<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM-10Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 1998
-----------------------------------------------
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 (Zip Code)
offices)
(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.
Outstanding at
Registrant Class November 12, 1998
- ---------------------------- ------------------------------ -----------------
HOLLYWOOD CASINO CORPORATION COMMON STOCK, $.0001 PAR VALUE 24,949,976 SHARES
HWCC-TUNICA, INC. COMMON STOCK, $.01 PAR VALUE 1,000 SHARES
1
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
PART I: FINANCIAL INFORMATION
INTRODUCTORY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Hollywood Casino Corporation ("HCC" or the "Company") develops, owns and
operates riverboat and land-based casino entertainment facilities 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"). HCC also has an approximately 50% interest in a joint
venture which holds a gaming license for a site in Shreveport, Louisiana.
Construction of a casino and hotel complex is scheduled to begin in 1999. The
Company is also actively pursuing potential gaming opportunities in domestic and
foreign jurisdictions where gaming is legalized or is being actively considered.
Approximately 46% 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 limited first mortgage 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 financial statements as of
September 30, 1998 and for the three and nine month periods ended September 30,
1998 and 1997 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 positions of
HCC and HCT and the financial position of HCA as of September 30, 1998, and the
results of their operations for the three and nine month periods ended September
30, 1998 and 1997 and cash flows for the nine month periods ended September 30,
1998 and 1997.
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 1997 Annual Report on Form 10-K.
Historically, the Aurora Casino and Tunica Casino have experienced
some degree of seasonality. Consequently, the results of operations for the nine
month period ended September 30, 1998 are not necessarily indicative of the
operating results to be reported for the full year.
2
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
DECEMBER 31,
1997
SEPTEMBER 30, AS RESTATED
1998 (NOTE 2)
------------- ------------
Current Assets:
Cash and cash equivalents $ 51,362,000 $ 38,156,000
Short-term investments 4,315,000 5,979,000
Accounts receivable, net of allowances of
$1,547,000 and $1,188,000, respectively 2,149,000 2,747,000
Inventories 1,325,000 1,454,000
Deferred income taxes 782,000 2,481,000
Refundable deposits and other
current assets 2,434,000 2,274,000
Due from affiliates 8,536,000 7,811,000
------------ ------------
Total current assets 70,903,000 60,902,000
------------ ------------
Investment in unconsolidated affiliates 4,500,000 2,000,000
------------ ------------
Property and Equipment:
Land 6,646,000 6,621,000
Buildings and improvements 120,060,000 119,534,000
Riverboats and barges 39,494,000 39,494,000
Operating equipment 75,885,000 70,390,000
Construction in progress 3,863,000 1,222,000
------------ ------------
245,948,000 237,261,000
Less - accumulated depreciation
and amortization (76,893,000) (66,099,000)
------------ ------------
Net property and equipment 169,055,000 171,162,000
------------ ------------
Other Assets:
Deferred financing costs 4,837,000 5,558,000
Notes receivable, net of allowance - 6,000,000
Land rights 7,301,000 7,454,000
Due from affiliates, net of valuation allowance 12,396,000 12,322,000
Land held for sale, net of valuation allowance 6,264,000 6,264,000
Other assets 5,891,000 4,556,000
------------ ------------
Total other assets 36,689,000 42,154,000
------------ ------------
$281,147,000 $276,218,000
============ ============
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated balance sheets.
3
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
DECEMBER 31,
1997
SEPTEMBER 30, AS RESTATED
1998 (NOTE 2)
------------- -------------
<S> <C> <C>
Current Liabilities:
Current maturities of long-term debt
and capital lease obligations $ 7,147,000 $ 7,661,000
Accounts payable 4,436,000 3,724,000
Accrued liabilities -
Salaries and wages 4,315,000 4,916,000
Interest 11,908,000 4,792,000
Gaming and other taxes 4,710,000 2,469,000
Insurance 2,805,000 2,667,000
Other 3,501,000 2,748,000
Federal income taxes payable 2,200,000 6,878,000
Other current liabilities 2,052,000 2,549,000
------------- -------------
Total current liabilities 43,074,000 38,404,000
------------- -------------
Long-Term Debt 198,300,000 198,420,000
------------- -------------
Capital Lease Obligations 20,419,000 20,841,000
------------- -------------
Other Noncurrent Liabilities 6,866,000 7,180,000
------------- -------------
Commitments and Contingencies
Minority Interest in Limited Partnership 2,953,000 2,256,000
------------- -------------
Shareholders' Equity:
Common Stock:
Class A common stock, $.0001 par value per share;
50,000,000 shares authorized; 24,950,000 and
24,910,000 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 216,926,000 216,926,000
Accumulated deficit (207,393,000) (207,811,000)
------------- -------------
Total shareholders' equity 9,535,000 9,117,000
------------- -------------
$ 281,147,000 $ 276,218,000
============= =============
</TABLE>
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated balance sheets.
4
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
-------------------------
1997
AS RESTATED
1998 (NOTE 2)
----------- -----------
<S> <C> <C>
Revenues:
Casino $66,767,000 $65,605,000
Rooms 2,550,000 2,725,000
Food and beverage 7,763,000 7,501,000
Other 1,199,000 911,000
----------- -----------
78,279,000 76,742,000
Less - promotional allowances (7,431,000) (6,903,000)
----------- -----------
Net revenues 70,848,000 69,839,000
----------- -----------
Expenses:
Casino 48,941,000 44,647,000
Rooms 459,000 452,000
Food and beverage 2,119,000 2,279,000
Other 742,000 858,000
General and administrative 4,608,000 4,261,000
Management and consulting fees 300,000 300,000
Depreciation and amortization 4,011,000 4,778,000
Development 282,000 298,000
----------- -----------
Total expenses 61,462,000 57,873,000
----------- -----------
Income from operations 9,386,000 11,966,000
----------- -----------
Non-operating income (expenses):
Interest income 786,000 470,000
Interest expense (7,790,000) (7,614,000)
Gain on disposal of assets 37,000 -
----------- -----------
Total non-operating expense, net (6,967,000) (7,144,000)
----------- -----------
Income before income taxes and other item 2,419,000 4,822,000
Income tax provision (349,000) (3,065,000)
----------- -----------
Income before other item 2,070,000 1,757,000
Minority interest in earnings of Limited Partnership (Note 1) (1,866,000) (1,974,000)
----------- -----------
Net income (loss) $ 204,000 $ (217,000)
=========== ===========
Basic and diluted net income (loss) per common share $ .01 $ (.01)
=========== ===========
</TABLE>
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated statements.
5
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------
1997
AS RESTATED
1998 (NOTE 2)
------------ ------------
<S> <C> <C>
Revenues:
Casino $189,009,000 $191,355,000
Rooms 7,058,000 7,453,000
Food and beverage 21,722,000 21,223,000
Other 3,098,000 2,513,000
------------ ------------
220,887,000 222,544,000
Less - promotional allowances (19,879,000) (18,934,000)
------------ ------------
Net revenues 201,008,000 203,610,000
------------ ------------
Expenses:
Casino 137,163,000 129,628,000
Rooms 1,357,000 1,371,000
Food and beverage 6,465,000 6,688,000
Other 2,084,000 2,402,000
General and administrative 13,446,000 12,581,000
Management and consulting fees 900,000 3,627,000
Depreciation and amortization 12,435,000 14,638,000
Development 706,000 1,193,000
------------ ------------
Total expenses 174,556,000 172,128,000
------------ ------------
Income from operations 26,452,000 31,482,000
------------ ------------
Non-operating income (expenses):
Interest income 2,203,000 1,293,000
Interest expense (22,697,000) (22,854,000)
(Loss) gain on disposal of assets (28,000) 411,000
------------ ------------
Total non-operating expense, net (20,522,000) (21,150,000)
------------ ------------
Income before income taxes and other item 5,930,000 10,332,000
Income tax provision (1,014,000) (5,154,000)
------------ ------------
Income before other item 4,916,000 5,178,000
Minority interest in earnings of Limited Partnership (Note 1) (4,498,000) (2,755,000)
------------ ------------
Net income $ 418,000 $ 2,423,000
============ ============
Basic and diluted net income per common share $ .02 $ .10
============ ============
</TABLE>
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated statements.
6
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------
1997
AS RESTATED
1998 (NOTE 2)
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 418,000 $ 2,423,000
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization, including accretion
of debt discount 13,197,000 15,301,000
Loss (gain) on disposal of assets 28,000 (411,000)
Minority interest in earnings of Limited Partnership 4,498,000 2,755,000
Provision for doubtful accounts 593,000 537,000
Deferred income tax provision 532,000 265,000
Decrease (increase) in accounts receivable 5,000 (30,000)
Increase in accounts payable and accrued expenses 10,359,000 7,593,000
(Decrease) increase in federal taxes payable (4,678,000) 4,282,000
Net change in other current assets and liabilities (1,350,000) (221,000)
Net change in other noncurrent assets and liabilities (610,000) 143,000
----------- -----------
Net cash provided by operating activities 22,992,000 32,637,000
----------- -----------
INVESTING ACTIVITIES:
Purchases of property and equipment (9,423,000) (3,527,000)
Short-term investments 1,664,000 -
Collections on notes receivable 6,000,000 -
Proceeds from disposal of assets 92,000 4,454,000
Investments in unconsolidated affiliates (2,500,000) (2,000,000)
Increase in cash from purchase of Limited Partnership interest - 451,000
----------- -----------
Net cash used in investing activities (4,167,000) (622,000)
----------- -----------
FINANCING ACTIVITIES:
Borrowings on credit facilities 541,000 -
Deferred financing costs - (24,000)
Repayments of long-term debt (1,934,000) (4,968,000)
Payments on capital lease obligations (425,000) (1,580,000)
Distributions to Limited Partner (3,801,000) (2,882,000)
----------- -----------
Net cash used in financing activities (5,619,000) (9,454,000)
----------- -----------
Net increase in cash and cash equivalents 13,206,000 22,561,000
Cash and cash equivalents at beginning of period 38,156,000 21,488,000
----------- -----------
Cash and cash equivalents at end of period $51,362,000 $44,049,000
=========== ===========
</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 54% 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. While owned by HCC, GBCC's principal asset was the Sands Hotel and
Casino in Atlantic City, New Jersey (the "Sands"). GBCC also has a limited
partnership interest in the entity that manages the Aurora Casino and has a
consulting contract with the Tunica Casino.
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 on the accompanying
consolidated financial statements as a minority interest.
The accompanying consolidated financial statements also reflect HCT's
initial one-third investment ($2,000,000) 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
scheduled to open in November 1998.
8
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
HCC also has an approximately 50% interest in a joint venture which holds a
gaming license for a site in Shreveport, Louisiana. Construction of a casino
and hotel project is scheduled to begin in 1999. HCC's investment in the joint
venture ($2,500,000) is reflected on the accompanying consolidated financial
statements under the equity method of accounting.
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 and for Long-Lived Assets to Be Disposed Of"
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.
Land held for sale is shown net of a valuation allowance in the amount of
$3,400,000 on the accompanying consolidated balance sheets at both September 30,
1998 and December 31, 1997.
The Financial Accounting Standards Board has issued a new standard,
"Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 requires the
presentation and disclosure of comprehensive income, which is defined as the
change in a company's equity resulting from non-owner transactions and events.
SFAS 130 became effective December 15, 1997 and requires the restatement of all
prior periods presented. The Company has adopted the provisions of SFAS 130;
however, the statement provides that an enterprise that has no items of other
comprehensive income for any period presented need only report net income. The
Company has no such other comprehensive income items for any period presented;
accordingly, the presentation and disclosure requirements of SFAS 130 are not
applicable.
The consolidated financial statements as of September 30, 1998 and for the
three and nine month periods ended September 30, 1998 and 1997 have been
prepared by HCC without audit. In the opinion of management, these consolidated
financial statements contain all adjustments (consisting of only normal
recurring adjustments) necessary to present fairly the consolidated financial
position of HCC as of September 30, 1998, the results of its operations for the
three and nine month periods ended September 30, 1998 and 1997 and its cash
flows for the nine month periods ended September 30, 1998 and 1997.
9
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(2) RESTATEMENT OF CONSOLIDATED FINANCIAL INFORMATION
As previously disclosed in HCC's quarterly report on Form 10-Q for the
period ended June 30, 1998, the Company was advised by its tax consultants that
it should modify its tax treatment of the spin-off of the stock of GBCC which
occurred on December 31, 1996. The Company has therefore restated its
consolidated financial information for all quarterly periods during 1997 as well
as its consolidated balance sheets at December 31, 1997 and 1996. The revised
tax treatment resulted in the Company being required to recognize additional
taxable income for 1996 and succeeding periods.
As a result of the additional taxable income the Company was required to
recognize from the spin-off, HCC utilized approximately $9,000,000 of its
available net operating loss carryforwards ("NOL's") as of December 31, 1996.
For alternative minimum tax ("AMT") purposes, the additional AMT income
resulting from the revised tax treatment resulted in the Company utilizing all
of its remaining AMT loss carryforwards and, in addition, being liable for the
payment of approximately $2,200,000 in AMT taxes in connection with the spin-off
transaction. As a result of the utilization of its NOL's, the obligation for
AMT payments and the impact on its other net deferred tax assets, the Company
has restated its consolidated balance sheet to provide an additional $6,308,000
charge to paid-in capital as of the December 31, 1996 spin-off date. The charge
to paid-in capital records the impact of all effects of the spin-off
transaction. HCC anticipates paying its $2,200,000 AMT obligation for 1996 plus
accrued interest thereon during the fourth quarter of 1998.
For the year ended December 31, 1997, the revised treatment resulted in
HCC's recognition for financial reporting purposes of additional income tax
expense of $2,202,000 in addition to the accrual of interest on the underpayment
of its federal tax obligations. HCC paid $4,678,000 during September 1998 with
respect to its calculated 1997 federal income tax obligation. HCC had originally
anticipated that certain tax-planning strategies would create tax attributes
which would offset this tax payment. However, as a result of the revised tax
treatment of the spin-off, these attributes were no longer available to offset
HCC's 1997 federal income tax obligations. The impact of such items on HCC's
interim consolidated financial results for the three and nine month periods
ended September 30, 1997 as originally reported is set forth below:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1997 SEPTEMBER 30, 1997
-------------------------- ------------------------------
AS REPORTED AS RESTATED AS REPORTED AS RESTATED
------------ ------------ ------------ ----------------
<S> <C> <C> <C> <C>
Income before income taxes and
other item $ 4,866,000 $ 4,822,000 $10,420,000 $10,332,000
Income tax provision (1,191,000) (3,065,000) (3,280,000) (5,154,000)
----------- ----------- ----------- -----------
Income before other item 3,675,000 1,757,000 7,140,000 5,178,000
Minority interest (1,974,000) (1,974,000) (2,755,000) (2,755,000)
----------- ----------- ----------- -----------
Net income (loss) $ 1,701,000 $ (217,000) $ 4,385,000 $ 2,423,000
=========== =========== =========== ===========
Basic and diluted net income
(loss) per share $ .07 $ (.01) $ .18 $ .10
=========== =========== =========== ===========
</TABLE>
10
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
In connection with the revised tax treatment, HCC has commenced litigation
against its former independent accountants and tax advisors alleging negligent
advice and breach of contract. The Company continues to work with its new
outside advisors and consultants to review these tax issues.
The impact of the revised tax treatment on state income taxes has not yet
been determined; however, the effect, if any, on the consolidated financial
statements of HCC is not anticipated to be material.
(3) EARNINGS PER SHARE
During 1997, HCC adopted the provisions of Financial Accounting Standards
No. 128, "Earnings per Share" ("SFAS 128"). SFAS 128 requires the calculation
and disclosure of earnings per common share assuming no dilution (basic earnings
per share) and earnings per common share assuming full dilution (diluted
earnings per share). SFAS 128 requires the restatement of earnings per share
for all prior years presented.
Under SFAS 128, basic earnings per common share is calculated by dividing
net income (loss) by the weighted average number of shares of common stock
outstanding. Diluted earnings per common share is calculated for periods in
which income from continuing operations was earned by dividing the components of
net income by the weighted average number of shares of common stock and common
stock equivalents outstanding. All common stock equivalents are excluded from
the calculation of diluted net loss per share for periods during which a loss
was incurred because the effect of their inclusion would be antidilutive.
The weighted average number of shares of common stock and common stock
equivalents outstanding used for the calculation of earnings per share is as
follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Shares used in the calculation of:
- ------------------------------------
Basic net income per share 24,949,976 24,859,968 24,945,104 24,823,837
Diluted net income per share 24,949,998 24,859,968 24,950,020 24,925,916
</TABLE>
The number of shares used in the calculation of diluted earnings per share
for the three and nine month periods ended September 30, 1998 and the nine month
period ended September 30 1997 has been adjusted to include common stock
equivalents arising from stock options held by certain employees and directors.
The number of shares used in the calculation of diluted earnings per share for
the nine month period ended September 30, 1997 also includes 12,088 common stock
equivalents arising from certain warrants held by a third party.
The calculation of diluted earnings per share excludes certain options to
purchase common stock. These options have been excluded as they would be
antidilutive to the diluted earnings per share calculation
11
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
due to the exercise price of the options being in excess of the average market
price of the underlying common stock. The weighted average number of options
excluded was 928,914 during the three month period ended September 30, 1998 and
616,583 and 367,561, respectively, during the nine month periods ended September
30, 1998 and 1997.
During June 1998, the Board of Directors authorized the repricing of options
to purchase 35,000 shares of common stock granted during 1996 and 1997 to non-
employee directors of the Company. The exercise price was adjusted to $1.75 per
share, the fair market value as of the date of the repricing; all of the
repriced options are fully vested. No shareholder owning 1% or more of the
Company's common stock participated in the repricing.
(4) LONG-TERM DEBT AND PLEDGE OF ASSETS
Substantially all of HCC's assets are pledged in connection with HCC's
long-term indebtedness.
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
-------------- -------------
<S> <C> <C>
Indebtedness of HCC:
12 3/4% Senior Secured Notes, due 2003, net
of discount of $7,366,000 and $8,128,000,
respectively (a) $199,846,000 $199,372,000
Promissory note to affiliate (Note 6) 3,002,000 3,447,000
------------ ------------
202,848,000 202,819,000
------------ ------------
Indebtedness of HCA:
Promissory note to bank (b) - 350,000
Equipment loans - 413,000
------------ ------------
- 763,000
------------ ------------
Indebtedness of HCT:
Equipment loans 1,239,000 1,638,000
Bank credit facility (c) 502,000 -
------------ ------------
1,741,000 1,638,000
------------ ------------
Total indebtedness 204,589,000 205,220,000
Less - current maturities (6,289,000) (6,800,000)
------------ ------------
Total long-term debt $198,300,000 $198,420,000
============ ============
- --------------------
</TABLE>
12
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(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. Interest on the Senior Secured Notes is
payable semiannually on May 1 and November 1 of each year.
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 limited first mortgage 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 limitation on the first
mortgage described in (ii) above was originally $39,007,000 and is subject
to reduction for principal payments on an intercompany note between HCC and
HCA. The outstanding balance of the intercompany note was $34,007,000 and
$36,507,000 at September 30, 1998 and December 31, 1997, respectively. The
note requires semiannual principal payments of $2,500,000 commencing
October 15, 1997 with the balance due November 1, 2003.
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 is required to make an offer
within 30 business days 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. During May 1998, HCC made such an offer resulting in the
redemption of $288,000 principal amount of the Senior Secured Notes. Costs
associated with the redemption, including the premium paid and the write
off of associated deferred financing costs, amounted to approximately
$36,000.
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 September 1998, HCA entered into a bank loan agreement to borrow up
to $2,000,000 on an unsecured basis. Borrowings under the agreement are
payable in 36 monthly installments including interest at the rate of 7.5%
per annum. HCA borrowed $2,000,000 under the agreement during October
1998.
(c) HCT had a bank credit facility in the amount of $1,300,000 available to
borrow against through September 30, 1998. HCT borrowed $541,000 under the
credit facility during 1998 at the rate of 8.875% per annum; no borrowings
were outstanding under the credit facility at December 31, 1997.
Borrowings under the credit facility are to be repaid in monthly
installments over a period
13
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
of 36 months and are collateralized by equipment purchased with the loan
proceeds. The credit facility was not renewed by HCT.
Scheduled payments of long-term debt as of September 30, 1998 are set forth
below:
<TABLE>
<CAPTION>
<S> <C>
1998 (three months) $ 2,784,000
1999 6,360,000
2000 6,416,000
2001 6,050,000
2002 5,633,000
Thereafter 184,712,000
------------
Total $211,955,000
============
</TABLE>
Interest paid amounted to $14,830,000 and $15,244,000, respectively, during
the nine month periods ended September 30, 1998 and 1997.
(5) CAPITAL LEASES
HCA leases two parking garages under capital lease agreements. The first
lease has an initial term ending in June 2023 with the right to extend the term
for an additional 69 years. Rental payments through June 2013 equal the City of
Aurora's financing costs related to its 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. The second
lease has an initial term ending in September 2026 with the right to extend the
lease for up to 20 additional years. Rental payments during the first 15 years
equal the lessor's debt service costs related to the industrial revenue bond
issue used to finance a portion of the construction costs of the parking garage.
The remaining construction costs were funded by HCA. In addition, HCA pays 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 the lessor'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 leased certain equipment under capital lease agreements which
provided for interest at the rate of 11.2% and expired in 1998. HCT leased
certain gaming and other equipment under capital lease agreements which provided
for interest at rates ranging up to 13 1/4% per annum and expired during 1997.
The original cost of HCA's parking garages is included in buildings on the
accompanying consolidated balance sheets at both September 30, 1998 and December
31, 1997 in the amount of $27,358,000. Assets under capital leases with an
original cost of $7,260,000 are included in operating equipment on the
accompanying consolidated balance sheets at both September 30, 1998 and December
31, 1997. Amortization expense with respect to these assets amounted to
$333,000 and $489,000, respectively, during the three month periods ended
September 30, 1998 and 1997 and $998,000 and $1,612,000, respectively, during
the nine month periods ended September 30, 1998 and 1997.
14
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
Future minimum lease payments under capital lease obligations as of September
30, 1998 are as follows:
<TABLE>
<CAPTION>
<S> <C>
1998 (three months) $ 1,008,000
1999 2,457,000
2000 2,483,000
2001 2,532,000
2002 2,643,000
Thereafter 24,076,000
------------
Total minimum lease payments 35,199,000
Less amount representing interest (13,922,000)
------------
Present value of future
minimum lease payments 21,277,000
Current capital lease obligation (858,000)
------------
Long-term capital lease obligation $ 20,419,000
------------
</TABLE>
(6) INCOME TAXES
As discussed in Note 2 above, the Company modified its tax treatment of the
spin-off of the stock of GBCC. The tax presentation and other disclosures for
periods in 1997 as set forth in this footnote have been restated accordingly.
Components of HCC's provision for income taxes consist of the following:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- ----------------------------
1997 1997
AS RESTATED AS RESTATED
1998 (NOTE 2) 1998 (NOTE 2)
--------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Current (provision for) benefit
in lieu of:
Federal $ 190,000 $(2,213,000) $ 1,355,000 $(5,796,000)
State (160,000) (250,000) (482,000) (607,000)
Deferred (provision for) benefit
in lieu of:
Federal 631,000 1,020,000 (821,000) 5,902,000
State (29,000) (13,000) (71,000) (139,000)
Change in valuation allowance (981,000) (1,609,000) (995,000) (4,514,000)
--------- ----------- ----------- -----------
$(349,000) $ (3,065,00) $(1,014,000) $(5,154,000)
========= =========== =========== ===========
</TABLE>
15
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
A federal tax payment of $4,678,000 was made during the nine month period
ended September 30, 1998; no such payments were made during the nine month
period ended September 30, 1997. State tax payments of $553,000 and $469,000,
respectively, were made during the nine month periods ended September 30, 1998
and 1997.
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
lobbying, meals and entertainment and other expenses. 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. Quarterly income tax
provisions or benefits are determined by applying the resulting estimated
effective income tax rate to the results of operations for the quarter.
At September 30, 1998, HCC and its subsidiaries have NOL's for federal income
tax purposes totaling approximately $3,600,000, none of which begin to expire
until the year 2028. Additionally, HCC and its subsidiaries have alternative
minimum and other tax credits available totaling $4,913,000 and $415,000,
respectively. Alternative minimum tax credits do not expire and none of the
other tax credits begin to expire until the year 2010. 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 $1,392,000 and $1,924,000 at September 30, 1998 and
December 31, 1997, respectively. The ultimate recognition of the current amount
of net deferred tax assets is dependent on HCC and its subsidiaries' ability to
generate approximately $4,000,000 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.
16
<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>
DECEMBER 31,
1997
SEPTEMBER 30, AS RESTATED
1998 (NOTE 2)
------------ ------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 1,233,000 $ -
Allowance for doubtful accounts 7,847,000 9,093,000
Alternative minimum tax credit 4,913,000 4,791,000
Investment and jobs tax credits 415,000 311,000
Basis in limited partnership 2,890,000 2,890,000
Other liabilities and accruals 4,051,000 2,749,000
Benefits accrual 1,710,000 1,710,000
Other 687,000 733,000
------------ ------------
Total deferred tax assets 23,746,000 22,277,000
------------ ------------
Deferred tax liabilities:
Depreciation and amortization (8,054,000) (6,422,000)
Amortization of note discount - (621,000)
Basis in debt obligations (850,000) (855,000)
------------ ------------
Total deferred tax liabilities (8,904,000) (7,898,000)
------------ ------------
Net deferred tax asset 14,842,000 14,379,000
Valuation allowance (13,450,000) (12,455,000)
------------ ------------
$ 1,392,000 $ 1,924,000
============ ============
</TABLE>
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 or results of operations of HCC.
17
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(7) TRANSACTIONS WITH RELATED PARTIES
HCC has advanced funds to GBCC totaling $6,750,000 as of both September 30,
1998 and December 31, 1997. 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
became due on April 1, 1998 for which payment has not been received. This
advance continues to bear interest at the rate of 14% per annum, payable
semiannually. Interest receivable amounting to $1,543,000 and $839,000 is
included in due from affiliates on the accompanying consolidated balance sheets
at September 30, 1998 and December 31, 1997, 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 $238,000 during each of the three month periods
ended September 30, 1998 and 1997 and $705,000 and $739,000, respectively,
during each of the nine month periods ended September 30, 1998 and 1997.
In connection with its acquisition of the general partnership interest in
PML (see Note 1), HCC issued a five-year note in the original amount of
$3,800,000 and assigned $13,750,000 undiscounted principal amount of PPI Funding
Notes (see below) and $350,000 accrued interest due from GBCC to PPI
Corporation. The $3,800,000 note is payable in monthly installments of $83,000,
including interest at the rate of 14% per annum, commencing on May 1, 1997, with
additional quarterly variable principal payments commencing on July 1, 1997 in
an amount equal to the general partner's share of quarterly cash distributions,
as defined, from PML. HCC incurred interest expense with respect to the note
amounting to $107,000 and $129,000, respectively, during the three month periods
ended September 30, 1998 and 1997. Such interest expense totaled $336,000 and
$260,000, respectively, during the nine month periods ended September 30, 1998
and 1997 . Accrued interest of $35,000 and $41,000, respectively, is included in
interest payable on the accompanying consolidated balance sheets at September
30, 1998 and December 31, 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 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. On January 5, 1998, GBCC's most
significant subsidiary, Greate Bay Hotel and Casino, Inc. ("GBHC"), filed for
protection under Chapter 11 of the United States Bankruptcy Code. It is
anticipated that GBCC's equity ownership of GBHC will be significantly reduced
in the reorganization under Chapter 11 and, as a consequence, HCC wrote off
$37,000,000 undiscounted principal amount of
18
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
the PPI Funding Notes at December 31, 1997, further reducing the maturity value
to $47,603,000. 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.
Prior to December 31, 1996, when GBCC and its subsidiaries were members of
the HCC consolidated group, it was anticipated that one of HCC's primary methods
of realizing the carrying value of the PPI Funding Notes would be through the
utilization of NOL's of GBCC. As a result of HCC's distribution of GBCC stock
at December 31, 1996, GBCC's NOL's are no longer available for utilization in
HCC's consolidated federal income tax returns; accordingly, HCC provided a
valuation allowance in the amount of $18,741,000 at December 31, 1996 which
reduced the carrying amount of the PPI Funding Notes to their estimated
realizable value of $35,597,000 at that date. As a result of GBHC's Chapter 11
filing discussed above, HCC took an additional write down during 1997, further
reducing the carrying amount of the PPI Funding Notes at both September 30, 1998
and December 31, 1997 to an estimated realizable value of $12,322,000.
Management presently anticipates that the remaining balance will be realized
through a combination of repayments from GBCC and additional asset acquisitions
from GBCC and its subsidiaries.
Pursuant to a management services 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 while PML was wholly owned by
subsidiaries of GBCC. Subsequent to March 31, 1997, PML is included in the
consolidated financial statements of HCC; accordingly, HCA's management fee
expense is eliminated in consolidation.
HCT incurs a monthly consulting fee of $100,000 pursuant to a ten-year
consulting agreement with a GBCC subsidiary. Such fees amounted to $300,000
during each of the three month periods ended September 30, 1998 and 1997 and
$900,000 during each of the nine month periods ended September 30, 1998 and
1997.
Advanced Casino Systems Corporation ("ACSC"), a GBCC subsidiary, provides
computer, marketing and other administrative services to HCC and its
subsidiaries. Computer services provided include hardware, software and
operator support and, for the most part, such services are billed by ACSC at its
direct cost plus expenses incurred. ACSC and HCT entered into a Computer
Services Agreement dated as of January 1, 1994 and renewed through December 31,
1999 to provide such services and to 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. HCT also pays ACSC a fixed license fee of $33,600 per month.
ACSC's billings for such products and services amounted to
19
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
$253,000 and $254,000, respectively, for the three month periods ended September
30, 1998 and 1997 and $915,000 and $578,000, respectively, for the nine month
periods ended September 30, 1998 and 1997. Unpaid charges included in due to
affiliates on the accompanying consolidated balance sheets at September 30, 1998
and December 31, 1997 amounted to $92,000 and $78,000, respectively.
Many of the marketing and administrative services now provided by ACSC were
previously provided to HCC and its subsidiaries by GBHC. Such charges amounted
to $163,000 and $720,000, respectively, during the three and nine month periods
ended September 30, 1997.
HCC allocates certain general and administrative costs to GBCC and its
subsidiaries pursuant to a services agreement. Such allocated costs and fees
amounted to $262,000 and $439,000, respectively, for the three month periods
ended September 30, 1998 and 1997 and $833,000 and $1,402,000, respectively, for
the nine month periods ended September 30, 1998 and 1997. In connection with
such charges, receivables in the amount of $86,000 and $156,000 are included in
due from affiliates on the accompanying consolidated balance sheets at September
30, 1998 and December 31, 1997, 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 charters aircraft from the
maintenance company. Such charter fees amounted to $6,000 and $20,000,
respectively, during the three and nine month periods ended September 30, 1998;
charter fees, expenses and commissions totaled $12,000 and $268,000,
respectively, during the three and nine month periods ended September 30, 1997.
(8) COMMITMENTS AND CONTINGENCIES
GROUND LEASE -
HCT entered into a ground lease covering 70 acres of land on which the
Tunica Casino was constructed. The ground lease is for an initial term of five
years from the opening date of the facility and, at HCT's option, may be renewed
for nine additional five-year periods. Obligations under the ground lease during
the initial term include both minimum monthly fixed payments and percentage
rent, which in the aggregate will be the greater of 4% of Gross Revenues, as
defined, or $1,100,000 per year. HCT is responsible for all operating and other
expenses of the property in accordance with the lease terms. During the three
month periods ended September 30, 1998 and 1997, HCT expensed $1,080,000 and
$1,047,000, respectively, in connection with the ground lease. Such expenses
amounted to $2,966,000 and $3,015,000, respectively, during the nine month
periods ended September 30, 1998 and 1997.
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
20
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
Defendants filed with the Court on September 18, 1996 an answer to PHII's
lawsuit, along with numerous counterclaims against PHII, Robert Earl and Keith
Barish (collectively, the "PHII Defendants"). PHII filed with the Court on
January 21, 1997, an amendment to their complaint which, among other things,
added HCT (together with the Original Hollywood Defendants, the "Hollywood
Defendants") and GBCC as defendants. The Original HollywoodDefendants filed with
the Court on February 4, 1997, and GBCC and HCT filed with the Court on February
20, 1997, answers and counterclaims to such amended complaint.
In its lawsuit, PHII alleges, among other things, that the Hollywood
Defendants and GBCC have, in opening and operating the Hollywood Casino concept,
infringed on PHII's trademark, service mark and trade dress and have engaged in
unfair competition and deceptive trade practices. In their counterclaims, the
Hollywood Defendants and GBCC allege, among other things, that the PHII
Defendants have, through their planned use of their mark in connection with
casino services, infringed on certain of HCC's service marks and trade dress and
have engaged in unfair competition.
Given the uncertainties inherent in litigation, no assurance can be given
that the Hollywood Defendants will prevail in this litigation; however, the
Hollywood Defendants believe that PHII's claims are without merit and intend to
defend their position and pursue their counterclaims vigorously. The
accompanying consolidated financial statements do not include any adjustments
that might result from the outcome of the uncertainties described above.
OTHER LITIGATION -
HCC and its subsidiaries are parties in various legal proceedings with
respect to the conduct of casino and hotel operations. Although a possible
range of loss cannot be estimated, in the opinion of management, based upon the
advice of counsel, settlement or resolution of these proceedings should not have
a material adverse impact on the consolidated financial position or results of
operations of HCC and its subsidiaries.
(9) THIRD PARTY NOTES RECEIVABLE
During November 1995, HCC loaned $10,000,000 of the proceeds from the
Senior Secured Notes to an unaffiliated gaming company in the form of two
$5,000,000 notes. On February 27, 1998, both parties agreed to settle the
outstanding obligations with the payment of $4,400,000 and the issuance of two
new, short-term obligations totaling $1,600,000, which were paid during April
1998. The $4,000,000 difference between the $10,000,000 carrying amount of the
notes receivable and the agreed upon settlement was reflected as a write down of
the notes receivable at December 31, 1997.
(10) 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 8); such
amortization commenced with the opening of the Tunica Casino. Management
21
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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 $1,144,000 and $991,000, respectively, at September 30, 1998 and
December 31, 1997.
(11) RECLASSIFICATIONS
Certain reclassifications have been made to the prior year's consolidated
financial statements to conform to the 1998 consolidated financial statement
presentation.
22
<PAGE>
HOLLYWOOD CASINO - AURORA, INC.
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
BALANCE SHEETS
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
-------------- -------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 8,810,000 $ 9,491,000
Short-term investments 414,000 2,103,000
Accounts receivable, net of allowances
of $638,000 and $483,000, respectively 1,197,000 1,603,000
Inventories 689,000 794,000
Deferred income taxes 1,568,000 1,336,000
Due from affiliates 300,000 558,000
Prepaid expenses and other current assets 1,126,000 932,000
------------ ------------
Total current assets 14,104,000 16,817,000
------------ ------------
Property and Equipment:
Land improvements 3,165,000 3,165,000
Buildings and improvements 46,205,000 46,205,000
Riverboats 36,970,000 36,970,000
Operating equipment 36,536,000 32,159,000
Construction in progress 613,000 534,000
------------ ------------
123,489,000 119,033,000
Less - accumulated depreciation and amortization (39,300,000) (33,919,000)
------------ ------------
Net property and equipment 84,189,000 85,114,000
------------ ------------
Other Assets 2,125,000 2,140,000
------------ ------------
$100,418,000 $104,071,000
============ ============
</TABLE>
The accompanying introductory notes and notes to financial statements
are an integral part of these balance sheets.
23
<PAGE>
HOLLYWOOD CASINO - AURORA, INC.
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
BALANCE SHEETS
(UNAUDITED)
LIABILITIES AND SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
<S> <C> <C>
Current Liabilities:
Current maturities of long-term debt
and capital lease obligations $ 5,858,000 $ 6,624,000
Accounts payable 1,815,000 2,023,000
Accrued liabilities -
Salaries and wages 1,482,000 2,228,000
Interest 2,376,000 1,192,000
Gaming and other taxes 3,701,000 938,000
Insurance 846,000 1,115,000
Other 1,495,000 1,120,000
Due to affiliates 1,928,000 2,185,000
Other current liabilities 919,000 1,209,000
------------ ------------
Total current liabilities 20,420,000 18,634,000
------------ ------------
Long-Term Debt 29,007,000 31,507,000
------------ ------------
Capital Lease Obligations 20,419,000 20,841,000
------------ ------------
Deferred Income Taxes 5,064,000 4,141,000
------------ ------------
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 952,000 4,392,000
------------ ------------
Total shareholder's equity 25,508,000 28,948,000
------------ ------------
$100,418,000 $104,071,000
============ ============
</TABLE>
The accompanying introductory notes and notes to financial statements
are an integral part of these balance sheets.
24
<PAGE>
HOLLYWOOD CASINO - AURORA, INC.
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
----------------------------
1998 1997
-------------- ------------
<S> <C> <C>
Revenues:
Casino $40,083,000 $40,099,000
Food and beverage 3,568,000 3,642,000
Other 811,000 573,000
----------- -----------
44,462,000 44,314,000
Less - promotional allowances (2,750,000) (2,573,000)
----------- -----------
Net revenues 41,712,000 41,741,000
----------- -----------
Expenses:
Casino 28,614,000 26,554,000
Food and beverage 1,139,000 1,160,000
Other 384,000 470,000
General and administrative 3,926,000 3,895,000
Depreciation and amortization 1,714,000 1,880,000
----------- -----------
Total expenses 35,777,000 33,959,000
----------- -----------
Income from operations 5,935,000 7,782,000
----------- -----------
Non-operating income (expenses):
Interest income 32,000 44,000
Interest expense (1,493,000) (1,719,000)
Gain on disposal of assets 6,000 -
----------- -----------
Total non-operating expense, net (1,455,000) (1,675,000)
----------- -----------
Income before income taxes 4,480,000 6,107,000
Income tax provision (1,698,000) (2,213,000)
----------- -----------
Net income $ 2,782,000 $ 3,894,000
=========== ===========
</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)
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------------
1998 1997
-------------- -------------
<S> <C> <C>
Revenues:
Casino $115,734,000 $116,335,000
Food and beverage 10,174,000 10,404,000
Other 2,065,000 1,442,000
------------ ------------
127,973,000 128,181,000
Less - promotional allowances (7,448,000) (7,159,000)
------------ ------------
Net revenues 120,525,000 121,022,000
------------ ------------
Expenses:
Casino 82,330,000 76,918,000
Food and beverage 3,462,000 3,560,000
Other 1,007,000 1,286,000
General and administrative 10,278,000 10,673,000
Depreciation and amortization 5,537,000 5,606,000
------------ ------------
Total expenses 102,614,000 98,043,000
------------ ------------
Income from operations 17,911,000 22,979,000
------------ ------------
Non-operating income (expenses):
Interest income 94,000 120,000
Interest expense (4,594,000) (5,225,000)
Gain on disposal of assets 3,000 -
------------ ------------
Total non-operating expense, net (4,497,000) (5,105,000)
------------ ------------
Income before income taxes 13,414,000 17,874,000
Income tax provision (5,113,000) (6,697,000)
------------ ------------
Net income $ 8,301,000 $ 11,177,000
============ ============
</TABLE>
The accompanying introductory notes and notes to financial statements
are an integral part of these financial statements.
26
<PAGE>
HOLLYWOOD CASINO - AURORA, INC.
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------------
1998 1997
------------------ -------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 8,301,000 $ 11,177,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 5,537,000 5,606,000
Provision for doubtful accounts 147,000 155,000
Gain on disposal of assets (3,000) -
Deferred income tax provision 691,000 1,495,000
Decrease in receivables 259,000 192,000
Increase in accounts payable and accrued liabilities 3,099,000 2,373,000
Net change in affiliate accounts (1,000) 847,000
Net change in other current assets and liabilities (377,000) 438,000
Net change in other assets and liabilities 15,000 (88,000)
------------ ------------
Net cash provided by operating activities 17,668,000 22,195,000
------------ ------------
INVESTING ACTIVITIES:
Purchases of property and equipment (4,655,000) (1,227,000)
Proceeds from disposal of assets 46,000 -
Short-term investments 1,689,000 -
------------ ------------
Net cash used in investing activities (2,920,000) (1,227,000)
------------ ------------
FINANCING ACTIVITIES:
Repayments of debt (3,263,000) (2,355,000)
Payments on capital lease obligations (425,000) (381,000)
Dividends (11,741,000) (13,599,000)
------------ ------------
Net cash used in financing activities (15,429,000) (16,355,000)
------------ ------------
Net (decrease) increase in cash and cash equivalents (681,000) 4,633,000
Cash and cash equivalents at beginning of period 9,491,000 9,034,000
------------ ------------
Cash and cash equivalents at end of period $ 8,810,000 $ 13,667,000
============ ============
</TABLE>
The accompanying introductory notes and notes to financial statements
are an integral part of these financial statements.
27
<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. Prior to April 1, 1997, subsidiaries of GBCC held the management
services contract for the Aurora Casino (see Note 5). A GBCC subsidiary
continues to have a limited partnership interest in the entity which holds such
management contract.
On June 17, 1993, the Illinois Gaming Board (the "IGB") issued HCA a
temporary operating permit and the Aurora Casino commenced operations. The IGB
issued HCA an owner's license on July 20, 1993 pursuant to the Illinois
Riverboat Gambling Act. HCA's current owner's license was renewed in July 1998
for a period of one year and subsequently extended by the IGB to December 1999.
Gaming taxes imposed by the state of Illinois are determined using a graduated
tax rate applied to the licensee's gaming revenues. HCA expenses such gaming
taxes based on its anticipated annual effective tax rate.
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.
28
<PAGE>
HOLLYWOOD CASINO - AURORA, INC.
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of"
requires, among other things, that an entity review its long-lived assets and
certain related intangibles for impairment whenever changes in circumstances
indicate that the carrying amount of an asset may not be fully recoverable. As
a result of its review, HCA does not believe that any such changes have
occurred.
The Financial Accounting Standards Board has issued a new standard,
"Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 requires the
presentation and disclosure of comprehensive income, which is defined as the
change in a company's equity resulting from non-owner transactions and events.
SFAS 130 became effective December 15, 1997 and requires the restatement of all
prior periods presented. HCA has adopted the provisions of SFAS 130; however,
the statement provides that an enterprise that has no items of other
comprehensive income for any period presented need only report net income. HCA
has no such other comprehensive income items for any period presented;
accordingly, the presentation and disclosure requirements of SFAS 130 are not
applicable.
The financial statements as of September 30, 1998 and for the three and
nine month periods ended September 30, 1998 and 1997 have been prepared by HCA
without audit. In the opinion of management, these financial statements contain
all adjustments (consisting of only normal recurring adjustments) necessary to
present fairly the financial position of HCA as of September 30, 1998, the
results of its operations for the three and nine month periods ended September
30, 1998 and 1997 and its cash flows for the nine month periods ended September
30, 1998 and 1997.
(2) LONG-TERM DEBT AND PLEDGE OF ASSETS
HCA's long-term indebtedness consists of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
<S> <C> <C>
12 3/4% Promissory Note to HCC, due on
November 1, 2003 (a) $34,007,000 $36,507,000
Promissory note to bank (b) - 350,000
Equipment loans (c) - 413,000
----------- -----------
Total indebtedness 34,007,000 37,270,000
Less - current maturities (5,000,000) (5,763,000)
----------- -----------
Total long-term debt $29,007,000 $31,507,000
=========== ===========
</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
29
<PAGE>
HOLLYWOOD CASINO - AURORA, INC.
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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 the outstanding principal amount of the intercompany note on
substantially all of the assets of HCA and by a pledge of the capital stock
of HCA.
(b) The promissory note outstanding at December 31, 1997 accrued interest at the
bank's prime lending rate plus 1% per annum and was repaid in 1998.
During September 1998, HCA entered into a bank loan agreement to borrow up
to $2,000,000 on an unsecured basis. Borrowings under the agreement are
payable in 36 monthly installments including interest at the rate of 7.5%
per annum. HCA borrowed $2,000,000 under the agreement during October 1998.
(c) HCA financed the purchase of certain equipment from vendors through the
issuance of note obligations totaling $2,985,000. The promissory notes were
repaid in 1998.
As of September 30, 1998, future maturities of long-term debt are as
follows:
<TABLE>
<CAPTION>
<S> <C>
1998 (three months) $ 2,500,000
1999 5,000,000
2000 5,000,000
2001 5,000,000
2002 5,000,000
Thereafter 11,507,000
-----------
$34,007,000
===========
</TABLE>
Interest paid for the nine month periods ended September 30, 1998 and 1997
amounted to $3,411,000 and $3,851,000, respectively.
(3) CAPITAL LEASES
HCA leases two parking garages under capital lease agreements. The first
lease has an initial term ending in June 2023 with the right to extend the term
for an additional 69 years. Rental payments through June 2013 equal the City of
Aurora's financing costs related to its 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. The second
lease has an initial term ending in September 2026 with the right to extend the
lease for up to 20 additional years. Rental payments during the first 15 years
equal the lessor's debt service costs related to the industrial revenue bond
issue used to finance a portion of the construction costs of the parking garage.
The remaining construction costs were funded by HCA. In addition, HCA pays base
rent equal to $15,000 per month, subject to a credit of $615,000 at the rate of
30
<PAGE>
HOLLYWOOD CASINO - AURORA, INC.
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
$10,000 per month for improvements made to the lessor'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 leased certain equipment under capital lease agreements which
provided for interest at the rate of 11.2% and expired in 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,
on the accompanying balance sheets at both September 30, 1998 and December 31,
1997. Amortization expense with respect to these assets amounted to $246,000 and
$225,000, respectively, during the three month periods ended September 30, 1998
and 1997 and $737,000 and $822,000, respectively, during the nine month periods
ended September 30, 1998 and 1997.
Future minimum lease payments under capital lease obligations as of September
30, 1998 are as follows:
<TABLE>
<CAPTION>
<S> <C>
1998 (three months) $ 1,008,000
1999 2,457,000
2000 2,483,000
2001 2,532,000
2002 2,643,000
Thereafter 24,076,000
-----------
Total minimum lease payments 35,199,000
Less amount representing interest (13,922,000)
-----------
Present value of future minimum lease payments 21,277,000
Current capital lease obligation (858,000)
-----------
Long-term capital lease obligation $20,419,000
===========
</TABLE>
31
<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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -----------------------------
1998 1997 1998 1997
----------- ----------- ------------- -------------
<S> <C> <C> <C> <C>
Current:
Federal $(1,258,000) $(1,709,000) $(3,949,000) $(4,617,000)
State (152,000) (234,000) (473,000) (585,000)
Deferred:
Federal (259,000) (257,000) (620,000) (1,356,000)
State (29,000) (13,000) (71,000) (139,000)
----------- ----------- ------------- -------------
$(1,698,000) $(2,213,000) $(5,113,000) $(6,697,000)
=========== =========== ============= =============
</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 to HCC amounting to
$4,133,000 and $3,591,000, respectively, and state income taxes amounting to
$540,000 and $469,000, respectively, during the nine month periods ended
September 30, 1998 and 1997.
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.
32
<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 September 30, 1998 and
December 31, 1997 are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts $ 240,000 $ 182,000
Other liabilities and reserves 1,448,000 1,271,000
----------- -----------
Total deferred tax assets 1,688,000 1,453,000
----------- -----------
Deferred tax liabilities:
Depreciation and amortization (5,184,000) (4,258,000)
----------- -----------
Net deferred tax liability $(3,496,000) $(2,805,000)
=========== ===========
</TABLE>
Receivables and payables in connection with the aforementioned tax allocation
agreements at September 30, 1998 and December 31, 1997 are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
<S> <C> <C>
Deferred tax assets $ 1,401,000 $ 1,194,000
Due from affiliates 224,000 538,000
Deferred tax liabilities (4,527,000) (3,700,000)
</TABLE>
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 or results of operations of HCA.
(5) TRANSACTIONS WITH RELATED PARTIES
Pursuant to a management services agreement, HCA pays base management and
incentive fees to Pratt Management, L.P. ("PML"), a limited partnership which,
prior to April 1, 1997, was wholly owned by GBCC. Effective as of April 1,
1997, HCC acquired the general partnership interest in PML. The base management
fee is equal to 5% of operating revenues (as defined in the agreement) subject
to a maximum of $5,500,000 in any consecutive twelve month period. The
incentive fee is equal to 10% of gross operating profit (as defined in the
agreement to generally include all revenues less expenses other than
depreciation, interest, amortization and taxes). HCA incurred such fees
totaling $2,444,000 and $2,668,000, respectively, during the three month periods
ended September 30, 1998 and 1997 and
33
<PAGE>
HOLLYWOOD CASINO - AURORA, INC.
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
$6,269,000 and $6,840,000, respectively, during the nine month periods ended
September 30, 1998 and 1997. Management and incentive fees payable at September
30, 1998 and December 31, 1997 were $1,883,000 and $2,130,000, respectively.
HCA incurred interest with respect to its promissory note payable to HCC (see
Note 2) amounting to $1,084,000 and $1,243,000, respectively, for the three
month periods ended September 30, 1998 and 1997 and $3,344,000 and $3,730,000,
respectively, for the nine month periods ended September 30, 1998 and 1997.
Interest payable to HCC on such notes amounted to $1,999,000 and $983,000 at
September 30, 1998 and December 31, 1997, respectively, and is included in
accrued interest payable on the accompanying balance sheets.
HCA has acquired computer software and hardware from GBCC and has been
allocated certain other expenses from HCC and GBCC. In addition, HCA is
reimbursed by HCC and GBCC for certain administrative and other services it
performs on their behalf. Such transactions resulted in net charges to HCA
totaling $91,000 and $109,000, respectively, during the three month periods
ended September 30, 1998 and 1997 and $251,000 and $359,000, respectively,
during the nine month periods ended September 30, 1998 and 1997. At September
30, 1998 and December 31, 1997, HCA had net receivables of $31,000 and net
payables of $36,000, respectively, with respect to such transactions.
(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.
34
<PAGE>
HOLLYWOOD CASINO - AURORA, INC.
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
Given the uncertainties inherent in litigation, no assurance can be given
that the Hollywood Defendants will prevail in this litigation; however, the
Hollywood Defendants believe that PHII's claims are without merit and intend to
defend their position and pursue their counterclaims vigorously. The
accompanying financial statements do not include any adjustments that might
result from the outcome of the uncertainties described above.
OTHER LITIGATION -
HCA is a party in various legal proceedings with respect to the conduct of
casino operations. Although a possible range of loss can not be estimated, in
the opinion of management, based upon the advice of counsel, settlement or
resolution of the proceedings should not have a material adverse impact on the
financial position or results of operations of HCA.
35
<PAGE>
HWCC - TUNICA, INC. AND SUBSIDIARY
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
-------------- -------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 16,408,000 $ 11,851,000
Short-term investments 3,901,000 3,876,000
Accounts receivable, net of allowances of
$909,000 and $705,000, respectively 1,016,000 1,510,000
Inventories 635,000 660,000
Deferred income taxes 1,385,000 1,632,000
Prepaid expenses and other current assets 1,199,000 1,129,000
------------ ------------
Total current assets 24,544,000 20,658,000
------------ ------------
Property and Equipment:
Land 3,481,000 3,456,000
Buildings 73,948,000 73,422,000
Barges 2,524,000 2,524,000
Operating equipment 38,539,000 37,588,000
Construction in progress 3,250,000 688,000
------------ ------------
121,742,000 117,678,000
Less - accumulated depreciation and amortization (37,008,000) (31,760,000)
------------ ------------
Net property and equipment 84,734,000 85,918,000
------------ ------------
Other Assets:
Land rights 7,301,000 7,454,000
Other assets 5,009,000 4,697,000
------------ ------------
Total other assets 12,310,000 12,151,000
------------ ------------
$121,588,000 $118,727,000
============ ============
</TABLE>
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated balance sheets.
36
<PAGE>
HWCC - TUNICA, INC. AND SUBSIDIARY
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
LIABILITIES AND SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
-------------- -------------
<S> <C> <C>
Current Liabilities:
Current maturities of long-term debt $ 670,000 $ 485,000
Accounts payable 2,134,000 1,372,000
Accrued liabilities -
Salaries and wages 1,942,000 1,579,000
Interest 476,000 476,000
Gaming and other taxes 803,000 1,230,000
Insurance 1,961,000 1,553,000
Other 1,985,000 1,627,000
Other current liabilities 1,095,000 1,325,000
------------ ------------
Total current liabilities 11,066,000 9,647,000
------------ ------------
Long-Term Debt 85,116,000 85,198,000
------------ ------------
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 (9,231,000) (10,755,000)
------------ ------------
Total shareholder's equity 25,406,000 23,882,000
------------ ------------
$121,588,000 $118,727,000
============ ============
</TABLE>
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated balance sheets.
37
<PAGE>
HWCC - TUNICA, INC. AND SUBSIDIARY
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
--------------------------
1998 1997
------------ ------------
<S> <C> <C>
Revenues:
Casino $26,684,000 $25,506,000
Rooms 2,550,000 2,725,000
Food and beverage 4,195,000 3,859,000
Other 378,000 324,000
----------- -----------
33,807,000 32,414,000
Less - promotional allowances (4,681,000) (4,330,000)
----------- -----------
Net revenues 29,126,000 28,084,000
----------- -----------
Expenses:
Casino 20,327,000 18,093,000
Rooms 459,000 452,000
Food and beverage 980,000 1,119,000
Other 358,000 389,000
General and administrative 1,366,000 1,545,000
Depreciation and amortization 2,020,000 2,377,000
----------- -----------
Total expenses 25,510,000 23,975,000
----------- -----------
Income from operations 3,616,000 4,109,000
----------- -----------
Non-operating income (expenses):
Interest income 166,000 55,000
Interest expense (2,730,000) (2,722,000)
Gain on disposal of assets 30,000 -
----------- -----------
Total non-operating expense, net (2,534,000) (2,667,000)
----------- -----------
Income before income taxes 1,082,000 1,442,000
Income tax provision (443,000) -
----------- -----------
Net income $ 639,000 $ 1,442,000
=========== ===========
</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)
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------
1998 1997
------------- -------------
<S> <C> <C>
Revenues:
Casino $ 73,275,000 $ 75,020,000
Rooms 7,058,000 7,453,000
Food and beverage 11,548,000 10,819,000
Other 993,000 900,000
------------ ------------
92,874,000 94,192,000
Less - promotional allowances (12,431,000) (11,775,000)
------------ ------------
Net revenues 80,443,000 82,417,000
------------ ------------
Expenses:
Casino 54,833,000 52,710,000
Rooms 1,357,000 1,371,000
Food and beverage 3,003,000 3,128,000
Other 1,028,000 1,074,000
General and administrative 4,373,000 4,425,000
Depreciation and amortization 6,080,000 7,808,000
------------ ------------
Total expenses 70,674,000 70,516,000
------------ ------------
Income from operations 9,769,000 11,901,000
------------ ------------
Non-operating income (expenses):
Interest income 434,000 160,000
Interest expense (8,205,000) (8,252,000)
Loss on disposal of assets (31,000) -
------------ ------------
Total non-operating expense, net (7,802,000) (8,092,000)
------------ ------------
Income before income taxes 1,967,000 3,809,000
Income tax (provision) benefit (443,000) 845,000
------------ ------------
Net income $ 1,524,000 $ 4,654,000
============ ============
</TABLE>
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated statements.
39
<PAGE>
HWCC - TUNICA, INC. AND SUBSIDIARY
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------
1998 1997
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 1,524,000 $ 4,654,000
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 6,080,000 7,808,000
Provision for doubtful accounts 446,000 382,000
Loss on disposal of assets 31,000 -
Deferred income tax benefit - (1,338,000)
Decrease (increase) in accounts receivable 48,000 (250,000)
Increase (decrease) in accounts payable
and accrued liabilities 1,464,000 (2,154,000)
Net change in other current assets and liabilities (275,000) (29,000)
Net change in other noncurrent assets and liabilities (223,000) 485,000
----------- -----------
Net cash provided by operating activities 9,095,000 9,558,000
----------- -----------
INVESTING ACTIVITIES:
Purchases of property and equipment (4,662,000) (2,255,000)
Proceeds from disposal of assets 46,000 -
Net change in short-term investments (25,000) -
Investment in unconsolidated affiliate - (2,000,000)
----------- -----------
Net cash used in investing activities (4,641,000) (4,255,000)
----------- -----------
FINANCING ACTIVITIES:
Borrowings on credit facility 541,000 -
Repayments of long-term debt (438,000) (257,000)
Payments on capital lease obligations - (1,199,000)
----------- -----------
Net cash provided by (used in) financing activities 103,000 (1,456,000)
----------- -----------
Net increase in cash and cash equivalents 4,557,000 3,847,000
Cash and cash equivalents at beginning of period 11,851,000 9,321,000
----------- -----------
Cash and cash equivalents at end of period $16,408,000 $13,168,000
=========== ===========
</TABLE>
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated statements.
40
<PAGE>
HWCC - TUNICA, INC. AND SUBSIDIARY
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) ORGANIZATION, BUSINESS AND BASIS OF PRESENTATION
HWCC - Tunica, Inc. ("HCT") is a Texas corporation and a wholly owned
subsidiary of Hollywood Casino Corporation ("HCC"), a Delaware corporation. HCT
was incorporated in December 1993 for the purpose of acquiring and completing a
gaming facility in northern Tunica County, Mississippi approximately 27 miles
southwest of Memphis, Tennessee. The completed facility (the "Tunica Casino"),
which currently includes a casino with 54,000 square feet of gaming space, 506
hotel rooms and suites and related amenities, commenced operations on August 8,
1994 under the service mark Hollywood Casino(R). HCT's gaming license has been
renewed by the Mississippi Gaming Commission through October 18, 1999.
The accompanying consolidated financial statements include the accounts of
HCT and its wholly owned subsidiary, HWCC-Golf Course Partners, Inc. ("Golf").
All significant intercompany balances have been eliminated in consolidation.
Golf, a Delaware corporation, was formed in 1996 to own an initial one-third
interest in Tunica Golf Course LLC, a limited liability company organized to
develop and operate a golf course to be used by patrons of the Tunica Casino and
other participating casino/hotel properties. The golf course is presently
scheduled to open in November 1998. Golf's investment in Tunica Golf Course,
LLC is accounted for under the equity method of accounting and is included in
other noncurrent assets on the accompanying consolidated balance sheets at
September 30, 1998 and December 31, 1997.
HCT estimates that a significant amount of the Tunica Casino's revenues are
derived from patrons living in the Memphis, Tennessee area, northern Mississippi
and Arkansas. The Tunica Casino faces intense competition from other casinos
operating in northern Tunica County and management believes that this
competition will continue in the future.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
HCT is self insured for a portion of its general liability, certain health
care and other liability exposures. Accrued insurance includes estimates of
such accrued liabilities based on an evaluation of the merits of individual
claims and historical claims experience; accordingly, HCT's ultimate liability
may differ from the amounts accrued.
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of"
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 such changes have
occurred.
The Financial Accounting Standards Board has issued a new standard,
"Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 requires the
presentation and disclosure of comprehensive income, which is defined as the
change in a company's equity resulting from non-owner transactions and events.
41
<PAGE>
HWCC - TUNICA, INC. AND SUBSIDIARY
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
SFAS 130 became effective December 15, 1997 and requires the restatement of all
prior periods presented. HCT has adopted the provisions of SFAS 130; however,
the statement provides that an enterprise that has no items of other
comprehensive income for any period presented need only report net income. HCT
has no such other comprehensive income items for any period presented;
accordingly, the presentation and disclosure requirements of SFAS 130 are not
applicable.
The consolidated financial statements as of September 30, 1998 and for the
three and nine month periods ended September 30, 1998 and 1997 have been
prepared by HCT 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 HCT as of September 30, 1998, the results of its operations for the
three and nine month periods ended September 30, 1998 and 1997 and cash flows
for the nine month periods ended September 30, 1998 and 1997.
(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:
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
<TABLE>
<CAPTION>
<S> <C> <C>
Promissory notes to HCC (a) $84,045,000 $84,045,000
Equipment loans (b) 1,239,000 1,638,000
Bank credit facility (c) 502,000 -
----------- -----------
Total indebtedness 85,786,000 85,683,000
Less - current maturities (670,000) (485,000)
----------- -----------
Total long-term debt $85,116,000 $85,198,000
=========== ===========
- ------------------
</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
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
42
<PAGE>
HWCC - TUNICA, INC. AND SUBSIDIARY
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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 limitation on the first
mortgage described in (ii) above is subject to semiannual reductions of $2.5
million commencing October 15, 1997.
The indenture to the Senior Secured Notes contains various provisions
limiting the ability of HCC, HCT and certain defined subsidiaries to, among
other things, pay dividends or make other restricted payments; incur
additional indebtedness or issue preferred stock; create liens; create
dividend or other payment restrictions affecting certain defined
subsidiaries; enter into mergers or consolidations or make sales of all or
substantially all assets of HCC, HCT or any future guarantor; and enter into
transactions with certain affiliates.
(b) The loans outstanding at September 30, 1998 are payable monthly including
interest at effective rates ranging from 7.8% to 12.9% per annum and mature
at various dates between 1999 and 2001.
(c) HCT had a bank credit facility in the amount of $1,300,000 available to
borrow against until September 30, 1998. HCT borrowed $541,000 under the
credit facility during 1998 at the rate of 8.875% per annum; no borrowings
were outstanding under the credit facility at December 31, 1997. Borrowings
under the credit facility are to be repaid in monthly installments over a
period of 36 months and are collateralized by equipment purchased with the
loan proceeds. The credit facility was not renewed by HCT.
Scheduled payments of long-term debt as of September 30, 1998 are set forth
below:
<TABLE>
<CAPTION>
<S> <C>
1998 (three months) $ 137,000
1999 720,000
2000 680,000
2001 204,000
2002 -
Thereafter 84,045,000
-----------
Total $85,786,000
===========
</TABLE>
Interest paid amounted to $8,205,000 and $10,038,000, respectively, during
the nine month periods ended September 30, 1998 and 1997.
43
<PAGE>
HWCC - TUNICA, INC. AND SUBSIDIARY
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(3) CAPITAL LEASES
HCT leased certain gaming and other equipment under capital lease
agreements which provided for interest at rates ranging up to 13 1/4% per annum
and which expired during 1997. Assets under capital leases with an original
cost of $4,814,000 are included in operating equipment on the accompanying
consolidated balance sheets at both September 30, 1998 and December 31, 1997.
Amortization expense was $87,000 and $264,000, respectively, for the three month
periods ended September 30, 1998 and 1997 and $261,000 and $790,000,
respectively, for the nine month periods ended September 30, 1998 and 1997.
Accumulated amortization at September 30, 1998 and December 31, 1997 with
respect to these assets amounted to $4,777,000 and $4,516,000, respectively. No
future payment obligations exist with respect to such capital leases.
(4) INCOME TAXES
Components of HCT's (provision) benefit for income taxes consist of the
following:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- ----------------------------
1998 1997 1998 1997
----------- ---------- -------------- ------------
<S> <C> <C> <C> <C>
(Provision for) benefit in lieu of
federal income taxes:
Current $ (70,000) $(630,000) $(184,000) $(1,173,000)
Deferred (302,000) (11,000) (517,000) 174,000
Change in valuation allowance (70,000) 641,000 259,000 1,844,000
--------- --------- --------- -----------
$(442,000) $ - $(442,000) $ 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
taxes to HCC in the amount of $175,000 and $494,000, respectively, during the
nine month periods ended September 30, 1998 and 1997. HCT paid no state income
taxes during either of the nine month periods ended September 30, 1998 or 1997.
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
44
<PAGE>
HWCC - TUNICA, INC. AND SUBSIDIARY
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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 net operating loss carryforwards ("NOL's") for federal income tax
purposes totaling approximately $14,800,000, 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 1997 and the first nine months of 1998 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 $2,107,000 at both September 30,
1998 and December 31, 1997. The ultimate recognition of this amount of deferred
tax assets is dependent on HCT's ability to generate approximately $7,000,000 of
taxable income for federal income tax purposes prior to the expiration dates of
the NOL's and the reversal of other temporary differences.
The components of the deferred tax assets are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
-------------- -------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 5,016,000 $ 5,200,000
Alternative minimum tax credit carryforward 669,000 226,000
Allowance for doubtful accounts 309,000 240,000
Other liabilities and accruals 1,256,000 1,108,000
----------- -----------
Total deferred tax assets 7,250,000 6,774,000
Deferred tax liabilities:
Depreciation and amortization (2,832,000) (2,097,000)
----------- -----------
Net deferred tax asset 4,418,000 4,677,000
Valuation allowance (2,311,000) (2,570,000)
----------- -----------
$ 2,107,000 $ 2,107,000
=========== ===========
</TABLE>
45
<PAGE>
HWCC - TUNICA, INC. AND SUBSIDIARY
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
Receivables in connection with HCT's federal income taxes are included on
the accompanying consolidated financial statements as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
<S> <C> <C>
Accounts receivable $ - $ 268,000
Deferred income taxes 1,385,000 1,632,000
Other noncurrent assets 722,000 475,000
</TABLE>
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 or results of operations of HCT.
(5) TRANSACTIONS WITH RELATED PARTIES
Pursuant to a ten-year consulting agreement with Pratt Casino Corporation,
an affiliated company, HCT incurs a monthly consulting fee of $100,000. Such
fees amounted to $300,000 during each of the three month periods ended September
30, 1998 and 1997 and $900,000 during each of the nine month periods ended
September 30, 1998 and 1997.
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. HCT also pays ACSC
a fixed license fee of $33,600 per month and reimburses ACSC for its direct
costs and expenses incurred under the agreement. Since the latter part of 1997,
ACSC also performs and bills HCT for certain administrative and marketing
services. Total charges incurred by HCT amounted to $136,000 and $162,000,
respectively, for the three month periods ended September 30, 1998 and 1997 and
$514,000 and $406,000, respectively, for the nine month periods ended September
30, 1998 and 1997. At both September 30, 1998 and December 31, 1997, HCT had
payables of $44,000 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,
performed certain administrative and marketing services on behalf of HCT during
most of 1997 and continues to perform limited services. Fees charged to HCT by
GBHC totaled $82,000 during the three month period ended September 30, 1997 and
$12,000 and $422,000, respectively, during the nine month periods ended
September 30, 1998 and 1997.
46
<PAGE>
HWCC - TUNICA, INC. AND SUBSIDIARY
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
HCT is charged for certain legal, accounting, and other expenses incurred
by HCC and its subsidiaries that relate to HCT's business. HCT also bills HCC
and its subsidiaries for services provided to those companies. Net charges from
HCC and its subsidiaries amounted to $34,000 and $99,000, respectively, for the
three month periods ended September 30, 1998 and 1997 and $96,000 and $276,000,
respectively, for the nine month periods ended September 30, 1998 and 1997. At
September 30, 1998 and December 31, 1997, HCT had net receivables of $82,000 and
$34,000, respectively, for such charges.
(6) COMMITMENTS AND CONTINGENCIES
GROUND LEASE -
HCT entered into a ground lease covering 70 acres of land on which the
Tunica Casino was constructed. The ground lease is for an initial term of five
years from the opening date of the facility and, at HCT's option, may be renewed
for nine additional five-year periods. Obligations under the ground lease during
the initial term include both minimum monthly fixed payments and percentage
rent, which in the aggregate will be the greater of 4% of Gross Revenues, as
defined, or $1,100,000 per year. HCT is responsible for all operating and other
expenses of the property in accordance with the lease terms. For the three month
periods ended September 30, 1998 and 1997, HCT expensed $1,080,000 and
$1,047,000, respectively, in connection with the ground lease. Such expenses
totaled $2,966,000 and $3,015,000, respectively, during the nine month periods
ended September 30, 1998 and 1997.
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
47
<PAGE>
HWCC - TUNICA, INC. AND SUBSIDIARY
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
their planned use of their mark in connection with casino services, infringed on
certain of HCC's service marks and trade dress and have engaged in unfair
competition.
Given the uncertainties inherent in litigation, no assurance can be given
that the Hollywood Defendants will prevail in this litigation; however, the
Hollywood Defendants believe that PHII's claims are without merit and intend to
defend their position and pursue their counterclaims vigorously. The
accompanying consolidated financial statements do not include any adjustments
that might result from the outcome of the uncertainties described above.
OTHER -
HCT is a party in various legal proceedings with respect to the conduct of
casino and hotel operations. Although a possible range of loss can not be
estimated, in the opinion of management, based upon the advice of counsel,
settlement or resolution of the proceedings should not have a material adverse
impact on the consolidated financial position or results of operations of HCT.
(7) LAND RIGHTS
Land rights are being amortized on a straight-line basis over a 40-year
period representing the estimated useful life of the facility, which is less
than the term of the ground lease including renewals (see Note 6); such
amortization commenced with the opening of the Tunica Casino. Management
presently intends to renew the ground lease at least through the estimated 40-
year useful life of the facility. Accumulated amortization of such land rights
amounted to $1,144,000 and $991,000, respectively, at September 30, 1998 and
December 31, 1997.
(8) RECLASSIFICATIONS
Certain reclassifications have been made to the prior year's consolidated
financial statements to conform to the 1998 consolidated financial statement
presentation.
48
<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 words
"believes", "estimates", "anticipates" and similar expressions as they relate to
the Company or its management are intended to identify forward-looking
statements.
RESULTS OF OPERATIONS
HCC had net revenues for the three month period ended September 30, 1998 of
$70.8 million, a slight increase from $69.8 million during the same period of
1997. The increase reflects an improvement in net revenues at the Tunica Casino
of $1 million (3.7%) while net revenues at the Aurora Casino were virtually
unchanged.
Consolidated operating expenses increased by $3.6 million to $61.5 million
during the three month period ended September 30, 1998 from $57.9 million during
the same period of 1997. Consequently, HCC's income from operations decreased
by $2.6 million (21.6%) during the third quarter of 1998 compared to the same
period of 1997. Income from operations after management fees at the Aurora
Casino decreased by $1.8 million to $5.9 million during the three month period
ended September 30, 1998 compared with the same period of 1997 due primarily to
increases in gaming taxes. Income from operations after consulting fees at the
Tunica Casino decreased by $493,000 to $3.6 million due primarily to increased
competition (see "Tunica Casino - Gaming Operations" below).
Net revenues of HCC for the nine month period ended September 30, 1998
amounted to $201 million, a 1.3% decrease from $203.6 million during the same
period of 1997. The decrease includes reductions in net revenues at the Aurora
Casino of $497,000 (less than 1%) and at the Tunica Casino of $2 million (2.4%).
HCC's operating expenses increased by $2.4 million to $174.6 million during
the nine month period ended September 30, 1998 from $172.1 million during the
same period of 1997. As a result, HCC's income from operations decreased by $5
million (16%) during the first nine months of 1998 compared to the same period
of 1997. Due to the same reason noted above, income from operations after
management fees at the Aurora Casino decreased by $5.1 million to $17.9 million
during the nine month period ended September 30, 1998 compared with the same
period of 1997 and income from operations after consulting fees at the Tunica
Casino decreased by $2.1 million to $9.8 million.
AURORA CASINO
GENERAL
Income from operations at the Aurora Casino, adjusted to exclude management
fees, amounted to $8.4 million and $24.2 million, respectively, for the three
and nine month periods ended September 30, 1998 compared to $10.5 million and
$29.8 million, respectively, during the same periods of 1997. Such
49
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
decreases are primarily due to an increase in the Illinois wagering tax rate
which took effect on January 1, 1998. The new tax structure consists of a
graduated tax rate system with rates ranging from 15% to 35% based on total
adjusted gross receipts. As a result of the tax rate increase, gaming revenue
taxes for the three and nine month periods ending September 30, 1998 were higher
by $2.9 million (35.7%) and $7.9 million (34.1%), respectively, than for the
corresponding periods in 1997. Such increased taxes resulted despite declines in
gaming revenues of less than 1% during each of the three and nine month periods
ended September 30, 1998 compared to the corresponding periods of the prior
year. The operating income decreases are also attributable to increased
competition from the opening in northern Indiana of two riverboat gaming
operations during April and August 1997. These two operations added
approximately 3,700 new gaming positions to the Chicago market area, an increase
of nearly 35%.
GAMING OPERATIONS
The following table sets forth certain unaudited financial and operating data
for the Aurora Casino's operations for the three and nine month periods ended
September 30, 1998 and 1997.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- -----------------------------------
1998 1997 1998 1997
------------- ------------- --------------- ------------------
<S> <C> <C> <C> <C>
REVENUES:
Table games $ 10,015,000 $ 11,795,000 $ 32,181,000 $ 35,762,000
Slot machines 29,534,000 27,721,000 81,811,000 79,824,000
Poker revenues 534,000 583,000 1,742,000 749,000
------------ ------------ -------------- --------------
Total $ 40,083,000 $ 40,099,000 $ 115,734,000 $ 116,335,000
============ ============ ============== ==============
TABLE GAMES:
Gross wagering (drop)(1) $ 64,155,000 $ 68,041,000 $ 187,203,000 $ 203,362,000
Hold percentage (2) 15.6% 17.3% 17.2% 17.6%
SLOT MACHINES:
Gross wagering (handle)(1) $521,835,000 $469,040,000 $1,458,944,000 $1,405,199,000
Hold percentage (2) 5.7% 5.9% 5.6% 5.7%
- -----------------------
</TABLE>
(1) Gross wagering consists of the total value of chips purchased for table
games ("drop") and coins wagered in slot machines ("handle").
(2) Casino revenues consist of the portion of gross wagering that a casino
retains and, as a percentage of gross wagering, is referred to as the "hold
percentage".
Total gross wagering at the Aurora Casino as measured by table drop and slot
machine handle increased $48.9 million (9.1%) during the third quarter of 1998
compared to the same period of 1997 offsetting declines experienced during the
early part of 1998. Consequently, gross wagering increased $37.6 million (2.3%)
during the nine month period ended September 30, 1998 compared to the same
period
50
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
of 1997. The three month increase results from the continuation of aggressive
marketing and promotional programs introduced in the second quarter of 1998 to
recapture market share in the Chicago area. Declines in gross wagering during
the 1998 first quarter resulted from reductions in patron volume due to changes
in the Aurora Casino's cruising schedule. In an effort to reduce unprofitable
operations and capitalize on profitable cruises in response to the increased
wagering tax discussed above, the smaller of the Aurora casino's two riverboats
ceased operating daytime cruises on weekdays during January and February;
however, all cruises resumed in March. Increased competition in the Chicago
market due to the opening of two new casinos in northern Indiana in April and
August 1997 has also limited growth in casino wagering.
REVENUES
Casino revenues decreased slightly (less than 1%) during both the third
quarter and the nine month period ended September 30, 1998 compared to the same
periods of 1997. Table game revenues decreased $1.8 million (15.1%) during the
third quarter of 1998 compared to the 1997 period as the 5.7% decrease in drop
was compounded by a decrease in the table game hold percentage to 15.6% from
17.3%. Table game revenues decreased $3.6 million (10%) during the first nine
months of 1998 compared to the 1997 period as the 7.9% decrease in drop was
further impacted by a decrease in the table game hold percentage to 17.2% from
17.6%. The 11.3% increase in slot machine handle during the third quarter of
1998 more than offset the decrease in the slot machine hold percentage to 5.7%
from 5.9% resulting in a three month slot machine revenue increase of $1.8
million (6.5%) compared to the same period of 1997. Nine month slot machine
revenues increased $2 million (2.5%) compared to the same period in 1997
reflecting the 3.8% increase in slot wagering partially offset by the decline in
the slot machine hold percentage to 5.6% from 5.7%. Casino revenues were also
favorably impacted by the introduction of poker during the second quarter of
1997, which generated casino revenues of $534,000 and $1.7 million,
respectively, for the three and nine month periods ended June 30, 1998. Such
revenues amounted to $583,000 and $749,000, respectively, for the three and nine
month periods ended June 30, 1997.
Food and beverage revenues at the Aurora Casino did not change significantly
during the three or nine month periods ended September 30, 1998 compared to the
same periods of 1997. Other revenues increased $238,000 (41.5%) and $623,000
(43.2%), respectively, during the three and nine month periods ended September
30, 1998 compared to the same periods of 1997 due to management's decision to
begin charging valet parking and garage fees in 1998.
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 62.8% and 60.9%, respectively, during the three and nine
month periods ended September 30, 1998 compared to 61% and 60.4%, respectively,
during the three and nine month periods ended September 30, 1997. The three
month increase reflects an increase in promotional activities designed to
recapture market share following a decrease in such activities during the early
part of 1998.
51
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
DEPARTMENTAL EXPENSES
Casino expenses increased $2.1 million (7.8%) and $5.4 million (7%),
respectively, during the three and nine month periods ended September 30, 1998
compared to the corresponding periods in 1997. Such increases are attributable
to the wagering tax increase discussed above, partially offset by overall
reductions in payroll and marketing costs. Gaming taxes imposed by the state of
Illinois are determined using a graduated tax rate applied to the licensee's
gaming revenues. The Aurora Casino expenses such gaming taxes based on its
anticipated annual effective tax rate.
Food and beverage expenses did not change significantly during either the
three or nine month periods ended September 30, 1998 compared to the same
periods in 1997. Other expenses decreased $86,000 (18.3%) and $279,000 (21.7%),
respectively, during the three and nine month periods ended September 30, 1998
compared to the same periods of 1997 reflecting reductions in personnel and
other operating expenses.
TUNICA CASINO
GENERAL
Income from operations at the Tunica Casino amounted to $3.6 million and $9.8
million, respectively, for the three and nine month periods ended September 30,
1998 compared to $4.1 million and $11.9 million, respectively, during the same
periods of 1997. The three month period decrease is primarily due to increased
marketing costs in response to competitive pressures. The nine month decrease
is attributable to a lower than expected table games hold percentages and to
increased competition in the Tunica market. The competitive pressure has
resulted from the opening of approximately 1,700 new hotel rooms by other casino
operators during the fourth quarter of 1997 and early 1998.
52
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
GAMING OPERATIONS
The following table sets forth certain unaudited financial and operating data
relating to the operations of the Tunica facility for the three and nine month
periods ended September 30, 1998 and 1997.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- -----------------------------------
1998 1997 1998 1997
------------- ------------- ------------------ ---------------
<S> <C> <C> <C> <C>
CASINO REVENUES:
Table games $ 4,239,000 $ 3,145,000 $ 10,628,000 $ 11,561,000
Slot machines 22,180,000 22,066,000 61,882,000 62,644,000
Poker revenues 265,000 295,000 765,000 815,000
------------ ------------ -------------- --------------
Total $ 26,684,000 $ 25,506,000 $ 73,275,000 $ 75,020,000
============ ============ ============== ==============
TABLE GAMES:
Gross wagering (drop) (1) $ 20,605,000 $ 20,285,000 $ 58,301,000 $ 59,754,000
Hold percentage (2) 20.6% 15.5% 18.2% 19.3%
SLOT MACHINES:
Gross wagering (handle) (1) $428,374,000 $426,450,000 $1,190,522,000 $1,217,502,000
Hold percentage (2) 5.2% 5.2% 5.2% 5.1%
- ---------------------
</TABLE>
(1)(2) See corresponding notes to the table at "Aurora Casino - Gaming
Operations" above.
Total gross wagering at the Tunica Casino as measured by table game drop
and slot machine handle increased slightly by $2.2 million (less than 1%) during
the three month period ended September 30, 1998 reducing the nine month decrease
in gross wagering to $28.4 million (2.2%) compared to the same periods of 1997.
The decreased patron volume is directly attributable to increased competition in
the Tunica market. Slot machine handle did not change significantly during the
three month period ended September 30, 1998 compared to the prior year period
resulting in a year to date decrease in handle of $27 million (2.2%). Table
game drop remained stable during the second and third quarters of 1998 compared
to the same periods of 1997 in spite of a reduction in the number of table games
on the casino floor. The overall decrease in drop was $1.5 million (2.4%) for
the nine month period ended September 30, 1998 compared to the 1997 period.
53
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
REVENUES
Casino revenues increased $1.2 million (4.6%) during the three month period
ended September 30, 1998 compared to the like 1997 period resulting in an
overall decrease in revenues of $1.7 million (2.3%) during the nine month period
ended September 30, 1998 compared to the 1997 period. Table game revenues
increased 34.8% during the third quarter of 1998 as a result of the significant
improvement in the hold percentage to 20.6% in 1998 from 15.5% in 1997. Table
game revenues decreased 8.1% during the first nine months of 1998 due to the
previously discussed decline in table drop coupled with an overall decline in
the hold percentage to 18.2% in 1998 from 19.3% in 1997. Slot machine revenues
did not change significantly during either the third quarter or first nine
months of 1998 compared to the prior year periods as the changes in gross
wagering were virtually offset by the impact of changes in the slot machine hold
percentages. Poker revenues decreased 10.2% during the third quarter of 1998
compared to the same period of the prior year resulting in a poker revenue
decrease of 6.1% for the nine month period ended September 30, 1998 compared to
1997. The decrease results primarily from a reduction in the number of poker
tables during the period from ten to six.
Rooms revenue decreased $175,000 (6.4%) and $395,000 (5.3%), respectively,
during the three and nine month periods ended September 30, 1998 compared to the
same periods in 1997 due to increased competition for overnight patrons. Hotel
occupancy rates decreased as a result of the additional competition to
approximately 82% in the first quarter of 1998 from approximately 88% during the
same period of 1997. Occupancy rates at the Tunica Casino for the second and
third quarters rebounded to approximately 95% (compared to 97% and 98%,
respectively, in the second and third quarters of 1997) as the market began to
absorb the additional hotel room capacity. Food and beverage revenues increased
$336,000 (8.7%) and $729,000 (6.7%), respectively, during the three and nine
month periods ended September 30, 1998 and 1997 compared to the same periods of
the prior year. Other revenues increased 16.7% and 10.3%, respectively, during
the three and nine month periods ended September 30, 1998 compared to the prior
year periods. The increases in both food and beverage and other revenues are
due to increased patron volume utilizing these services as a result of expanded
promotional activities.
Promotional allowances represent the estimated value of goods and services
provided free of charge to casino customers under various marketing programs.
Such allowances, as a percentage of rooms, food and beverage and other revenues,
increased to 65.7% from 62.7% and to 63.4% from 61.4% during the three and nine
month periods ended September 30, 1998, respectively, compared to the like
periods in 1997. The percentage increases are the result of increased
complimentary food and beverage and other services due to increased marketing
efforts.
DEPARTMENTAL EXPENSES
Casino expenses increased by $2.2 million (12.3%) and $2.1 million (4%),
respectively, during the three and nine month periods ended September 30, 1998
compared to the same periods in 1997. The increases resulted from additional
promotional activities instituted during the third quarter of 1998 in response
to competitive pressures. Rooms expense did not change significantly during the
three and nine
54
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
month periods ended September 30, 1998 compared to the same 1997 periods.
Despite the increases in food and beverage revenues discussed above, food and
beverage expenses decreased by $139,000 (12.4%) and $125,000 (4%), respectively,
during the third quarter and nine month period of 1998 compared to the like
periods of 1997. Such decreases result from the previously noted increase in
marketing activities with respect to food and beverage programs, the costs of
which are allocated to casino expenses. Decreases in other expenses during the
1998 periods were not significant from a monetary amount.
OTHER CONSOLIDATED ITEMS
- ------------------------
GENERAL AND ADMINISTRATIVE
General and administrative expenses increased by $347,000 (8.1%) and
$865,000 (6.9%), respectively, during the three and nine month periods ended
September 30, 1998 compared to the same periods in 1997. Such expenses at the
Aurora Casino (net of management fees) increased by $255,000 (20.8%) during the
three month period ended September 30, 1998 from the prior year period bringing
the nine month period increase to 4.6%. The three month 1998 increase at the
Aurora Casino results primarily from legal fees. The Tunica Casino experienced
a general and administration cost reduction (net of consulting fees) of 14.4%
for the three month period ended September 30, 1998 bringing the nine month
period expense total in line with the previous year period. The remaining
corporate general and administrative expense increases of 15.3% and 14.2%,
respectively, for the three and nine month periods result from increases in
corporate overhead costs, primarily in legal fees and personnel costs.
MANAGEMENT AND CONSULTING FEES
The nine month decrease in management and consulting fees during the 1998
period is 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 $767,000 (16.1%) and $2.2
million (15%), respectively, during the three and nine month periods ended
September 30, 1998 compared to the 1997 periods primarily due to certain
operating equipment at the Tunica Casino becoming fully depreciated during the
third quarter of 1997.
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 or where additional licenses might be available. Such costs
decreased by $16,000 (5.4%) and $487,000 (40.8%), respectively, during the
three and nine month periods ended September 30, 1998 compared to 1997 primarily
as a result of costs
55
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
incurred during the 1997 period with respect to HCC's efforts in obtaining a
gaming site in Louisiana. A gaming project in Shreveport, Louisiana was approved
by the Louisiana Gaming Control Board during the third quarter of 1998 (see
"Liquidity and Capital Resources-Capital Expenditures and Other Investing
Activities" below).
INTEREST
Interest income increased $316,000 (67.2%) and $910,000 (70.4%),
respectively, for the three and nine month periods ended September 30, 1998
compared to the same periods of 1997 as a result of more cash being available
for investment purposes during the 1998 periods. Interest expense did not
change significantly during the three or nine month periods ended September 30,
1998 compared to the same periods of the prior year.
(LOSS) GAIN ON DISPOSAL OF ASSETS
The nine month 1998 loss results from the sale of certain slot machines at
the Tunica Casino as part of its program to update such equipment; the 1997 gain
resulted from the sale of a company-owned aircraft.
INCOME TAXES
As previously disclosed in HCC's quarterly report on Form 10-Q for the
period ended June 30, 1998, the Company was advised by its tax consultants that
it should modify its tax treatment of the spin-off of the stock of GBCC which
occurred on December 31, 1996. The Company has therefore restated its
consolidated financial information for all quarterly periods during 1997 as well
as its consolidated balance sheets at December 31, 1997 and 1996. The revised
tax treatment resulted in the Company being required to recognize additional
taxable income for 1996 and succeeding periods.
As a result of the additional taxable income the Company was required to
recognize from the spin-off, HCC utilized approximately $9 million of its
available net operating loss carryforwards ("NOL's") as of December 31, 1996.
For alternative minimum tax ("AMT") purposes, the additional AMT income
resulting from the revised tax treatment resulted in the Company utilizing all
of its remaining AMT loss carryforwards and, in addition, being liable for the
payment of approximately $2.2 million in AMT taxes in connection with the spin-
off transaction. As a result of the utilization of its NOL's, the obligation
for AMT payments and the impact on its other net deferred tax assets, the
Company has restated its consolidated balance sheet to provide an additional
$6.3 million charge to paid-in capital as of the December 31, 1996 spin-off
date. The charge to paid-in capital records the impact of all effects of the
spin-off transaction. HCC anticipates paying its $2.2 million AMT obligation
for 1996 plus accrued interest thereon during the fourth quarter of 1998.
For the year ended December 31, 1997, the revised treatment resulted in
HCC's recognition for financial reporting purposes of additional income tax
expense of $2.2 million in addition to the accrual of interest on the
underpayment of its federal tax obligations. HCC paid $4.7 million during
September 1998 with respect to its calculated 1997 federal income tax
obligation. HCC had originally anticipated that
56
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
certain tax-planning strategies would create tax attributes which would offset
this tax payment. However, as a result of the revised tax treatment of the spin-
off, these attributes were no longer available to offset HCC's 1997 federal
income tax obligations.
In connection with the revised tax treatment, HCC has commenced litigation
against its former independent accountants and tax advisors alleging negligent
advice and breach of contract. As a result of the revised tax treatment and the
ensuing litigation, the Company replaced its independent accountants. The
Company continues to work with its new outside advisors and consultants to
review these tax issues.
At September 30, 1998, HCC and its subsidiaries have NOL's for federal
income tax purposes totaling approximately $3.6 million, none of which begin to
expire until the year 2028. Additionally, HCC and its subsidiaries have
alternative minimum tax and other tax credits available totaling approximately
$4.9 million and $415,000, respectively. Alternative minimum tax credits do not
expire and none of the other tax credits begin to expire until the year 2010.
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 sheet reflects
net deferred tax assets of $1.4 million as of September 30, 1998. 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 $4 million of taxable income for
federal tax purposes prior to the expiration dates of the NOL's and tax credit
carryforwards and the reversal of other temporary differences.
Sales by HCC or existing stockholders of common stock, or securities
convertible into common stock, 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.
YEAR 2000 COMPLIANCE
In the year 2000, computer programs that have date sensitive software may
recognize a date using "00" as the year 1900 rather than 2000. Such an error
could result in a system failure or miscalculations causing disruptions of
operations including, among other things, a temporary inability to process
transactions or engage in similar normal business activities.
Management has initiated a program to prepare the Company's computer
systems and applications for the year 2000. Such program includes the use of
both internal and external resources to test and, if necessary, modify or
replace software applications. The costs of acquiring, testing and converting
such systems are expected to be less than $1 million. Management expects its
Year 2000 date conversion projects to be completed on a timely basis. The
Company has also initiated formal communication with its significant suppliers
to determine the extent to which its information systems are vulnerable to those
57
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
third parties' failure to resolve their year 2000 issues. While there can be no
assurance that the Company and its suppliers and customers will fully resolve
the Year 2000 issues, neither the estimated costs nor the outcome of the Year
2000 problem is expected to have a material impact on the Company's operations,
liquidity or financial position.
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 some lesser degree of seasonality also
causes 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
OPERATING ACTIVITIES
The operations of the Aurora Casino continue to be HCC's primary source of
liquidity and capital resources, having contributed approximately $17.7 million
of cash flow from operations during the first nine months of 1998 after
deducting the payment of $6.5 million of management fees. The Tunica Casino
provided $9.1 million of cash from operations during the first nine months of
1998 after deducting the payment of $900,000 of consulting fees to GBCC. HCC's
other sources of funds include interest income earned on temporary investments.
In addition to operating expenses at the Aurora Casino and the Tunica Casino,
uses of operating cash by HCC during the first nine months of 1998 included
costs to pursue development opportunities ($706,000) and corporate overhead
costs ($6 million). HCC also made federal income tax payments amounting to $4.7
million with respect to its 1997 income tax obligation (see "Results of
Operations - Income Taxes" above). The Company estimates additional tax payment
obligations amounting to $2.2 million during 1998 with respect to its
distribution of the common stock of GBCC in 1996. Estimated federal tax
obligations have been included in the accompanying consolidated financial
statements at September 30, 1998; however, additional state tax obligations, if
any, have not yet been determined, but are not anticipated to be material.
During the first nine months of 1998, consolidated cash flow from
operations ($23 million) and collections on notes receivable ($6 million) were
used, in part, by HCC to fund capital expenditures of
58
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
$9.4 million, to repay third party indebtedness and make payments under capital
lease obligations of $1.9 million and $425,000, respectively, to fund its
initial $2.5 million investment in a joint venture formed to construct a gaming
and hotel facility in Shreveport, Louisiana and to pay distributions amounting
to $3.8 million to GBCC as limited partner in PML.
FINANCING ACTIVITIES
During October 1995, HCC completed the refinancing of certain outstanding
indebtedness through a public offering of $210 million of 12 3/4% Senior Secured
Notes due November 1, 2003, discounted to yield 13 3/4% per annum. 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 limited
first mortgage 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 limitation on the
first mortgage described in (ii) above is currently $34 million and subject to
reduction for principal payments on an intercompany note between HCC and HCA.
The intercompany note requires semiannual principal payments of $2.5 million
commencing October 15, 1997 with the balance due November 1, 2003.
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 is required to make an offer within 30
business days 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.
HCC made such offers in December 1997 and May 1998 and redeemed a total of $2.8
million principal amount of the Senior Secured Notes.
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.
HCT had a $1.3 million bank credit facility available to borrow against
through September 30, 1998. Outstanding borrowings on the line of credit
($502,000 at September 30, 1998) are to be repaid in monthly installments over
36 months and accrue interest at the rate of prime plus 1/4, per annum subject
to a minimum of 8.875%.
During September 1998, HCA entered into a bank loan agreement to borrow up
to $2 million on an unsecured basis. Borrowings under the agreement are payable
in 36 monthly installments including interest at the rate of 7.5% per annum.
HCA borrowed $2 million under the agreement during October 1998.
59
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Effective as of April 1, 1997, HCC acquired from PPI Corporation, a GBCC
subsidiary, the general partnership interest in the limited partnership which
holds the Aurora management agreement. The acquisition price for the general
partnership interest included a note in the original principal amount of $3.8
million and the assignment of $13.8 million undiscounted principal amount of PPI
Funding Notes and $350,000 accrued interest due from GBCC to PPI Corporation.
Annual principal and interest payments by HCC on the $3.8 million note
approximate the general partner's share of partnership distributions now being
made to HCC.
As of September 30, 1998, HCC's scheduled maturities of long-term debt and
payments under capital leases during the remainder of 1998 are approximately
$2.8 million and $1 million, respectively. The estimated long-term debt
maturities include the potential redemption of $2.5 million of Senior Secured
Notes pursuant to the mandatory redemption offer previously described.
CAPITAL EXPENDITURES AND OTHER INVESTING ACTIVITIES
Capital expenditures at the Aurora Casino during the first nine months of
1998 were $4.7 million; management anticipates spending $2 million during the
remainder of 1998 primarily for its ongoing capital improvements program with no
major projects currently scheduled.
Capital expenditures at the Tunica Casino during the first nine months of
1998 were also $4.7 million; management anticipates spending $2.9 million during
the remainder of 1998. Projects underway include upgrades to the lobby area and
hotel rooms and new slot machines in addition to the property's 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
Senior Secured Notes to an unaffiliated gaming company in the form of two $5
million notes. On February 27, 1998, both parties agreed to settle the
outstanding obligations with the payment of $4.4 million and the issuance of two
new, short-term obligations totaling $1.6 million, which were paid during April
1998. The $4 million difference between the $10 million carrying amount of the
notes receivable and the agreed upon settlement was reflected as a write down of
the notes receivable at December 31, 1997.
In July 1998, HCC entered into a revised agreement with two partners to
develop a hotel and casino complex on the Red River in Shreveport, Louisiana;
HCC's ownership interest in the joint venture is approximately 50%. As
presently contemplated, HCC would contribute its proportionate share of
approximately $40 million as an equity investment in the venture with the
remaining construction and preopening costs (estimated at $140 million) to come
from non-recourse project financing.
HCC continues to pursue several additional potential gaming opportunities.
HCC intends to finance any future ventures with cash flow from operations,
together with third party financing, including non-recourse project financing.
60
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
SUMMARY
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.
61
<PAGE>
PART II: OTHER INFORMATION
- ---------------------------
ITEM 6.(A) - EXHIBITS
10.1 Amended and Restated Joint Venture Agreement by and among Shreveport
Paddlewheels, L.L.C., Sodak Louisiana, L.L.C. and HWCC-Louisiana, Inc.
dated July 31, 1998.
10.2 September 1998 Amendment to the July Amended and Restated Joint Venture
Agreement.
10.3 Agreement dated as of September 2, 1998 by and among GBHC, GB Holdings,
Inc., and GB Property Funding Corp., on the one hand, and GBCC, PHC
Acquisition Corp., Lieber Check Cashing, LLC, Jack E. Pratt, William D.
Pratt, Edward T. Pratt, Jr. and HCC, on the other.
*99.1 Petition filed on October 8, 1998 in the District Court of Dallas County,
Texas by Hollywood Casino Corporation and Greate Bay Casino Corporation
("Plaintiffs") against Arthur Andersen L.L.P., Richard L. Robbins,
Michael E. Gamache, Daniel J. Meehan, and Brent A. Railsback
("Defendants")
__________________
* Incorporated by reference to the same-numbered exhibit to the Form 8-K
filed October 22, 1998 by the Registrants with the Securities and
Exchange Commission.
ITEM 6.(B) - REPORTS ON FORM 8-K
The Registrants did not file any reports on Form 8-K during the quarter
ended September 30, 1998. On October 22, 1998, the Registrants filed a Form 8-K
to report a change in certifying accountants. On October 30, 1998 the
Registrants filed a Form 8-K/A to include their former accountants' letter to
the Securities and Exchange Commission as an exhibit.
SIGNATURES
- ----------
Pursuant to the requirements of the Securities Exchange Act of 1934, each of
the Registrants has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HOLLYWOOD CASINO CORPORATION
Date: November 13, 1998 By: /s/ Charles F. LaFrano III
------------------- --------------------------------
Charles F. LaFrano III
Vice President of Finance and
Principal Accounting Officer
HWCC - TUNICA, INC.
Date: November 13, 1998 By: /s/ Charles F. LaFrano III
------------------- --------------------------------
Charles F. LaFrano III
Principal Accounting Officer
62
<PAGE>
EXHIBIT 10.1
EXHIBIT B
AMENDED AND RESTATED JOINT VENTURE AGREEMENT
<PAGE>
AMENDED AND RESTATED
JOINT VENTURE AGREEMENT
OF QNOV
(FORMERLY KNOWN AS
THE "QUEEN OF NEW ORLEANS AT THE
HILTON JOINT VENTURE")
THIS AMENDED AND RESTATED JOINT VENTURE AGREEMENT is entered into as of
July 31, 1998, by and among Shreveport Paddlewheels, L.L.C. ("Paddlewheels"),
Sodak Louisiana, L.L.C. ("Sodak"), and HWCC-Louisiana, Inc ("HWCC"). Unless the
context otherwise requires, terms which are capitalized and not otherwise
defined shall have the meanings set forth or cross-referenced in Article I of
this Agreement.
PRELIMINARY STATEMENT
---------------------
A. Hilton Hotels Corporation ("Hilton") and New Orleans Paddlewheels,
Inc. ("NOP") entered into a Basic Agreement, dated as of January 9, 1992, and
Joint Venture Agreement dated May 20, 1992 (the "Original Joint Venture
Agreement") collectively setting forth the agreement of such parties to operate,
as joint venturers under the name "Queen of New Orleans at the Hilton Joint
Venture" (the "Original JV"), riverboat casinos located in New Orleans,
Louisiana.
B. Hilton assigned its equity interest in the Original JV to Hilton New
Orleans Corporation ("HNOC") on January 14, 1994.
C. On the Closing Date, it is contemplated that HNOC will transfer its
total equity interest in the Original JV to Sodak and HWCC, and NOP will
transfer certain of its equity interest in the Original JV to Sodak and HWCC.
D. Paddlewheels, Sodak, HWCC and New Orleans Paddlewheels, Inc. ("NOP")
have entered into an Amended and Restated Master Agreement dated July 31, 1998
(the "Master Agreement"), setting forth the agreement of the parties, as joint
venturers, to participate in, construct and operate a riverboat gaming vessel,
hotel and casino in Shreveport, Louisiana.
NOW, THEREFORE, in consideration of the premises and the mutual agreements
herein contained, the Original Joint Venture Agreement is hereby amended and
restated in its entirety as follows:
<PAGE>
ARTICLE I
---------
DEFINITIONS
-----------
1.1 Definitions. The following terms shall have the respective meanings
-----------
indicated:
"Accountants" - shall mean independent certified public accountants of
-------------
recognized national standing.
"Act" - shall mean the Louisiana Gaming Control Act, La. R.S. 27:1 et.
-----
seq., including the amendments thereto and regulations promulgated
thereunder, as may be in effect from time to time.
"Affiliate(s)" - shall mean with respect to any person or entity, any firm,
--------------
corporation, partnership, limited liability company, association, trust or
other person or entity which, directly or indirectly, controls, is
controlled by, or is under common control with, the subject person or
entity or such person or entity owns directly or indirectly ten percent
(10%) or more of any class of equity securities of, or otherwise has a
substantial beneficial interest in such entity. For purposes hereof, the
term "control" shall mean the possession, directly or indirectly, of the
power to direct or cause the direction of the management and policies of
any such person or entity, whether through the ownership of voting
securities, by contract or otherwise. Such term shall also include with
respect to any person who is a spouse, child, grandchild, sibling or parent
of the owner of any Venturer, or any trust, partnership or other entity
beneficially owned by any of the foregoing, individually or collectively.
"Agreement" - shall mean this Amended and Restated Joint Venture Agreement.
-----------
"Assignment Agreement" - shall mean the Assignment of Joint Venture
----------------------
Interest dated as of the date hereof by and among Sodak, HWCC and NOP.
"Budget" - shall mean the annual operating budget for the Venturers adopted
--------
by the Management Committee pursuant to Article VIII hereof.
"Business Days" - shall mean any day during which federally chartered banks
---------------
are not required to be closed under applicable federal or Louisiana law.
"Casino" - shall mean the premises of the Complex upon which gaming
--------
activities will be conducted pursuant to the Act.
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<PAGE>
"Closing Date" - shall have the same meaning as set forth in the Master
--------------
Agreement.
"Code" - shall mean the Internal Revenue Code of 1986, as amended.
------
"Commencement Date" - shall mean the opening date of the Project.
------------------
"Complex" - shall mean, upon completion of the Project, collectively the
---------
Vessel, the Casino, the Hotel, and the land based facilities related
thereto, together with all related improvements, facilities and amenities
used in connection with the operation thereof.
"Complex Net Revenues" - shall have the same meaning as set forth in the
----------------------
Management Agreement.
"Contribution Date" - shall have the same meaning as defined in Section
-------------------
3.3(b) below.
"Debt Restriction" - shall have the same meaning as defined Section 6.1
------------------
below.
"Defaulting Venturer" - shall have the meaning as defined in Section 13.1
---------------------
below.
"Gaming Authorities" - shall mean any State of Louisiana gaming regulatory
--------------------
authority authorized under the Act, including but not limited to, the
Louisiana Gaming Control Board and the Riverboat Gaming Enforcement
Division of the Louisiana State Police, and any other gaming regulatory
authority with jurisdiction over the Venture or any Venturer.
"HCC" - shall mean Hollywood Casino Corporation, a Delaware corporation.
----
"HWCC" - shall mean HWCC - Louisiana, Inc., a Louisiana corporation, which
------
is a wholly owned subsidiary of HCC.
"Hotel" - shall mean a hotel, which will contain no less than 300 rooms to
-------
be owned by the Venture located at the Venture Site in Shreveport,
Louisiana.
"JV Interest" - shall mean a unit representing a Venturer's equity
-------------
interest in the Venture.
"JV Value" - shall have the meaning as defined in Section 10.6(a)(i) below.
--------
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<PAGE>
"LGCB" - shall mean the State of Louisiana Gaming Control Board.
----
"Liquidating Venturer" - shall have the meaning as defined in Article XII.
----------------------
"Loan Commitments" - shall mean collectively the financing commitments that
------------------
the Venture intends to procure for construction, development and operation
of the Project upon terms acceptable to the Management Committee.
"Management Agreement" - shall mean the Management Services Agreement
----------------------
between the Venture and the Operator dated as of the date hereof, together
with such amendments as the parties thereto may mutually agree.
"Management Agreement Value" - shall have the same meaning as defined in
---------------------------
Section 10.6(a)(i) below.
"Management Committee" - shall mean the management committee of the
----------------------
Venture, as defined in Section 7.1 below.
"Marine Agreement" - shall mean the Marine Services Agreement dated as of
------------------
the date hereof between the Venture and Paddlewheels or an Affiliate
thereof.
"Master Agreement" - shall mean the Amended and Restated Master Agreement
------------------
dated as of July 31, 1998 by and among Sodak, HWCC, NOP and Paddlewheels.
"NOP" - shall mean New Orleans Paddlewheels, Inc., a Louisiana corporation.
-----
"Operator" - shall mean HWCC - Shreveport, Inc., a Louisiana corporation.
----------
"Paddlewheels" - shall mean Shreveport Paddlewheels, L.L.C., a Louisiana
--------------
limited liability company, which is a wholly-owned subsidiary of NOP.
"Pari Passu Obligations" - shall mean the Venture's obligation to pay (i)
------------------------
1% of the Venture's Complex Net Revenues to Sodak Gaming, Inc., pursuant to
the terms and conditions of the Sodak Agreement, and (ii) any Complex
Incentive Fees (as defined in the Management Agreement) to the Operator
pursuant to the terms and conditions of the Management Agreement.
"Project" - shall mean the planning, construction and operation of (i) the
---------
Vessel, (ii) landside improvements to
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<PAGE>
facilitate the operation of the Complex and (iii) the Hotel (collectively,
the "Project"). The berth site for the Vessel shall be located at the
Venture Site.
"Regulations" - shall mean permanent, temporary, or proposed income tax
-------------
regulations of the United States Department of Treasury promulgated under
the Code.
"Relative Ownership Ratio" - shall have the meaning as defined in Section
--------------------------
5.2(b) below.
"Residual Ownership Ratio" - shall have the same meaning as defined in
--------------------------
Section 3.2(d) below.
"Sodak" - shall mean Sodak Louisiana, L.L.C., a Louisiana limited liability
-------
company, which is a wholly owned subsidiary of Sodak Gaming, Inc.
"Sodak Agreement" - shall mean the Consulting Agreement dated as of the
-----------------
date hereof between the Venture and Sodak.
"Transfer" - shall mean the sale, assignment, or other transfer, whether
----------
voluntary or by operation of law.
"Venture" - shall mean the joint venture governed by this Agreement.
---------
"Venturer(s)" - shall mean Paddlewheels, Sodak, HWCC, and such other
-------------
entities which may hereafter become Venturers and any person or entity
admitted to the Venture pursuant to the provisions of this Agreement, and
any of the Venturers when the reference is singular, and their respective
successors in interest.
"Venture Site" - shall mean the berth site located at or adjacent to the
-------------
Harrah's valet parking site in Shreveport, Louisiana as more expressly
described in "Exhibit A" attached hereto.
---------
"Vessel" - shall mean a riverboat gaming vessel having approximately 30,000
--------
square feet of net gaming space or such other amount of net gaming space as
may be permitted under applicable Louisiana law, which riverboat gaming
vessel shall be located at the Venture Site in Shreveport, Louisiana.
1.2 References. Except as otherwise specifically indicated, all
----------
references to Article, Section and Subsection numbers refer to Articles,
Sections and Subsections of this Agreement, and all references to Exhibits refer
to the Exhibits attached hereto. The words "herein", "hereof", "hereunder",
"hereinafter" and words of similar import refer to this Agreement as a whole and
not to any
-5-
<PAGE>
particular Section or Subsection hereof. For purpose of convenience, the
impersonal pronoun is sometimes used herein to refer to the Venturers.
ARTICLE II
----------
FORMATION OF VENTURE
--------------------
2.1 Joint Venturers. The Venturers hereby agree to continue the Original
---------------
JV, in partnership form (the "Venture"), for the limited purposes and pursuant
to the terms and conditions set forth herein.
2.2 Name. From and after the date hereof, the name of the Venture shall
----
be "QNOV."
2.3 Principal Office. The principal office of the Venture shall initially
----------------
be located at Two Galleria Tower, Dallas, Texas, and it is the current intention
of the Management Committee to relocate the principal office in or near
Shreveport, Louisiana or such other place as the Management Committee may, from
time to time, determine.
2.4 Partnership Act; Ownership. Except as otherwise expressly stated
--------------------------
herein, the rights and obligations of the Venturers and the administration and
termination of the Venture shall be governed by this Agreement and the internal
laws (including partnership law) of the State of Louisiana.
2.5 Purpose. The purpose of the Venture shall be to develop, construct,
-------
own and operate the Project, and the performance of all things necessary or
incidental to or in connection with the foregoing, in accordance with the terms
and conditions of this Agreement. The purposes of the Venture shall not be
modified in any manner, except in the manner set forth in Article VII hereof.
2.6 No Individual Authority. Except as otherwise expressly provided in
-----------------------
this Agreement, no Venturer, acting alone, shall have any authority to act for,
or undertake or assume any obligations or responsibility, in the name of or on
behalf of, the other Venturers or the Venture.
2.7 No Restrictions. Nothing contained in this Agreement shall be
---------------
construed so as to limit, in any manner, a Venturer, or any Affiliate of such
Venturer, from owning, operating, financing, investing in, providing maritime
services to, or otherwise being affiliated with, any other venture or operation,
including any riverboat or gaming operation not owned or operated by the Venture
wherever located; provided, however, that no Venturer, nor any of its
Affiliates, may be directly or indirectly involved in the ownership, operation,
management, financing or development of any
-6-
<PAGE>
casino gaming operation (a "Competing Casino") (i) located within the parishes
described in "Exhibit B" attached hereto or in those areas in the States of
---------
Texas and Arkansas that are within a 100-mile radius of the dock site of the
Complex, without the prior written consent of all Venturers (other than
Paddlewheels and any Affiliate thereof), and (ii) at any time prior to October
16, 2002, in Tarrant or Dallas County, Texas, or the State of Arkansas without
providing each of the Venturers with written notice of its proposed involvement
in a Competing Casino (the "Competing Casino Notice"), which Competing Casino
Notice shall include an offer to all Venturers (other than Paddlewheels and any
Affiliate thereof) to participate in the Competing Casino pro rata on the same
terms and conditions as the notifying Venturer, with such offer to participate
in such particular Competing Casino expiring and being of no further force or
effect with respect to any such Venturer who has not delivered to the notifying
Venturer written notice of an election to participate within thirty (30) days of
delivery of the Competing Casino Notice. Nothing in this Section 2.7 shall be
deemed to restrict (a) Sodak or an Affiliate thereof, or HWCC or an Affiliate
thereof, in any manner, from engaging in the business of the distribution, sale,
lease, financing or maintenance of casino gaming equipment, gaming and
accounting software and systems, and ancillary equipment and supplies or (b)
Paddlewheels or an Affiliate thereof, in any manner, from performing maritime
services.
2.8 Venturers Not Responsible for Other's Commitments. No Venturer shall
-------------------------------------------------
be responsible or liable for any indebtedness or obligation of another Venturer
incurred either before or after the execution of this Agreement, nor shall the
Venture be responsible or liable for any such indebtedness or obligation of a
Venturer, except for (i) indebtedness or obligations expressly incurred or
assumed by a Venturer pursuant to the terms of this Agreement or (ii) otherwise
as expressly mutually agreed upon by the parties.
2.9 Term. The Venture shall continue until the first to occur of the
----
following:
(a) the purchase by a Venturer of the JV Interests owned by all of the
other Venturers;
(b) the sale or other disposition by the Venturers to a third party of
all or substantially all of the outstanding JV Interests, or the sale by
the Venture of all or substantially all of the Venture's assets;
(c) the dissolution of the Venture as expressly provided in this
Agreement;
(d) the mutual agreement of Sodak and HWCC to liquidate and wind up
the Venture; or
-7-
<PAGE>
(e) August 24, 2099.
2.10 Effective Date. The effective date of this Agreement shall be the
--------------
Closing Date (as defined in the Master Agreement).
ARTICLE III
-----------
CAPITAL CONTRIBUTIONS
---------------------
3.1 Transfers to Affiliates. Subject to the approval of the applicable
-----------------------
Gaming Authorities, at any time or from time to time during the term hereof, (a)
Sodak may transfer to Sodak Gaming, Inc., or an Affiliate thereof, (b) HWCC may
transfer to HCC or an Affiliate thereof, and (c) Paddlewheels may transfer to an
Affiliate thereof, all or any portion of their respective right, title and
interest in the Venture. The parties hereby consent to any such transfer and
waive any right or claim they may have had or will have to participate in such
transfer.
3.2 Capital Contributions and Ownership Ratios.
------------------------------------------
(a) Sodak and HWCC. Payments of $100,000 each made by Sodak and HWCC
--------------
prior to the date hereof together with payments of an additional $2,400,000
each made by Sodak and HWCC on the Closing Date to be deposited into a bank
account established by the Operator, which funds may be withdrawn from the
bank account in accordance with and for the purposes set forth in the
Technical Services Agreement that is attached to the Master Agreement as
Exhibit G. Such contributions shall be deemed to be initial capital
contributions to the Venture made by such parties.
(b) Paddlewheels. (i) Paddlewheels acknowledges and agrees that, as
------------
consideration for its ownership interest in, and rights to receive payments
from, the Venture from and after the date hereof in accordance with the
terms of this Agreement, Paddlewheels shall make a $1 million cash
contribution concurrent with the date the Venture receives initial funding
under any Loan Commitment. (ii) Furthermore, Paddlewheels acknowledges and
agrees that NOP's agreement in the Master Agreement to fulfill its
obligations pursuant to Section 1(E) of the Loan and Settlement Agreement
dated January 16, 1998, by and between Paddlewheels, HNOC, NOP, Sodak and
HWCC (the "Loan and Settlement Agreement") constitutes additional
consideration for Paddlewheels' ownership interest in and rights to receive
payments from the Venture pursuant hereto.
(c) Allocation of JV Interests. Each of Sodak and HWCC is hereby
--------------------------
credited with one JV Interest for each dollar contributed by such Venturer
pursuant to Section 3.2(a) and
-8-
<PAGE>
shall be credited with one additional JV Interest for each dollar
contributed as a Subsequent Capital Contribution in accordance with Section
3.3 below. Paddlewheels shall be credited with one JV Interest for each
dollar contributed by such party pursuant to Section 3.2(b)(i) above and
shall be credited, as of the date the Venture receives initial funding
under any Loan Commitment, with an additional $1 million of JV Interests in
connection with NOP's obligations as described under Section 3.2(b)(ii)
above.
(d) Residual Ownership Ratios. In consideration for the capital
-------------------------
contributions described in this Section 3.2 made or to be made by the
Venturers, each Venturer shall be deemed to have the following Residual
Ownership Ratio:
Residual
Ownership
Ratio
---------------
Paddlewheels 10%
Sodak 45%
HWCC 45%
Paddlewheels' Residual Ownership Ratio shall not be subject to adjustment,
increase or diminution. The Residual Ownership Ratio of each Venturer (other
than Paddlewheels and any Affiliate thereof) shall be adjusted from time to time
as Subsequent Capital Contributions are made in accordance with this Article
III, and shall be (x) the quotient equal to the number of outstanding JV
Interests held by such Venturer at such time, divided by the total number of
outstanding JV Interests held by all Venturers other than Paddlewheels at such
time (y) multiplied by 90.
3.3 Subsequent Capital Contributions.
--------------------------------
(a) The Venturers (except Paddlewheels and any Affiliate thereof) from
time to time may, but shall not be obligated to, make additional capital
contributions to the Venture ("Subsequent Capital Contributions") in cash
as needed to meet the needs of the Venture. Paddlewheels and any Affiliate
thereof shall not be permitted or required to make Subsequent Capital
Contributions.
(b) The Management Committee shall authorize and approve Subsequent
Capital Contributions and shall give written notice (the "Notice of
Subsequent Capital Contribution") to each Venturer of the decision of the
Management Committee that Subsequent Capital Contributions are necessary in
connection with the Project. Such notices will state (i) the total amount
of additional capital required by the Venture, (ii) the amount of
additional capital that each of Sodak, HWCC or any
-9-
<PAGE>
other eligible Venturer is required to contribute, which shall be based on
their relative Subsequent Contribution Ownership Ratios as provided in
Section 3.3(d) below, (iii) the use of proceeds of the requested Subsequent
Capital Contribution, including a reasonable itemization of such use, and
(iv) the date by which the contribution shall be made (the "Contribution
Date"), which date shall not be less than 20 days after mailing of the
Notice of Subsequent Capital Contribution. In the event a Venturer elects
not to contribute its pro rata share of Subsequent Capital Contributions
that is authorized and approved by the Management Committee pursuant to
this Section 3.3, then the other contributing Venturers may elect to
contribute such unpaid portion of Subsequent Capital Contributions on a pro
rata basis in accordance with their Subsequent Contribution Ownership Ratio
(which shall not include, for purposes of calculating the foregoing, the JV
Interests of the non-contributing Venturer).
(c) Each Venturer that makes a Subsequent Capital Contribution shall
be credited with one additional JV Interest for each additional dollar
contributed by such party to the Venture.
(d) The allocation of any Subsequent Capital Contribution among the
contributing Venturers will be based on the "Subsequent Contribution
Ownership Ratio" for each contributing Venturer which shall be, for each
such contributing Venturer, (i) the quotient equal to the number of JV
Interests held by such contributing Venturer, divided by the total number
of outstanding JV Interests held by all Venturers (other than Paddlewheels
and any Affiliate thereof), (ii) multiplied by (100), immediately prior to
the issuance of the Notice of Subsequent Capital Contribution.
3.4 No Right to Return of Contribution. Except as otherwise expressly
----------------------------------
provided in this Agreement, no Venturer shall have the right to withdraw or
receive any return of its initial or any Subsequent Capital Contribution. Under
circumstances requiring a return of any initial or Subsequent Capital
Contribution, no Venturer shall have the right to receive property other than
cash. No Venturer shall have any right to the withdrawal or to the return of any
initial or Subsequent Capital Contribution made by it to the Venture, except as
otherwise provided in this Agreement.
ARTICLE IV
LOANS
-----
The Venturers may be entitled, but are not obligated, to make loans to the
Venture from time to time, the terms and conditions of
-10-
<PAGE>
which (including, but not limited to, any equity conversion provisions) shall be
approved by the Management Committee, and any such loans (prior to any
applicable conversion thereof) shall not be treated as Subsequent Capital
Contributions to the Venture for any purpose hereunder, nor entitle such
Venturer to any increase in its share of the profits and losses and cash
distributions of the Venture, but the Venture shall be obligated to such
Venturer for the amount of any such loans pursuant to the terms thereof. All
scheduled principal and interest payments with respect to any loans from a
Venturer to the Venture pursuant to this Section shall be repaid prior to any
distributions to any Venturer pursuant to Section 5.1 below. No Venturer shall
be paid interest on any initial or Subsequent Capital Contribution to the
Venture.
ARTICLE V
DISTRIBUTIONS
-------------
From time to time, but in no event less frequently than once each calendar
year, the Management Committee shall determine the amount of equity
distributions that shall be made to the Venturers (other than Paddlewheels and
any Affiliate thereof) pursuant to Section 5.1 and 5.2 below.
5.1 Equity Distributions. No equity distributions shall be made to Sodak
--------------------
and HWCC pursuant to Section 5.2 below unless and until the Pari Passu
Obligations have been paid in full.
5.2 (a) Priority of Distributions. All equity distributions (other than
-------------------------
distributions pursuant to Section 5.2(d) below) shall be made pro rata to
the Venturers (other than Paddlewheels and any Affiliate thereof) based on
their respective Relative Ownership Ratios (as defined in Section 5.2(b)
below), immediately prior to any such distribution.
(b) Definition of Relative Ownership Ratio. For purposes of this
--------------------------------------
Agreement, the term "Relative Ownership Ratio" shall mean for each Venturer
(except Paddlewheels and any Affiliate thereof) a percentage equal to (i)
the quotient equal to the number of JV Interests held by such Venturer,
divided by the total number of outstanding JV Interests held by all
Venturers (excluding JV Interests held by Paddlewheels and any Affiliate
thereof), (ii) multiplied by 100.
(c) Withholding. If required by the Code or by state or local law,
------------
the Venture will withhold any required amount payable to a Venturer
pursuant to Article V for payment to the appropriate taxing authority. Any
amount so withheld from a Venturer will be treated as distributions made
pursuant to Section 5.1 above by the Venture to such Venturer. Each
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Venturer agrees to timely file any agreement or return that is required by
any taxing authority in order to avoid any withholding obligation that
would otherwise be imposed on the Venture.
(d) Tax Distributions. The Venture shall distribute to each Venturer
-----------------
(including Paddlewheels and any Affiliate thereof) in the event such
persons are allocated any share of Venture taxable income from operations
(but not with respect to any other allocations of taxable income or gain,
including but not limited to, allocations of income and gains in connection
with a sale of assets by the Venture or a liquidation of the Venture or in
connection with any deemed capital contribution) pursuant to the Code,
Regulations or any formal action by the Internal Revenue Service for each
year, as additional equity distributions, amounts equal to the amount by
which (a) such Venturer's allocable share of Venture taxable income
multiplied by the highest marginal combined federal, state and local income
tax rate applicable to any Venturer that has been allocated a share of
Venture taxable income for such year exceeds (b) cash distributions
otherwise made to such Venturer with respect to such year.
5.3 Profits and Losses.
------------------
(a) Profits and Losses. "Profits and Losses" means, for each Venture
------------------
fiscal year or other fiscal period, an amount equal to the Venture's
taxable income or loss for such year or period, as determined in accordance
with Section 703(a) of the Code (for this purpose, all items of income,
gain, loss or deduction required to be stated separately pursuant to
Section 703(a)(1) of the Code shall be included in Profits or Losses).
(b) Allocation of Losses. All Losses shall be allocated to the
--------------------
Venturers (other than Paddlewheels and any Affiliate thereof) in proportion
to such Venturers' Relative Ownership Ratios; provided, however, that any
Losses (or portion thereof) attributable to a loan made or guaranteed by a
Venturer, or Venturer nonrecourse debt within the meaning of Regulation
Section 1.704-2(b)(4) ("Venturer Nonrecourse Debt"), shall be allocated to
such Venturer in accordance with such Regulation.
(c) Allocation of Profits. Subject to the special allocation
---------------------
provisions set forth in Section 5.3(d) below, all Profits shall be
allocated to the Venturers (other than Paddlewheels and any Affiliate
thereof) in accordance with such Venturers' respective Relative Ownership
Ratios.
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(d) Special Allocation. In any period during which Paddlewheels
------------------
receives payment of any amount representing its share of Net Realized Value
(as defined in Section 10.7 below), Paddlewheels shall be allocated taxable
income or gain for such period in an aggregate amount equal to such
payment. Except as set forth in the preceding sentence, no income, profits,
gains, losses or tax credits shall be allocated to Paddlewheels.
5.4 Transfer. If, after the date hereof, any JV Interest is transferred
--------
during any fiscal year of the Venture (whether by liquidation of a JV Interest,
transfer of all or part of a JV Interest or otherwise), the books of the Venture
will be deemed to be or will be closed as of the effective date of such
transfer. The Profits or Losses attributable to the period from the first day of
such fiscal year through the effective date of such transfer will be allocated
to the transferor, and the Profits or Losses attributable to the period
commencing on the effective date of such transfer will be allocated to the
transferee. In lieu of an interim closing of the books of the Venture and with
the agreement of the transferor and the transferee, the Venture may allocate
Profits and Losses for such fiscal year between the transferor and the
transferee based on a daily proration of items for such fiscal year or any other
reasonable method of allocation (including an allocation of extraordinary
Venture items, as determined by the Venture, based on when such items are
recognized for federal income tax purposes). This allocation provision is
subject to the provisions of Section 706(d) of the Code, relating to allocable
cash basis items.
5.5 Tax Credits. Any tax credit, and any tax credit recapture, will
-----------
be allocated to the Venturers (other than Paddlewheels and any Affiliate
thereof) in the same ratio that the federal income tax basis of the asset (to
which such tax credit relates) is allocated to the Venturers under the
Regulations promulgated under Section 46 of the Code, and if no basis is
allocated, in the same manner as Profits are allocated to the Venturers under
Section 5.3 hereof.
5.6 Tax Information Notices. Each Venturer shall furnish the "Tax Matters
-----------------------
Manager" (as defined in Section 9.8 hereof) with such information (including
information specified in Section 6230(e) of the Code) as the Tax Matters Manager
may reasonably request to permit the Tax Matters Manager to provide the Internal
Revenue Service with sufficient information to allow proper notice to the
Venturers in accordance with Section 6223 of the Code. The Tax Matters Manager
shall keep each Venturer informed of those administrative and judicial
proceedings for the adjustment of the Venture level of Venture items required by
Section 6223(g) of the Code and the Regulations thereunder, and such other
matters as the Tax Matters Manager, in its sole discretion, deems appropriate.
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5.7 Inconsistent Tax Treatment. Each Venturer shall notify the Tax
---------------------------
Matters Manager in the event its treatment of any Venture item on its federal
income tax return is inconsistent with the treatment of that item on any return
filed by or in any records of the Venture within thirty (30) days of the date
such Venturer's return is filed.
5.8 Tax Proceedings. The Tax Matters Manager, in its sole discretion,
----------------
shall direct and oversee all proceedings, disputes and other similar matters
between the Venture and the Internal Revenue Service. Any Venturer who intends
to file a petition under Section 6226, 6228, or other sections of the Code with
respect to any Venture item, or other tax matters involving the Venture shall
give reasonable notice to each of the Venturers of such intention and the nature
of the contemplated proceedings. In the case where the Tax Matters Manager, on
behalf of the Venture, intends to file such petition, the Tax Matters Manager,
in its sole discretion, shall choose the forum in which such petition will be
filed. If any Venturer desires to seek review of any court decision rendered as
a result of a proceeding instituted under this Section, such Venturer shall so
notify each of the Venturers, and shall request the Tax Matters Manager to so
act. The Tax Matters Manager may, in its sole discretion, choose to pursue or
forego settlement, review, litigation or any other proceedings in connection
with any such proceeding, dispute or other similar matter with the Internal
Revenue Service.
5.9 Tax Settlements. The Tax Matters Manager shall have the authority to
---------------
bind any other Venturer to a settlement agreement regarding any proceeding
dispute or other matter by and between the Venture and the Internal Revenue
Service upon the written concurrence of any such Venturer who would be bound by
such agreement.
5.10 Expenditures, Fees and Indemnification. The Tax Matters Manager may
---------------------------------------
engage such legal counsel, certified public accountants, or others (including,
without limitation, experts) on behalf of the Venture as it may determine to be
necessary and appropriate. Any other Venturer may engage other legal counsel,
certified public accountants, or others on such other Venturer's own behalf and
at such other Venturer's sole cost and expense. Any reasonable item of expense,
including but not limited to fees and expenses for legal counsel, certified
public accountants, and others (including, without limitation, experts) that the
Tax Matters Manager incurs on behalf of the Venture in connection with any
audit, assessment, litigation, or other proceeding regarding any Venture item,
shall constitute expenses of the Venture. In the event that the Venture does
not have adequate cash or other assets to pay such items of expense, the Tax
Matters Manager shall not be obligated to make Capital Contributions or loans to
fund such expenses except as otherwise provided herein, and the Tax Matters
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Manager shall be free to resign as the "tax matters partner" of the Venture
pursuant to Section 5.11 hereof.
5.11 Resignation of Tax Matters Manager. The Tax Matters Manager may
-----------------------------------
resign as "Tax Matters Manager" of the Venture at any time upon the filing of a
signed statement with the Internal Revenue Service in accordance with Temp.
Treas. Reg. (S) 301.623(a)(7)-1T(i) (or any successor provision thereto). The
successor "Tax Matters Manager" shall be determined pursuant to Temp. Treas.
Reg. (S) 301.6231(a)(7)-1T (or any successor provision thereto).
5.12 Survival of Tax Matters Manager Provisions. The provisions of this
------------------------------------------
Article including without limitation the obligation to pay fees and expenses
shall survive the termination of the Venture or the termination of any
Venturer's interest in the Venture and shall remain binding on the Venture for a
period of time necessary to resolve with the Internal Revenue Service, the
Department of the Treasury or any state taxing authority any and all matters
regarding the federal or state income taxation of the Venture for the applicable
tax year(s).
ARTICLE VI
----------
CASH PRIORITIES
---------------
6.1 Priority. (a) The parties hereto agree and acknowledge that, subject
--------
to the payment subordination terms, restrictions and conditions set
forth in any credit facility or other applicable loan agreement or
indenture entered into by the Venture (a "Debt Restriction"), the
Venture shall pay the following fees, expenses and distributions in
the following order of priority:
(i) First, the Venture shall pay the Operator the Basic
Management Fee (as defined in the Management Agreement), pursuant to
the terms and conditions of the Management Agreement.
(ii) Second, the Venture shall pay the Pari Passu Obligations,
which payments shall be made in accordance with Section 6.1(b) below.
(iii) Finally, the Venture shall make equity
distributions pursuant to Section 5.2 above.
(b) In the event the Venture cannot pay, in full, the Pari Passu
Obligations, as a result of any Debt Restriction, payments shall be made to
Sodak and the Operator, pro rata, based on each party's respective portion of
the aggregate amount of all Pari Passu Obligations payable to all parties with
respect to such fiscal year; provided that in the event Pari Passu Obligations
have
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accrued for any prior fiscal year, the order of priority shall be to first pay
accrued amounts relating to each such prior fiscal year starting with the
earliest fiscal year.
ARTICLE VII
-----------
MANAGEMENT AND OPERATION OF THE VENTURE
---------------------------------------
7.1 Management Committee. The Venture shall be managed by a management
--------------------
committee (the "Management Committee") to oversee and supervise the operation of
the Venture's business and to make all decisions on behalf of the Venture. The
Management Committee shall have sole and exclusive control of the business of
the Venture and shall be authorized and empowered to determine all questions
relating to the conduct, operation and management of the business of the
Venture, and the determinations of the Management Committee shall be binding
upon Venturers and all other persons for all purposes.
7.2 Number; Appointment. The number of members on the Management
-------------------
Committee shall be four. Two members shall be appointed by each of Sodak (the
"Sodak Representatives") and HWCC (the "HWCC Representatives"); provided that
the right of either such Venturer to appoint any member or members shall
terminate immediately at such time as such Venturer no longer owns 20% of the
total number of JV Interests outstanding (not including any JV Interests held by
Paddlewheels and any Affiliate thereof). Each of Sodak and HWCC, in its
respective sole discretion, may remove the applicable member or members of the
Management Committee who was appointed by it and appoint a new member or
members, by giving the other Venturers written notice of such change. The
initial members of the Management Committee are set forth in Exhibit C attached
hereto.
7.3 Acts of the Managers; Minutes. Except as otherwise provided herein,
-----------------------------
the Sodak Representatives collectively shall be entitled to one vote (which may
be voted by either of them) and the HWCC Representatives collectively shall be
entitled to one vote (which may be voted by either of them) on all Management
Committee matters. The Management Committee shall take action by a majority
vote. No member, acting individually, shall have any authority to act for or to
assume any obligations or responsibilities on behalf of the Venture, unless
expressly authorized by the members of the Management Committee in accordance
with this Section 7.3. Minutes of all actions of the Management Committee shall
be kept with the other Venture records and shall be available at any reasonable
time for inspection by any Venturer.
7.4 Management Committee Meetings. The Management Committee shall meet
-----------------------------
from time to time to take any action it deems necessary or advisable for the
furtherance of the Venture's business. Meetings of the Management Committee
shall be held at such time and
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place as shall be designated at a previous meeting of the Management Committee.
Any or all members of the Management Committee may participate in any meeting of
the Management Committee by any means of communication through which all of the
members of the Management Committee participating in such meeting can
simultaneously hear and speak to each other during such meeting. For the
purposes of establishing a quorum and taking any action at the meeting, such
members of the Management Committee so participating shall be deemed present in
person at the meeting; and the place of the meeting shall be the place of
origination of the telephone conversation or other comparable communication
technique.
7.5 Calling Special Meetings; Notice. Special meetings of the Management
--------------------------------
Committee may be called by any member by giving at least five (5) business days'
notice of the date, time and place thereof to each member by mail, telephone,
facsimile, telegram or in person. If the day or date, time and place of a
special meeting of the Management Committee has been announced at a previous
meeting of the Management Committee, no notice is required. Notice of an
adjourned meeting of the Management Committee need not be given other than by
announcement at the meeting at which adjournment is taken. The notice of any
special meeting shall contain a statement of the purposes of the meeting.
7.6 Waiver of Notice. Notice of any meeting of the Management Committee
----------------
may be waived by any member thereof either before, at, or after such meeting in
a writing signed by such member. A member, by his or her attendance at any
meeting of the Management Committee, shall be deemed to have waived notice of
such meeting, except where the member objects at the beginning of the meeting to
the transaction of business because the meeting is not properly called or
convened and does not participate thereafter in the meeting.
7.7 Quorum. One Sodak Representative and one HWCC Representative shall
------
constitute a quorum for the transaction of business at any meeting with respect
to which notice was duly given or waived.
7.8 Written Action; Proxies.
-----------------------
(a) Notwithstanding the provisions of Sections 7.4, 7.5 and 7.6, any
action required or permitted to be taken at a meeting of the Management
Committee may be taken without a meeting by written action signed by the
members that would be required to take the same action at a meeting of the
Management Committee at which such members were present. The written
action is effective when signed by the required members, unless a different
effective time is provided in the written action. When written action is
taken by less than all of the members representing all of the outstanding
JV
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Interests, all of the members shall be notified immediately of its text and
effective date.
(b) A member of the Management Committee may cast or authorize the
casting of a vote (including any and all votes at any and all meetings of
the members) by filing a written appointment of a proxy with the Management
Committee of the Venture at or before the meeting or meetings at which the
appointment is to be effective. Any appointment of a proxy shall be signed
by the member making the appointment.
7.9 Powers of the Management Committee. The Management Committee shall
----------------------------------
have all necessary powers to carry out the purposes and conduct the business of
the Venture. In addition to any other rights and powers that the Management
Committee may possess, the Management Committee shall have all specific rights
and powers required or appropriate to the management of the business of the
Venture including, but not limited to, approving the financing or refinancing of
the Project or any portion thereof (including mortgaging, granting a security
interest or otherwise encumbering all or any portion of the real or immovable,
personal or movable, tangible or intangible property of the Venture with any
documents evidencing such mortgage or security interest containing the usual and
customary security clauses, including without limitation a confession of
judgment, waiver of appraisal and pact de non alienando), approving the
construction and development plans and budgets, approving any future Project
expansion, and approving any sale of all of part of the Project, and only the
Management Committee shall have these rights and powers. Notwithstanding the
foregoing, the Management Committee may delegate any or all such rights and
powers to any other person. As a result, the parties hereto acknowledge that
the Management Committee has delegated to Operator certain powers pursuant to
the terms and conditions of and expressly described in the Management Agreement.
Subject to the requirements of Section 7.11 below, all decisions made for or on
behalf of the Venture by the Management Committee consistent with the above
provisions shall be binding upon the Venture.
7.10 Indemnification.
---------------
(a) To the fullest extent permitted by law, the members of the
Management Committee and each Venturer (including Paddlewheels and its
Affiliates) (the "Indemnitee") shall be indemnified, held harmless and
defended by the Venture, (collectively, the "Indemnifying Party"), from and
against any and all losses, claims, damages, liabilities, whether joint or
several, expenses (including legal fees and expenses), judgments, fines and
other amounts paid in settlement, incurred or suffered by such Indemnitee,
as a party or otherwise, in connection with any threatened, pending, or
completed claim, demand, action, suit or proceedings whether
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civil, criminal, administrative or investigative, and whether formal or
informal, arising out of or in connection with the business or the
operation of the Venture and by reason of the Indemnitee's status with
respect to the Venture regardless of whether the Indemnitee continues to be
a member of the Management Committee or a Venturer at the time any such
loss, claim, damage, liability or other expense is paid or incurred
(collectively, the "Losses" individually, a "Loss") if, with respect to a
claim for which an Indemnitee is seeking indemnification, (i) the
Indemnitee acted in good faith and in a manner it reasonable believed to be
in the best interests of the Venture and, with respect to any criminal
proceeding, had no reasonable cause to believe that its conduct was
unlawful, (ii) the Indemnitee's conduct did not constitute gross
negligence, willful misconduct or a material breach of the terms of this
Agreement and (iii) the Indemnitee's conduct did not constitute fraud or
breach of their fiduciary duty, if any, to the Venture. The termination of
any action, suit or proceeding by judgment, order, settlement or upon a
plea of nolo contendere, or its equivalent, shall not, of itself, create a
presumption that the Indemnitee did not act in the best interests of the
Venture.
(b) In the event that the Indemnitee is made a defendant in or party
to any action or proceeding, judicial or administrative, instituted by any
third party for the liability or the costs or expenses of which are Losses
(any such third party action or proceeding being referred to as a "Claim"),
the Indemnitee shall give the Indemnifying Party prompt notice thereof.
The failure to give such notice shall not affect any Indemnitee's ability
to seek reimbursement unless such failure has materially and adversely
affected the Indemnifying Party's ability to defend successfully a Claim.
The Indemnifying Party shall be entitled to contest and defend such Claim;
provided, that the Indemnifying Party (i) has a reasonable basis for
--------
concluding that such defense may be successful and (ii) diligently contests
and defends such Claim. Such contest and defense shall be conducted by
attorneys employed by the Indemnifying Party. The Notifying Party shall be
entitled at any time, at its own cost and expense, to participate in such
contest and defense and to be represented by attorneys of its or their own
choosing. If the Indemnitee elects to participate in such defense, the
Indemnitee shall cooperate with the Indemnifying Party in the conduct of
such defense. Neither the Indemnitee nor the Indemnifying Party may
concede, settle or compromise any Claim without the consent of the other
party, which consents will not be unreasonably withheld.
(c) The Venture, Sodak and HWCC, individually and collectively, waive
any and all claims and rights of
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contribution against Paddlewheels or any Affiliate thereof in connection
with, arising out of or related to any Claims.
7.11 Negative Consent. Neither the Venture nor any Venturer without the
----------------
prior written consent of Paddlewheels shall approve any action that (a) amends,
modifies or otherwise changes (i) the method of calculation of Net Realized
Value pursuant to Section 10.7 below or (ii) Paddlewheels' right to receive 10%
of Net Realized Value pursuant to Section 10.7 below, or (b) transfers, all or a
portion of, Sodak's or HWCC's JV Interests to an Affiliate thereof unless such
applicable Affiliate consents in writing to be bound by the terms of Sections
6.1 and 10.2 hereof.
7.12 Bank Accounts. The Venture shall maintain bank accounts in such banks
-------------
as the Management Committee may designate exclusively for the deposit and
disbursement of all funds of the Venture. All funds of the Venture shall be
promptly deposited in such accounts. The Management Committee from time to time
shall authorize the signatories for such accounts.
7.13 Reimbursement for Costs and Expenses. The Management Committee shall
------------------------------------
determine the amounts, if any, that the Venture will reimburse a Venturer (or
any Affiliate thereof) for costs and expenses incurred by such Venturer or
Affiliate on behalf and for the benefit of the Venture; provided, however, that
no overhead or general administrative expenses of a Venturer or its Affiliates
shall be allocated to the operation of the Venture, and no salaries, fees,
commissions or other compensation shall be paid by the Venture to a Venturer or
its Affiliates or to any officer or employee of a Venturer or its Affiliates for
any services rendered to the Venture, except as may be provided in the
Management Agreement, the Sodak Agreement and the Marine Agreement or as may be
approved in advance by the Management Committee.
7.14 Fidelity Bonds and Insurance. To the extent determined by the
----------------------------
Management Committee, the Venture shall obtain fidelity bonds with reputable
surety or insurance companies covering all persons having access to the
Venture's funds, indemnifying the Venture against loss resulting from fraud,
theft, dishonesty and other wrongful acts of such persons. The Venture shall
carry or cause to be carried on its behalf in insurance companies acceptable to
the Management Committee all property, liability and workmen's compensation
insurance as shall be required under applicable loans, leases, agreements and
other instruments and statutes or as may otherwise be required by the Management
Committee.
7.15 Cooperation. The Venturers agree to use their best efforts and
-----------
cooperate with each other in carrying out the transactions contemplated by this
Agreement, including the following, provided that the cost thereof shall be
borne by the Venture:
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(a) filing all required applications with the Gaming Authorities for
receipt on maintaining of a gaming license under the Act, and maintaining
compliance by the Venture with directives of the Gaming Authorities and the
provisions of the Act;
(b) filing materials with, or participating in, all attendant
investigations instituted by, a gaming regulatory authority of a State
other than Louisiana to which a Venturer is subject;
(c) developing the design of the Complex and supervising the
construction thereof;
(d) filing all required applications for the Vessel license, liquor
licenses and any other licenses or permits required for the operation of
the Complex;
(e) filing all tax returns and other governmental filings on behalf of
the Venture;
(f) securing all required insurance covering the Complex and the
operation thereof; and
(g) executing and delivering any other agreements, instruments,
documents or consents necessary for the construction, development and
operation of the Complex, including but not limited to, the Loan
Commitments, the Hotel and Vessel construction agreements and any dock site
licensing or leasing agreements.
ARTICLE VIII
------------
BUDGETS AND CONTRIBUTIONS
-------------------------
The Management Committee shall furnish to each of the Venturers prior to
the commencement of a fiscal year a budget (the "Budget(s)") covering in
reasonable detail the budget for such ensuing fiscal year. Each Budget shall
show the additional cash requirements of the Venture for the ensuing fiscal
year, which shall be the aggregate of all estimated expenditures to be made by
the Venture during such year, plus appropriate reserves for general maintenance
and cash contingencies, over the sum of the anticipated borrowings from the Loan
Commitments and the estimated cash on hand at the beginning of the year. Within
a reasonable time after the end of each calendar quarter, the Venture will
furnish to each of the Venturers any updates or revisions to operating
forecasts.
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ARTICLE IX
----------
BOOKS AND RECORDS;
AUDIT, TAXES, ETC.
------------------
9.1 Books; Statements. The Venture shall keep, or cause to be kept, books
-----------------
and accounts showing its assets and liabilities, operations, transactions and
financial condition. All financial statements shall present fairly the
financial position and results of the Venture and shall be prepared on an
accrual basis in accordance with generally accepted accounting principles
consistently applied. The Management Committee shall determine the methods to
be used in the preparation of financial statements and federal, state and
municipal income and other tax returns for the Venture in connection with all
items of income and expense, including but not limited to, valuation of assets,
the methods of depreciation, elections, credits and accounting procedures.
9.2 Reports and Statements. On and after the Commencement Date, the
----------------------
Venture shall furnish, or cause to be furnished, to each of the Venturers the
reports and statements required to be furnished by the Operator pursuant to the
terms and conditions of the Management Agreement.
9.3 Where Maintained. The books, accounts and records of the Venture
----------------
shall be at all times maintained at its principal office.
9.4 Audits. Any Venturer may, at its option and at its own expense,
------
conduct internal audits of the books, records and accounts of the Venture.
Audits may be conducted in a reasonable manner, at reasonable times during
normal business hours, that will not interfere or impair the day to day business
operations of QNOV and may be conducted by employees of any Venturer, or of an
Affiliate of any Venturer, or by independent auditors retained by a Venturer at
such Venturer's expense.
9.5 Objections to Statements. Each Venturer shall have the right to
------------------------
object to each statement provided to such Venturer pursuant to Section 9.2
hereof by giving notice in writing to the Management Committee within 45 days
after such statement is received by such Venturer, indicating in reasonable
detail the objections of such Venturer and the basis for such objections. The
statements described in Section 9.2 and the contents thereof, in the absence of
fraud or willful misconduct by the other Venturer or by the Accountants
certifying the statements, shall be deemed conclusive and binding upon any
Venturer who fails to give such notice within such 45-day period. Settlement of
objections to any statement and disputes of any result of audits of the
Venture's books shall be made by the Management Committee.
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9.6 Fiscal Year. The fiscal year of the Venture shall be the calendar
-----------
year.
9.7 Tax Returns. The Management Committee shall cause the Accountants to
-----------
prepare and file all state and federal tax returns on a timely basis. The
Management Committee shall cause the Venture's Accountants to prepare and submit
to the Venture on or before April 1 of each year for its approval all federal
and state income tax returns of the Venture. If the Venture shall disapprove
the Venture's tax returns as submitted by the Accountants, the Venture may
direct the Accountants to revise the tax returns and resubmit them to the
Venture for its approval. A statement of the allocation of profit or loss shown
on the annual income tax returns prepared by the Accountants shall be
transmitted and delivered to each Venturer within ten days of the receipt
thereof by the Venture.
9.8 Tax Information Submitted; Notices Sent. HWCC shall be the "tax
---------------------------------------
matters partner" as defined in Section 6231(a)(7) of the Code (the "Tax Matters
Manager"). The Tax Matters Manager shall perform all duties and functions
within the contemplation of Sections 6223, 6224, 6226, 6228 and 6230 of the Code
in connection with any administrative proceeding by the Internal Revenue Service
(or any taxing authority) or ensuing judicial proceeding by the Internal Revenue
Service (or any taxing authority) or ensuing judicial proceeding regarding a tax
return of the Venture. The Tax Matters Manager shall determine whether the
Venture should make any available tax election and, except for fraud or bad
faith in the making or failure to make such election, shall not be held
responsible or liable for the making of or failure to make such election. The
Tax Matters Manager shall consult with the Venturers concerning, and shall keep
the Venturers apprised of, matters within the scope of responsibility of the Tax
Matters Manager.
ARTICLE X
---------
ASSIGNMENT BY ANY VENTURER OF ITS JV INTERESTS
----------------------------------------------
10.1 Restriction on Transfer.
-----------------------
(a) Except as expressly permitted in Section 10.2 below and, in any
case, subject to the other provisions of this Article X and Article XI, no
Venturer shall sell, assign, transfer, convey, or otherwise dispose of all
or any part of its JV Interests, whether for consideration or not, and no
purchaser or other transferee thereof for value or otherwise shall have any
rights in the Venture or, have any rights as a Venturer with respect to all
or any part of such JV Interests attempted to be sold, assigned,
transferred, conveyed or otherwise disposed of, and any such attempted
sale, assignment, transfer, conveyance, or other disposition (a
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"Transfer") of all or any part of a Venturer's JV Interests shall be
entirely null and void, unless all of the applicable provisions of this
Article X have been satisfied.
(b) The appropriate Venture records shall be noted to prevent the
transfer of a Venturer's JV Interests otherwise than in accordance with
this Article X.
10.2 Certain Permitted Transfers. Subject to the other provisions of this
---------------------------
Article X, Article XI, this Agreement, the Act or as otherwise agreed to by
Sodak and HWCC, the sale, assignment, transfer, conveyance or other disposition,
of all or any part of the JV Interests of a Venturer shall be permitted in each
of the following limited circumstances: (i) where such sale, assignment,
transfer, conveyance or other disposition is performed pursuant to the
requirements of Sections 10.3 and 10.4 hereof; or (ii) where a Venturer
transfers all, but not less than all of its JV Interests to another Venturer or
an Affiliate of the transferring Venturer. In the event of any such transfer by
a Venturer to one of its Affiliates, the transferee of the Venturer's JV
Interests shall assume in writing all of the obligations and liabilities of the
Venturer under this Agreement and succeed to all of the rights, obligations, and
privileges of the Venturer under this Agreement, the Marine Agreement and the
Assignment Agreement (only with respect to the Venture's obligations to make
payments of 1% of "Complex Net Revenues" (as defined in the Assignment
Agreement) to Paddlewheels or any Affiliate thereof).
10.3 Rights of First Refusal Arising from Desired Transfer.
-----------------------------------------------------
(a) Grant of Options. Subject to Section 10.2 and any other express
----------------
agreement by the Venturers, if any Venturer (the "Optionor Venturer")
desires to Transfer any or all of the JV Interests owned by it, such
Venturer shall give notice in writing (the "First Option Notice") to the
Venture and the other Venturers setting forth such desire, the portion of
the JV Interests (the "Offered JV Interests") sought to be transferred, the
price (the "Offer Price") at which the Optionor Venturer proposes to make
such transfer and the name of the proposed transferee. Upon receipt of the
First Option Notice, the Venture shall have the irrevocable right and
option (the "First Option") to purchase all or a portion of the Offered JV
Interests. In the event that the Venture does not exercise the First
Option with respect to all of the Offered JV Interests within the time
period specified in Section 10.3(b), such Optionor Venturer shall give
notice in writing (the "Second Option Notice"), within five days of its
receipt of the earlier of the Election Notice described in Section 10.3(b)
or expiration of the 30-day period following the date of the First Option
Notice (or 20-day period if Paddlewheels or any Affiliate thereof is an
Optionor
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Venturer), to each of the other Venturers setting forth the same
information as in the First Option Notice and the number of Offered JV
Interests to be purchased by the Venture. Upon the giving of the Second
Option Notice, each other Venturer shall have the irrevocable right and
option (the "Second Option") to collectively purchase all of the remaining
Offered JV Interests.
(b) Exercise of First Option. The Venture may exercise the First
------------------------
Option by delivering to the Optionor Venturer written notice (the "Election
Notice") of its election to exercise all or part of the First Option within
30 days after the date that the Venture receives the First Option Notice;
provided that if the Optionor Venturer is Paddlewheels or any Affiliate
thereof the Venture shall exercise such First Option within 20 days of the
date the Venture receives the First Option Notice.
(c) Exercise of Second Option. If the Venture does not exercise its
-------------------------
option to purchase all of the Offered JV Interests, each of the other
Venturers shall, pursuant to the Second Option, have the right to
collectively purchase all of the remaining Offered JV Interests. If the
other Venturers exercising the Second Option elect to purchase more JV
Interests than are subject to the Second Option, each participating
Venturer will be entitled to purchase up to its pro rata share, based on
the respective Relative Ownership Ratio of the participating Venturer, of
the remaining Offered JV Interests. Each participating Venturer may
exercise the Second Option by delivering to the Optionor Venturer written
notice of its election to exercise the Second Option within the 10-day
period immediately following the date of the Second Option Notice. If any
participating Venturer should elect to purchase less than its pro rata
share of the remaining Offered JV Interests, the Optionor Venturer shall
give oral or written notice of the number of remaining Offered JV Interests
available to each other eligible Venturer, each of whom shall have five
business days after receipt of such notice to elect to purchase all of such
remaining JV Interests. If the participating Venturers elect to purchase
more of the remaining Offered JV Interests than are available, each
Venturer participating in such re-offer shall have the right to purchase
its pro rata share (based on the respective Relative Ownership Ratio of
such Venturers participating in the re-offer, which shall be calculated by
excluding the JV Interests of such non-participating Venturer) of such
remaining Offered JV Interests. If, after such re-offer, the participating
Venturers shall fail to purchase all of the Offered JV Interests, the
Second Option shall expire.
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(d) Purchase Price. The purchase price (the "Purchase Price") for the
--------------
Offered JV Interests at which the Optionor Venturer shall be obligated to
sell the Offered JV Interests pursuant to the First Option or the Second
Option shall be equal to the price set forth in the applicable third party
offer. No Venturer shall voluntarily transfer any JV Interests for any
consideration other than for cash. The Venture and Venturers who exercise
the First Option and Second Option shall tender payment in cash for the
Offered JV Interests to be purchased by them on the date of closing of such
purchase, which shall occur no later than the earlier of the tenth day
immediately after the expiration of the 10-day period following the date of
the Second Option Notice or the 75th day immediately following the date of
the First Option Notice.
(e) Sale of Offered JV Interests. If the First Option Notice and the
----------------------------
Second Option Notice shall be duly given, and if the Venture and the
applicable Venturers shall not collectively exercise their options to
purchase all of the Offered JV Interests, then the Optionor Venturer shall
be free to sell all of its Offered JV Interests to any third party
transferee on the same material terms as were described in the First Option
Notice on and after the 30th day immediately following the date the
applicable transferee, if required, obtains a license from the applicable
Gaming Authorities. In such instance, the Venture's and applicable
Venturers' election to purchase any of the Offered JV Interests shall be
null and void and of no further legal effect.
(f) Re-Offers. If the proposed purchase price of a transferee for the
---------
Offered JV Interests is less than the applicable price as set forth in the
First Option Notice, the Optionor Venturer shall not transfer the Offered
JV Interests to such transferee unless the Optionor Venturer shall first
re-offer the Offered JV Interests at such lesser price to the Venture and
each of the other Venturers by giving written notice (the "Re-offer
Notice") thereof, stating the Optionor Venturer's intention to make such
transfer at such lower price (the "Re-offer Price"). The Venture and each
of the other Venturers shall then have the irrevocable and exclusive option
to purchase all of the Offered JV Interests at the Re-offer Price,
exercisable in the same order of priority, proportions and manner as
provided in Sections 10.3(b), (c) and (d) hereof; provided the 30-day and
20-day periods referenced in Section 10.3(b) shall each be reduced to a
10-day period.
(g) Limitation. Notwithstanding the terms and conditions of this
----------
Section 10.3, Paddlewheels and any Affiliate thereof, individually or
collectively, shall not have the right, in any manner, to acquire from any
Venturer
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all or a portion of such other Venturer's JV Interests except as expressly
provided elsewhere in this Agreement. Any such acquisition of JV Interests
by Paddlewheels or any Affiliate thereof shall be null and void, and of no
further legal effect. In the event Sodak, HWCC and any other Venturer
(other than Paddlewheels and any Affiliate thereof) have the right to
purchase all of Paddlewheels' JV Interest, then in addition to such rights,
Sodak, HWCC and such other Venturers and the Venture shall have the right
to purchase all of Paddlewheels' rights to receive payments pursuant to the
Marine Agreement for an additional purchase price equal to the appraised
value of Paddlewheels' right to receive future fees pursuant thereto.
10.4 Transfer by Legal Process.
-------------------------
(a) Involuntary Transfers. Upon any involuntary transfer of all or
---------------------
any portion of the JV Interests pursuant to a levy of execution,
foreclosure of pledge, garnishment, attachment, bankruptcy or other legal
process (or by operation of law resulting from the liquidation, dissolution
or winding-up of a Venture), the applicable transferee or transferees of,
or any successor in title to, the transferred JV Interests (hereinafter the
"Transferred JV Interests"), shall, within 30 days after such transfer,
offer the Transferred JV Interests first to the Venture and second to the
other Venturers under this Section 10.4 by delivering notice of such offer
(the "Transfer Notice") in writing to the Venture and to the other
Venturers. In the event a creditor of the Venture commences foreclosure
against and acquires the assets of the Venture, then Paddlewheels' right to
receive payments pursuant to the Marine Agreement and Section 10.7 below
shall immediately terminate, and the Venture and the other Venturers shall
have no further obligations to make such payments to Paddlewheels.
(b) Option. The Venture shall have the right to purchase any or all
------
of any Transferred JV Interests at a price equal to the stated book value
thereof by giving written notice to the transferee or transferees thereof,
or successor in title thereto (any such transferee, transferees, successor
or Venturer being hereinafter collectively referred to as the "Recipient")
within 90 days after receipt of the Transfer Notice.
(c) Transfer Option. If the Venture does not elect to purchase all of
---------------
the Transferred JV Interests, the Venturers (other than any Venturer whose
JV Interests were subject to the transfer by legal process) shall have the
option (the "Transfer Option") to purchase the remaining Transferred JV
Interests at a price equal to the stated book value thereof by giving
written notice to the recipient within 120 days after
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their receipt of the Transfer Notice. If the other Venturers elect to
purchase more Transferred JV Interests than are available, the available
Transferred JV Interests shall be allocated among the participating
Venturers in the manner described in Section 10.3(c) above.
(d) Transfer Price. The Venture and other Venturers who exercise the
--------------
Transfer Option shall tender payment in cash for the Transferred JV
Interests to be purchased by them on the date of closing of such purchase,
which shall occur no later than the tenth day immediately after the 120th
day following the receipt of the Transfer Notice.
(e) Absence of Transfer Notice. If no Transfer Notice shall be given
--------------------------
and the Venture or any Venturer becomes aware of the transfer of JV
Interests by legal process or otherwise that is subject to this Section
10.4(e), then the Venture or such Venturer shall give written notice to the
Venturers, in the case of the Venture, and to the Venture and Venturers, in
the case of any Venturer, of such of the facts and circumstances of such
transfer as are known by the Venture or such Venturer and such notice shall
be considered the Transfer Notice for the purposes of this Section 10.4(e).
Any Transferred JV Interests shall nevertheless remain subject to this
Section 10.4(e) until a Transfer Notice shall have been properly delivered
by the Recipient and the Venture and the Venturers shall have been given
the opportunity to exercise their respective options during the periods
provided in Sections 10.4(b) and (c) above. If, after a Transfer Notice
shall have been properly delivered, the Venture and the Venturers shall
fail to purchase all of the Transferred JV Interests as provided above, the
Transferred JV Interests not so purchased will no longer be subject to this
Section 10.4(e), provided, however, that the Recipient (if such person is
-------- -------
not already a party to this Agreement) shall, as a condition to the
effectiveness of any transfer to such person be required to become a party
to this Agreement.
(f) Limitation. Notwithstanding the terms and conditions of this
----------
Section 10.4, Paddlewheels and any Affiliate thereof, individually or
collectively, shall not have the right, in any manner, to acquire JV
Interests pursuant to this Section 10.4. Any such acquisition of JV
Interests by Paddlewheels and any Affiliate thereof, shall be null and
void, and of no further legal effect.
10.5 Forfeit of License; Transfer.
----------------------------
(a) If at any time Paddlewheels remains a Venturer and the Management
Committee or the Venturers authorize(s) or approve(s) the surrender or
forfeiture of the Venture's gaming
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<PAGE>
license issued by the Gaming Authorities, then Paddlewheels shall have the
option to acquire all of Sodak's, HWCC's and their respective Affiliate's
JV Interests, and upon such election, Sodak, HWCC and such Affiliates agree
to immediately transfer to Paddlewheels all of their JV Interests without
consideration.
(b) In the event the Venture is unable, during the period of time
(including any extensions thereof) established by the applicable Gaming
Authorities to enter into a credit facility or other loan agreement with a
third party lender that, together with capital contributions made or to be
made by Sodak and HWCC, provides sufficient funds to finance the
construction of the Complex, or if Sodak and HWCC notify Paddlewheels that
they are abandoning the Project without causing the dissolution of the
Venture, then Paddlewheels or its permitted assignees shall have the right,
subject to approval by the applicable Gaming Authorities, to purchase all
of the JV Interests held by Sodak and HWCC for an aggregate purchase price,
payable in cash, equal to the aggregate amount of Capital Contributions and
Subsequent Capital Contributions made by Sodak (and an Affiliate thereof)
and HWCC (or an Affiliate thereof), and expenses paid or incurred by such
parties in connection with the Project, less distributions that are a
return of capital paid by the Venture to Sodak and HWCC. The closing of
the transactions contemplated by this Section 10.5(b) shall occur no later
than the 30th day following the date the Gaming Authorities approve such
transfer.
10.6 Tag-a-Long and Call Rights.
--------------------------
(a) In the event of a Change-in-Control (as defined in Section 10.6(b)
below), then Sodak shall have the right to exercise its Tag-a-Long Rights
(as defined below) or its Call Rights (as defined below), subject to the
following conditions:
(i) HWCC will (A) first inform Sodak in writing (the "Change-in-
Control Notice") of (x) the occurrence of such Change-in-Control, (y)
if applicable, the prices, terms and conditions upon which such
Change-in-Control will be effected, including the consideration to be
received by HCC and/or its stockholders (the "Consideration"), and (z)
preliminary determination of the value of (I) a JV Interest (after
giving effect to the fees associated with the Management Agreement)
(the "JV Value") as determined by an investment banking firm(s) of
national standing involved in such business combination, transaction
or sale or, if no investment banking firm is involved, as determined
by HWCC (the
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<PAGE>
"HWCC JV Valuation") and (II) the Management Agreement (the
"Management Agreement Value") as determined by the same such
investment banking firm(s) or if no investment banking firm is
involved, as determined by HWCC (the "HWCC Management Agreement
Valuation") and (B) offer Sodak the opportunity to irrevocably elect
to either (x) sell Sodak's interest in the Venture by participating in
the Transaction Event (as defined below) that results in such Change-
in-Control, if practicable (in which case Sodak would sell its
interest in the Venture, excluding Sodak's right to receive 1% of
Complex Net Revenues, upon the same terms and conditions as are
included in the Change-in-Control transaction, it being understood
that if the Consideration is other than cash or unrestricted publicly
traded stock, Sodak may demand that it receives its consideration in
cash) or, if the Change-in-Control is not the result of a Transaction
Event, sell its interest in the Venture directly to HWCC or HWCC's
designee for a cash price equal to the JV Value (as determined
pursuant to Section 10.6(a)(ii) below) multiplied by the total number
of JV Interests proposed to be transferred by Sodak (the "Tag-a-Long
Rights") or (y) require that (I) HWCC sell to Sodak or its designee
all of HWCC's interest in the Venture for a cash price equal to the JV
Value (as determined pursuant to Section 10.6(a)(ii) below) multiplied
by the total number of JV Interests proposed to be transferred by HWCC
and (II) the Operator (or an Affiliate of HCC) sell its interest in
the Management Agreement to Sodak or its designee for a cash price
equal to the Management Agreement Value (as determined pursuant to
Section 10.6(a)(ii) below) (the "Call Rights").
(ii) If Sodak, within 6 business days after receipt of the
Change-in-Control Notice, does not object to the HWCC JV Valuation or
the HWCC Management Agreement Valuation, then such Valuations shall be
deemed to be the JV Value and the Management Agreement Value. If Sodak
objects to either the HWCC JV Valuation or the HWCC Management
Agreement Valuation within the 6-day period referenced in the
preceding sentence, then the JV Value and the Management Agreement
Value shall be determined within a reasonable time by an independent
appraiser selected by mutual agreement of Sodak and HWCC.
(iii) Within 5 business days after the determination of the JV
Value and the Management Agreement Value in accordance with Section
10.6(a)(ii), Sodak may elect to exercise the Tag-a-Long Rights or the
Call Rights. Such Tag-a-Long Rights and Call Rights shall be deemed to
have been waived if such rights have
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<PAGE>
not been exercised in writing within 5 business days after the
determination of the JV Value and the Management Agreement Value in
accordance with Section 10.6(a)(ii).
(iv) In the event that Sodak exercises its Tag-a-Long Rights in
a Change-In Control that results from a Transaction Event, HWCC shall
use its best efforts to cause the surviving entity if applicable, to
purchase Sodak's interest in the Venture according to the terms of
Section 10.6(a)(i)(B) above, and at the price established pursuant to
---------------------
Section 10.6(a)(ii) above. In the event that the Change-in-Control
results from a Transaction Event, and the surviving entity will not
agree to purchase Sodak's interest in the Venture, (i) HCC may not
proceed with such Change-in-Control without the prior written consent
of Sodak and (ii) if no Change-in-Control occurs, neither HCC, the
Operator nor HWCC shall have any further obligations with respect to
such particular exercise of the Tag-a-Long Rights.
(v) In the event that Sodak exercises its Call Rights, Sodak
shall purchase HWCC's interest in the Venture and shall purchase the
Operator's interest in the Management Agreement at the prices
established pursuant to Section 10.6(a)(ii) above. The closing for
such sale will occur within 30 days of exercise of the Call Rights or
such other period as mutually agreed upon by Sodak and HWCC.
(b) For purposes of this Section 10.6, the term "Change of Control"
means the occurrence of any of the following events: (i) the sale, lease,
transfer, conveyance or other disposition in one or a series of related
transactions, of all or substantially all of the assets of HCC and its
subsidiaries, taken as a whole, other than a sale to a real estate
investment trust; (ii) the liquidation or dissolution of HCC; (iii) HCC
becoming aware of (by way of a report or any other filing pursuant to
Section 13(d) of the Securities Exchange Act, proxy vote, written notice or
otherwise) the acquisition by any person or related group (within the
meaning of Section 13(d)(3) or Section 14(d)(2) of the Securities Exchange
Act, or any successor provision to either of the foregoing, including any
"group" acting for the purpose of acquiring, holding or disposing of
securities within the meaning of Rule 13d-5(b)(1) under the Securities
Exchange Act), other than the Pratt Holders (as defined in Section 10.6(c)
below), in a single transaction or in a related series of transactions, by
way of merger, consolidation or other business combination or purchase of
beneficial ownership (within the meaning of Rule 13d-3 under
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<PAGE>
the Securities Exchange Act, or any successor provision) of 30% or more of
the total voting power entitled to vote in the election of the board of
directors of HCC or such other entity surviving the transaction and, at
such time, the Pratt Holders collectively shall fail to beneficially own,
directly or indirectly, securities representing greater than the combined
voting power of HCC's or such other entity's voting stock as is
beneficially owned by such person or group; or (iv) during any period of
two consecutive years, individuals who at the beginning of such period
constituted HCC's Board of Directors (together with any new directors whose
election or appointment by such board or whose nomination for election by
the stockholders of HCC was approved by a vote of a majority of the
directors then still in office who were either directors at the beginning
of such period or whose election or nomination for election was previously
so approved) ceasing for any reason to constitute a majority of HCC's board
of directors then in office. Any Change-in-Control referred to in Sections
10.6(b)(i), (ii) and (iii), other than a Change-in-Control resulting from a
hostile takeover attempt, are referred to herein as a "Transaction Event."
(c) For purposes of this Section 10.6, the term "Pratt Holders" means
(i) Jack E. Pratt, Edward T. Pratt, Jr., William D. Pratt, Crystal A.
Pratt, Maria A. Pratt and Edward T. Pratt, III, their respective estates
and members of the immediate family (including adopted children) of any
such individuals who acquire voting stock of HCC from any such estates,
(ii) J.E. Pratt Co. No. 1, E.T. Pratt Co. No. 1, W.D. Pratt Co. No. 1, each
a Texas general partnership, (iii) C.A. Pratt Partners, Ltd., a Texas
limited partnership, and (iv) J.E. Pratt Family Trust, E. Pratt Family
Trust and W.D. Pratt Family Trust.
10.7 Special Purchase Rights. If, at any time after the opening of the
-----------------------
Project, (i) QNOV sells all or substantially all of its assets to a person that
is not an Affiliate of either Sodak, HWCC , Operator, HCC, Sodak Gaming or any
other Venturer (other than Paddlewheels and any Affiliate thereof), or (ii)
Sodak, HWCC, the Operator, HCC, Sodak Gaming and such other Venturer
collectively sell all of their JV Interests to a person that is not an Affiliate
of either Sodak, HWCC, the Operator, HCC, Sodak Gaming or such Venturer, then
the Venture or Sodak, HWCC, the Operator, HCC, Sodak Gaming and such other
Venturer shall pay Paddlewheels an amount equal to 10% of the Net Realized Value
(as defined below) of such applicable sale received by the Venture, or Sodak,
HWCC, the Operator, HCC, Sodak Gaming and such other Venturer, together with an
additional amount representing the appraised value of Paddlewheels' right to
future fees that would otherwise continue to be payable under the Marine
Agreement. Upon payment of such Net Realized Value to Paddlewheels pursuant to
this Section 10.7, the
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Venture shall not be obligated make any payments to Paddlewheels pursuant to the
Marine Agreement, and all of the JV Interests held by Paddlewheels and all of
its Affiliates shall terminate, expire and be of no legal effect. For purposes
of this section, the term "Net Realized Value" shall mean the gross sales
proceeds from the applicable sale less (x) transaction costs (including, but not
limited to, accountants' and attorneys' fees), and amounts used to repay debt
and to establish reserves for debt payments, replacements and contingencies
(provided that Net Realized Value shall later be increased to the extent that
any portion of such reserves are paid to the Venture subsequent to the initial
determination of Net Realized Value), and (y) paid by the Venture to Sodak,
HWCC, Paddlewheels, the Operator, HCC, Sodak Gaming, any other Venturer, or any
Affiliate thereof representing a return of each Venturer's initial Capital
Contributions and any Subsequent Capital Contributions. The parties hereto agree
and acknowledge that if any sale referred to in this Section 10.7 is made to an
Affiliate of the Venture, Sodak, HWCC, the Operator, HCC, Sodak Gaming or any
other Venturer (other than Paddlewheels or any Affiliate thereof), then
Paddlewheels shall not be entitled to receive any payments pursuant to this
Section 10.7.
ARTICLE XI
----------
MANDATORY TRANSFERS
-------------------
11.1 Unsuitability in Louisiana. If the Louisiana Gaming Control Board
--------------------------
("LGCB") makes a determination any Venturer or any Affiliate of such Venturer
(the "Unsuitable Venturer") is unsuitable to hold a license to perform or
conduct gaming activities (an "Unsuitability Determination"), after the
commencement of gaming operations of the Complex, the Unsuitable Venturer shall
immediately give to the other Venturers (except Paddlewheels and any Affiliate
thereof), upon submitting written notice, a right to purchase all of the
Unsuitable Venturers' JV Interests. In the event such other Venturers elect not
to purchase all of the Unsuitable Venturer's JV Interests within a 30-day period
following the date the Unsuitable Venturers' written notice, the Venture shall
purchase all of the remaining Unsuitable Venturer's JV Interests within a 30-day
period following the termination date of the foregoing 30-day period. The
purchase price for the JV Interests purchased pursuant to this Section 11.1
shall be equal to the lesser of (i) an amount agreed upon by the purchasing and
selling party, and if no such agreement is made, the fair market value as
determined by an appraiser mutually acceptable to the selling and purchasing
party, or (ii) an amount approved by the LGCB. Notwithstanding the foregoing,
if the Unsuitable Venturer receives an offer to purchase such Unsuitable
Venturer's
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JV Interests from a third person, at any time during either the Venturers' 30-
day election period or Venture's 30-day election period pursuant to this Section
11.1, then the provisions set forth in Sections 10.3 and 10.4 shall govern.
Each Venturer shall independently comply with all federal, state and local
gaming regulations and any jurisdiction to which any Venturer is or becomes
subject to during the term of the license issued by the LGCB to the Venture,
including submitting to and cooperating in any investigation required by such
jurisdiction by virtue of the Venturer's JV Interests in the Venture. Each
Venturer shall bear all of its own costs which it incurs in connection with such
compliance.
11.2 Unsuitability in Other Jurisdictions.
------------------------------------
(a) Buy/Sell. If (i) a Gaming Authority of a State other than
--------
Louisiana makes an Unsuitability Determination as to any Venturer or an
Affiliate of such Venturer and (ii) any other Venturer (the "Affected
Venturer") reasonably determines that the affiliation of the Affected
Venturer with such Unsuitable Venturers threatens any gaming permit,
approval or other entitlement that the Affected Venturer or any Affiliate
of the Affected Venturer holds or has applied for because of such
Unsuitability Determination, then the Affected Venturer shall give a notice
of such determination to such Unsuitable Venturers. Within 20 days after
such notice is given, the Venturers receiving such notice shall give a
notice (a "Buy/Sell Notice") to the Affected Venturer and to the Affected
Venturer's Accountants of its election to either sell all (but not less
that all) of the Unsuitable Venturers' JV Interests to the Affected
Venturer or to buy all (but not less that all) of the JV Interests of the
Affected Venturer, in either case at a purchase price mutually agreed upon
by such parties or at the fair market value of such JV Interests as
determined by an appraiser mutually acceptable to such parties.
(b) Suitability Determination. Without limiting reasonableness to
-------------------------
such circumstances, a determination made by the Affected Venturer referred
to in Section 11.2(a) hereof shall be deemed to be reasonable if based
upon: (i) any written communication from a gaming regulatory authority of
the applicable state; or (ii) written evidence that, if true, the Affected
Venturer's participation in the Venture would violate any law, rule or
regulation administered by any gaming regulatory authority, so long as such
evidence is not induced in bad faith by its recipient.
11.3 Closing of Inter-Venturer Transfers. The closing of any Transfer of
-----------------------------------
the JV Interests of a Venturer to another Venturer
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under this Article XI shall take place at the principal office of the Venture or
such other place as may be agreed upon by the Venturers on the first Business
Day that is at least ten days after the date on which the purchase price is
determined pursuant to the applicable provisions set forth in Article XI, or
such other date as may be agreed by the Venturers.
11.4 Limitation of Transfers. Except for Transfers effected pursuant to
-----------------------
any of Sections 11.1 and 11.2, no Transfer shall be made of any JV Interests if
(a) such Transfer, in the opinion of the Venture's legal counsel, would result
in the Venture being treated as an association taxable as a corporation for
federal or state tax purposes, (b) such Transfer, when considered with all other
Transfers of JV Interests within the previous 12 months, would result in the
Venture's being considered to have terminated within the meaning of Code Section
708, (c) such Transfer is effectuated through an "established securities market"
or a "secondary market (or the substantial equivalent thereof)" within the
meaning of Code Section 7704, (d) such Transfer would otherwise result in the
Venture's being classified as a "publicly traded venture" within the meaning of
Code Section 7704(b), (e) in the opinion of the Venture's legal counsel such
Transfer requires the registration of such JV Interests pursuant to any federal
or state securities law, (f) such Transfer would otherwise violate any
applicable federal or state securities laws (including any investor suitability
standards), (g) such Transfer would subject the Venture or any of the Venturers
to regulation under the Investment Company Act of 1940, the Investment Advisers
Act of 1940 or the Employee Retirement Income Security Act of 1974, each as
amended, (h) such Transfer would violate state gaming laws or regulations; (i)
such Transfer is made to any person who lacks the legal right, power or capacity
to own such JV Interests, or (j) the Venture does not receive written
instruments (including, without limitation, true copies of any transfer
instruments and the transferee's consent to be bound by this Agreement) that are
in form and substance satisfactory to the Management Committee of the Venture in
its sole and absolute discretion. Notwithstanding Sections 10.2, 10.3 and 10.4
above, no Transfer of any JV Interests shall be made if such Transfer would (w)
result in a default under the instrument evidencing or securing indebtedness of
the Venture unless such Transfer is otherwise consented to by, or such default
is waived by, the applicable lender, (x) with respect to any agreements or
comments to which any party is bound, require a prepayment of, or result in any
adverse change in the terms of any other instrument evidencing or securing
indebtedness of the Venture, (y) result in, or jeopardize the revocation,
suspension or denial of the gaming license issued by the Gaming Authorities to
the Venture permitting gaming activities pursuant to the Act, or (z) result in,
or jeopardize the revocation, suspension or denial of any gaming license, or
application for a gaming license, of any Venturer or any of its Affiliates in
any jurisdiction in which such Venturer or
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its Affiliates are so licensed or have applied for a gaming license. The
Venturers acknowledge that adequate legal remedies are not likely to exist for
any breach of this Section 11.4 and, accordingly, that the Venture and any
aggrieved Venturer(s) shall have the right to secure injunctive relief in the
event of any actual or threatened breach of a Venturer's obligations under this
Section 11.4.
11.5 Ineligible Transferees. Notwithstanding any provision of this
----------------------
Agreement to the contrary, no Transfer of any JV Interests may be made under any
circumstances to any person who: (a) has not been determined suitable or
otherwise approved or exempted from such determination by the Louisiana Gaming
Control Board; or (b) is subject to an unsuitability determination by any
regulatory authority of any other state; or (c) has been convicted of a felony
offense.
11.6 Limitation. (a) Notwithstanding the terms and conditions contained in
----------
this Article XI, neither Paddlewheels nor any Affiliate thereof, individually or
collectively, shall have the right to acquire any JV Interests unless expressly
provided elsewhere in this Agreement. Any such acquisition of JV Interests by
Paddlewheels or any such Affiliate shall be null and void, and of no further
legal effect. In the event Sodak, HWCC or any other Venturer (other than
Paddlewheels and any Affiliate thereof) has the right to purchase Paddlewheels'
JV Interests pursuant to this Article XI, then Sodak, HWCC and such other
Venturer shall have the right to purchase all of Paddlewheels' rights to receive
payments pursuant to the Marine Agreement for a purchase price equal to the
appraised value of Paddlewheels' right to receive future fees pursuant thereto.
ARTICLE XII
-----------
DISSOLUTION UPON CERTAIN EVENTS
-------------------------------
Upon the occurrence of any event enumerated in Section 2.9 herein, then,
unless such occurrence shall by law cause the Venture not to be dissolved, the
Venturers in accordance with the provisions of Article XIV hereof, shall wind up
the affairs of the Venture unless Sodak and HWCC elect within 60 days after such
dissolution event to continue the Venture. If, upon dissolution of the Venture
for any reason described in Article XII, the business of the Venture is
continued without liquidation and without the winding up of the affairs of the
Venture pursuant to the terms hereof, title to the property of the Venture shall
be vested in the Venture continuing the business subject to Paddlewheels' right
to purchase JV Interests as expressly set forth in Section 13.1 below. Upon such
dissolution, each non-consenting Venturer, or any legal representative of such
Venturer, shall have the right to an accounting of its JV Interests as against
the Venture continuing
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the business, and such Venturer shall have the right to have the value of its
interest as of the date of dissolution ascertained or have any right as a
creditor or otherwise with respect to the value of its JV Interests.
ARTICLE XIII
------------
DEFAULTS AND TERMINATION
------------------------
13.1 Defaults. Upon the occurrence of any of the following events (the
--------
affected Venturer being herein called the "Defaulting Venturer"):
(a) if the Defaulting Venturer shall fail in any other material
respect to perform its obligations and agreements hereunder, and such
default shall continue for 30 days after receipt of a notice of default
with respect thereto (provided that if either the event or condition
causing the default shall be such that it could not reasonably be cured
within 30 days, then no default shall be deemed to have occurred hereunder
if within such 30-day period the Defaulting Venturer shall have commenced
the curing of such default and shall thereafter proceed with all reasonable
diligence to complete the same);
(b) if the Defaulting Venturer shall be dissolved (except as permitted
in Article X);
(c) if the Gaming Authorities provide notice to the effect that the
Defaulting Venturer no longer satisfies the criteria for licensure under
the Act, or that the gaming license of the Venture or the other Venturer
shall be in jeopardy of being revoked, denied or suspended as a result of
the continued participation of the Defaulting Venturer in the Venture, and
the Defaulting Venturer has exhausted all administrative remedies;
(d) if the Defaulting Venturer shall file a voluntary petition in
bankruptcy or shall be adjudicated a bankrupt or insolvent, or shall file
any petition or answer seeking any reorganization, arrangement,
composition, readjustment, liquidation, dissolution or similar relief for
itself under the present or any future federal bankruptcy, or state
insolvency or other relief for debtors, or shall seek or consent to or
acquiesce in the appointment of any trustee, receiver, conservator or
liquidator of such Venturer or of all, or any substantial part of its
properties or its interest in the Venture (the term "acquiesce" includes
but is not limited to the failure to file a petition or motion to vacate or
discharge any order, judgment or decree providing for such appointment
within 10 days after the appointment);
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(e) if a court of competent jurisdiction shall enter an order,
judgment or decree approving a petition filed against the Defaulting
Venturer seeking any reorganization, arrangement, composition,
readjustment, liquidation, dissolution or similar relief under the present
or any future federal bankruptcy act, or any other present or future
applicable federal, state or other statute or law relating to bankruptcy,
insolvency or other relief for debtors, and such Venturer shall acquiesce
in the entry of such order, judgment or decree (the term "acquiesce"
includes but is not limited to the failure to file a petition or motion to
vacate or discharge such order, judgment or decree within 10 days after the
entry of the order, judgment or decree), or such order, judgment or decree
shall remain unvacated and unstayed for an aggregate of 60 days (whether or
not consecutive) from the date of entry thereof, or any trustee, receiver,
conservator or liquidator of such Venturer or of all or any substantial
part of its property or its interest in the Venture shall be appointed
without the consent or acquiescence of such Venturer and such appointment
shall remain unvacated and unstayed for an aggregate of 60 days (whether or
not consecutive);
(f) if the Defaulting Venturer shall admit in writing its inability to
pay its debts as they mature;
(g) if the Defaulting Venturer shall give written notice to any
governmental body of insolvency or pending insolvency, or suspension or
pending suspension of operations;
(h) if the Defaulting Venturer shall make an assignment for the
benefit of creditors or take any other similar action for the protection or
benefit of creditors; or
(i) if all or a portion of JV Interests of the Defaulting Venturer in
the Venture shall be validly and legally seized or charged in execution of
a judgment;
then in any such event, the other Venturer(s) (if such Venturers are Sodak or
HWCC, or an Affiliate of either) (the "Nondefaulting Venturer(s)") shall have
the right to dissolve the Venture by giving the Defaulting Venturer written
notice thereof, unless Sodak and/or HWCC (or such applicable Affiliates) (if
either such party is a Non-Defaulting Venturer or both such parties are
Defaulting Venturers), elect to continue the Venture. If the Non-Defaulting
Venturers(s) elect to continue the business of the Venture, then the
Nondefaulting Venturer(s) shall have the right to acquire all of the JV
Interests of the Defaulting Venturer at a purchase price equal to the lesser of
book value or liquidation value of the Defaulting Venturer's JV Interests,
provided that Paddlewheels or any Affiliate thereof shall not have the right, in
any manner, to acquire JV Interests pursuant to this Section 13.1.
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Notwithstanding the foregoing, in the event Sodak, HWCC and any other Venturer
(other than Paddlewheels and any Affiliate thereof) each elect to dissolve the
Venture pursuant to this Section 13.1 or as otherwise set forth in this
Agreement, Paddlewheels and any Affiliate thereof shall have the right to
acquire, subject to the approval of the applicable Gaming Authorities, all of
the JV Interests of Sodak, HWCC and such other Venturer (including any Affiliate
thereof), at a purchase price equal to the lesser of book value or liquidation
value.
Failure by the Non-Defaulting Venturers to give any notice of a default as
specified herein, or any failure to insist upon strict performance of any of the
terms of this Agreement shall not constitute a waiver of any such breach or any
of the terms of this Agreement. No breach shall be waived and no duty to be
performed shall be altered or modified except in writing. One or more waivers
or failure to give notice of default shall not be considered as a waiver of a
subsequent or continuing breach of the same covenant.
13.2 Not Exclusive Remedy. The rights granted in Section 13.1 shall not be
--------------------
deemed an exclusive remedy of the Nondefaulting Venturers, but all other rights
and remedies, legal and equitable, shall be available to it.
ARTICLE XIV
-----------
DISSOLUTION
-----------
14.1 General Procedures. Upon any event of termination or dissolution of
------------------
the Venture as set forth in Article XII or Article XIII, hereof, the Venture
shall cease to engage in any further business, except to the extent necessary to
perform existing contracts, and shall wind up its affairs and liquidate its
assets, unless the Non-Defaulting Venturers elect to continue the business of
the Venture pursuant to Article XII, Section 13.1 above or as otherwise set
forth in this Agreement. During the course of liquidation, the Venturers shall
continue to share in the profits and losses as provided in Article V hereof, and
the provisions of this Agreement shall continue to bind the Venturers and apply
to the activities of the Venture, except as specifically provided to the
contrary, but there shall be no cash distributions to any of the Venturers until
the Distribution Date (as defined below).
14.2 Distribution Date. Liquidation will continue until the Venture's
-----------------
affairs are in such condition that there can be a final accounting, showing that
all fixed or liquidated obligations of the Venture are satisfied or can be
adequately provided for hereunder. The assumption or guarantee in good faith by
one or more financially responsible corporations or other persons shall be
deemed to be an adequate means of providing for such obligations.
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When the Venturers shall have determined that there can be a final accounting,
the Venturers shall establish a date for the distribution of the Venture's
assets (the "Distribution Date") and the assets of the Venture shall be
distributed as provided in Section 14.3 hereof on such date.
14.3 Liquidation and Winding Up. If upon dissolution of the Venture, the
---------------------------
business of the Venture is not continued pursuant to the terms of Article XII or
Section 13.1 (if Paddlewheels and any Affiliate thereof elect not to acquire JV
Interests pursuant to such Section), the Venture shall be liquidated and the
Management Committee (or other person or persons designated by a decree of a
court with proper jurisdiction) shall wind up the affairs of the Venture. The
Management Committee or other persons winding up the affairs of the Venture
shall promptly proceed to the liquidation of the Venture and, in settling the
accounts of the Venture, the assets and the property of the Venture shall be
distributed in the following order of priority:
(a) the payment of all debts and liabilities of the Venture in the
order of priority as provided by law (including outstanding loans from a
Venturer);
(b) the establishment of any reserves deemed necessary by the
Management Committee or the person winding up the affairs of the Venture
for any contingent liabilities or obligations of the Venture;
(c) the payment to each Venturer on a pro rata basis an amount equal
to the aggregate amount of initial and Subsequent Capital Contributions
made by each Venturer; and
(d) the balance, if any, distributed to the Venturers (including
Paddlewheels and any Affiliate thereof) pro rata in accordance with such
Venturers' Residual Ownership Ratios.
14.4 Compensation and Reimbursement. The Venture shall retain a person
------------------------------
(who may be any Nondefaulting Venturer) to act as liquidator for the Venture's
assets. The Nondefaulting Venturer or other person so retained shall be
entitled to reimbursement for out-of-pocket expenses incurred and reasonable
compensation for services rendered in connection with the winding up and
liquidation of the Venture, as agreed by the Venturers. Such reimbursement
shall be paid as an expense of the Venture after all debts to third parties have
been repaid or adequately provided for.
14.5 No Capital Contribution Upon Dissolution. Each Venturer shall look
----------------------------------------
solely to the assets of the Venture for all distributions with respect to the
Venture, and shall have no recourse therefor (upon dissolution or otherwise)
against any other Venturer. No Venturer shall be obligated to restore to the
Venture
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any negative balance that may exist or continue in such Venturer's Capital
Account.
ARTICLE XV
----------
NOTICES
-------
15.1 Notices. All notices or other communications hereunder shall be in
-------
writing and shall be deemed delivered, given or made, upon delivery if delivered
personally, by facsimile, or by express mail or other overnight courier service
or 72 hours after deposit thereof in the United States mails, certified or
registered mail, return receipt requested, postage prepaid, addressed as
follows:
If to Paddlewheels:
Shreveport Paddlewheels, L.L.C.
610 S. Peters St.
New Orleans, Louisiana
Facsimile: (504) 587-1740
Attention: Warren L. Reuther, Jr., Chief Executive Officer
With copy to:
Smith Martin
700 Camp Street
New Orleans, Louisiana
Facsimile: (504) 525-0163
Attention: James E. Smith, Jr. Esq.
If to Sodak:
Sodak Louisiana, L.L.C.
5301 South Highway 16
Rapid City, South Dakota 57701
Facsimile: (605) 355-4976
Attention: General Counsel
With copy to:
John T. Kramer
Dorsey & Whitney LLP
220 South Sixth St.
Minneapolis, MN 55402
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If to HWCC:
HWCC-Louisiana, Inc.
c/o Hollywood Gaming Corporation
Two Galleria Tower, Suite 2200
13455 Noel Road, LB 48
Dallas, Texas 75240
Facsimile: (972) 716-3903
Attention: General Counsel
Any party shall have the right to change its address for notice by written
notice to the other Venturers delivered in accordance with this Section 15.1.
ARTICLE XVI
-----------
ADDITIONAL AGREEMENTS
---------------------
16.1 Covenant. Paddlewheels hereby covenants and agrees, and shall cause
--------
any of its permitted assignees or any Affiliate thereof, not to institute any
legal proceedings arising out of any claims, which have arisen or may arise out
of or are in any way connected with this Agreement, the Master Agreement, the
Marine Agreement, the Management Agreement, the Technical Services Agreement,
the Assignment Agreement, the Sodak Agreement, or any agreement, contract,
instrument in connection herewith or therewith or transactions contemplated
hereby or thereby. Notwithstanding the foregoing, Paddlewheels may bring any
claim, demand, cause of action, either in law or in equity, against the Venture,
Sodak or HWCC or any of their successors and assignees for any and all
liabilities and damages arising from the Venture's failure to make payments due
and owing to Paddlewheels under this Agreement, the Marine Agreement and its
right to receive 1% of "Complex Net Revenues" (as defined in the Assignment
Agreement).
16.2 Additional Obligations. The Venture and the Venturers agree that
----------------------
Paddlewheels shall not be required to make Subsequent Capital Contributions to
the Venture or additional contributions to the City of New Orleans or any other
third party (the "Exit Payments") in connection with the Venture's $7 million
exit fee payment obligation to the City of New Orleans, Louisiana pursuant to
the terms and conditions of the (i) Compromise Agreement, (ii) Loan and
Settlement Agreement, (iii) the Side Agreement, (iv) the Escrow Agreement and
(v) the Indemnity Agreement, each dated January 16, 1998 among NOP, HNOC and
certain other respective parties expressly named therein (collectively, the
"Settlement Agreements") or otherwise, and the Venture shall indemnify, defend
and hold Paddlewheels harmless from and against any claims for any Exit Payments
made by Paddlewheels in connection with the Settlement Agreements. The
Venturers agree not to amend, change or modify any of the Settlement Agreements
in any manner that
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adversely affects Paddlewheels' rights thereunder without Paddlewheels' prior
written consent. Sodak and HWCC agree and acknowledge that if Paddlewheels is
required to satisfy all or any portion of the outstanding principal or accrued
interest payable by the Venture to HNOC pursuant to the terms and conditions of
the Loan and Settlement Agreement, then Paddlewheels shall be deemed to be a
creditor of the Venture to the extent of such satisfied amounts, provided that
Paddlewheels shall not, in any manner, seek recourse against Sodak, HWCC or any
of their respective Affiliates for payment of the same.
16.3 Termination of Marine Agreement. In the event Paddlewheels and any
-------------------------------
Affiliate thereof assigns, conveys or otherwise transfers all of their JV
Interests to a party other than Paddlewheels or its Affiliate (a "Third Party"),
then Paddlewheels' right to receive payments from the Venture pursuant to the
Marine Agreement shall immediately terminate, unless at the same time of such
assignment, conveyance or transfer to a Third Party, Paddlewheels and such
Affiliates assign to such Third Party all of Paddlewheels' and such Affiliates'
rights and obligations under the Marine Agreement.
16.4 Appraisal. Unless otherwise expressly set forth in this Agreement,
---------
any appraisal required to be performed between a selling and purchasing party
pursuant to this Agreement shall be conducted by an appraiser selected pursuant
to the provisions set forth in this Section 16.4. The selling party or group
and purchasing party or group shall each appoint an appraiser who, in turn,
shall appoint a "third party" appraiser to perform the applicable appraisal.
The decision of the third party appraiser shall be final and binding and not
reviewable for any type of error. Unless otherwise expressly set forth in this
Agreement, the fees and costs of appraisal shall be borne equally by the selling
party or group and purchasing party or group.
16.5 Conversion to Limited Liability Company or Limited Partnership. The
--------------------------------------------------------------
Venturers hereby agree to pursue the possible change of the Venture from a
general partnership to either a limited liability company or a limited
partnership.
ARTICLE XVII
------------
CASUALTY AND CONDEMNATION
-------------------------
17.1 Insurance. The Venture shall maintain insurance with respect to the
---------
ownership and operation of the Complex, and any additional assets and the risks
of conducting its business, including but not limited to worker's compensation
coverage, all
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risk coverage, difference in conditions coverage, public liability coverage,
property damage coverage, and boiler and machinery coverage, on such terms and
in such amounts as are agreed upon by the Management Committee from time to
time.
17.2 Procedure Following Casualty. Upon the occurrence of a casualty
----------------------------
resulting in any damage to or destruction of all or any portion of the Complex,
any insurance proceeds in respect of such casualty, net of any collection costs
and amounts due to any lender to the Venture, shall, subject to the Management
Agreement, be used to repair or reconstruct such damaged portion of the Complex
on the condition that the Venturers (other than Paddlewheels and an Affiliate
thereof) shall have previously mutually agreed upon or mutually approved each of
the following:
(a) A construction schedule calling for complete repair or
reconstruction of the damage within a specified time period after the date
of occurrence of the casualty;
(b) A construction contract pursuant to which the repair or
reconstruction is to be accomplished;
(c) Plans and specifications for the repair or reconstruction;
(d) An operating budget for the restored property which demonstrates
that the Complex, after repair or reconstruction, can reasonably be
expected to be economically viable; and
(e) A budget and source of funds for the cost of such repair or
reconstruction and express approval of any expenses in excess of any
insurance proceeds that may be available for such repair or reconstruction.
17.3 Procedure Following Partial Condemnation. Upon the occurrence of any
----------------------------------------
partial condemnation of the Complex, any proceeds or payments to the Venture as
a result of such partial condemnation, net of any collections costs and amounts
due to any lender to the Venture, shall, subject to the terms and conditions of
the Management Agreement, be used to repair or reconstruct the remaining portion
of the Complex on the condition that the Venturers (other than Paddlewheels and
any Affiliate thereof) shall have previously mutually agreed upon or mutually
approved each of the following:
(a) A construction schedule calling for complete repair or
reconstruction of the remaining portion of the Complex within a specified
time period after the partial taking;
(b) A construction contract pursuant to which the repair or
reconstruction is to be accomplished;
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(c) Plans and specifications for the repair or reconstruction;
(d) An operating budget for the remaining portion of the Complex which
demonstrates that such remaining portion of the Complex, after the repair
or reconstruction, can reasonably be expected to be economically viable;
and
(e) A budget and source of funds for the cost of such repair and
reconstruction and express approval of any expenses in excess of any
condemnation proceeds that may be available for such repair or
reconstruction.
ARTICLE XVIII
-------------
GENERAL PROVISIONS
------------------
18.1 Other Interests. Each of the Venturers understands that each other
---------------
Venturer or its Affiliates may be interested, directly or indirectly, in various
other businesses and undertakings not included in the Venture. Except as
provided in Section 18.3 hereof or elsewhere in this Agreement or as mutually
agreed upon by the Venturers, the Venturers hereby agree that the creation of
the Venture and the assumption by each of the Venturers of its duties hereunder
shall be without prejudice to their rights (or the rights of its respective
Affiliates) to have such other interests and activities and to receive and enjoy
profits or compensation therefrom, and each Venturer waives any rights it may
otherwise have to, by reason of any duty otherwise owed to the Venture or its
Venturers, share or participate in such other interests or activities of the
other Venturer or its Affiliates. Except as provided in Section 18.3 hereof or
elsewhere in the Agreement, the Venturers and their Affiliates may engage in or
possess any interest in any other business venture of any nature or description
independently or with others, including, but not limited to, the ownership,
financing, leasing, operation, management, syndication, brokerage, or
development of real property and gambling casinos, and neither the Venture nor
any other Venturer shall have the right by virtue of this Agreement or otherwise
to prevent or participate in any such activity or the income or profits derived
therefrom.
18.2 Other Opportunities. Except as provided in this Agreement, no
-------------------
Venturer need disclose to any other Venturer or the Venture any other business
venture in which it or its Affiliates may have an interest or any other business
opportunity presented to it, even if such opportunity is of a character which,
if presented to the Venture, could be taken by the Venture, and each Venturer
and its Affiliates shall have the right to take for its own account or to
recommend to others any such particular investment opportunity or business
venture.
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18.3 Prohibited Payments. Each Venturer agrees that it and its Affiliates
-------------------
will conduct their activities, and will cause any activities conducted on their
behalf to be conducted, in a lawful manner and specifically will not engage in
the following transactions:
(a) Payments or offers of payment, directly or indirectly, to any
domestic or foreign government official or employee in order to obtain
business, retain business or direct business to others, or for the purpose
of inducing such government official or employee to fail to perform or to
perform improperly his official functions;
(b) receive, pay or offer anything of value, directly or indirectly,
from or to any private party in the form of a commercial bribe, influence
payment or kickback for any such purpose; or
(c) use, directly or indirectly, any funds or other assets of the
Venture or of such Venturer for any unlawful purpose including, without
limitation, political contributions in violation of applicable laws,
regulations, rules or orders.
18.4 Subsequent Actions and Good Faith. Each Venturer shall hereafter
---------------------------------
execute, deliver and file such further instruments and do such further acts and
things as may be required or useful to carry out the intent and purpose of this
Agreement and that are not inconsistent with the terms of this Agreement. Each
Venturer shall exercise in good faith and its best efforts in all transactions
affecting the Venture. If a Venturer is required to retain the services of an
attorney to enforce or otherwise litigate or defend any matter arising out of
this Agreement between such Venturer and the Venture or any other of the
Venturers, the prevailing party shall be entitled to be reimbursed for its
reasonable attorney's fees by the non-prevailing party.
18.5 Standing and Discharge of Liens. Each Venturer: (a) shall at all
-------------------------------
times preserve and keep in good standing its corporate status, as the case may
be, in Louisiana and in the State under whose laws it is organized; and (b)
shall pay all federal, state and local taxes, assessments and other governmental
charges imposed upon it or its JV Interests before any such taxes, assessments
or charges become a lien on its JV Interests.
18.6 Captions. The captions and section headings used herein are for
--------
convenience and for ease of reference only and constitute no part of the
agreement or understanding of the parties hereto, and no reference shall be made
thereto for the purpose of construing or interpreting any of the provisions of
this Agreement.
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18.7 Counterparts. This Agreement and any amendments hereto may be
------------
executed in one or more counterparts, all of which, taken together, shall
constitute one agreement binding upon the parties, notwithstanding that all
parties are not signatories to the same counterpart.
18.8 Applicable Law. This Agreement is made pursuant to, and shall be
--------------
governed by the internal laws of the State of Louisiana.
18.9 Entire Agreement. Except for the Master Agreement, Management
----------------
Agreement, the Marine Agreement, the Assignment Agreement and the Sodak
Agreement and all other agreements attached hereto and thereto as exhibits or
expressly referred to herein or therein, this Agreement shall supersede any
written and oral agreement among such parties and constitutes the entire
understanding and agreement of the Venturers with respect to the subject matter,
and may not be altered, modified or rescinded except by written instrument
executed by the Venturers. The parties hereto acknowledge that they do not deem
or intend their interests in the Venture, either alone, together or in
conjunction with the Management Agreement or any other document or
understanding, to represent or to be a "security" for the purposes of any state
or federal law.
18.10 Severability. If any of the terms and provisions of this
------------
Agreement shall be held invalid or unenforceable for any reason, such invalidity
or unenforceability shall in no event affect any of the other terms or
provisions, each of which other terms and provisions of this Agreement shall be
valid and enforceable to the fullest extent permitted by law
18.11 Successors and Assigns. The terms, provisions, covenants,
----------------------
undertakings, agreements, obligations and conditions of this Agreement shall be
binding upon and shall inure to the benefit of the permitted successors in
interest and assigns of the parties hereto with the same effect as if mentioned
in each instance where the party hereto is named or referred to, except that no
Transfer by a Venturer in violation of the provisions of this Agreement shall
vest any rights in the assignee, transferee, purchaser, secured party, mortgagee
or pledgee.
18.12 Time of the Essence. Time is of the essence with respect to all
-------------------
of the terms, covenants, obligations and agreements herein contained.
18.13 No Third Party Beneficiaries. Nothing contained in this
----------------------------
Agreement shall inure to the benefit of any third parties or any creditors of
the Venture or grant such third parties or creditors any rights or causes of
action against any of the parties hereto.
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18.14 Regulatory Information. Each Venturer shall provide, to the
----------------------
Venture or regulatory agency, as the case may be, as required by applicable
laws, regulations, rules or orders, all information pertaining to the Venture
and such Venturer's officers, directors, shareholders, financial sources, and
associations as shall be required by any federal or state securities law or any
regulatory authority with jurisdiction over the Venture, the Complex, or any
Venturer or any Affiliates of such person.
18.15 Lender Suitability. No Venturer shall incur or permit any person
------------------
or entity that holds any JV Interests to incur any indebtedness unless the
documents for such indebtedness provide that:
(a) If any lender to the Venture or to any person that holds any JV
Interest becomes subject to an unsuitability determination by the Gaming
Authorities the result of which is to threaten the revocation, suspension,
termination or rescission of any permit, approval, any entitlement or
license granted by the Gaming Authorities to or for the benefit of the
Venture, a Venturer, or any Affiliate of a Venturer, or result in any other
penalty to the Venture, a Venturer and any Affiliate of a Venturer, and if
such Unsuitability Determination is not cured in accordance with applicable
laws, regulations rules or orders, then to the extent and so long as
provided by applicable laws, regulations, rules or orders: (i) all payments
to such lender shall be suspended and escrowed; (ii) such lender shall
immediately divest itself of all loans made to the Venture or such person;
and (iii) such lender shall be subject to any other remedies as shall be
required by applicable laws, regulations, rules and orders.
(b) If the Management Committee reasonably determines that the
existence of a loan from a lender to the Venture will threaten any gaming
license, permit, approval, or other entitlement that such Venturer or any
Affiliate of such Venturer holds or applies for in any other jurisdiction,
such Venturer may, at no cost to the Venture or the other Venturer: (i)
require the Venture to exercise any redemption rights in any loan documents
with such lender and redeem such loan so long as such Venturer makes a loan
to the Venture (with the same security, interest and maturity provisions as
the redeemed loan) of the funds necessary to effect such redemption or
procures a loan for the Venture (with the same interest, security and
maturity provisions as the redeemed loan) from a Substitute Lender and so
long as such loan is in compliance with the Venture's loan documents and
this Agreement; (ii) require the Venture to exercise the rights in any loan
documents with such lender to procure a Substitute Lender or lenders that
will assume and accept the rights and obligations of the objectionable
lender; or (iii) with the
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<PAGE>
consent of such lender, if required in any loan documents with such lender,
procure a Substitute Lender or lenders that assume and accept the rights
and obligations of the objectionable lender.
ARTICLE XIV
-----------
[INTENTIONALLY OMITTED]
ARTICLE XX
----------
INSURANCE
---------
20.1 Coverage.
--------
(a) Required Insurance. The Venture shall secure and maintain the
------------------
following insurance with respect to the Complex at all times during the
term of this Agreement:
(i) Comprehensive general liability insurance at a limit of at
least $1 million per occurrence/$2 million aggregate, including, but
not limited to, liquor liability and innkeepers liability coverage to
protect against theft of or damage to guests' property;
(ii) Automobile liability and physical damage insurance for at
least $1 million combined single limit to include broad form drive
other car coverage;
(iii) Comprehensive crime insurance including, but not limited
to, employee dishonesty and depositor's forgery Coverages;
(iv) Worker's compensation insurance and employer's liability,
including the maritime employers liability endorsement, U.S.L.& H.,
and similar insurances as may be required by law;
(v) Group benefits insurance including major medical and
hospitalization for Complex employees;
(vi) Fiduciary liability insurance, as required by the
Employment Retirement Income Security Act of 1974 covering pension and
benefit plans, in a limit sufficient to cover the assets at risk;
(vii) Marine hull and machinery and property insurance in an
amount equal to at least 100% of the agreed insurable value including
all gaming equipment thereof on a replacement cost basis;
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<PAGE>
(viii) Marine business interruption insurance against loss of
profits measured by net income of the Venture;
(ix) Builder's risk insurance, if required, including delayed
opening coverage;
(x) Protection and indemnity coverage, if required, including
Jones Act, in an amount of at least $1 million with Excess Protection
and Indemnity coverage in an amount of not less than $25 million;
(xi) Vessel pollution insurance, if required;
(xii) Media/memorabilia professional liability insurance
affording protection for liabilities which may arise from the use and
display of "Hollywood" themed media and memorabilia at the Complex of
at least $2 million;
(xiii) Any insurance which the Venture or Operator may be
required to obtain pursuant to any franchise covering the Complex;
(xiv) Umbrella (excess liability) insurance in an amount of not
less than $100 million;
(xv) Any other insurance required by the terms of the Project
financing; and
(xvi) Insurance against such other insurable risks as may
reasonably be required.
(b) Changes in Coverage. The Venture may raise the minimum amount of
-------------------
insurance to be maintained with respect to the Complex under Section
20.1(a) above to make such insurance comparable to the amount of insurance
carried with respect to other similar operations taking into account the
size, location and character of the Complex. In addition, neither party
shall unreasonably withhold its consent to a request by the other party
that such minimum limits of insurance be lowered on the basis that such
insurance cannot be obtained in such amounts, or can be obtained only at a
prohibitive cost. Similarly, if during the term of this Agreement changes
in the insurance industry shall make any of the descriptions of the
required insurance coverage inaccurate or inappropriate, then the Venture
may change such requirements to accurately describe, the type of insurance
which would be comparable to the coverage described in Section 20.1(a)
above.
-50-
<PAGE>
(c) Requirements. All policies of insurance shall be written on an
------------
"occurrence" basis, if possible, and if any policy is written on a "claims
made" basis, then such policy must, if possible, be continued in effect for
a period of two years following the expiration or early termination of this
Agreement. The insurance coverage shall in any event comply with the
requirements of the Loan Commitments, if any.
20.2 Policies and Endorsements.
-------------------------
(a) Policies. All insurance provided for under Section 20.1 above
--------
shall be effected by policies issued by insurance companies of good
reputation and of sound and adequate financial responsibility as determined
by the Management Committee. The Venture shall furnish to each Venturer
certificates of insurance with respect to all of the policies of insurance
so procured, including existing, additional and renewal policies, and in
the case of insurance about to expire, the Venture shall deliver to each
Venturer certificates of insurance with respect to the renewal policies not
less than 30 days after the respective dates of expiration.
(b) Endorsements. All policies of insurance provided for under this
------------
Article XX shall have attached thereto (a) an endorsement that such policy
shall not be canceled or materially changed without at least 30 days prior
written notice to the Venture and each Venturer, (b) an endorsement to the
effect that no act or omission of the Venture or any Venturer shall affect
the obligation of the insurer to pay the full amount of any loss sustained
and (c) an endorsement to the effect that all liability policies of
insurance shall be endorsed to include worldwide coverage for suits brought
against named insureds as described in Section 20.2(c) below.
(c) Named Insureds. All policies of insurance required under clauses
--------------
(a)(i) and (a)(ii) of Section 20.1 shall be carried in the name of the
Venture, and, if required, the lender under the Loan Commitments, and each
of the Venturers shall be named as additional insureds thereunder. Losses
thereunder shall be payable to the parties as their respective interests
may appear. Notwithstanding the foregoing, if the lender under the Loan
Commitments is an institutional lender, and so requires, losses may be made
payable to such lender, or to a bank or trust company, in either instance
as trustee for the custody and disposition of the proceeds therefrom. The
Venturers agree that any Loan Commitment documents shall contain a
provision to the effect that proceeds from property insurance shall be
available for restoration of the Complex. All insurance policies required
in clauses (a)(iii), (a)(iv) and (a)(v) of Section 20.1 shall name the
Venture and its
-51-
<PAGE>
Affiliates, and the directors, officers, agents and employees of each such
entity as named insureds, and the Venturers and their Affiliates, and the
directors, officers, agents and employees of such entity as additional
insureds.
20.3 Waiver of Liability. No Venturer shall assert against the other, and
-------------------
each of the Venturers hereby waives with respect to each other, or against any
other entity or person named as additional insureds on any policies carried
under this Article XX, any claims for any losses, damages, liability or expenses
(including attorney's fees) incurred or sustained by either of them on account
of injury to persons or damage to property arising out of the ownership,
development, construction, completion, operation or maintenance of the Complex,
to the extent that the same are covered by the insurance required under this
Article XX. Each policy of insurance shall contain a specific waiver of
subrogation reflecting the provisions of this Section 20.3, or a provision to
the effect that the existence of the preceding waiver shall not affect the
validity of any such policy or the obligation of the insurer to pay the full
amount of any loss sustained.
20.4 Insurance by Venturers. Any insurance provided by the Venture under
----------------------
this Article XX may be effected under policies of blanket insurance which cover
other properties of the Venturers, or any of their respective Affiliates, and
the pro rata portion of such premiums shall be charged and allocated to the
Complex on the same basis as allocated to other participating operations of said
Venturer. Any policies of insurance maintained by the Venture pursuant to the
provisions of this Article XX may contain deductible provisions in such amounts
as are maintained with respect to other operations of said Venturer, taking into
account local standards and practices. Further, in lieu of all or a part of
comprehensive public liability insurance and worker's compensation and
employer's liability insurance under clauses (a)(iii) and (a)(v) of Section
20.1, any or all of the risks covered by such insurance may be self-insured or
self-assumed by the Venture under a self-insurance or assumption of risk program
similar to those in effect at other operations of said Venturer, up to such
amounts as such risks are assumed or self-insured at other operations of said
Venturers.
-52-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have duly executed and delivered
this Agreement as of the day and year first above written.
By: SODAK LOUISIANA, L.L.C.
By: Kevin L. Buntrack
-----------------------------------------------
Title: Manager
-----------------------------------
By: HWCC - LOUISIANA, INC.
By: Jack E. Pratt
-----------------------------------------------
Title: President
-----------------------------------
By: SHREVEPORT PADDLEWHEELS, L.L.C.
By: Warren Reuther
-----------------------------------------------
Title: CEO
-----------------------------------
-53-
<PAGE>
EXHIBIT 10.2
September 1998 Amendment
to the July Amended and Restated
Joint Venture Agreement of QNOV
This September 1998 Amendment to the Amended and Restated Joint Venture
Agreement of QNOV (the "Amendment") is hereby entered into as of September 22,
1998 by and among Shreveport Paddlewheels, L.L.C. ("Paddlewheels"), Sodak
Louisiana, L.L.C. ("Sodak") and HWCC-Louisiana, Inc. ("HWCC"). Unless the
context otherwise requires, terms that are capitalized and not otherwise defined
shall have the meaning set forth or cross-referenced in the JV Agreement.
WHEREAS, the parties entered into the Amended and Restated Joint Venture
Agreement of QNOV dated July 31, 1998 (the "JV Agreement") in order to comply
with a deadline that had been established by the Louisiana Gaming Control Board
("LGCB"); and
WHEREAS, subsequent to the filing of the executed JV Agreement that was
delivered to the LGCB, the parties became aware of certain provisions in the JV
Agreement that needed clarification, or did not fully or completely reflect the
intention of the parties; and
WHEREAS, the parties desire to make amendments to the JV Agreement to
clarify such provisions or otherwise amend or modify such provisions in a manner
that fully reflects the intention of the parties.
NOW THEREFORE, the parties hereto do hereby amend the JV Agreement, as
follows:
A. Article III is hereby amended by adding the following new Section
3.5:
3.5 Lack of Approval of Initial Debt Financing.
The board of directors for the parent company of each of Sodak and
HWCC (each, a "Parent's Board") shall each have the right to approve
or disapprove, at their sole and absolute discretion, the terms and
conditions of any credit facility or loan with any third party lender
for the financing of the construction of the Complex (the "Project
Financing"). In the event that either party's Parent's Board fails to
approve the Project Financing, such party shall have the right,
subject to the approval of and any terms or conditions imposed by the
LGCB, to exit the Venture (an "Exiting Venturer") with no further
obligation by such Exiting Venturer to the Venture or any other
Venturer, and the Venture or any Venturer shall have no further
obligation to such Exiting Venturer.
B. The last sentence of Section 3.2(d) is hereby amended to provide
that the Residual Ownership Ratio of each Venturer (other than Paddlewheels and
any Affiliate thereof)
<PAGE>
shall also be adjusted in accordance with the provisions of Section 3.2(d) in
the event a Venturer exits the Venture in accordance with Section 3.5 herein.
C. The penultimate paragraph of Section 13.1 is hereby amended by
adding the following clause to the end of such penultimate paragraph:
; provided that a dissolution resulting from, or in connection with,
the sale of all or substantially all of the assets of the Venture
shall not entitle Paddlewheels or any Affiliate thereof to acquire the
JV Interests of any other Venturer.
D. Section 14.3(d) is hereby amended by adding the following clause
to the end of such section:
; provided, however, that Paddlewheels or any Affiliate thereof shall
not be entitled to any distribution whatsoever pursuant to this
Section 14.3(d) if such party has been, or has a right to be, paid an
amount equal to 10% of the Net Realized Value in accordance with
Section 10.7 of this Agreement.
E. Article XVI is hereby amended by adding the following Section 16.6:
16.6 Buy/Sell Agreement.
(a) Sodak and HWCC shall each have the rights of purchase and sale
as set forth in this Section 16.6, which shall be exercised by
Sodak or HWCC by delivering to the other party a written notice
(an "Election Notice").
(b) Except as provided under Section 16.6(h) below, at any time after
the two-year anniversary date of the commencement of gambling at
the Complex, (the "Commencement Date"), Sodak or HWCC (the
"Electing Party") may submit to the other applicable party (the
"Notice Party") an Election Notice. The Election Notice, to be
valid, shall state a proposed price for all of the Electing
Party's ownership interest in the Venture. In addition, the
Election Notice shall state that if HWCC becomes obligated to
sell, and Sodak becomes obligated to purchase, all of HWCC's
ownership interest in the Venture pursuant to the terms and
conditions of this Section 16.6, then Sodak shall also be
obligated to purchase all rights and benefits (the "Operator
Rights") of HWCC-Shreveport, Inc., its successors and assigns
(the "Operator") under the Management Services Agreement dated
September 22, 1998 by and between QNOV and the Operator, as
amended (the "Management Agreement") pursuant to Section 16.6(d)
below.
(c) An Election Notice shall constitute an irrevocable offer by the
Electing Party either to (i) sell to the Notice Party all, but
not less than all, of the Electing
2
<PAGE>
Party's ownership interest in the Venture at a price equal to
that set forth in the Election Notice (the "Electing Party JV
Interest Price") and, in the event HWCC is the Electing Party to
cause the Operator to sell to the Notice Party all, but not less
than all, of the Operator Rights, or (ii) purchase from the
Notice Party all, but not less than all, of the Notice Party's
interest in the Venture at a price equal to the Electing Party JV
Interest Price multiplied by a fraction, the numerator of which
is the Notice Party's Relative Ownership Ratio, and the
denominator of which is the Electing Party's Relative Ownership
Ratio (the "Notice Party JV Interest Price"), and, in the event
HWCC is the Notice Party, purchase from the Operator all, but not
less than all, of the Operator Rights.
(d) The price at which the Operator Rights are purchased and sold
under this Section 16.6 shall be the "Management Agreement
Value." The Management Agreement Value shall be the fair market
value of the Operator Rights as determined by mutual agreement of
the parties; provided, however, that if the parties are unable to
agree on the Management Agreement Value within twenty (20) days
after delivery of the Election Notice, then either party may
provide notice (the "Initial Appraisal Notice") to the other
party that the Management Agreement Value shall be determined
according to the terms and conditions of the remainder of this
Section 16.6(d). In the event the Electing Party and the Notice
Party are able to mutually agree upon an investment banking firm
of national standing (an "Authorized Investment Banker") within
ten (10) days following the delivery of the Initial Appraisal
Notice, then the Management Agreement Value shall be the fair
market value of the Operator Rights as determined by such
Authorized Investment Banker, the cost of which appraisal shall
be equally borne by the Electing Party and the Notice Party. In
the event the Electing Party and the Notice Party are unable to
agree upon an Authorized Investment Banker within ten (10) days
following the delivery of the Initial Appraisal Notice, then
within twenty (20) days of delivery of the Initial Appraisal
Notice each such party shall select an Authorized Investment
Banker, each of whom shall perform an appraisal of the fair
market value of the Operator Rights (each an "Initial Appraisal"
and together the "Initial Appraisals"). The cost of each Initial
Appraisal shall be borne by the party appointing the Authorized
Investment Banker conducting such appraisal. In the event that
the difference between the Initial Appraisals is more than 10% of
the higher of such Initial Appraisals, then within ten (10) days
of the date both parties have received notice of the amount of
such Initial Appraisals, either party may provide notice (the
"Final Appraisal Notice") to the other party that a third
appraisal shall be conducted, in which case each party shall
instruct their Authorized Investment Banker to work with the
other party's Authorized Investment Banker to appoint a third
Authorized Investment Banker (the "Final Investment Banker") to
conduct an appraisal of
3
<PAGE>
the fair market value of the Operator Rights (the "Final
Appraisal"). In the event of a Final Appraisal Notice, the
Management Agreement Value shall be the average of (i) the
average of the Initial Appraisals and (ii) the Final Appraisal.
The cost of the Final Appraisal shall be equally borne by the
Electing Party and the Notice Party. In the event that either (x)
the difference between the Initial Appraisals is 10% or less of
the higher of such Initial Appraisals, or (y) such difference is
greater than 10% but neither party elects to send a Final
Appraisal Notice within the required ten (10) day period, then
the Management Agreement Value shall be deemed to be the average
of the Initial Appraisals.
(e) The Notice Party shall have the right, within thirty (30) days
following the later of the delivery of the Election Notice or the
determination of the Management Agreement Value, to elect, in
writing, to either (i) purchase the Electing Party's ownership
interest in the Venture at the Electing Party JV Interest Price
and, in the event the Electing Party is HWCC, the Operator Rights
at the Management Agreement Value, or (ii) sell to the Electing
Party all, but not less than all, of its ownership interest in
the Venture at the Notice Party JV Interest Price and, in the
event the Notice Party is HWCC, to cause the Operator to sell to
the Electing Party all, but not less than all, of the Operator
Rights at the Management Agreement Value. In the event the Notice
Party does not elect, in writing, to purchase the Electing
Party's ownership interest in the Venture and the Operator Rights
(in the event the Electing Party is HWCC) within the
aforementioned thirty (30) day period, then the Notice Party
shall be obligated to sell to the Electing Party, and the
Electing Party shall be obligated to purchase, all but not less
than all, of the Notice Party's ownership interest in the Venture
at the Notice Party JV Interest Price and, in the event the
Notice Party is HWCC, to cause the Operator to sell to the
Electing Party all, but not less than all, of the Operator Rights
at the Management Agreement Value.
(f) The closing of the purchase and sale of the transactions
contemplated by this Section shall occur on a date and time
mutually agreed upon by the Electing Party and Notice Party,
which, in any event, shall occur no later than one hundred and
five (105) days (other than in the event of an Election Notice
submitted in accordance with Section 16.6(h), in which case such
period shall be sixty (60) days) immediately following the
earlier of the date of the Notice Party's written notice of
election as set forth in Section 16.6(e) or the expiration of the
thirty (30) day period referenced in Section 16.6(e). At the
closing, the selling and the purchasing party shall execute such
documents and instruments of conveyance as may be necessary or
appropriate to confirm the
4
<PAGE>
transactions contemplated by this Section 16.6. Each party shall
bear all of their own respective costs and expenses in connection
with the closing pursuant hereto except as expressly provided
above.
(g) Notwithstanding the terms and provisions set forth in this
Section 16.6, in no instance shall a party have the right to
submit an Election Notice in the event such party is at such time
deemed to be unsuitable by the LGCB. If at any time following the
date of an Election Notice but prior to the closing date of the
transactions contemplated by the Election Notice (the "Interim
Period"), a party is deemed to be unsuitable by the LGCB, then
the Election Notice shall be null and void unless the Notice
Party elects, in writing, within ten (10) days following the date
the Notice Party receives notice that the applicable party is
deemed unsuitable, to proceed with the procedures and
transactions contemplated by such Election Notice pursuant
hereto. Notwithstanding the foregoing, if the Notice Party is
deemed unsuitable at any time during the Interim Period, the
Notice Party shall not have the foregoing right to proceed with
the procedures and transactions contemplated by the applicable
Election Notice.
(h) Notwithstanding the terms and provisions set forth in this
Section, a party may submit an Election Notice at any time
following the termination of the Funding Notice Period (as
defined below) if (i) such other applicable party fails to
provide its pro rata portion of funds (x) necessary to complete
construction of the Complex according to a size, scope, details
and specifications mutually agreeable to each of HWCC and Sodak
or (y) required under the terms of this Agreement, and (ii) the
party submitting such Election Notice has provided its required
portion of such funds. Upon the occurrence of an event set forth
in Section 16.6(h)(i), the funding party shall notify the non-
funding party, in writing, that the non-funding party shall have
the right to cure its failure to fund by providing its pro rata
portion of funds within the twenty (20) day period following the
date of such notice (the "Funding Notice Period). In the event of
an Election Notice delivered in accordance with this Section
16.6(h), the Electing Party may elect to contribute the funds
required to be contributed by the Notice Party (the "Shortfall
Required Amount"), and such Shortfall Required Amount shall be
either deemed to be (x) a loan by the Electing Party to the
Venture, accruing interest at a variable rate of interest per
annum equal to the prime rate of interest announced from time to
time by U.S. Bank National Association, and to be repaid by the
Notice Party in the event that the Notice Party elects to
purchase in accordance with Section 16.6(e) at the same time as
the closing for the purchase of the Electing Party's interest in
the Venture or (y) if any credit or other loan agreement or
arrangement to
5
<PAGE>
which the Venture is subject prohibits such a loan, a preferred
stock or other equity security upon substantially similar terms
that complies with such credit or other loan agreement or
arrangement.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed as of the date first written above.
SHREVEPORT PADDLEWHEELS, L.L.C.
By /s/ Warren Reuther
--------------------------------------------
Its CEO
----------------------------------------
SODAK LOUISIANA L.L.C.
By /s/ Kevin L. Buntrack
--------------------------------------------
Its Manager
----------------------------------------
HWCC-LOUISIANA, INC.
By Jack E. Pratt
--------------------------------------------
Its President
----------------------------------------
6
<PAGE>
EXHIBIT 10.3
AGREEMENT
This Agreement (herein so called) is entered into as of this 2nd day of
September, 1998 by and among Greate Bay Hotel and Casino, Inc. ("GBHC"), GB
Holdings, Inc., ("GBH"), GB Property Funding Corp. ("GBPF") (collectively with
their Subsidiaries, the "Debtors"), on the one hand, and Greate Bay Casino Corp.
("GBCC"), PHC Acquisition Corp. ("PHC"), Lieber Check Cashing, LLC. ("Lieber"),
Jack E. Pratt, William D. Pratt, and Edward T. Pratt, Jr. (collectively, the
"Pratts" and together with GBCC, PHC, and Lieber, the "Defendants"), and
Hollywood Casino Corporation ("HCC"), on the other.
R E C I T A L S
A. On January 5, 1998, the Debtors commenced proceedings under Chapter 11 of
Title 11 of the United States Code (the "Chapter 11 Proceedings") in the
United States Bankruptcy Court for the District of New Jersey, Camden
Vicinage (the "Court").
B. On July 27, 1998, GBHC filed a certain adversary proceeding against the
Defendants in the Court that was docketed at No. 98-1220 seeking to
recover, among other things, the rights under that certain contract of sale
between PHC and FGP Bala, Inc. ("FGP") dated as of January 1, 1998 for the
sale of Lots 5, 6, 7, 2, 3, 16, 19, & 42 on Block 30 and Lot 73 on Block 33
on the Tax Map of the City of Atlantic City and what is commonly known in
Atlantic City, New Jersey as the Midtown Bala (the "Midtown Bala Option"),
and the rights to Lot 14 on Block 30 of the Tax Map of the City of Atlantic
City that Lieber acquired, subject to a purchase money mortgage, from
Andermatt Corp. by deed dated July 22, 1996 (the "Lieber Parcel"), and to
restrain the Defendants from using the Net Operating Loss tax attributes
(the "NOL's") of the Debtors (the "Adversary Proceeding").
C. On or about August 19, 1998, the Defendants filed a Motion in the Adversary
Proceeding seeking to disqualify Gibbons Del Deo Griffinger & Vecchione as
counsel to the Debtors in the Adversary Proceeding (the "Gibbons DQ
Motion"), and on or about August 20, 1998 filed a Motion seeking a
Preliminary Injunction Against Frederick H. Kraus (the "FK Motion").
D. On August 24, 1998, GBCC filed a Response and Emergency Application in the
Adversary Proceeding (the "Consolidated Return Motion").
E. The Debtors, on one side, and the Defendants, on the other side, have
reached a settlement in the Adversary Proceeding which resolves all of the
issues raised in the Adversary Proceeding, including the Consolidated
Return Motion, and which results in the dismissal with prejudice of the
Gibbons DQ Motion and the FK Motion.
<PAGE>
NOW, THEREFORE, the Debtors, the Defendants, and where applicable, HCC, for
themselves and all entities owned or controlled by them, including direct or
indirect subsidiaries ("Subsidiaries") stipulate and agree as follows:
1. Forthwith upon the execution of this Agreement and approval of this
Agreement by the Court, the Debtors will provide GBCC with executed Internal
Revenue Service Form 1122's for the 1997 tax year with respect to the GBCC
Group, as hereafter defined, for each of the Debtors and the Subsidiaries of GBH
and the remaining tax issues are resolved in accordance with the terms as
follows:
a. HCC may file an amended consolidated federal corporate tax return
("Amended Return") for calendar year 1996. HCC may use any NOL's
attributable to the Debtors as of December 31, 1996 for any purpose in
the Amended Return. However, if any tax, interest or penalties are due
on the Amended Return, HCC, GBCC or any of GBCC's Subsidiaries other
than the Debtors will satisfy all such obligations from its or their
own funds.
b. GBCC will file a timely return by the September 15, 1998 extended
date for the filing of a return previously obtained by GBCC for a new
consolidated group for calendar year 1997 consisting of GBCC and all
of its Subsidiaries (the "GBCC Group"). GBCC may use any NOL's
attributable to the Debtors as of December 31, 1997 for any purpose in
the GBCC 1997 return. However, if any tax is due on the GBCC 1997
return, GBCC or any of its Subsidiaries other than the Debtors will
satisfy all such obligations from its or their own funds.
c. The GBCC Group will file a return for calendar year 1998 and in a
manner in accordance with prior practice. HCC represents and covenants
that it will take no action that will require any cancellation of debt
income or any gains on disposition of assets to be recognized by the
GBCC Group in 1998. GBCC represents and covenants that any
restructuring of the obligations of Pratt Casino Corporation ("PCC"),
PRT Funding Corp. ("PRT"), and/or New Jersey Management, Inc. ("NJMI")
(the "PRT Restructuring") will not result in any cancellation of debt
income or other taxable gains to the GBCC Group while the Debtors are
members of the GBCC Group; provided that nothing herein shall prevent
the cancellation of indebtedness in a bankruptcy proceeding. In the
event that GBHC seeks to take a deduction for tax purposes for post
petition interest expense as part of the 1998 return, GBHC will
deliver to GBCC an opinion addressed to GBCC from a law firm
reasonably satisfactory to GBCC or from a nationally recognized "Big
Five" certified public accounting firm that there is substantial
authority for such deduction. GBCC represents and covenants that NOL's
of the GBCC Group will be available to shelter any taxable income from
GBH and Subsidiaries in 1998 or from the deconsolidation of the GBH
Group as hereafter defined, and otherwise GBCC or its Subsidiaries
will pay any resulting tax liability. However, to the extent that
there is tax actually due as a result of GBHC not taking a deduction
for post petition interest expense and if the remaining NOL's of the
GBCC Group are insufficient to shelter the tax liability resulting
from nondeducted
2
<PAGE>
post petition interest expense, GBHC will be obligated to pay any such
tax liability. In addition, after allowing for the use of GBCC Group
NOL's to shelter any income of the Debtors, regardless of whether such
income results from nondeducted interest or otherwise, HCC may take
action that would result in cancellation of debt income or gain on the
disposition of assets to the GBCC Group, if GBCC and its Subsidiaries
other than the Debtors pay any tax due.
d. On or before December 31, 1998, GBCC will cause GBH and its
Subsidiaries to become deconsolidated from the GBCC Group by causing
PCC to transfer 21% of the stock ownership interest of PCC in GBH (the
"GBH Stock Interest") free and clear of liens and encumbrances to a
person other than any member of the GBCC Group such that PCC and its
affiliates would no longer be the owner of at least 80% of the vote
and value of the GBH stock as set forth in 26 USC (S)1504 or, with the
written consent of GBHC, by otherwise causing GBH and its Subsidiaries
to cease to be members of the GBCC Group so that GBH and its
Subsidiaries can form a new consolidated group with GBH as the common
parent (the GBH Group"). Unless GBCC notifies GBHC within seven (7)
days of the approval of this Agreement by the Court that GBCC will
otherwise cause the deconsolidation of GBH and its Subsidiaries or
notifies GBHC of the identity of a person to hold the GBH Stock
Interest, GBCC authorizes GBHC to file a petition with the New Jersey
Casino Control Commission, seeking approval to transfer the GBH Stock
Interest to a designee of the Debtors (or to the person designated by
GBCC if notice is provided within such seven (7) days) effective on or
before December 31, 1998 and will cooperate with GBHC, using GBCC's
good faith best efforts, to cause such approval to be obtained. GBHC
will use its good faith best efforts to obtain approval of such a
petition. In addition, GBCC will cause PCC to take no action that will
prevent the effectiveness of the consent of GBH to be the common
parent of the GBH Group. At the deconsolidation of GBH and its
Subsidiaries, the Debtors will receive their allocated share of any
unused NOL's available to the GBCC Group in accordance with
regulations and procedures of the IRS. GBCC Group shall not make an
election under Treas. Reg. 1.1502-20(g) with respect to such
deconsolidation. If because of the deconsolidation, any adjustment is
required by the Treasury Regulations promulgated under 26 U.S.C.
Section 1502, GBCC will fully disclose to the Debtors its analysis and
calculation of such adjustments on a timely basis but no later than
forty-five (45) days before the GBCC Group's 1998 federal income tax
return is due (taking into account any extension). The inclusion of
all such adjustments that relate to the GBH Group as a result of such
deconsolidation shall be subject to the written consent of the GBH
Group. Any dispute concerning such adjustments shall be resolved by
the Court.
e. HCC and GBCC represent and covenant with respect to any audits
for returns covering tax periods beginning prior to January 1, 1997,
and GBCC represents and covenants with respect to any audits covering
tax periods beginning subsequent to December 31, 1996 and until
formation of the GBH Group, that the Debtors will be protected from
exposure to liabilities resulting from activities of HCC and its
Subsidiaries or GBCC and its Subsidiaries, as the case may be, other
than the Debtors, and, to the extent there is money
3
<PAGE>
due the IRS as a result of audits with respect to such activities, HCC
and/or GBCC will be responsible for payment of such amounts. The
Debtors represent and covenant with respect to any audit adjustments
covering tax periods prior to the formation of the GBH Group that the
GBCC Group (other than the Debtors) and HCC will be protected from
exposure to liabilities resulting from activities of the Debtors and,
to the extent there is money due the IRS as a result of audits with
respect to such activities, the Debtors will be responsible for
payment of such amounts.
f. Except as provided in this Agreement, neither HCC nor GBCC will
enter into any agreements with the IRS or take a position in any IRS
audit or amend any returns that will adversely affect the tax
attributes of the Debtors or any tax issues affecting the Debtors
without the written consent of the Debtors nor will HCC and/or GBCC
engage in any negotiations with the IRS where either HCC or GBCC will
make concessions with respect to issues or tax attributes affecting
the Debtors in return for favorable treatment or the absence of any
action with respect to issues or tax attributes affecting HCC and/or
GBCC and their Subsidiaries other than the Debtors without the Debtors
written consent. HCC and GBCC will fully disclose to the Debtors all
audit issues, notices and correspondence with the IRS as they arise
that would affect the Debtors so the Debtors can enforce, at their
expense, the rights provided to them under the provisions of this
paragraph.
2. With respect to that certain promissory note by GBHC in favor of GBCC
dated February 7, 1997 in the amount of $8,000,000 together with accrued
interest (the "GBHC Demand Note"), and with respect to that certain claim in the
amount of $10,902,000 for the claimed double payment of taxes by GBHC against
GBCC arising from the payment of deferred taxes to Pratt Casino Properties,
Inc., PPI Corporation, or GBCC (the "Deferred Tax Claim"), GBHC releases GBCC
and its Subsidiaries, their officers, directors, employees, shareholders,
agents, and insurers from the Deferred Tax Claim in exchange for a release of
GBHC, which GBCC hereby grants to GBHC and its Subsidiaries, their officers,
directors, employees, shareholders, agents, and insurers, from the claims
arising from the GBHC Demand Note.
3. With respect to the claim of GBHC against PCPI Funding Corp. ("PCPI")
arising from an advance on or about September 27, 1990 in the amount of $6.6
million plus accrued interest (the "PCPI Advance"), GBHC covenants not to sue
any members of the GBCC Group or any of their officers, directors, employees,
shareholders, agents, and insurers for, or take any other action with respect
to, any claim arising out of the PCPI Advance, except that GBHC preserves
whatever rights it may have to offset the amount of the PCPI Advance against the
holders of, and with respect to, the Subordinated Notes as hereafter defined.
4. PHC represents that it and FGP entered into that certain Extension of
Closing Date Agreement dated as of July 28, 1998, which extended the closing
date under the Midtown Bala Option until September 30, 1999 (the "Extension").
Under the Midtown Bala Option, PHC has made the required down payment of
$1,000,000 to be applied against the purchase price and the down payment of
$1,000,000 is being held in escrow in accordance with the terms of that certain
Escrow Agreement dated as of January 1, 1998 (the "Escrow") between PHC, FGP,
and the Title Company
4
<PAGE>
of Jersey (the "Title Company"). PHC also represents that it has paid the
$300,000 required under the Extension to FGP and that the only act required to
extend the Midtown Bala Option under the Extension to September 30, 1999 is the
payment of another $1,000,000 to be held under the Escrow and to be applied
against the purchase price under the Midtown Bala Option. PHC also represents
that its rights under the Midtown Bala Option remain freely assignable as
provided under the original provisions of the Midtown Bala Option. PHC agrees to
assign, and, by this Agreement, does hereby assign, effective immediately after
the transfer of the Membership interests in Lieber to GBHC, as described in
paragraph 5 below, all of its right, title, and interest under the Midtown Bala
Option and the Extension and to the funds held by the Title Company under the
Escrow to Lieber in return for the payment by GBHC of $1,300,000 upon approval
of this Agreement by the Court and for the Confirmation Payment as hereafter
defined. PHC also agrees to deliver to GBHC a separate confirmatory instrument
of assignment consistent with the provisions of this paragraph and in a form
reasonably satisfactory to GBHC.
5. Lieber owns the Lieber Parcel. The Lieber Parcel shall be conveyed as
described below, subject to the purchase money mortgage in favor of Andermatt
Corp. (the "Mortgage"), for the sum of (a) $150,000, representing the payments
made to Andermatt Corp. on account of the purchase price (the "Downpayment")
plus (b) principal and interest payments on the Mortgage (the "P&I Payments"),
plus (C) out of pocket expenses incurred by Lieber at or after closing for the
Lieber Parcel (other than attorney's fees) (the "Expenses") less (d) all income
received in respect of the Lieber Parcel on or after closing (the "Income") (the
"Downpayment", the "P&I Payments", and the "Expenses" less the "Income,
collectively, the "Purchase Price") upon the approval of this Agreement by the
Court, and upon payment of the Purchase Price. GBHC and Lieber agree that the
Purchase Price equals the $251,000 advanced by GBCC under the Lieber Note as
hereafter defined provided that GBHC shall be entitled to any cash on hand in
the checking account of Lieber. GBHC will pay the Purchase Price to GBCC in
complete satisfaction of that certain promissory note by Lieber in favor of GBCC
dated July 22, 1996 (the "Lieber Note") and in return for the transfer of the
ownership of the Lieber Parcel, and the rights to the lease for the Lieber
Parcel to FGP (the "Lieber Lease") upon the approval of this Agreement by the
Court. The transfer of the ownership of the Lieber Parcel and the rights to the
Lieber Lease shall be accomplished by transfer of the Membership Interests of
PHC Properties, Inc. ("PHCP") and PHC Holdings, Inc. ("PHCH") in Lieber to GBHC
and, by this Agreement, the Membership Interests of PHCP and PHCH in Lieber,
constituting all of the Membership Interests in Lieber, are assigned to GBHC
upon approval of this Agreement by the Court and upon payment of the Purchase
Price. Except for the Mortgage, Lieber represents and covenants that the
transfer of the Lieber Parcel and the Lieber Lease will be free and clear of the
claims of any persons other than customary restrictions and easements of record
and identified in the "marked-up" title commitment of the Title Company at the
closing on the Lieber Parcel on July 22, 1996, and GBCC represents that Lieber
has no debts or obligations to anyone other than the Lieber Note that will be
satisfied as a result of the actions contemplated in this paragraph. GBCC also
agrees to deliver to GBHC a confirmatory instrument of assignment of the
Membership interests of PHCH and PHCP in Lieber consistent with the provisions
of this paragraph and in a form reasonably satisfactory to GBHC.
5
<PAGE>
6. The Confirmation Payment is $500,000, is not subject to offset, and is
payable to a designee of GBCC as an allowed administrative claim under Sections
503 and 507 of the Bankruptcy Code upon the effective date of a Plan of
Reorganization of GBHC.
7. This Agreement resolves all of the issues raised in the Adversary
Proceeding and the Adversary Proceeding including the Consolidated Return
Motion, the Gibbons DQ Motion and the FK Motion are dismissed with prejudice.
Except to the extent set forth herein, HCC on its behalf and on behalf of its
Subsidiaries and GBCC on its behalf and on behalf of its Subsidiaries exclusive
of the Debtors, on one side, and the Debtors on their own behalf and on behalf
of their Subsidiaries, on the other side, do hereby release each other and their
respective officers, directors, employees, shareholders, counsel, agents, and
insurers (collectively, the "Released Parties"). The Released Parties agree to
deliver to each other confirmatory mutual releases consistent with the
provisions of this paragraph and in a form reasonably satisfactory to each
other. Nothing in this paragraph shall be deemed to amend those certain
agreements dated June 28, 1998, which were approved by the Court on July 7, 1998
and by the Casino Control Commission on July 8, 1998, and those agreements
remain in effect in accordance with their terms. Nothing in this Agreement
shall release any claim against a party that is not a Released Party.
8. GBCC will cause the opposition to the pending Motion of GBHC to Reject
the Management Agreement, which is returnable September 28, 1998 (the "Rejection
Motion"), to be withdrawn and will do so in a form reasonably satisfactory to
GBHC for presentation to the Court contemporaneously at the hearing on the
approval of this Agreement for the entry of an Order granting the Rejection
Motion effective September 28, 1998. The withdrawal of the opposition to the
Rejection Motion is without prejudice to NJMI to assert a damages claim (the
"Rejection Claim") and without prejudice to the Debtors to assert any defenses
they have to that rejection damages claim and, except as provided in paragraph
8a below, including a fraudulent conveyance claim. Notwithstanding the
foregoing, and as provided in paragraph 8a below, the fraudulent conveyance
claim may not be asserted against any member of the GBCC Group (other than NJMI
and PRT) and HCC. Without limiting the standing of NJMI to assert the Rejection
Claim, the Rejection Claim may only be brought by or on behalf, and, in either
case, only for the benefit of, the bondholders of PRT (the "Bondholders") or the
designees of the Bondholders provided, however, that, if the Rejection Claim is
successful, whether by reason of settlement or trial, there shall be no direct
or indirect distribution to or for the benefit of the Released Parties except
that PCC or NJMI could use any proceeds to pay the operating expenses of PCC or
NJMI incurred on or before any such recovery. Neither HCC and its Subsidiaries
nor GBCC and its Subsidiaries other than NJMI or PRT will provide financial
support for the prosecution of the Rejection Claim.
8a. Except with respect to NJMI and PRT, the Debtors will not assert and
hereby release claims arising under Chapter 5 of the Bankruptcy Code ("Avoidance
Actions/Claims") against HCC, GBCC, and their affiliates, including but not
limited to, PCC. With respect to NJMI and PRT, the Debtors additionally will not
assert Avoidance Actions/Claims against either of them or the PRT Bondholders
unless a Rejection Claim is filed within 30 days after Court approval of this
Agreement (the "Rejection Claims Bar Date"). If a Rejection Claim is not timely
filed, it shall be deemed released and waived with prejudice, and, similarly,
any Avoidance Actions/Claims of the Debtors
6
<PAGE>
against NJMI and PRT and the PRT Bondholders will be deemed released and waived
with prejudice simultaneously with the expiration of the Rejection Claim at the
Rejection Claim Bar Date. If a Rejection Claim is timely filed by the Rejection
Claim Bar Date, then the Debtors may assert Avoidance Actions/Claims against PRT
or NJMI or against any holder of the Rejection Damage Claim or the Subordinated
Notes (except for PCC with respect to the PCC Sub Note other than the offset
described in the next sentence), but may not seek to levy, collect upon or
otherwise recover from any intercompany balance, debt, receivable, note, or
other obligation owing to PRT or NJMI from PCC or any other nonDebtor affiliate
of GBCC or HCC. Notwithstanding the release of the Avoidance Actions/Claims as
to PCC described in this paragraph, the Debtors may, in the event a Rejection
Claim is timely filed by the Rejection Bar Date, defensively assert Avoidance
Actions/Claims as an offset to the PCC Sub Note, but the Debtors may not assert
Avoidance Actions/Claims affirmatively against any other assets of PCC. Pursuant
to this Agreement, PCC and all other affiliates of GBCC and HCC, other than NJMI
and PRT, are buying their peace with the Debtors and are fully released from all
claims by the Debtors or their estates.
9. Except as provided in paragraphs 8 or 8a of this Agreement, nothing in
this Agreement shall operate to prejudice the rights, if any, of the holders of
that certain Subordinated Promissory Note of GBHC in favor of PRT dated February
17, 1994 in the amount of $10,000,000 (the "PRT Sub Note") and that certain
Subordinated Promissory Note of GBHC in favor of PCC dated January 14, 1997 in
the amount of $5,000,000 (the "PCC Sub Note" and together with the PRT Sub Note,
the "Subordinated Notes"). All defenses, if any, the Debtors have to the
Subordinated Notes are preserved. The rights, if any, in the Subordinated Notes
are preserved for the benefit of the Bondholders in the PRT Restructuring and,
in the event of recovery on the Subordinated Notes, whether by reason of
settlement or trial, there will be no distribution to or for the benefit of the
nonDebtor Released Parties, provided that the holders of the Subordinated
Notes have standing to assert any claim on the Subordinated Notes for the
benefit of the Bondholders.
10. GBHC and HCC have already commenced the process of splitting off the
employees of GBHC from the HCC Employee 401K Retirement Savings Plan (the "401K
Plan") and will jointly cause the employees to become part of a separate 401K
Plan by January 1, 1999. Until that changeover, HCC will continue to administer
the 401K Plan and GBHC will continue to pay its allocated share of external
costs of administration in accordance with present practice.
11. This agreement is without prejudice to the proofs of claims filed by
HCC or GBCC or their Subsidiaries in the GBHC Chapter 11 Proceedings for goods,
services or royalty fees provided in the ordinary course of business to GBHC.
The only claims held by HCC, or any of the Defendants or any of their
Subsidiaries against any of the Debtors or the Debtors Subsidiaries as of the
date immediately prior to giving effect to this Agreement are set forth on
Exhibit A (the "Claims"). Except as provided herein, the defenses, offsets, and
counterclaims, if any, of GBHC to any such proofs of claims are also preserved
provided, however, that the counterclaims with respect to NJMI and PRT are
described in paragraphs 8 and 8a above and otherwise are limited to intercompany
accounts arising from the provision of goods or services by or on behalf of the
Debtors in the ordinary course of business to HCC or GBCC or their Subsidiaries.
HCC, the Defendants, and their Subsidiaries shall (a) not amend or increase any
of the Claims, (b) consent to the expungement of
7
<PAGE>
any of the Claims which are released pursuant to this Agreement, and (C) not
acquire or assert any claims against any of the Debtors or their Subsidiaries
which are not set forth on Exhibit A. Nothing in this paragraph 11 varies or
modifies the provisions of paragraphs 2, 3, 6, 8, 8a, or 9 above with respect to
the claims or defenses described therein. With respect to post petition
intercompany accounts between GBH and its Subsidiaries and HCC or its
Subsidiaries or GBCC or its Subsidiaries other than the Debtors, nothing in this
Agreement releases any person from any obligation for goods, services or
royalties provided by or on behalf of any other person in the ordinary course of
business.
12. Neither HCC nor any of the Defendants will make any application to
terminate the exclusivity period of the Debtors or to oppose any future
extension of the exclusivity period. Neither HCC nor GBCC will seek, request,
apply for or support directly or indirectly the appointment of a trustee or
examiner for any of the Debtors. HCC and GBCC will cause their Subsidiaries to
comply with the provisions of this paragraph.
13. Pending the hearing on the settlement on the Adversary Proceeding
represented by this Agreement, the Debtors agree to adjourn the date for
responsive pleadings in the Adversary Proceedings by the Defendants and, in the
event this settlement of the Adversary Proceeding is not approved by the Court,
agree that such responsive pleadings may be filed within five days after the
date of a decision by the Court rejecting the settlement of the Adversary
Proceeding. The dates by which GBHC may respond to the Gibbons DQ Motion, the
FK Motion, or any discovery served in this action is extended to the later of
the date otherwise required by the discovery rules or five days after the date
of a decision by the Court rejecting the settlement of the Adversary Proceeding.
14. The parties to this Agreement agree to cooperate with each other, and
to take all actions necessary, to confirm the transactions contemplated by this
Agreement.
15. Time is of the essence in the performance of this Agreement.
16. This Agreement may not be amended or modified in any respect except
with the written consent of the parties hereto, is binding upon the successors
and assigns of the parties and their successors in interest, and shall be
interpreted in accordance with New Jersey law without regard to the conflicts of
laws principles of New Jersey law.
17. This Agreement will be effective when executed by all of the parties
hereto and when approved by the Court. This Agreement may be executed in
counterparts by the parties and a
THE REMAINDER OF THIS PAGE LEFT INTENTIONALLY BLANK
8
<PAGE>
telecopied signature is as effective as an original.
ACCEPTED AND AGREED:
Greate Bay Casino Corporation
PHC Acquisition Corp.
BY: /s/ John C. Hull BY: /s/ William D. Pratt
----------------------------- -----------------------------
Lieber Check Cashing, LLC. Hollywood Casino Corporation
BY: /s/ Jack E. Pratt BY: /s/ Edward T. Pratt III
----------------------------- -----------------------------
Jack E. Pratt, President of its
Members, PHC Properties, Inc. and
PHC Holdings, Inc.
Jack E. Pratt William D. Pratt
/s/ Jack E. Pratt /s/ William D. Pratt
----------------------------- -----------------------------------
Edward T. Pratt, Jr.
/s/ Edward T. Pratt Jr.
-----------------------------
Greate Bay Hotel and Casino, Inc. GB Holdings, Inc.
BY: /s/ Timothy A. Ebling BY: /s/ Timothy A. Ebling
----------------------------- -----------------------------
Timothy A. Ebling Timothy A. Ebling
Exec. VP Exec. VP
GB Property Funding Corp.
BY: /s/ Timothy A. Ebling
-----------------------------
Timothy A. Ebling
Exec. VP
9
<PAGE>
EXHIBIT "A" TO AGREEMENT
---
DATED SEPTEMBER 2, 1998
PROOFS OF CLAIM AND INTEREST FILED BY GBCC GROUP,
HCC AND AFFILIATES IN THE SANDS BANKRUPTCY
Claimant Amount/1/ Explanation
- -------- ------ -----------
PCC $5,728,000.00 Based upon GBHC $5 Million Note, a.k.a. the "PCC
Sub Note"
PCC 1,279.58 On account of routine corporate expenses paid
prepetition on behalf of GB Holdings (claim is
against GB Holdings)/2/
PCC N/A Proof of interest (as opposed to a proof of
claim) to reflect PCC's 100% ownership interest
in GB Holdings, as evidenced by that certain
stock certificate dated October 27, 1993
reflecting PCC's ownership of 1000 shares of
common stock.
PRT 12,754,375.00 Based upon GBHC $10 Million Note, a.k.a. the "PRT
Sub Note"
GBCC 9,479,871.98 Based upon GBHC $8 Million Note, a.k.a. the "GBHC
Demand Note" (amount is net of certain
prepetition payables owed to GBHC)/3/
- ---------------------
/1/ Amounts include the respective claimants' computation of principal,
interest accrued as of the January 5, 1998 bankruptcy petition date with respect
to the Sands Group, charges and offsets, where applicable, all as set forth in
detail in the various proofs of claim.
/2/ All other proofs of claim listed herein, with the exception of this
one proof of claim filed by PCC against GB Holdings, are against GBHC. The proof
of interest described in the third line hereinabove is against GB Holdings.
/3/ This proof of claim is to be deemed withdrawn and/or released pursuant
to paragraph 2 of the Agreement.
1 of 2
<PAGE>
NJMI 128,899.60 On account of unpaid, prepetition management fees
for the 12/1/97-1/4/98 time period (amount is
net of certain prepetition payables owed to
GBHC). NJMI will likely file an additional proof
of claim in respect of rejection damages, after
the September 28, 1998 rejection of the NJMI
Management Services Agreement, pursuant to
paragraph 7 of the Agreement.
ACSC 49,230.74 On account of various prepetition goods and
services provided (amount is net of certain
prepetition payables owed to GBHC)
PPI Corp. 22,467.09 On account of unpaid, prepetition royalty fees
for use of the "Sands" trademark for the 12/1/97
- 1/4/98 time period
HCC 3,360.30 On account of various prepetition services
provided (amount is net of certain prepetition
payables owed to GBHC)
HMI 19,253.35 On account of various prepetition services
provided (amount is net of certain prepetition
payables owed to GBHC)
2 of 2
<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 9-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998
<PERIOD-START> JUL-01-1998 JAN-01-1998
<PERIOD-END> SEP-30-1998 SEP-30-1998
<CASH> 51,362 51,362
<SECURITIES> 0 0
<RECEIVABLES> 3,696 3,696
<ALLOWANCES> 1,547 1,547
<INVENTORY> 1,325 1,325
<CURRENT-ASSETS> 70,903 70,903
<PP&E> 245,948 245,948
<DEPRECIATION> 76,893 76,893
<TOTAL-ASSETS> 281,147 281,147
<CURRENT-LIABILITIES> 43,074 43,074
<BONDS> 218,719 218,719
0 0
0 0
<COMMON> 2 2
<OTHER-SE> 9,533 9,533
<TOTAL-LIABILITY-AND-EQUITY> 281,147 281,147
<SALES> 0 0
<TOTAL-REVENUES> 70,848 201,008
<CGS> 0 0
<TOTAL-COSTS> 52,134 146,476
<OTHER-EXPENSES> 11,030 32,013
<LOSS-PROVISION> 127 593
<INTEREST-EXPENSE> 7,004 20,494
<INCOME-PRETAX> 553 1,432
<INCOME-TAX> 349 1,014
<INCOME-CONTINUING> 204 418
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 204 418
<EPS-PRIMARY> 0.01 0.02
<EPS-DILUTED> 0.01 0.02
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATON EXTRACTED FROM THE FINANCIAL
STATEMENTS OF HOLLYWOOD CASINO CORPORATION AND ITS 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> <C>
<PERIOD-TYPE> 3-MOS 9-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997 DEC-31-1997
<PERIOD-START> JUL-01-1997 JAN-01-1997 JAN-01-1997
<PERIOD-END> SEP-30-1997 SEP-30-1997 DEC-31-1997
<CASH> 44,049 44,049 38,156
<SECURITIES> 0 0 0
<RECEIVABLES> 4,476 4,476 3,935
<ALLOWANCES> 1,843 1,843 1,188
<INVENTORY> 1,377 1,377 1,454
<CURRENT-ASSETS> 59,909 59,909 60,902
<PP&E> 236,137 236,137 237,261
<DEPRECIATION> 62,581 62,581 66,099
<TOTAL-ASSETS> 304,120 304,120 276,218
<CURRENT-LIABILITIES> 45,754 45,754 38,404
<BONDS> 221,710 221,710 219,261
0 0 0
0 0 0
<COMMON> 2 2 2
<OTHER-SE> 28,885 28,885 9,115
<TOTAL-LIABILITY-AND-EQUITY> 304,120 304,120 276,218
<SALES> 0 0 0
<TOTAL-REVENUES> 69,839 203,610 267,757
<CGS> 0 0 0
<TOTAL-COSTS> 48,034 139,552 185,055
<OTHER-EXPENSES> 11,611 34,383 45,558
<LOSS-PROVISION> 202 537 20,376
<INTEREST-EXPENSE> 7,144 21,561 28,541
<INCOME-PRETAX> 2,848 7,577 (11,773)
<INCOME-TAX> 3,065 5,154 5,359
<INCOME-CONTINUING> (217) 2,423 (17,132)
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 (215)
<CHANGES> 0 0 0
<NET-INCOME> (217) 2,423 (17,347)
<EPS-PRIMARY> (0.01) 0.10 (0.70)
<EPS-DILUTED> (0.01) 0.10 (0.70)
</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 9-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998
<PERIOD-START> JUL-01-1998 JAN-01-1998
<PERIOD-END> SEP-30-1998 SEP-30-1998
<CASH> 16,408 16,408
<SECURITIES> 0 0
<RECEIVABLES> 1,925 1,925
<ALLOWANCES> 909 909
<INVENTORY> 635 635
<CURRENT-ASSETS> 24,544 24,544
<PP&E> 121,742 121,742
<DEPRECIATION> 37,008 37,008
<TOTAL-ASSETS> 121,588 121,588
<CURRENT-LIABILITIES> 11,066 11,066
<BONDS> 85,116 85,116
0 0
0 0
<COMMON> 0 0
<OTHER-SE> 25,406 25,406
<TOTAL-LIABILITY-AND-EQUITY> 121,588 121,588
<SALES> 0 0
<TOTAL-REVENUES> 29,126 80,443
<CGS> 0 0
<TOTAL-COSTS> 21,977 59,775
<OTHER-EXPENSES> 3,356 10,484
<LOSS-PROVISION> 147 446
<INTEREST-EXPENSE> 2,564 7,771
<INCOME-PRETAX> 1,082 1,967
<INCOME-TAX> 443 443
<INCOME-CONTINUING> 639 1,524
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 639 1,524
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
</TABLE>
