<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM-10Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended MARCH 31, 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 offices) (Zip Code)
(Registrants' telephone number, including area code) (972) 392-7777
----------------
(NOT APPLICABLE)
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether each of the Registrants (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that each
of the Registrants was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. YES X NO
------ ------
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
Registrant Class Outstanding at May 12, 1998
- ------------------------------ ------------------------------ ---------------------------
<S> <C> <C>
HOLLYWOOD CASINO CORPORATION COMMON STOCK, $.0001 PAR VALUE 24,949,976 SHARES
HWCC-TUNICA, INC. COMMON STOCK, $.01 PAR VALUE 1,000 SHARES
</TABLE>
1
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
PART I: FINANCIAL INFORMATION
- ------------------------------
INTRODUCTORY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------
Hollywood Casino Corporation ("HCC" or the "Company") develops, owns and
operates riverboat and land-based casino entertainment facilities under the
service mark Hollywood Casino(R). Through its subsidiaries, HCC currently owns
and operates a riverboat gaming facility located in Aurora, Illinois (the
"Aurora Casino") and a casino and hotel complex in Tunica County, Mississippi
(the "Tunica Casino"); and is actively pursuing potential gaming opportunities
in domestic and foreign jurisdictions where gaming is legalized or is being
actively considered. Approximately 47% of HCC's outstanding common shares are
listed and traded on the Nasdaq National Market tier of the Nasdaq Stock Market
under the symbol HWCC. The remaining outstanding HCC common shares are owned by
certain general partnerships and trusts controlled by Jack E. Pratt, Edward T.
Pratt, Jr. and William D. Pratt and by other family members (collectively, the
"Pratt Family").
HCC owns all of the outstanding common stock of both Hollywood
Casino - Aurora, Inc. ("HCA") and HWCC - Tunica, Inc. ("HCT"). HCA is an
Illinois corporation organized by the Pratt Family during 1990 for the purpose
of developing and owning the Aurora Casino. HCT is a Texas corporation formed by
HCC during 1993 to acquire and complete the Tunica Casino. Prior to December 31,
1996, HCC also owned approximately 80% of the common stock of Greate Bay Casino
Corporation ("GBCC"), a Delaware corporation, whose principal assets are the
Sands Hotel and Casino in Atlantic City, New Jersey (the "Sands") and management
and consulting agreements on the Aurora Casino and the Tunica Casino,
respectively. On December 31, 1996, HCC distributed the common stock of GBCC
owned by HCC to its shareholders. As a result of the dividend, GBCC is no longer
a subsidiary of HCC.
As further discussed in the Notes to Consolidated Financial Statements, HCC
issued $210,000,000 of 12 3/4% Senior Secured Notes (the "Senior Secured Notes")
due November 1, 2003, discounted to yield 13 3/4% per annum, through a public
offering in October 1995. The Senior Secured Notes are unconditionally
guaranteed on a senior secured basis by HCT and by certain future subsidiaries
of HCC. The Senior Secured Notes are secured by, among other things, (i)
substantially all of the assets of HCT, (ii) a 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 March
31, 1998 and for the three month periods ended March 31, 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 March 31, 1998, and the results of their
operations for the three month periods ended March 31, 1998 and 1997 and cash
flows for the three month periods ended March 31, 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
three month period ended March 31, 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
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
------------ ------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 55,760,000 $ 38,156,000
Short-term investments 6,896,000 5,979,000
Accounts receivable, net of allowances of
$1,395,000 and $1,188,000, respectively 2,525,000 2,747,000
Inventories 1,198,000 1,454,000
Deferred income taxes 1,289,000 2,273,000
Refundable deposits and other
current assets 1,872,000 2,274,000
Notes receivable 1,600,000 -
Due from affiliates 8,021,000 7,811,000
------------ ------------
Total current assets 79,161,000 60,694,000
------------ ------------
Property and Equipment:
Land 6,621,000 6,621,000
Buildings and improvements 119,592,000 119,534,000
Riverboats and barges 39,494,000 39,494,000
Operating equipment 71,882,000 70,390,000
Construction in progress 1,539,000 1,222,000
------------ ------------
239,128,000 237,261,000
Less - accumulated depreciation
and amortization (69,940,000) (66,099,000)
------------ ------------
Net property and equipment 169,188,000 171,162,000
------------ ------------
Other Assets:
Deferred financing costs 5,320,000 5,558,000
Notes receivable, net of allowance - 6,000,000
Land rights 7,403,000 7,454,000
Due from affiliates, net of valuation allowance 12,417,000 12,322,000
Land held for sale, net of valuation allowance 6,264,000 6,264,000
Other assets 9,063,000 8,148,000
------------ ------------
Total other assets 40,467,000 45,746,000
------------ ------------
$288,816,000 $277,602,000
============ ============
</TABLE>
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated balance sheets.
3
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
------------- -------------
<S> <C> <C>
Current Liabilities:
Current maturities of long-term debt
and capital lease obligations $ 7,072,000 $ 7,661,000
Accounts payable 5,691,000 3,596,000
Accrued liabilities -
Salaries and wages 4,930,000 4,916,000
Interest 11,441,000 4,660,000
Gaming and other taxes 5,448,000 2,469,000
Insurance 2,803,000 2,667,000
Other 3,119,000 2,748,000
Due to affiliates 304,000 128,000
Other current liabilities 2,475,000 2,549,000
------------- -------------
Total current liabilities 43,283,000 31,394,000
------------- -------------
Long-Term Debt 198,306,000 198,420,000
------------- -------------
Capital Lease Obligations 20,703,000 20,841,000
------------- -------------
Other Noncurrent Liabilities 6,811,000 7,064,000
------------- -------------
Commitments and Contingencies
Minority Interest in Limited Partnership 2,017,000 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 223,234,000 223,234,000
Accumulated deficit (205,540,000) (205,609,000)
------------- -------------
Total shareholders' equity 17,696,000 17,627,000
------------- -------------
$ 288,816,000 $ 277,602,000
============= =============
</TABLE>
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated balance sheets.
4
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------------
1998 1997
----------- -----------
<S> <C> <C>
Revenues:
Casino $59,906,000 $63,535,000
Rooms 2,007,000 2,175,000
Food and beverage 6,781,000 6,714,000
Other 917,000 822,000
----------- -----------
69,611,000 73,246,000
Less - promotional allowances (5,804,000) (5,776,000)
----------- -----------
Net revenues 63,807,000 67,470,000
----------- -----------
Expenses:
Casino 42,372,000 42,471,000
Rooms 445,000 458,000
Food and beverage 2,173,000 2,208,000
Other 683,000 773,000
General and administrative 4,305,000 4,051,000
Management and consulting fees 300,000 3,027,000
Depreciation and amortization 4,214,000 4,916,000
Development 255,000 305,000
----------- -----------
Total expenses 54,747,000 58,209,000
----------- -----------
Income from operations 9,060,000 9,261,000
----------- -----------
Non-operating income (expense):
Interest income 672,000 405,000
Interest expense (7,451,000) (7,569,000)
(Loss) gain on disposal of assets (1,000) 415,000
----------- -----------
Total non-operating expense, net (6,780,000) (6,749,000)
----------- -----------
Income before income taxes and other item 2,280,000 2,512,000
Income tax provision (291,000) (1,021,000)
----------- -----------
Income before other item 1,989,000 1,491,000
Minority interest in earnings of Limited Partnership (Note 1) (1,920,000) -
----------- -----------
Net income $ 69,000 $ 1,491,000
=========== ===========
Basic and diluted net income per common share $.00 $.06
=========== ===========
</TABLE>
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated statements.
5
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------------
1998 1997
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 69,000 $ 1,491,000
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization, including accretion
of debt discount 4,456,000 5,130,000
Loss (gain) on disposal of assets 1,000 (415,000)
Minority interest in earnings of Limited Partnership 1,920,000 -
Provision for doubtful accounts 240,000 161,000
Deferred income tax provision 162,000 871,000
(Increase) decrease in accounts receivable (18,000) 230,000
Increase in accounts payable and accrued expenses 12,376,000 6,041,000
Net change in other current assets and liabilities 455,000 886,000
Net change in other noncurrent assets and liabilities (399,000) 72,000
----------- -----------
Net cash provided by operating activities 19,262,000 14,467,000
----------- -----------
INVESTING ACTIVITIES:
Purchases of property and equipment (1,899,000) (972,000)
Short-term investments (917,000) -
Collections on notes receivable 4,400,000 -
Proceeds from disposal of assets - 2,658,000
Investments in unconsolidated affiliates - (2,000,000)
----------- -----------
Net cash provided by (used in) investing activities 1,584,000 (314,000)
----------- -----------
FINANCING ACTIVITIES:
Borrowings on credit facilities - 1,000,000
Deferred financing costs - (21,000)
Repayments of long-term debt (944,000) (3,015,000)
Payments on capital lease obligations (139,000) (575,000)
Limited partnership distributions (2,159,000) -
----------- -----------
Net cash used in financing activities (3,242,000) (2,611,000)
----------- -----------
Net increase in cash and cash equivalents 17,604,000 11,542,000
Cash and cash equivalents at beginning of period 38,156,000 21,488,000
----------- -----------
Cash and cash equivalents at end of period $55,760,000 $33,030,000
=========== ===========
</TABLE>
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated statements.
6
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) ORGANIZATION AND BUSINESS
Hollywood Casino Corporation ("HCC" or the "Company"), is a Delaware
corporation which was organized and incorporated on November 5, 1990.
Approximately 53% of the issued and outstanding stock of HCC is owned by certain
general partnerships and trusts controlled by Jack E. Pratt, Edward T. Pratt,
Jr. and William D. Pratt and by other family members (collectively, the "Pratt
Family").
HCC owns all of the outstanding common stock of both Hollywood
Casino - Aurora, Inc. ("HCA") and HWCC - Tunica, Inc. ("HCT"). HCA is an
Illinois corporation organized during 1990 which owns and operates a 32,100
square foot riverboat gaming operation together with docking and other
entertainment facilities under the service mark Hollywood Casino(R) located in
Aurora, Illinois (the "Aurora Casino"). HCT is a Texas corporation formed by HCC
during 1993 which owns and operates a 54,000 square foot gaming facility,
adjacent support facilities and a 506-room hotel complex under the service mark
Hollywood Casino(R) in northern Tunica County, Mississippi (the "Tunica
Casino"). The Aurora Casino and the Tunica Casino commenced operations in June
1993 and August 1994, respectively.
The 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 management and
consulting contracts with the Aurora Casino and the Tunica Casino, respectively.
Effective as of April 1, 1997, HCC acquired the general partnership interest
in Pratt Management, L.P. ("PML"), the limited partnership which holds the
management contract on the Aurora Casino, from PPI Corporation, a wholly owned
subsidiary of GBCC. For all periods subsequent to the acquisition date (April
1, 1997), PML is reflected as a consolidated subsidiary of HCC. The assets and
liabilities of PML were recorded at historical cost at the date of acquisition
with the difference between acquisition cost and the historical net book value
($12,747,000) recorded as a charge to paid-in capital. PML earns management
fees from the Aurora Casino and incurs operating and other expenses with respect
to its management thereof. As general partner, HCC receives 99% of the first
$84,000 of net income earned by PML each month together with 1% of any income
earned above such amount. The remaining limited partnership interest continues
to be held by a subsidiary of GBCC and is reflected on the accompanying
consolidated financial statements as a minority interest.
The accompanying consolidated financial statements also reflect HCT's
initial one-third investment in Tunica Golf Course LLC under the equity method
of accounting. This limited liability company was organized in 1996 to develop
and operate a golf course to be used by patrons of the Tunica Casino and other
participating casino/hotel properties. The golf course is presently scheduled
for completion in 1998. The $2,000,000 investment is included in other
noncurrent assets.
7
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
HCC is self insured for a portion of its general liability, certain health
care and other liability exposures. Accrued insurance includes estimates of
such accrued liabilities based on an evaluation of the merits of individual
claims and historical claims experience; accordingly, HCC's ultimate liability
may differ from the amounts accrued.
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets 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 March 31,
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 March 31, 1998 and for the three
month periods ended March 31, 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
March 31, 1998, the results of its operations for the three month periods ended
March 31, 1998 and 1997 and its cash flows for the three month periods ended
March 31, 1998 and 1997.
(2) 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 became effective on December 15, 1997 and
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 by the weighted average number of shares of common stock outstanding.
Diluted earnings per common share is
8
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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:
THREE MONTHS ENDED
MARCH 31,
----------------------
1998 1997
---------- ----------
Shares used in the calculation of:
- ------------------------------------
Basic net income per share 24,935,306 24,759,968
Diluted net income per share 24,950,984 24,908,075
The number of shares used in the calculation of diluted earnings per share
for the three month periods ended March 31, 1998 and 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 three months ended March 31, 1997 also
includes 27,778 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. The weighted
average number of options excluded was 688,334 and 44,167, respectively, for the
three month periods ended March 31, 1998 and 1997.
(3) SHORT-TERM CREDIT FACILITIES
HCT has a bank credit facility in the amount of $1,300,000 available
through September 30, 1998. No borrowings were outstanding under the credit
facility at either March 31, 1998 or December 31, 1997; however, HCT borrowed
approximately $400,000 under the credit facility in April 1998. Borrowings
under the line of credit accrue interest at the bank's prime lending rate plus
1/4% per annum subject to a minimum of 8.875%. Borrowings under the line of
credit are to be collateralized by equipment purchased with such loan proceeds.
The line of credit agreement requires the maintenance of certain balances in
addition to the provision of certain financial reports.
9
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(4) LONG-TERM DEBT AND PLEDGE OF ASSETS
Substantially all of HCC's assets are pledged in connection with HCC's
long-term indebtedness.
MARCH 31, DECEMBER 31,
1998 1997
------------ ------------
Indebtedness of HCC:
12 3/4% Senior Secured Notes, due 2003, net
of discount of $7,886,000 and $8,128,000,
respectively (a) $199,614,000 $199,372,000
Promissory note to affiliate (Note 7) 3,293,000 3,447,000
------------ ------------
202,907,000 202,819,000
------------ ------------
Indebtedness of HCA:
Promissory note to bank (b) - 350,000
Equipment loans 127,000 413,000
------------ ------------
127,000 763,000
------------ ------------
Indebtedness of HCT:
Equipment loans 1,484,000 1,638,000
------------ ------------
Total indebtedness 204,518,000 205,220,000
Less - current maturities (6,212,000) (6,800,000)
------------ ------------
Total long-term debt $198,306,000 $198,420,000
============ ============
(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 first mortgage limited to approximately
$39 million on substantially all of the assets of HCA, (iii) a pledge of
the capital stock of certain subsidiaries of HCC and (iv) the collateral
assignment of any future management contracts entered into by HCC. The
limitation on the first mortgage described in (ii) above is subject to
reduction for principal payments on an intercompany note between HCC and
HCA. The intercompany note
10
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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
to purchase not more than $2,500,000 in principal amount of the Senior
Secured Notes at a price of 106.375% of the principal amount tendered. The
May 1998 offering period has commenced; however, the principal amount of
Senior Secured Notes tendered can not yet be determined.
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) The note accrued interest at the bank's prime lending rate plus 1% per
annum and was repaid in 1998.
Scheduled payments of long-term debt as of March 31, 1998 are set forth
below:
<TABLE>
<CAPTION>
<S> <C>
1998 (nine months) $ 5,856,000
1999 6,181,000
2000 6,219,000
2001 5,953,000
2002 5,695,000
Thereafter 182,500,000
------------
Total $212,404,000
============
</TABLE>
Interest paid amounted to $428,000 and $519,000, respectively, during the
three month periods ended March 31, 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. In September
1996, HCA and the Aurora Metropolitan Exposition, Auditorium and Office Building
Authority ("ACCA") completed the joint construction of a five-story parking
garage directly across the street from, and connected by a climate-controlled
tunnel to, the Aurora
11
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
Casino's Pavilion. The garage provides additional parking for patrons of the
Aurora Casino and contains approximately 1,500 square feet of retail space. ACCA
financed a portion of the construction costs through an $11,500,000, 7.5%
industrial revenue bond issue which yielded proceeds of approximately
$10,500,000. HCA funded all remaining construction costs and escrowed $3,500,000
at the rate of $400,000 per month beginning in September 1995 towards
satisfaction of its obligations under the agreement. The facility is owned by
ACCA and operated by HCA pursuant to a 30-year lease with the right to extend
the lease for up to 20 additional years. Rental payments during the first 15
years equal ACCA's debt service costs related to the industrial revenue bond
issue. In addition, HCA pays ACCA base rent equal to $15,000 per month, subject
to a credit of $615,000 at the rate of $10,000 per month for improvements made
to ACCA's North Island Center banquet and meeting facilities. HCA is also
responsible for additional rent, consisting of costs such as real estate taxes,
maintenance costs, insurance premiums and utilities, arising out of its
operation of both parking garages.
HCA also leases certain equipment under capital lease agreements which
provide for interest at the rate of 11.2% and expire at various dates through
1998. HCT leased certain gaming and other equipment under capital lease
agreements which provided for interest at rates ranging up to 13 1/4% per annum
and which expired during 1997.
The original cost of HCA's parking garages is included in buildings on the
accompanying consolidated balance sheets at both March 31, 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 March 31, 1998 and December 31, 1997.
Amortization expense with respect to these assets amounted to $332,000 and
$832,000, respectively, during the three month periods ended March 31, 1998 and
1997.
Future minimum lease payments under capital lease obligations as of March 31,
1998 were as follows:
1998 (nine months) $ 2,113,000
1999 2,457,000
2000 2,483,000
2001 2,532,000
2002 2,643,000
Thereafter 24,076,000
------------
Total minimum lease payments 36,304,000
Less amount representing interest (14,741,000)
------------
Present value of future
minimum lease payments 21,563,000
Current capital lease obligation (860,000)
------------
Long-term capital lease obligation $ 20,703,000
============
12
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(6) INCOME TAXES
Components of HCC's (provision) benefit for income taxes consist of the
following:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------------
1998 1997
----------- ---------
<S> <C> <C>
Current:
Federal $ 1,775,000 $(1,730,000)
State (129,000) (150,000)
Deferred:
Federal (1,882,000) 929,000
State (41,000) (70,000)
Valuation allowance (14,000) -
------------ -----------
$ (291,000) $(1,021,000)
============ ===========
</TABLE>
No federal or state tax payments were made during the three month periods
ended March 31, 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. Quarterly income tax
provisions or benefits are determined by applying the resulting effective income
tax rate to the results of operations for the quarter.
At March 31, 1998, HCC and its subsidiaries have tax net operating loss
carryforwards ("NOL's") totaling approximately $32,350,000, none of which begin
to expire until the year 2010. Additionally, HCC and its subsidiaries have
various tax credits available totaling approximately $311,000, none of which
begin to expire until the year 2008. Statement of Financial Accounting Standards
No. 109, "Accounting for Income Taxes" ("SFAS 109") requires that the tax
benefit of such NOL's and credit carryforwards, together with the tax benefit of
deferred tax assets resulting from temporary differences, be recorded as an
asset and, to the extent that management can not assess that the utilization of
all or a portion of such NOL's and deferred tax assets is more likely than not,
a valuation allowance should be recorded. Management believes that it is more
likely than not that future consolidated taxable income of HCC (primarily from
the Aurora Casino and the Tunica Casino) will be sufficient to utilize at least
a portion of the net deferred tax assets. Accordingly, valuation allowances have
been established which result in net deferred tax assets of $3,262,000 and
$3,424,000 at March 31, 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
$9,600,000 of taxable income for federal tax purposes
13
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
prior to the expiration dates of the NOL's and tax credit carryforwards and the
reversal of other temporary differences.
Sales by HCC or existing stockholders of common stock can cause a "change of
control", as defined in Section 382 of the Internal Revenue Code of 1986, as
amended, which would limit the ability of HCC or its subsidiaries to utilize
these loss carryforwards in later tax periods. Should such a change of control
occur, the amount of loss carryforwards available for use in any one year would
most likely be substantially reduced. Future treasury regulations,
administrative rulings or court decisions may also effect HCC's utilization of
its loss carryforwards.
The Internal Revenue Service is currently examining the consolidated Federal
income tax returns of HCC for the years 1993 and 1994. Management believes that
the results of such examination will not have a material adverse effect on the
consolidated financial position or results of operations of HCC.
The components of the net deferred tax asset were as follows:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
------------ ------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 11,001,000 $ 9,226,000
Allowance for doubtful accounts 6,998,000 8,575,000
Investment and jobs tax credits 311,000 311,000
Basis in limited partnership 2,890,000 2,890,000
Other liabilities and accruals 2,381,000 2,749,000
Benefits accrual 1,710,000 1,710,000
Other 756,000 733,000
------------ ------------
Total deferred tax assets 26,047,000 26,194,000
------------ ------------
Deferred tax liabilities:
Depreciation and amortization (7,044,000) (6,422,000)
Amortization of note discount - (621,000)
------------ ------------
Total deferred tax liabilities (7,044,000) (7,043,000)
------------ ------------
Net deferred tax asset 19,003,000 19,151,000
Valuation allowance (15,741,000) (15,727,000)
------------ ------------
$ 3,262,000 $ 3,424,000
============ ============
</TABLE>
(7) TRANSACTIONS WITH RELATED PARTIES
HCC has advanced funds to GBCC totaling $6,750,000 as of both March 31, 1998
and December 31, 1997. During the third quarter of 1996, GBCC borrowed
$6,500,000 from HCC on a
14
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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 $1,071,000 and $839,000 is included in due from affiliates on the
accompanying consolidated balance sheets at March 31, 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
$232,000 and $267,000, respectively, during the three month periods ended March
31, 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 $116,000 during the three month period ended March 31, 1998.
Accrued interest of $39,000 and $41,000, respectively, is included in interest
payable on the accompanying consolidated balance sheets at March 31, 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 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
15
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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 March 31, 1998 and December 31, 1997 to an estimated
realizable value of $12,322,000. Management anticipates that the remaining
balance will be realized through a combination of additional asset acquisitions
from GBCC and its subsidiaries and repayments from GBCC.
Pursuant to a management 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 March 31, 1998 and 1997.
Various subsidiaries of GBCC provide certain administrative and marketing
services to HCA, HCT and, since April 1, 1997, to PML. Total charges during the
three month periods ended March 31, 1998 and 1997 amounted to $31,000 and
$268,000, respectively.
HCT and Advanced Casino Systems Corporation ("ACSC"), a subsidiary of GBCC,
entered into a Computer Services Agreement dated as of January 1, 1994 and
renewed through December 31, 1999. The agreement provides, among other things,
that ACSC will sell HCT computer hardware and information systems equipment and
will license or sublicense to HCT computer software necessary to operate HCT's
casino hotel and related facilities and business operations. HCT pays ACSC for
such equipment and licenses such software at amounts and on terms and conditions
that ACSC provides to unrelated third parties. 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. Total charges during the three month
periods ended March 31, 1998 and 1997 amounted to $146,000 and $111,000,
respectively. Unpaid charges amounting to $117,000 and $44,000 are included in
due to affiliates on the accompanying consolidated balance sheets at March 31,
1998 and December 31, 1997, respectively.
HCA also receives certain computer-related services from ACSC including
hardware, software and operator support. HCA reimburses ACSC for its direct
costs and any expenses incurred. Total charges during the three month periods
ended March 31, 1998 and 1997 amounted to $134,000 and $43,000, respectively.
Unpaid charges amounting to $112,000 and $11,000 are included in due to
affiliates on the accompanying consolidated balance sheets at March 31, 1998 and
December 31, 1997, respectively.
16
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
HCC allocates certain general and administrative costs to GBCC and its
subsidiaries pursuant to a services agreement. Net allocated costs and fees
charged to GBCC and its subsidiaries by HCC amounted to $296,000 and $686,000,
respectively, for the three month periods ended March 31, 1998 and 1997. In
connection with such charges, receivables in the amount of $81,000 and $156,000
are included in due from affiliates on the accompanying consolidated balance
sheets at March 31, 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 chartered aircraft from the
maintenance company. No such charter fees were incurred during the three month
period ended March 31, 1998; charter fees, expenses and commissions totaled
$253,000 during the three month period ended March 31, 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 March 31, 1998 and 1997, HCT expensed $940,000 and $928,000,
respectively, in connection with the ground lease.
PLANET HOLLYWOOD LITIGATION -
Planet Hollywood International, Inc., a Delaware corporation, and Planet
Hollywood (Region IV), Inc., a Minnesota corporation (collectively, "PHII"),
filed a complaint in the United States District Court for the Northern District
of Illinois, Eastern Division on July 29, 1996 against HCC, HCA and a member of
the Pratt Family (collectively, the "Original Hollywood Defendants"). The
Original Hollywood Defendants filed with the Court on September 18, 1996 an
answer to PHII's lawsuit, along with numerous counterclaims against PHII, Robert
Earl and Keith Barish (collectively, the "PHII Defendants"). PHII filed with
the Court on January 21, 1997, an amendment to their complaint which, among
other things, added HCT (together with the Original Hollywood Defendants, the
"Hollywood Defendants") and GBCC as defendants. The Original Hollywood
Defendants filed with the Court on February 4, 1997, and GBCC and HCT filed with
the Court on February 20, 1997, answers and counterclaims to such amended
complaint.
In its lawsuit, PHII alleges, among other things, that the Hollywood
Defendants and GBCC have, in opening and operating the Hollywood Casino concept,
infringed on PHII's trademark, service mark and
17
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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
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 $1,402,000 and $991,000, respectively, at March 31, 1998 and
December 31, 1997.
18
<PAGE>
HOLLYWOOD CASINO - AURORA, INC.
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
BALANCE SHEETS
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
------------ ------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 15,885,000 $ 9,491,000
Short-term investments 3,020,000 2,103,000
Accounts receivable, net of allowances
of $571,000 and $483,000, respectively 1,334,000 1,603,000
Inventories 666,000 794,000
Deferred income taxes 1,395,000 1,336,000
Due from affiliates 30,000 558,000
Prepaid expenses and other current assets 636,000 932,000
------------ ------------
Total current assets 22,966,000 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 33,381,000 32,159,000
Construction in progress 659,000 534,000
------------ ------------
120,380,000 119,033,000
Less - accumulated depreciation and amortization (35,844,000) (33,919,000)
------------ ------------
Net property and equipment 84,536,000 85,114,000
------------ ------------
Other Assets 2,182,000 2,140,000
------------ ------------
$109,684,000 $104,071,000
============ ============
</TABLE>
The accompanying introductory notes and notes to financial statements
are an integral part of these balance sheets.
19
<PAGE>
HOLLYWOOD CASINO - AURORA, INC.
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
BALANCE SHEETS
(UNAUDITED)
LIABILITIES AND SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
------------ ------------
<S> <C> <C>
Current Liabilities:
Current maturities of long-term debt
and capital lease obligations $ 5,987,000 $ 6,624,000
Accounts payable 4,373,000 2,023,000
Accrued liabilities -
Salaries and wages 2,696,000 2,228,000
Interest 2,525,000 1,192,000
Gaming and other taxes 4,594,000 938,000
Insurance 1,305,000 1,115,000
Other 1,117,000 1,120,000
Due to affiliates 2,689,000 2,185,000
Other current liabilities 1,266,000 1,209,000
------------ ------------
Total current liabilities 26,552,000 18,634,000
------------ ------------
Long-Term Debt 31,507,000 31,507,000
------------ ------------
Capital Lease Obligations 20,703,000 20,841,000
------------ ------------
Deferred Income Taxes 4,595,000 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 1,771,000 4,392,000
------------ ------------
Total shareholder's equity 26,327,000 28,948,000
------------ ------------
$109,684,000 $104,071,000
============ ============
</TABLE>
The accompanying introductory notes and notes to financial statements
are an integral part of these balance sheets.
20
<PAGE>
HOLLYWOOD CASINO - AURORA, INC.
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------------
1998 1997
----------- -----------
<S> <C> <C>
Revenues:
Casino $37,103,000 $38,859,000
Food and beverage 3,233,000 3,316,000
Other 622,000 415,000
----------- -----------
40,958,000 42,590,000
Less - promotional allowances (2,238,000) (2,240,000)
----------- -----------
Net revenues 38,720,000 40,350,000
----------- -----------
Expenses:
Casino 25,961,000 25,639,000
Food and beverage 1,202,000 1,200,000
Other 322,000 401,000
General and administrative 3,781,000 4,033,000
Depreciation and amortization 1,924,000 1,853,000
----------- -----------
Total expenses 33,190,000 33,126,000
----------- -----------
Income from operations 5,530,000 7,224,000
----------- -----------
Non-operating income (expense):
Interest income 36,000 36,000
Interest expense (1,590,000) (1,762,000)
Gain on disposal of assets 2,000 -
----------- -----------
Total non-operating expense, net (1,552,000) (1,726,000)
----------- -----------
Income before income taxes 3,978,000 5,498,000
Income tax provision (1,520,000) (2,067,000)
----------- -----------
Net income $ 2,458,000 $ 3,431,000
=========== ===========
</TABLE>
The accompanying introductory notes and notes to financial statements
are an integral part of these financial statements.
21
<PAGE>
HOLLYWOOD CASINO - AURORA, INC.
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------------
1998 1997
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 2,458,000 $ 3,431,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 1,924,000 1,853,000
Provision for doubtful accounts 88,000 44,000
Gain on disposal of assets (2,000) -
Deferred income tax provision 395,000 682,000
Decrease in receivables 181,000 274,000
Increase in accounts payable and accrued liabilities 7,994,000 901,000
Net change in affiliate accounts 1,032,000 1,176,000
Net change in other current assets and liabilities 481,000 831,000
Net change in other assets and liabilities (42,000) (27,000)
----------- -----------
Net cash provided by operating activities 14,509,000 9,165,000
----------- -----------
INVESTING ACTIVITIES:
Purchases of property and equipment (1,344,000) (474,000)
Short-term investments (917,000) -
----------- -----------
Net cash used in investing activities (2,261,000) (474,000)
----------- -----------
FINANCING ACTIVITIES:
Repayments of debt (636,000) (766,000)
Payments on capital lease obligations (139,000) (107,000)
Dividends (5,079,000) (5,455,000)
----------- -----------
Net cash used in financing activities (5,854,000) (6,328,000)
----------- -----------
Net increase in cash and cash equivalents 6,394,000 2,363,000
Cash and cash equivalents at beginning of period 9,491,000 9,034,000
----------- -----------
Cash and cash equivalents at end of period $15,885,000 $11,397,000
=========== ===========
</TABLE>
The accompanying introductory notes and notes to financial statements
are an integral part of these financial statements.
22
<PAGE>
HOLLYWOOD CASINO - AURORA, INC.
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(1) ORGANIZATION AND BUSINESS
Hollywood Casino - Aurora, Inc. ("HCA") is an Illinois corporation and a
wholly owned subsidiary of Hollywood Casino Corporation ("HCC"), a Delaware
corporation. HCA was organized and incorporated during December 1990 by certain
relatives of Jack E. Pratt, Edward T. Pratt, Jr. and William D. Pratt
(collectively, the "Pratt Family") for the purpose of developing and holding the
ownership interest in a riverboat gaming operation located in Aurora, Illinois
(the "Aurora Casino"). In May 1992, HCC, which was then wholly owned by
members of the Pratt Family or by certain general partnerships and trusts
controlled by the Pratt Family, acquired all of the outstanding stock of HCA
through the issuance of HCC stock. Prior to December 31, 1996, HCC also owned
approximately 80% of Greate Bay Casino Corporation ("GBCC"), a Delaware
corporation. 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 an ownership interest in 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 1997
for a period of one year.
The Aurora Casino consists of two, four-level riverboats having a combined
casino space of approximately 32,000 square feet and a four-level pavilion and
docking facility which houses ticketing, food service, passenger waiting, and
various administrative functions. The Aurora Casino also includes two parking
structures with approximately 1,300 parking spaces. HCA was responsible for the
design and construction of the parking garages; however, it leases the
facilities under long-term lease agreements. The leases are treated as capital
leases for financial reporting purposes (see Note 3).
HCA estimates that a significant amount of the Aurora Casino's revenues
are derived from patrons living in the Chicago area and surrounding northern and
western suburbs. The Aurora Casino faces intense competition from other
riverboat gaming operations in Illinois and Indiana which serve the Chicago area
and management believes that this competition will continue in the future.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
HCA is self insured for a portion of its general liability, certain health
care and other liability exposures. Accrued insurance includes estimates of
such accrued liabilities based on an evaluation of the merits of individual
claims and historical claims experience; accordingly, HCA's ultimate liability
may differ from the amounts accrued.
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets 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
23
<PAGE>
HOLLYWOOD CASINO - AURORA, INC.
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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 March 31, 1998 and for the three month
periods ended March 31, 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 March 31, 1998, the results of its
operations for the three month periods ended March 31, 1998 and 1997 and its
cash flows for the three month periods ended March 31, 1998 and 1997.
(2) LONG-TERM DEBT AND PLEDGE OF ASSETS
HCA's long-term indebtedness consists of the following:
MARCH 31, DECEMBER 31,
1998 1997
----------- ------------
12 3/4% Promissory Note to HCC, due on
November 1, 2003 (a) $36,507,000 $36,507,000
Promissory note to bank (b) - 350,000
Equipment loans (c) 127,000 413,000
----------- ------------
Total indebtedness 36,634,000 37,270,000
Less - current maturities (5,127,000) (5,763,000)
----------- ------------
Total long-term debt $31,507,000 $ 31,507,000
=========== ============
- -------------------------
(a) The intercompany note accrues interest at the rate of 12 3/4% per annum
payable semiannually on October 15 and April 15 of each year and requires
semiannual principal repayments of $2,500,000 commencing October 15, 1997
with the balance of the note due November 1, 2003. The note is pledged as
security with respect to HCC's 12 3/4% Senior Secured Notes due in 2003.
HCA is not a guarantor of HCC's indebtedness; however, the indebtedness is
secured, in part, by a first
24
<PAGE>
HOLLYWOOD CASINO - AURORA, INC.
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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 accrued interest at the bank's prime lending rate plus
1% per annum and was repaid in 1998.
(c) HCA financed the purchase of certain equipment from vendors through the
issuance of note obligations totaling $2,985,000. The promissory notes are
payable in monthly installments, including interest at the approximate rate
of 12 1/4% per annum, and mature at various dates in 1998.
As of March 31, 1998, future maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
<S> <C>
1998 (nine months) $ 5,127,000
1999 5,000,000
2000 5,000,000
2001 5,000,000
2002 5,000,000
Thereafter 11,507,000
-----------
$36,634,000
===========
</TABLE>
Interest paid for the three month periods ended March 31, 1998 and 1997
amounted to $257,000 and $376,000, 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. In September
1996, HCA and the Aurora Metropolitan Exposition, Auditorium and Office Building
Authority ("ACCA") completed the joint construction of a five-story parking
garage directly across the street from, and connected by a climate-controlled
tunnel to, the Aurora Casino's Pavilion. The garage provides additional parking
for patrons of the Aurora Casino and contains approximately 1,500 square feet of
retail space. ACCA financed a portion of the construction costs through an
$11,500,000, 7.5% industrial revenue bond issue which yielded proceeds of
approximately $10,500,000. HCA funded all remaining construction costs and
escrowed $3,500,000 at the rate of $400,000 per month beginning in September
1995 toward satisfaction of its obligations under the agreement. The facility
is owned by ACCA and operated by HCA pursuant to a 30-year lease with the right
to extend the lease for up to 20 additional years. Rental payments during the
first 15 years equal ACCA's debt service costs related to the industrial revenue
bond issue. In addition, HCA pays ACCA base rent equal to $15,000 per month,
subject to a credit of $615,000 at the rate of $10,000 per month for
25
<PAGE>
HOLLYWOOD CASINO - AURORA, INC.
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
improvements made to ACCA's North Island Center banquet and meeting facilities.
HCA is also responsible for additional rent, consisting of costs such as real
estate taxes, maintenance costs, insurance premiums and utilities, arising out
of its operation of both parking garages.
HCA also leases certain equipment under capital lease agreements which
provide for interest at the rate of 11.2% and expire at various dates through
1998. 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
March 31, 1998 and December 31, 1997. Amortization expense with respect to
these assets amounted to $245,000 and $381,000, respectively, during the three
month periods ended March 31, 1998 and 1997.
Future minimum lease payments under capital lease obligations as of March 31,
1998 are as follows:
<TABLE>
<CAPTION>
<S> <C>
1998 (nine months) $ 2,113,000
1999 2,457,000
2000 2,483,000
2001 2,532,000
2002 2,643,000
Thereafter 24,076,000
-----------
Total minimum lease payments 36,304,000
Less amount representing interest (14,741,000)
-----------
Present value of future minimum lease payments 21,563,000
Current capital lease obligation (860,000)
-----------
Long-term capital lease obligation $20,703,000
===========
</TABLE>
26
<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
MARCH 31,
-------------------------
1998 1997
----------- -----------
<S> <C> <C>
Current:
Federal $(1,005,000) $(1,235,000)
State (120,000) (150,000)
Deferred:
Federal (353,000) (612,000)
State (42,000) (70,000)
----------- -----------
$(1,520,000) $(2,067,000)
=========== ===========
</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 no federal or state taxes during the
three month periods ended March 31, 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.
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.
27
<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 March 31, 1998 and
December 31, 1997 are as follows:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
----------- -----------
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts $ 215,000 $ 182,000
Other liabilities and reserves 1,300,000 1,271,000
----------- -----------
Total deferred tax assets 1,515,000 1,453,000
----------- -----------
Deferred tax liabilities:
Depreciation and amortization (4,715,000) (4,258,000)
----------- -----------
Net deferred tax liability $(3,200,000) $(2,805,000)
=========== ===========
</TABLE>
Receivables and payables in connection with the aforementioned tax allocation
agreements at March 31, 1998 and December 31, 1997 are as follows:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
----------- -----------
<S> <C> <C>
Deferred tax assets $ 1,247,000 $ 1,194,000
Due (to) from affiliates (468,000) 538,000
Deferred tax liabilities (4,106,000) (3,700,000)
</TABLE>
(5) TRANSACTIONS WITH RELATED PARTIES
Pursuant to a management services agreement, HCA pays base management and
incentive fees to Pratt Management, L.P. ("PML"), a limited partnership which,
prior to April 1, 1997, was wholly owned by GBCC. Effective as of April 1,
1997, HCC acquired the general partnership interest in PML. The base management
fee is equal to 5% of operating revenues (as defined in the agreement) subject
to a maximum of $5,500,000 in any consecutive twelve month period. The
incentive fee is equal to 10% of gross operating profit (as defined in the
agreement to generally include all revenues less expenses other than
depreciation, interest, amortization and taxes). HCA incurred such fees
totaling $2,546,000 and $2,727,000, respectively, during the three month periods
ended March 31, 1998 and 1997. Management and incentive fees payable at March
31, 1998 and December 31, 1997 were $2,028,000 and $2,130,000, respectively.
28
<PAGE>
HOLLYWOOD CASINO - AURORA, INC.
(wholly owned by Hollywood Casino Corporation)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
HCA incurred interest with respect to its promissory note payable to HCC (see
Note 2) amounting to $1,163,000 and $1,243,000, respectively, for the three
month periods ended March 31, 1998 and 1997. Interest payable to HCC on such
notes amounted to $2,146,000 and $983,000 at March 31, 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. During the three month
periods ended March 31, 1998 and 1997, such transactions totaled $134,000 and
$131,000, respectively. At March 31, 1998 and December 31, 1997, HCA had
payables amounting to $164,000 and $36,000, respectively, in connection with
such charges.
(6) LITIGATION
PLANET HOLLYWOOD LITIGATION -
Planet Hollywood International, Inc., a Delaware corporation, and Planet
Hollywood (Region IV), Inc., a Minnesota corporation (collectively, "PHII"),
filed a complaint in the United States District Court for the Northern District
of Illinois, Eastern Division on July 29, 1996 against HCC, HCA and a member of
the Pratt Family (collectively, the "Original Hollywood Defendants"). The
Original Hollywood Defendants filed with the Court on September 18, 1996 an
answer to PHII's lawsuit, along with numerous counterclaims against PHII, Robert
Earl and Keith Barish (collectively, the "PHII Defendants"). PHII filed with
the Court on January 21, 1997, an amendment to their complaint which, among
other things, added the HCC subsidiary which owns and operates a casino in
Tunica County, Mississippi, HWCC-Tunica, Inc. ("HCT" together with the Original
Hollywood Defendants, the "Hollywood Defendants"), and GBCC as defendants. The
Original Hollywood Defendants filed with the Court on February 4, 1997, and GBCC
and HCT filed with the Court on February 20, 1997, answers and counterclaims to
such amended complaint.
In its lawsuit, PHII alleges, among other things, that the Hollywood
Defendants and GBCC have, in opening and operating the Hollywood Casino concept,
infringed on PHII's trademark, service mark and trade dress and have engaged in
unfair competition and deceptive trade practices. In their counterclaims, the
Hollywood Defendants and GBCC allege, among other things, that the PHII
Defendants have, through their planned use of their mark in connection with
casino services, infringed on certain of HCC's service marks and trade dress and
have engaged in unfair competition.
Given the uncertainties inherent in litigation, no assurance can be given
that the Hollywood Defendants will prevail in this litigation; however, the
Hollywood Defendants believe that PHII's claims are without merit and intend to
defend their position and pursue their counterclaims vigorously. The
accompanying financial statements do not include any adjustments that might
result from the outcome of the uncertainties described above.
29
<PAGE>
HOLLYWOOD CASINO - AURORA, INC.
(wholly owned by Hollywood Casino Corporation)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
OTHER LITIGATION -
HCA is a party in various legal proceedings with respect to the conduct of
casino operations. Although a possible range of loss can not be estimated, in
the opinion of management, based upon the advice of counsel, settlement or
resolution of the proceedings should not have a material adverse impact on the
financial position or results of operations of HCA.
30
<PAGE>
HWCC - TUNICA, INC. AND SUBSIDIARY
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
------------ ------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 13,416,000 $ 11,851,000
Short-term investments 3,876,000 3,876,000
Accounts receivable, net of allowances of
$824,000 and $705,000, respectively 1,569,000 1,510,000
Inventories 532,000 660,000
Deferred income taxes 1,099,000 1,632,000
Prepaid expenses and other current assets 1,104,000 1,129,000
------------ ------------
Total current assets 21,596,000 20,658,000
------------ ------------
Property and Equipment:
Land 3,456,000 3,456,000
Buildings 73,481,000 73,422,000
Barges 2,524,000 2,524,000
Operating equipment 37,841,000 37,588,000
Construction in progress 880,000 688,000
------------ ------------
118,182,000 117,678,000
Less - accumulated depreciation and amortization (33,672,000) (31,760,000)
------------ ------------
Net property and equipment 84,510,000 85,918,000
------------ ------------
Other Assets:
Land rights 7,403,000 7,454,000
Other assets 5,173,000 4,697,000
------------ ------------
Total other assets 12,576,000 12,151,000
------------ ------------
$118,682,000 $118,727,000
============ ============
</TABLE>
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated balance sheets.
31
<PAGE>
HWCC - TUNICA, INC. AND SUBSIDIARY
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
LIABILITIES AND SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
------------ ------------
<S> <C> <C>
Current Liabilities:
Current maturities of long-term debt $ 462,000 $ 485,000
Accounts payable 1,015,000 1,372,000
Accrued liabilities -
Salaries and wages 1,751,000 1,579,000
Interest 476,000 476,000
Gaming and other taxes 650,000 1,230,000
Insurance 1,500,000 1,553,000
Other 1,995,000 1,627,000
Other current liabilities 1,152,000 1,325,000
------------ ------------
Total current liabilities 9,001,000 9,647,000
------------ ------------
Long-Term Debt 85,067,000 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 (10,023,000) (10,755,000)
------------ ------------
Total shareholder's equity 24,614,000 23,882,000
------------ ------------
$118,682,000 $118,727,000
============ ============
</TABLE>
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated balance sheets.
32
<PAGE>
HWCC - TUNICA, INC. AND SUBSIDIARY
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------------
1998 1997
----------- -----------
<S> <C> <C>
Revenues:
Casino $22,803,000 $24,676,000
Rooms 2,007,000 2,175,000
Food and beverage 3,548,000 3,398,000
Other 280,000 266,000
----------- -----------
28,638,000 30,515,000
Less - promotional allowances (3,566,000) (3,536,000)
----------- -----------
Net revenues 25,072,000 26,979,000
----------- -----------
Expenses:
Casino 16,411,000 16,832,000
Rooms 445,000 458,000
Food and beverage 971,000 1,008,000
Other 324,000 331,000
General and administrative 1,557,000 1,446,000
Depreciation and amortization 2,020,000 2,751,000
----------- -----------
Total expenses 21,728,000 22,826,000
----------- -----------
Income from operations 3,344,000 4,153,000
----------- -----------
Non-operating income (expenses):
Interest income 122,000 51,000
Interest expense (2,731,000) (2,773,000)
Loss on disposal of assets (3,000) -
----------- -----------
Total non-operating expenses, net (2,612,000) (2,722,000)
----------- -----------
Income before income taxes 732,000 1,431,000
Income tax provision - -
----------- -----------
Net income $ 732,000 $ 1,431,000
=========== ===========
</TABLE>
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated statements.
33
<PAGE>
HWCC - TUNICA, INC. AND SUBSIDIARY
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------------
1998 1997
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 732,000 $ 1,431,000
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 2,020,000 2,751,000
Provision for doubtful accounts 152,000 117,000
Loss on disposal of assets 3,000 -
Increase in accounts receivable (211,000) (73,000)
Decrease in accounts payable
and accrued expenses (450,000) (429,000)
Net change in other current assets and liabilities (20,000) 97,000
Net change in other noncurrent assets and liabilities 4,000 (8,000)
----------- -----------
Net cash provided by operating activities 2,230,000 3,886,000
----------- -----------
INVESTING ACTIVITIES:
Purchases of property and equipment (511,000) (498,000)
Investment in unconsolidated affiliate - (2,000,000)
----------- -----------
Net cash used in investing activities (511,000) (2,498,000)
----------- -----------
FINANCING ACTIVITIES:
Borrowings on credit facility - 1,000,000
Repayments of long-term debt (154,000) (99,000)
Payments on capital lease obligations - (468,000)
----------- -----------
Net cash (used in) provided by financing activities (154,000) 433,000
----------- -----------
Net increase in cash and cash equivalents 1,565,000 1,821,000
Cash and cash equivalents at beginning of period 11,851,000 9,321,000
----------- -----------
Cash and cash equivalents at end of period $13,416,000 $11,142,000
=========== ===========
</TABLE>
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated statements.
34
<PAGE>
HWCC - TUNICA, INC. AND SUBSIDIARY
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) ORGANIZATION, BUSINESS AND BASIS OF PRESENTATION
HWCC - Tunica, Inc. ("HCT") is a Texas corporation and a wholly owned
subsidiary of Hollywood Casino Corporation ("HCC"), a Delaware corporation. HCT
was incorporated in December 1993 for the purpose of acquiring and completing a
gaming facility in northern Tunica County, Mississippi approximately 27 miles
southwest of Memphis, Tennessee. The completed facility (the "Tunica Casino"),
which currently includes a casino with 54,000 square feet of gaming space, 506
hotel rooms and suites and related amenities, commenced operations on August 8,
1994 under the service mark Hollywood Casino(R). HCT's gaming license has been
renewed by the Mississippi Gaming Commission through October 18, 1999.
The accompanying consolidated financial statements include the accounts of
HCT and its wholly owned subsidiary, HWCC-Golf Course Partners, Inc. ("Golf").
All significant intercompany balances have been eliminated in consolidation.
Golf, a Delaware corporation, was formed in 1996 to own an initial one-third
interest in Tunica Golf Course LLC, a limited liability company organized to
develop and operate a golf course to be used by patrons of the Tunica Casino and
other participating casino/hotel properties. The golf course is presently
scheduled for completion in 1998. Golf's investment in Tunica Golf Course, LLC
is accounted for under the equity method of accounting and is included in other
noncurrent assets on the accompanying consolidated balance sheets at March 31,
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.
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
35
<PAGE>
HWCC - TUNICA, INC. AND SUBSIDIARY
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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 financial statements as of March 31, 1998 and for the three month
periods ended March 31, 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 financial position of HCT as of March 31, 1998, the results
of its operations for the three month periods ended March 31, 1998 and 1997 and
cash flows for the three month periods ended March 31, 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:
MARCH 31, DECEMBER 31,
1998 1997
----------- -----------
Promissory notes to HCC (a) $84,045,000 $84,045,000
Equipment loans (b) 1,484,000 1,638,000
----------- -----------
Total indebtedness 85,529,000 85,683,000
Less - current maturities (462,000) (485,000)
----------- -----------
Total long-term debt $85,067,000 $85,198,000
=========== ===========
- ------------------------
(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 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
36
<PAGE>
HWCC - TUNICA, INC. AND SUBSIDIARY
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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 March 31, 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.
Scheduled payments of long-term debt as of March 31, 1998 are set forth below:
<TABLE>
<CAPTION>
<S> <C>
1998 (nine months) $ 331,000
1999 547,000
2000 491,000
2001 115,000
2002 -
Thereafter 84,045,000
-----------
Total $85,529,000
===========
</TABLE>
Interest paid amounted to $2,731,000 and $3,660,000, respectively, during
the three month periods ended March 31, 1998 and 1997.
(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 March 31, 1998 and December 31, 1997.
Amortization expense for the three month periods ended March 31, 1998 and 1997
was $87,000 and $451,000, respectively. Accumulated amortization at March 31,
1998 and December 31, 1997 with respect to these assets amounted to $4,603,000
and $4,516,000, respectively. No future payment obligations exist with respect
to such capital leases.
37
<PAGE>
HWCC - TUNICA, INC. AND SUBSIDIARY
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(4) INCOME TAXES
Components of HCT's provision for income taxes consist of the following:
THREE MONTHS ENDED
MARCH 31,
---------------------
1998 1997
--------- ---------
Provision for federal income taxes:
Current $ 68,000 $ 308,000
Deferred 196,000 187,000
Valuation allowance (264,000) (495,000)
--------- ---------
$ - $ -
========= =========
State income taxes have not been provided for since a credit for state
gaming taxes based on gross revenues is allowed to offset income taxes incurred.
The credit is the lesser of total gaming taxes paid or the state income tax,
with no credit carryforward permitted.
HCT is included in HCC's consolidated federal income tax return. HCT's
provision for federal income taxes is based on the amount of tax which would be
provided if a separate federal income tax return were filed. HCT paid no
federal or state taxes during either of the three month periods ended March 31,
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 tax purposes and
differences in the timing of deductions taken between tax and financial
reporting purposes for the amortization of preopening costs and other accruals.
HCT has tax net operating loss carryforwards ("NOL's") totaling
approximately $15,000,000, which do not begin to expire until the year 2010.
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes", requires that the tax benefit of such NOL's, together with the tax
benefit of deferred tax assets resulting from temporary differences, be recorded
as an asset and, to the extent that management can not assess that the
utilization of all or a portion of such deferred tax assets is more likely than
not, a valuation allowance should be recorded. Based on the taxable income
earned by HCT during 1997 and the first quarter 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 March 31, 1998
and December 31, 1997. The ultimate recognition of the current amount of
deferred tax assets is dependent on HCT's ability to generate approximately
$6,200,000 of taxable income for federal income tax purposes prior to the
expiration dates of the NOL's and the reversal of other temporary differences.
38
<PAGE>
HWCC - TUNICA, INC. AND SUBSIDIARY
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
The Internal Revenue Service is currently examining the consolidated
Federal income tax returns of HCC for the years 1993 and 1994. Management
believes that the results of such examination will not have a material adverse
effect on the consolidated financial position or results of operations of HCT.
The components of the deferred tax asset are as follows:
MARCH 31, DECEMBER 31,
1998 1997
------------ ------------
Deferred tax assets:
Net operating loss carryforwards $ 5,132,000 $ 5,200,000
Alternative minimum tax credit carryforward 226,000 226,000
Allowance for doubtful accounts 280,000 240,000
Other liabilities and accruals 1,053,000 1,108,000
----------- -----------
Total deferred tax assets 6,691,000 6,774,000
Deferred tax liabilities:
Depreciation and amortization (2,278,000) (2,097,000)
----------- -----------
Net deferred tax asset 4,413,000 4,677,000
Valuation allowance (2,306,000) (2,570,000)
----------- -----------
$ 2,107,000 $ 2,107,000
=========== ===========
Receivables and payables in connection with HCT's federal income taxes are
included on the accompanying consolidated financial statements as follows:
MARCH 31, DECEMBER 31,
1998 1997
---------- ------------
Accounts receivable $ 268,000 $ 268,000
Deferred income taxes 1,099,000 1,632,000
Other noncurrent assets 1,008,000 475,000
(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 March 31,
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
39
<PAGE>
HWCC - TUNICA, INC. AND SUBSIDIARY
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
systems equipment and will license or sublicense to HCT computer software
necessary to operate HCT's casino, hotel and related facilities and business
operations. HCT pays ACSC for such equipment and licenses such software at
amounts and on terms and conditions that ACSC provides to unrelated third
parties. 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
$146,000 and $111,000, respectively, for the three month periods ended March 31,
1998 and 1997. At March 31, 1998 and December 31, 1997, HCT had payables of
$117,000 and $44,000, respectively, included in accounts payable with respect to
such charges.
Greate Bay Hotel and Casino, Inc. ("GBHC"), an affiliated company which owns
and operates the Sands Hotel and Casino in Atlantic City, New Jersey, performs
certain administrative and marketing services on behalf of HCT. During the
three month periods ended March 31, 1998 and 1997, fees charged to HCT by GBHC
totaled $11,000 and $182,000, respectively.
HCT is charged for certain legal, accounting, and other expenses incurred by
HCC and its subsidiaries that relate to HCT's business. For the three month
periods ended March 31, 1998 and 1997, such charges amounted to $44,000 and
$96,000, respectively. At March 31, 1998 and December 31, 1997, HCT had
payables of $80,000 and $43,000, respectively, included in accounts payable with
respect to such charges.
(6) COMMITMENTS AND CONTINGENCIES
GROUND LEASE -
HCT entered into a ground lease covering 70 acres of land on which the Tunica
Casino was constructed. The ground lease is for an initial term of five years
from the opening date of the facility and, at HCT's option, may be renewed for
nine additional five-year periods. Obligations under the ground lease during
the initial term include both minimum monthly fixed payments and percentage
rent, which in the aggregate will be the greater of 4% of Gross Revenues, as
defined, or $1,100,000 per year. HCT is responsible for all operating and other
expenses of the property in accordance with the lease terms. For the three month
periods ended March 31, 1998 and 1997, HCT expensed $940,000 and $928,000,
respectively, in connection with the ground lease.
CREDIT FACILITY -
HCT has a bank credit facility in the amount of $1,300,000 available through
September 30, 1998. No borrowings were outstanding under the credit facility at
either March 31, 1998 or December 31, 1997; however, HCT borrowed approximately
$400,000 under the credit facility in April 1998. Borrowings under the line of
credit accrue interest at the bank's prime lending rate plus 1/4% per annum
subject to a minimum of 8.875%. Borrowings under the line of credit are to be
collateralized by equipment purchased with such loan proceeds. The line of
credit agreement requires the maintenance of certain balances in addition to the
provision of certain financial reports.
40
<PAGE>
HWCC - TUNICA, INC. AND SUBSIDIARY
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
PLANET HOLLYWOOD LITIGATION -
Planet Hollywood International, Inc., a Delaware corporation, and Planet
Hollywood (Region IV), Inc., a Minnesota corporation (collectively, "PHII"),
filed a complaint in the United States District Court for the Northern District
of Illinois, Eastern Division on July 29, 1996 against HCC, the wholly owned
subsidiary of HCC which owns and operates a casino in Aurora, Illinois and a
member of the Pratt Family (collectively, the "Original Hollywood Defendants").
The Original Hollywood Defendants filed with the Court on September 18, 1996 an
answer to PHII's lawsuit, along with numerous counterclaims against PHII, Robert
Earl and Keith Barish (collectively, the "PHII Defendants"). PHII filed with
the Court on January 21, 1997, an amendment to their complaint which, among
other things, added HCT (together with the Original Hollywood Defendants, the
"Hollywood Defendants") and Greate Bay Casino Corporation ("GBCC"), an
affiliated company, as defendants. The Original Hollywood Defendants filed with
the Court on February 4, 1997, and GBCC and HCT filed with the Court on February
20, 1997, answers and counterclaims to such amended complaint.
In its lawsuit, PHII alleges, among other things, that the Hollywood
Defendants and GBCC have, in opening and operating the Hollywood Casino concept,
infringed on PHII's trademark, service mark and trade dress and have engaged in
unfair competition and deceptive trade practices. In their counterclaims, the
Hollywood Defendants and GBCC allege, among other things, that the PHII
Defendants have, through their planned use of their mark in connection with
casino services, infringed on certain of HCC's service marks and trade dress and
have engaged in unfair competition.
Given the uncertainties inherent in litigation, no assurance can be given
that the Hollywood Defendants will prevail in this litigation; however, the
Hollywood Defendants believe that PHII's claims are without merit and intend to
defend their position and pursue their counterclaims vigorously. The
accompanying consolidated financial statements do not include any adjustments
that might result from the outcome of the uncertainties described above.
OTHER -
HCT is a party in various legal proceedings with respect to the conduct of
casino and hotel operations. Although a possible range of loss can not be
estimated, in the opinion of management, based upon the advice of counsel,
settlement or resolution of the proceedings should not have a material adverse
impact on the consolidated financial position or results of operations of HCT.
(7) LAND RIGHTS
Land rights are being amortized on a straight-line basis over a 40-year
period representing the estimated useful life of the facility, which is less
than the term of the ground lease including renewals (see Note 6); such
amortization commenced with the opening of the Tunica Casino. Management
presently intends to renew the ground lease at least through the estimated
40-year useful life of the facility. Accumulated amortization of such land
rights amounted to $1,042,000 and $991,000, respectively, at March 31, 1998 and
December 31, 1997.
41
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This Quarterly Report on Form 10-Q contains forward-looking statements about
the business, financial condition and prospects of the Company. The actual
results could differ materially from those indicated by the forward-looking
statements because of various competition, economic conditions, tax regulations,
state regulations applicable to the gaming industry in general or the Company in
particular and other risks indicated in the Company's filings with the
Securities and Exchange Commission. Such risks and uncertainties are beyond
management's ability to control and, in many cases, can not be predicted by
management. When used in this Quarterly Report on Form 10-Q, the 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 March 31, 1998 of $63.8
million, a 5.4% decrease from the $67.5 million during the same period of 1997.
The decrease includes reductions in net revenues at the Aurora Casino of $1.6
million (4%) and at the Tunica Casino of $1.9 million (7.1%).
Operating expenses decreased by $3.5 million to $54.7 million during the
three month period ended March 31, 1998 from $58.2 million during the same
period of 1997. Consequently, HCC's income from operations only decreased by
$201,000 (2.2%) during the first quarter of 1998 compared to the same period of
1997. The first quarter 1998 results include the operations of Pratt
Management, L.P. ("PML"), the limited partnership which holds the management
contract on the Aurora Casino. HCC acquired the general partnership interest in
PML as of April 1, 1997. PML's income from operations amounted to $2.2 million
during the first quarter of 1998. Income from operations after management fees
at the Aurora Casino decreased by $1.7 million to $5.5 million during the three
month period ended March 31, 1998 compared with the same period of 1997 due to
increased competition in its market and increases in gaming taxes. Income from
operations after consulting fees at the Tunica Casino decreased by $809,000 to
$3.3 million due primarily to increased competition.
AURORA CASINO
GENERAL
Income from operations at the Aurora Casino, adjusted to exclude management
fees, amounted to $8.1 million and $10 million, respectively, for the three
month periods ended March 31, 1998 and 1997. Such decrease is due 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%. The decrease is also attributable 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 and
despite a decrease in gaming revenues, gaming taxes for the three month period
ending March 31, 1998 were $2.2 million higher than for the corresponding period
in 1997.
42
<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
for the Aurora Casino's operations for the three month periods ended March 31,
1998 and 1997.
THREE MONTHS ENDED
MARCH 31,
-----------------------------
1998 1997
------------ -------------
REVENUES:
Table games $ 11,410,000 $ 12,334,000
Slot machines 25,024,000 26,525,000
Poker revenues 669,000 -
------------ ------------
Total $ 37,103,000 $ 38,859,000
============ ============
TABLE GAMES:
Gross wagering (drop) (1) $ 62,897,000 $ 69,685,000
Hold percentage (2) 18.1% 17.7%
SLOT MACHINES:
Gross wagering (handle) (1) $444,823,000 $470,657,000
Hold percentage (2) 5.6% 5.6%
- -----------------------
(1) Gross wagering consists of the total value of chips purchased for table
games ("drop") and coins wagered in slot machines ("handle").
(2) Casino revenues consist of the portion of gross wagering that a casino
retains and, as a percentage of gross wagering, is referred to as the "hold
percentage".
Total gross wagering at the Aurora Casino as measured by table drop and slot
machine handle decreased $32.6 million (6%) during the first quarter of 1998
compared to the first quarter of 1997. The decrease reflects reductions in
patron volume as a result of 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.
The decline in patron volume is also attributable to increased competition in
the Chicago market due to the opening of two new casinos in northern Indiana in
April and August 1997 and to reductions in marketing programs.
REVENUES
Casino revenues decreased $1.8 million (4.5%) during the first quarter of
1998, compared to the same period of 1997 due to decreased patron volume as
discussed above. Table game revenues decreased
43
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
$924,000 (7.5%) during the first quarter of 1998 compared to the 1997 period as
the decrease in drop of 9.7% was partially offset by an increase in the table
game hold percentage to 18.1% from 17.7%. The 5.5% decrease in slot machine
handle during the first quarter of 1998 resulted in a three month slot machine
revenue decrease of $1.5 million (5.7%) compared to the same period of 1997.
Casino revenues were favorably impacted by the introduction of poker during the
second quarter of 1997, which generated casino revenues of $669,000 for the
three month period ended March 31, 1998.
Food and beverage revenues at the Aurora Casino did not change significantly
during the three month period ended March 31, 1998 compared to the same period
of 1997. Other revenues increased by $207,000 (49.9%) during the three month
period ended March 31, 1998 compared to the 1997 period due to management's
decision to begin charging valet parking and garage fees.
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 58.1% during the three month period ended March 31, 1998
compared to 60% during the like period of 1997. The decrease from the prior
year period reflects a decrease in promotional activities to attract marginal
customers as a result of the wagering tax increase discussed above.
DEPARTMENTAL EXPENSES
Casino expenses did not change significantly during the 1998 first quarter
compared to the 1997 period reflecting the success of management's efforts to
offset the wagering tax increase by controlling personnel and marketing costs in
order to maintain profitability.
Food and beverage expenses did not change significantly during the first
quarter of 1998. Other expenses decreased $79,000 (19.7%) during the first
quarter of 1998 compared to the first quarter of 1997 due to reductions in
personnel and other expenses resulting from the Aurora Casino's reduced cruising
schedule and management's efforts to contain costs.
TUNICA CASINO
GENERAL
Income from operations at the Tunica Casino amounted to $3.3 million for the
three month period ended March 31, 1998 compared to $4.2 million during the same
period of 1997. The decrease is primarily attributable to increased competition
in the Tunica market as a result of the opening of approximately 1,700 new hotel
rooms by competitors in the fourth quarter of 1997.
44
<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 March 31, 1998 and 1997.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------------
1998 1997
------------ ------------
<S> <C> <C>
CASINO REVENUES:
Table games $ 3,443,000 $ 4,364,000
Slot machines 19,146,000 20,057,000
Poker revenues 214,000 255,000
------------ ------------
Total $ 22,803,000 $ 24,676,000
============ ============
TABLE GAMES:
Gross wagering (drop) (1) $ 18,686,000 $ 20,388,000
Hold percentage (2) 18.4% 21.4%
SLOT MACHINES:
Gross wagering (handle) (1) $372,017,000 $383,804,000
Hold percentage (2) 5.1% 5.2%
- -------------------------
</TABLE>
(1)(2) See corresponding notes to the table at "Aurora Casino - Gaming
Operations" above.
Total gross wagering at the Tunica Casino as measured by table game drop
and slot machine handle decreased $13.5 million (3.3%) during the three month
period ended March 31, 1998 compared to the same period of 1997. The decreased
patron volume is directly attributable to increased competition in the Tunica
market. Slot machine handle and table game drop decreased by $11.8 million
(3.1%) and $1.7 million (8.3%), respectively, during the first quarter of 1998
compared to the prior year period.
REVENUES
Casino revenues decreased $1.9 million (7.6%) during the three month
period ended March 31, 1998 compared to the 1997 period. Table game revenues
decreased 21.1% during the first quarter of 1998 due to the decline in table
drop discussed above as well as a significant decline in the hold percentage to
18.4% from 21.4% during the 1997 period. Slot machine revenue declined 4.5% for
the three month period ended March 31, 1998, reflecting the decrease in gross
wagering discussed above, coupled with a slight decrease in the slot machine
hold percentage during the 1998 period compared to the 1997 period. Poker
revenues also decreased by 16.1% due to a reduction in the number of poker
tables resulting from a casino remodeling.
Rooms revenue decreased $168,000 (7.7%) during the three month period
ended March 31, 1998 compared to the same period in 1997. The decrease is due to
increased competition for overnight patrons resulting from the addition of
approximately 1,700 hotel rooms in the Tunica market during the fourth
45
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
quarter of 1997. Hotel occupancy rates have decreased as a result of the
competition from approximately 88% in the first quarter of 1997 to approximately
82% during the three month period ended March 31, 1998. Food and beverage and
other revenues did not change significantly during the first quarter of 1998
compared to the same period in 1997.
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 slightly to 61.1% from 60.6% during the three month period ended March
31, 1998 compared to 1997. The first quarter percentage increase is the result
of higher complimentary food and beverage costs due to increased marketing
efforts.
DEPARTMENTAL EXPENSES
Casino expenses decreased slightly (2.5%) during the three month period
ended March 31, 1998 compared to the 1997 period reflecting the decrease in
patron volume. Rooms, food and beverage and other expenses did not change
significantly during the first quarter of 1998 compared to the same period of
1997.
OTHER CONSOLIDATED ITEMS
- ------------------------
GENERAL AND ADMINISTRATIVE
General and administrative expenses increased by $254,000 (6.3%) during the
first quarter of 1998 compared to the same period in 1997. Such expenses at the
Aurora Casino (net of management fees) decreased by 5.4% for the three month
period ended March 31, 1998 from the prior year period as a result of
management's efforts to control costs. The Tunica Casino had a cost increase in
this area of 9.7% (net of consulting fees) for the three month period ended
March 31, 1998 compared to the prior year primarily as a result of increased
property taxes. The remaining corporate general and administrative expense
increase of 13.4% for the three month period results from increases in corporate
overhead costs, primarily in legal fees and personnel costs.
MANAGEMENT AND CONSULTING FEES
The decrease in management and consulting fees during the 1998 period is
primarily attributable to the acquisition by HCC of the general partnership
interest in PML. PML is now included in the consolidated results of operations
of HCC; consequently, management fees earned from the Aurora Casino subsequent
to April 1, 1997 have been eliminated in consolidation.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense decreased $702,000 (14.3%) during the
three month period ended March 31, 1998 compared to the 1997 period primarily
due to certain operating equipment at the Tunica Casino becoming fully
depreciated during the third quarter of 1997.
46
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
DEVELOPMENT EXPENSES
Development expenses represent costs incurred in connection with HCC's
pursuit of potential gaming opportunities in jurisdictions where gaming has not
been legalized. Such costs decreased by $50,000 (16.4%) during the three month
period ended March 31, 1998 compared to the 1997 period primarily as a result of
costs incurred during the 1997 period with respect to HCC's efforts in obtaining
a gaming site in Louisiana. In October 1997, HCC entered into a preliminary
agreement with two partners to develop a hotel and casino complex on the Red
River in Shreveport, Louisiana subject to approval of the Louisiana Gaming
Control Board; such approval is anticipated during the second quarter of 1998.
INTEREST
Interest income increased $267,000 (65.9%) for the three month period ended
March 31, 1998 compared to the same period of 1997 as a result of more cash
being available for investment purposes during the 1998 period. Interest
expense did not change significantly during the three month period ended March
31, 1998 compared to the prior year period.
(LOSS) GAIN ON DISPOSAL OF ASSETS
The 1997 gain resulted from the sale of a company-owned aircraft.
INCOME TAX (PROVISION) BENEFIT
HCC and its subsidiaries have tax net operating loss carryforwards
("NOL's") totaling approximately $32.4 million, none of which begin to expire
until the year 2010. Additionally, HCC and its subsidiaries have various tax
credits available totaling approximately $311,000, which do not begin to expire
until the year 2008.
Management believes that it is more likely than not that future
consolidated taxable income of HCC (primarily from the Aurora Casino and the
Tunica Casino) will be sufficient to utilize at least a portion of the NOL's,
tax credits and other deferred tax assets resulting from temporary differences.
Accordingly, under the provisions of Statement of Financial Accounting Standards
No. 109, "Accounting for Income Taxes", the consolidated balance sheet reflects
net deferred tax assets of $3.3 million as of March 31, 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 $9.6 million of taxable income
for federal tax purposes prior to the expiration dates of the NOL's and tax
credit carryforwards and the reversal of other temporary differences.
NET OPERATING LOSS CARRYFORWARDS
Sales by HCC or existing stockholders of common stock, or securities
convertible into common stock, can cause a "change of control", as defined in
Section 382 of the Internal Revenue Code of 1986, as amended, which would limit
the ability of HCC or its subsidiaries to utilize these loss carryforwards in
later tax periods. Should such a change of control occur, the amount of loss
carryforwards available for use in any one year would most likely be
substantially reduced. Future treasury regulations, administrative rulings or
court decisions may also effect HCC's future utilization of its loss
carryforwards.
47
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
YEAR 2000 COMPLIANCE
Management believes that its information systems are Year 2000 compliant.
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 $14.5 million
of cash flow from operations during the first three months of 1998 after
deducting the payment of $2.6 million of management fees. The Tunica Casino
provided $2.2 million of cash from operations during the first three months of
1998 after deducting the payment of $300,000 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 three months of 1998 included
costs to pursue development opportunities ($255,000) and corporate overhead
costs ($1.8 million).
During the first three months of 1998, cash flow from operations was used
by HCC to fund capital expenditures of $1.9 million, to repay third party
indebtedness and make payments under capital lease obligations of $944,000 and
$139,000, respectively, and to pay distributions amounting to $2.2 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 first
mortgage limited to approximately $39 million on substantially all of the assets
of HCA, (iii) a pledge of
48
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
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 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 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 an offer in
December 1997 and redeemed $2.5 million principal amount of the Senior Secured
Notes. An additional offer commenced in May 1998; however, the principal amount
of notes being tendered can not yet be determined.
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 has a $1.3 million bank credit facility available through September 30,
1998 on which no borrowings were outstanding at March 31, 1998. During April
1998, HCT borrowed approximately $400,000 under the credit facility. Borrowings
on the line of credit accrue interest at the rate of prime plus 1/4% per annum
subject to a minimum of 8.875%.
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 $13.75 million undiscounted principal amount of
PPI Funding Notes and $350,000 accrued interest due from GBCC to PPI
Corporation. Annual principal and interest payments by HCC on the $3.8 million
note approximate the general partner's share of partnership distributions now
being made to HCC.
As of March 31, 1998, HCC's scheduled maturities of long-term debt and
payments under capital leases during the remainder of 1998 are approximately
$5.9 million and $860,000, respectively. The estimated long-term debt
maturities include the redemption of $5 million of Senior Secured Notes pursuant
to the mandatory redemption offers previously described.
CAPITAL EXPENDITURES AND OTHER INVESTING ACTIVITIES
Capital expenditures at the Aurora Casino during the first three months of
1998 were $1.3 million; management anticipates spending $2.1 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 three months of
1998 amounted to $511,000; management anticipates spending $6.4 million during
the remainder of 1998. Projects currently
49
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
planned for 1998 include upgrades to the lobby area and hotel rooms, an
expansion of the recreational vehicle parking area 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.
HCC is pursuing several potential gaming opportunities including the
aforementioned Shreveport, Louisiana joint venture project. As presently
contemplated, HCC would contribute its proportionate share of approximately $40
million as an equity investment in the venture with the remaining construction
and preopening costs (estimated at $120 million) to come from non-recourse
project financing.
HCC intends to finance any future ventures with cash flow from operations,
together with third party financing, including non-recourse project financing.
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.
50
<PAGE>
PART II: OTHER INFORMATION
- ---------------------------
The Registrants did not file any reports on Form 8-K during the quarter
ended March 31, 1998. The Registrants filed their Annual Report on Form 10-K
for the year ended December 31, 1997 with the Securities and Exchange Commission
on April 15, 1998.
SIGNATURES
- ----------
Pursuant to the requirements of the Securities Exchange Act of 1934, each of
the Registrants has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HOLLYWOOD CASINO CORPORATION
Date: May 13, 1998 By: /s/ Charles F. LaFrano III
-------------- --------------------------------
Charles F. LaFrano III
Vice President of Finance and
Principal Accounting Officer
HWCC - TUNICA, INC.
Date: May 13, 1998 By: /s/ Charles F. LaFrano III
-------------- -------------------------------
Charles F. LaFrano III
Principal Accounting Officer
51
<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>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 55,760
<SECURITIES> 0
<RECEIVABLES> 3,920
<ALLOWANCES> 1,395
<INVENTORY> 1,198
<CURRENT-ASSETS> 79,161
<PP&E> 239,128
<DEPRECIATION> 69,940
<TOTAL-ASSETS> 288,816
<CURRENT-LIABILITIES> 43,283
<BONDS> 219,009
0
0
<COMMON> 2
<OTHER-SE> 17,694
<TOTAL-LIABILITY-AND-EQUITY> 288,816
<SALES> 0
<TOTAL-REVENUES> 63,807
<CGS> 0
<TOTAL-COSTS> 45,433
<OTHER-EXPENSES> 10,995
<LOSS-PROVISION> 240
<INTEREST-EXPENSE> 6,779
<INCOME-PRETAX> 360
<INCOME-TAX> 291
<INCOME-CONTINUING> 69
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 69
<EPS-PRIMARY> 0.00
<EPS-DILUTED> 0.00
</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>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 13,416
<SECURITIES> 0
<RECEIVABLES> 2,393
<ALLOWANCES> 824
<INVENTORY> 532
<CURRENT-ASSETS> 21,596
<PP&E> 118,182
<DEPRECIATION> 33,672
<TOTAL-ASSETS> 118,682
<CURRENT-LIABILITIES> 9,001
<BONDS> 85,067
0
0
<COMMON> 0
<OTHER-SE> 24,614
<TOTAL-LIABILITY-AND-EQUITY> 118,682
<SALES> 0
<TOTAL-REVENUES> 25,072
<CGS> 0
<TOTAL-COSTS> 17,999
<OTHER-EXPENSES> 3,580
<LOSS-PROVISION> 152
<INTEREST-EXPENSE> 2,609
<INCOME-PRETAX> 732
<INCOME-TAX> 0
<INCOME-CONTINUING> 732
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 732
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
