<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM-10Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended JUNE 30, 1997
-------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________________ to ____________________
Commission file number 33-48887
--------------------
HOLLYWOOD CASINO CORPORATION
HWCC-TUNICA, INC.
- --------------------------------------------------------------------------------
(Exact name of each Registrant as specified in its charter)
DELAWARE 75-2352412
TEXAS 75-2513808
- -------------------------------------------- --------------------------------
(States or other jurisdictions of (I.R.S. Employer
incorporation or organization) Identification No.'s)
TWO GALLERIA TOWER, SUITE 2200
13455 NOEL ROAD, LB 48
DALLAS, TEXAS 75240
- -------------------------------------------- --------------------------------
(Address of principal executive offices) (Zip Code)
(Registrants' telephone number, including area code) (972) 392-7777
--------------
(NOT APPLICABLE)
- -------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether each of the Registrants (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that each
of the Registrants was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. YES X NO
------ ------
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
<TABLE>
<S> <C> <C>
Registrant Class Outstanding at August 11, 1997
- ------------------------------- ------------------------------ ------------------------------
HOLLYWOOD CASINO CORPORATION COMMON STOCK, $.0001 PAR VALUE 24,859,968 SHARES
HWCC-TUNICA, INC. COMMON STOCK, $.01 PAR VALUE 1,000 SHARES
</TABLE>
1
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
PART I: FINANCIAL INFORMATION
- ------------------------------
INTRODUCTORY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------
Hollywood Casino Corporation ("HCC" or the "Company") develops, owns and
operates riverboat and land-based casino entertainment facilities under the
service mark Hollywood Casino(R). Through its subsidiaries, HCC currently owns
and operates a riverboat gaming facility located in Aurora, Illinois (the
"Aurora Casino") and a casino and hotel complex in Tunica County, Mississippi
(the "Tunica Casino"); and is actively pursuing potential gaming opportunities
in domestic and foreign jurisdictions where gaming is legalized or is being
actively considered. Approximately 47% of HCC's outstanding common shares are
listed and traded on the Nasdaq National Market tier of the Nasdaq Stock Market
under the symbol HWCC. The remaining outstanding HCC common shares are owned by
certain general partnerships and trusts controlled by Jack E. Pratt, Edward T.
Pratt, Jr. and William D. Pratt and by other family members (collectively, the
"Pratt Family").
HCC owns all of the outstanding common stock of both Hollywood Casino -
Aurora, Inc. ("HCA") and HWCC - Tunica, Inc. ("HCT"). HCA is an Illinois
corporation organized by the Pratt Family during 1990 for the purpose of
developing and owning the Aurora Casino. HCT is a Texas corporation formed by
HCC during 1993 to acquire and complete the Tunica Casino. Prior to December
31, 1996, HCC also owned approximately 80% of the common stock of Greate Bay
Casino Corporation ("GBCC"), a Delaware corporation, whose principal assets are
the Sands Hotel and Casino in Atlantic City, New Jersey (the "Sands") and
management and consulting agreements on the Aurora Casino and the Tunica Casino,
respectively. On December 31, 1996, HCC distributed the common stock of GBCC
owned by HCC to its shareholders. As a result of the dividend, GBCC is no
longer a subsidiary of HCC.
As further discussed in the Notes to Consolidated Financial Statements, HCC
issued $210,000,000 of 12 3/4% Senior Secured Notes (the "Senior Secured Notes")
due November 1, 2003, discounted to yield 13 3/4% per annum, through a public
offering in October 1995. The Senior Secured Notes are unconditionally
guaranteed on a senior secured basis by HCT and by certain future subsidiaries
of HCC. The Senior Secured Notes are secured by, among other things, (i)
substantially all of the assets of HCT, (ii) a first mortgage limited to
approximately $39 million on substantially all of the assets of HCA and (iii) a
pledge of the capital stock of certain subsidiaries of HCC including HCA and
HCT. Accordingly, the financial statements of HCA and HCT are also included
herein.
The consolidated financial statements and the financial statements as of June
30, 1997 and for the three and six month periods ended June 30, 1997 and 1996
have been prepared by HCC, HCA and HCT without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. In the opinion of
management, these consolidated financial statements and financial statements
contain all adjustments (consisting of only normal recurring adjustments)
necessary to present fairly the consolidated financial position of HCC and HCT
and the financial position of HCA as of June 30, 1997, and the results of their
operations for the three and six month periods ended June 30, 1997 and 1996 and
cash flows for the six month periods ended June 30, 1997 and 1996.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. These financial statements should be read in
conjunction with the financial statements and notes thereto included in HCC and
HCT's 1996 Annual Report on Form 10-K.
Historically, the Aurora Casino has experienced some degree of
seasonality and management believes that seasonality may also cause fluctuations
in reported results at the Tunica Casino. Consequently, the results of
operations for the three and six month periods ended June 30, 1997 are not
necessarily indicative of the operating results to be reported for the full
year.
2
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
------------- -------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 26,807,000 $ 21,488,000
Accounts receivable, net of allowances of
$1,791,000 and $1,693,000, respectively 2,788,000 3,140,000
Inventories 1,454,000 1,620,000
Deferred income taxes 3,257,000 4,271,000
Prepaid expenses and other
current assets 2,339,000 1,691,000
Due from affiliates 7,305,000 7,641,000
------------ ------------
Total current assets 43,950,000 39,851,000
------------ ------------
Investment in unconsolidated affiliate 2,000,000 -
------------ ------------
Property and Equipment:
Land and land improvements 5,855,000 5,845,000
Buildings and improvements 119,683,000 119,501,000
Riverboats and barges 39,494,000 39,494,000
Operating equipment 68,732,000 69,713,000
Construction in progress 1,056,000 687,000
------------ ------------
234,820,000 235,240,000
Less - accumulated depreciation
and amortization (58,398,000) (49,740,000)
------------ ------------
Net property and equipment 176,422,000 185,500,000
------------ ------------
Other Assets:
Deferred financing costs 6,107,000 6,565,000
Notes receivable 10,000,000 10,000,000
Land rights 7,556,000 7,658,000
Due from affiliates, net of valuation allowance 28,000,000 36,597,000
Land held for sale, net of allowance 14,501,000 14,501,000
Other assets 6,600,000 7,413,000
------------ ------------
Total other assets 72,764,000 82,734,000
------------ ------------
$295,136,000 $308,085,000
============ ============
</TABLE>
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated balance sheets.
3
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
-------------- --------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term debt
and capital lease obligations $ 9,247,000 $ 8,282,000
Accounts payable 3,288,000 5,407,000
Accrued liabilities -
Salaries and wages 3,744,000 3,531,000
Interest 4,734,000 4,734,000
Insurance 2,766,000 2,140,000
Other 4,488,000 5,179,000
Due to affiliates 498,000 2,534,000
Other current liabilities 2,587,000 1,867,000
------------- -------------
Total current liabilities 31,352,000 33,674,000
------------- -------------
Long-Term Debt 200,469,000 202,057,000
------------- -------------
Capital Lease Obligations 21,416,000 21,707,000
------------- -------------
Other Noncurrent Liabilities 5,663,000 5,503,000
------------- -------------
Commitments and Contingencies
Minority Interest in Limited Partnership 780,000 -
------------- -------------
Shareholders' Equity:
Common Stock:
Class A common stock, $.0001 par value per share;
50,000,000 shares authorized; 24,860,000 and
24,760,000 shares issued and outstanding, respectively 2,000 2,000
Class B, non-voting, $.01 par value per share;
10,000,000 shares authorized; no shares issued - -
Additional paid-in capital 223,234,000 235,606,000
Accumulated deficit (187,780,000) (190,464,000)
------------- -------------
Total shareholders' equity 35,456,000 45,144,000
------------- -------------
$ 295,136,000 $ 308,085,000
============= =============
</TABLE>
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated balance sheets.
4
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
----------------------------
1997 1996
------------ -------------
<S> <C> <C>
Revenues:
Casino $62,215,000 $127,395,000
Rooms 2,553,000 4,600,000
Food and beverage 7,008,000 15,670,000
Other 780,000 3,440,000
----------- ------------
72,556,000 151,105,000
Less - promotional allowances (6,255,000) (12,844,000)
----------- ------------
Net revenues 66,301,000 138,261,000
----------- ------------
Expenses:
Casino 42,510,000 104,049,000
Rooms 461,000 1,707,000
Food and beverage 2,201,000 4,984,000
Other 771,000 1,498,000
General and administrative 4,269,000 9,652,000
Management and consulting fees 300,000 -
Depreciation and amortization 4,944,000 11,041,000
Development 590,000 345,000
----------- ------------
Total expenses 56,046,000 133,276,000
----------- ------------
Income from operations 10,255,000 4,985,000
----------- ------------
Non-operating income (expenses):
Interest income 418,000 949,000
Interest expense, net of capitalized interest
of $391,000 in 1996 (7,627,000) (14,540,000)
Loss on disposal of assets (4,000) (22,000)
----------- ------------
Total non-operating expenses, net (7,213,000) (13,613,000)
----------- ------------
Income (loss) before income taxes and other item 3,042,000 (8,628,000)
Income tax (provision) benefit (1,068,000) 378,000
----------- ------------
Income (loss) before other item 1,974,000 (8,250,000)
Minority interest in earnings of Limited
Partnership (Note 1) (781,000) -
----------- ------------
Net income (loss) $ 1,193,000 $ (8,250,000)
=========== ============
Net income (loss) per common share $.05 $(.33)
=========== ============
</TABLE>
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated statements.
5
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-----------------------------
1997 1996
------------- -------------
<S> <C> <C>
Revenues:
Casino $125,750,000 $249,885,000
Rooms 4,728,000 8,950,000
Food and beverage 13,722,000 30,895,000
Other 1,602,000 6,992,000
------------ ------------
145,802,000 296,722,000
Less - promotional allowances (12,031,000) (25,346,000)
------------ ------------
Net revenues 133,771,000 271,376,000
------------ ------------
Expenses:
Casino 84,981,000 202,892,000
Rooms 919,000 3,207,000
Food and beverage 4,409,000 9,742,000
Other 1,544,000 2,757,000
General and administrative 8,320,000 19,064,000
Management and consulting fees 3,327,000 -
Depreciation and amortization 9,860,000 21,636,000
Development 895,000 542,000
------------ ------------
Total expenses 114,255,000 259,840,000
------------ ------------
Income from operations 19,516,000 11,536,000
------------ ------------
Non-operating income (expenses):
Interest income 823,000 1,968,000
Interest expense, net of capitalized interest
of $472,000 in 1996 (15,196,000) (29,461,000)
Gain (loss) on disposal of assets 411,000 (23,000)
------------ ------------
Total non-operating expenses, net (13,962,000) (27,516,000)
------------ ------------
Income (loss) before income taxes and other item 5,554,000 (15,980,000)
Income tax (provision) benefit (2,089,000) 1,070,000
------------ ------------
Income (loss) before other item 3,465,000 (14,910,000)
Minority interest in earnings of
Limited Partnership (Note 1) (781,000) -
------------ ------------
Net income (loss) $ 2,684,000 $(14,910,000)
============ ============
Net income (loss) per common share $.11 $(.60)
============ ============
</TABLE>
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated statements.
6
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
----------------------------
1997 1996
------------ -------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ 2,684,000 $(14,910,000)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization, including accretion of debt discount 10,295,000 22,015,000
(Gain) loss on disposal of assets (411,000) 23,000
Minority interest in earnings of limited partnership 781,000 -
Provision for doubtful accounts 335,000 1,343,000
Deferred income tax provision (benefit) 1,732,000 (98,000)
Decrease in accounts receivable 17,000 894,000
(Decrease) increase in accounts payable and accrued expenses (1,971,000) 7,447,000
Net change in other current assets and liabilities 87,000 (840,000)
Net change in other noncurrent assets and liabilities 149,000 (510,000)
----------- ------------
Net cash provided by operating activities 13,698,000 15,364,000
----------- ------------
INVESTING ACTIVITIES:
Net property and equipment additions (2,210,000) (30,763,000)
Collections on notes receivable - 54,000
Proceeds from sale of assets 2,654,000 66,000
Obligatory investments - (1,432,000)
Investments in unconsolidated affiliates (2,000,000) -
Increase in cash from purchase of limited partnership interest 451,000 -
Decrease in cash restricted for construction projects - 13,252,000
----------- ------------
Net cash used in investing activities (1,105,000) (18,823,000)
----------- ------------
FINANCING ACTIVITIES:
Borrowings on credit facilities - 2,000,000
Deferred financing costs (24,000) (86,000)
Repayments of long-term debt (3,955,000) (3,112,000)
Payments on capital lease obligations (1,194,000) (1,238,000)
Limited partnership distributions (2,101,000) -
----------- ------------
Net cash used in financing activities (7,274,000) (2,436,000)
----------- ------------
Net increase (decrease) in cash and cash equivalents 5,319,000 (5,895,000)
Cash and cash equivalents at beginning of period 21,488,000 56,538,000
----------- ------------
Cash and cash equivalents at end of period $26,807,000 $ 50,643,000
=========== ============
</TABLE>
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated statements.
7
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) ORGANIZATION AND BUSINESS
Hollywood Casino Corporation ("HCC" or the "Company"), is a Delaware
corporation which was organized and incorporated on November 5, 1990.
Approximately 53% of the issued and outstanding stock of HCC is owned by certain
general partnerships and trusts controlled by Jack E. Pratt, Edward T. Pratt,
Jr. and William D. Pratt and by other family members (collectively, the "Pratt
Family").
HCC owns all of the outstanding common stock of both Hollywood Casino -
Aurora, Inc. ("HCA") and HWCC - Tunica, Inc. ("HCT"). HCA is an Illinois
corporation organized during 1990 which owns and operates a 32,100 square foot
riverboat gaming operation together with docking and other entertainment
facilities under the service mark Hollywood Casino(R) located in Aurora,
Illinois (the "Aurora Casino"). HCT is a Texas corporation formed by HCC during
1993 which owns and operates a 54,000 square foot gaming facility, adjacent
support facilities and a 506-room hotel complex under the service mark Hollywood
Casino(R) in northern Tunica County, Mississippi (the "Tunica Casino"). The
Aurora Casino and the Tunica Casino commenced operations in June 1993 and August
1994, respectively.
The Company estimates that its two gaming operations derive a significant
amount of their gaming revenues from patrons living in areas surrounding the
sites where the Company's gaming operations are located. Competition within the
Company's gaming markets is intense and management believes that this
competition will continue in the future.
Prior to December 31, 1996, HCC also owned approximately 80% of the common
stock of Greate Bay Casino Corporation ("GBCC"), also a Delaware corporation.
On December 31, 1996, HCC distributed to its shareholders the common stock of
GBCC owned by HCC. As a result of the dividend, GBCC is no longer a subsidiary
of HCC. The accompanying consolidated financial statements include GBCC's
operations and cash flows for all periods during 1996; however the accompanying
consolidated balance sheet at December 31, 1996 does not include the assets or
liabilities of GBCC. GBCC's principal assets are the Sands Hotel and Casino in
Atlantic City, New Jersey (the "Sands") and management and consulting contracts
with the Aurora Casino and the Tunica Casino, respectively.
Effective as of April 1, 1997, HCC acquired the general partnership interest
in Pratt Management, L.P. ("PML"), the limited partnership which holds the
management contract on the Aurora Casino, from PPI Corporation, a wholly owned
subsidiary of GBCC. For all periods subsequent to the acquisition date (April
1, 1997), PML is reflected as a consolidated subsidiary of HCC. The assets and
liabilities of PML were recorded at historical cost at the date of acquisition
with the difference between acquisition cost and the historical net book value
($12,747,000) recorded as a charge to paid-in capital. PML earns management
fees from the Aurora Casino and incurs operating and other expenses with respect
to its management thereof. As general partner, HCC receives 99% of the first
$84,000 of net income earned by PML each month together with 1% of any income
earned above such amount. The remaining limited partnership interest continues
to be held by a subsidiary of GBCC and is reflected in the accompanying
consolidated financial statements as a minority interest.
The accompanying consolidated financial statements also reflect HCT's
initial one-third investment in Tunica Golf Course LLC under the equity method
of accounting. This limited liability company was organized in 1996 to develop
and operate a golf course to be used by patrons of the Tunica Casino and other
participating casino/hotel properties. The golf course is presently scheduled
for completion in 1998.
8
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
HCC is self insured for a portion of its general liability, certain health
care and other liability exposures. Accrued insurance includes estimates of
such accrued liabilities based on an evaluation of the merits of individual
claims and historical claims experience; accordingly, HCC's ultimate liability
may differ from the amounts accrued.
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets" requires, among other things, that an entity
review its long-lived assets and certain related intangibles for impairment
whenever changes in circumstances indicate that the carrying amount of an asset
may not be fully recoverable. During 1996, certain real property held as
potential gaming development sites in Texas was offered for sale; consequently,
management conducted a review to determine its estimate of net realizable value
with respect to these properties. As a result of its review, HCC recorded a
valuation allowance in the amount of $3,400,000 related to its long-lived
assets.
Net income (loss) per common share for all periods is calculated by dividing
the net income (loss) by the weighted average number of shares of common stock
and common stock equivalents outstanding. Common stock equivalents are included
in the calculation of net income per share for periods during which income was
realized. All common stock equivalents are excluded from the calculation of net
loss per share for periods during which a loss was incurred as the effect of
their inclusion would be antidilutive. The weighted average number of shares of
common stock and common stock equivalents outstanding used for earnings per
share calculation purposes was 24,851,000 and 24,806,000, respectively, for the
three and six month periods ended June 30, 1997 and 24,720,000, for both the
three and six month periods ended June 30, 1996.
The Financial Accounting Standards Board has issued a new standard,
"Earnings per Share" ("SFAS 128"). SFAS 128 provides for revisions to the
current method of calculating earnings per share and for the disclosure of
certain information about the capital structure of the reporting entity. SFAS
128 will become effective on December 15, 1997; early adoption is not permitted.
HCC does not believe the new pronouncement will impact its present calculation
of earnings per share.
The consolidated financial statements as of June 30, 1997 and for the three
and six month periods ended June 30, 1997 and 1996 have been prepared by HCC
without audit. In the opinion of management, these consolidated financial
statements contain all adjustments (consisting of only normal recurring
adjustments) necessary to present fairly the consolidated financial position of
HCC as of June 30, 1997, the results of its operations for the three and six
month periods ended June 30, 1997 and 1996 and its cash flows for the six month
periods ended June 30, 1997 and 1996.
9
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(2) SHORT-TERM CREDIT FACILITIES
HCT has a bank credit facility in the amount of $1,000,000 available through
August 15, 1997. No borrowings were outstanding under the credit facility at
either June 30, 1997 or December 31, 1996. Borrowings under the line of credit
accrue interest at the bank's prime lending rate plus 1 1/2% per annum. The line
of credit agreement requires the maintenance of certain financial ratios and
balances in addition to the provision of certain financial reports.
(3) LONG-TERM DEBT AND PLEDGE OF ASSETS
Substantially all of HCC's assets are pledged in connection with HCC's long-
term indebtedness.
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
------------- -------------
<S> <C> <C>
Indebtedness of HCC:
12 3/4% Senior Secured Notes, due 2003, net
of discount of $8,692,000 and $9,127,000,
respectively (a) $201,308,000 $200,873,000
Promissory note to affiliate (Note 6) 3,722,000 -
Term note - 2,150,000
------------ ------------
205,030,000 203,023,000
------------ ------------
Indebtedness of HCA:
Promissory note to bank (b) 1,435,000 2,472,000
Equipment loans 959,000 1,472,000
------------ ------------
2,394,000 3,944,000
------------ ------------
Indebtedness of HCT:
Equipment loans 1,224,000 1,401,000
------------ ------------
Total indebtedness 208,648,000 208,368,000
Less - current maturities (8,179,000) (6,311,000)
------------ ------------
Total long-term debt $200,469,000 $202,057,000
============ ============
</TABLE>
- ---------------------------
(a) During October 1995, HCC completed the refinancing of certain outstanding
indebtedness through a public offering of $210,000,000 of 12 3/4% Senior
Secured Notes (the "Senior Secured Notes") due November 1, 2003, discounted
to yield 13 3/4% per annum (the "HCC Refinancing"). In addition to
refinancing existing debt, proceeds from the HCC Refinancing were used to
finance construction of a 352-room hotel tower and related amenities and to
fund development and
10
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
construction of a themed gaming area at the Tunica Casino; to fund HCA's
required contribution of $4,000,000 for construction of a new 500-space
parking garage (see Note 4); and, to the extent available, for working
capital purposes. Interest on the Senior Secured Notes is payable
semiannually on May 1 and November 1 of each year commencing on May 1,
1996.
The Senior Secured Notes are unconditionally guaranteed on a senior secured
basis by HCT and may be guaranteed by certain future subsidiaries of HCC.
HCA is not a guarantor. The Senior Secured Notes and related guarantees
are secured by, among other things, (i) substantially all of the assets of
HCT and future guarantors, (ii) a first mortgage limited to approximately
$39 million on substantially all of the assets of HCA, (iii) a pledge of
the capital stock of certain subsidiaries of HCC and (iv) the collateral
assignment of any future management contracts entered into by HCC.
The Senior Secured Notes are redeemable at the option of HCC any time on or
after November 1, 1999 at 106.375% of the then outstanding principal
amount, decreasing to 103.1875% and 100%, respectively, on November 1, 2000
and 2001. Commencing with the November 1, 1997 interest payment date and
at each subsequent interest payment date, HCC will be required to make an
offer to purchase not more than $2,500,000 in principal amount of the
Senior Secured Notes at a price of 106.375% of the principal amount
tendered.
The indenture to the Senior Secured Notes contains various provisions
limiting the ability of HCC and certain defined subsidiaries to, among
other things, pay dividends or make other restricted payments; incur
additional indebtedness or issue preferred stock; create liens; create
dividend or other payment restrictions affecting certain defined
subsidiaries; enter into mergers or consolidations or make sales of all or
substantially all assets of HCC, HCT or any future guarantor; and enter
into transactions with certain affiliates.
(b) During February 1995, HCA entered into a $5,000,000 bank promissory note
agreement. The note accrues interest at the bank's prime lending rate plus
1% per annum. Interest only was payable during the first six months.
Commencing September 1, 1995, principal and interest are payable monthly
based on a 30-month amortization schedule with the final payment due on
February 1, 1998.
Scheduled payments of long-term debt as of June 30, 1997 are set forth
below:
<TABLE>
<S> <C>
1997 (six months) $ 4,523,000
1998 6,663,000
1999 6,031,000
2000 6,059,000
2001 5,833,000
Thereafter 188,231,000
------------
Total $217,340,000
============
</TABLE>
11
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
Interest paid, net of capitalized interest, amounted to $14,761,000 and
$30,242,000, respectively, during the six month periods ended June 30, 1997 and
1996.
(4) CAPITAL LEASES
HCA leases two parking garages under capital lease agreements. The first
such lease has an initial term of 30 years commencing in June 1993 with the
right to extend the term to a maximum of 99 years. Rental payments during the
first 20 years equal the City of Aurora's financing costs related to its
$10,000,000 general obligation bond issue used to finance the construction of
the parking garage. The general obligation bond issue includes interest at
rates between 7% and 7 5/8% per annum. In September 1996, HCA and the Aurora
Metropolitan Exposition, Auditorium and Office Building Authority ("ACCA")
completed the joint construction of a new five-story, approximately 500-space
parking garage directly across the street from, and connected by a climate-
controlled tunnel to, the Aurora Casino's Pavilion. The garage provides
additional parking for patrons of the Aurora Casino and contains approximately
1,500 square feet of retail space. ACCA financed a portion of the construction
costs through an $11,500,000, 7.5% industrial revenue bond issue which yielded
proceeds of approximately $10,500,000. HCA funded all remaining construction
costs and escrowed a total of $3,500,000 at the rate of $400,000 per month
beginning in September 1995 towards satisfaction of its obligations under the
agreement. HCA additionally agreed to make payments to ACCA during construction
equal to the financing costs due in July 1996 relating to the ACCA industrial
revenue bond issue. The facility is owned by ACCA and operated by HCA pursuant
to a 30 year lease with the right to extend the lease for up to 20 additional
years. Rental payments during the first 15 years equal ACCA's debt service
costs related to the industrial revenue bond issue. In addition, HCA pays ACCA
base rent equal to $15,000 per month, subject to a credit of $615,000 at the
rate of $10,000 per month for improvements made to ACCA's North Island Center
banquet and meeting facilities. HCA is also responsible for additional rent,
consisting of costs such as real estate taxes, maintenance costs, insurance
premiums and utilities, arising out of its operation of both parking garages.
HCA also leases certain equipment under capital lease agreements which
provide for interest at the rate of 11.2% and expire at various dates through
1998. HCT leases certain gaming and other equipment under capital lease
agreements which provide for interest at rates ranging up to 13 1/4% per annum
and which expire during 1997.
The original cost of HCA's parking garages is included in buildings in the
accompanying consolidated balance sheets at both June 30, 1997 and December 31,
1996 in the amount of $27,358,000. Assets under capital leases with an original
cost of $7,260,000 are included in operating equipment in the accompanying
consolidated balance sheets at both June 30, 1997 and December 31, 1996.
Amortization expense with respect to these assets amounted to $479,000 and
$652,000, respectively, during the three month periods ended June 30, 1997 and
1996 and $1,123,000 and $1,310,000, respectively during the six month periods
ended June 30, 1997 and 1996.
12
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
Future minimum lease payments under capital lease obligations as of June 30,
1997 were as follows:
<TABLE>
<S> <C>
1997 (six months) $ 1,621,000
1998 2,494,000
1999 2,457,000
2000 2,483,000
2001 2,532,000
Thereafter 26,719,000
------------
Total minimum lease payments 38,306,000
Less amount representing interest (15,822,000)
------------
Present value of future
minimum lease payments 22,484,000
Current capital lease obligation (1,068,000)
------------
Long-term capital lease obligation $ 21,416,000
------------
</TABLE>
(5) INCOME TAXES
Components of HCC's (provision) benefit for income taxes consisted of the
following:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- --------------------------
1997 1996 1997 1996
----------- -------- ------------ ----------
<S> <C> <C> <C> <C>
Current:
Federal $ - $ - $ - $ -
State (207,000) 347,000 (357,000) 972,000
Deferred:
Federal (805,000) - (1,606,000) -
State (56,000) 31,000 (126,000) 98,000
----------- -------- ------------ ----------
$(1,068,000) $378,000 $ (2,089,000) $1,070,000
=========== ======== ============ ==========
</TABLE>
No federal income taxes were paid by HCC during either of the six month
periods ended June 30, 1997 or 1996; state tax payments of $196,000 and $121,000
were made during the six month periods ended June 30, 1997 and 1996,
respectively.
Federal and state income tax provisions or benefits are based upon estimates
of the results of operations for the current period and reflect the
nondeductibility for income tax purposes of certain items, including certain
amortization, meals and entertainment and other expenses. Quarterly income tax
provisions or benefits are determined by applying the resulting effective income
tax rate to the results of operations for the quarter.
13
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
At June 30, 1997, HCC and its subsidiaries have tax net operating loss
carryforwards ("NOL's") totaling approximately $12,500,000, none of which begin
to expire until the year 2010. Additionally, HCC and its subsidiaries have
various tax credits available totaling approximately $213,000, none of which
begin to expire until the year 2008. Statement of Financial Accounting Standards
No. 109, "Accounting for Income Taxes" ("SFAS 109") requires that the tax
benefit of such NOL's and credit carryforwards, together with the tax benefit of
deferred tax assets resulting from temporary differences, be recorded as an
asset and, to the extent that management can not assess that the utilization of
all or a portion of such NOL's and deferred tax assets is more likely than not,
a valuation allowance should be recorded. Management believes that it is more
likely than not that future consolidated taxable income of HCC (primarily from
the Aurora Casino and the Tunica Casino) will be sufficient to utilize at least
a portion of the net deferred tax assets. Accordingly, valuation allowances
have been established which result in net deferred tax assets of $4,825,000 and
$6,513,000 at June 30, 1997 and December 31, 1996, respectively.
The ultimate recognition of the current amount of net deferred tax assets is
dependent on HCC and its subsidiaries' ability to generate approximately
$14,000,000 of taxable income for federal tax purposes prior to the expiration
dates of the NOL's and tax credit carryforwards and the reversal of other
temporary differences.
Sales by HCC or existing stockholders of common stock can cause a "change of
control", as defined in Section 382 of the Internal Revenue Code of 1986, as
amended, which would limit the ability of HCC or its subsidiaries to utilize
these loss carryforwards in later tax periods. Should such a change of control
occur, the amount of loss carryforwards available for use in any one year would
most likely be substantially reduced. Future treasury regulations,
administrative rulings or court decisions may also effect HCC's utilization of
its loss carryforwards.
The Internal Revenue Service is currently examining the consolidated Federal
income tax returns of HCC for the years 1993 and 1994. Management believes that
the results of such examination will not have a material adverse effect on the
consolidated financial position of HCC.
14
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
The components of the net deferred tax asset were as follows:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
------------ -------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 4,284,000 $ 6,746,000
Allowance for doubtful accounts 8,703,000 7,316,000
Investment and jobs tax credits 213,000 213,000
Basis in limited partnership 2,890,000 -
Other liabilities and accruals 1,758,000 3,179,000
Benefits accrual 1,706,000 1,704,000
Other 1,176,000 750,000
----------- -----------
Total deferred tax assets 20,730,000 19,908,000
----------- -----------
Deferred tax liabilities:
Depreciation and amortization (4,931,000) (4,395,000)
Amortization of note discount (1,712,000) (2,628,000)
----------- -----------
Total deferred tax liabilities (6,643,000) (7,023,000)
----------- -----------
Net deferred tax asset 14,087,000 12,885,000
Valuation allowance (9,262,000) (6,372,000)
----------- -----------
$ 4,825,000 $ 6,513,000
=========== ===========
</TABLE>
(6) TRANSACTIONS WITH RELATED PARTIES
As a result of the distribution by HCC of the GBCC common stock it owned,
GBCC is no longer a consolidated subsidiary. Accordingly, transactions between
HCC and GBCC and its subsidiaries which previously eliminated in consolidation
are now considered transactions with affiliates.
HCC had advanced funds to GBCC totaling $6,750,000 and $7,750,000 as of June
30, 1997 and December 31, 1996, respectively. Included in the balance at
December 31, 1996 was a $1,000,000, 14% note receivable from PML which, together
with the related interest, is now eliminated in consolidation as a result of
HCC's acquisition of the general partnership interest in PML. During the third
quarter of 1996, GBCC borrowed $6,500,000 from HCC on a demand basis with
interest at the rate of 13 3/4% per annum payable quarterly commencing October
1, 1996. An additional $250,000 note is due on demand, or if no demand is made,
on April 1, 1998 and bears interest at the rate of 14% per annum, payable
semiannually. Interest receivable amounting to $364,000 and $323,000 is included
in due from affiliates in the accompanying consolidated balance sheets at June
30, 1997 and December 31, 1996, respectively. The payment of principal and
interest to HCC on such borrowings is subject to the approval of the New Jersey
Casino Control Commission. Interest income accrued on loans and advances to
GBCC amounted to $235,000 and $502,000, respectively, during the three and six
month periods ended June 30, 1997.
15
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
In connection with its acquisition of the general partnership interest in PML
(see Note 1), HCC issued a five-year note in the original amount of $3,800,000
and assigned $13,750,000 undiscounted principal amount of PPI Funding Notes (see
below) and $350,000 accrued interest due from GBCC to PPI Corporation. The
$3,800,000 note is payable in monthly installments of $83,000, including
interest at the rate of 14% per annum, commencing on May 1, 1997, with
additional quarterly variable principal payments commencing on July 1, 1997 in
an amount equal to the general partner's share of quarterly cash distributions,
as defined, from PML. HCC incurred interest expense with respect to the note
amounting to $131,000 during the three month period ended June 30, 1997;
interest payable of $43,000 to GBCC is included in interest payable in the
accompanying consolidated financial statements at June 30, 1997.
On February 17, 1994, PPI Funding Corp., a subsidiary of GBCC, issued
$40,524,000 discounted principal amount of new deferred interest notes (the "PPI
Funding Notes") to HCC in exchange for $38,779,000 principal amount of 15 1/2%
unsecured notes (the "PCPI Notes") held by HCC and issued by PCPI Funding Corp.,
another subsidiary of GBCC. The increased principal amount of the new notes
included a call premium on the exchange ($1,745,000) equal to 4 1/2% of the
principal amount of PCPI Notes exchanged; such premium was also paid to third
party holders of $58,364,000 principal amount of PCPI Notes concurrently
redeemed. The PPI Funding Notes were discounted to yield interest at the rate
of 14 7/8% per annum and had an original face value of $110,636,000. Subsequent
principal payments by PPI Funding Corp. reduced the maturity value of the notes
to $98,353,000 at December 31, 1996. During the second quarter of 1997, HCC
assigned $13,750,000 undiscounted principal amount of the PPI Funding Notes to
PPI Corporation as consideration, in part, for HCC's acquisition of the general
partnership interest in PML. Such assignment reduced the maturity value of the
notes to $84,603,000. Payment of interest is deferred through February 17, 2001
at which time interest will become payable semiannually, with the unpaid
principal balance due on February 17, 2006. The PPI Funding Notes are
collateralized by a pledge of all of the common stock of a subsidiary of GBCC.
It was anticipated that HCC's primary method of collection with respect to
the PPI Funding Notes would be through the utilization of NOL's of GBCC. As
GBCC is no longer a consolidated subsidiary for federal income tax purposes,
this means of collection is no longer available to HCC. Accordingly, at June
30, 1997 and December 31, 1996, HCC provided valuation allowances in the
amounts of $22,218,000 and $18,741,000, respectively, to reduce the outstanding
principal balance on the PPI Funding Notes to their estimated realizable values
of $28,000,000 and $35,597,000, respectively. Management anticipates that the
remaining balance will be realized through a combination of additional asset
acquisitions from GBCC and its subsidiaries and repayments from GBCC.
Pursuant to a management agreement, HCA pays PML a base management fee equal
to 5% of the Aurora Casino's operating revenues (as defined in the agreement)
subject to a maximum of $5,500,000 annually, and an incentive fee equal to 10%
of gross operating profit (as defined in the agreement to generally include all
revenues, less expenses other than depreciation, interest, amortization and
taxes). HCA incurred such fees totaling $2,727,000 during the three month period
ended March 31, 1997. Unpaid fees amounting to $2,096,000 were included in
amounts due to affiliates in the accompanying consolidated
16
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
balance sheet at December 31, 1996. Subsequent to March 31, 1997, PML is
included in the consolidated financial statements of HCC; accordingly, both
HCA's management fee expense and fees payable to PML are eliminated in
consolidation.
Pursuant to a ten-year consulting agreement with GBCC, HCT incurs a monthly
consulting fee of $100,000. Such fees amounted to $300,000 and $600,000,
respectively, for the three and six month periods ended June 30, 1997.
Various subsidiaries of GBCC provide services to HCA, HCT and, since April 1,
1997, to PML including certain administrative and marketing services. Total
charges during the three and six month periods ended June 30, 1997 amounted to
$289,000 and $557,000, respectively. Unpaid fees amounting to $218,000 and
$128,000 are included in due to affiliates in the accompanying consolidated
balance sheets at June 30, 1997 and December 31, 1996, respectively.
HCT and Advanced Casino Systems Corporation ("ACSC"), a subsidiary of GBCC,
entered into a Computer Services Agreement dated as of January 1, 1994 and
renewed through December 31, 1999. The agreement provides, among other things,
that ACSC will sell HCT computer hardware and information systems equipment and
will license or sublicense to HCT computer software necessary to operate HCT's
casino hotel and related facilities and business operations. HCT pays ACSC for
such equipment and licenses such software at amounts and on terms and conditions
that ACSC provides to unrelated third parties as well as a fixed license fee of
$33,600 per month ($30,000 prior to January 1, 1997). HCT also reimburses ACSC
for its direct costs and expenses incurred under this agreement. Total charges
during the three and six month periods ended June 30, 1997 amounted to $133,000
and $244,000, respectively. Unpaid charges amounting to $50,000 and $30,000 are
included in due to affiliates in the accompanying consolidated balance sheets at
June 30, 1997 and December 31, 1996, respectively.
HCA also receives certain computer-related services from ACSC including
hardware, software and operator support. HCA reimburses ACSC for its direct
costs and any expenses incurred. Total charges during the three and six month
periods ended June 30, 1997 amounted to $12,000 and $55,000, respectively.
Unpaid charges amounting to $44,000 and $51,000 are included in due to
affiliates in the accompanying consolidated balance sheets at June 30, 1997 and
December 31, 1996, respectively.
GBCC and its subsidiaries share certain general and administrative costs with
HCC. Net allocated costs and fees charged to GBCC and its subsidiaries by HCC
amounted to $277,000 and $963,000, respectively, for the three and six month
periods ended June 30, 1997. In connection with such allocated costs and fees,
receivables in the amount of $122,000 and $203,000 are included in due from
affiliates in the accompanying consolidated balance sheets at June 30, 1997 and
December 31, 1996, respectively.
In September 1994, a subsidiary of HCC entered into an agreement with an
entity owned by a member of the Pratt Family to manage the operation and
maintenance of a Company-owned aircraft and to make such aircraft available for
charter by third parties. The aircraft was sold during the first quarter of
1997. Subsequent to the sale, HCC has occasionally chartered aircraft from the
maintenance company.
17
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
Charter fees, expenses and commissions totaled $3,000 and $167,000,
respectively, during the three month periods ended June 30, 1997 and 1996 and
$256,000 and $270,000, respectively, during the six month periods ended June 30,
1997 and 1996.
(7) COMMITMENTS AND CONTINGENCIES
GROUND LEASE
- ------------
HCT entered into a ground lease covering 70 acres of land on which the Tunica
Casino was constructed. The ground lease is for an initial term of five years
from the opening date of the facility and, at the option of HCT, may be renewed
for nine additional five-year periods. Obligations under the ground lease
during the initial term include both minimum monthly fixed payments and
percentage rent, which in the aggregate will be the greater of 4% of Gross
Revenues, as defined, or $1,100,000 per year. HCT is responsible for all
operating and other expenses of the property in accordance with the lease terms.
During the three month periods ended June 30, 1997 and 1996, HCT expensed
$1,040,000 and $829,000, respectively, in connection with the ground lease.
Such expenses amounted to $1,968,000 and $1,732,000, respectively, during the
six month periods ended June 30, 1997 and 1996.
PLANET HOLLYWOOD LITIGATION
- ---------------------------
Planet Hollywood International, Inc., a Delaware corporation, and Planet
Hollywood (Region IV), Inc., a Minnesota corporation (collectively, "PHII"),
filed a complaint in the United States District Court for the Northern District
of Illinois, Eastern Division on July 29, 1996 against HCC, HCA and a member of
the Pratt Family (collectively, the "Original Hollywood Defendants"). The
Original Hollywood Defendants filed with the Court on September 18, 1996 an
answer to PHII's lawsuit, along with numerous counterclaims against PHII, Robert
Earl and Keith Barish (collectively, the "PHII Defendants"). PHII filed with
the Court on January 21, 1997, an amendment to their complaint which, among
other things, added HCT (together with the Original Hollywood Defendants, the
"Hollywood Defendants") and GBCC as defendants. The Original Hollywood
Defendants filed with the Court on February 4, 1997, and GBCC and HCT filed with
the Court on February 20, 1997, answers and counterclaims to such amended
complaint.
In its lawsuit, PHII alleges, among other things, that the Hollywood
Defendants and GBCC have, in opening and operating the Hollywood Casino concept,
infringed on PHII's trademark, service mark and trade dress and have engaged in
unfair competition and deceptive trade practices. In their counterclaims, the
Hollywood Defendants and GBCC allege, among other things, that the PHII
Defendants have, through their planned use of their mark in connection with
casino services, infringed on certain of HCC's service marks and trade dress and
have engaged in unfair competition.
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
18
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
are without merit and intend to defend their position and pursue their
counterclaims vigorously. The accompanying consolidated financial statements do
not include any adjustments that might result from the outcome of the
uncertainties described above.
OTHER LITIGATION
- ----------------
HCC and its subsidiaries are parties in various legal proceedings with
respect to the conduct of casino and hotel operations. Although a possible
range of loss cannot be estimated, in the opinion of management, based upon the
advice of counsel, settlement or resolution of these proceedings should not have
a material adverse impact on the consolidated financial position or results of
operations of HCC and its subsidiaries.
(8) THIRD PARTY NOTES RECEIVABLE
During November 1995, HCC loaned $10,000,000 of the proceeds from the HCC
Refinancing to an unaffiliated gaming company in the form of two $5,000,000
notes (Series A and Series B). The loans earn interest at the rate of prime
plus one percent per annum and are payable in quarterly installments of
principal and interest commencing in November 1997 with the final payment due in
August 2000. All principal payments received are to be applied first to the
Series A note. In connection with the loans, HCC received warrants to acquire
up to a 10% equity interest in the gaming company at any time between November
15, 1998 and November 15, 2000 at an exercise price of $500,000 per 1/2%
interest. Under the terms of the loan agreement, the gaming company may require
HCC to exercise warrants to acquire a 5% equity interest on November 15, 1998 at
a cost not to exceed $5,000,000 payable through the reduction of the outstanding
principal balance and, to the extent applicable, the forgiveness of accrued
interest on the Series B note.
(9) LAND RIGHTS
Land rights are being amortized on a straight-line basis over a 40-year
period representing the estimated useful life of the Tunica facility, which is
less than the term of the ground lease including renewals (see Note 7); such
amortization commenced with the opening of the Tunica Casino. Management
presently intends to renew the ground lease at least through the estimated 40-
year useful life of the facility. Accumulated amortization of such land rights
amounted to $889,000 and $787,000, respectively, at June 30, 1997 and December
31, 1996.
(10) SUPPLEMENTAL CASH FLOW INFORMATION
During the second quarter of 1997, HCC issued 100,000 shares of its common
stock in exchange for a $10,000,000 loan commitment from unrelated third
parties. The commitment fee which was valued at $375,000, the fair market value
of the stock on the date of its issuance, is being amortized over the eight
month commitment period and is included in other assets on the accompanying
consolidated balance sheet at June 30, 1997 at its unamortized cost of $250,000.
19
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
Also during the second quarter of 1997, HCC acquired the general partnership
interest in PML (see Notes 1 and 6). The purchase price included the assignment
of certain receivables from GBCC and the issuance of a note to GBCC. In
connection with the acquisition, certain liabilities were assumed as follows:
<TABLE>
<S> <C>
Assignment of PPI Funding Notes $(7,597,000)
Assignment of interest receivable (350,000)
Note issued (3,800,000)
Charge to paid-in capital (Note 1) 12,747,000
-----------
Net liabilities assumed $ 1,000,000
===========
</TABLE>
(11) RECLASSIFICATIONS
Certain reclassifications have been made to the 1996 consolidated financial
statements to conform to the 1997 consolidated financial statement presentation.
Such reclassifications include the reallocation of certain costs among the
various operating departments and general and administrative expenses resulting
from the completion of a comprehensive internal review during 1996 of
departmental allocations. Management believes that such reclassifications better
reflect the matching of costs with the associated revenues.
20
<PAGE>
HOLLYWOOD CASINO - AURORA, INC.
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
BALANCE SHEETS
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
------------- -------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 8,069,000 $ 9,034,000
Accounts receivable, net of allowances
of $921,000 and $1,071,000, respectively 1,548,000 1,895,000
Inventories 815,000 948,000
Deferred income taxes 1,357,000 1,421,000
Due from affiliates 55,000 1,046,000
Prepaid expenses and other current assets 772,000 854,000
------------ ------------
Total current assets 12,616,000 15,198,000
------------ ------------
Property and Equipment:
Land improvements 2,795,000 2,786,000
Buildings and improvements 46,358,000 46,247,000
Riverboats 36,970,000 36,970,000
Operating equipment 31,862,000 30,766,000
Construction in progress 224,000 276,000
------------ ------------
118,209,000 117,045,000
Less - accumulated depreciation and amortization (30,540,000) (26,814,000)
------------ ------------
Net property and equipment 87,669,000 90,231,000
------------ ------------
Other Assets 2,108,000 2,020,000
------------ ------------
$102,393,000 $107,449,000
============ ============
</TABLE>
The accompanying introductory notes and notes to financial statements
are an integral part of these balance sheets.
21
<PAGE>
HOLLYWOOD CASINO - AURORA, INC.
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDER'S EQUITY
Current Liabilities:
Current maturities of long-term debt
and capital lease obligations $ 8,182,000 $ 6,456,000
Accounts payable 1,277,000 2,131,000
Accrued liabilities -
Salaries and wages 1,857,000 2,117,000
Interest 1,278,000 1,315,000
Gaming and other taxes 777,000 497,000
Insurance 1,431,000 1,054,000
Other 1,081,000 1,351,000
Due to affiliates 938,000 2,278,000
Other current liabilities 1,425,000 1,200,000
------------ ------------
Total current liabilities 18,246,000 18,399,000
------------ ------------
Long-Term Debt 34,039,000 37,267,000
------------ ------------
Capital Lease Obligations 21,416,000 21,707,000
------------ ------------
Other Noncurrent Liabilities 3,204,000 2,043,000
------------ ------------
Commitments and Contingencies
Shareholder's Equity:
Common stock, $.01 par value per share;
2,000,000 shares authorized; 1,501,000
shares issued and outstanding 15,000 15,000
Additional paid-in capital 24,541,000 24,541,000
Retained earnings 932,000 3,477,000
------------ ------------
Total shareholder's equity 25,488,000 28,033,000
------------ ------------
$102,393,000 $107,449,000
============ ============
</TABLE>
The accompanying introductory notes and notes to financial statements
are an integral part of these balance sheets.
22
<PAGE>
HOLLYWOOD CASINO - AURORA, INC.
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
---------------------------
1997 1996
------------ ------------
<S> <C> <C>
Revenues:
Casino $37,377,000 $41,567,000
Food and beverage 3,446,000 3,481,000
Other 454,000 1,074,000
----------- -----------
41,277,000 46,122,000
Less - promotional allowances (2,346,000) (3,083,000)
----------- -----------
Net revenues 38,931,000 43,039,000
----------- -----------
Expenses:
Casino 24,725,000 28,553,000
Food and beverage 1,200,000 882,000
Other 415,000 22,000
General and administrative 2,745,000 2,999,000
Depreciation and amortization 1,873,000 2,569,000
----------- -----------
Total expenses 30,958,000 35,025,000
----------- -----------
Income from operations 7,973,000 8,014,000
----------- -----------
Non-operating income (expense):
Interest income 40,000 59,000
Interest expense (1,744,000) (1,577,000)
----------- -----------
Total non-operating expenses, net (1,704,000) (1,518,000)
----------- -----------
Income before income taxes 6,269,000 6,496,000
Income tax provision (2,417,000) (2,358,000)
----------- -----------
Net income $ 3,852,000 $ 4,138,000
=========== ===========
</TABLE>
The accompanying introductory notes and notes to financial statements
are an integral part of these financial statements.
23
<PAGE>
HOLLYWOOD CASINO - AURORA, INC.
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
---------------------------
1997 1996
------------ ------------
<S> <C> <C>
Revenues:
Casino $76,236,000 $83,734,000
Food and beverage 6,762,000 6,794,000
Other 869,000 2,137,000
----------- -----------
83,867,000 92,665,000
Less - promotional allowances (4,586,000) (5,911,000)
----------- -----------
Net revenues 79,281,000 86,754,000
----------- -----------
Expenses:
Casino 50,364,000 55,948,000
Food and beverage 2,400,000 1,784,000
Other 816,000 32,000
General and administrative 6,778,000 7,383,000
Depreciation and amortization 3,726,000 5,091,000
----------- -----------
Total expenses 64,084,000 70,238,000
----------- -----------
Income from operations 15,197,000 16,516,000
----------- -----------
Non-operating income (expense):
Interest income 76,000 121,000
Interest expense (3,506,000) (3,177,000)
----------- -----------
Total non-operating expenses, net (3,430,000) (3,056,000)
----------- -----------
Income before income taxes 11,767,000 13,460,000
Income tax provision (4,484,000) (4,886,000)
----------- -----------
Net income $ 7,283,000 $ 8,574,000
=========== ===========
</TABLE>
The accompanying introductory notes and notes to financial statements
are an integral part of these financial statements.
24
<PAGE>
HOLLYWOOD CASINO - AURORA, INC.
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------------------------------
1997 1996
----------------- ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 7,283,000 $ 8,574,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 3,726,000 5,091,000
Provision for doubtful accounts 95,000 197,000
Deferred income tax provision 1,225,000 164,000
Decrease in receivables 252,000 335,000
(Decrease) increase in accounts payable and accrued liabilities (764,000) 226,000
Net change in affiliate accounts (349,000) (981,000)
Net change in other current assets and liabilities 440,000 470,000
Net change in other assets and liabilities (88,000) (508,000)
------------ -----------
Net cash provided by operating activities 11,820,000 13,568,000
------------ -----------
INVESTING ACTIVITIES:
Net property and equipment additions (1,164,000) (1,607,000)
Increase in cash restricted for construction projects - (2,326,000)
------------ -----------
Net cash used in investing activities (1,164,000) (3,933,000)
------------ -----------
FINANCING ACTIVITIES:
Repayments of debt (1,550,000) (1,397,000)
Payments on capital lease obligations (243,000) (257,000)
Dividends (9,828,000) (7,093,000)
------------ -----------
Net cash used in financing activities (11,621,000) (8,747,000)
------------ -----------
Net (decrease) increase in cash and cash equivalents (965,000) 888,000
Cash and cash equivalents at beginning of period 9,034,000 8,996,000
------------ -----------
Cash and cash equivalents at end of period $ 8,069,000 $ 9,884,000
============ ===========
</TABLE>
The accompanying introductory notes and notes to financial statements
are an integral part of these financial statements.
25
<PAGE>
HOLLYWOOD CASINO - AURORA, INC.
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(1) ORGANIZATION AND BUSINESS
Hollywood Casino - Aurora, Inc. ("HCA") is an Illinois corporation and a
wholly owned subsidiary of Hollywood Casino Corporation ("HCC"), a Delaware
corporation. HCA was organized and incorporated during December 1990 by certain
relatives of Jack E. Pratt, Edward T. Pratt, Jr. and William D. Pratt
(collectively, the "Pratt Family") for the purpose of developing and holding the
ownership interest in a riverboat gaming operation located in Aurora, Illinois
(the "Aurora Casino"). In May 1992, HCC, which was then wholly owned by
members of the Pratt Family or by certain general partnerships and trusts
controlled by the Pratt Family, acquired all of the outstanding stock of HCA
through the issuance of HCC stock. Prior to December 31, 1996, HCC also owned
approximately 80% of Greate Bay Casino Corporation ("GBCC"), a Delaware
corporation which, prior to April 1, 1997, owned the entity with which HCA has a
management services contract and which continues to have an ownership interest
in such entity.
On June 17, 1993, the Illinois Gaming Board (the "IGB") issued HCA a
temporary operating permit and the Aurora Casino commenced operations. The IGB
issued HCA an owner's license on July 20, 1993 pursuant to the Illinois
Riverboat Gambling Act. HCA's current owner's license was renewed in July 1997
for a period of one year.
The Aurora Casino consists of two, four-level riverboats having a combined
casino space of approximately 32,000 square feet and a four-level pavilion and
docking facility which houses ticketing, food service, passenger waiting, and
various administrative functions. The Aurora Casino also includes two parking
structures with approximately 1,300 parking spaces. HCA was responsible for the
design and construction of the parking garages; however, it leases the
facilities under long-term lease agreements. The leases are treated as capital
leases for financial reporting purposes (see Note 3).
HCA estimates that a significant amount of the Aurora Casino's revenues are
derived from patrons living in the Chicago area and surrounding northern and
western suburbs. The Aurora Casino faces intense competition from other
riverboat gaming operations in Illinois and Indiana which serve the Chicago area
and management believes that this competition will continue in the future.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
HCA is self insured for a portion of its general liability, certain health
care and other liability exposures. Accrued insurance includes estimates of
such accrued liabilities based on an evaluation of the merits of individual
claims and historical claims experience; accordingly, HCA's ultimate liability
may differ from the amounts accrued.
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets" requires, among other things, that an entity
review its long-lived assets and certain related intangibles for impairment
whenever changes in circumstances indicate that the carrying amount of an asset
26
<PAGE>
HOLLYWOOD CASINO - AURORA, INC.
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
may not be fully recoverable. As a result of its review, HCA does not believe
that any material impairment currently exists related to its long-lived assets.
The financial statements as of June 30, 1997 and for the three and six month
periods ended June 30, 1997 and 1996 have been prepared by HCA without audit.
In the opinion of management, these financial statements contain all adjustments
(consisting of only normal recurring adjustments) necessary to present fairly
the financial position of HCA as of June 30, 1997, the results of its operations
for the three and six month periods ended June 30, 1997 and 1996 and its cash
flows for the six month periods ended June 30, 1997 and 1996. Operating results
for the three and six month periods ended June 30, 1997 are not necessarily
indicative of the results that may be achieved for the year ended December 31,
1997.
(2) LONG-TERM DEBT AND PLEDGE OF ASSETS
HCA's long-term indebtedness consists of the following:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
------------ -------------
<S> <C> <C>
12 3/4% Promissory Note to HCC, due on
November 1, 2003 (a) $39,007,000 $39,007,000
Promissory note to bank (b) 1,435,000 2,472,000
Equipment loans (c) 959,000 1,472,000
----------- -----------
Total indebtedness 41,401,000 42,951,000
Less - current maturities (7,362,000) (5,684,000)
----------- -----------
Total long-term debt $34,039,000 $37,267,000
=========== ===========
</TABLE>
- -----------------------------
(a) The intercompany note accrues interest at the rate of 12 3/4% per annum
payable semiannually on October 15 and April 15 of each year and requires
semiannual principal repayments of $2,500,000 commencing October 15, 1997
with the balance of the note due November 1, 2003. The note is pledged as
security with respect to HCC's 12 3/4% Senior Secured Notes due in 2003.
HCA is not a guarantor of HCC's indebtedness; however, the indebtedness is
secured, in part, by a first mortgage limited to approximately $39 million
on substantially all of the assets of HCA and by a pledge of the capital
stock of HCA. The 12 3/4% intercompany note replaced a previous 14%
intercompany note to HCC as a result of HCC's refinancing of its outstanding
indebtedness during October 1995.
(b) During February 1995, HCA entered into a $5,000,000 bank promissory note
agreement. The note accrues interest at the bank's prime lending rate plus
1% per annum. Interest only was payable
27
<PAGE>
HOLLYWOOD CASINO - AURORA, INC.
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
during the first six months. Commencing September 1, 1995, principal and
interest are payable monthly based on a 30-month amortization schedule with
the final payment due on February 1, 1998.
(c) HCA financed the purchase of certain equipment from vendors through the
issuance of note obligations totaling $2,985,000. The promissory notes are
payable in monthly installments, including interest at the approximate rate
of 12 1/4% per annum, and mature at various dates in 1998.
As of June 30, 1997, future maturities of long-term debt are as follows:
<TABLE>
<S> <C>
1997 (six months) $ 4,134,000
1998 5,760,000
1999 5,000,000
2000 5,000,000
2001 5,000,000
Thereafter 16,507,000
-----------
$41,401,000
===========
</TABLE>
Interest paid for the six month periods ended June 30, 1997 and 1996 amounted
to $3,543,000 and $3,161,000, respectively.
(3) CAPITAL LEASES
HCA leases two parking garages under capital lease agreements. The first
such lease has an initial term of 30 years commencing in June 1993 with the
right to extend the term to a maximum of 99 years. Rental payments during the
first 20 years equal the City of Aurora's financing costs related to its
$10,000,000 general obligation bond issue used to finance the construction of
the parking garage. The general obligation bond issue includes interest at
rates between 7% and 7 5/8% per annum. In September 1996, HCA and the Aurora
Metropolitan Exposition, Auditorium and Office Building Authority ("ACCA")
completed the joint construction of a new five-story, approximately 500-space
parking garage directly across the street from, and connected by a climate-
controlled tunnel to, the Aurora Casino's Pavilion. The garage provides
additional parking for patrons of the Aurora Casino and contains approximately
1,500 square feet of retail space. ACCA financed a portion of the construction
costs through an $11,500,000, 7.5% industrial revenue bond issue which yielded
proceeds of approximately $10,500,000. HCA funded all remaining construction
costs and escrowed a total of $3,500,000 at the rate of $400,000 per month
beginning in September 1995 toward satisfaction of its obligations under the
agreement. HCA additionally agreed to make payments to ACCA during construction
equal to the financing costs due in July 1996 relating to the ACCA industrial
revenue bond issue. The facility is owned by ACCA and operated by HCA pursuant
to a 30 year lease with the right to extend the lease for up to 20 additional
years. Rental payments during the first 15 years equal ACCA's debt service
costs related to the industrial revenue bond issue. In addition, HCA pays ACCA
base rent equal to $15,000 per month, subject to a credit of $615,000 at the
rate of $10,000 per month for improvements made to ACCA's North
28
<PAGE>
HOLLYWOOD CASINO - AURORA, INC.
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
Island Center banquet and meeting facilities. HCA is also responsible for
additional rent, consisting of costs such as real estate taxes, maintenance
costs, insurance premiums and utilities, arising out of its operation of both
parking garages.
HCA also leases certain equipment under capital lease agreements which
provide for interest at the rate of 11.2% and expire at various dates through
1998. Assets under capital lease agreements with an original cost of
$27,358,000 and $2,446,000 are included in buildings and improvements and in
operating equipment, respectively, in the accompanying balance sheets at both
June 30, 1997 and December 31, 1996. Amortization expense with respect to these
assets amounted to $216,000 and $597,000, respectively, during the three and six
month periods ended June 30, 1997 and $263,000 and $526,000, respectively,
during the three and six month periods ended June 30, 1996.
Future minimum lease payments under capital lease obligations as of June 30,
1997 are as follows:
<TABLE>
<S> <C>
1997 (six months) $ 1,370,000
1998 2,494,000
1999 2,457,000
2000 2,483,000
2001 2,532,000
Thereafter 26,719,000
-----------
Total minimum lease payments 38,055,000
Less amount representing interest (15,819,000)
-----------
Present value of future minimum lease payments 22,236,000
Current capital lease obligation (820,000)
-----------
Long-term capital lease obligation $21,416,000
===========
</TABLE>
29
<PAGE>
HOLLYWOOD CASINO - AURORA, INC.
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(4) INCOME TAXES
HCA's provision for income taxes consists of the following:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- -------------------------------
1997 1996 1997 1996
----------- ----------- ---------------- -----------
<S> <C> <C> <C> <C>
Current:
Federal $(1,673,000) $(2,169,000) $(2,908,000) $(4,462,000)
State (201,000) (129,000) (351,000) (260,000)
Deferred:
Federal (487,000) (59,000) (1,099,000) (155,000)
State (56,000) (1,000) (126,000) (9,000)
----------- ----------- ---------------- -----------
$(2,417,000) $(2,358,000) $(4,484,000) $(4,886,000)
=========== =========== ================ ===========
</TABLE>
HCA is included in HCC's consolidated federal income tax return. Pursuant to
agreements between HCC and HCA, HCA's current provision for federal income taxes
is based on the amount of tax which would be provided if a separate federal
income tax return were filed. HCA paid federal income taxes amounting
$1,826,000 and $4,693,000, respectively, and state income taxes amounting to
$196,000 and $28,000, respectively, during the six month periods ended June 30,
1997 and 1996. Deferred taxes are computed based on the expected future tax
consequences of temporary differences between the carrying amounts and tax bases
of assets and liabilities, using enacted tax rates.
Deferred income taxes result primarily from the use of the allowance method
rather than the direct write-off method for doubtful accounts, the use of
accelerated methods of depreciation for federal income tax purposes and
differences in the timing of deductions taken between tax and financial
reporting purposes for the amortization of preopening costs and other accruals.
The Internal Revenue Service is currently examining the consolidated Federal
income tax returns of HCC for the years 1993 and 1994. Management believes that
the results of such examination will not have a material adverse effect on the
financial position of HCA.
30
<PAGE>
HOLLYWOOD CASINO - AURORA, INC.
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
The components of HCA's net deferred tax liability at June 30, 1997 and
December 31, 1996 are as follows:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
------------ -------------
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts $ 346,000 $ 375,000
Other liabilities and reserves 1,117,000 1,130,000
----------- -----------
Total deferred tax assets 1,463,000 1,505,000
----------- -----------
Deferred tax liabilities:
Depreciation and amortization (3,310,000) (2,127,000)
----------- -----------
Net deferred tax liability $(1,847,000) $ (622,000)
=========== ===========
</TABLE>
Receivables and payables in connection with the aforementioned tax allocation
agreements at June 30, 1997 and December 31, 1996 are as follows:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
------------ -------------
<S> <C> <C>
Deferred tax assets $ 1,213,000 $ 1,421,000
Due (to) from affiliates (79,000) 1,002,000
Deferred tax liabilities (2,842,000) (2,043,000)
</TABLE>
(5) TRANSACTIONS WITH RELATED PARTIES
Pursuant to a management services agreement, HCA pays base management and
incentive fees to Pratt Management, L.P. ("PML"), a limited partnership which,
prior to April 1, 1997, was wholly owned by GBCC. Effective as of April 1,
1997, HCC acquired the general partnership interest in PML. The base management
fee is equal to 5% of operating revenues (as defined in the agreement) subject
to a maximum of $5,500,000 in any consecutive twelve month period. The
incentive fee is equal to 10% of gross operating profit (as defined in the
agreement to generally include all revenues less expenses other than
depreciation, interest, amortization and taxes). HCA incurred such fees
totaling $1,445,000 and $1,528,000, respectively, during the three month periods
ended June 30, 1997 and 1996 and $4,172,000 and $4,471,000, respectively, during
the six month periods ended June 30, 1997 and 1996. Management and incentive
fees payable at June 30, 1997 and December 31, 1996 were $655,000 and
$2,096,000, respectively.
31
<PAGE>
HOLLYWOOD CASINO - AURORA, INC.
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
HCA incurred interest with respect to its promissory note payable to HCC (see
Note 2) amounting to $1,243,000 and $2,487,000, respectively, for each of the
three and six month periods ended June 30, 1997 and 1996. Interest payable to
HCC on such notes amounted to $1,050,000 at both June 30, 1997 and December 31,
1996 and is included in accrued interest payable in the accompanying balance
sheets.
HCA has acquired computer software and hardware from GBCC and has been
allocated certain other expenses from HCC and GBCC. During the three month
periods ended June 30, 1997 and 1996, such transactions totaled $119,000 and
$255,000, respectively. Such transactions totaled $250,000 and $512,000,
respectively, during the six month periods ended June 30, 1997 and 1996. At
June 30, 1997 and December 31, 1996, HCA had payables amounting to $88,000 and
$138,000, respectively, in connection with such charges.
(6) LITIGATION
PLANET HOLLYWOOD LITIGATION
- ---------------------------
Planet Hollywood International, Inc., a Delaware corporation, and Planet
Hollywood (Region IV), Inc., a Minnesota corporation (collectively, "PHII"),
filed a complaint in the United States District Court for the Northern District
of Illinois, Eastern Division on July 29, 1996 against HCC, HCA and a member of
the Pratt Family (collectively, the "Original Hollywood Defendants"). The
Original Hollywood Defendants filed with the Court on September 18, 1996 an
answer to PHII's lawsuit, along with numerous counterclaims against PHII, Robert
Earl and Keith Barish (collectively, the "PHII Defendants"). PHII filed with
the Court on January 21, 1997, an amendment to their complaint which, among
other things, added the HCC subsidiary which owns and operates a casino in
Tunica County, Mississippi, HWCC-Tunica, Inc. ("HCT" together with the Original
Hollywood Defendants, the "Hollywood Defendants"), and GBCC as defendants. The
Original Hollywood Defendants filed with the Court on February 4, 1997, and GBCC
and HCT filed with the Court on February 20, 1997, answers and counterclaims to
such amended complaint.
In its lawsuit, PHII alleges, among other things, that the Hollywood
Defendants and GBCC have, in opening and operating the Hollywood Casino concept,
infringed on PHII's trademark, service mark and trade dress and have engaged in
unfair competition and deceptive trade practices. In their counterclaims, the
Hollywood Defendants and GBCC allege, among other things, that the PHII
Defendants have, through their planned use of their mark in connection with
casino services, infringed on certain of HCC's service marks and trade dress and
have engaged in unfair competition.
Given the uncertainties inherent in litigation, no assurance can be given
that the Hollywood Defendants will prevail in this litigation; however, the
Hollywood Defendants believe that PHII's claims are without merit and intend to
defend their position and pursue their counterclaims vigorously. The
accompanying financial statements do not include any adjustments that might
result from the outcome of the uncertainties described above.
32
<PAGE>
HOLLYWOOD CASINO - AURORA, INC.
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
OTHER LITIGATION
- ----------------
HCA is a party in various legal proceedings with respect to the conduct of
casino operations. Although a possible range of loss can not be estimated, in
the opinion of management, based upon the advice of counsel, settlement or
resolution of the proceedings should not have a material adverse impact on the
financial position or results of operations of HCA.
(7) RECLASSIFICATIONS
Certain reclassifications have been made to the 1996 financial statements to
conform to the 1997 financial statement presentation. Such reclassifications
include the reallocation of certain costs among the various operating
departments and general and administrative expenses resulting from the
completion of a comprehensive internal review during 1996 of departmental
allocations. Management believes that such reclassifications better reflect the
matching of costs with the associated revenues.
33
<PAGE>
HWCC - TUNICA, INC. AND SUBSIDIARY
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
------------- -------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 10,581,000 $ 9,321,000
Accounts receivable, net of allowances of
$870,000 and $622,000, respectively 1,089,000 1,363,000
Inventories 639,000 672,000
Deferred income taxes 1,823,000 953,000
Prepaid expenses and other current assets 1,170,000 854,000
------------ ------------
Total current assets 15,302,000 13,163,000
------------ ------------
Investment in Tunica Golf Course, LLC 2,000,000 -
------------ ------------
Property and Equipment:
Land and improvements 3,060,000 3,060,000
Buildings 73,420,000 73,348,000
Barges 2,524,000 2,524,000
Operating equipment 36,276,000 35,724,000
Construction in progress 832,000 412,000
------------ ------------
116,112,000 115,068,000
Less - accumulated depreciation and amortization (27,499,000) (22,275,000)
------------ ------------
Net property and equipment 88,613,000 92,793,000
------------ ------------
Other Assets:
Land rights 7,556,000 7,658,000
Other assets 2,546,000 3,006,000
------------ ------------
Total other assets 10,102,000 10,664,000
------------ ------------
$116,017,000 $116,620,000
============ ============
</TABLE>
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated balance sheets.
34
<PAGE>
HWCC - TUNICA, INC. AND SUBSIDIARY
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
------------- -------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDER'S EQUITY
Current Liabilities:
Current maturities of long-term debt
and capital lease obligations $ 554,000 $ 1,511,000
Accounts payable 1,644,000 2,797,000
Accrued liabilities -
Salaries and wages 1,347,000 1,254,000
Interest 476,000 2,262,000
Gaming and other taxes 611,000 813,000
Insurance 1,308,000 1,063,000
Other 1,711,000 1,824,000
Other current liabilities 981,000 752,000
------------ ------------
Total current liabilities 8,632,000 12,276,000
------------ ------------
Long-Term Debt 84,963,000 85,134,000
------------ ------------
Commitments and Contingencies
Shareholder's Equity:
Common stock, $.01 par value
per share; 100,000 shares authorized;
1,000 shares issued and outstanding - -
Additional paid-in capital 34,637,000 34,637,000
Accumulated deficit (12,215,000) (15,427,000)
------------ ------------
Total shareholder's equity 22,422,000 19,210,000
------------ ------------
$116,017,000 $116,620,000
============ ============
</TABLE>
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated balance sheets.
35
<PAGE>
HWCC - TUNICA, INC. AND SUBSIDIARY
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
---------------------------
1997 1996
------------ ------------
<S> <C> <C>
Revenues:
Casino $24,838,000 $20,518,000
Rooms 2,553,000 834,000
Food and beverage 3,562,000 2,978,000
Other 310,000 303,000
----------- -----------
31,263,000 24,633,000
Less - promotional allowances (3,909,000) (2,726,000)
----------- -----------
Net revenues 27,354,000 21,907,000
----------- -----------
Expenses:
Casino 17,785,000 17,012,000
Rooms 461,000 285,000
Food and beverage 1,001,000 909,000
Other 354,000 335,000
General and administrative 1,434,000 1,566,000
Depreciation and amortization 2,680,000 2,824,000
----------- -----------
Total expenses 23,715,000 22,931,000
----------- -----------
Income (loss) from operations 3,639,000 (1,024,000)
----------- -----------
Non-operating income (expenses):
Interest income 54,000 265,000
Interest expense, net of capitalized
interest of $391,000 in 1996 (2,757,000) (2,380,000)
Loss on disposal of assets - (19,000)
----------- -----------
Total non-operating expenses, net (2,703,000) (2,134,000)
----------- -----------
Income (loss) before income taxes 936,000 (3,158,000)
Income tax benefit 845,000 -
----------- -----------
Net income (loss) $ 1,781,000 $(3,158,000)
=========== ===========
</TABLE>
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated statements.
36
<PAGE>
HWCC - TUNICA, INC. AND SUBSIDIARY
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
---------------------------
1997 1996
------------ ------------
<S> <C> <C>
Revenues:
Casino $49,514,000 $43,236,000
Rooms 4,728,000 1,660,000
Food and beverage 6,960,000 5,940,000
Other 576,000 582,000
----------- -----------
61,778,000 51,418,000
Less - promotional allowances (7,445,000) (5,281,000)
----------- -----------
Net revenues 54,333,000 46,137,000
----------- -----------
Expenses:
Casino 34,617,000 33,966,000
Rooms 919,000 606,000
Food and beverage 2,009,000 1,814,000
Other 685,000 634,000
General and administrative 2,880,000 2,894,000
Depreciation and amortization 5,431,000 5,341,000
----------- -----------
Total expenses 46,541,000 45,255,000
----------- -----------
Income from operations 7,792,000 882,000
----------- -----------
Non-operating income (expenses):
Interest income 105,000 684,000
Interest expense, net of capitalized
interest of $472,000 in 1996 (5,530,000) (5,106,000)
Loss on disposal of assets - (35,000)
----------- -----------
Total non-operating expenses, net (5,425,000) (4,457,000)
----------- -----------
Income (loss) before income taxes 2,367,000 (3,575,000)
Income tax benefit 845,000 -
----------- -----------
Net income (loss) $ 3,212,000 $(3,575,000)
=========== ===========
</TABLE>
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated statements.
37
<PAGE>
HWCC - TUNICA, INC. AND SUBSIDIARY
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
---------------------------------
1997 1996
----------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ 3,212,000 $ (3,575,000)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 5,431,000 5,341,000
Loss on sale of assets - 35,000
Provision for doubtful accounts 240,000 252,000
Deferred income tax benefit (845,000) -
Decrease (increase) in accounts receivable 34,000 (25,000)
(Decrease) increase in accounts payable
and accrued expenses (2,916,000) 6,852,000
Net change in other current assets and liabilities (212,000) (49,000)
Net change in other noncurrent assets and liabilities 487,000 (293,000)
----------- ------------
Net cash provided by operating activities 5,431,000 8,538,000
----------- ------------
INVESTING ACTIVITIES:
Net property and equipment additions (1,043,000) (23,845,000)
Investment in unconsolidated affiliate (2,000,000) -
Proceeds from the sale of assets - 53,000
Decrease in cash restricted for construction projects - 15,578,000
----------- ------------
Net cash used in investing activities (3,043,000) (8,214,000)
----------- ------------
FINANCING ACTIVITIES:
Repayments of long-term debt (177,000) (1,367,000)
Payments on capital lease obligations (951,000) (981,000)
----------- ------------
Net cash used in financing activities (1,128,000) (2,348,000)
----------- ------------
Net increase (decrease) in cash and cash equivalents 1,260,000 (2,024,000)
Cash and cash equivalents at beginning of period 9,321,000 11,529,000
----------- ------------
Cash and cash equivalents at end of period $10,581,000 $ 9,505,000
=========== ============
</TABLE>
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated statements.
38
<PAGE>
HWCC - TUNICA, INC. AND SUBSIDIARY
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) ORGANIZATION, BUSINESS AND BASIS OF PRESENTATION
HWCC - Tunica, Inc. ("HCT") is a Texas corporation and a wholly owned
subsidiary of Hollywood Casino Corporation ("HCC"), a Delaware corporation. HCT
was incorporated in December 1993 for the purpose of acquiring and completing a
gaming facility in northern Tunica County, Mississippi approximately 27 miles
southwest of Memphis, Tennessee. The completed facility (the "Tunica Casino")
which currently includes a casino with 54,000 square feet of gaming space, 506
hotel rooms and suites and related amenities, commenced operations on August 8,
1994 under the service mark Hollywood Casino(R). HCT's gaming license has been
renewed by the Mississippi Gaming Commission through October 17, 1997.
The accompanying consolidated financial statements include the accounts of
HCT and its wholly owned subsidiary, HWCC-Golf Course Partners, Inc. ("Golf").
All significant intercompany balances have been eliminated in consolidation.
Golf, a Delaware corporation, was formed in 1996 to own an initial one-third
interest in Tunica Golf Course LLC, a limited liability company organized to
develop and operate a golf course to be used by patrons of the Tunica Casino and
other participating casino/hotel properties. The golf course is presently
scheduled for completion in 1998. Golf's investment in Tunica Golf Course, LLC
is accounted for under the equity method of accounting.
HCT estimates that a significant amount of the Tunica Casino's revenues are
derived from patrons living in the Memphis, Tennessee area, northern Mississippi
and Arkansas. The Tunica Casino faces intense competition from other casinos
operating in northern Tunica County and management believes that competition
will continue in the future.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
HCT is self insured for a portion of its general liability, certain health
care and other liability exposures. Accrued insurance includes estimates of
such accrued liabilities based on an evaluation of the merits of individual
claims and historical claims experience; accordingly, HCT's ultimate liability
may differ from the amounts accrued.
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets" requires, among other things, that an entity
review its long-lived assets and certain related intangibles for impairment
whenever changes in circumstances indicate that the carrying amount of an asset
may not be fully recoverable. As a result of its review, HCT does not believe
that any material impairment currently exists related to its long-lived assets.
The financial statements as of June 30, 1997 and for the three and six
month periods ended June 30, 1997 and 1996 have been prepared by HCT without
audit. In the opinion of management, these
39
<PAGE>
HWCC - TUNICA, INC. AND SUBSIDIARY
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
consolidated financial statements contain all adjustments (consisting of only
normal recurring adjustments) necessary to present fairly the financial position
of HCT as of June 30, 1997, the results of its operations for the three and six
month periods ended June 30, 1997 and 1996 and cash flows for the six month
periods ended June 30, 1997 and 1996.
(2) LONG-TERM DEBT AND PLEDGE OF ASSETS
Substantially all of HCT's assets are pledged in connection with its long-
term indebtedness. Long-term debt consists of the following:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
------------ -------------
<S> <C> <C>
Promissory notes to HCC (a) $84,045,000 $84,045,000
Equipment loans (b) 1,224,000 1,401,000
----------- -----------
Total indebtedness 85,269,000 85,446,000
Less - current maturities (306,000) (312,000)
----------- -----------
Total long-term debt $84,963,000 $85,134,000
=========== ===========
</TABLE>
- ---------------------------
(a) During October 1995, HCC loaned $54,045,000 to HCT to repay its outstanding
mortgage indebtedness, together with the associated call premium and certain
accrued interest thereon, and loaned an additional $30,000,000 to HCT to be
used to finance construction of a 352-room hotel tower and related amenities
and to fund development and construction of a themed gaming area. Such
intercompany loans were made with a portion of the note proceeds from HCC's
issue of $210,000,000 of 12 3/4% Senior Secured Notes (the "Senior Secured
Notes") due November 1, 2003, discounted to yield 13 3/4% per annum.
Interest on the loans from HCC accrues at the rate of 12 3/4% per annum and
is payable semiannually on April 15 and October 15 of each year. The Senior
Secured Notes are unconditionally guaranteed on a senior secured basis by
HCT and by certain future subsidiaries of HCC. The Senior Secured Notes and
related guarantees are secured by, among other things, (i) substantially all
of the assets of HCT and other future guarantors, (ii) a first mortgage
limited to approximately $39 million on substantially all of the assets of
another gaming facility operated by a wholly owned subsidiary of HCC, (iii)
a pledge of the capital stock of HCT and certain other subsidiaries of HCC
and (iv) the collateral assignment of any future management contracts
entered into by HCC.
The indenture to the Senior Secured Notes contains various provisions
limiting the ability of HCC, HCT and certain defined subsidiaries to, among
other things, pay dividends or make other restricted
40
<PAGE>
HWCC - TUNICA, INC. AND SUBSIDIARY
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
payments; incur additional indebtedness or issue preferred stock; create
liens; create dividend or other payment restrictions affecting certain
defined subsidiaries; enter into mergers or consolidations or make sales of
all or substantially all assets of HCC, HCT or any future guarantor; and
enter into transactions with certain affiliates.
(b) The loans outstanding are payable monthly including interest at effective
rates ranging from 12.3% to 12.9% per annum and are due in 2000.
Scheduled payments of long-term debt as of June 30, 1997 are set forth below:
<TABLE>
<CAPTION>
<S> <C>
1997 (six months) $ 135,000
1998 354,000
1999 400,000
2000 335,000
2001 -
Thereafter 84,045,000
-----------
Total $85,269,000
===========
</TABLE>
Interest paid, net of amounts capitalized, amounted to $7,316,000 and
$5,046,000, respectively, during the six month periods ended June 30, 1997 and
1996.
(3) CAPITAL LEASES
HCT leases certain gaming and other equipment under capital lease
agreements which provide for interest at rates ranging up to 13 1/4% per annum
and which expire during 1997. Assets under capital leases with an original cost
of $4,814,000 are included in operating equipment in the accompanying
consolidated balance sheets at both June 30, 1997 and December 31, 1996.
Amortization expense for the three month periods ended June 30, 1997 and 1996
was $263,000 and $389,000, respectively. Such expense amounted to $526,000 and
$784,000, respectively, for the six month periods ended June 30, 1997 and 1996.
Accumulated amortization at June 30, 1997 and December 31, 1996 with respect to
these assets amounted to $4,097,000 and $3,571,000, respectively.
Future minimum lease payments under capital lease obligations as of June
30, 1997 are $251,000 in 1997 of which $3,000 represents interest, resulting in
a current capital lease obligation of $248,000.
41
<PAGE>
HWCC - TUNICA, INC. AND SUBSIDIARY
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(4) INCOME TAXES
Components of HCT's benefit for income taxes for the three and six month
periods ended June 30, 1997 and 1996 consisted of the following:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- ------------------------------
1997 1996 1997 1996
---------- ------------ ----------- -----------------
<S> <C> <C> <C> <C>
Benefit in lieu of (provision for)
federal income taxes:
Current $(235,000) $ 1,221,000 $ (543,000) $ 1,627,000
Deferred 372,000 (172,000) 185,000 (432,000)
Valuation allowance 708,000 (1,049,000) 1,203,000 (1,195,000)
--------- ----------- ---------- -----------
$ 845,000 $ - $ 845,000 $ -
========= =========== ========== ===========
</TABLE>
State income taxes have not been provided for since a credit for state
gaming taxes based on gross revenues is allowed to offset income taxes incurred.
The credit is the lesser of total gaming taxes paid or the state income tax,
with no credit carryforward permitted.
HCT is included in HCC's consolidated federal income tax return. HCT's
provision for federal income taxes is based on the amount of tax which would be
provided if a separate federal income tax return were filed. HCT paid federal
income taxes of $158,000 during the six month period ended June 30, 1997; no
federal taxes were paid during the six month period ended June 30, 1996. HCT
paid no state income taxes during either of the six month periods ended June 30,
1997 or 1996.
Deferred income taxes result primarily from the use of the allowance method
rather than the direct write-off method for doubtful accounts, the use of
accelerated methods of depreciation for federal income tax purposes and
differences in the timing of deductions taken between tax and financial
reporting purposes for the amortization of preopening costs and other accruals.
HCT has tax net operating loss carryforwards ("NOL's") totaling
approximately $16,000,000, which do not begin to expire until the year 2010.
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes", requires that the tax benefit of such NOL's, together with the tax
benefit of deferred tax assets resulting from temporary differences, be recorded
as an asset and, to the extent that management can not assess that the
utilization of all or a portion of such deferred tax assets is more likely than
not, a valuation allowance should be recorded. Based on the taxable income
earned by HCT during the first half of 1997 and the expectation of future
taxable income, management believes that it is more likely than not that at
least a portion of the NOL's and deferred tax assets will be utilized.
Accordingly, a valuation allowance has been established which has resulted in
the recording of net deferred tax assets of $2,040,000 and $1,037,000 at June
30, 1997 and December 31, 1996, respectively. The ultimate
42
<PAGE>
HWCC - TUNICA, INC. AND SUBSIDIARY
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
recognition of the current amount of deferred tax assets is dependent on HCT's
ability to generate approximately $6,000,000 of taxable income for federal
income tax purposes prior to the expiration dates of the NOL's and the reversal
of other temporary differences.
The Internal Revenue Service is currently examining the consolidated
Federal income tax returns of HCC for the years 1993 and 1994. Management
believes that the results of such examination will not have a material adverse
effect on the consolidated financial position of HCT.
The components of the deferred tax asset are as follows:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
------------ -------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 5,436,000 $ 6,138,000
Alternative minimum tax credit carryforward 158,000 -
Allowance for doubtful accounts 296,000 211,000
Other liabilities and accruals 913,000 809,000
----------- -----------
Total deferred tax assets 6,803,000 7,158,000
Deferred tax liabilities:
Depreciation and amortization (1,513,000) (1,668,000)
----------- -----------
Net deferred tax asset 5,290,000 5,490,000
Valuation allowance (3,250,000) (4,453,000)
----------- -----------
$ 2,040,000 $ 1,037,000
=========== ===========
</TABLE>
Receivables and payables in connection with HCT's federal income taxes are
included in the accompanying financial statements as follows:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
---------- ------------
<S> <C> <C>
Deferred income taxes $1,823,000 $953,000
Other noncurrent assets 217,000 84,000
</TABLE>
43
<PAGE>
HWCC - TUNICA, INC. AND SUBSIDIARY
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(5) TRANSACTIONS WITH RELATED PARTIES
Pursuant to a ten-year consulting agreement with Pratt Casino Corporation, an
affiliated company, HCT incurs a monthly consulting fee of $100,000. Such fees
amounted to $300,000 during each of the three month periods ended June 30, 1997
and 1996 and $600,000 during each of the six month periods ended June 30, 1997
and 1996.
HCT and Advanced Casino Systems Corporation ("ACSC"), an affiliated company,
entered into a Computer Services Agreement dated as of January 1, 1994 and
renewed through December 31, 1999. The agreement provides, among other things,
that ACSC will sell HCT computer hardware and information systems equipment and
will license or sublicense to HCT computer software necessary to operate HCT's
casino, hotel and related facilities and business operations. HCT pays ACSC for
such equipment and licenses such software at amounts and on terms and conditions
that ACSC provides to unrelated third parties as well as a fixed license fee of
$33,600 per month ($30,000 prior to January 1, 1997). HCT also reimburses ACSC
for its direct costs and expenses incurred under this agreement. Total charges
incurred under such agreement amounted to $133,000 and $191,000, respectively,
for the three month periods ended June 30, 1997 and 1996 and $244,000 and
$312,000, respectively, for the six month periods ended June 30, 1997 and 1996.
At June 30, 1997 and December 31, 1996, HCT had payables of $50,000 and $30,000,
respectively, included in accounts payable with respect to such charges.
Greate Bay Hotel and Casino, Inc. ("GBHC"), an affiliated company which owns
and operates the Sands Hotel and Casino in Atlantic City, New Jersey, performs
certain administrative and marketing services on behalf of HCT. During the
three month periods ended June 30, 1997 and 1996, fees charged to HCT by GBHC
totaled $158,000 and $94,000, respectively. Such charges amounted to $340,000
and $287,000, respectively, during the six month periods ended June 30, 1997 and
1996. At June 30, 1997 and December 31, 1996, HCT had payables of $111,000 and
$99,000, respectively, included in accounts payable with respect to such
charges.
HCT is charged for certain legal, accounting, and other expenses incurred by
HCC that relate to HCT's business. For the three month periods ended June 30,
1997 and 1996, such charges amounted to $119,000 and $129,000, respectively; for
the six month periods ended June 30, 1997 and 1996, such charges amounted to
$215,000 and $251,000, respectively. At June 30, 1997 and December 31, 1996,
HCT had payables of $75,000 and $226,000, respectively, included in accounts
payable with respect to such charges.
(6) COMMITMENTS AND CONTINGENCIES
GROUND LEASE
- ------------
HCT entered into a ground lease covering 70 acres of land on which the Tunica
Casino was constructed. The ground lease is for an initial term of five years
from the opening date of the facility and,
44
<PAGE>
HWCC - TUNICA, INC. AND SUBSIDIARY
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
at HCT's option, may be renewed for nine additional five-year periods.
Obligations under the ground lease during the initial term include both minimum
monthly fixed payments and percentage rent, which in the aggregate will be the
greater of 4% of Gross Revenues, as defined, or $1,100,000 per year. HCT is
responsible for all operating and other expenses of the property in accordance
with the lease terms. For the three month periods ended June 30, 1997 and 1996,
HCT expensed $1,040,000 and $829,000, respectively, in connection with the
ground lease. Such expense totaled $1,968,000 and $1,732,000, respectively,
during the six month periods ended June 30, 1997 and 1996.
CREDIT FACILITY
- ---------------
HCT has a bank credit facility in the amount of $1,000,000 available through
August 15, 1997. No borrowings were outstanding under the credit facility at
either June 30, 1997 or December 31, 1996. Borrowings under the line of credit
accrue interest at the bank's prime lending rate plus 1 1/2% per annum. The line
of credit agreement requires the maintenance of certain financial ratios and
balances in addition to the provision of certain financial reports.
PLANET HOLLYWOOD LITIGATION
- ---------------------------
Planet Hollywood International, Inc., a Delaware corporation, and Planet
Hollywood (Region IV), Inc., a Minnesota corporation (collectively, "PHII"),
filed a complaint in the United States District Court for the Northern District
of Illinois, Eastern Division on July 29, 1996 against HCC, the wholly owned
subsidiary of HCC which owns and operates a casino in Aurora, Illinois and a
member of the Pratt Family (collectively, the "Original Hollywood Defendants").
The Original Hollywood Defendants filed with the Court on September 18, 1996 an
answer to PHII's lawsuit, along with numerous counterclaims against PHII, Robert
Earl and Keith Barish (collectively, the "PHII Defendants"). PHII filed with
the Court on January 21, 1997, an amendment to their complaint which, among
other things, added HCT (together with the Original Hollywood Defendants, the
"Hollywood Defendants") and Greate Bay Casino Corporation ("GBCC"), an
affiliated company, as defendants. The Original Hollywood Defendants filed with
the Court on February 4, 1997, and GBCC and HCT filed with the Court on February
20, 1997, answers and counterclaims to such amended complaint.
In its lawsuit, PHII alleges, among other things, that the Hollywood
Defendants and GBCC have, in opening and operating the Hollywood Casino concept,
infringed on PHII's trademark, service mark and trade dress and have engaged in
unfair competition and deceptive trade practices. In their counterclaims, the
Hollywood Defendants and GBCC allege, among other things, that the PHII
Defendants have, through their planned use of their mark in connection with
casino services, infringed on certain of HCC's service marks and trade dress and
have engaged in unfair competition.
Given the uncertainties inherent in litigation, no assurance can be given
that the Hollywood Defendants will prevail in this litigation; however, the
Hollywood Defendants believe that PHII's claims are without merit and intend to
defend their position and pursue their counterclaims vigorously. The
45
<PAGE>
HWCC - TUNICA, INC. AND SUBSIDIARY
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
accompanying consolidated financial statements do not include any adjustments
that might result from the outcome of the uncertainties described above.
OTHER
- -----
HCT is a party in various legal proceedings with respect to the conduct of
casino and hotel operations. Although a possible range of loss can not be
estimated, in the opinion of management, based upon the advice of counsel,
settlement or resolution of the proceedings should not have a material adverse
impact on the consolidated financial position or results of operations of HCT.
(7) LAND RIGHTS
Land rights are being amortized on a straight-line basis over a 40-year
period representing the estimated useful life of the facility, which is less
than the term of the ground lease including renewals (see Note 6); such
amortization commenced with the opening of the Tunica Casino. Management
presently intends to renew the ground lease at least through the estimated 40-
year useful life of the facility. Accumulated amortization of such land rights
amounted to $889,000 and $787,000, respectively, at June 30, 1997 and December
31, 1996.
(8) RECLASSIFICATIONS
Certain reclassifications have been made to the consolidated 1996 financial
statements to conform to the 1997 consolidated financial statement presentation.
Such reclassifications include the reallocation of certain costs among the
various operating departments and general and administrative expenses resulting
from the completion of a comprehensive internal review during 1996 of the
departmental allocations. Management believes that such reclassifications better
reflect the matching of costs with the associated revenues.
46
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This Quarterly Report on Form 10-Q contains forward-looking statements about
the business, financial condition and prospects of the Company. The actual
results could differ materially from those indicated by the forward-looking
statements because of various competition, economic conditions, tax regulations,
state regulations applicable to the gaming industry in general or the Company in
particular, and other risks indicated in the Company's filings with the
Securities and Exchange Commission. Such risks and uncertainties are beyond
management's ability to control and, in many cases, can not be predicted by
management. When used in this Quarterly Report on Form 10-Q, the word
"believes", "estimates", "anticipates" and similar expressions as they relate to
the Company or its management are intended to identify forward-looking
statements.
47
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS
On December 31, 1996, HCC distributed to its shareholders the common stock of
GBCC owned by HCC. As a result of the dividend, GBCC is no longer a subsidiary
of HCC. For the three and six month periods ended June 30, 1996, however, the
operations of GBCC are included in the consolidated results of operations of
HCC. The following tables set forth the pro forma income (loss) before income
taxes for the three and six month periods ended June 30, 1996 of HCC and its
subsidiaries, exclusive of GBCC and its subsidiaries (the "HCC Group"), on a
basis comparable to the like periods ended June 30, 1997. Other than this
presentation, the impact of GBCC's exclusion from the 1997 results of operations
will not be addressed in the discussion which follows.
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, 1996
THREE MONTHS -------------------------------------------------------------
ENDED HCC GBCC AND ADJUSTMENTS/ FORM 10-Q
JUNE 30, 1997 GROUP SUBSIDIARIES ELIMINATIONS PRESENTATION
-------------- -------- ------------- ---------------- ---------------
(amounts in thousands)
<S> <C> <C> <C> <C> <C>
Revenues:
Casino $62,215 $62,085 $65,310 $ - $127,395
Rooms 2,553 834 3,766 - 4,600
Food and beverage 7,008 6,459 9,211 - 15,670
Other 780 1,552 3,965 (2,077) 3,440
------- ------- ------- ------- --------
72,556 70,930 82,252 (2,077) 151,105
Less - promotional allowances (6,255) (5,809) (7,035) - (12,844)
------- ------- ------- ------- --------
Net revenues 66,301 65,121 75,217 (2,077) 138,261
------- ------- ------- ------- --------
Expenses:
Casino 42,510 45,565 58,484 - 104,049
Rooms 461 285 1,422 - 1,707
Food and beverage 2,201 1,791 3,193 - 4,984
Other 771 424 1,074 - 1,498
General and administrative 4,269 4,712 5,180 (240) 9,652
Management and consulting fees 300 1,828 - (1,828) -
Depreciation and amortization 4,944 5,704 5,346 (9) 11,041
Development 590 345 - - 345
------- ------- ------- ------- --------
Total expenses 56,046 60,654 74,699 (2,077) 133,276
------- ------- ------- ------- --------
Income from operations 10,255 4,467 518 - 4,985
Interest expense, net (7,209) (6,344) (9,351) 2,104 (13,591)
Gain (loss) on disposal of assets (4) (20) (2) - (22)
------- ------- ------- ------- --------
Income (loss) before income taxes
and other item $ 3,042 $(1,897) $(8,835) $ 2,104 $ (8,628)
======= ======= ======= ======= ========
</TABLE>
Net revenues of the HCC Group for the three month period ended June 30, 1997
were $66.3 million, a slight increase (1.8%) from the $65.1 million during the
same period of 1996. The increase includes a decrease in net revenues at the
Aurora Casino of $4.1 million which was more than offset by an increase in net
revenues at the Tunica Casino of $5.4 million.
48
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Operating expenses decreased by $4.6 million to $56.1 million during the
three month period ended June 30, 1997 from $60.7 million during the same period
of 1996. Consequently, overall income from operations for the HCC Group
increased by $5.8 million (129.6%) during the second quarter of 1997 compared to
the same period of 1996. The second quarter 1997 results include the operations
of Pratt Management, L.P. ("PML"), the limited partnership which holds the
management contract on the Aurora Casino. HCC acquired the general partnership
interest in PML as of April 1, 1997. PML's income from operations amounted to
$1.1 million during the second quarter of 1997. Income from operations after
management fees at the Aurora Casino was basically unchanged during the three
month period ended June 30, 1997 compared with 1996 despite increased
competition in its market; income from operations after consulting fees at the
Tunica Casino increased by $4.7 million to $3.6 million primarily attributable
to the opening of its new hotel tower.
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1996
SIX MONTHS ------------------------------------------------------------
ENDED HCC GBCC AND ADJUSTMENTS/ FORM 10-Q
JUNE 30, 1997 GROUP SUBSIDIARIES ELIMINATIONS PRESENTATION
-------------- --------- ------------- --------------- --------------
(amounts in thousands)
<S> <C> <C> <C> <C> <C>
Revenues:
Casino $125,750 $126,970 $122,915 $ - $249,885
Rooms 4,728 1,660 7,290 - 8,950
Food and beverage 13,722 12,734 18,161 - 30,895
Other 1,602 2,996 9,563 (5,567) 6,992
-------- -------- -------- ------- --------
145,802 144,360 157,929 (5,567) 296,722
Less - promotional allowances (12,031) (11,192) (14,154) - (25,346)
-------- -------- -------- ------- --------
Net revenues 133,771 133,168 143,775 (5,567) 271,376
-------- -------- -------- ------- --------
Expenses:
Casino 84,981 89,914 112,978 - 202,892
Rooms 919 606 2,601 - 3,207
Food and beverage 4,409 3,598 6,144 - 9,742
Other 1,544 725 2,032 - 2,757
General and administrative 8,320 9,287 10,257 (480) 19,064
Management and consulting fees 3,327 5,071 - (5,071) -
Depreciation and amortization 9,860 11,053 10,601 (18) 21,636
Development 895 542 - - 542
-------- -------- -------- ------- --------
Total expenses 114,255 120,796 144,613 (5,569) 259,840
-------- -------- -------- ------- --------
Income from operations 19,516 12,372 (838) 2 11,536
Interest expense, net (14,373) (13,028) (18,637) 4,172 (27,493)
Gain (loss) on disposal of assets 411 (36) 13 - (23)
-------- -------- -------- ------- --------
Income (loss) before income taxes
and other item $ 5,554 $ (692) $(19,462) $ 4,174 $(15,980)
======== ======== ======== ======= ========
</TABLE>
Net revenues of the HCC Group for the six month period ended June 30, 1997
were $133.8 million, a slight increase (.5%) from the $133.2 million during the
same period of 1996. The increase reflects a
49
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
decrease in net revenues at the Aurora Casino of $7.5 million offset by an
increase in net revenues at the Tunica Casino of $8.2 million.
Operating expenses decreased by $6.5 million to $114.3 million during the six
month period ended June 30, 1997 from $120.8 million during the same period of
1996. Consequently, overall income from operations for the HCC Group (including
$1.1 million generated by PML) increased by $7.1 million (57.7%) during the
first half of 1997 compared to the same period of 1996. Income from operations
after management fees at the Aurora Casino decreased by $1.3 million during the
six month period ended June 30, 1997 compared with 1996 as a result of increased
competition in its market; income from operations after consulting fees at the
Tunica Casino increased by $6.9 million to $7.8 million primarily attributable
to the opening of its new hotel tower.
AURORA CASINO
GENERAL
Income from operations at the Aurora Casino, adjusted to exclude management
fees, amounted to $9.4 million and $19.4 million, respectively, for the three
and six month periods ended June 30, 1997 compared to $9.5 million and $21
million, respectively, during the 1996 periods. The declines are primarily
attributable to increased competition from the opening in northern Indiana of
three riverboat gaming operations during June 1996 and a fourth operation in
April 1997 which more than doubled gaming capacity in the Chicago area. The new
facilities have added approximately 7,600 gaming positions to the Chicago area;
the existing Illinois riverboats in the Chicago area have only 5,800 gaming
positions. The Indiana facilities are more convenient to certain areas within
the Chicago market, primarily the south side of Chicago, and have served to
reduce patronage to the Aurora Casino from those areas.
GAMING OPERATIONS
The following table sets forth certain unaudited financial and operating data
for the Aurora Casino's operations for the three and six month periods ended
June 30, 1997 and 1996.
50
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------- ---------------------------------
1997 1996 1997 1996
------------- ------------- ------------- -----------------
<S> <C> <C> <C> <C>
REVENUES:
Table games $ 11,633,000 $ 13,390,000 $ 23,967,000 $ 27,643,000
Slot machines 25,578,000 28,177,000 52,103,000 56,091,000
Poker revenues 166,000 - 166,000 -
------------ ------------ ------------ --------------
Total $ 37,377,000 $ 41,567,000 $ 76,236,000 $ 83,734,000
============ ============ ============ ==============
TABLE GAMES:
Gross wagering (drop) (1) $ 65,636,000 $ 76,852,000 $135,321,000 $ 160,534,000
Hold percentage (2) 17.7% 17.4% 17.7% 17.2%
SLOT MACHINES:
Gross wagering (handle) (1) $465,502,000 $507,036,000 $936,159,000 $1,012,210,000
Hold percentage (2) 5.5% 5.6% 5.6% 5.5%
- -----------------------
</TABLE>
(1) Gross wagering consists of the total value of chips purchased for table
games ("drop") and coins wagered in slot machines ("handle").
(2) Casino revenues consist of the portion of gross wagering that a casino
retains and, as a percentage of gross wagering, is referred to as the "hold
percentage".
Total gross wagering at the Aurora Casino as measured by table drop and slot
machine handle decreased $52.8 million (9%) and $101.3 million (8.6%),
respectively, during the three and six month periods ended June 30, 1997 from
the comparable 1996 periods. The overall decrease in casino wagering reflects
the aforementioned addition of significant gaming capacity in the Chicago market
area from newly opened Indiana gaming operations. However, the Illinois-based
riverboat operators located closer to the new Indiana facilities and which drew
a greater percentage of their customers from areas now more conveniently served
by the Indiana facilities suffered a greater loss of patronage than the Aurora
Casino. The Aurora Casino's decreases in gross wagering compare favorably with
the decreases in gross wagering for the two Joliet, Illinois riverboat operators
which, based on information published by the Illinois Gaming Board, suffered
combined decreases in gross wagering of 28.3% and 29.8%, respectively, during
the three and six month periods ended June 30, 1997 compared to the same periods
in 1996. Accordingly, the Aurora Casino's location and resulting customer base
west of Chicago together with the success of its capital improvements program,
including the completion of a new 500-space parking garage facility during
September 1996, have helped maintain patron volume.
REVENUES
Overall, casino revenues decreased $4.2 million (10.1%) and $7.5 million
(9%), respectively, during the three and six month periods ended June 30, 1997
compared to the same periods of 1996. Table game revenues decreased $1.8
million (13.1%) during the second quarter of 1997 and $3.7 million (13.3%)
51
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
during the first half of 1997 compared to the same periods of 1996 as the 14.6%
and 15.7% decreases in drop were partially offset by increases in the table game
hold percentage. The 8.2% and 7.5% decreases in slot machine handle during the
second quarter and first six months of 1997, respectively, were slightly
impacted by changes in the slot hold percentage, resulting in three and six
month periods ended June 30, 1997 slot machine revenue decreases of $2.6 million
(9.2%) and $4 million (7.1%), respectively, compared to the same periods of
1996. Casino revenues were also impacted by the introduction of Poker during
the second quarter of 1997 which generated revenues amounting to $166,000.
Food and beverage revenues at the Aurora Casino did not change significantly
during the three or six month periods ended June 30, 1997 compared to the same
periods of 1996. Other revenues decreased by $620,000 (57.7%) and $1.3 million
(59.3%), respectively, during the three and six month periods ended June 30,
1997 compared to the 1996 periods primarily due to the elimination of garage and
valet parking revenues for competitive reasons.
Promotional allowances represent the estimated value of goods and services
provided free of charge to casino customers under various marketing programs.
These allowances, as a percentage of food and beverage and other revenues at the
Aurora Casino, were 60.2% and 60.1%, respectively, during the three and six
month periods ended June 30, 1997 compared to 67.7% and 66.2%, respectively,
during the like periods of 1996. The decreases from the prior year periods
reflect decreases in promotional activity with respect to parking as noted
previously.
DEPARTMENTAL EXPENSES
Casino expenses decreased by $3.8 million (13.4%) and $5.6 million (10%),
respectively, during the three and six month periods ended June 30, 1997
compared to 1996 reflecting decreases of similar magnitude in casino revenues
together with decreased promotional activities and reduced staffing levels.
Food and beverage expenses increased $318,000 (36.1%) and $616,000 (34.5%),
respectively, during the 1997 three and six month periods compared to 1996 as a
result of reduced allocations to the casino department. Other expenses
increased $393,000 during the second quarter of 1997 and $784,000 during the
first six months of 1997 compared to 1996 reflecting an extremely low amount of
such costs during the 1996 periods as a result of allocations made to other
departments. Food and beverage and other services to casino patrons are, for
the most part, ancillary to the casino operation. Accordingly, these
departments are not expected to contribute significantly to income from
operations.
TUNICA CASINO
GENERAL
Income from operations at the Tunica Casino, adjusted to exclude consulting
fees payable to a subsidiary of GBCC, amounted to $3.9 million and $8.4 million,
respectively, for the three and six month periods ended June 30, 1997 compared
to a loss from operations of $724,000 and income from operations of $1.5 million
during the same periods of 1996. The increases are primarily attributable to
the opening of the Tunica Casino's new 352-room hotel tower in September 1996
which increased room capacity by over 225% and added luxury suites, meeting
space and other amenities. The Tunica market has experienced significant growth
over the past few years with increased competition as a consequence.
52
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Harrah's Entertainment, Inc., which currently owns two casinos in the cluster of
gaming facilities where the Tunica Casino is located, has closed its smaller
facility while continuing its efforts to sell the property.
GAMING OPERATIONS
The following table sets forth certain unaudited financial and operating data
relating to the operations of the Tunica facility for the three and six month
periods ended June 30, 1997 and 1996. Published local and state-wide industry
information is limited in both detail and availability; accordingly, comparable
data for other casino operators is unavailable.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------- ---------------------------------
1997 1996 1997 1996
------------- ------------- ----------------- -------------
<S> <C> <C> <C> <C>
CASINO REVENUES:
Table games $ 4,052,000 $ 3,412,000 $ 8,416,000 $ 7,931,000
Slot machines 20,521,000 16,826,000 40,578,000 34,760,000
Poker revenues 265,000 280,000 520,000 545,000
------------ ------------ ------------ ------------
Total $ 24,838,000 $ 20,518,000 $ 49,514,000 $ 43,236,000
============ ============ ============ ============
TABLE GAMES:
Gross wagering (drop) (1) $ 19,081,000 $ 20,943,000 $ 39,469,000 $ 42,430,000
Hold percentage (2) 21.2% 16.3% 21.3% 18.7%
SLOT MACHINES:
Gross wagering (handle) (1) $407,248,000 $335,650,000 $791,052,000 $672,128,000
Hold percentage (2) 5.0% 5.0% 5.1% 5.2%
- -----------------------------
</TABLE>
(1)(2) See corresponding notes to the table at "Aurora Casino - Gaming
Operations" above.
Total gross wagering at the Tunica Casino as measured by table game drop
and slot machine handle increased $69.7 million (19.6%) and $116 million
(16.2%), respectively, during the three and six month periods ended June 30,
1997 compared to the same periods in 1996. The additional patron volume is
directly attributable to the hotel expansion completed in September 1996. Slot
machine handle during the second quarter and first half of 1997 increased by
$71.6 million (21.3%) and $118.9 million (17.7%), respectively. Table game drop
showed decreases of $1.9 million (8.9%) and $3 million (7%), respectively, in
1997 compared to the 1996 periods as the popularity of slot machines continues
to grow.
REVENUES
Casino revenues increased $4.3 million (21.1%) and $6.3 million (14.5%),
respectively, during the three and six month periods ended June 30, 1997
compared to the 1996 periods. Table game revenues suffered from declines in
wagering of 8.9% and 7%, respectively; however, increases in the hold percentage
compared to the same periods of 1996 offset such declines resulting in table
game revenues
53
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
increasing 18.8% and 6.1%, respectively. Slot machine revenue growth reflects
the significant increase in slot machine gross wagering as discussed above,
partially offset by a slight decrease in the slot machine hold percentages
during the six month period ended June 30, 1997 compared to 1996.
Rooms revenue increased $1.7 million (206.1%) and $3.1 million (184.8%),
respectively, during the three and six month periods ended June 30, 1997
compared to the same periods in 1996. These increases result from the opening
of the Tunica Casino's new 352-room hotel tower during the third quarter of
1996. Hotel occupancy rates have decreased slightly as a result of the
additional room capacity, declining from nearly 100% in both the second quarter
and first half of 1996 to approximately 97% and 92%, respectively, during the
three and six month periods ended June 30, 1997. Food and beverage revenues
increased $584,000 (19.6%) and $1 million (17.2%), respectively, during the
second quarter and first six months of 1997 compared to the same periods in 1996
due to increased patron volume as reflected in the increase in gross wagering
and attributable largely to the opening of the new hotel tower. Other revenues
did not change significantly during the 1997 periods compared to 1996.
Promotional allowances represent the estimated value of goods and services
provided free of charge to casino customers under various marketing programs.
Although promotional allowances increased by nearly $1.2 million and $2.2
million during the 1997 periods, such allowances, as a percentage of rooms, food
and beverage and other revenues, decreased to 60.8% and 60.7%, respectively,
during the second quarter and first six months of 1997 compared to 66.2% and
64.5%, respectively, during the same periods of 1996. The dollar increases in
promotional allowances reflect the increased availability of rooms for
promotional activities while the percentage decreases demonstrate the success of
the Tunica Casino's programs in generating additional revenues. The 1997
percentage decreases also result from a disproportionately high use of hotel and
food and beverage complimentaries during the 1996 periods as part of the Tunica
Casino's promotional activities with respect to the opening of the "Adventure
Slots" attraction.
DEPARTMENTAL EXPENSES
Casino expenses did not change significantly during the three and six month
periods ended June 30, 1997 compared to the same periods of 1996. In spite of
increased casino volume, marketing and promotional activities were significantly
reduced compared to the first quarter of 1996 when the "Adventure Slots"
attraction opened.
Rooms expense increased $176,000 (61.8%) and $313,000 (51.7%),
respectively, during the three and six month periods ended June 30, 1997
compared to the same periods of 1996 due to the Tunica Casino's new hotel tower,
offset somewhat by increased promotional activity, the cost of which is
allocated to the casino department.
Food and beverage expense increased $92,000 (10.1%) and $195,000 (10.7%),
respectively, during the second quarter and first half of 1997 compared to the
same periods in 1996 primarily due to increased patron volume associated with
the opening of the new hotel tower and additional dining outlets. Such increases
were partially offset by increased promotional activity, the cost of which is
allocated to the casino department. Other expenses increased $19,000 (5.7%) and
$51,000 (8%), respectively, during the 1997 periods compared to the prior year
due to increased costs associated with merchandise sales and theater
entertainment. Rooms, food and beverage and other departmental expenses are,
for the most part,
54
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
ancillary to the casino operation. Accordingly, these departments are not
expected to contribute significantly to income from operations.
OTHER HCC GROUP ITEMS
- ---------------------
GENERAL AND ADMINISTRATIVE
General and administrative expenses for the HCC Group decreased by $443,000
(9.4%) and $967,000 (10.4%), respectively, during the second quarter and first
six months of 1997 compared to the same periods in 1996. Such expenses at the
Aurora Casino (net of management fees) decreased by 11.6% and 10.5%,
respectively, for the three and six month periods ended June 30, 1997 from the
prior year periods as a result of management's efforts to control costs. The
Tunica Casino achieved cost reductions in this area of 10.4% (net of consulting
fees) for the three month period ended June 30, 1997 compared to the prior year
as cost containment efforts brought the year to date expenses in line with the
previous year following higher first quarter costs associated with the new hotel
tower. The remaining corporate general and administrative expense decreases of
7.1% and 15.9% for the three and six month periods, respectively, result from
reductions in corporate overhead costs, primarily in salaries and professional
fees.
MANAGEMENT AND CONSULTING FEES
The decrease in management and consulting fees during the 1997 periods is
primarily attributable to the acquisition by HCC of the general partnership
interest in PML. PML is now included in the consolidated results of operations
of HCC; consequently, management fees earned from the Aurora Casino subsequent
to April 1, 1997 have been eliminated in consolidation.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense decreased $760,000 (13.3%) and $1.2
million (10.8%), respectively, during the three and six month periods ended June
30, 1997 compared to the 1996 periods. Although completion of a parking garage
at the Aurora Casino and a new hotel tower at the Tunica Casino during the third
quarter of 1996 significantly increased the amount of depreciable assets, the
revision in estimated useful lives of buildings and certain operating equipment
effective October 1, 1996 resulted in an overall decrease in depreciation and
amortization.
DEVELOPMENT EXPENSES
Development expenses represent costs incurred in connection with HCC's
pursuit of potential gaming opportunities in jurisdictions where gaming has not
been legalized. Such costs increased by $245,000 (71%) and $353,000 (65.1%),
respectively, during the three and six month periods ended June 30, 1997
compared to the 1996 periods primarily as a result of costs incurred with
respect to HCC's efforts in being awarded the last available gaming license in
Louisiana. During the second quarter of 1997, HCC's joint venture partner in
the Louisiana project withdrew from the casino portion of the project.
Consequently, Louisiana gaming authorities reopened the bidding process for the
license which had been conditionally awarded to the HCC joint venture in March
1997.
55
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
INTEREST
Interest income decreased $215,000 (34%) and $468,000 (36.3%),
respectively, for the three and six month periods ended June 30, 1997 compared
to the same periods of 1996. The decreases result from interest earned on cash
restricted for construction projects during 1996; such cash was spent during
1996 in connection with construction projects.
Interest expense increased $650,000 (9.3%) and $877,000 (6.1%),
respectively, during the three and six month periods ended June 30, 1997
compared to the prior year periods primarily due to additional interest incurred
with respect to the new parking garage at the Aurora Casino which is treated as
a capital lease for financial reporting purposes and to the capitalization of
interest at the Tunica Casino with respect to construction of its new hotel
tower during the 1996 periods.
GAIN (LOSS) ON DISPOSAL OF ASSETS
The gain during the first half of 1997 resulted from the sale of a company-
owned aircraft.
INCOME TAX (PROVISION) BENEFIT
HCC and its subsidiaries have tax net operating loss carryforwards
("NOL's") totaling approximately $12.5 million, none of which begin to expire
until the year 2010. Additionally, HCC and its subsidiaries have various tax
credits available totaling approximately $200,000, which do not begin to expire
until the year 2008.
Management believes that it is more likely than not that future
consolidated taxable income of HCC (primarily from the Aurora Casino and the
Tunica Casino) will be sufficient to utilize at least a portion of the NOL's,
tax credits and other deferred tax assets resulting from temporary differences.
Accordingly, under the provisions of Statement of Financial Accounting Standards
No. 109, "Accounting for Income Taxes", the consolidated balance sheets reflect
the recording of net deferred tax assets of $4.8 million and $6.5 million as of
June 30, 1997 and December 31, 1996, respectively. In the absence of a "change
of control" as discussed below, the ultimate recognition of the current amount
of net deferred tax assets will be dependent on HCC and its subsidiaries'
ability to generate approximately $14 million of taxable income for federal tax
purposes prior to the expiration dates of the NOL's and tax credit carryforwards
and the reversal of other temporary differences.
NET OPERATING LOSS CARRYFORWARDS
Sales by HCC or existing stockholders of common stock, or securities
convertible into common stock, can cause a "change of control", as defined in
Section 382 of the Internal Revenue Code of 1986, as amended, which would limit
the ability of HCC or its subsidiaries to utilize these loss carryforwards in
later tax periods. Should such a change of control occur, the amount of loss
carryforwards available for use in any one year would most likely be
substantially reduced. Future treasury regulations, administrative rulings or
court decisions may also effect HCC's future utilization of its loss
carryforwards.
56
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
INFLATION
Management believes that in the near term, modest inflation, together with
increased competition within the gaming industry for qualified and experienced
personnel, will continue to cause increases in operating expenses, particularly
labor and employee benefits costs.
SEASONALITY
Historically, the Aurora Casino's operations have experienced some
seasonality, with the peak activity occurring from May to September.
Consequently, the results of HCC's operations for the first and fourth quarters
are traditionally less profitable than the other quarters of the fiscal year.
Furthermore, management believes that seasonality may also cause fluctuations in
reported results at the Tunica Casino. In addition, the operations of the Aurora
Casino and the Tunica Casino may fluctuate significantly due to a number of
factors, including chance. Such seasonality and fluctuations may materially
affect HCC's casino revenues and overall profitability.
LIQUIDITY AND CAPITAL RESOURCES
Since their openings on June 17, 1993 and August 8, 1994, respectively, the
Aurora Casino and the Tunica Casino have become the principal sources of
liquidity and capital resources for HCC. Prior to the commencement of
operations of the Aurora facility, HCC's principal business activity was its
approximate 80% ownership of GBCC. GBCC's principal sources of liquidity and
capital resources were cash flow from the Sands, proceeds from debt financings
and proceeds from asset sales.
OPERATING ACTIVITIES
The operations of the Aurora Casino continue to be HCC's primary source of
liquidity and capital resources, having contributed approximately $11.8 million
of cash flow from operations during the first six months of 1997 after deducting
the payment of $5.6 million of management fees. The Tunica Casino provided $5.4
million of cash from operations during the first half of 1997 after deducting
the payment of $600,000 of consulting fees to GBCC. HCC's other sources of
funds have historically included the repayment of principal and interest on
intercompany loans made to GBCC and interest income earned on temporary
investments. In addition to operating expenses at the Aurora Casino and the
Tunica Casino, uses of operating cash by HCC during the first six months of 1997
included costs to pursue development opportunities ($895,000) and corporate
overhead costs ($3.4 million).
During the first six months of 1997, cash flow from operations, proceeds
from the sale of an airplane and existing cash were used by HCC to fund capital
expenditures of $2.2 million, to make a $2 million contribution toward
construction of a golf course to benefit the Tunica Casino, to repay third party
indebtedness of $4 million and to make payments under capital lease obligations
of $1.2 million.
FINANCING ACTIVITIES
During October 1995, HCC completed the refinancing of certain outstanding
indebtedness through a public offering of $210 million of 12 3/4% Senior Secured
Notes due November 1, 2003, discounted to yield 13 3/4% per annum (the "HCC
Refinancing"). In addition to refinancing existing debt, proceeds
57
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
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 June 30, 1997, HCT has a $1 million bank credit facility available
through August 15, 1997 on which no borrowings were outstanding. Borrowings on
the line of credit accrue interest at the rate of prime plus 1 1/2% per annum.
Effective as of April 1, 1997, HCC acquired from PPI Corporation, a GBCC
subsidiary, the general partnership interest in the limited partnership which
holds the Aurora management agreement. The acquisition price for the general
partnership interest included a note in the amount of $3.8 million and the
assignment of $13.75 million undiscounted principal amount of PPI Funding Notes
and $350,000 accrued interest due from GBCC to PPI Corporation. Annual
principal and interest payments by HCC on the $3.8 million note approximate the
general partner's share of partnership distributions now being made to HCC.
As of June 30, 1997, HCC's scheduled maturities of long-term debt and
payments under capital leases during the remainder of 1997 are approximately
$4.5 million and $1.6 million, respectively.
58
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
CAPITAL EXPENDITURES AND OTHER INVESTING ACTIVITIES
Capital expenditures at the Aurora Casino during the first half of 1997
were $1.2 million; management anticipates spending $2 million during the
remainder of 1997 primarily for its ongoing capital improvements program with no
major projects currently scheduled.
Capital expenditures at the Tunica Casino during the first half of 1997
amounted to $1 million; management anticipates spending $1.6 million during the
remainder of 1997 primarily for its ongoing program of capital improvements.
HCT entered into an agreement with two other casino operators during 1996
providing for the joint construction and ownership of a golf course.
Contributions by HCT to the limited liability corporation formed to develop and
operate the golf course amounted to $2 million during the first quarter of 1997.
No additional contributions are currently anticipated.
During November 1995, HCC loaned $10 million of the proceeds from the HCC
Refinancing to an unaffiliated gaming company in the form of two $5 million
notes (Series A and Series B). The loans earn interest at the rate of prime
plus one percent per annum and are payable in quarterly installments of
principal and interest commencing in November 1997 with the final payment due in
August 2000. All principal payments received are to be applied first to the
Series A note. In connection with the loans, HCC received warrants to acquire
up to a 10% equity interest in the gaming company at any time between November
15, 1998 and November 15, 2000 at an exercise price of $500,000 per 1/2%
interest. Under the terms of the loan agreement, the gaming company may require
HCC to exercise warrants to acquire a 5% equity interest on November 15, 1998 at
a cost not to exceed $5 million, payable through the reduction of the
outstanding principal balance and, to the extent applicable, the forgiveness of
accrued interest on the Series B note.
HCC is pursuing several potential gaming opportunities. HCC intends to
finance any future ventures with cash flow from operations, together with
private, public or bank financing, which might include non-recourse project
financing.
SUMMARY
Other than cash requirements with respect to specific projects for which
project financing would be obtained, management anticipates that HCC's funding
requirements for the next twelve months will be satisfied by existing cash and
cash generated by the Aurora and Tunica Casinos.
59
<PAGE>
PART II: OTHER INFORMATION
- ---------------------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBIT
10.30 General Partnership Interest Purchase Agreement dated as of April 1, 1997
by and between HWCC-Aurora Management, Inc. and PPI Corporation.
The Registrants did not file any reports on Form 8-K during the quarter
ended June 30, 1997.
SIGNATURES
- ----------
Pursuant to the requirements of the Securities Exchange Act of 1934, each of
the Registrants has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HOLLYWOOD CASINO CORPORATION
Date: August 12, 1997 By: /s/ John C. Hull
----------------- -----------------------------
John C. Hull
Corporate Controller and
Principal Accounting Officer
HWCC - TUNICA, INC.
Date: August 12, 1997 By: /s/ John C. Hull
----------------- ---------------------------
John C. Hull
Principal Accounting Officer
60
<PAGE>
INDEX TO EXHIBITS
-----------------
10.30 General Partnership Interest Purchase Agreement dated as of April 1, 1997
by and between HWCC-Aurora Management, Inc. and PPI Corporation.
<PAGE>
Exhibit 10.30
<PAGE>
GENERAL PARTNERSHIP INTEREST PURCHASE AGREEMENT
THIS GENERAL PARTNERSHIP INTEREST PURCHASE AGREEMENT (this "AGREEMENT") is
made as of the first day of April, 1997, by and between HWCC-AURORA MANAGEMENT,
INC., an Illinois corporation (the "BUYER"), and PPI CORPORATION, a New Jersey
corporation (the "SELLER").
RECITALS
--------
1. The Seller desires to sell, assign and transfer to the Buyer, and
the Buyer desires to purchase and assume from the Seller, the general
partnership interest of the Seller (the "GP INTEREST") in Pratt Management,
L.P., a Delaware limited partnership (the "PARTNERSHIP").
2. The parties wish to set forth their agreement with respect to the
purchase and sale of the GP Interest and other matters.
AGREEMENT
---------
NOW THEREFORE, in consideration of the foregoing and the mutual covenants
and promises herein contained, the parties agree as follows:
1. PURCHASE, SALE, ASSIGNMENT AND ASSUMPTION OF THE GP INTEREST.
------------------------------------------------------------
1.1 PURCHASE, SALE, ASSIGNMENT AND ASSUMPTION. Subject to the
-----------------------------------------
terms and conditions hereof, at the Closing (as defined in Section 1.3 hereof)
the Seller shall sell, assign, convey and otherwise transfer to the Buyer, and
the Buyer shall purchase and assume from the Seller, all right, title, interest
and obligations of Seller in, to and under the entire GP Interest, free and
clear of any and all security interests, liens, claims, agreements, obligations
and encumbrances of any nature whatsoever other than those specified in the
Agreement of Limited Partnership of the Partnership dated as of February 17,
1994 (the "PARTNERSHIP AGREEMENT"), and the Seller agrees to cause the
Partnership Agreement to be amended to admit the Buyer as a substituted general
partner of the Partnership.
1.2 PURCHASE PRICE. In consideration of the sale, assignment and
--------------
transfer of the GP Interest pursuant to Section 1.1 hereof, the Buyer will pay
to the Seller Eleven Million Seven Hundred Forty-Six Thousand Six-Hundred Sixty
Four Dollars ($11,746,664) (the "PURCHASE PRICE"), to be paid by the Buyer to
the Seller at the Closing (as defined below), as follows:
(A) the Buyer will issue to the Seller a promissory note in the
form of Exhibit 1 attached hereto (the "NOTE"), in the principal amount of Three
Million Eight Hundred Thousand Dollars ($3,800,000);
(B) the Buyer will assign to the Seller a portion of the
outstanding principal amount of that certain PPI Funding Corp. 14 7/8% Secured
Promissory Note due 2006 in the original principal amount of One Hundred Ten
Million Six Hundred Thirty-Five Thousand Seven Hundred Thirty-Nine Dollars and
Forty Cents ($110,635,739.40) the ("PPI FUNDING NOTE") equal to Thirteen Million
Seven Hundred Fifty Thousand Dollars ($13,750,000), which, for purposes of the
Agreement, will be deemed to have a discounted value of Seven Million Five
Hundred Ninety-Six Thousand Six Hundred Sixty-Four Dollars ($7,596,664) as of
December 31, 1996; and
<PAGE>
(C) the Buyer will assign to the Seller the right to receive
accrued interest in the amount of $350,000 on certain notes receivable in the
current aggregate unpaid principal amount of $6,750,000 (the "ACCRUED INTEREST
ON NOTES RECEIVABLE") from Greate Bay Casino Corporation (fka Pratt Hotel
Corporation), a Delaware corporation which directly owns 100% of the issued and
outstanding common stock of the Seller.
1.3 CLOSING. The closing of the transactions contemplated hereby
-------
(respectively, the "CLOSING" and the "TRANSACTIONS") shall be held
simultaneously with the execution and delivery of this Agreement.
2. REPRESENTATIONS AND WARRANTIES OF THE SELLER.
--------------------------------------------
The Seller, on its own behalf and on behalf of the Partnership, as
applicable, represents and warrants to the Buyer, as of the date hereof, as set
forth below. THE SELLER MAKES NO REPRESENTATIONS OR WARRANTIES OF ANY KIND OR
CHARACTER, EXPRESS OR IMPLIED, EXCEPT AS SET FORTH IN THIS SECTION 2.
2.1 AUTHORITY. The Seller possesses full corporate power and
---------
authority to execute and deliver this Agreement and to consummate the
Transactions. This Agreement has been duly and validly executed and delivered
by the Seller and constitutes the legal, valid and binding obligation of the
Seller, enforceable against it in accordance with its terms, except as such
enforceability may be limited by bankruptcy, insolvency or other similar laws
from time to time in effect which affect the enforcement of creditors' rights
generally and by general principles of equity.
2.2 NO VIOLATION. The execution and delivery of this Agreement by
------------
the Seller and the performance by it of the Transactions do not (A) violate any
provision of the Certificate of Incorporation or By-laws of the Seller, or the
Management Services Agreement, dated as of June 21, 1991, by and between
Hollywood Casino-Aurora, Inc. (formerly known as Aurora Riverboats, Inc.) and
the Partnership (assignee of the Seller, the successor by merger to Greate Bay
Casino Corporation), as amended by that certain First Amendment to Management
Services Agreement dated May 14, 1992 (as amended, the "AURORA MANAGEMENT
CONTRACt"), or, to the Seller's knowledge, (B) violate any law or regulation of
any United States federal, territorial, state or local governmental or
regulatory agency or authority (an "AUTHORITY"), (C) require the consent or
approval of any Authority which has not been obtained or (D) result in a breach
of any provision of, or require the consent or approval of any third party which
has not been obtained under, or result in the creation or imposition of any
security interest, lien, claim or other encumbrance upon any portion of the
assets of the Partnership pursuant to the terms of any contract or agreement to
which the Seller or the Partnership is a party, which violation, breach or
consent or approval (if not obtained), in the case of each of clause (B) and (C)
above, would have a material adverse effect on the business, operations or
financial condition of the Partnership or on the Transactions.
2.3 TITLE TO THE GP INTEREST.
-------------------------
(A) The Seller is the record and beneficial owner of and has
good and valid title to the GP Interest, free and clear of any and all security
interests, liens, claims, agreements, obligations and encumbrances of any nature
whatsoever other than those specified in the Partnership Agreement, and the
delivery by the Seller of the GP Interest to the Buyer conveys to the Buyer good
and valid title to the GP Interest free and clear of all, and does not
-2-
<PAGE>
result in the Buyer being subject to any, security interests, liens, claims,
agreements, obligations and encumbrances of any nature whatsoever, other than
those specified in the Partnership Agreement.
(B) Except as set forth in the Partnership Agreement, neither
the Seller has, nor shall the Buyer have immediately after the Closing, any
obligation to make any capital contribution, loan or other payment or any other
transfer of assets or services to the Partnership.
2.4 STRUCTURE OF THE PARTNERSHIP. The Partnership is comprised
----------------------------
solely of the following two (2) partners: (A) Pratt Casino Corporation, a
Delaware corporation ("PCC"), which is the sole limited partner of the
Partnership, and (B) the Seller, which is the sole general partner of the
Partnership. No other person or entity has, or possesses any rights to acquire,
any ownership or equity interest in the Partnership or its capital, profits or
distributions.
3. REPRESENTATIONS AND WARRANTIES OF THE BUYER. The Buyer represents
-------------------------------------------
and warrants to the Seller that the Buyer possesses full corporate power and
authority to execute and deliver this Agreement and to consummate the
Transactions. This Agreement has been duly and validly executed and delivered
by the Buyer and constitutes the legal, valid and binding obligation of the
Buyer, enforceable against it in accordance with its terms, except as such
enforceability may be limited by bankruptcy, insolvency or other similar laws
from time to time in effect which affect the enforcement of creditors' rights
generally and by general principles of equity. The execution and delivery of
this Agreement by the Buyer and the performance by it of the Transactions do not
violate the Articles of Incorporation or By-laws of the Buyer or, to the Buyer's
knowledge, (A) violate any law or regulation of any Authority, or (B) result in
a breach of any provision of, or require the consent or approval of any third
party which has not been obtained under, the terms of any contract or agreement
to which the Buyer is a party, or the consent or approval of any Authority,
which violation, breach or consent or approval (if not obtained) would have a
material adverse effect on the business, operations or financial condition of
the Buyer or on the Transactions. THE BUYER MAKES NO REPRESENTATIONS OR
WARRANTIES OF ANY KIND OR CHARACTER, EXPRESS OR IMPLIED, EXCEPT AS SET FORTH IN
THIS SECTION 3.
4. CERTAIN COVENANTS.
------------------
4.1 BOOKS AND RECORDS.
------------------
(A) On reasonable notice at any time after the Closing, the
Buyer shall permit representatives of the Seller full and free access at the
Seller's expense, during normal business hours, to all correspondence,
contracts, agreements and purchase and sale orders and other books and records
of the Partnership relating to the operation of the business of the Partnership
as the same may relate to the GP Interest on or prior to the Closing for
purposes of inspection or copying. The Buyer shall cause all such materials to
be preserved for at least six years after the Closing and shall not thereafter
destroy or otherwise dispose of any such materials unless it shall have notified
the Seller at least six months before such disposition and given the Seller the
opportunity to remove and retain such materials.
(B) Without limiting the foregoing, the Buyer agrees that, at
the Seller's expense, for a period of six years after the Closing, it will
assist and cooperate with the Seller in collecting and assembling information
relating to the operation of the business of the Partnership on or prior to the
Closing that customarily has been provided or used in connection with the
preparation of any and all tax returns, information returns or other reports
required to
-3-
<PAGE>
be filed by the Seller or any affiliate of the Seller with any Authority and
shall make available to the Seller the services of personnel reasonably
necessary to enable the Seller or any affiliate of the Seller to prepare and
file any and all tax returns, information returns or other reports required to
be filed by the Seller or other affiliate of the Seller with any Authority
and/or to respond to and conduct any and all tax audits or other tax
determinations or proceedings.
4.2 CERTAIN COVENANTS OF THE PARTIES.
(A) FILINGS. Each of the Buyer and the Seller, on its own behalf
-------
and on behalf of the Partnership, shall promptly take all such action as may,
under applicable law, be necessary or appropriate for, and will promptly file
and, if appropriate, use its best efforts to have declared effective or approved
all documents and notifications with or to any Authority that are necessary or
appropriate for the consummation of the Transactions, and each of the Buyer and
the Seller shall promptly give the other party information requested by such
other party pertaining to it and its affiliates that is reasonably necessary to
enable such other party to take such actions and file in a timely manner all
documents and notifications required to be so filed by applicable law.
(B) OTHER ACTIONS. Each of the Buyer and the Seller, on its own
------------
behalf and on behalf of the Partnership, shall use its reasonable best efforts
to consummate the Transactions and make them effective as promptly as
practicable, including, without limitation, (i) defending lawsuits or other
proceedings challenging this Agreement or the consummation of any of the
Transactions, (ii) using reasonable best efforts to lift any injunction or order
adversely affecting this Agreement or the consummation of the Transactions or
(iii) using reasonable best efforts to obtain any consents necessary for its
performance of the Transactions.
(C) PRORATIONS. All taxable items of the Partnership that arise
----------
prior to or on the date of the Closing and are allocable to the General Partner
of the Partnership pursuant to Section 4.2 of the Partnership Agreement shall be
allocated to the Seller and those that arise after the date of the Closing and
are so allocable to the General Partner shall be allocated to the Buyer based
upon a closing-of-the-books method of accounting.
5. CLOSING DOCUMENTS.
-----------------
5.1 THE SELLER'S DOCUMENTS. At the Closing, the Seller will
----------------------
deliver or cause to be delivered to the Buyer:
(A) CERTIFICATE. A Certificate of the Secretary of the Seller
-----------
certifying (i) copies of resolutions duly adopted by the Board of Directors of
the Seller authorizing and approving the execution, delivery and performance of
this Agreement and the other agreements and documents executed and delivered in
connection herewith, (ii) that all partnership action necessary to approve the
execution, delivery and performance of this Agreement, and the other agreements
and documents executed and delivered by the Partnership in connection herewith,
shall have been duly and validly taken and (iii) such other matters as the Buyer
may reasonably request;
(B) ASSIGNMENT AND ASSUMPTION AGREEMENT AND AMENDMENT TO
----------------------------------------------------
PARTNERSHIP AGREEMENT. An Assignment and Assumption Agreement and Amendment to
- ---------------------
Partnership Agreement, providing for the sale, assignment and assumption of the
GP Interest set forth in Section 1.1 above and the admission and substitution of
the Buyer as the general partner of the Partnership, substantially in the form
attached as Exhibit 2 hereto (the "ASSIGNMENT AND ASSUMPTION AND AMENDMENT
AGREEMENT") executed by each of PCC and the Seller and such other
-4-
<PAGE>
documentation as shall be reasonably requested by the Buyer to evidence the
valid assignment of the GP Interest and the admission and substitution of the
Buyer as the general partner of the Partnership;
(C) AMENDMENTS TO PARTNERSHIP CERTIFICATE. A Certificate of
-------------------------------------
Amendment to the Certificate of Limited Partnership of the Partnership,
evidencing the substitution and admission of the Buyer as the general partner of
the Partnership, substantially in the form attached as Exhibit 3 hereto,
executed by each of PCC and the Seller; and
(D) REPLACEMENT NOTE. A new PPI Funding Note in the same form as
----------------
the PPI Funding Note and in an original principal amount equal to the
outstanding principal amount of the PPI Funding Note as of the Closing Date
minus Thirteen Million Seven Hundred Thousand Dollars ($13,750,000).
5.2 THE BUYER'S DOCUMENTS. At the Closing, the Buyer will deliver
---------------------
or cause to be delivered to the Seller:
(A) CERTIFICATE. A Certificate of the Secretary of the Buyer
-----------
certifying (i) copies of resolutions duly adopted by the Board of Directors of
the Buyer authorizing and approving the execution, delivery and performance of
this Agreement, the Note and the other agreements and documents executed and
delivered in connection herewith and (ii) such other matters as the Seller may
reasonably request;
(B) ASSIGNMENT AND ASSUMPTION OF AGREEMENT AND AMENDMENT TO
-------------------------------------------------------
PARTNERSHIP AGREEMENT. An Assignment and Assumption and Amendment Agreement,
- ---------------------
executed by the Buyer;
(C) THE NOTE. The Note, executed by the Buyer and payable to
--------
the order of the Seller;
(D) ASSIGNMENT OF PPI FUNDING NOTE. A partial assignment of the
------------------------------
PPI Funding Note, providing for the assignment of Thirteen Million Seven Hundred
Fifty Thousand Dollars ($13,750,000) in outstanding principal amount of the PPI
Funding Note;
(E) ASSIGNMENT OF ACCRUED INTEREST ON NOTES RECEIVABLE. An
--------------------------------------------------
assignment of the Accrued Interest on Notes Receivable;
(F) SECURITY AGREEMENT AND PLEDGE. A Security Agreement and
-----------------------------
Pledge (the "Security Agreement") providing for the pledge of the GP Interest to
the Seller as security for the payment of the Note, substantially in the form of
Exhibit 4 hereto, executed by the Buyer;
(G) HCA ESTOPPEL LETTER. An estoppel letter executed by
-------------------
Hollywood Casino-Aurora, Inc. ("HCA") stating that the obligations of the
Partnership required to be performed under the terms of the Aurora Management
Contract prior to the Closing have been performed and that there is no existing
breach or default by or on the part of the Partnership thereunder and setting
forth the agreement of HCA respecting the giving of notices of default under the
Aurora Management Contract and related matters, which estoppel letter shall be
in form and substance reasonably satisfactory to the Seller; and
(H) HCC ESTOPPEL LETTER. An estoppel letter executed by
-------------------
Hollywood Casino Corporation ("HCC") stating that the obligations, if any, of
the Partnership
-5-
<PAGE>
required to be performed prior to the Closing under the terms of the Service
Agreement by and between HCC and the Partnership to be entered into at or before
the Closing have been performed and that there is no existing breach or default
by or on the part of the Partnership thereunder and setting forth the agreement
of HCC respecting the giving of notices of default under such Services Agreement
and related matters, which estoppel letter shall be in form and substance
reasonably satisfactory to the Seller.
6. SURVIVAL OF REPRESENTATIVES; INDEMNITIES.
----------------------------------------
(A) SURVIVAL. The representations and warranties contained in
--------
this Agreement shall survive the sale, assignment and transfer to the Buyer of
the GP Interest hereunder and shall continue in full force and effect. The
agreements and covenants contained in this Agreement shall survive in accordance
with their terms.
(B) NO EFFECT ON LIABILITY. None of (i) the consummation of the
----------------------
Transactions, (ii) the delay or omission of any party to exercise any of its
rights under this Agreement or (iii) any investigation or disclosure that any
party makes, any notice that any party gives, or any knowledge that any party
obtains as a result thereof, or otherwise, shall (x) affect the liability of the
parties to one another for breaches of their covenants contained in this
Agreement, (y) affect the liability of the parties to one another for
misrepresentation under this Agreement, or (z) prevent any party from relying on
the representations contained in this Agreement.
6.1 INDEMNITIES.
------------
(A) THE SELLER'S INDEMNITY.
----------------------
(1) The Seller agrees to indemnify and hold the Buyer
harmless from and against any and all liabilities, damages, obligations, claims
and expenses (including, without limitation, reasonable costs of investigation
and reasonable defense and attorney's fees) (collectively "LOSSES") that the
Buyer sustains or becomes subject to as a result of the breach of any of the
warranties, representations, covenants or agreements of the Seller made herein
less any amounts actually received by the Buyer or the Partnership in respect of
such Losses under insurance policies; provided, however, that the Seller's
-------- -------
indemnity obligations hereunder shall not exceed the amount of the Purchase
Price.
(2) The Buyer shall not have any right to offset against
the Note for Losses indemnified pursuant to Section 6.1(A)(1).
(B) THE BUYER'S INDEMNITY. The Buyer agrees to indemnify and
---------------------
hold the Seller harmless from and against all Losses that it sustains or becomes
subject to as a result of the breach of any of the warranties, representations,
covenants or agreements of the Buyer made herein, as well as any claim made
against the Seller arising out of the Aurora Management Agreement and relating
to actions taken after the date of this Agreement, less any amounts actually
received by the Seller in respect of such Loss under insurance policies.
(C) THIRD PARTY CLAIM. Promptly after receipt by the Buyer or
-----------------
the Seller of notification of the assertion, or possible assertion, by a third
party of any claim, action, suit, proceeding or demand with respect to which
indemnification shall or may be claimed by the Buyer or the Seller pursuant to
this Section 6 (the "THIRD PARTY CLAIM") (such recipient being referred to
hereinafter as the "INDEMNITEE") the Indemnitee shall give written notice
describing the Third Party Claim in reasonable detail (an "INDEMNITY NOTICE") to
the other party (herein, the "INDEMNITOR"). Failure by the Indemnitee to send
the Indemnity Notice shall not release the Indemnitor from its
-6-
<PAGE>
obligations hereunder except to the extent that the failure to send the
Indemnity Notice prejudices the rights of the Indemnitor. The Indemnitor shall,
at its option, have full authority to defend any such claim, action, suit,
proceeding or demand, in the name of such Indemnitee or otherwise as the
Indemnitor shall elect utilizing counsel reasonably acceptable to the
Indemnitee, unless (i) the Indemnitee reasonably objects to such assumption on
the ground that counsel for such Indemnitor cannot represent both the Indemnitee
and the Indemnitor because such representation would be reasonably likely to
result in a conflict of interest or because there may be defenses available to
the Indemnitee that are not available to such Indemnitor, (ii) the Indemnitor is
not capable (by reason of insufficient financial capacity, bankruptcy,
receivership, liquidation, managerial deadlock, managerial neglect or similar
events) of maintaining a reasonable defense of such action or proceeding, (iii)
the action or proceeding seeks injunctive or other equitable relief against the
Indemnitee, or (iv) the amount in controversy exceeds the amount for which the
Indemnitor is liable under this Section 6.1. Neither the Indemnitor nor the
Indemnitee shall adjust, compromise or settle any such claim, action, suit,
proceeding or demand without the written consent of the other, which consent
shall not be unreasonably withheld. As to any Third Party Claim the defense of
which has been assumed by the Indemnitor, (i) the Indemnitee shall cooperate
fully in such defense as and to the extent reasonably requested by the
Indemnitor (such cooperation shall include the retention and, upon the
Indemnitor's request, the provision to the Indemnitor of records and information
that are reasonably relevant to such claim or demand and making employees
available on a mutually convenient basis to provide additional information and
explanation of any material provided hereunder) and (ii) the Indemnitor shall
not, subsequent to such assumption, be liable for any legal expenses incurred by
the Indemnitee. In the event of any claim under this Section 6 for
indemnification (whether or not in connection with a Third Party Claim), the
Indemnitee shall promptly advise the Indemnitor in writing, in reasonable
detail, of the amount and circumstances surrounding said claim (which notice
shall also be deemed to be an Indemnity Notice).
(D) INDEMNITY EXCLUSIVE REMEDY. Other than with respect to
--------------------------
enforcement of its rights to receive payment of the Note and to enforce the
Security Agreement and Pledge, the indemnity in this Section 6 shall be the
exclusive remedy for any misrepresentation or breach of warranty or breach of
any covenant or agreement in this Agreement.
7. FURTHER ASSURANCES AND COOPERATION. Following the Closing, the
----------------------------------
Seller and the Buyer shall each promptly execute, deliver and/or file such
documents, and promptly take such other actions, as shall be reasonably
requested by the other party to effectuate the Transactions.
8. GENERAL PROVISIONS.
-------------------
8.1 NOTICES. All notices and other communications hereunder shall
-------
be in writing and shall be delivered personally (including express courier) or
sent by telecopy (and promptly confirmed by mail) or sent by prepaid registered
or certified mail (return receipt requested) to the parties at the following
addresses:
(A) if to the Buyer, to
HWCC-Aurora Management, Inc.
Two Galleria Tower, Suite 2200
13455 Noel Road, LB 48
Dallas, Texas 75240
Attention: William D. Pratt
Telecopier: (972) 386-7411
-7-
<PAGE>
with a copy to:
Haynes and Boone, LLP
3100 NationsBank Plaza
901 Main Street
Dallas, Texas 75202-3789
Attention: William R. Hays, III
Telecopier: (214) 651-5940
(B) if to the Seller, to
PPI Corporation
Two Galleria Tower, Suite 2200
13455 Noel Road, LB48
Dallas, Texas 75240
Attention: Jack E. Pratt
Telecopier: (972) 386-7411
with a copy to:
Cox & Smith Incorporated
112 East Pecan Street, Suite 1800
San Antonio, Texas 78205-1521
Attention: Daniel G. Webster, III
Telecopier: (210) 226-8395
and to:
PPI Corporation
136 South Kentucky Ave.
Atlantic City, NJ 08401
Attention: Frederick H. Kraus
Telecopier: (609) 441-4624
Notices sent as aforesaid shall be deemed given and effective upon receipt (or
the date delivery is refused). Any party (and any other person or entity
designated to receive notice) may change its address or telecopy number for
notice by delivery to all other parties of notice to such effect in the manner
set forth herein.
8.2 ENTIRE AGREEMENT. This Agreement (including the Exhibits,
----------------
Schedules, documents and instruments referred to or incorporated herein)
constitutes the entire agreement, and supersedes all other prior agreements and
undertakings, both written and oral, among the parties with respect to the
subject matter hereof and thereof.
8.3 THIRD PARTIES; ASSIGNMENT. This Agreement is not intended to
-------------------------
confer upon any person other than the parties hereto any rights or remedies
hereunder and shall not be assigned (either rights or obligations) by either
party without the prior written consent of the other party.
8.4 GOVERNING LAW. This Agreement shall be construed in
-------------
accordance with the laws of the State of Texas and of the United States of
America, except to the extent that the requirements of the New Jersey Casino
Control Commission, the Illinois Gaming Board, the
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<PAGE>
Mississippi Gaming Commission and any other similar entity (collectively,
the "GAMING AUTHORITIES") and the New Jersey Casino Control Act, the Illinois
Riverboat Gambling Act, the Mississippi Gaming Control Act, all rules and
regulations promulgated thereunder and any and all other applicable gaming laws,
statutes, codes, ordinances, orders, judgments, decrees, injunctions, notices,
rules, regulations, restrictions and requirements (collectively, the "GAMING
LAWS") shall necessarily control, in which event the rights and obligations of
the parties hereto shall be subject and subordinate to the requirements of the
Gaming Authorities and the Gaming Laws.
8.5 COUNTERPARTS. This Agreement may be executed in counterparts
------------
which together shall constitute a single agreement.
8.6 JURISDICTION AND VENUE. Each party hereto irrevocably submits
----------------------
and consents to the exclusive jurisdiction of the United States District Court
for the Northern District of Texas and, if such court does not have
jurisdiction, of the courts of the State of Texas in Dallas County, in
connection with any action or proceeding arising out of or relating to this
Agreement and the transactions contemplated hereby, including the enforcement of
any arbitration award, and hereby waives any forum non conveniens objection to
----- --- ----------
any of such fora. In any such litigation, each party waives personal service of
the summons and complaint or other process and papers issued therein and agrees
that the service thereof may be made by certified or registered mail directed to
it at the address provided for in Section 8.1.
8.7 AMENDMENT. This Agreement may only be amended by an
---------
instrument in writing signed by the parties hereto.
8.8 WAIVER. Any term or provision of this Agreement may be waived
------
at any time by the party or parties entitled to the benefits thereof but (A) no
such waiver shall be effective unless in writing and signed by the party claimed
to have made such waiver, and (B) no waiver of any term, provision or breach of
this Agreement shall operate or be construed as a waiver of the same or any
other term or provision, or any other breach of this Agreement, on any other
occasion.
8.9 SEVERABILITY. In case any one or more of the provisions
------------
contained in this Agreement shall for any reason be held to be invalid, illegal
or unenforceable in any respect, such invalidity, illegality or unenforceability
shall not effect any other provision hereof, and this Agreement shall be
construed as if such invalid, illegal or unenforceable provision had never been
contained herein.
* * * * *
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
BUYER:
HWCC-AURORA MANAGEMENT, INC.
By: /s/ William D. Pratt
-----------------------------
Name: William D. Pratt
Title: Vice President
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<PAGE>
SELLER:
PPI CORPORATION
By: /s/ Jack E. Pratt
---------------------------
Name: Jack E. Pratt
Title: President
-10-
<PAGE>
Exhibit 1
---------
PROMISSORY NOTE
$3,800,000.00 Dallas, Texas April 1, 1997
FOR VALUE RECEIVED, the undersigned, HWCC-AURORA MANAGEMENT, INC., an
Illinois corporation (the "MAKER"), hereby unconditionally promises to pay to
the order of PPI CORPORATION, a New Jersey corporation ("PAYEE"), at Two
Galleria Tower, Suite 2200, 13455 Noel Road, LB 48, Dallas, Texas 75240, or such
other address in Dallas County, Texas, given to Maker by Payee, the principal
sum of Three Million Eight Hundred Thousand and 0/100 Dollars ($3,800,000.00) in
lawful money of the United States of America, together with interest (calculated
on the basis of a 365-day year or 366-day year, as appropriate), on the unpaid
principal balance, computed from the date hereof until maturity at the rate per
annum equal to the Interest Rate.
SECTION 1. DEFINITIONS. When used in this Note, the following terms shall
-----------------------
have the respective meanings specified herein or in the section referred to:
"Assignment and Assumption Agreement" shall mean the Assignment and
-----------------------------------
Assumption Agreement and Amendment to Agreement of Limited Partnership of PMLP
of even date herewith by and among Maker, Payee and Pratt Casino Corporation.
"Business Day" shall mean a day upon which business is transacted by
------------
national banks in Dallas, Texas.
"Event of Default" shall have the meaning ascribed to it in Section 5
----------------
hereof.
"Gaming Authorities" shall mean the New Jersey Casino Control Commission,
------------------
the Illinois Gaming Board, the Mississippi Gaming Commission and any other
similar entity.
"Gaming Laws" shall mean the New Jersey Casino Control Act, the Illinois
-----------
Riverboat Gambling Act, the Mississippi Gaming Control Act, all rules and
regulations promulgated thereunder and any and all other applicable gaming laws,
statutes, codes, ordinances, orders, judgments, decrees, injunctions, notices,
rules, regulations, restrictions and requirements.
"General Partnership Interest" shall mean Maker's general partnership
----------------------------
interest in PMLP.
"Interest Rate" shall mean fourteen percent (14%).
-------------
"Management Services Agreement" shall mean that certain Management Services
-----------------------------
Agreement made and entered into as of June 21, 1991, by and between Hollywood
Casino-Aurora, Inc., an Illinois corporation ("HCA"), and Greate Bay Casino
Corporation, a New Jersey corporation ("GBCC") (whose interest is now owned by
PMLP), as amended by that certain First Amendment to Management Services
Agreement made and entered into as of May 14, 1992, by and between HCA and GBCC
(whose interest is now owned by PMLP).
<PAGE>
"Maximum Rate" shall mean the highest nonusurious rate of interest (if any)
------------
permitted from day to day by applicable law. Payee hereby notifies and
discloses to Maker that, for purposes of Tex. Rev. Civ. Stat. Ann. art. 5069-
1.04, as it may from time to time be amended, the "applicable rate ceiling"
shall be the "indicated rate" ceiling from time to time in effect as limited by
article 5069-1.04(b); provided, however, that to the extent permitted by
applicable law, Payee reserves the right to change the "applicable rate ceiling"
from time to time by further notice and disclosure to Maker.
"Obligation" shall mean all of Maker's indebtedness, liabilities and
----------
obligations now or hereafter existing in favor of Payee, arising under this
Note, the Security Agreement, the Purchase Agreement or the Assignment and
Assumption Agreement, regardless of whether they are direct, indirect, primary,
secondary, joint, several, joint and several, liquidated, unliquidated, fixed or
contingent.
"PMLP" shall mean Pratt Management, L.P., a Delaware limited partnership.
----
"Purchase Agreement" shall mean the General Partnership Interest Purchase
------------------
Agreement of even date herewith by and between Maker and Payee.
"Security Agreement" shall mean that certain security agreement dated of
------------------
even date herewith from Maker to Payee covering the General Partnership
Interest.
"Services Agreement" shall mean that certain Services Agreement of even
------------------
date herewith, by and between Hollywood Casino Corporation, a Delaware
corporation, and PMLP.
SECTION 2. PAYMENT. The Note shall be due and payable in (i) equal
-------------------
monthly installments of principal and interest in the amount of $83,333.00,
commencing on May 1, 1997, and thereafter, on the first day of each succeeding
calendar month during the term of this Note; (ii) variable quarterly
installments of principal commencing on July 1, 1997, and thereafter, on each
succeeding October 1, January 1, April 1 and July 1, through January 1, 2002, in
the amount equal to the general partner's share of quarterly cash distributions
from PMLP pursuant to Section 4.3 of the Agreement of Limited Partnership of
PMLP dated as of February 17, 1994, as amended to date; and (iii) in one final
installment of principal on April 1, 2002 in the amount of the unpaid principal
balance, if any, on this Note as of such date together with all accrued and
unpaid interest, if any.
Should the principal of, or any installment of the principal of or interest
upon, this Note become due and payable on any day other than a Business Day, the
maturity thereof shall be extended to the next succeeding Business Day, and
interest shall be payable with respect to such extension. All payments of
principal and interest on this Note shall be made by Maker to Payee in federal
or other immediately available funds. Payments made to Payee by Maker hereunder
shall be applied first to accrued interest and then to principal.
All past due principal of and, to the extent permitted by applicable law,
interest upon this Note shall bear interest at the Maximum Rate.
SECTION 3. WAIVER. Except as otherwise provided herein,
-------------------------------
Maker and each surety, endorser, guarantor and other party ever liable for
payment of any sums of money payable upon this Note, jointly and severally waive
presentment, demand, protest, notice of protest and non-payment or other notice
of default, notice of acceleration and intention to accelerate or other notice
of any kind, and agree that their liability under this Note shall not be
affected by any renewal or extension in the time of payment hereof, or in any
indulgences, or by any release or change in any security for the payment of this
Note, and hereby consent to any and all renewals, extensions,
-2-
<PAGE>
indulgences, releases or changes, regardless of the number of such renewals,
extensions, indulgences, releases or changes.
No waiver by Payee of any of its rights or remedies hereunder or under any
other document evidencing or securing this Note or otherwise, shall be
considered a waiver of any other subsequent right or remedy of Payee; no delay
or omission in the exercise or enforcement by Payee of any rights or remedies
shall ever be construed as a waiver of any right or remedy of Payee; and no
exercise or enforcement of any such rights or remedies shall ever be held to
exhaust any right or remedy of Payee.
SECTION 4. SECURITY. This Note is secured by the collateral described in
--------------------
the Security Agreement.
SECTION 5. EVENTS OF DEFAULT AND REMEDIES. An "Event of Default" shall
------------------------------------------
exist hereunder if any one or more of the following events shall occur and be
continuing: (a) Maker shall fail to pay when due any principal of, or interest
upon, this Note or any other Obligation and such failure shall continue for ten
(10) days following the date Payee notifies Maker of such failure; (b) any
representation or warranty made by Maker to Payee herein or in the Security
Agreement shall prove to be untrue or inaccurate in any material respect and
shall continue to be untrue or inaccurate thirty (30) days after the date Payee
notifies Maker of such event; (c) default shall occur in the performance of any
of the covenants or agreements of Maker contained herein or in the Security
Agreement and such default shall continue for thirty (30) days following the
date Payee notifies Maker of such default; (d) default shall occur in the
payment of any material indebtedness of Maker, or any such indebtedness shall
become due before its stated maturity by acceleration of the maturity thereof or
otherwise or shall become due by its terms and shall not be promptly paid or
extended; (e) the Security Agreement shall cease to be a legal, valid, binding
agreement enforceable against any party executing the same in accordance with
the respective terms thereof or shall in any way be terminated or become or be
declared ineffective or inoperative or shall in any way whatsoever cease to give
or provide the liens, security interests, rights, titles, interests, remedies,
powers or privileges intended to be created thereby; (f) Maker shall (1) apply
for or consent to the appointment of a receiver, trustee, intervenor, custodian
or liquidator of itself or of all or a substantial part of its assets, (2) be
adjudicated a bankrupt or insolvent or file a voluntary petition for bankruptcy
or admit in writing that it is unable to pay its debts as they become due, (3)
make a general assignment for the benefit of creditors, (4) file a petition or
answer seeking reorganization or an arrangement with creditors or to take
advantage of any bankruptcy or insolvency laws, or (5) file an answer admitting
the material allegations of, or consent to, or default in answering, a petition
filed against it in any bankruptcy, reorganization or insolvency proceeding, or
take corporate action for the purpose of effecting any of the foregoing; (g) an
order, judgment or decree shall be entered by any court of competent
jurisdiction or other competent authority approving a petition seeking
reorganization of Maker or appointing a receiver, trustee, intervenor or
liquidator of Maker, or of all or substantially all of its or their assets, and
such order, judgment or decree shall continue unstayed and in effect for a
period of sixty (60) days; (h) Payee's liens, mortgages or security interests in
any of the collateral for this Note should become unenforceable, or cease to be
first priority liens, mortgages or security interests; (i) the dissolution or
termination of Maker; (j) any final judgment(s) for the payment of money in
excess of the sum of $100,000 in the aggregate shall be rendered against Maker
and such judgment or judgments shall not be satisfied or discharged at least ten
(10) days prior to the date on which any of its assets could be lawfully sold to
satisfy such judgments; or (k) any default or event of default shall occur under
the Services Agreement or the Management Services Agreement.
Upon the occurrence of any Event of Default hereunder or under the Security
Agreement, then in any such event the holder hereof may, at its option, (i)
declare the entire unpaid balance of principal of and accrued interest upon this
Note and any other Obligation to be immediately due and payable without
presentment or notice of any kind which Maker waives pursuant to Section 3
---------
herein,
-3-
<PAGE>
(ii) reduce any claim to judgment; and/or (iii) pursue and enforce any of
Payee's rights and remedies available pursuant to any applicable law or
agreement including, without limitation, foreclosing all liens and security
interests securing payment of all or any part hereof or thereof.
The holder hereof agrees that, notwithstanding anything set forth herein to
the contrary, in the event of a default hereunder or in the performance of any
of the terms, covenants or conditions contained in any instrument or instruments
given as security for the payment of this Note, which defaults do not involve
the payment of money and for which the holder hereof elects to accelerate the
maturity of the indebtedness evidenced hereby, the holder hereof shall, prior to
such acceleration, give written notice of such default to Maker as and to the
extent hereinafter provided, which notice shall be the only notice required to
be given to Maker or others liable hereon. In the event that such default shall
not be cured within ten (10) days from the effective date of such notice, then
the holder hereof may, at such holder's option, without further or additional
notice, and, in any event, without demand or presentment, declare the
indebtedness evidenced by this Note at once due and payable. The foregoing is
not intended and shall not be deemed under any circumstances to require the
holder hereof to give notice of any type or nature to Maker in the event of
default in the payment of any installment of principal or interest hereon, which
notice, together with any demand or presentment hereof, are hereby expressly
waived by Maker.
SECTION 6. NOTICE. Whenever this Note requires or permits any notice,
------------------
approval, request or demand from one party to another, the notice, approval,
request or demand must be in writing and shall be deemed to have been given when
personally served (including by courier or overnight delivery service) or sent
by telecopy (with confirmation of receipt received) or when deposited in the
United States mails, registered or certified, return receipt requested,
addressed to the party to be notified at the following address (or at such other
address as may have been designated by written notice):
Payee: PPI Corporation
Two Galleria Tower, Suite 2200
13455 Noel Road, LB 48
Dallas, Texas 75240
Attention: Jack E. Pratt
Telecopier: (972) 386-7411
Maker: HWCC-Aurora Management, Inc.
Two Galleria Tower, Suite 2200
13455 Noel Road, LB 48
Dallas, Texas 75240
Attention: William D. Pratt
Telecopier: (972) 386-7411
SECTION 7. VOLUNTARY PREPAYMENT. Maker reserves the right to prepay the
--------------------------------
outstanding principal balance of this Note, in whole or in part, at any time and
from time to time, without premium or penalty. Any such prepayment shall be
made together with payment of interest accrued on the amount of principal being
prepaid through the date of such prepayment, and shall be applied to the
installments of principal due hereunder in the inverse order of maturity.
SECTION 8. USURY LAWS. Regardless of any provisions contained in this
----------------------
Note, the Payee shall never be deemed to have contracted for or be entitled to
receive, collect or apply as interest on this Note, any amount in excess of the
Maximum Rate, and, in the event Payee ever receives, collects or applies as
interest any such excess, such amount which would be excessive interest shall be
applied to the reduction of the unpaid principal balance of this Note, and, if
the principal balance of
-4-
<PAGE>
this Note is paid in full, any remaining excess shall forthwith be paid to
Maker. In determining whether or not the interest paid or payable under any
specific contingency exceeds the Maximum Rate, Maker and Payee shall, to the
maximum extent permitted under applicable law, (i) characterize any non-
principal payment (other than payments which are expressly designated as
interest payments hereunder) as an expense, fee, or premium, rather than as
interest; (ii) exclude voluntary prepayments and the effect thereof; and (iii)
spread the total amount of interest throughout the entire contemplated term of
this Note so that the interest rate is uniform throughout such term.
SECTION 9. COSTS. If this Note is placed in the hands of an attorney for
-----------------
collection, or if it is collected through any legal proceeding at law or in
equity, or in bankruptcy, receivership or other court proceedings, Maker agrees
to pay all costs of collection, including, but not limited to, court costs and
reasonable attorneys' fees, including all costs of appeal.
SECTION 10. APPLICABLE LAW. This Note is being executed and delivered and
---------------------------
is intended to be performed in the State of Texas. This Note shall be construed
in accordance with the laws of the State of Texas and of the United States of
America, except to the extent that the requirements of the Gaming Authorities
and Gaming Laws shall necessarily control, in which event the rights and
obligations of the parties hereto shall be subject and subordinate to the
requirements of the Gaming Authorities and the Gaming Laws. In the event of a
dispute involving this Note or any other instruments executed in connection
herewith, the undersigned irrevocably agrees that venue for such dispute shall
lie in any court of competent jurisdiction in Dallas County, Texas.
MAKER:
HWCC-AURORA MANAGEMENT, INC.
By:_____________________________
Name: William D. Pratt
Title: Vice President
-5-
<PAGE>
Exhibit 2
---------
ASSIGNMENT AND ASSUMPTION AGREEMENT
AND AMENDMENT TO AGREEMENT OF LIMITED
PARTNERSHIP OF
PRATT MANAGEMENT, L.P.
THIS ASSIGNMENT AND ASSUMPTION AGREEMENT AND AMENDMENT TO AGREEMENT OF
LIMITED PARTNERSHIP OF PRATT MANAGEMENT, L.P. (this "AGREEMENT"), is made as of
April 1, 1997 by and among PPI CORPORATION, a New Jersey corporation ("PPI"),
PRATT CASINO CORPORATION, a Delaware corporation ("PCC"), and HWCC-AURORA
MANAGEMENT, INC., an Illinois corporation ("HOLLYWOOD").
RECITALS
--------
1. Pratt Management, L.P. (the "PARTNERSHIP") has been formed as a
limited partnership under the Delaware Revised Uniform Limited Partnership Act
(the "ACT") pursuant to a Certificate of Limited Partnership of the Partnership,
as filed in the office of the Secretary of State of the State of Delaware (the
"SECRETARY OF STATE") on October 26, 1994 (the "CERTIFICATE"), and an Agreement
of Limited Partnership of the Partnership, dated February 17, 1994 (the
"PARTNERSHIP AGREEMENT").
2. PPI is the sole general partner of the Partnership and PCC is the sole
limited partner of the Partnership.
3. PPI desires to assign, transfer and convey all of its interest in the
Partnership as a general partner of the Partnership (the "GP INTEREST") to
Hollywood, and PPI desires to withdraw from the Partnership as a general partner
of the Partnership.
4. Hollywood desires to purchase the GP Interest, and Hollywood and PCC
desire that Hollywood be admitted to the Partnership as a substitute general
partner of the Partnership.
5. PPI and Hollywood are, contemporaneously herewith, entering into a
General Partnership Interest Purchase Agreement dated as of the date hereof (the
"PURCHASE AGREEMENT"), pursuant to which PPI has agreed to sell to Hollywood,
and Hollywood has agreed to purchase, the GP Interest.
6. The undersigned, being all of the partners of the Partnership, to
accomplish the foregoing, desire to amend the Partnership Agreement and provide
for the assignment and assumption of the General Partner Interest in the manner
set forth herein.
AGREEMENT
---------
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants
and promises contained herein and in the Purchase Agreement, and for other good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties agree as follows:
1. ASSIGNMENT. Notwithstanding any provision in the Partnership
----------
Agreement to the contrary, for value received, the receipt and sufficiency of
which are hereby acknowledged, upon the execution of this Agreement by the
parties hereto, PPI does hereby sell, assign, convey and otherwise transfer to
Hollywood all right, title, interest and obligations of PPI in, to and under the
GP Interest. Such assignment entitles Hollywood to become or to exercise all
rights and powers, including management rights, of a general partner under the
Act and the Partnership Agreement.
<PAGE>
2. ASSUMPTION AND RELEASE. Hollywood does hereby assume and agree to
----------------------
perform, pay or discharge those liabilities and obligations set forth in,
related to, or arising out of the GP Interest under the Partnership Agreement
and the Act, to the extent to be performed, paid or discharged after the date
hereof. PPI is hereby released from any and all liabilities and obligations to
the Partnership, whether known or unknown, liquidated or unliquidated, and,
subject to the provisions of Section 3 below, none of the Partnership, PCC or
Hollywood shall have any claim against PPI on account, by reason of or pursuant
to the Partnership Agreement or PPI having acted as a general partner of the
Partnership.
3. ADDITIONAL RIGHTS AND OBLIGATIONS. PPI and Hollywood agree and
---------------------------------
acknowledge that this Agreement is being entered into pursuant to and subject to
the terms and conditions set forth in the Purchase Agreement and that additional
rights of PPI and Hollywood are expressly provided for therein, and that the
execution and delivery of this Agreement shall not impair or diminish any of the
rights or obligations of any of the parties to the Purchase Agreement as set
forth therein.
4. ADMISSION. Notwithstanding any provision in the Partnership Agreement
----------
to the contrary, Hollywood is hereby admitted to the Partnership as a general
partner of the Partnership. The admission shall be effective upon the filing of
an amendment to the Certificate in the Office of the Secretary of State of
Delaware that reflects the fact that Hollywood is a general partner of the
Partnership, and shall occur, and for all purposes shall be deemed to have
occurred, immediately prior to the withdrawal of PPI from the Partnership as a
general partner of the Partnership.
5. WITHDRAWAL. Notwithstanding any provision in the Partnership
----------
Agreement to the contrary, PPI hereby withdraws from the Partnership as a
general partner of the Partnership. The withdrawal shall be effective upon the
filing of an amendment to the Certificate in the Office of the Secretary of
State of Delaware that reflects the fact that PPI is not a general partner of
the Partnership. Notwithstanding such withdrawal, PPI and its directors,
officers, employees and agents, and their respective assigns, shall nevertheless
continue to be "Covered Persons" for the purposes of Section 6.6 and 6.7 of the
Partnership Agreement and entitled to enforce the provisions thereof.
6. CONTINUATION. Following the withdrawal of PPI from the Partnership as
------------
a general partner of the Partnership, Hollywood is authorized to and hereby
agrees to continue the business of the Partnership without dissolution.
7. BOOKS AND RECORDS. PPI, as the withdrawing general partner of the
-----------------
Partnership, and Hollywood, as the substituted general partner of the
Partnership, shall take all actions necessary under the Act and the Partnership
Agreement to evidence the withdrawal of PPI from the Partnership as a general
partner of the Partnership and the admission of Hollywood to the Partnership as
a substituted general partner of the Partnership.
8. FUTURE COOPERATION. Each of the parties hereto agrees to cooperate at
------------------
all times from and after the date hereof with respect to all of the matters
described herein, and to execute such further assignments, releases,
assumptions, amendments of the Partnership Agreement, notifications and other
documents as may be reasonably requested for the purpose of giving effect to, or
evidencing or giving notice of, the transactions contemplated by this Agreement.
9. BINDING EFFECT. This Agreement, and all the terms and provisions
--------------
hereof, shall be binding upon, and shall inure to the benefit of, the parties
hereto and their respective successors and permitted assigns.
10. EXECUTION IN COUNTERPARTS. This Agreement may be executed in
-------------------------
counterparts, which shall constitute a single agreement.
-2-
<PAGE>
11. AGREEMENT IN EFFECT. Except as hereby amended, the Partnership
-------------------
Agreement shall remain in full force and effect.
12. GOVERNING LAW. The construction and validity of this Agreement and
-------------
the rights and obligations of the respective parties hereunder shall be governed
by and interpreted and enforced in accordance with the laws of the State of
Delaware except to the extent that applicable gaming laws necessarily control.
13. NOTICES. Any and all written notices to Hollywood required or
-------
permitted by this Agreement or the Partnership Agreement shall be addressed to:
HWCC-Aurora Management, Inc.
Two Galleria Tower, Suite 2200
13455 Noel Road, LB 48
Dallas, Texas 75240
Attn.: Mr. William D. Pratt,
General Counsel
Telephone Number: (972) 392-7777
Telecopy Number: (972) 386-7411
14. AMENDMENT. This Agreement may only be amended by an instrument in
---------
writing signed by the parties hereto.
* * * * *
-3-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
day and year first above written.
HWCC-AURORA MANAGEMENT, INC.,
as General Partner
By:______________________________
Name: William D. Pratt
Title: Vice President
PRATT CASINO CORPORATION,
as Limited Partner
By:_______________________________
Name: Charles F. LaFrano III
Title: Vice President
PPI CORPORATION,
as Withdrawing General Partner
By:_______________________________
Name: Jack E. Pratt
Title: President
-4-
<PAGE>
Exhibit 3
---------
CERTIFICATE OF AMENDMENT
TO THE
CERTIFICATE OF LIMITED PARTNERSHIP
OF
PRATT MANAGEMENT, L.P.
The undersigned, desiring to amend the Certificate of Limited Partnership
of Pratt Management, L.P. (the "PARTNERSHIP") pursuant to the provisions of
Section 17-202 of the Revised Uniform Limited Partnership Act of the State of
Delaware, does hereby certify as follows:
FIRST: The name of the Partnership is Pratt Management, L.P.
SECOND: Article 3 of the Certificate of Limited Partnership shall be
amended as follows:
The name and business address of the sole general partner of the
Partnership are as follows:
HWCC-Aurora Management, Inc.
Two Galleria Tower, Suite 2200
13455 Noel Road, LB 48
Dallas, Texas 75240
IN WITNESS WHEREOF, the undersigned executed this Amendment to the
Certificate of Limited Partnership as of this 1st day of April, 1997.
PRATT MANAGEMENT, L.P.
BY: PPI CORPORATION,
its Withdrawing General Partner
By:_______________________________
William D. Pratt
Vice President
BY: HWCC-AURORA MANAGEMENT, INC.,
Its Substituted General Partner
By:________________________________
Charles F. LaFrano III
Vice President
<PAGE>
Exhibit 4
---------
SECURITY AGREEMENT AND PLEDGE
THIS SECURITY AGREEMENT is made and entered into as of April 1, 1997, by
and between HWCC-AURORA MANAGEMENT, INC., an Illinois corporation ("PLEDGOR"),
and PPI CORPORATION, a New Jersey corporation ("SECURED PARTY").
1. COLLATERAL AND OBLIGATIONS.
--------------------------
Pledgor is the legal and equitable owner of a general partnership interest
(the "GENERAL PARTNERSHIP INTEREST") in Pratt Management, L.P., a Delaware
limited partnership (the "PARTNERSHIP"), created and existing under that certain
Agreement of Limited Partnership dated February 17, 1994, as amended by that
certain Assignment and Assumption Agreement and Amendment to Agreement of
Limited Partnership (the "ASSIGNMENT AND ASSUMPTION AND AMENDMENT AGREEMENT"),
dated of even date herewith, (as amended, the "PARTNERSHIP AGREEMENT").
Pursuant to that certain General Partnership Interest Purchase Agreement of even
date herewith (the "PURCHASE AGREEMENT"), Pledgor has executed that one certain
promissory note payable to the order of Secured Party in the original principal
amount of Three Million Eight Hundred Thousand Dollars ($3,800,000) (the
"NOTE"), dated of even date herewith. Capitalized terms not otherwise defined
herein shall have the same meanings as in the Note, the terms and provisions of
which are incorporated by this reference. As used herein, the term
"OBLIGATIONS" shall mean: all indebtedness, liabilities and obligations of
Pledgor arising under the Note, this Security Agreement, the Purchase Agreement
and the Assignment and Assumption and Amendment Agreement, now or hereafter
existing in favor of Secured Party, regardless of whether they are direct,
indirect, primary, secondary, joint, several, joint and several, liquidated,
unliquidated, fixed or contingent, and any and all renewals, extensions,
modifications, rearrangements, or restatements of all or any part of the
indebtednesses, liabilities, and obligations arising under any of the
Obligations.
In order to secure the Obligations, Pledgor hereby pledges, transfers and
assigns to Secured Party and grants to Secured Party a security interest in and
to the following (the "COLLATERAL"):
All of Pledgor's right, title and interest in and to the General
Partnership Interest, whether now owned or hereafter acquired, including
(a) all distributions, proceeds, fees, preferences, payments or other
benefits which Pledgor now is or may hereafter become entitled to receive
with respect to or on account of the General Partnership Interest and (b)
all rights, powers and authority of Pledgor to serve as the sole general
partner of the Partnership to the fullest extent provided in the
Partnership Agreement.
2. WARRANTIES AND COVENANTS OF PLEDGOR.
-----------------------------------
The Pledgor hereby warrants to Secured Party and covenants and agrees with
Secured Party as follows:
(a) That Pledgor is the sole legal and equitable owner and holder of
the General Partnership Interest; that it has the authority to execute this
Security Agreement; and that this Security Agreement constitutes the legal,
valid and binding obligation of Pledgor;
(b) That, as of the date hereof, Pledgor has not transferred,
assigned, pledged, hypothecated or granted any security interest in all or any
portion of the Collateral; that it has full right and power to make the
transfer, pledge and assignment and grant the security interest granted hereby;
and that this instrument is effective to accomplish such transfer, pledge,
assignment and grant;
<PAGE>
(c) That Pledgor shall, at its sole cost and expense, execute and
deliver any financing statements or other documents which Secured Party
reasonably requests to protect or perfect the assignment, pledge, transfer and
grant of the security interest made herein;
(d) That Secured Party shall not be responsible in any way for any
depreciation in the value of the Collateral nor have any duty or responsibility
whatsoever to take any steps to preserve any rights of Pledgor in the
Collateral; and
(e) That Pledgor shall not sell, mortgage, hypothecate, assign or
otherwise transfer any portion of or interest in the Collateral without the
prior written consent of Secured Party.
3. EVENTS OF DEFAULT.
-----------------
A Default or Event of Default under the Note shall constitute an "Event of
Default" hereunder.
4. REMEDIES UPON DEFAULT.
---------------------
(a) Upon the occurrence of any Event of Default, Secured Party shall
have the following rights with respect to the Collateral:
(1) To sell the Collateral or any part thereof, upon giving at
least ten (10) days' prior notice to Pledgor of the time and place of sale
(which notice Pledgor and Secured Party agree is reasonable), for cash or
upon credit or for future delivery, Pledgor hereby waiving all rights, if
any, of marshalling the Collateral and any other security for the
Obligations, and at the option and in the complete discretion of Secured
Party, either:
(A) at public sale; or
(B) at private sale, in which event such notice shall also
contain the terms of the proposed sale, and Pledgor shall have until
the time of such proposed sale in which to redeem the Collateral or to
procure a purchaser willing, ready and able to purchase the Collateral
on terms more favorable to Pledgor, Secured Party and the holders of
the Note, and if such a purchaser is so procured, then Secured Party
shall sell the Collateral to the purchaser so procured; and
(2) To bid for and to acquire, unless prohibited by applicable
law, free from any redemption right, the Collateral, or any part thereof,
and, if Secured Party is then the holder of the Obligations or any
participation or other interest therein, in lieu of paying cash therefor,
Secured Party may make settlement for the selling price by crediting the
net selling price, if any, after deducting all costs and expenses of every
kind, upon the outstanding principal amount of the Obligations, in such
order and manner as Secured Party, in its discretion, may deem advisable.
The Secured Party, upon so acquiring the Collateral, or any part thereof,
shall be entitled to hold or otherwise deal with or dispose of the same in
any manner not prohibited by applicable law.
(3) To enforce any other remedy available to Secured Party at law
or in equity.
From time to time Secured Party may, but shall not be obligated to,
postpone the time and change the place of any proposed sale of any of the
Collateral for which notice has been given as provided above, upon giving at
least five (5) days' prior notice to Pledgor (which notice Pledgor and Secured
Party agree is reasonable) of the new time and place of such sale whenever, in
the judgment of Secured Party, such postponement or change is necessary or
appropriate in order that the
-2-
<PAGE>
provisions of this agreement applicable to such sale may be fulfilled or in
order to obtain more favorable conditions under which such sale may take place.
If, in the exercise of its remedies hereunder, Secured Party (but only if
Secured Party is PPI Corporation) elects to foreclose on the portion of the
Collateral described in clause (b) of the description of the Collateral
contained in the second paragraph of Section 1 hereof, and if Secured Party is
the successful bidder at any such public or private sale conducted hereunder
(the "foreclosure"), Secured Party shall have the right, but not the obligation,
to become and to be admitted as the sole general partner of the Partnership. In
order to exercise such right, Secured Party shall give written notice to Pledgor
and the Partnership any time after the foreclosure whereupon Pledgor shall
immediately execute and deliver to Purchaser an amendment to the Partnership
Agreement and to the Partnership's Certificate of Limited Partnership pursuant
to which the Pledgor withdraws as the general partner of the Partnership and
Secured Party is admitted as the new sole general partner of the Partnership.
Pledgor hereby irrevocably appoints Secured Party as its true and lawful
attorney-in-fact to execute and deliver the foregoing documents and any and all
other documents or instruments reasonably necessary to implement the rights
granted to Secured Party pursuant to this paragraph. This power of attorney is
coupled with an interest and shall thus be irrevocable by Pledgor. The rights
granted to Secured Party under this paragraph shall survive the foreclosure and
the exercise by Secured Party of any and all other rights and remedies available
to Secured Party.
(b) In case of any sale by Secured Party of any of the Collateral on
credit or for future delivery, which may be elected at the option and in the
complete discretion of Secured Party, the Collateral so sold may be retained by
Secured Party until the selling price is paid by the purchaser, but Secured
Party shall incur no liability in case of failure of the purchaser to take up
and pay for the Collateral so sold. In case of any such failure, such
Collateral so sold may be again similarly sold. After deducting all costs or
expenses of every kind (including, without limitation, the reasonable attorneys'
fees and legal expenses incurred by Secured Party), Secured Party shall apply
the residue of the proceeds of any sale or sales, if any, to pay the principal
of and interest upon the Obligation in such order and manner as Secured Party in
its discretion may deem advisable. The excess, if any, shall be paid to
Pledgor. Secured Party shall not incur any liability as a result of the sale of
the Collateral at any private sale or sales.
(c) Secured Party shall have all rights, remedies and recourses
granted in the Note and/or existing at common law or equity in connection with
the payment and performance of the Obligations (including specifically those
granted by the Texas Business and Commerce Code, and the right of offset), and
such rights and remedies (1) shall be cumulative and concurrent, (2) may be
pursued separately, successively or concurrently against Pledgor and any other
party obligated under the Obligations, or against the Collateral, at the sole
discretion of Secured Party, (3) may be exercised as often as occasion therefor
shall arise, it being agreed by Pledgor that the exercise or failure to exercise
any of same shall in no event be construed as a waiver or release thereof or of
any other right, remedy or recourse, and (4) are intended to be and shall be,
non-exclusive.
(d) Notwithstanding a foreclosure upon any of the Collateral or
exercise of any other remedy by Secured Party in connection with an Event of
Default, Pledgor shall not be subrogated thereby to any rights of Secured Party
against the Collateral or Pledgor or any property of Pledgor, nor shall Pledgor
be deemed to be the owner of any interest in any of the Obligations, nor shall
Pledgor exercise any rights or remedies with respect to Pledgor or the
Collateral or the property of Pledgor until all Obligations have been paid to
Secured Party and are fully performed and discharged.
(e) All recitals in any instrument of assignment or any other
instrument executed by Secured Party incident to the sale, transfer, assignment
or other disposition or utilization of the Collateral or any part thereof
hereunder shall be full proof of the matters stated therein and no other
-3-
<PAGE>
proof shall be required to establish full legal propriety of the sale or other
action taken by Secured Party or of any fact, condition or thing incident
thereto, and all prerequisites of such sale or other action shall be presumed
conclusively to have been performed or to have occurred.
5. NOTICES.
-------
All notices, consents and other communications hereunder shall be in
writing and shall be delivered personally (including express courier) or sent by
telecopy (and promptly confirmed by mail) or sent by prepared registered or
certified mail (return receipt requested) to the parties at the following
addresses:
Pledgor:
-------
HWCC-Aurora Management, Inc.
Two Galleria Tower, Suite 2200
13455 Noel Road, LB 48
Dallas, Texas 75240
Attention: William D. Pratt
Telecopier: (972) 386-7411
Secured Party:
-------------
PPI Corporation
Two Galleria Tower, Suite 2200
13455 Noel Road, LB 48
Dallas, Texas 75240
Attention: Jack E. Pratt
Telecopier: (972) 386-7411
Notices sent as aforesaid shall be deemed given and effective upon receipt
(or the date delivery is refused). Any party (and any other person or entity
designated to receive notice) may change its address or telecopy number for
notice by delivery to all after notice to such effect in the manner set forth
herein.
6. GOVERNING LAW.
-------------
This Security Agreement shall be construed in accordance with the laws of
the State of Texas and of the United States of America, except to the extent
that the requirements of the New Jersey Casino Control Commission, the Illinois
Gaming Board, the Mississippi Gaming Commission and any other similar entity
(collectively, the "GAMING AUTHORITIES") and the New Jersey Casino Control Act,
the Illinois Riverboat Gambling Act, the Mississippi Gaming Control Act, all
rules and regulations promulgated thereunder and any and all other applicable
gaming laws, statutes, codes, ordinances, orders, judgments, decrees,
injunctions, notices, rules, regulations, restrictions and requirements
(collectively, the "GAMING LAWS") shall necessarily control, in which event the
rights and obligations of the parties hereto shall be subject and subordinate to
the requirements of the Gaming Authorities and the Gaming Laws.
7. BINDING EFFECT; MISCELLANEOUS.
-----------------------------
(a) This Security Agreement shall be binding upon and inure to the
benefit of and be enforceable by the undersigned and their respective successors
and assigns.
(b) The headings to the various paragraphs of this Security Agreement
have been inserted for reference only and shall not modify, define, limit or
expand the expressed provisions of
-4-
<PAGE>
this agreement. This Security Agreement may be executed in counterparts, each of
which shall be an original, and such counterparts shall together constitute but
one and the same instrument.
(c) No delay or omission on the part of Secured Party in exercising
any right hereunder shall operate as a waiver of any such right or any other
right. A waiver on any one or more occasions shall not be construed as a bar to
or waiver of any right or remedy on any future occasion.
(d) All covenants, duties and obligations of Pledgor under this
Security Agreement shall be performed in Dallas, Dallas County, Texas.
(e) The remedies given to Secured Party hereunder are cumulative and
in addition to any and all other rights which Secured Party may have against
Pledgor or any other person or firm, at law or in equity, including exoneration
and subrogation, or by virtue of any other agreement.
(f) This Security Agreement and the provisions set forth herein, shall
continue until payment in full of the Obligations.
(g) Secured Party has not assumed, and nothing contained herein shall
be declared to have imposed upon Secured Party, any of Pledgor's duties or
obligations as a partner of the Partnership.
* * * * *
-5-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
HWCC-AURORA MANAGEMENT, INC.
By:_______________________________
Name: William D. Pratt
Title: Vice President
PPI CORPORATION
By:________________________________
Name: Jack E. Pratt
Title: President
CONSENT
The undersigned, Pratt Casino Corporation, being the sole limited partner
of the Partnership, hereby consents to the foregoing Security Agreement and
Pledge and to the terms and provisions thereof, and, to the extent applicable,
agrees to be bound thereby.
PRATT CASINO CORPORATION
By:_________________________________
Name: Charles F. LaFrano III
Title: Vice President
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF HOLLYWOOD CASINO CORPORATION AND
SUBSIDIARIES AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<CIK> 0000888245
<NAME> HOLLYWOOD CASINO CORPORATION
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997
<PERIOD-START> APR-01-1997 JAN-01-1997
<PERIOD-END> JUN-30-1997 JUN-30-1997
<CASH> 26,807 26,807
<SECURITIES> 0 0
<RECEIVABLES> 4,579 4,579
<ALLOWANCES> 1,791 1,791
<INVENTORY> 3,257 3,257
<CURRENT-ASSETS> 43,950 43,950
<PP&E> 234,820 234,820
<DEPRECIATION> 58,398 58,398
<TOTAL-ASSETS> 295,136 295,136
<CURRENT-LIABILITIES> 31,352 31,352
<BONDS> 221,885 221,885
0 0
0 0
<COMMON> 2 2
<OTHER-SE> 35,454 35,454
<TOTAL-LIABILITY-AND-EQUITY> 295,136 295,136
<SALES> 0 0
<TOTAL-REVENUES> 66,301 133,771
<CGS> 0 0
<TOTAL-COSTS> 45,769 91,518
<OTHER-EXPENSES> 10,888 22,772
<LOSS-PROVISION> 174 335
<INTEREST-EXPENSE> 7,209 14,373
<INCOME-PRETAX> 2,261 4,773
<INCOME-TAX> 1,068 2,089
<INCOME-CONTINUING> 1,193 2,684
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1,193 2,684
<EPS-PRIMARY> .05 .11
<EPS-DILUTED> 0 0
</TABLE>
<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>
<RESTATED>
<CIK> 0000888245
<NAME> HOLLYWOOD CASINO CORPORATION
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996
<PERIOD-START> APR-01-1996 JAN-01-1996
<PERIOD-END> JUN-30-1996 JUN-30-1996
<CASH> 50,643 50,643
<SECURITIES> 0 0
<RECEIVABLES> 31,512 31,512
<ALLOWANCES> 17,339 17,339
<INVENTORY> 5,347 5,347
<CURRENT-ASSETS> 94,440 94,440
<PP&E> 542,652 542,652
<DEPRECIATION> 197,504 197,504
<TOTAL-ASSETS> 504,076 504,076
<CURRENT-LIABILITIES> 79,276 79,276
<BONDS> 485,078 485,078
0 0
0 0
<COMMON> 2 2
<OTHER-SE> (72,145) (72,145)
<TOTAL-LIABILITY-AND-EQUITY> 504,076 504,076
<SALES> 0 0
<TOTAL-REVENUES> 138,261 271,376
<CGS> 0 0
<TOTAL-COSTS> 111,722 217,255
<OTHER-EXPENSES> 21,060 41,265
<LOSS-PROVISION> 516 1,343
<INTEREST-EXPENSE> 13,591 27,493
<INCOME-PRETAX> (8,628) (15,980)
<INCOME-TAX> (378) (1,070)
<INCOME-CONTINUING> (8,250) (14,910)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (8,250) (14,910)
<EPS-PRIMARY> (.33) (.60)
<EPS-DILUTED> 0 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF HWCC - TUNICA, INC. AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000927801
<NAME> HWCC-TUNICA, INC.
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997
<PERIOD-START> APR-01-1997 JAN-01-1997
<PERIOD-END> JUN-30-1997 JUN-30-1997
<CASH> 10,581 10,581
<SECURITIES> 0 0
<RECEIVABLES> 1,959 1,959
<ALLOWANCES> 870 870
<INVENTORY> 639 639
<CURRENT-ASSETS> 15,302 15,302
<PP&E> 116,112 116,112
<DEPRECIATION> 27,499 27,499
<TOTAL-ASSETS> 116,017 116,017
<CURRENT-LIABILITIES> 8,632 8,632
<BONDS> 84,963 84,963
0 0
0 0
<COMMON> 0 0
<OTHER-SE> 22,422 22,422
<TOTAL-LIABILITY-AND-EQUITY> 116,017 116,017
<SALES> 0 0
<TOTAL-REVENUES> 27,354 54,333
<CGS> 0 0
<TOTAL-COSTS> 19,478 37,990
<OTHER-EXPENSES> 4,114 8,311
<LOSS-PROVISION> 123 240
<INTEREST-EXPENSE> 2,703 5,425
<INCOME-PRETAX> 936 2,367
<INCOME-TAX> (845) (845)
<INCOME-CONTINUING> 1,781 3,212
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1,781 3,212
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF HWCC-TUNICA, INC. AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<CIK> 0000927801
<NAME> HWCC-TUNICA, INC.
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996
<PERIOD-START> APR-01-1996 JAN-01-1996
<PERIOD-END> JUN-30-1996 JUN-30-1996
<CASH> 9,505 9,505
<SECURITIES> 0 0
<RECEIVABLES> 1,758 1,758
<ALLOWANCES> 557 557
<INVENTORY> 772 772
<CURRENT-ASSETS> 12,655 12,655
<PP&E> 104,188 104,188
<DEPRECIATION> 17,202 17,202
<TOTAL-ASSETS> 123,058 123,058
<CURRENT-LIABILITIES> 18,901 18,901
<BONDS> 84,293 84,293
0 0
0 0
<COMMON> 0 0
<OTHER-SE> 19,851 19,851
<TOTAL-LIABILITY-AND-EQUITY> 123,058 123,058
<SALES> 0 0
<TOTAL-REVENUES> 21,907 46,137
<CGS> 0 0
<TOTAL-COSTS> 18,428 36,768
<OTHER-EXPENSES> 4,409 8,270
<LOSS-PROVISION> 113 252
<INTEREST-EXPENSE> 2,115 4,422
<INCOME-PRETAX> (3,158) (3,575)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (3,158) (3,575)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (3,158) (3,575)
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
</TABLE>
