITH COPY TO:
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Telecopier No.
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All notices hand-delivered shall be deemed delivered as of the date actually
delivered. All notices mailed shall be deemed delivered as of five (5)
business days after the date postmarked. All notices telecopied shall be
deemed delivered as of the business day immediately following the date receipt
of the telecopy is confirmed. All notices sent via commercial courier shall
be deemed delivered as of the business day immediately following the date the
notice is entrusted to the commercial courier service with directions for
service within one (1) day. Any changes in any of the addresses listed herein
shall be made by notice as provided in this Article Three.
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ARTICLE FOUR
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OPERATION
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4.01 STANDARDS.
(a) With respect to the operation of the Complex pursuant to this and every
other applicable Section of this Agreement, Operator shall manage the Complex
in a manner consistent with both a first class entertainment complex and the
standards and procedures exercised by Operator, its subsidiaries and
affiliates, in the management of other casinos owned and operated by
affiliates of Operator in the United States of America of the same or similar
type, class and quality as the Complex, as such standards and procedures may
be reasonably modified or revised by Operator from time to time, all in a
professional manner and in the exercise of good faith.
(b) In order for Operator to meet or exceed the aforementioned standards
and procedures in a professional manner, and to comply with any legal
requirements, Owner hereby agrees that (i) Operator shall have uninterrupted
control and operation of the Complex during the Term of this Agreement, (ii)
Owner will not interfere or involve itself with the day-to-day operation of
the Complex, and (iii) Operator may operate the Complex free of molestation,
eviction or disturbance by Owner or any third party claiming by, through or
under Owner. Examples of the matters which Operator in its sole and exclusive
discretion shall determine from time to time hereunder include, but shall not
be limited to: rates; prices; charges to guests for other services performed
by Operator at the Complex; the issuance of credit or other like decisions;
the granting of complementaries or other like decisions; the terms of
admittance to the Complex for purposes of entertainment; the labor policies of
the Complex; and the type and character of publicity and promotion.
4.02 PERMITS. Owner, with the assistance of Operator, shall obtain and
maintain in full force and effect all necessary licenses and permits as may be
required for the operation of the Complex by Operator including, without
limitation, casino, liquor, bar, restaurant, sign and hotel licenses. All
licenses and permits are to be in effect as of the Commencement Date of this
Agreement. Operator undertakes to comply fully with any and all reasonably
imposed conditions set out in any such licenses and permits.
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4.03 PERSONNEL.
(a) All personnel of the Complex, except those mentioned in Section
4.03(b), shall be personnel of Owner. As agent for Owner, Operator shall have
the sole and absolute discretion to hire, supervise, direct the work of,
discharge and determine the compensation and other benefits of all personnel
working in the Complex. Owner shall not interfere with or give orders or
instructions to personnel employed at the Complex. Operator, in its sole and
absolution discretion, shall determine the fitness and qualification of such
personnel. Operator shall in no way be liable to said personnel or to Owner
for any and all claims for wages, compensation or other benefits (including,
without limitation, severance, pension, superannuation, retirement and
termination pay) asserted by or on behalf of such personnel. The salaries,
other compensation and benefits of such personnel shall be either paid by
Owner or paid by Operator's check and reimbursed to Operator by Owner,
depending upon which procedure Operator and Owner agree is most feasible.
(b) Operator shall employ, in Operator's name but as agent of Owner and at
Owner's sole expense, all key personnel as deemed reasonably necessary to be
employed by Operator for the successful operation of the Complex. Operator
shall pay the salaries, other compensation and benefits of such key personnel
described above, for which Operator shall be reimbursed by Owner each month as
a charge against Complex operations. Upon any termination of this Agreement,
Operator shall have the right, but not the obligation, to remove or terminate
said personnel from their duties at the Complex simultaneously with the
termination hereof; Owner hereby covenants and agrees that it shall not hire
or otherwise retain any such key personnel either prior to or after removal by
Operator, without Operator's prior written consent thereto, which consent may
be unreasonably withheld. As an expense of Complex operations, Operator shall
have the right to grant such key personnel (i) such complimentary privileges
usual and customary in the industry to similar positions, (ii) housing and
meal allowances, including complimentary housing and meals at or near the
Complex as is usual and customary in the hospitality industry for similar
positions, or (iii) both (i) and (ii).
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(c) Operator shall employ and pay, and Owner shall reimburse Operator for,
such reasonable pro rata wages and other reasonable compensation of Operator's
own employees and those of subsidiaries and affiliates of Operator not
employed on the premises of the Complex on a permanent basis who are engaged
in the performance of duties imposed under this Agreement. Owner shall pay
monthly to Operator all reasonable travel, lodging and meal costs and expenses
incurred by Operator's employees, and those of subsidiaries and affiliates of
Operator, prior to and after the Complex is opened to the public as the same
are incurred in the performance of duties imposed under this Agreement.
Operator shall have the right, which right shall not be unreasonably
exercised, to determine the advisability of such travel. Operator's employees
shall be furnished and provided with rooms and food, as an expense of Complex
operations, whenever such employees are located at the Complex in the
performance of this Agreement.
(d) Operator shall, as agent for Owner and at Owner's sole expense, employ
specialists to perform services for the Complex related to the operation,
maintenance and/or protection of the Complex, such as engineers, designers,
attorneys, independent accountants and the like.
4.04 SALES AND PROMOTIONS.
(a) Operator shall cause the Complex to participate in sales and
promotional campaigns and, as appropriate, activities involving complimentary
items to hotels, casinos, travel agents, tourist officials and airline
representatives and other hospitality industry representatives. Operator shall
have the sole right to entitle the key personnel and the personnel employed by
Owner and Operator to grant complimentary items when the same is customary in
the travel, hospitality or gaming industry or in Operator's standard practice
or policy.
(b) Owner agrees that no influence will be brought on Operator or the
General Manager of the Complex relating to the granting or extension of
credit. Credit facilities shall be granted by Operator in its sole reasonable
discretion and in accordance with Operator's standard procedures.
(c) Operator, on behalf of Owner, shall institute and supervise a sales and
marketing program and shall coordinate and cooperate with the local and
international sales and marketing programs of Operator and shall also
coordinate with tour programs marketed by airlines, travel
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agents and government tourist departments when Operator determines such
programs are in the best interest of Owner.
4.05 MAINTENANCE AND CAPITAL REPLACEMENT.
(a) Owner recognizes the necessity of a program of replacement of FF&E and
the need to cause the Complex to continue to be furnished, equipped and
landscaped in accordance with the standards described herein. Both parties
recognize that the particular properties or particular articles of FF&E may
not require expenditure for maintenance and repairs in any given year, but
average costs thereof shall be reflected in the Budgets (as defined in Section
4.10(a)). During the first year of operations hereunder, a reserve of not
less than one and one-half percent (1.5%) of the gross revenues of the Complex
shall be established for replacements, substitutions and additions to FF&E,
such reserve to be established by setting aside each month from operating
profits an amount equal to one and one-half percent (1.5%) of the gross
revenues of the Complex for such month; for the second operating year (and for
each operating year thereafter), the respective percentages shall be increased
to two percent (2%), respectively. In determining the Annual Budget (as
defined in Section 4.10(a)(iii)) of the second operating year (and for each
operating year thereafter), Owner and Operator shall mutually agree as to
whether such reserve should be increased, it being understood that the account
of such reserve must always be sufficient to meet the standards established
hereunder.
(b) Operator, as agent of Owner, is authorized to make and enter into such
agreements as are in Operator's reasonable opinion necessary for the
operation, supply and maintenance of the Complex as required by this
Agreement. Notwithstanding the foregoing, Operator may not enter into
agreements for the provision of goods and/or services to the Complex from
Operator's affiliated entities, unless such agreements are at or below the
fair market value of the goods and/or services provided or rendered; for
purposes of this Agreement, the term "Operator's affiliated entities" shall
mean any entity in which Operator, either directly or indirectly, has the
power to control or vote a significant part of the outstanding securities or
equity interest of such entity.
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(c) Operator shall have the right to make such alterations, additions or
improvements in or to the Complex as are consistent with the standards
established hereunder. The cost of such alternations, additions or
improvements shall be charged directly to current expenses of the Complex or
shall be capitalized and amortized on the books of account of the Complex in
accordance with Operator's standard accounting practices consistently applied.
(d) In the event that, at any time during the Term of this Agreement,
repairs or additions to or changes in the Complex shall be required by reason
of any laws, ordinances, rules or regulations now or hereafter in force, or by
proper and lawful order of any governmental or municipal power, department,
agency, authority, or officer, such repairs or changes shall be made at the
discretion of Operator, without the prior approval of Owner; provided that
Operator shall use its best efforts to consult, in advance, with Owner with
respect to such changes, additions or repairs.
4.06 ACCOUNTING SERVICES.
(a) Operator, at Owner's sole cost and expense, shall maintain a complete
accounting system in connection with the management of the Complex. The books
and records shall be kept in accordance with generally accepted accounting
principles consistently applied, as applied by Operator or its subsidiaries or
affiliates in other gaming operations similar to the Complex. Books and
accounts shall be maintained at the Complex. Title to such books and accounts
shall vest jointly in Owner and Operator, while possession of such books and
records shall vest solely in Operator; provided, however, that upon proper
termination of this Agreement and proper and timely payment to Operator of all
sums due to or accrued for the benefit of Operator under this Agreement, title
to and possession of such books and accounts shall vest in Owner. Owner shall
have the right and privilege of examining and copying said books and records
at any reasonable time during regular business hours.
(b) Operator, at Owner's sole cost and expense, shall cause a certified
audit of the Complex to be performed annually by such reputable accounting
firm mutually acceptable to Owner and Operator, and at least three (3) copies
thereof shall be furnished to each party not later than ninety (90) days from
the end of Owner's fiscal year. Nothing herein contained shall
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prevent Owner, at its sole expense, from designating a reputable accounting
firm to, upon reasonable prior written notice, examine the books and records
of the Complex during regular business hours.
(c) On or before the twenty-fifth (25th) day of each month, Operator shall
furnish Owner with an unaudited operating statement for the prior calendar
month detailing (i) Statistical Data, (ii) Gaming Revenue Data (broken down by
departmental or revenue source), (iii) Gaming Operating Expense Data (broken
down by departmental or expense source) (iv) Food & Beverage Department Data,
(v) Other Income Data, (vi) Overhead Departments Data, (vii) Fixed Charges,
(viii) Gross Operating Profit, and (ix) Net Income or Loss, including
management fees and other amounts paid to Operator. Any adjustment required
to make up an underpayment or to refund an overpayment of the monthly payments
to Owner or to Operator, as revealed in any monthly operating statement, shall
be made by way of an adjustment in the payment during the month following the
furnishing of said monthly operating statement. Likewise, any adjustments
predicated on the annual audited statements for the Complex, will be made
during the first month following completion of the annual audit.
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4.07 BANK ACCOUNTS.
(a) Operator shall establish at reputable financial institution(s)
reasonably approved by Owner such Complex bank accounts as Operator deems
necessary for the operation of the Complex. The accounts shall be styled
"name of Complex-type of account (e.g., operations, payroll)", and all bank
accounts shall provide that Operator's designees shall be the only parties
authorized to draw upon said accounts. At least thirty (30) days prior to the
Commencement Date, Owner shall deposit the amount of _____________
($___________) into the operating bank account, as designated by Operator, to
serve as a minimum bank account to use as the Complex's initial operating
capital in accordance with the approved Budgets. After the Commencement Date,
Operator shall deposit, not less frequently than monthly, any cash on hand in
excess of its reasonably anticipated operating capital needs for the next
thirty (30) days and of any reserves required hereunder in such bank accounts
or other depositories as may be designated by Owner. It is understood that
Operator shall maintain funds at the Complex and shall make payments therefrom
as the same are usually and customarily made in the hospitality and gaming
industry.
(b) During the Term hereof, Owner shall furnish to Operator true and
correct copies of all property tax statements and insurance policies and all
financing documents (including notes and mortgages) relating to the Complex.
Without in any way diminishing Owner's responsibility hereunder, Operator
shall be authorized, if Owner so requests in writing, to pay from the Complex
bank accounts the amounts indicated by said statements and/or documents,
provided sufficient funds are in such Complex accounts.
4.08 CONCESSIONS. Operator shall have the exclusive right to consummate,
in the name of and for the benefit of Owner, arrangements and leases with
concessioners, licensees, tenants and other users of any commercial space in
the Complex, at then-prevailing commercially reasonable rates.
4.09 EXPENSES.
(a) All costs, expenses, funding of operating deficits and working capital,
and other obligations and liabilities hereunder ("OWNER'S FINANCIAL
OBLIGATIONS") shall be the sole and
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exclusive responsibility and obligation of Owner, except for those instances
herein where it is expressly and specifically stated that such item shall be
for the accounts of Operator. It is understood that statements herein
indicating that Operator shall "furnish", "provide" or otherwise supply,
present or contribute items or services hereunder shall not be interpreted or
construed to mean that Operator is liable or responsible to fund or pay for
such items or services, except in those specific instances mentioned above.
(b) With respect to Owner's Financial Obligations, the same shall be funded
and/or paid for as follows: (i) First, from monies which may be available in
the Complex accounts maintained by Operator hereunder; and (ii) Second, if
such Complex accounts maintained by Operator hereunder do not contain monies
sufficient to fund and/or pay Owner's Financial Obligations, from monies which
shall be deposited by Owner in such Complex accounts within fifteen (15) days
after request therefor by Operator in writing. If such monies are not so
deposited by Owner in the amounts requested by Operator within such fifteen
(15) day period, Operator shall have the right, but not the obligation, to
terminate this Agreement upon ten (10) days prior written notice to Owner and,
in the event of two (2) consecutive such defaults in any calendar year,
regardless of Owner's cure thereof.
(c) It is understood and agreed that Operator shall have no obligation or
duty to fund and/or pay for any of Owner's Financial Obligations.
4.10 BUDGETS.
(a) Operator shall be obligated to furnish Owner with the following budgets
(collectively "BUDGETS") during the Term hereof:
(i) A pre-opening budget ("PRE-OPENING BUDGET") on or prior to the
Commencement Date, which Pre-Opening Budget shall detail all costs and
expenses reasonably anticipated by Operator for the actions described
in Section 2.01.
(ii) A commencement budget ("COMMENCEMENT BUDGET") within sixty (60)
days prior to the Commencement Date to be updated within thirty (30)
days after the Commencement Date, which Commencement Budget shall
detail all costs, expenses and reserves reasonably anticipated by
Operator, or contemplated in this Agreement, during the remainder of
the first calendar year of the Term of this Agreement, including but
not limited to, working capital, initial operating equipment and
supplies, expenditures for
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recruiting, training, advertising and promotion and other similar
costs and expenses.
(iii) An annual budget ("ANNUAL BUDGET") at least sixty (60) days
prior to the end of the first calendar year after the Commencement
Date and each succeeding calendar year of the Term hereunder. Each
Annual Budget shall detail all costs, expenses and reserves reasonably
anticipated by Operator, or contemplated in this Agreement, for the
next succeeding year. Annual Budgets may be amended from time to
time, after submission by Operator to Owner of such amendments.
(b) Operator makes no guarantee, warranty or representation whatsoever in
regard to Budgets, same being intended as reasonable estimates only.
(c) With respect to any deficits which may arise as a result of operations
hereunder, Owner shall be obligated to fund and pay such deficits which are not
covered by Complex income within fifteen (15) days after written request
therefor by Operator. If Owner fails or delays in furnishing funds to cover
deficits as aforesaid (by failure to approve or delay in approving Budgets in a
timely manner or otherwise), Operator shall have no responsibility or liability
therefor, and Owner shall indemnify and hold harmless Operator with respect to
any liability, however arising, which may arise out of or relate to, directly or
indirectly, such failure or delay in funding such obligations.
(d) All Budgets submitted by Operator to Owner under this Section 4.10
shall (i) be prepared generally in accordance with generally accepted accounting
principles, (ii) be presented substantially in the format of the operating
statements required of Operator pursuant to Section 4.06(c) of this Agreement,
(iii) include detailed business and market plans, and (iv) be subject to Owner's
prior express approval, which approval shall not be unreasonably withheld or
unduly delayed. In the event Owner and Operator are unable to agree on any
given Budget within two (2) months from the end of a fiscal year, Owner and
Operator, hereby appoint Arthur Andersen & Co. as an independent arbiter which
shall determine a Budget no later than four (4) weeks after its receipt of
written notice of such a dispute. The arbiter's Budget shall be binding upon
Owner and Operator. All expenses incurred as a result of the invocation of such
independent arbiter provision shall be borne solely by the Complex, subordinated
to the payment of all fees and expenses due to or accrued for the benefit of
Operator pursuant to this Agreement. The provisions of this Section 4.10(d) are
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to be carried out in tandem with, and not as an alternative for, the arbitration
provisions of Section 13.07 of this Agreement.
(e) The foregoing notwithstanding, Operator may incur expenses in excess of
the amounts set forth in the Budgets provided:
(i) the actual total expenditures for the operating department within
which any given expense is allocable will not exceed one hundred ten
(110%) percent of the total budgeted expenditures for such operating
department approved in the then-applicable Budget; or
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(ii) such expenditure is expressly authorized in this Agreement; or,
(iii) Operator obtains Owner's prior approval of such expenditure,
which approval shall not be unreasonably withheld or unduly delayed;
or,
(iv) such expenditure is warranted by increased levels of business;
or,
(v) such expenditure is required to meet emergency conditions and
Owner is promptly advised thereof; or,
(vi) additional expenditures are incurred by reason of the occurrence
of an event or events not reasonably foreseeable by Operator; or,
(vii) such expenditure is caused by the occurrence of an event or
events outside Operator's reasonable control.
4.11 APPROVALS. In approving or consenting to any matter hereunder, Owner
shall act in a reasonable manner; however, Owner shall take into account
Operator's advises stemming from its experience as a manager of complex gaming
properties, and taking into account conditions prevailing generally in the
hospitality and gaming industry.
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ARTICLE FIVE
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COMPENSATION OF OPERATOR
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5.01 FORMS OF COMPENSATION. For and in consideration of the services
rendered by Operator pursuant to this Agreement, Owner agrees to pay to Operator
the Management Fee (defined below) and all reimbursables set forth elsewhere in
this Agreement.
5.02 MANAGEMENT FEE DEFINED. For purposes of this Article Five, the term
"MANAGEMENT FEE" shall mean a fee equal to four percent (4%) of all gross
revenues of the Complex, including without limitation, all revenues and proceeds
from business interruption or other loss of income insurance. In computing the
Management Fee, there shall first be deducted the following:
(a) Any gratuities, or service charges added to a customer's bill or
statement in lieu of gratuities, which are payable to Complex
employees;
(b) An amount equal to all credits or refunds made to customers,
guests or patrons;
(c) All sums and credits received in settlement of claims for loss or
damage of FF&E or to the physical plant of the Complex;
(d) All gaming taxes, sales taxes, excise taxes, gross receipt taxes,
admission taxes, entertainment taxes, tourist taxes or charges;
(e) Any and all income from the sale of FF&E;
(f) Any compensation payments for claims against third parties arising
out of or during the course of the operation of the Complex.
The Management Fee shall (i) be computed monthly before the payment of any and
all income, franchise, federal, state or municipal taxes (other than gaming
taxes), and (ii) shall be paid monthly in arrears on the tenth (10th) day of
each month. The Management Fee shall be included in all operating statements
which Operator furnishes to Owner hereunder, and adjusted annually in accordance
with the audited Financial Statements for the Complex.
5.03 LOSSES. Except to the extent set forth in Section 5.03, losses in
any year shall be borne
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exclusively by Owner and shall not reduce the amount of any compensation which
Operator may be entitled to receive hereunder for any prior, present, or
subsequent years. No part of such losses shall be charged against, recaptured
out of or otherwise serve to diminish or affect the Gross Operating Profit of
the Complex for prior, present, or subsequent years.
ARTICLE SIX
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INSURANCE AND INDEMNITY
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6.01 PROPERTY INSURANCE. Operator shall procure and maintain, and Owner
shall pay for, from the Commencement Date and thereafter at all times during the
Term hereof property insurance, equal to at least one hundred percent (100%) of
the insurable value thereof on a replacement cost basis, or such lesser amount
to which Operator, in its sole and exclusive discretion, may determine, against
loss or damage to the Complex and its contents from fire, boiler explosion and
such other extended coverage risks and casualties as Operator shall deem
necessary. Operator shall also procure and maintain, and Owner shall pay for,
business interruption insurance against loss or damage by fire and other hazards
customarily included in an extended coverage endorsement, including riot, civil
commotion and insurrection, all of said business interruption insurance to be
effective from the Commencement Date of this Agreement and during the Term
hereof. Such liability and property insurance coverage shall list Operator as
an additional insured, with a right to thirty (30) days prior written notice in
the event of cancellation or modification of coverage.
6.02 LIABILITY INSURANCE/MISCELLANEOUS COVERAGES. Operator shall procure
and maintain, and Owner shall pay for, during the Term hereof, the following
insurance, which insurance shall list Operator and Operator's subsidiaries,
affiliates, officers, directors, agents, servants, workmen, and employees (all
collectively referred to herein as "OPERATOR") as additional insures, with a
right to thirty (30) days prior written notice in the event of cancellation or
modification of coverage:
(a) Comprehensive General Liability Insurance at a limit of at least
$1 million per occurrence/$2 million aggregate, including, but not
limited to, liquor liability and innkeepers liability coverage to
protect against theft of or damage to guests' property;
(b) Automobile Liability and Physical Damage Insurance for at least
$1 million combined single limit to include broad form drive other car
coverage;
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(c) Comprehensive Crime Insurance including, but not limited to,
Employee Dishonesty and Depositor's Forgery Coverages;
(d) Such Workman's Compensation, Employer's Liability or similar
insurance as may be required by law;
(e) Group Benefits Insurance including major medical and
hospitalization for Complex employees;
(f) Any insurance which Owner or Operator may be required to obtain
pursuant to any franchise covering the Complex;
(g) Umbrella (Excess Liability) Insurance in an amount of not less
than $100 million; and
(h) Insurance against such other operating risks which it is now or
may hereafter be customary to insure in the operation of gaming
complexes.
6.03 INSURANCE STANDARDS AND REQUIREMENTS.
(a) It is agreed that all insurance hereunder shall fully and adequately
protect Owner and Operator, and shall meet or exceed any requirements of
applicable laws, rules or regulations, insurance underwriters, or other third
parties having the right to determine insurance requirements for the Complex.
Owner and Operator shall each approve all insurance required for the Complex
with respect to amount and types of coverage, and the terms and conditions
thereof; provided that, in making determinations hereunder with respect to
insurance, Owner and Operator shall take into account Operator's advice derived
from its experience as a casino and hotel manager. Insurance procured
hereunder shall be placed with reputable, financially sound insurance companies
acceptable to Owner and Operator, and shall be obtained in the name of Owner or
Operator (as agent for Owner), as the parties may mutually agree. All insurance
hereunder shall name Operator and Owner as co-insureds and/or additional
insureds. If Owner should refuse or delay in approving the procuring or
maintaining of insurance which Operator reasonably deems to be advisable to
obtain for the Complex, Operator shall have (i) the right, upon five (5) days
prior written notice to Owner, to procure such insurance in Operator's own name
but at Owner's sole cost and expense, and (ii) the right to terminate this
Agreement upon sixty (60) days prior written notice to Owner, unless such
insurance is procured by Owner within such notice period.
(b) Operator and Owner shall submit to each other each year a summary of
the insurance
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coverage maintained by each with respect to the Complex, and each party shall
have thirty (30) days thereafter to give its comments thereon to the other. If
a submitting party receives no written comments from the other party within said
period, the insurance program shall be deemed approved for that year.
6.04 INDEMNITY. Owner agrees:
(a) To indemnify and hold Operator free and harmless from any liability for
injury or death to persons or damage or destruction of property due to any cause
whatsoever, either in or about the Complex or elsewhere, as a result of the
performance of this Agreement by Operator, its agents, workmen, servants,
officers, directors or employees, irrespective of whether caused, wholly or
partially, by the negligence of Operator, its agents, officers, directors or
employees; and,
(b) To reimburse Operator upon demand for any money or other property which
Operator is required to pay out for any reason whatsoever in performing its
duties hereunder or as a consequence thereof, whether the payment is required by
law to settle labor claims, for operating expenses or any other charges or debts
incurred or assumed by Operator or any other party, or judgments, settlements,
or expenses in defense of any claim, civil or criminal action, proceeding,
charge, or prosecution made, instituted or maintained against Operator or Owner,
jointly or severally, because of the condition or use of the Complex, or acts of
failures to act of Operator, its employees, officers, directors or agents,
Owner, its employees, officer or agents, or arising out of or based upon any
law, regulation, requirement, contract or award; and,
(c) To defend any claim, action, suit or proceeding brought against
Operator or Owner, jointly or severally, arising out of or connected with any of
the foregoing, and to hold harmless and fully indemnify Operator from any
judgment, loss or settlement on account thereof, regardless of the jurisdiction
in which any such claims, actions, suits or proceedings may be brought.
(d) Notwithstanding the foregoing, Owner shall not be liable to indemnify
and hold Operator harmless from any liability described above which results from
the gross negligence or willful misconduct of Operator, its agents, employees,
officers or directors.
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ARTICLE SEVEN
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GROUP SERVICES BY OPERATOR
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7.01 GROUP SERVICES. Operator shall provide to the Complex, from other
offices or casinos managed by Operator or its affiliates or subsidiaries, the
following services:
(a) General Administrative Service, in connection with:
(i) Operation:
Quality Control and Inspection;
General Supervision;
Supervision of Employee Hiring and Training;
Sales Coordination;
Coordination of a System-wide Preventive Maintenance
Program;
Coordination of Advertising and Promotional Program;
Renovating and Redecoration of Complex;
Purchasing of Furnishings and Equipment.
(ii) Accounting:
Coordination of the Accounting System, and the
procuring of a Computer Program (Software) for the
same;
General Supervision of Accounting Reports;
Internal Audits.
(b) Specific services, whereby personnel might be loaned to the Complex as
may be deemed reasonable by Operator from other hotel and/or casinos from time
to time for the Complex's benefit.
7.02 COSTS OF SERVICES. The cost of the services referred to in Section
7.01 shall be reimbursed to Operator as a Complex operating expenses on a direct
cost bases. Such costs for services include:
(a) Actual out-of-pocket telecommunication and travel expenses for the
personnel necessary to coordinate the above services directly attributable
to the Complex operation; and
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(b) The direct cost to Operator in preparing payrolls, computer time and
financial statements for the Complex; and
(c) The proportional cost attributable to the Complex of the overall
advertising and promotion budget undertaken by Operator or its affiliates
or subsidiaries; and
(d) In the case of specific services described in Section 7.01(b), the actual
pro rata compensation cost and out-of-pocket reimbursable travel expenses
of personnel while loaned to the Complex for its benefit.
7.03 SOFTWARE.
(a) Software. Operator and Owner acknowledge that, through the experience
of Operator's affiliates, Operator has developed or directed the development of
data processing computer software for hotel operations (the "SOFTWARE"). As
part of the services furnished by Operator under this Agreement, Operator shall
procure for the Complex, at Owner's sole cost and expense, Operator's data
processing computer software for the operation of the Complex from Operator's
affiliates. Owner agrees that Operator shall purchase, at Owner's sole cost and
expense, the necessary data processing hardware equipment to use the computer
software in the operation of the Complex. Owner further agrees that, as an
operating expense of the Complex and at Owner's sole cost and expense, Operator
shall procure such installation, training, retraining and maintenance assistance
from Operator's affiliates as Operator, in its sole discretion, deems advisable.
For purposes of this Section 7.03(a), the term "Owner's cost and expense" is
defined as a cost which is cost competitive in the marketplace with other
comparable available date processing software and hardware.
(b) Title to the Software. Owner hereby acknowledges that the exclusive
right of ownership in the Software, as well as any subsequent improvements,
modifications or updates to the Software, vests solely in Operator. Owner
hereby disclaims any right to ownership, possession or use of the Software and
related materials. Owner hereby acknowledges the unique proprietary nature of
the Software and does hereby covenant that Owner shall maintain the strict
confidential nature of the Software and related materials provided for use
pursuant to this Agreement and Owner shall not disseminate such Software or
related materials to any other person or entity without the express written
consent of Operator thereto. Owner hereby further covenants that it shall not,
and it shall not suffer any other person or entity to, violate the provisions of
this Section 7.03(b), which Owner
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hereby consents shall be enforceable in equity, in a summary fashion, by
Operator or its assignees without proof of harm other than an unauthorized
disclosure.
(c) Return of the Software. Upon termination of this Agreement, for
whatever reason, Owner shall immediately discontinue the use of the Software
and/or related materials and shall, within sixty (60) days of such termination,
certify to Owner that (i) the use of the Software and related materials has been
discontinued, (ii) all originals and copies of the Software have been returned
to Operator, and (iii) no person or entity has retained any portion, in original
or duplicate, of the Software or related material. The provisions of Sections
7.03(b) and 7.03(c) of this Agreement shall survive any termination of this
Agreement.
7.04 INTELLECTUAL PROPERTY. Operator shall procure for the Complex the
use of the "Hollywood Casino" name and related trademarks, including those marks
which may from time to time be developed and implemented in operating Hollywood
Casino establishments in the United States (the "INTELLECTUAL PROPERTY") to the
extent that the use of such additional marks are appropriate (as determined by
the Operator) for use at the Complex. The cost and expense of such Intellectual
Property shall be deemed to be included within the Management Fee.
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ARTICLE EIGHT
-------------
DAMAGE TO AND DESTRUCTION OF THE COMPLEX
----------------------------------------
8.01 OWNER TO RESTORE. Owner agrees, subject to the provisions of this
Article Eight, to repair, restore, rebuild or replace any insured damage to, or
impairment or destruction of the Complex from fire or other casualty. If Owner
fails to undertake such work within ninety (90) days after the fire or other
casualty, or shall fail to complete the same diligently, Operator may, but shall
not be obligated to, undertake or complete such work for the account of Owner
and shall be entitled to be repaid therefor, and proceeds of insurance shall be
made available to Operator.
8.02 LIMITATION ON RESTORATION. If the Complex shall be totally destroyed
or substantially destroyed during the Term of this Agreement by fire or other
casualty and (a) adequate insurance as required by Article Six of this Agreement
shall have been maintained, and (b) the cost of repairing, restoring, rebuilding
and replacing the same shall exceed one hundred percent (100%) of the proceeds
of the insurance collectible by Owner for and on account thereof, Owner shall
have the right and option, upon notice served upon Operator within sixty (60)
days after such fire or other casualty, to terminate this Agreement. If the
cost of repairing, restoring, rebuilding or replacing the damage, impairment or
destruction resulting from such fire or other casualty shall be less than one
hundred percent (100%) of the proceeds of the insurance collectible by Owner,
or, if greater, is the result of Owner not having maintained adequate insurance
as required by Article Six of this Agreement, Owner shall repair, restore,
rebuild or replace such damage, impairment or destruction, unless and to the
extent that Owner and Operator shall otherwise agree. If Owner fails to
undertake such work within ninety (90) days after a fire or other casualty, or
shall fail to complete the same diligently, Operator, without prejudice to its
rights to repair, restore, rebuild or replace such damage, impairment or
destruction for and on behalf of Owner and its rights and remedies upon
undertaking any such work provided for in this Article, may at its election,
terminate this Agreement upon notice to Owner.
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ARTICLE NINE
------------
CONDEMNATION
------------
9.01 TOTAL CONDEMNATION. If the whole of the Complex shall be taken
or condemned in any eminent domain, condemnation, compulsory acquisition or like
proceeding by any competent authority for any public or quasi-public use or
purpose, or if such a portion hereof shall be taken or condemned so as to make
it imprudent or unfeasible, in Operator's reasonable opinion, to use the
remaining portion as a Complex of type and class immediately preceding such
taking or condemnation, then, in either of such events, Operator, in its sole
discretion, may determine that the Term of this Agreement shall cease and
terminate as of the date of such taking or condemnation, and, in any such event,
Operator shall be paid from such award an amount equal to four percent (4%) of
such award or Operator's Management Fee earned during the year preceding the
date of termination of this Agreement, whichever is greater.
9.02 PARTIAL CONDEMNATION. If only a part of the Complex shall be
taken or condemned and the taking or condemnation of such part does not make it
unfeasible or imprudent, in Operator's reasonable opinion, to operate the
remainder as a Complex of the type and class immediately preceding such taking
or condemnation, this Agreement shall not terminate, but out of the award to
Owner, so much thereof as shall be reasonable necessary to repair any damage to
the Complex, or any part thereof, or to alter or modify the Complex, or any part
thereof, so as to render the Complex a complete and satisfactory architectural
unit as a Complex of the same type and class as it was immediately preceding the
taking or condemnation shall be used by Owner for that purpose. The balance of
the award, after deduction of the sum necessary for restoration, shall be fairly
and equitably apportioned between Owner and Operator so as to compensate
Operator for any loss of income resulting from or as the result of the taking or
condemnation.
ARTICLE TEN
-----------
RELATIONSHIP AND AUTHORITY
--------------------------
The provisions of this Agreement relating to the Management Fee
payable hereunder is included solely for the purpose of providing a method
whereby the said fees can be measured and ascertained. Operator and Owner shall
not be construed as joint venturers or partners of each other
26
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and neither shall have the power to bind or obligate the other except as set
forth in this Agreement. Operator is, however, clothed with such additional
authority and powers as agent of Owner as may be necessary to carry out the
spirit and intent of this Agreement.
ARTICLE ELEVEN
--------------
TERMINATION
-----------
11.01 RECIPROCAL TERMINATION. Notwithstanding any other provision of
this Agreement to the contrary, each party shall have the right to terminate
this Agreement on forty-five (45) days prior written notice to the other in the
event such other party shall cause, commit or suffer to exist with respect to:
(a) A material breach of this Agreement which is not cured within the
period of written notice thereof; or
(b) The institution of any statute, regulation, rule or ruling
rendering the conduct of gaming in the United States or at the
Complex illegal.
11.02 OPERATOR'S RIGHT TO FUND NECESSARY FUNDS OR TERMINATE. Upon the
failure of Owner to furnish the funds required for Operator to properly manage
the Complex as contemplated herein or the failure of Owner to either compensate
or reimburse Operator as stipulated in this Agreement, Operator shall have the
right, but not the obligation, to either (a) advance the necessary funds to the
Owner as a loan, which loan will bear interest at a market rate of interest, or
(b) terminate this Agreement, said termination to become effective upon the
expiration of the notice period otherwise provided in this Agreement, unless
cured by Owner within such period. In the event Operator elects to exercise
its rights under clause (a) of the preceding sentence, Owner will, if requested
by Operator, execute and deliver a negotiable promissory note in form and
substance satisfactory to Operator evidencing such obligation.
ARTICLE TWELVE
--------------
SUCCESSORS AND ASSIGNS
----------------------
12.01 Assignments by Operator. Owner's consent shall not be required for
Operator to assign this Agreement or its rights and interest in the operation of
the Complex to any entity in which Hollywood Casino Corporation, a Delaware
corporation, either directly or indirectly maintains a controlling interest and
such assignment shall serve to fully relieve and discharge Operator from
27
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any further duties or obligations pursuant to this Agreement. In addition,
Owner's consent shall not be required for Operator to collaterally assign this
Agreement or its rights and interest in the operation of the Complex to any
entity as security for indebtedness. Except as hereinabove provided, neither
Operator nor Owner shall assign this Agreement or in any manner sell, assign or
transfer its rights and interests in the Complex without the prior written
consent of the non-assigning party. It is understood and agreed that any consent
granted by the non-assigning party to any such assignment shall not be deemed a
waiver of the covenant herein contained against assignment in any subsequent
case.
12.02 TRANSFERS BY OWNER. If at any time during the term of this
Agreement (a) Owner shall be desirous of selling or assigning the whole or a
majority part of its interest in the Complex or (b) by virtue of the exercise of
rights by the holder of a mortgage or such similar encumbrance Owner shall be
required to part with the whole or a majority part of its interest in the
Complex, Owner shall so notify Operator in writing. The assignee, purchaser or
recipient in any such assignment or transfer by Owner of a whole or a majority
of its interest in this Agreement or the Complex shall be free to either attorn
to, and be bound by, this Agreement or terminate this Agreement; provided,
however, such assignee, purchaser or transferee shall be deemed to have attorned
to, and be bound by, this Agreement if it shall not have provided Operator with
written notice of termination within three (3) business days after the effective
date of such assignment or transfer. Operator shall have the absolute right to
require that any new owner or holder of less than a majority interest shall be
bound by the terms of this Agreement. Any assignment or transfer by Owner of
less than a majority interest in this Agreement or the Complex, whether
voluntary or involuntary, shall require that the assignee, purchaser or
recipient thereunder shall attorn to and be bound by this Agreement.
12.03 ASSIGNS BOUND. Subject to the provisions of this Agreement
regarding and/or restricting sale or assignments as set forth elsewhere in this
Agreement, the terms, provisions, covenants, undertakings, agreements,
obligations and conditions of this Agreement shall be binding upon and shall
inure to the benefit of the successors in interest and the assigns of the
parties hereto with the same effect as if mentioned in each instance where the
party hereto is named or referred to,
28
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except that no assignment, transfer pledge, mortgage, lease or sublease by or
through Operator or by or through Owner, as the case may be, in violation of the
provision of this Agreement shall vest any rights in the assignee, transferee,
mortgagee, pledge, lessee, sublessee or occupant.
ARTICLE THIRTEEN
----------------
GENERAL PROVISIONS
------------------
13.01 BEST EVIDENCE. This Agreement shall be executed in original and
"Xerox" or photostatic copies and each copy bearing original signatures of the
parties hereto in ink shall be deemed an original.
13.02 AMENDMENT OR MODIFICATION. This Agreement may not be amended or
modified except by a writing signed by all parties hereto.
13.03 GOVERNING LAW. This Agreement shall be governed by and construed
under the laws of the State of _________ in effect on the date of the execution
of this Agreement. Notwithstanding the foregoing, this Agreement shall, as
required, be governed by and construed in accordance with the Louisiana Gaming
Control Act and the rules and regulations of the Louisiana Gaming Control Board
promulgated thereunder.
13.04 INTERPRETATION. The preamble recitals of this Agreement are
incorporated into and made a part of this Agreement; titles of Sections and
Articles are for convenience only and are not to be considered a part of this
Agreement. All references to years shall mean a year commencing as of the first
day of January of each year. All references to the singular shall include the
plural and all references to gender shall, as appropriate, include other
genders.
13.05 SEVERABILITY. In the event any one or more provisions of this
Agreement is judicially declared null and void or otherwise unenforceable, the
remainder of this Agreement shall survive, unless such survival vitiates the
intent of the parties hereto.
13.06 PROHIBITION ON RECORDATION/COVENANT OF DISCLOSURE.
(a) Operator hereby covenants and agrees that it shall take no action,
nor authorize or suffer any one to take any action, the result of which would be
to cause this Agreement, or a memorandum thereof, to be filed of record against
the realty of the Complex. This covenant prohibiting recordation shall not
apply to the filing of a judgment lien by reason of an action or cause
29
<PAGE>
of action arising from this Agreement or the breach thereof.
(b) Owner hereby covenants and agrees that it shall disclose the
existence, terms, provisions and conditions of this Agreement to any and all
prospective purchasers and mortgagees of the realty of the Complex.
13.07 ARBITRATION. Any dispute, controversy or claim arising out of or
related to this Agreement, shall be resolved in the following manner; provided,
however, that any dispute, controversy or claim arising out of or related to the
intellectual property rights of Operator (or Operator's parent, subsidiary or
affiliates) will not be subject to arbitration. The parties hereto shall refer
the matter to their chief executive officers for the negotiation of a mutually
satisfactory resolution. If no such resolution is reached, then at any time
after fifteen (15) days following the date the matter was referred to the chief
executive officers of the parties, either party hereto may notify the other of
its intention to have the claim finally settled by confidential arbitration in
Dallas, Texas, in accordance with the Commercial Arbitration Rules of the
American Arbitration Association and in accordance with the Federal Rules of
Civil Procedure and Evidence applicable thereto. This agreement to arbitrate
shall be specifically enforceable in any court of competent jurisdiction.
13.08 FORCE MAJEURE. With the exception of payment obligations imposed
under this Agreement (which obligations are not subject to suspension,
extinguishment or cancellation as a consequence of this Section 13.08 or
otherwise), the parties to this Agreement shall be excused from the performance
of any obligation under this Agreement in the event such performance is hindered
or prevented by strike, boycott, lockout or other labor trouble; and storm,
fire, earthquake or Act of God; any riot, civil disturbance, or any act of war
or of the public enemy; the shortage, unavailability or disruption in the supply
of labor, materials, fuels or the disruption of postal, electrical, telephone or
other utility service; any present or future governmental law, ordinance, order
rule or regulation; or any other cause or contingency beyond the respective
parties' control, but only during such time as such party is unable due to a
specified reason herein to perform its obligations hereunder.
13.09 WAIVER. None of the terms of this Agreement, including this Section
13.09, or any term, right or remedy hereunder shall be deemed waived unless such
waiver is in writing and signed
30
<PAGE>
by the party to be charged therewith and in no event by reason of any failure to
assert or delay in asserting any such term, right or remedy or similar term,
right or remedy hereunder.
13.10 GENERAL WARRANTIES. Each party hereto warrants and represents to
the other as follows:
(a) Each party is the holder of good standing of all necessary
governmental licenses and permits required to satisfy its obligations
under this Agreement; and,
(b) Each party has the right, power, title and authority to enter into
this Agreement.
13.11 PAROL. This Agreement constitutes the entire agreement and
understanding of the parties hereto with respect to the subject matter hereof,
and this Agreement supersedes any prior understandings, agreements, or
undertakings.
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IN WITNESS WHEREOF, the parties hereto have duly executed and delivered
this Agreement as of the day and year first above written.
ATTEST:
---------------------------------
By:
- --------------------------------- ------------------------------
Name:
----------------------------
Title:
---------------------------
ATTEST:
---------------------------------
By:
- --------------------------------- ------------------------------
Name:
----------------------------
Title:
---------------------------
Exhibits:
- --------
A - Description of Complex
B - Furnishings and Equipment of the Complex
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<PAGE>
EXHIBIT 10.28
HOLLYWOOD CASINO CORPORATION
1996 LONG-TERM INCENTIVE PLAN
-----------------------------
The Hollywood Casino Corporation 1996 Long-Term Incentive Plan (hereinafter
called the "Plan") was adopted by the Board of Directors of Hollywood Casino
Corporation, a Delaware corporation (hereinafter called the "Company"),
effective as of June 12, 1996, and was approved by the Company's stockholders on
July 30, 1996.
ARTICLE 1
PURPOSE
-------
The purpose of the Plan is to attract and retain key management employees
of the Company and its Subsidiaries and to provide such persons with a
proprietary interest in the Company through the granting of incentive stock
options, non-qualified stock options or restricted stock, whether granted singly
or in combination, that will
(a) increase the interest of such persons in the Company's welfare;
(b) furnish an incentive to such persons to continue their services for the
Company; and
(c) provide a means through which the Company may attract able persons as
employees.
ARTICLE 2
DEFINITIONS
-----------
For the purpose of the Plan, unless the context requires otherwise, the
following terms shall have the meanings indicated:
2.1 "Act" means the Illinois Act, the Mississippi Act, the New Jersey Act,
and any other gaming laws to which the Company is or may be subject.
2.2 "Award" means the grant of any Incentive Stock Option, Non-qualified
Stock Option or Restricted Stock, whether granted singly or in combination (each
individually referred to herein as an "Incentive").
2.3 "Award Agreement" means a written agreement between a Participant and
the Company which sets out the terms of the grant of an Award.
2.4 "Award Period" means the period during which one or more Incentives
granted under an Award may be exercised.
2.5 "Board" means the board of directors of the Company.
2.6 "Change of Control" means any of the following: (i) any
consolidation, merger or share exchange of the Company in which the Company is
not the continuing or surviving corporation or pursuant to which shares of the
Company's Common Stock would be converted into cash, securities or other
property, other than a consolidation, merger or share exchange of the Company in
which the holders of the Company's Common Stock immediately prior to such
transaction have the same proportionate ownership of Common Stock of the
surviving corporation immediately after such transaction or in which a Pratt
Family Member owns a majority of the combined total voting power of each class
of capital stock of the surviving or resulting corporation;
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(ii) any sale, lease, exchange or other transfer (excluding transfer by way of
pledge or hypothecation) in one transaction or a series of related transactions,
of all or substantially all of the assets of the Company other than a sale,
lease, exchange or transfer to a Pratt Family Member; (iii) the stockholders of
the Company approve any plan or proposal for the liquidation or dissolution of
the Company unless such liquidation or dissolution is approved by all of the
Pratt Family Members who then own or hold beneficially or of record any shares
of capital stock of the Company; (iv) the cessation of control (by virtue of
their not constituting a majority of directors) of the Board by the individuals
(the "Continuing Directors") who (x) at the date of this Plan were directors or
(y) become directors after the date of this Plan and whose election or
nomination for election by the Company's stockholders, was approved by a vote of
at least two-thirds of the directors then in office who were directors at the
date of this Plan or whose election or nomination for election was previously so
approved; (v) the acquisition of beneficial ownership (within the meaning of
Rule 13d-3 under the Securities Exchange Act of 1934, as amended (the "1934
Act")) of an aggregate of 20% of the voting power of the Company's outstanding
voting securities by any person or group (as such term is used in Rule 13d-5
under the 1934 Act) who beneficially owned less than 10% of the voting power of
the Company's outstanding voting securities on the date of this Plan, or the
acquisition of beneficial ownership of an additional 5% of the voting power of
the Company's outstanding voting securities by any person or group who
beneficially owned at least 10% of the voting power of the Company's outstanding
voting securities on the date of this Plan, provided, however, that
notwithstanding the foregoing, an acquisition shall not constitute a Change of
Control hereunder if the acquiror is (w) a Pratt Family Member, (x) a trustee or
other fiduciary holding securities under an employee benefit plan of the Company
and acting in such capacity, (y) a Subsidiary of the Company or a corporation
owned, directly or indirectly, by the stockholders of the Company in
substantially the same proportions as their ownership of voting securities of
the Company or (z) any other person whose acquisition of shares of voting
securities is approved in advance by a majority of the Continuing Directors; or
(vi) in a Title 11 bankruptcy proceeding, the appointment of a trustee or the
conversion of a case involving the Company to a case under Chapter 7.
2.7 "Code" means the Internal Revenue Code of 1986, as amended.
2.8 "Commission" means the Illinois Commission, the Mississippi
Commission, the New Jersey Commission, and any other similar gaming entity to
which the Company is or may be subject in the future.
2.9 "Committee" means the committee appointed or designated by the Board
to administer the Plan in accordance with ARTICLE 3 of this Plan.
2.10 "Common Stock" means the Class A Common Stock which the Company is
currently authorized to issue or may in the future be authorized to issue.
2.11 "Company" means Hollywood Casino Corporation, a Delaware corporation,
and any successor entity.
2.12 "Date of Grant" means the effective date on which an Award is made to
a Participant as set forth in the applicable Award Agreement; provided, however,
that solely for purposes of Section 16 of the 1934 Act and the rules and
regulations promulgated thereunder, the Date of Grant of an Award shall be the
date of stockholder approval of the Plan if such date is later than the
effective date of such Award as set forth in the Award Agreement.
2.13 "Employee" means common law employee (as defined in accordance with
the Regulations and Revenue Rulings then applicable under Section 3401(c) of the
Code) of the Company or any Subsidiary of the Company.
2.14 "Fair Market Value" of a share of Common Stock means (i) the closing
price per share on any stock exchange on which the Common Stock is traded, (ii)
the mean between the
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closing or average (as the case may be) bid and asked prices per share of Common
Stock on the over-the-counter market or (iii) as determined by the Committee if
the Common Stock is not traded on an exchange or quoted on an over-the-counter
market, whichever is applicable.
2.15 "Illinois Act" means the Illinois Riverboat Gambling Act, Ill. Rev.
Stat. ch. 120, Paragraph 2401 et seq., as amended, and the regulations
promulgated and rulings issued thereunder, and any other Illinois statute
regulating gaming activity.
2.16 "Illinois Commission" means the Illinois Gaming Board established
pursuant to Section 5 of the Illinois Act.
2.17 "Incentive Stock Option" or "ISO" means an incentive stock option
within the meaning of Section 422 of the Code, granted pursuant to this Plan.
2.18 "Mississippi Act" means the Mississippi Gaming Control Act, as
amended and the regulations promulgated and rulings issued thereunder, and any
other Mississippi statute regulating gaming activity.
2.19 "Mississippi Commission" means the Mississippi Gaming Commission
established pursuant to the Mississippi Act.
2.20 "New Jersey Act" means the New Jersey Casino Control Act, N.J. Stat.
Ann. 5:12 1, et seq., as amended, and the regulations promulgated and rulings
issued thereunder, and any other New Jersey statute regulating gaming activity.
2.21 "New Jersey Commission" means the New Jersey Casino Control
Commission.
2.22 "Non-qualified Stock Option" or "NQSO" means a non-qualified stock
option, granted pursuant to this Plan.
2.23 "Option Price" means the price which must be paid by a Participant
upon exercise of a Stock Option to purchase a share of Common Stock.
2.24 "Participant" shall mean an Employee of the Company or a Subsidiary
to whom an Award is granted under this Plan.
2.25 "Plan" means this Hollywood Casino Corporation 1996 Long-Term
Incentive Plan, as amended from time to time.
2.26 "Pratt Family Member" means Jack E. Pratt, Edward T. Pratt, Jr.,
William D. Pratt, or any affiliate or associate (as such terms are defined in
Rule 12b-2 promulgated under the 1934 Act) of any of those persons.
2.27 "Restricted Stock" means shares of Common Stock issued or transferred
to a Participant pursuant to this Plan which are subject to restrictions or
limitations set forth in this Plan and in the related Award Agreement.
2.28 "Retirement" means any Termination of Service pursuant to the terms
of any pension plan or policy of the Company which is applicable to such
Participant at the time of his or her Termination of Service, or if no such plan
or policy exists, the attainment of either (i) age 65, or (ii) age 55 and the
completion of 10 full years of service with the Company.
2.29 "Stock Option" means a Non-qualified Stock Option or an Incentive
Stock Option.
2.30 "Subsidiary" means (i) any corporation in an unbroken chain of
corporations
3
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beginning with the Company, if each of the corporations other than the last
corporation in the unbroken chain owns stock possessing a majority of the total
combined voting power of all classes of stock in one of the other corporations
in the chain, (ii) any limited partnership, if the Company or any corporation
described in item (i) above owns a majority of the general partnership interest
and a majority of the limited partnership interests entitled to vote on the
removal and replacement of the general partner, and (iii) any partnership, if
the partners thereof are composed only of the Company, any corporation listed in
item (i) above or any limited partnership listed in item (ii) above.
"Subsidiaries" means more than one of any such corporations, limited
partnerships or partnerships.
2.31 "Termination of Service" occurs when a Participant who is an Employee
of the Company or any Subsidiary shall cease to serve as an Employee of the
Company and its Subsidiaries, for any reason.
2.32 "Total and Permanent Disability" means a Participant is qualified for
long-term disability benefits under the Company's disability plan or insurance
policy; or, if no such plan or policy is then in existence, that the
Participant, because of ill health, physical or mental disability or any other
reason beyond his or her control, is unable to perform his or her duties of
employment for a period of six (6) continuous months, as determined in good
faith by the Committee.
ARTICLE 3
ADMINISTRATION
--------------
The Plan shall be administered by a committee appointed by the Board (the
"Committee"). The Committee shall consist of not fewer than two persons. Any
member of the Committee may be removed at any time, with or without cause, by
resolution of the Board. Any vacancy occurring in the membership of the
Committee may be filled by appointment by the Board.
Membership on the Committee shall be limited to those members of the Board
who are disinterested persons under Rule 16b-3(c) promulgated pursuant to the
1934 Act. The Committee shall select one of its members to act as its Chairman.
A majority of the Committee shall constitute a quorum, and the act of a majority
of the members of the Committee present at a meeting at which a quorum is
present shall be the act of the Committee.
The Committee shall determine and designate from time to time the eligible
persons to whom Awards will be granted and shall set forth in each related Award
Agreement the Award Period, the Date of Grant, and such other terms, provisions,
limitations, and performance requirements, as are approved by the Committee, but
not inconsistent with the Plan. The Committee shall determine whether an Award
shall include one type of Incentive or two or more Incentives granted in
combination.
The Committee, in its discretion, shall (i) interpret the Plan, (ii)
prescribe, amend, and rescind any rules and regulations necessary or appropriate
for the administration of the Plan, and (iii) make such other determinations and
take such other action as it deems necessary or advisable in the administration
of the Plan. Any interpretation, determination, or other action made or taken
by the Committee shall be final, binding, and conclusive on all interested
parties.
ARTICLE 4
ELIGIBILITY
-----------
Any Employee (including an Employee who is also a director or an
officer) whose judgment, initiative, and efforts contributed or may be expected
to contribute to the successful performance of the Company is eligible to
participate in the Plan. Non-employee directors shall not be eligible to
participate in the Plan. The Committee, upon its own action, may grant, but
shall not be required to grant, an Award to any Employee of the Company or any
Subsidiary. Awards may be granted by the Committee at any time and from time to
time to new Participants, or to then Participants, or to
4
<PAGE>
a greater or lesser number of Participants, and may include or exclude previous
Participants, as the Committee shall determine. Except as required by this
Plan, Awards granted at different times need not contain similar provisions.
The Committee's determinations under the Plan (including without limitation
determinations of which Employees, if any, are to receive Awards, the form,
amount and timing of such Awards, the terms and provisions of such Awards and
the agreements evidencing same) need not be uniform and may be made by it
selectively among Employees who receive, or are eligible to receive, Awards
under the Plan.
ARTICLE 5
SHARES SUBJECT TO PLAN
----------------------
The maximum number of shares of Common Stock that may be issued
pursuant to Awards granted under the Plan is three million (3,000,000) (as may
be adjusted in accordance with ARTICLES 13 and 14 hereof). Shares to be issued
may be made available from either authorized but unissued Common Stock or Common
Stock held by the Company in its treasury. Shares of Common Stock previously
subject to Awards which are forfeited, terminated, settled in cash in lieu of
Common Stock, or exchanged for Awards that do not involve Common Stock, or
expired unexercised, shall immediately become available for Awards under the
Plan.
During the term of this Plan, the Company will at all times reserve
and keep available the number of shares of Common Stock that shall be sufficient
to satisfy the requirements of this Plan.
ARTICLE 6
GRANT OF AWARDS
---------------
6.1 IN GENERAL. The grant of an Award shall be authorized by the
Committee and shall be evidenced by an Award Agreement setting forth the
Incentive or Incentives being granted, the total number of shares of Common
Stock subject to the Incentive(s), the Option Price (if applicable), the Award
Period, the Date of Grant, and such other terms, provisions, limitations, and
performance objectives, as are approved by the Committee, but not inconsistent
with the Plan. The Company shall execute an Award Agreement with a Participant
after the Committee approves the issuance of an Award. Any Award granted
pursuant to this Plan must be granted within ten (10) years of the date of
adoption of this Plan. The Plan shall be submitted to the Company's stockholders
for approval; however, the Committee may grant Awards under the Plan prior to
the time of stockholder approval. Any such options granted prior to such
stockholder approval shall be made subject to such stockholder approval. The
grant of an Award to a Participant shall not be deemed either to entitle the
Participant to, or to disqualify the Participant from, receipt of any other
Award under the Plan.
If the Committee establishes a purchase price for an Award, the
Participant must accept such Award within a period of 30 days (or such shorter
period as the Committee may specify) after the Date of Grant by executing the
applicable Award Agreement and paying such purchase price.
6.2 MAXIMUM ISO GRANTS. The Committee may not grant Incentive Stock
Options under the Plan to any Employee which would permit the aggregate Fair
Market Value (determined on the Date of Grant) of the Common Stock with respect
to which Incentive Stock Options (under this and any other plan of the Company
and its Subsidiaries) are exercisable for the first time by such Employee during
any calendar year to exceed $100,000. To the extent any Stock Option granted
under this Plan which is designated as an Incentive Stock Option exceeds this
limit, such Stock Option shall be a Non-qualified Stock Option.
6.3 MAXIMUM INDIVIDUAL GRANTS. No Participant may receive during any
fiscal year of the Company Awards covering an aggregate of more than one hundred
fifty thousand (150,000) shares of Common Stock.
5
<PAGE>
6.4 RESTRICTED STOCK. If Restricted Stock is granted to a
Participant under an Award, the Committee shall set forth in the related Award
Agreement: (i) the number of shares of Common Stock awarded, (ii) the price, if
any, to be paid by the Participant for such Restricted Stock, (iii) the time or
times within which such Award may be subject to forfeiture, (iv) specified
performance goals, or other criteria, which the Committee determines must be met
in order to remove any restrictions (including vesting) on such Award, and (v)
all other terms, limitations, restrictions, and conditions of the Restricted
Stock, which shall be consistent with this Plan. The provisions of Restricted
Stock need not be the same with respect to each Participant.
(A) LEGEND ON SHARES. Each Participant who is awarded Restricted
Stock shall be issued a stock certificate or certificates in respect of such
shares of Common Stock. Such certificate(s) shall be registered in the name of
the Participant, and shall bear an appropriate legend referring to the terms,
conditions, and restrictions applicable to such Restricted Stock, substantially
as provided in SECTION 17.9 of the Plan. The Committee may require that the
stock certificates evidencing shares of Restricted Stock be held in custody by
the Company until the restrictions thereon shall have lapsed, and that the
Participant deliver to the Committee a stock power or stock powers, endorsed in
blank, relating to the shares of Restricted Stock.
(B) RESTRICTIONS AND CONDITIONS. Shares of Restricted Stock shall be
subject to the following restrictions and conditions:
(i) Subject to the other provisions of this Plan and the terms of the
particular Award Agreements, during such period as may be determined by the
Committee commencing on the Date of Grant (the "Restriction Period"), the
Participant shall not be permitted to sell, transfer, pledge or assign shares of
Restricted Stock. Except for these limitations, the Committee may in its sole
discretion, remove any or all of the restrictions on such Restricted Stock
whenever it may determine that, by reason of changes in applicable laws or other
changes in circumstances arising after the date of the Award, such action is
appropriate. If the Restricted Stock is held by an insider (as defined in
SECTION 8.2 of the Plan), the Restriction Period shall be at least six months
from the Date of Grant.
(ii) Except as provided in sub-paragraph (i) above, the Participant
shall have, with respect to his or her Restricted Stock, all of the rights of a
stockholder of the Company, including the right to vote the shares, and the
right to receive any dividends thereon. Certificates for shares of Common Stock
free of restriction under this Plan shall be delivered to the Participant
promptly after, and only after, the Restriction Period shall expire without
forfeiture in respect of such shares of Common Stock. Certificates for the
shares of Common Stock forfeited under the provisions of the Plan and the
applicable Award Agreement shall be promptly returned to the Company by the
forfeiting Participant. Each Award Agreement shall require that (x) each
Participant, by his or her acceptance of Restricted Stock, shall irrevocably
grant to the Company a power of attorney to transfer any shares so forfeited to
the Company and agrees to execute any documents requested by the Company in
connection with such forfeiture and transfer, and (y) such provisions regarding
returns and transfers of stock certificates with respect to forfeited shares of
Common Stock shall be specifically performable by the Company in a court of
equity or law.
(iii) The Restriction Period of Restricted Stock shall commence on
the Date of Grant and, subject to paragraph (d) of ARTICLE 14 of the Plan,
unless otherwise established by the Committee in the Award Agreement setting
forth the terms of the Restricted Stock, shall expire upon satisfaction of the
conditions set forth in the Award Agreement; such conditions may provide for
vesting based on (i) length of continuous service, (ii) achievement of specific
business objectives, (iii) increases in specified indices, (iv) attainment of
specified growth rates, or (v) other comparable measurements of Company
performance, as may be determined by the Committee in its sole discretion.
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<PAGE>
(iv) Subject to the provisions of the particular Award Agreement, upon
Termination of Service for any reason during the Restriction Period, the
nonvested shares of Restricted Stock shall be forfeited by the Participant. In
the event a Participant has paid any consideration to the Company for such
forfeited Restricted Stock, the Company shall, as soon as practicable after the
event causing forfeiture (but in any event within 5 business days), pay to the
Participant, in cash, an amount equal to the total consideration paid by the
Participant for such forfeited shares. Upon any forfeiture, all rights of a
Participant with respect to the forfeited shares of the Restricted Stock shall
cease and terminate, without any further obligation on the part of the Company.
ARTICLE 7
OPTION PRICE
------------
The Option Price for any share of Common Stock which may be purchased
under a Stock Option shall be at least One Hundred Percent (100%) of the Fair
Market Value of the share on the Date of Grant. If an Incentive Stock Option is
granted to an Employee who owns or is deemed to own (by reason of the
attribution rules of Section 424(d) of the Code) more than 10% of the combined
voting power of all classes of stock of the Company (or any parent or
Subsidiary), the Option Price shall be at least 110% of the Fair Market Value of
the Common Stock on the Date of Grant.
ARTICLE 8
AWARD PERIOD; VESTING
---------------------
8.1 AWARD PERIOD. Subject to the other provisions of this Plan, the
Committee may, in its discretion, provide that an Incentive may not be exercised
in whole or in part for any period or periods of time or beyond any date
specified in the Award Agreement. Except as provided in the Award Agreement, an
Incentive may be exercised in whole or in part at any time during its term. The
Award Period for an Incentive shall be reduced or terminated upon Termination of
Service in accordance with this ARTICLE 8 and ARTICLE 9. No Incentive granted
under the Plan may be exercised at any time after the end of its Award Period.
No portion of any Incentive may be exercised after the expiration of ten (10)
years from its Date of Grant. However, if an Employee owns or is deemed to own
(by reason of the attribution rules of Section 424(d) of the Code) more than 10%
of the combined voting power of all classes of stock of the Company (or any
parent or Subsidiary) and an Incentive Stock Option is granted to such Employee,
the term of such Incentive Stock Option (to the extent required by the Code at
the time of grant) shall be no more than five (5) years from the Date of Grant.
8.2 VESTING. The Committee, in its sole discretion, may determine
that an Incentive will be immediately exercisable, in whole or in part, or that
all or any portion may not be exercised until a date, or dates, subsequent to
its Date of Grant, or until the occurrence of one or more specified events,
subject in any case to the terms of the Plan. If the Committee imposes
conditions upon exercise, then subsequent to the Date of Grant, the Committee
may, in its sole discretion, accelerate the date on which all or any portion of
the Incentive may be exercised. Notwithstanding anything in the Plan to the
contrary, a participant who is a director, executive officer or 10% or greater
stockholder of the Company under Section 16 of the 1934 Act and the rules
promulgated thereunder (an "insider") cannot exercise a Stock Option until at
least six months have expired from the Date of Grant.
ARTICLE 9
TERMINATION OF SERVICE
----------------------
In the event of Termination of Service of a Participant, a Stock
Option may only be exercised as determined by the Committee and provided in the
Award Agreement.
7
<PAGE>
ARTICLE 10
EXERCISE OF INCENTIVE
---------------------
10.1 IN GENERAL. A vested Incentive may be exercised during its
Award Period, subject to limitations and restrictions set forth therein and in
ARTICLE 9. A vested Incentive may be exercised at such times and in such
amounts as provided in this Plan and the applicable Award Agreement, subject to
the terms, conditions, and restrictions of the Plan.
In no event may an Incentive be exercised or shares of Common Stock be
issued pursuant to an Award if a necessary listing of the shares of Common Stock
on a stock exchange or any registration under state or federal securities laws
required under the circumstances has not been accomplished. No Incentive may be
exercised for a fractional share of Common Stock. The granting of an Incentive
shall impose no obligation upon the Participant to exercise that Incentive.
Subject to such administrative regulations as the Committee may from
time to time adopt, a Stock Option may be exercised by the delivery of written
notice to the Committee setting forth the number of shares of Common Stock with
respect to which the Stock Option is to be exercised and the date of exercise
thereof (the "Exercise Date") which shall be at least three (3) days after
giving such notice unless an earlier time shall have been mutually agreed upon.
On the Exercise Date, the Participant shall deliver to the Company consideration
with a value equal to the total Option Price of the shares to be purchased,
payable as follows: (a) cash, certified check, bank draft, or money order
payable to the order of the Company, (b) Common Stock (including Restricted
Stock), valued at its Fair Market Value on the Exercise Date, and/or (c) any
other form of payment which is acceptable to the Committee. In the event that
shares of Restricted Stock are tendered as consideration for the exercise of a
Stock Option, a number of shares of Common Stock issued upon the exercise of the
Stock Option equal to the number of shares of Restricted Stock used as
consideration therefor, shall be subject to the same restrictions as the
Restricted Stock so submitted. Common Stock which is acquired by the Participant
pursuant to the exercise of a Stock Option may not be used to exercise a
subsequent Stock Option until and unless such shares have been held for a period
of six months.
Upon payment of all amounts due from the Participant, the Company
shall cause certificates for the Common Stock then being purchased to be
delivered to the Participant (or the person exercising the Participant's Stock
Option in the event of his death) at its principal business office promptly
after the Exercise Date; provided that the Participant has exercised an
Incentive Stock Option, the Company may at its option retain physical possession
of the certificate evidencing the shares acquired upon exercise until the
expiration of the holding periods described in Section 422(a)(1) of the Code.
The obligation of the Company to deliver shares of Common Stock shall, however,
be subject to the condition that if at any time the Committee shall determine in
its discretion that the listing, registration, or qualification of the Stock
Option or the Common Stock upon any securities exchange or under any state or
federal law, or the consent or approval of any governmental regulatory body, is
necessary or desirable as a condition of, or in connection with, the Stock
Option or the issuance or purchase of shares of Common Stock thereunder, the
Stock Option may not be exercised in whole or in part unless such listing,
registration, qualification, consent, or approval shall have been effected or
obtained free of any conditions not acceptable to the Committee.
If the Participant fails to pay for any of the Common Stock specified
in such notice or fails to accept delivery thereof, the Participant's right to
purchase such Common Stock may be terminated by the Company.
10.2 DISQUALIFYING DISPOSITION OF ISO. If shares of Common Stock
acquired upon exercise of an Incentive Stock Option are disposed of by a
Participant prior to the expiration of either two (2) years from the Date of
Grant of such Stock Option or one (1) year from the transfer of shares of Common
Stock to the Participant pursuant to the exercise of such Stock Option, or in
any other disqualifying disposition within the meaning of Section 422 of the
Code, such Participant shall
8
<PAGE>
notify the Company in writing of the date and terms of such disposition. A
disqualifying disposition by a Participant shall not affect the status of any
other Stock Option granted under the Plan as an Incentive Stock Option within
the meaning of Section 422 of the Code.
ARTICLE 11
AMENDMENT OR DISCONTINUANCE
---------------------------
Subject to the limitations set forth in this ARTICLE 11, the Board may
at any time and from time to time, without the consent of the Participants,
alter, amend, revise, suspend, or discontinue the Plan in whole or in part;
provided, however, that no amendment which requires stockholder approval in
order for the Plan to continue to comply with Rule 16b-3 under the 1934 Act and
Section 162(m) of the Code, including any successors to such Rule and Section,
shall be effective unless such amendment shall be approved by the requisite vote
of the stockholders of the Company entitled to vote thereon.
Subject to the forgoing, the Board shall have the power and authority
to amend the Plan in any manner advisable in order for Stock Options granted
under the Plan to qualify for the exemption provided by Rule 16b-3 (or any
successor rule relating to exemption from Section 16(b) of the 1934 Act) or to
qualify as "performance-based" compensation under Section 162(m) of the Code
(including amendments as a result of changes to Rule 16b-3 or Section 162(m) or
the regulations thereunder to permit greater flexibility with respect to Stock
Options granted under the Plan), and any such amendment shall, to the extent
deemed necessary or advisable by the Committee, be applicable to any outstanding
Stock Options theretofore granted under the Plan, notwithstanding any contrary
provisions contained in any stock option agreement. In the event of any such
amendment to the Plan, the holder of any Stock Option outstanding under the Plan
shall, upon request of the Committee and as a condition to the exercisability
thereof, execute a conforming amendment in the form prescribed by the Committee
to any stock option agreement relating thereto within such reasonable time as
the Committee shall specify in such request. Notwithstanding anything contained
in this Plan to the contrary, unless required by law, no action contemplated or
permitted by this ARTICLE 11 shall adversely affect any rights of Participants
or obligations of the Company to Participants with respect to any Stock Options
theretofore granted under the Plan without the consent of the affected
Participant.
ARTICLE 12
TERM
----
The Plan shall be effective from the date that this Plan is approved
by the Board. Unless sooner terminated by action of the Board, the Plan will
terminate on June 12, 2006, but Incentives granted before that date will
continue to be effective in accordance with their terms and conditions.
ARTICLE 13
CAPITAL ADJUSTMENTS
-------------------
If at any time while the Plan is in effect, or unexercised Stock
Options are outstanding, there shall be any increase or decrease in the number
of issued and outstanding shares of Common Stock resulting from (1) the
declaration or payment of a stock dividend, (2) any recapitalization resulting
in a stock split-up, combination, or exchange of shares of Common Stock, or (3)
other increase or decrease in such shares of Common Stock effected without
receipt of consideration by the Company, then and in such event:
(i) An appropriate adjustment shall be made in the maximum number of
shares of Common Stock then subject to being awarded under the Plan and in the
maximum number of shares of Common Stock then subject to being awarded to a
Participant, to the end that the same proportion of the Company's issued and
outstanding shares of Common Stock shall continue to be subject to being so
awarded; and
9
<PAGE>
(ii) Appropriate adjustments shall be made in the number of shares of
Common Stock and the Option Price thereof then subject to purchase pursuant to
each such Stock Option previously granted and unexercised, to the end that the
same proportion of the Company's issued and outstanding shares of Common Stock
in each such instance shall remain subject to purchase at the same aggregate
Option Price.
Except as otherwise expressly provided herein, the issuance by the
Company of shares of its capital stock of any class, or securities convertible
into shares of capital stock of any class, either in connection with direct sale
or upon the exercise of rights or warrants to subscribe therefor, or upon
conversion of shares or obligations of the Company convertible into such shares
or other securities, shall not affect, and no adjustment by reason thereof shall
be made with respect to, the number of or Option Price of shares of Common Stock
then subject to outstanding Stock Options granted under the Plan.
Upon the occurrence of each event requiring an adjustment with respect
to any Stock Option, the Company shall mail to each affected Participant its
computation of such adjustment which shall be conclusive and shall be binding
upon each such Participant.
ARTICLE 14
RECAPITALIZATION, MERGER AND
CONSOLIDATION; CHANGE IN CONTROL
--------------------------------
(a) The existence of this Plan and Incentives granted hereunder shall
not affect in any way the right or power of the Company or its stockholders to
make or authorize any or all adjustments, recapitalizations, reorganizations, or
other changes in the Company's capital structure and its business, or any merger
or consolidation of the Company, or any issue of bonds, debentures, preferred or
preference stocks ranking prior to or otherwise affecting the Common Stock or
the rights thereof (or any rights, options, or warrants to purchase same), or
the dissolution or liquidation of the Company, or any sale or transfer of all or
any part of its assets or business, or any other corporate act or proceeding,
whether of a similar character or otherwise.
(b) Subject to any required action by the stockholders, if the Company
shall be the surviving or resulting corporation in any merger, consolidation or
share exchange, any Incentive granted hereunder shall pertain to and apply to
the securities or rights (including cash, property, or assets) to which a holder
of the number of shares of Common Stock subject to the Incentive would have been
entitled.
(c) In the event of any merger, consolidation or share exchange
pursuant to which the Company is not the surviving or resulting corporation,
there shall be substituted for each share of Common Stock subject to the
unexercised portions of such outstanding Incentives, that number of shares of
each class of stock or other securities or that amount of cash, property, or
assets of the surviving, resulting or consolidated company which were
distributed or distributable to the stockholders of the Company in respect to
each share of Common Stock held by them, such outstanding Incentives to be
thereafter exercisable for such stock, securities, cash, or property in
accordance with their terms. Notwithstanding the foregoing, however, all such
Incentives may be cancelled by the Company as of the effective date of any such
reorganization, merger, consolidation, share exchange or any dissolution or
liquidation of the Company by giving notice to each holder thereof or his
personal representative of its intention to do so and by permitting the purchase
during the thirty (30) day period next preceding such effective date of all of
the shares of Common Stock subject to such outstanding Incentives.
(d) In the event of a Change of Control, then, notwithstanding any
other provision in this Plan to the contrary, all unmatured installments of
Incentives outstanding shall thereupon automatically be accelerated and
exercisable in full and all Restriction Periods applicable to Awards
10
<PAGE>
of Restricted Stock shall automatically expire. The determination of the
Committee that any of the foregoing conditions has been met shall be binding and
conclusive on all parties.
ARTICLE 15
LIQUIDATION OR DISSOLUTION
--------------------------
In case the Company shall, at any time while any Incentive under this
Plan shall be in force and remain unexpired, (i) sell all or substantially all
of its property, or (ii) dissolve, liquidate, or wind up its affairs, then each
Participant may thereafter receive upon exercise of a Stock Option (in lieu of
each share of Common Stock of the Company which such Participant would have been
entitled to receive) the same kind and amount of any securities or assets as may
be issuable, distributable, or payable upon any such sale, dissolution,
liquidation, or winding up with respect to each share of Common Stock of the
Company. If the Company shall, at any time prior to the expiration of any Stock
Option, make any partial distribution of its assets, in the nature of a partial
liquidation, whether payable in cash or in kind (but excluding the distribution
of a cash dividend payable out of earned surplus and designated as such) then in
such event the Option Prices then in effect with respect to each Stock Option
shall be reduced, on the payment date of such distribution, in proportion to the
percentage reduction in the tangible book value of the shares of the Company's
Common Stock (determined in accordance with generally accepted accounting
principles) resulting by reason of such distribution.
ARTICLE 16
INCENTIVES IN SUBSTITUTION FOR
INCENTIVES GRANTED BY OTHER CORPORATIONS
----------------------------------------
Incentives may be granted under the Plan from time to time in
substitution for similar instruments held by employees of a corporation who
become or are about to become management Employees of the Company or any
Subsidiary as a result of a merger or consolidation of the employing corporation
with the Company or the acquisition by the Company of stock of the employing
corporation. The terms and conditions of the substitute Incentives so granted
may vary from the terms and conditions set forth in this Plan to such extent as
the Board at the time of grant may deem appropriate to conform, in whole or in
part, to the provisions of the Incentives stock appreciation right in
substitution for which they are granted.
ARTICLE 17
MISCELLANEOUS PROVISIONS
------------------------
17.1 INVESTMENT INTENT. The Company may require that there be
presented to and filed with it by any Participant under the Plan, such evidence
as it may deem necessary to establish that the Incentives granted or the shares
of Common Stock to be purchased or transferred are being acquired for investment
and not with a view to their distribution.
17.2 NO RIGHT TO CONTINUED EMPLOYMENT. Neither the Plan nor any
Incentive granted under the Plan shall confer upon any Participant any right
with respect to continuance of employment by the Company or any Subsidiary.
17.3 INDEMNIFICATION OF BOARD AND COMMITTEE. No member of the Board
or the Committee, nor any officer or Employee of the Company acting on behalf of
the Board or the Committee, shall be personally liable for any action,
determination, or interpretation taken or made in good faith with respect to the
Plan, and all members of the Board or the Committee and each and any officer or
employee of the Company acting on their behalf shall, to the extent permitted by
law, be fully indemnified and protected by the Company in respect of any such
action, determination, or interpretation.
11
<PAGE>
17.4 EFFECT OF THE PLAN. Neither the adoption of this Plan nor any
action of the Board or the Committee shall be deemed to give any person any
right to be granted an Award or any other rights except as may be evidenced by
an Award Agreement, or any amendment thereto, duly authorized by the Committee
and executed on behalf of the Company, and then only to the extent and upon the
terms and conditions expressly set forth therein.
17.5 COMPLIANCE WITH OTHER LAWS AND REGULATIONS. Notwithstanding
anything contained herein to the contrary, the Company shall not be required to
sell or issue shares of Common Stock under any Incentive if the issuance thereof
would constitute a violation by the Participant or the Company of any provisions
of any law or regulation of any governmental authority or any national
securities exchange or other forum in which shares of Common Stock are traded
(including without limitation any gaming laws or SECTION 16 of the 1934 Act);
and, as a condition of any sale or issuance of shares of Common Stock under an
Incentive, the Committee may require such agreements or undertakings, if any, as
the Committee may deem necessary or advisable to assure compliance with any such
law or regulation. The Plan, the grant and exercise of Incentives hereunder,
and the obligation of the Company to sell and deliver shares of Common Stock,
shall be subject to all applicable federal and state laws, rules and regulations
and to such approvals by any government or regulatory agency as may be required.
17.6 TAX REQUIREMENTS. The Company shall have the right to deduct
from all amounts hereunder paid in cash or other form, any Federal, state, or
local taxes required by law to be withheld with respect to such payments. The
Participant receiving shares of Common Stock issued under the Plan shall be
required to pay the Company the amount of any taxes which the Company is
required to withhold with respect to such shares of Common Stock. Such payments
shall be required to be made prior to the delivery of any certificate
representing such shares of Common Stock. Such payment may be made in cash, by
check, or through the delivery of shares of Common Stock owned by the
Participant (which may be effected by the actual delivery of shares of Common
Stock by the Participant or, if the Participant is not an insider (as defined in
SECTION 8.2 of the Plan), by the Company's withholding a number of shares to be
issued upon the exercise of a Stock Option, if applicable), which shares have an
aggregate Fair Market Value equal to the required minimum withholding payment,
or any combination thereof.
17.7 NON-ASSIGNABILITY. An Incentive granted to a Participant may
not be transferred or assigned other than by will or by the laws of descent and
distribution, and in the case of a Non-qualified Stock Option, may also be
assigned pursuant to a qualified domestic relations order as defined in the Code
or Title I of the Employee Retirement Income Security Act of 1974, as amended.
If the Participant attempts to alienate, assign, pledge, hypothecate, or
otherwise dispose of his Incentive or any right thereunder, except as provided
for in this Plan or the Award Agreement, or in the event of any levy,
attachment, execution, or similar process upon the right or interest conferred
by this Plan or the Award Agreement, the Committee may terminate the
Participant's Incentive by notice to him, and it shall thereupon become null and
void. In the case of a Restricted Stock Award or a cash Award, such Award, or
any portion thereof, shall no longer be deemed to be an Incentive under this
Section when such Award or portion of such Award becomes vested and all
restrictions and conditions applicable to such Award or portion thereof have
lapsed or been satisfied, as the case may be.
17.8 USE OF PROCEEDS. Proceeds from the sale of shares of Common
Stock pursuant to Incentives granted under this Plan shall constitute general
funds of the Company.
17.9 LEGEND. Each certificate representing shares of Restricted
Stock issued to a Participant shall bear the following legend, or a similar
legend deemed by the Company to constitute an appropriate notice of the
provisions hereof (any such certificate not having such legend shall be
surrendered upon demand by the Company and so endorsed):
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<PAGE>
On the face of the certificate:
"Transfer of this stock is restricted in accordance with conditions
printed on the reverse of this certificate."
On the reverse:
"The shares of stock evidenced by this certificate are subject to and
transferrable only in accordance with that certain Hollywood Casino
Corporation 1996 Long-Term Incentive Plan, a copy of which is on file
at the principal office of the Company in Dallas, Texas. No transfer
or pledge of the shares evidenced hereby may be made except in
accordance with and subject to the provisions of said Plan. By
acceptance of this certificate, any holder, transferee or pledgee
hereof agrees to be bound by all of the provisions of said Plan."
The following legend shall be inserted on a certificate evidencing Common
Stock issued under the Plan if the shares were not issued in a transaction
registered under the applicable federal and state securities laws:
"Shares of stock represented by this certificate have been acquired by
the holder for investment and not for resale, transfer or
distribution, have been issued pursuant to exemptions from the
registration requirements of applicable state and federal securities
laws, and may not be offered for sale, sold or transferred other than
pursuant to effective registration under such laws, or in transactions
otherwise in compliance with such laws, and upon evidence satisfactory
to the Company of compliance with such laws, as to which the Company
may rely upon an opinion of counsel satisfactory to the Company."
A copy of this Plan shall be kept on file in the principal office of the
Company in Dallas, Texas.
17.10 COMMISSION. To the extent required by law, stock ownership under
the Plan will be subject to review by each Commission pursuant to the provisions
of the applicable Act. If, after exercise of any Stock Options or issuance of
any Restricted Stock under the Plan, a Participant is found to be disqualified
by a Commission, such person shall dispose of his shares of Common Stock and the
Company shall have the absolute right to repurchase such shares at the then Fair
Market Value, the Option Price or the purchase price (if applicable), whichever
is the least.
13
<PAGE>
IN WITNESS WHEREOF, the Company has caused this instrument to be executed
as of July 30, 1996, by its President and Secretary pursuant to prior action
taken by the Board.
HOLLYWOOD CASINO CORPORATION
By: /s/ Edward T. Pratt III
-----------------------
President
Attest:
/s/ William D. Pratt
-----------------------------------------
Secretary
14
<PAGE>
AMENDMENT TO HOLLYWOOD CASINO CORPORATION
1996 LONG-TERM INCENTIVE PLAN
-----------------------------
WHEREAS, Hollywood Casino Corporation, a Delaware corporation (the
"Company"), established the Hollywood Casino Corporation 1996 Long-Term
Incentive Plan (the "Plan") effective June 12, 1996; and
WHEREAS, Article 11 of the Plan authorizes the Board of Directors of the
Company to amend the Plan without the approval of the stockholders of the
Company unless stockholder approval is necessary to comply with Section 162(m)
of the Internal Revenue Code of 1986 or Rule 16b-3 (the "Rule") promulgated
under Section 16(b) of the Securities Exchange Act of 1934; and
WHEREAS, the Board of Directors (the "Board") has authorized the amendment
of the Plan and all awards granted under the Plan to bring them into conformity
with recently adopted amendments to the Rule; and
WHEREAS, all capitalized terms used but not defined herein shall have the
respective meanings assigned to them in the Plan;
NOW, THEREFORE, effective as of March 18, 1997, the Corporation hereby
amends the Plan and all outstanding awards granted under the Plan as follows:
I.
The last sentence of Section 8.2 of the Plan is amended to read in its
entirety as follows:
"Notwithstanding anything in the Plan to the contrary, a participant who is a
director, executive officer or 10% or greater stockholder of the Company under
Section 16 of the 1934 Act and the rules promulgated thereunder (an "insider")
cannot dispose of any Common Stock such insider acquires pursuant to an Award
until six months have expired from the Date of Grant of such Award, unless the
Committee determines that such disposition by the insider would not result in a
violation of Section 16(b) of the 1934 Act."
II.
The foregoing amendments to the Plan shall be deemed to apply to all
outstanding Awards granted under the Plan, and such Awards are hereby deemed
amended to the extent necessary to bring them into conformity with the foregoing
amendments to the Plan.
*****
<PAGE>
IN WITNESS WHEREOF, the Company has executed this Amendment this 18th day
of March, 1997.
HOLLYWOOD CASINO CORPORATION
By: /s/ Jack E. Pratt
-----------------
Name: Jack E. Pratt
Title: Chairman of the Board and
Chief Executive Officer
Attest:
/s/ William D. Pratt
--------------------
William D. Pratt, Secretary
2
<PAGE>
EXHIBIT 10.29
HOLLYWOOD CASINO CORPORATION
1996 NON-EMPLOYEE DIRECTOR STOCK PLAN
-------------------------------------
The Hollywood Casino Corporation 1996 Non-Employee Director Stock Plan
(hereinafter called the "Plan") was adopted by the Board of Directors of
Hollywood Casino Corporation, a Delaware corporation (hereinafter called the
"Company"), effective as of June 12, 1996, and was approved by the Company's
stockholders on July 30, 1996.
ARTICLE 1
PURPOSE
-------
The purpose of the Plan is to attract and retain key Outside Directors of
Hollywood Casino Corporation and to provide such persons with a proprietary
interest in the Company through the issuance of Common Stock that will
(a) increase the interest of such persons in the Company's welfare;
(b) furnish an incentive to such persons to continue their services for the
Company; and
(c) provide a means through which the Company may attract able persons as
directors.
ARTICLE 2
DEFINITIONS
-----------
For the purpose of the Plan, unless the context requires otherwise, the
following terms shall have the meanings indicated:
2.1 "Act" means the Illinois Act, the Mississippi Act, the New Jersey Act,
and any other gaming laws to which the Company is or may be subject.
2.2 "Board" means the board of directors of the Company.
2.3 "Code" means the Internal Revenue Code of 1986, as amended.
2.4 "Commission" means the Illinois Commission, the Mississippi
Commission, the New Jersey Commission, and any other similar gaming entity to
which the Company is or may be subject in the future.
2.5 "Committee" means the committee appointed or designated by the Board
to administer the Plan in accordance with ARTICLE 3 of this Plan.
2.6 "Common Stock" means the Common Stock which the Company is currently
authorized to issue or may in the future be authorized to issue.
2.7 "Company" means Hollywood Casino Corporation, a Delaware corporation,
and any successor entity.
2.8 "Date of Grant" means the effective date on which a Stock Option is
awarded
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to an Outside Director (as defined in ARTICLE 4 of this Plan) as set forth in
the applicable Stock Option Agreement.
2.9 "Employee" means common law employee (as defined in accordance with
the Regulations and Revenue Rulings then applicable under Section 3401(c) of the
Code) of the Company or any Subsidiary of the Company.
2.10 "Fair Market Value" of a share of Common Stock means (i) the closing
price per share on any stock exchange on which the Common Stock is traded, (ii)
the mean between the closing or average (as the case may be) bid and asked
prices per share of Common Stock on the over-the-counter market, whichever is
applicable, or (iii) as determined by the Committee if the Common Stock is not
traded on an exchange or quoted on an over-the-counter market, whichever is
applicable.
2.11 "Illinois Act" means the Illinois Riverboat Gambling Act, Ill. Rev.
Stat. ch. 120, Paragraph 2401 et seq., as amended, and the regulations
promulgated and rulings issued thereunder, and any other Illinois statute
regulating gaming activity.
2.12 "Illinois Commission" means the Illinois Gaming Board established
pursuant to Section 5 of the Illinois Act.
2.13 "Mississippi Act" means the Mississippi Gaming Control Act, as
amended, and the regulations promulgated and rulings issued thereunder, and any
other Mississippi statute regulating gaming activity.
2.14 "Mississippi Commission" means the Mississippi Gaming Commission
established pursuant to the Mississippi Act.
2.15 "New Jersey Act" means the New Jersey Casino Control Act, N.J. Stat.
Ann. 5:12 1, et seq., as amended, and the regulations promulgated and rulings
issued thereunder, and any other New Jersey statute regulating gaming activity.
2.16 "New Jersey Commission" means the New Jersey Casino Control
Commission.
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2.17 "Option Period" means the period during which a Stock Option may be
exercised.
2.18 "Option Price" means the price which must be paid by a Participant
upon exercise of a Stock Option to purchase a share of Common Stock.
2.19 "Outside Director" means a director of the Company who is not an
Employee.
2.20 "Participant" shall mean an Outside Director of the Company who is
entitled to participate in the Plan.
2.21 "Plan" means this Hollywood Casino Corporation 1996 Non-Employee
Director Stock Plan, as amended from time to time.
2.22 "Retirement" means Termination of Service at or after attaining age
65.
2.23 "Stock Option" means a non-qualified option to purchase Common Stock
of the Company granted under this Plan.
2.24 "Stock Option Agreement" means a written agreement between a
Participant and the Company which sets out the terms of the grant of a Stock
Option.
2.25 "Subsidiary" means (i) any corporation in an unbroken chain of
corporations beginning with the Company, if each of the corporations other than
the last corporation in the unbroken chain owns stock possessing a majority of
the total combined voting power of all classes of stock in one of the other
corporations in the chain, (ii) any limited partnership, if the Company or any
corporation described in item (i) above owns a majority of the general
partnership interest and a majority of the limited partnership interests
entitled to vote on the removal and replacement of the general partner, and
(iii) any partnership, if the partners thereof are composed only of the Company,
any corporation listed in item (i) above or any limited partnership listed in
item (ii) above. "Subsidiaries" means more than one of any such corporations,
limited partnerships or partnerships.
2.26 "Termination of Service as a Director" occurs when a Participant who
is an Outside Director of the Company shall cease to serve as a director of the
Company for any reason.
2.27 "Total and Permanent Disability" means total and permanent disability
as defined in Section 22(e) of the Code.
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ARTICLE 3
ADMINISTRATION
--------------
The Plan shall be administered by a committee appointed by the Board (the
"Committee"). The Committee shall consist of not fewer than two persons. Any
member of the Committee may be removed at any time, with or without cause, by
resolution of the Board. Any vacancy occurring in the membership of the
Committee may be filled by appointment by the Board.
The Committee shall select one of its members to act as its Chairman and
shall make such rules and regulations for its operation as it deems appropriate.
A majority of the Committee shall constitute a quorum, and the act of a majority
of the members of the Committee present at a meeting at which a quorum is
present shall be the act of the Committee. The Committee, in its discretion,
shall (i) interpret the Plan, (ii) prescribe, amend, and rescind any rules and
regulations necessary or appropriate for the administration of the Plan, and
(iii) make such other determinations and take such other action as it deems
necessary or advisable in the administration of the Plan. Any interpretation,
determination, or other action made or taken by the Committee shall be final,
binding, and conclusive on all interested parties.
ARTICLE 4
ELIGIBILITY; GRANT OF OPTIONS
-----------------------------
The Committee shall grant Stock Options as follows: (i) each Outside
Director serving as such on the effective date of the Plan shall receive a Stock
Option for 10,000 shares of Common Stock; (ii) each person who shall
subsequently be elected or appointed after the effective date of the Plan to
serve as an Outside Director and who shall not have previously served as an
Outside Director of the Company shall receive a Stock Option for 10,000 shares
of Common Stock; and (iii) each person serving as an Outside Director on
January 15th of each calendar year shall receive a Stock Option for 2,500 shares
of Common Stock. The Committee shall not grant Stock Options under any other
circumstances.
The grant of a Stock Option shall be evidenced by a Stock Option Agreement
setting forth the total number of shares of Common Stock subject to the Stock
Option, the Option Price, the maximum term of the Stock Option, the Date of
Grant, and such other terms and provisions as are approved by the Committee, but
not inconsistent with the Plan. The Company shall execute a Stock Option
Agreement with a Participant after the issuance of a Stock Option. Any Stock
Option granted pursuant to this Plan must be granted within ten (10) years of
the date of adoption of this Plan. The Plan shall be submitted to the Company's
stockholders for approval; however, the Committee may grant Stock Options under
the Plan prior to the time of stockholder approval. Any such options granted
prior to such stockholder approval shall be subject to such stockholder
approval.
ARTICLE 5
SHARES SUBJECT TO PLAN
----------------------
The maximum number of shares of Common Stock that may be issued under the
Plan is one hundred and fifty thousand (150,000) (as may be adjusted in
accordance with ARTICLES 12 and 13 hereof). All Stock Options granted under the
Plan shall be designated as non-qualified stock options. Shares of Common Stock
to be issued under the Plan may be made available from either authorized but
unissued Common Stock or Common Stock held by the Company in its treasury.
Shares of Common Stock previously subject to Stock Options which are forfeited,
terminated, or settled in cash in lieu of Common Stock, or expired unexercised,
shall immediately become available for
4
<PAGE>
grants of Stock Options under the Plan.
During the term of this Plan, the Company will at all times reserve and
keep available the number of shares of Common Stock that shall be sufficient to
satisfy the requirements of this Plan.
ARTICLE 6
OPTION PRICE
------------
The Option Price for any share of Common Stock which may be purchased under
a Stock Option shall be One Hundred Percent (100%) of the Fair Market Value of
the share on the Date of Grant.
ARTICLE 7
OPTION PERIOD; FORFEITURE
-------------------------
A Stock Option may be exercised in whole or in part at any time during its
Option Period after the expiration of six (6) months from its Date of Grant. No
Stock Option granted under the Plan may be exercised at any time after the end
of its Option Period.
The Option Period for each Stock Option will terminate at the first of the
following to occur:
(a) 5 p.m. on the tenth anniversary of the Date of Grant;
(b) 5 p.m. on the date which is twelve (12) months following the
Participant's Termination of Service as a Director due to death or Total and
Permanent Disability;
(c) 5 p.m. on the date which is three (3) months following the
Participant's Termination of Service as a Director due to Retirement; or
(d) 5 p.m. on the 30th day after the day of any other Termination of
Service as a Director; provided, however, that if such termination occurs after
the date this Plan is adopted but before this Plan is approved by the
stockholders of the Company, such 30-day period shall begin to run on the
effective date of such stockholder approval rather than on the date of
termination.
ARTICLE 8
EXERCISE OF OPTION
------------------
Stock Options may be exercised during the Option Period. Options may be
exercised at such times and in such amounts as provided in this Plan and the
applicable Stock Option Agreements, subject to the terms, conditions, and
restrictions of the Plan.
In no event may a Stock Option be exercised or shares of Common Stock be
issued pursuant to a Stock Option if a necessary listing of the shares on a
stock exchange or any registration under state or federal securities laws
required under the circumstances has not been accomplished. No Stock Option may
be exercised for a fractional share of Stock. The granting of a Stock Option
shall impose no obligation upon the Participant to exercise that Stock Option.
Subject to such administrative regulations as the Committee may from time
to time adopt, a Stock Option may be exercised by the delivery of written notice
to the Committee setting forth the
5
<PAGE>
number of shares of Common Stock with respect to which the Stock Option is to be
exercised and the date of exercise thereof (the "Exercise Date") which shall be
at least three (3) days after giving such notice unless an earlier time shall
have been mutually agreed upon. On the Exercise Date, the Participant shall
deliver to the Company consideration with a value equal to the total Option
Price of the shares of Common Stock to be purchased, payable as follows: (a)
cash, certified check, bank draft, or money order payable to the order of the
Company, (b) Common Stock, valued at its Fair Market Value on the Exercise
Date, and/or (c) any other form of payment which is acceptable to the Committee.
Common Stock which is acquired by the Participant pursuant to the exercise of a
Stock Option may not be used to exercise a subsequent Stock Option until and
unless such shares have been held for a period of six months.
Upon payment of all amounts due from the Participant, the Company shall
cause certificates for the Common Stock then being purchased to be delivered to
the Participant (or the person exercising the Participant's Stock Option in the
event of his death) at its principal business office promptly after the Exercise
Date. The obligation of the Company to deliver shares of Common Stock shall,
however, be subject to the condition that if at any time the Committee shall
determine in its discretion that the listing, registration, or qualification of
the Stock Option or the Common Stock upon any securities exchange or under any
state or federal law, or the consent or approval of any governmental regulatory
body, is necessary or desirable as a condition of, or in connection with, the
Stock Option or the issuance or purchase of shares of Common Stock thereunder,
the Stock Option may not be exercised in whole or in part unless such listing,
registration, qualification, consent, or approval shall have been effected or
obtained free of any conditions not acceptable to the Committee.
If the Participant fails to pay for any of the Common Stock specified in
such notice or fails to accept delivery thereof, the Participant's right to
purchase such Common Stock may be terminated by the Company.
ARTICLE 9
AMENDMENT OR DISCONTINUANCE
---------------------------
Subject to the limitations set forth in this ARTICLE 9, the Board may at
any time and from time to time, without the consent of the Participants, alter,
amend, revise, suspend, or discontinue the Plan in whole or in part; provided,
however, that no amendment which requires stockholder approval in order for the
Plan to continue to comply with Rule 16b-3 under the Securities Exchange Act of
1934 Act, as in effect from time to time (the "1934 Act"), including any
successor to such Rule, shall be effective unless such amendment shall be
approved by the requisite vote of the stockholders of the Company entitled to
vote thereon.
Subject to the forgoing, the Board shall have the power and authority to
amend the Plan in any manner advisable in order for Stock Options granted under
the Plan to qualify for the exemption provided by Rule 16b-3 (or any successor
rule relating to exemption from Section 16(b) of the 1934 Act) (including
amendments as a result of changes to Rule 16b-3 or the regulations thereunder to
permit greater flexibility with respect to Stock Options granted under the
Plan), and any such amendment shall, to the extent deemed necessary or advisable
by the Committee, be applicable to any outstanding Stock Options theretofore
granted under the Plan, notwithstanding any contrary provisions contained in any
stock option agreement. To the extent required by the rules and regulations
promulgated under Section 16 of the 1934 Act, ARTICLES 4, 6 and 7 of the Plan
shall not be amended more than once every six months, except that the foregoing
shall not preclude any amendment to comport with changes in the Code, the
Employee Retirement Income Security Act of 1974 or the rules thereunder in
effect from time to time. In the event of any such amendments to the Plan, the
holder of any Stock Option outstanding under the Plan shall, upon request of the
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Committee and as a condition to the exercisability thereof, execute a conforming
amendment in the form prescribed by the Committee to any stock option agreement
relating thereto within such reasonable time as the Committee shall specify in
such request. Notwithstanding anything contained in this Plan to the contrary,
unless required by law, no action contemplated or permitted by this ARTICLE 9
shall adversely affect any rights of Participants or obligations of the Company
to Participants with respect to any Stock Options theretofore granted under the
Plan without the consent of the affected Participant.
ARTICLE 10
ELECTION TO RECEIVE COMMON STOCK
IN LIEU OF RETAINER
-------------------
A Participant may elect to reduce all or part of the cash compensation
otherwise payable for services to be rendered by him or her as a director
(including the annual retainer fee and any fees payable for services on the
Board or any committee thereon) and to receive in lieu thereof shares of Common
Stock. Any such election (a) shall be in writing, (b) shall specify an amount
of such compensation to be received in the form of Common Stock (expressed as a
percentage of the compensation otherwise payable in cash, as an amount in
dollars of compensation otherwise payable in cash or as a type of fee (e.g.,
retainer fee) otherwise payable in cash), (c) shall be made at least six months
prior to the end of the first calendar quarter with respect to which such
election is to apply and (d) may not be revoked or changed thereafter except as
to compensation for services rendered at least six months after any such
election to revoke or change is made in writing. Any such election shall
continue in effect until six months after an election to revoke or change such
election is made in writing.
If a Participant elects pursuant to this ARTICLE 10 to receive Common
Stock, there shall be issued to such Participant promptly after the end of each
calendar quarter with respect to which such election applies a number of shares
of Common Stock equal to the amount of such compensation divided by the Fair
Market Value of a share of Common Stock on the last business day of the calendar
quarter for which the compensation would have been paid in cash in the absence
of such election. To the extent that the application of the foregoing formula
would result in fractional shares of Common Stock being issuable, cash will be
paid to the Participant in lieu of such fractional shares based upon the value
established pursuant to such formula.
ARTICLE 11
TERM
----
The Plan shall be effective from the date that this Plan is approved by the
Board. Unless sooner terminated by action of the Board, the Plan will terminate
on June 12, 2006, but Stock Options granted before the date will continue to be
effective in accordance with their terms and conditions.
ARTICLE 12
CAPITAL ADJUSTMENTS
-------------------
If at any time while the Plan is in effect or unexercised Stock Options are
outstanding there shall be any increase or decrease in the number of issued and
outstanding shares of Common Stock resulting from (1) the declaration or payment
of a stock dividend, (2) any recapitalization resulting
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<PAGE>
in a stock split-up, combination, or exchange of shares of Common Stock, or (3)
other increase or decrease in such shares of Common Stock effected without
receipt of consideration by the Company, then and in such event:
(i) An appropriate adjustment shall be made in the maximum number of shares
of Common Stock then subject to being issued under the Plan, to the end that the
same proportion of the Company's issued and outstanding shares of Common Stock
shall continue to be subject to being so issued;
(ii) Appropriate adjustments shall be made in the number of shares to be
granted under ARTICLE 4 of the Plan, to the end that the same proportion of the
Company's issued and outstanding shares of Common Stock shall be granted under
ARTICLE 4.
(iii) Appropriate adjustments shall be made in the number of shares of
Common Stock and the Option Price thereof then subject to purchase pursuant to
each such Stock Option previously granted and unexercised, to the end that the
same proportion of the Company's issued and outstanding shares of Common Stock
in each such instance shall remain subject to purchase at the same aggregate
Option Price.
Except as otherwise expressly provided herein, the issuance by the Company
of shares of its capital stock of any class, or securities convertible into
shares of capital stock of any class, either in connection with direct sale or
upon the exercise of rights or warrants to subscribe therefor, or upon
conversion of shares or obligations of the Company convertible into such shares
or other securities, shall not affect, and no adjustment by reason thereof shall
be made with respect to, the number of or Option Price of shares of Common Stock
then subject to outstanding Stock Options granted under the Plan.
Upon the occurrence of each event requiring an adjustment with respect to
any Stock Option, the Company shall mail to each Participant its computation of
such adjustment which shall be conclusive and shall be binding upon each such
Participant.
ARTICLE 13
RECAPITALIZATION, MERGER AND CONSOLIDATION
------------------------------------------
(a) The existence of this Plan and Stock Options granted hereunder shall
not affect in any way the right or power of the Company or its stockholders to
make or authorize any or all adjustments, recapitalizations, reorganizations, or
other changes in the Company's capital structure and its business, or any merger
or consolidation of the Company, or any issue of bonds, debentures, preferred or
preference stocks ranking prior to or otherwise affecting the Common stock or
the rights thereof (or any rights, options, or warrants to purchase same), or
the dissolution or liquidation of the Company, or any sale or transfer of all or
any part of its assets or business, or any other corporate act or proceeding,
whether of a similar character or otherwise.
(b) Subject to any required action by the stockholders, if the Company
shall be the surviving or resulting corporation in any merger or consolidation,
any Stock Option granted hereunder shall pertain to and apply to the securities
or rights (including cash, property, or assets) to which a holder of the number
of shares of Common Stock subject to the Stock Option would have been entitled.
(c) In the event of any merger or consolidation pursuant to which the
Company is not the surviving or resulting corporation, there shall be
substituted for each share of Common Stock subject
8
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to the unexercised portions of such outstanding Stock Options, that number of
shares of each class of stock or other securities or that amount of cash,
property, or assets of the surviving or consolidated company which were
distributed or distributable to the stockholders of the Company in respect to
each share of Common Stock held by them, such outstanding Stock Options to be
thereafter exercisable for such stock, securities, cash, or property in
accordance with their terms. Notwithstanding the foregoing, however, all such
Stock Options may be cancelled by the Company as of the effective date of any
such reorganization, merger, consolidation, or any dissolution or liquidation of
the Company by giving notice to each holder thereof or his personal
representative of its intention to do so and by permitting the purchase during
the thirty (30) day period next preceding such effective date of all of the
shares of Common Stock subject to such outstanding Stock Options.
(d) Upon the occurrence of each event requiring an adjustment of the Option
Price or the number of shares of Common Stock purchasable pursuant to Stock
Options granted pursuant to the terms of this Plan, the Company shall mail to
each Participant its computation of such adjustment which shall be conclusive
and shall be binding upon each such Participant.
ARTICLE 14
LIQUIDATION OR DISSOLUTION
--------------------------
In case the Company shall, at any time while any Stock Option under this
Plan shall be in force and remain unexpired, (i) sell all or substantially all
of its property, or (ii) dissolve, liquidate, or wind up its affairs, then each
Participant may thereafter receive upon exercise hereof (in lieu of each share
of Common Stock of the Company which such Participant would have been entitled
to receive) the same kind and amount of any securities or assets as may be
issuable, distributable, or payable upon any such sale, dissolution,
liquidation, or winding up with respect to each share of Common Stock of the
Company. If the Company shall, at any time prior to the expiration of any Stock
Option, make any partial distribution of its assets, in the nature of a partial
liquidation, whether payable in cash or in kind (but excluding the distribution
of a cash dividend payable out of earned surplus and designated as such) then in
such event the prices then in effect with respect to each Stock Option shall be
reduced, on the payment date of such distribution, in proportion to the
percentage reduction in the tangible book value of the shares of the Company's
Common Stock (determined in accordance with generally accepted accounting
principles) resulting by reason of such distribution.
ARTICLE 15
OPTIONS IN SUBSTITUTION FOR
STOCK OPTIONS GRANTED BY OTHER CORPORATIONS
-------------------------------------------
Stock Options may be granted under the Plan from time to time in
substitution for such options held by directors of a corporation who become or
are about to become Outside Directors in connection with a merger or
consolidation of the employing corporation with the Company or the acquisition
by the Company of stock of the employing corporation. The terms and conditions
of the substitute options so granted may vary from the terms and conditions set
forth in this Plan to such extent as the Committee at the time of grant may deem
appropriate to conform, in whole or in part, to the provisions of the options in
substitution for which they are granted.
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ARTICLE 16
MISCELLANEOUS PROVISIONS
------------------------
16.1 INVESTMENT INTENT. The Company may require that there be presented to
and filed with it by any Participant under the Plan, such evidence as it may
deem necessary to establish that the options granted or the shares of Common
Stock to be purchased or transferred are being acquired for investment and not
with a view to their distribution.
16.2 NO EMPLOYMENT RELATIONSHIP. The Participant is not an Employee of the
Company or any Subsidiary. Nothing herein shall be construed to create an
employer-employee relationship between the Company and the Participant.
16.3 INDEMNIFICATION OF BOARD AND COMMITTEE. No member of the Board or the
Committee, nor any officer or employee of the Company acting on behalf of the
Board or the Committee, shall be personally liable for any action,
determination, or interpretation taken or made in good faith with respect to the
Plan, and all members of the Board or the Committee and each and any officer or
employee of the Company acting on their behalf shall, to the extent permitted by
law, be fully indemnified and protected by the Company in respect of any such
action, determination, or interpretation.
16.4 EFFECT OF THE PLAN. Neither the adoption of this Plan nor any action
of the Board or the Committee shall be deemed to give any person any right to be
granted a Stock Option to purchase Common Stock of the Company or any other
rights except as may be evidenced by a Stock Option Agreement, or any amendment
thereto, duly authorized by the Committee and executed on behalf of the Company,
and then only to the extent and upon the terms and conditions expressly set
forth therein.
16.5 COMPLIANCE WITH OTHER LAWS AND REGULATIONS. Notwithstanding anything
contained herein to the contrary, the Company shall not be required to sell or
issue shares of Common Stock under any Stock Option if the issuance thereof
would constitute a violation by the Participant or the Company of any provisions
of any law or regulation of any governmental authority or any national
securities exchange or other forum in which shares of Common Stock are traded
(including without limitation any gaming laws or Section 16 of the Securities
Exchange Act of 1934); and, as a condition of any sale or issuance of shares of
Common Stock under a Stock Option, the Committee may require such agreements or
undertakings, if any, as the Committee may deem necessary or advisable to assure
compliance with any such law or regulation. The Plan, the grant and exercise of
Stock Options hereunder, and the obligation of the Company to sell and deliver
shares of Common Stock, shall be subject to all applicable federal and state
laws, rules and regulations and to such approvals by any government or
regulatory agency as may be required.
16.6 TAX REQUIREMENTS. The Company shall have the right to deduct from all
amounts hereunder paid in cash or other form, any Federal, state, or local taxes
required by law to be withheld with respect to such payments. The Participant
receiving shares of Common Stock issued under the Plan shall be required to pay
the Company the amount of any taxes which the Company is required to withhold
with respect to such shares of Common Stock. Such payments shall be required to
be made prior to the delivery of any certificate representing such shares of
Common Stock. Such payment may be made in cash or by check.
16.7 NON-ASSIGNABILITY. A Stock Option granted to a Participant may not be
transferred or assigned other than by will or the laws of descent and
distribution or pursuant to a qualified domestic relations order as defined in
the Code or Title I of the Employee Retirement Income
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Security Act of 1974, as amended. If the Participant attempts to alienate,
assign, pledge, hypothecate, or otherwise dispose of his Stock Option or any
right thereunder, except as provided for in this Plan or the Stock Option
Agreement, or in the event of any levy, attachment, execution, or similar
process upon the right or interest conferred by this Plan or the Stock Option
Agreement, the Committee may terminate the Participant's Stock Option by notice
to him, and it shall thereupon become null and void.
16.8 USE OF PROCEEDS. Proceeds from the sale of shares of Common Stock
pursuant to Stock Options granted under this Plan shall constitute general funds
of the Company.
16.9 LEGEND. If shares of Common Stock are issued upon exercise of a
Stock Option, and such transaction is not registered under the applicable
federal and state securities laws, the certificate(s) representing such shares
shall bear the following legend, or a similar legend deemed by the Company to
constitute an appropriate notice of the provisions of the applicable securities
laws (any such certificate not having such legend shall be surrendered upon
demand by the Company and so endorsed):
"Shares of stock represented by this certificate have been acquired by the
holder for investment and not for resale, transfer or distribution, have been
issued pursuant to exemptions from the registration requirements of applicable
state and federal securities laws, and may not be offered for sale, sold or
transferred other than pursuant to effective registration under such laws, or in
transactions otherwise in compliance with such laws, and upon evidence
satisfactory to the Company of compliance with such laws, as to which the
Company may rely upon an opinion of counsel satisfactory to the Company."
16.10 COMMISSION. To the extent required by law, stock ownership under the
Plan will be subject to review by each Commission pursuant to the provisions of
the applicable Act. If, after the exercise of any Stock Options or the issuance
of any Common Stock under the Plan, a Participant is found to be disqualified by
a Commission, such person shall dispose of his shares of Common Stock and the
Company shall have the absolute right to repurchase such shares at the then
market price, the Option Price or the Fair Market Value, if any, whichever is
the least.
IN WITNESS WHEREOF, the Company has caused this instrument to be executed
as of July 30, 1996, by its President and Secretary pursuant to prior action
taken by the Board.
HOLLYWOOD CASINO CORPORATION
By: /s/ Edward T. Pratt III
-----------------------
President
Attest:
/s/ William D. Pratt
------------------------------------------
Secretary
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EXHIBIT 11.1
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
STATEMENT RE COMPUTATION OF PER SHARE (LOSSES) INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------
1996 1995 1994 1993 1992
------------- ------------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Calculation of losses:
Net (loss) income before
extraordinary items.............. $(55,293,000) $ (6,520,000) $ 1,744,000 $ 528,000 $(36,122,000)
Preferred stock dividend
requirements..................... - - - (79,000) (113,000)
------------ ------------ ----------- ------------ ------------
Net (loss) income to common
stockholders before
extraordinary items.............. (55,293,000) 6,520,000 1,744,000 449,000 (36,235,000)
Extraordinary items................ - (23,808,000) 126,000 (13,069,000) -
------------ ------------ ----------- ------------ ------------
Net (loss) income to common
stockholders........................ $(55,293,000) $(17,288,000) $ 1,870,000 $(12,620,000) $(36,235,000)
============ ============ =========== ============ ============
Calculation of number of shares:
Class A common stock............... 24,721,000 24,720,000 24,392,000 16,968,000 13,300,000
Exercise of options................ - 130,000 458,000 1,047,000 1,050,000
Exercise of warrants............... - - - 4,791,000 5,700,000
------------ ------------ ----------- ------------ ------------
Weighted average shares
outstanding......................... 24,721,000 24,850,000 24,850,000 22,806,000 20,050,000
============ ============ =========== ============ ============
Per share data:
Net (loss) income to common
stockholders before
extraordinary items.............. $ (2.24) $ 0.26 $ 0.07 $ 0.02 $ (1.81)
Extraordinary items................ - (0.96) 0.01 (0.57) -
------------ ------------ ----------- ------------ ------------
Net (loss) income to common
stockholders........................ $ (2.24) $ (0.70) $ 0.08 $ (0.55) $ (1.81)
============ ============ =========== ============ ============
</TABLE>
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF HOLLYWOOD CASINO CORPORATION
<TABLE>
<CAPTION>
STATE
NAME ADDRESS ORGANIZED
<S> <C> <C>
Hollywood Casino - Aurora, Inc. 13455 Noel Road Illinois
Suite 2200, LB48
Dallas, TX 75240
HWCC-Aurora Management, Inc. 13455 Noel Road Illinois
Suite 2200, LB48
Dallas, TX 75240
HWCC - Tunica, Inc. 13455 Noel Road Texas
Suite 2200, LB48
Dallas, TX 75240
HWCC Development Corp. 13455 Noel Road Texas
Suite 2200, LB48
Dallas, TX 75240
HWCC - Louisiana, Inc. 13455 Noel Road Louisiana
Suite 2200, LB48
Dallas, TX 75240
HWCC - Argentina, Inc. 13455 Noel Road Texas
Suite 2200, LB48
Dallas, TX 75240
Hollywood Management, Inc. 13455 Noel Road Texas
Suite 2200, LB48
Dallas, TX 75240
HWCC - Golf Course Partners, Inc. 13455 Noel Road Delaware
Suite 2200, LB48
Dallas, TX 75240
HWCC - Aviation, Inc. 13455 Noel Road Texas
Suite 2200, LB48
Dallas, TX 75240
</TABLE>
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
-----------------------------------------
To Hollywood Casino Corporation:
As independent public accountants, we hereby consent to the incorporation of our
report included in this Form 10-K, into the Company's previously filed
Registration Statement File No. 333-11163.
ARTHUR ANDERSEN LLP
Roseland, New Jersey
March 28, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF HOLLYWOOD CASINO CORPORATION AND
SUBSIDIARIES AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<CIK> 0000888245
<NAME> HOLLYWOOD CASINO CORPORATION
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1995
<PERIOD-START> JAN-01-1996 JAN-01-1995
<PERIOD-END> DEC-31-1996 DEC-31-1995
<CASH> 21,488 56,538
<SECURITIES> 0 0
<RECEIVABLES> 4,833 34,085
<ALLOWANCES> 1,693 17,675
<INVENTORY> 1,620 5,837
<CURRENT-ASSETS> 39,851 93,850
<PP&E> 249,741 513,209
<DEPRECIATION> 49,740 179,073
<TOTAL-ASSETS> 308,085 514,463
<CURRENT-LIABILITIES> 33,674 72,353
<BONDS> 223,764 487,522
0 0
0 0
<COMMON> 2 2
<OTHER-SE> 45,142 (57,235)
<TOTAL-LIABILITY-AND-EQUITY> 308,085 514,463
<SALES> 0 0
<TOTAL-REVENUES> 530,580 539,943
<CGS> 0 0
<TOTAL-COSTS> 423,738 392,383
<OTHER-EXPENSES> 84,311 85,148
<LOSS-PROVISION> 21,772 3,774
<INTEREST-EXPENSE> 55,989 51,850
<INCOME-PRETAX> (55,230) 6,788
<INCOME-TAX> 63 268
<INCOME-CONTINUING> (55,293) 6,520
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 (23,808)
<CHANGES> 0 0
<NET-INCOME> (55,293) (17,288)
<EPS-PRIMARY> (2.24) (.70)
<EPS-DILUTED> 0 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF HWCC - TUNICA, INC. AND SUBSIDIARY 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> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1995
<PERIOD-START> JAN-01-1996 JAN-01-1995
<PERIOD-END> DEC-31-1996 DEC-31-1995
<CASH> 9,321 11,529
<SECURITIES> 0 0
<RECEIVABLES> 1,985 1,741
<ALLOWANCES> 622 313
<INVENTORY> 672 883
<CURRENT-ASSETS> 13,163 15,033
<PP&E> 115,068 80,473
<DEPRECIATION> 22,275 12,178
<TOTAL-ASSETS> 116,620 122,240
<CURRENT-LIABILITIES> 12,276 13,482
<BONDS> 85,134 85,244
0 0
0 0
<COMMON> 0 0
<OTHER-SE> 19,210 23,426
<TOTAL-LIABILITY-AND-EQUITY> 116,620 122,240
<SALES> 0 0
<TOTAL-REVENUES> 94,524 94,416
<CGS> 0 0
<TOTAL-COSTS> 72,063 63,393
<OTHER-EXPENSES> 16,913 16,572
<LOSS-PROVISION> 539 449
<INTEREST-EXPENSE> 9,225 10,155
<INCOME-PRETAX> (4,216) 3,847
<INCOME-TAX> 0 (694)
<INCOME-CONTINUING> (4,216) 4,541
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 (9,614)
<CHANGES> 0 0
<NET-INCOME> (4,216) (5,073)
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
</TABLE>
