<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM-10Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended JUNE 30, 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 August 13, 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 46% of HCC's outstanding common shares are
listed and traded on the Nasdaq National Market tier of the Nasdaq Stock Market
under the symbol HWCC. The remaining outstanding HCC common shares are owned by
certain general partnerships and trusts controlled by Jack E. Pratt, Edward T.
Pratt, Jr. and William D. Pratt and by other family members (collectively, the
"Pratt Family").
HCC owns all of the outstanding common stock of both Hollywood Casino -
Aurora, Inc. ("HCA") and HWCC - Tunica, Inc. ("HCT"). HCA is an Illinois
corporation organized by the Pratt Family during 1990 for the purpose of
developing and owning the Aurora Casino. HCT is a Texas corporation formed by
HCC during 1993 to acquire and complete the Tunica Casino. Prior to December
31, 1996, HCC also owned approximately 80% of the common stock of Greate Bay
Casino Corporation ("GBCC"), a Delaware corporation, whose principal assets are
the Sands Hotel and Casino in Atlantic City, New Jersey (the "Sands") and
management and consulting agreements on the Aurora Casino and the Tunica Casino,
respectively. On December 31, 1996, HCC distributed the common stock of GBCC
owned by HCC to its shareholders. As a result of the dividend, GBCC is no
longer a subsidiary of HCC.
As further discussed in the Notes to Consolidated Financial Statements, HCC
issued $210,000,000 of 12 3/4% Senior Secured Notes (the "Senior Secured Notes")
due November 1, 2003, discounted to yield 13 3/4% per annum, through a public
offering in October 1995. The Senior Secured Notes are unconditionally
guaranteed on a senior secured basis by HCT and by certain future subsidiaries
of HCC. The Senior Secured Notes are secured by, among other things, (i)
substantially all of the assets of HCT, (ii) a limited first mortgage on
substantially all of the assets of HCA and (iii) a pledge of the capital stock
of certain subsidiaries of HCC including HCA and HCT. Accordingly, the
financial statements of HCA and HCT are also included herein.
The consolidated financial statements and financial statements as of June 30,
1998 and for the three and six month periods ended June 30, 1998 and 1997 have
been prepared by HCC, HCA and HCT without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Other than with respect
to the uncertainty discussed in Note 5 of the Notes to Consolidated Financial
Statements, 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 June
30, 1998, and the results of their operations for the three and six month
periods ended June 30, 1998 and 1997 and cash flows for the six month periods
ended June 30, 1998 and 1997.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. These financial statements should be read in
conjunction with the financial statements and notes thereto included in HCC and
HCT's 1997 Annual Report on Form 10-K.
Historically, the Aurora Casino and Tunica Casino have experienced some
degree of seasonality. Consequently, the results of operations for the six month
period ended June 30, 1998 are not necessarily indicative of the operating
results to be reported for the full year.
2
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
------------- -------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 52,634,000 $ 38,156,000
Short-term investments 5,062,000 5,979,000
Accounts receivable, net of allowances of
$1,442,000 and $1,188,000, respectively 2,141,000 2,747,000
Inventories 1,225,000 1,454,000
Deferred income taxes 1,472,000 2,273,000
Refundable deposits and other
current assets 2,301,000 2,274,000
Due from affiliates 8,383,000 7,811,000
------------ ------------
Total current assets 73,218,000 60,694,000
------------ ------------
Property and Equipment:
Land 6,621,000 6,621,000
Buildings and improvements 119,802,000 119,534,000
Riverboats and barges 39,494,000 39,494,000
Operating equipment 72,562,000 70,390,000
Construction in progress 1,832,000 1,222,000
------------ ------------
240,311,000 237,261,000
Less - accumulated depreciation
and amortization (73,174,000) (66,099,000)
------------ ------------
Net property and equipment 167,137,000 171,162,000
------------ ------------
Other Assets:
Deferred financing costs 5,075,000 5,558,000
Notes receivable, net of allowance - 6,000,000
Land rights 7,352,000 7,454,000
Due from affiliates, net of valuation allowance 12,396,000 12,322,000
Land held for sale, net of valuation allowance 6,264,000 6,264,000
Other assets 8,796,000 8,148,000
------------ ------------
Total other assets 39,883,000 45,746,000
------------ ------------
$280,238,000 $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>
JUNE 30, DECEMBER 31,
1998 1997
-------------- --------------
<S> <C> <C>
Current Liabilities:
Current maturities of long-term debt
and capital lease obligations $ 7,086,000 $ 7,661,000
Accounts payable 3,674,000 3,724,000
Accrued liabilities -
Salaries and wages 4,043,000 4,916,000
Interest 4,649,000 4,660,000
Gaming and other taxes 6,864,000 2,469,000
Insurance 3,106,000 2,667,000
Other 3,491,000 2,748,000
Other current liabilities 2,009,000 2,549,000
------------- -------------
Total current liabilities 34,922,000 31,394,000
------------- -------------
Long-Term Debt 198,283,000 198,420,000
------------- -------------
Capital Lease Obligations 20,562,000 20,841,000
------------- -------------
Other Noncurrent Liabilities 6,831,000 7,064,000
------------- -------------
Commitments and Contingencies
Minority Interest in Limited Partnership 1,799,000 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 (205,395,000) (205,609,000)
------------- -------------
Total shareholders' equity 17,841,000 17,627,000
------------- -------------
$ 280,238,000 $ 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
JUNE 30,
--------------------------
1998 1997
------------ ------------
<S> <C> <C>
Revenues:
Casino $62,336,000 $62,215,000
Rooms 2,501,000 2,553,000
Food and beverage 7,178,000 7,008,000
Other 982,000 780,000
----------- -----------
72,997,000 72,556,000
Less - promotional allowances (6,644,000) (6,255,000)
----------- -----------
Net revenues 66,353,000 66,301,000
----------- -----------
Expenses:
Casino 45,850,000 42,510,000
Rooms 453,000 461,000
Food and beverage 2,173,000 2,201,000
Other 659,000 771,000
General and administrative 4,533,000 4,269,000
Management and consulting fees 300,000 300,000
Depreciation and amortization 4,210,000 4,944,000
Development 169,000 590,000
----------- -----------
Total expenses 58,347,000 56,046,000
----------- -----------
Income from operations 8,006,000 10,255,000
----------- -----------
Non-operating income (expenses):
Interest income 745,000 418,000
Interest expense (7,456,000) (7,627,000)
Loss on disposal of assets (64,000) (4,000)
----------- -----------
Total non-operating expense, net (6,775,000) (7,213,000)
----------- -----------
Income before income taxes and other item 1,231,000 3,042,000
Income tax provision (374,000) (1,068,000)
----------- -----------
Income before other item 857,000 1,974,000
Minority interest in earnings of Limited Partnership (Note 1) (712,000) (781,000)
----------- -----------
Net income $ 145,000 $ 1,193,000
=========== ===========
Basic and diluted net income per common share $ .01 $ .05
=========== ===========
</TABLE>
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated statements.
5
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
----------------------------
1998 1997
------------- -------------
<S> <C> <C>
Revenues:
Casino $122,242,000 $125,750,000
Rooms 4,508,000 4,728,000
Food and beverage 13,959,000 13,722,000
Other 1,899,000 1,602,000
------------ ------------
142,608,000 145,802,000
Less - promotional allowances (12,448,000) (12,031,000)
------------ ------------
Net revenues 130,160,000 133,771,000
------------ ------------
Expenses:
Casino 88,222,000 84,981,000
Rooms 898,000 919,000
Food and beverage 4,346,000 4,409,000
Other 1,342,000 1,544,000
General and administrative 8,838,000 8,320,000
Management and consulting fees 600,000 3,327,000
Depreciation and amortization 8,424,000 9,860,000
Development 424,000 895,000
------------ ------------
Total expenses 113,094,000 114,255,000
------------ ------------
Income from operations 17,066,000 19,516,000
------------ ------------
Non-operating income (expenses):
Interest income 1,417,000 823,000
Interest expense (14,907,000) (15,196,000)
(Loss) gain on disposal of assets (65,000) 411,000
------------ ------------
Total non-operating expense, net (13,555,000) (13,962,000)
------------ ------------
Income before income taxes and other item 3,511,000 5,554,000
Income tax provision (665,000) (2,089,000)
------------ ------------
Income before other item 2,846,000 3,465,000
Minority interest in earnings of Limited Partnership (Note 1) (2,632,000) (781,000)
------------ ------------
Net income $ 214,000 $ 2,684,000
============ ============
Basic and diluted net income per common share $ .01 $ .11
============ ============
</TABLE>
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated statements.
6
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------------------------
1998 1997
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 214,000 $ 2,684,000
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization, including accretion
of debt discount 8,928,000 10,295,000
Loss (gain) on disposal of assets 65,000 (411,000)
Minority interest in earnings of Limited Partnership 2,632,000 781,000
Provision for doubtful accounts 466,000 335,000
Deferred income tax provision 343,000 1,732,000
Decrease in accounts receivable 140,000 17,000
Increase (decrease) in accounts payable and accrued expenses 4,643,000 (1,925,000)
Net change in other current assets and liabilities (984,000) 41,000
Net change in other noncurrent assets and liabilities (522,000) 149,000
----------- -----------
Net cash provided by operating activities 15,925,000 13,698,000
----------- -----------
INVESTING ACTIVITIES:
Purchases of property and equipment (3,795,000) (2,210,000)
Short-term investments 917,000 -
Collections on notes receivable 6,000,000 -
Proceeds from disposal of assets 15,000 2,654,000
Investments in unconsolidated affiliates - (2,000,000)
Increase in cash from purchase of Limited Partnership interest - 451,000
----------- -----------
Net cash provided by (used in) investing activities 3,137,000 (1,105,000)
----------- -----------
FINANCING ACTIVITIES:
Borrowings on credit facilities 398,000 -
Deferred financing costs - (24,000)
Repayments of long-term debt (1,602,000) (3,955,000)
Payments on capital lease obligations (291,000) (1,194,000)
Distributions to Limited Partner (3,089,000) (2,101,000)
----------- -----------
Net cash used in financing activities (4,584,000) (7,274,000)
----------- -----------
Net increase in cash and cash equivalents 14,478,000 5,319,000
Cash and cash equivalents at beginning of period 38,156,000 21,488,000
----------- -----------
Cash and cash equivalents at end of period $52,634,000 $26,807,000
=========== ===========
</TABLE>
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated statements.
7
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) ORGANIZATION AND BUSINESS
Hollywood Casino Corporation ("HCC" or the "Company"), is a Delaware
corporation which was organized and incorporated on November 5, 1990.
Approximately 54% of the issued and outstanding stock of HCC is owned by certain
general partnerships and trusts controlled by Jack E. Pratt, Edward T. Pratt,
Jr. and William D. Pratt and by other family members (collectively, the "Pratt
Family").
HCC owns all of the outstanding common stock of both Hollywood Casino -
Aurora, Inc. ("HCA") and HWCC - Tunica, Inc. ("HCT"). HCA is an Illinois
corporation organized during 1990 which owns and operates a 32,100 square foot
riverboat gaming operation together with docking and other entertainment
facilities under the service mark Hollywood Casino(R) located in Aurora,
Illinois (the "Aurora Casino"). HCT is a Texas corporation formed by HCC during
1993 which owns and operates a 54,000 square foot gaming facility, adjacent
support facilities and a 506-room hotel complex under the service mark Hollywood
Casino(R) in northern Tunica County, Mississippi (the "Tunica Casino"). The
Aurora Casino and the Tunica Casino commenced operations in June 1993 and August
1994, respectively.
The Company estimates that its two gaming operations derive a significant
amount of their gaming revenues from patrons living in areas surrounding the
sites where the Company's gaming operations are located. Competition within the
Company's gaming markets is intense and management believes that this
competition will continue in the future.
Prior to December 31, 1996, HCC also owned approximately 80% of the common
stock of Greate Bay Casino Corporation ("GBCC"), also a Delaware corporation.
On December 31, 1996, HCC distributed to its shareholders the common stock of
GBCC owned by HCC. As a result of the dividend, GBCC is no longer a subsidiary
of HCC. While owned by HCC, GBCC's principal asset was the Sands Hotel and
Casino in Atlantic City, New Jersey (the "Sands"). GBCC also has a limited
partnership interest in the entity that manages the Aurora Casino and has a
consulting contract with the Tunica Casino.
Effective as of April 1, 1997, HCC acquired the general partnership interest
in Pratt Management, L.P. ("PML"), the limited partnership which holds the
management contract on the Aurora Casino, from PPI Corporation, a wholly owned
subsidiary of GBCC. For all periods subsequent to the acquisition date (April
1, 1997), PML is reflected as a consolidated subsidiary of HCC. The assets and
liabilities of PML were recorded at historical cost at the date of acquisition
with the difference between acquisition cost and the historical net book value
($12,747,000) recorded as a charge to paid-in capital. PML earns management
fees from the Aurora Casino and incurs operating and other expenses with respect
to its management thereof. As general partner, HCC receives 99% of the first
$84,000 of net income earned by PML each month together with 1% of any income
earned above such amount. The remaining limited partnership interest continues
to be held by a subsidiary of GBCC and is reflected on the accompanying
consolidated financial statements as a minority interest.
The accompanying consolidated financial statements also reflect HCT's
initial one-third investment 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 late 1998. The $2,000,000 investment is included in other
noncurrent assets.
8
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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 June 30, 1998
and December 31, 1997.
The Financial Accounting Standards Board has issued a new standard,
"Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 requires the
presentation and disclosure of comprehensive income, which is defined as the
change in a company's equity resulting from non-owner transactions and events.
SFAS 130 became effective December 15, 1997 and requires the restatement of all
prior periods presented. The Company has adopted the provisions of SFAS 130;
however, the statement provides that an enterprise that has no items of other
comprehensive income for any period presented need only report net income. The
Company has no such other comprehensive income items for any period presented;
accordingly, the presentation and disclosure requirements of SFAS 130 are not
applicable.
The consolidated financial statements as of June 30, 1998 and for the three
and six month periods ended June 30, 1998 and 1997 have been prepared by HCC
without audit. Other than with respect to the uncertainty discussed in Note 5,
in the opinion of management, these consolidated financial statements contain
all adjustments (consisting of only normal recurring adjustments) necessary to
present fairly the consolidated financial position of HCC as of June 30, 1998,
the results of its operations for the three and six month periods ended June 30,
1998 and 1997 and its cash flows for the six month periods ended June 30, 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 requires the restatement of earnings per share
for all prior years presented.
9
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 calculated for periods in which income from
continuing operations was earned by dividing the components of net income by the
weighted average number of shares of common stock and common stock equivalents
outstanding. All common stock equivalents are excluded from the calculation of
diluted net loss per share for periods during which a loss was incurred because
the effect of their inclusion would be antidilutive.
The weighted average number of shares of common stock and common stock
equivalents outstanding used for the calculation of earnings per share is as
follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- ----------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Shares used in the calculation of:
- ---------------------------------
Basic net income per share 24,949,976 24,851,177 24,942,641 24,805,572
Diluted net income per share 24,952,485 24,973,462 24,952,213 24,940,003
</TABLE>
The number of shares used in the calculation of diluted earnings per share
for the three and six month periods ended June 30, 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 and six month periods ended June 30,
1997 also include 8,791 and 18,232 common stock equivalents, respectively,
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 due to the exercise
price of the options being in excess of the average market price of the
underlying common stock. The weighted average number of options excluded was
772,418 and 45,000, respectively, during the three month periods ended June 30,
1998 and 1997 and 713,204 and 44,586, respectively, during the six month periods
ended June 30, 1998 and 1997.
During June 1998, the Board of Directors authorized the repricing of options
to purchase 35,000 shares of common stock granted during 1996 and 1997 to non-
employee directors of the Company. The exercise price was adjusted to $1.75 per
share, the fair market value as of the date of the repricing; all of the
repriced options are fully vested. No shareholder owning 1% or more of the
Company's common stock participated in the repricing.
10
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(3) LONG-TERM DEBT AND PLEDGE OF ASSETS
Substantially all of HCC's assets are pledged in connection with HCC's long-
term indebtedness.
JUNE 30, DECEMBER 31,
1998 1997
------------- -------------
Indebtedness of HCC:
12 3/4% Senior Secured Notes, due 2003, net
of discount of $7,624,000 and $8,128,000,
respectively (a) $199,588,000 $199,372,000
Promissory note to affiliate (Note 6) 3,149,000 3,447,000
------------ ------------
202,737,000 202,819,000
------------ ------------
Indebtedness of HCA:
Promissory note to bank - 350,000
Equipment loans 32,000 413,000
------------ ------------
32,000 763,000
------------ ------------
Indebtedness of HCT:
Equipment loans 1,362,000 1,638,000
Bank credit facility (b) 389,000 -
------------ ------------
1,751,000 1,638,000
------------ ------------
Total indebtedness 204,520,000 205,220,000
Less - current maturities (6,237,000) (6,800,000)
------------ ------------
Total long-term debt $198,283,000 $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 limited first mortgage on substantially
all of the assets of HCA, (iii) a pledge of the capital stock of certain
subsidiaries of HCC and (iv) the collateral assignment of any future
management contracts entered into by HCC. The limitation on
11
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
the first mortgage described in (ii) above was originally $39,007,000 and
is subject to reduction for principal payments on an intercompany note
between HCC and HCA. The outstanding balance of the intercompany note was
$34,007,000 and $36,507,000 at June 30, 1998 and December 31, 1997,
respectively. The note requires semiannual principal payments of $2,500,000
commencing October 15, 1997 with the balance due November 1, 2003.
The Senior Secured Notes are redeemable at the option of HCC any time on or
after November 1, 1999 at 106.375% of the then outstanding principal
amount, decreasing to 103.1875% and 100%, respectively, on November 1, 2000
and 2001. Commencing with the November 1, 1997 interest payment date and
at each subsequent interest payment date, HCC is required to make an offer
to purchase not more than $2,500,000 in principal amount of the Senior
Secured Notes at a price of 106.375% of the principal amount tendered.
During May 1998, HCC made such an offer resulting in the redemption of
$288,000 principal amount of the Senior Secured Notes. Costs associated
with the redemption, including the premium paid and the write off of
associated deferred financing costs, amounted to approximately $36,000.
The indenture to the Senior Secured Notes contains various provisions
limiting the ability of HCC and certain defined subsidiaries to, among
other things, pay dividends or make other restricted payments; incur
additional indebtedness or issue preferred stock; create liens; create
dividend or other payment restrictions affecting certain defined
subsidiaries; enter into mergers or consolidations or make sales of all or
substantially all assets of HCC, HCT or any future guarantor; and enter
into transactions with certain affiliates.
(b) HCT has a bank credit facility in the amount of $1,300,000 available to
borrow against through September 30, 1998. HCT borrowed $398,000 under the
credit facility in April 1998 at the rate of 8.875% per annum; no
borrowings were outstanding under the credit facility at December 31, 1997.
Borrowings under the credit facility are to be repaid in monthly
installments over a period of 36 months and accrue interest at the bank's
prime lending rate plus 1/4% per annum subject to a minimum of 8.875%.
Such borrowings are collateralized by equipment purchased with the loan
proceeds. The line of credit agreement requires the maintenance of certain
balances in addition to the provision of certain financial reports.
Scheduled payments of long-term debt as of June 30, 1998 are set forth
below:
1998 (six months) $ 3,066,000
1999 6,309,000
2000 6,360,000
2001 6,003,000
2002 5,694,000
Thereafter 184,712,000
------------
Total $212,144,000
============
12
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Interest paid amounted to $14,425,000 and $14,761,000, respectively, during
the six month periods ended June 30, 1998 and 1997.
(4) 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 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 leased certain equipment under capital lease agreements which
provided for interest at the rate of 11.2% and expired in 1998. HCT leased
certain gaming and other equipment under capital lease agreements which provided
for interest at rates ranging up to 13 1/4% per annum and expired during 1997.
The original cost of HCA's parking garages is included in buildings on the
accompanying consolidated balance sheets at both June 30, 1998 and December 31,
1997 in the amount of $27,358,000. Assets under capital leases with an original
cost of $7,260,000 are included in operating equipment on the accompanying
consolidated balance sheets at both June 30, 1998 and December 31, 1997.
Amortization expense with respect to these assets amounted to $333,000 and
$479,000, respectively, during the three month periods ended June 30, 1998 and
1997 and $665,000 and $1,123,000, respectively, during the six month periods
ended June 30, 1998 and 1997.
13
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Future minimum lease payments under capital lease obligations as of June 30,
1998 are as follows:
1998 (six months) $ 1,378,000
1999 2,457,000
2000 2,483,000
2001 2,532,000
2002 2,643,000
Thereafter 24,076,000
------------
Total minimum lease payments 35,569,000
Less amount representing interest (14,158,000)
------------
Present value of future
minimum lease payments 21,411,000
Current capital lease obligation (849,000)
------------
Long-term capital lease obligation $ 20,562,000
------------
(5) INCOME TAXES
The Company has recently been advised that it may have to modify its tax
treatment of the spin-off of the stock of GBCC which occurred on December 31,
1996. The revised tax treatment may result in the Company being required to
recognize additional taxable income for 1996 and succeeding periods. The
Company has not yet been able to reasonably estimate the amount of additional
taxable income, if any, that might be required to be recognized for such period;
however, the amount of additional taxable income to be recognized may be
material. To the extent the Company is required to recognize additional taxable
income for 1996 or succeeding periods, the Company's significant net operating
loss carryforwards or other tax attributes may partially offset or mitigate any
additional tax liabilities. The Company has commenced an investigation into and
will continue to review these issues with the assistance of outside advisors and
consultants. Until the Company completes its investigation, the potential impact
of this revised tax treatment on the Company's financial statements, if any, is
uncertain. The Company will disclose the results of this review as soon as
additional information is known.
The tax presentation and other disclosures as set forth in this footnote are
subject to the outcome of the uncertainties discussed in the preceding
paragraph.
14
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Components of HCC's provision for income taxes consist of the following:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ --------------------------
1998 1997 1998 1997
---------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Current (provision for) benefit
in lieu of:
Federal $(605,000) $ (732,000) $ 1,170,000 $(2,462,000)
State (193,000) (207,000) (322,000) (357,000)
Deferred (provision for) benefit
in lieu of:
Federal 425,000 2,817,000 (1,457,000) 3,746,000
State (1,000) (56,000) (42,000) (126,000)
Valuation allowance - (2,890,000) (14,000) (2,890,000)
--------- ----------- ----------- -----------
$(374,000) $(1,068,000) $ (665,000) $(2,089,000)
========= =========== =========== ===========
</TABLE>
No federal tax payments were made during the six month periods ended
June 30, 1998 and 1997. State tax payments of $328,000 and $196,000,
respectively, were made during the six month periods ended June 30, 1998 and
1997.
Federal and state income tax provisions or benefits are based upon estimates
of the results of operations for the current period and reflect the
nondeductibility for income tax purposes of certain items, including certain
lobbying, meals and entertainment and other expenses. Deferred income taxes
result primarily from the use of the allowance method rather than the direct
write-off method for doubtful accounts, the use of accelerated methods of
depreciation for federal income tax purposes and differences in the timing of
deductions taken between tax and financial reporting purposes for the
amortization of preopening costs and other accruals. Quarterly income tax
provisions or benefits are determined by applying the resulting effective income
tax rate to the results of operations for the quarter.
At June 30, 1998, HCC and its subsidiaries have tax net operating loss
carryforwards ("NOL's") totaling approximately $30,600,000, 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 $3,081,000 and
$3,424,000 at June 30, 1998 and December 31, 1997, respectively.
15
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The ultimate recognition of the current amount of net deferred tax assets is
dependent on HCC and its subsidiaries' ability to generate approximately
$9,100,000 of taxable income for federal tax purposes prior to the expiration
dates of the NOL's and tax credit carryforwards and the reversal of other
temporary differences.
Sales by HCC or existing stockholders of common stock can cause a "change of
control", as defined in Section 382 of the Internal Revenue Code of 1986, as
amended, which would limit the ability of HCC or its subsidiaries to utilize
these loss carryforwards in later tax periods. Should such a change of control
occur, the amount of loss carryforwards available for use in any one year would
most likely be substantially reduced. Future treasury regulations,
administrative rulings or court decisions may also effect HCC's utilization of
its loss carryforwards.
The Internal Revenue Service is currently examining the consolidated Federal
income tax returns of HCC for the years 1993 and 1994. Management believes that
the results of such examination will not have a material adverse effect on the
consolidated financial position or results of operations of HCC.
The components of the net deferred tax asset were as follows:
JUNE 30, DECEMBER 31,
1998 1997
------------- -------------
Deferred tax assets:
Net operating loss carryforwards $ 10,396,000 $ 9,226,000
Allowance for doubtful accounts 7,407,000 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 2,856,000 2,749,000
Benefits accrual 1,710,000 1,710,000
Other 657,000 733,000
------------ ------------
Total deferred tax assets 26,227,000 26,194,000
------------ ------------
Deferred tax liabilities:
Depreciation and amortization (7,405,000) (6,422,000)
Amortization of note discount - (621,000)
------------ ------------
Total deferred tax liabilities (7,405,000) (7,043,000)
------------ ------------
Net deferred tax asset 18,822,000 19,151,000
Valuation allowance (15,741,000) (15,727,000)
------------ ------------
$ 3,081,000 $ 3,424,000
============ ============
16
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(6) TRANSACTIONS WITH RELATED PARTIES
HCC has advanced funds to GBCC totaling $6,750,000 as of both June 30, 1998
and December 31, 1997. During the third quarter of 1996, GBCC borrowed
$6,500,000 from HCC on a demand basis with interest at the rate of 13 3/4% per
annum payable quarterly commencing October 1, 1996. An additional $250,000 note
became due on April 1, 1998 for which payment has not been received. This
advance continues to bear interest at the rate of 14% per annum, payable
semiannually. Interest receivable amounting to $1,244,000 and $839,000 is
included in due from affiliates on the accompanying consolidated balance sheets
at June 30, 1998 and December 31, 1997, respectively. The payment of principal
and interest to HCC on such borrowings is subject to the approval of the New
Jersey Casino Control Commission. Interest income accrued on loans and advances
to GBCC amounted to $235,000 during each of the three month periods ended June
30, 1998 and 1997 and $467,000 and $502,000, respectively, during the six months
ended June 30, 1998 and 1997.
In connection with its acquisition of the general partnership interest in
PML (see Note 1), HCC issued a five-year note in the original amount of
$3,800,000 and assigned $13,750,000 undiscounted principal amount of PPI Funding
Notes (see below) and $350,000 accrued interest due from GBCC to PPI
Corporation. The $3,800,000 note is payable in monthly installments of $83,000,
including interest at the rate of 14% per annum, commencing on May 1, 1997, with
additional quarterly variable principal payments commencing on July 1, 1997 in
an amount equal to the general partner's share of quarterly cash distributions,
as defined, from PML. HCC incurred interest expense with respect to the note
amounting to $113,000 and $229,000, respectively, during the three and six month
periods ended June 30, 1998. Such interest expense incurred by HCC during the
three month period ended June 30, 1997 totaled $131,000. Accrued interest of
$36,000 and $41,000, respectively, is included in interest payable on the
accompanying consolidated balance sheets at June 30, 1998 and December 31, 1997.
On February 17, 1994, PPI Funding Corp., a subsidiary of GBCC, issued
$40,524,000 discounted principal amount of new deferred interest notes (the "PPI
Funding Notes") to HCC in exchange for $38,779,000 principal amount of 15 1/2%
unsecured notes (the "PCPI Notes") held by HCC and issued by PCPI Funding Corp.,
another subsidiary of GBCC. The PPI Funding Notes were discounted to yield
interest at the rate of 14 7/8% per annum and had an original face value of
$110,636,000. Subsequent principal payments by PPI Funding Corp. reduced the
maturity value of the notes to $98,353,000 at December 31, 1996. During the
second quarter of 1997, HCC assigned $13,750,000 undiscounted principal amount
of the PPI Funding Notes to PPI Corporation as consideration, in part, for HCC's
acquisition of the general partnership interest in PML. Such assignment reduced
the maturity value of the notes to $84,603,000. On January 5, 1998, GBCC's most
significant subsidiary, Greate Bay Hotel and Casino, Inc. ("GBHC"), filed for
protection under Chapter 11 of the United States Bankruptcy Code. It is
anticipated that GBCC's equity ownership of GBHC will be significantly reduced
in the reorganization under Chapter 11 and, as a consequence, HCC wrote off
$37,000,000 undiscounted principal amount of 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.
17
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Prior to December 31, 1996, when GBCC and its subsidiaries were members of
the HCC consolidated group, it was anticipated that one of HCC's primary methods
of realizing the carrying value of the PPI Funding Notes would be through the
utilization of NOL's of GBCC. As a result of HCC's distribution of GBCC stock
at December 31, 1996, GBCC's NOL's are no longer available for utilization in
HCC's consolidated federal income tax returns; accordingly, HCC provided a
valuation allowance in the amount of $18,741,000 at December 31, 1996 which
reduced the carrying amount of the PPI Funding Notes to their estimated
realizable value of $35,597,000 at that date. As a result of GBHC's Chapter 11
filing discussed above, HCC took an additional write down during 1997, further
reducing the carrying amount of the PPI Funding Notes at both June 30, 1998 and
December 31, 1997 to an estimated realizable value of $12,322,000. Management
presently anticipates that the remaining balance will be realized through a
combination of 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 June 30, 1998 and 1997 and $600,000
during each of the six month periods ended June 30, 1998 and 1997.
18
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Advanced Casino Systems Corporation ("ACSC"), a GBCC subsidiary, provides
computer, marketing and other administrative services to HCC and its
subsidiaries. Computer services provided include hardware, software and
operator support and, for the most part, such services are billed by ACSC at its
direct cost plus expenses incurred. ACSC and HCT entered into a Computer
Services Agreement dated as of January 1, 1994 and renewed through December 31,
1999 to provide such services and to license or sublicense to HCT computer
software necessary to operate HCT's casino, hotel and related facilities and
business operations. HCT pays ACSC for such equipment and licenses such
software at amounts and on terms and conditions that ACSC provides to unrelated
third parties. HCT also pays ACSC a fixed license fee of $33,600 per month.
ACSC's billings for such products and services amounted to $358,000 and
$157,000, respectively, for the three month periods ended June 30, 1998 and 1997
and $662,000 and $324,000, respectively, for the six month periods ended June
30, 1998 and 1997. Unpaid charges included in due to affiliates on the
accompanying consolidated balance sheets at June 30, 1998 and December 31, 1997
amounted to $91,000 and $66,000, respectively.
Many of the marketing and administrative services now provided by ACSC were
previously provided to HCC and its subsidiaries by GBHC. Such charges amounted
to $253,000 and $521,000, respectively, during the three and six month periods
ended June 30, 1997.
HCC allocates certain general and administrative costs to GBCC and its
subsidiaries pursuant to a services agreement. Such allocated costs and fees
amounted to $275,000 and $277,000, respectively, for the three month periods
ended June 30, 1998 and 1997 and $571,000 and $963,000, respectively, for the
six month periods ended June 30, 1998 and 1997. In connection with such
charges, receivables in the amount of $88,000 and $156,000 are included in due
from affiliates on the accompanying consolidated balance sheets at June 30, 1998
and December 31, 1997, respectively.
In September 1994, a subsidiary of HCC entered into an agreement with an
entity owned by a member of the Pratt Family to manage the operation and
maintenance of a Company-owned aircraft and to make such aircraft available for
charter by third parties. The aircraft was sold during the first quarter of
1997. Subsequent to the sale, HCC has occasionally chartered aircraft from the
maintenance company. No such charter fees were incurred during the three or six
month periods ended June 30, 1998; charter fees, expenses and commissions
totaled $3,000 and $256,000, respectively, during the three and six month
periods ended June 30, 1997.
19
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(7) COMMITMENTS AND CONTINGENCIES
INCOME TAXES -
The Company has recently been advised that it may have to modify its tax
treatment of the spin-off of the stock of GBCC which occurred on December 31,
1996. The revised tax treatment may result in the Company being required to
recognize additional taxable income for 1996 and succeeding periods. The
Company has not yet been able to reasonably estimate the amount of additional
taxable income, if any, that might be required to be recognized for such period;
however, the amount of additional taxable income to be recognized may be
material (see Note 5).
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 June 30, 1998 and 1997, HCT expensed $946,000 and
$1,040,000, respectively, in connection with the ground lease. Such expenses
amounted to $1,886,000 and $1,968,000, respectively, during the six month
periods ended June 30, 1998 and 1997.
PLANET HOLLYWOOD LITIGATION -
Planet Hollywood International, Inc., a Delaware corporation, and Planet
Hollywood (Region IV), Inc., a Minnesota corporation (collectively, "PHII"),
filed a complaint in the United States District Court for the Northern District
of Illinois, Eastern Division on July 29, 1996 against HCC, HCA and a member of
the Pratt Family (collectively, the "Original Hollywood Defendants"). The
Original Hollywood Defendants filed with the Court on September 18, 1996 an
answer to PHII's lawsuit, along with numerous counterclaims against PHII, Robert
Earl and Keith Barish (collectively, the "PHII Defendants"). PHII filed with
the Court on January 21, 1997, an amendment to their complaint which, among
other things, added HCT (together with the Original Hollywood Defendants, the
"Hollywood Defendants") and GBCC as defendants. The Original Hollywood
Defendants filed with the Court on February 4, 1997, and GBCC and HCT filed with
the Court on February 20, 1997, answers and counterclaims to such amended
complaint.
In its lawsuit, PHII alleges, among other things, that the Hollywood
Defendants and GBCC have, in opening and operating the Hollywood Casino concept,
infringed on PHII's trademark, service mark and trade dress and have engaged in
unfair competition and deceptive trade practices. In their counterclaims, the
Hollywood Defendants and GBCC allege, among other things, that the PHII
Defendants have, through their planned use of their mark in connection with
casino services, infringed on certain of HCC's service marks and trade dress and
have engaged in unfair competition.
20
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
Given the uncertainties inherent in litigation, no assurance can be given
that the Hollywood Defendants will prevail in this litigation; however, the
Hollywood Defendants believe that PHII's claims are without merit and intend to
defend their position and pursue their counterclaims vigorously. The
accompanying consolidated financial statements do not include any adjustments
that might result from the outcome of the uncertainties described above.
OTHER LITIGATION -
HCC and its subsidiaries are parties in various legal proceedings with
respect to the conduct of casino and hotel operations. Although a possible
range of loss cannot be estimated, in the opinion of management, based upon the
advice of counsel, settlement or resolution of these proceedings should not have
a material adverse impact on the consolidated financial position or results of
operations of HCC and its subsidiaries.
(8) THIRD PARTY NOTES RECEIVABLE
During November 1995, HCC loaned $10,000,000 of the proceeds from the
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.
(9) LAND RIGHTS
Land rights are being amortized on a straight-line basis over a 40-year
period representing the estimated useful life of the Tunica facility, which is
less than the term of the ground lease including renewals (see Note 7); such
amortization commenced with the opening of the Tunica Casino. Management
presently intends to renew the ground lease at least through the estimated 40-
year useful life of the facility. Accumulated amortization of such land rights
amounted to $1,093,000 and $991,000, respectively, at June 30, 1998 and December
31, 1997.
(10) RECLASSIFICATIONS
Certain reclassifications have been made to the prior year's consolidated
financial statements to conform to the 1998 consolidated financial statement
presentation.
21
<PAGE>
HOLLYWOOD CASINO - AURORA, INC.
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
BALANCE SHEETS
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
------------- -------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 10,057,000 $ 9,491,000
Short-term investments 1,186,000 2,103,000
Accounts receivable, net of allowances
of $654,000 and $483,000, respectively 1,226,000 1,603,000
Inventories 674,000 794,000
Deferred income taxes 1,569,000 1,336,000
Due from affiliates 72,000 558,000
Prepaid expenses and other current assets 1,112,000 932,000
------------ ------------
Total current assets 15,896,000 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 33,948,000 32,159,000
Construction in progress 614,000 534,000
------------ ------------
120,902,000 119,033,000
Less - accumulated depreciation and amortization (37,624,000) (33,919,000)
------------ ------------
Net property and equipment 83,278,000 85,114,000
------------ ------------
Other Assets 2,120,000 2,140,000
------------ ------------
$101,294,000 $104,071,000
============ ============
</TABLE>
The accompanying introductory notes and notes to financial statements
are an integral part of these balance sheets.
22
<PAGE>
HOLLYWOOD CASINO - AURORA, INC.
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
BALANCE SHEETS
(UNAUDITED)
LIABILITIES AND SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
------------ ------------
<S> <C> <C>
Current Liabilities:
Current maturities of long-term debt
and capital lease obligations $ 5,881,000 $ 6,624,000
Accounts payable 2,573,000 2,023,000
Accrued liabilities -
Salaries and wages 2,037,000 2,228,000
Interest 1,124,000 1,192,000
Gaming and other taxes 5,611,000 938,000
Insurance 1,218,000 1,115,000
Other 1,304,000 1,120,000
Due to affiliates 662,000 2,185,000
Other current liabilities 1,238,000 1,209,000
------------ ------------
Total current liabilities 21,648,000 18,634,000
------------ ------------
Long-Term Debt 29,007,000 31,507,000
------------ ------------
Capital Lease Obligations 20,562,000 20,841,000
------------ ------------
Deferred Income Taxes 4,777,000 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 744,000 4,392,000
------------ ------------
Total shareholder's equity 25,300,000 28,948,000
------------ ------------
$101,294,000 $104,071,000
============ ============
</TABLE>
The accompanying introductory notes and notes to financial statements
are an integral part of these balance sheets.
23
<PAGE>
HOLLYWOOD CASINO - AURORA, INC.
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
--------------------------
1998 1997
------------ ------------
<S> <C> <C>
Revenues:
Casino $38,548,000 $37,377,000
Food and beverage 3,373,000 3,446,000
Other 632,000 454,000
----------- -----------
42,553,000 41,277,000
Less - promotional allowances (2,460,000) (2,346,000)
----------- -----------
Net revenues 40,093,000 38,931,000
----------- -----------
Expenses:
Casino 27,755,000 24,725,000
Food and beverage 1,121,000 1,200,000
Other 301,000 415,000
General and administrative 2,571,000 2,745,000
Depreciation and amortization 1,899,000 1,873,000
----------- -----------
Total expenses 33,647,000 30,958,000
----------- -----------
Income from operations 6,446,000 7,973,000
----------- -----------
Non-operating income (expenses):
Interest income 26,000 40,000
Interest expense (1,511,000) (1,744,000)
Loss on disposal of assets (5,000) -
----------- -----------
Total non-operating expense, net (1,490,000) (1,704,000)
----------- -----------
Income before income taxes 4,956,000 6,269,000
Income tax provision (1,895,000) (2,417,000)
----------- -----------
Net income $ 3,061,000 $ 3,852,000
=========== ===========
</TABLE>
The accompanying introductory notes and notes to financial statements
are an integral part of these financial statements.
24
<PAGE>
HOLLYWOOD CASINO - AURORA, INC.
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------------------------
1998 1997
------------ ------------
<S> <C> <C>
Revenues:
Casino $75,651,000 $76,236,000
Food and beverage 6,606,000 6,762,000
Other 1,254,000 869,000
----------- -----------
83,511,000 83,867,000
Less - promotional allowances (4,698,000) (4,586,000)
----------- -----------
Net revenues 78,813,000 79,281,000
----------- -----------
Expenses:
Casino 53,716,000 50,364,000
Food and beverage 2,323,000 2,400,000
Other 623,000 816,000
General and administrative 6,352,000 6,778,000
Depreciation and amortization 3,823,000 3,726,000
----------- -----------
Total expenses 66,837,000 64,084,000
----------- -----------
Income from operations 11,976,000 15,197,000
----------- -----------
Non-operating income (expenses):
Interest income 62,000 76,000
Interest expense (3,101,000) (3,506,000)
Loss on disposal of assets (3,000) -
----------- -----------
Total non-operating expense, net (3,042,000) (3,430,000)
----------- -----------
Income before income taxes 8,934,000 11,767,000
Income tax provision (3,415,000) (4,484,000)
----------- -----------
Net income $ 5,519,000 $ 7,283,000
=========== ===========
</TABLE>
The accompanying introductory notes and notes to financial statements
are an integral part of these financial statements.
25
<PAGE>
HOLLYWOOD CASINO - AURORA, INC.
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------------------------------
1998 1997
----------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 5,519,000 $ 7,283,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 3,823,000 3,726,000
Provision for doubtful accounts 167,000 95,000
Loss on disposal of assets 3,000 -
Deferred income tax provision 403,000 1,225,000
Decrease in receivables 210,000 252,000
Increase (decrease) in accounts payable and accrued liabilities 5,251,000 (764,000)
Net change in affiliate accounts (1,037,000) (349,000)
Net change in other current assets and liabilities (31,000) 440,000
Net change in other assets and liabilities 20,000 (88,000)
------------ ------------
Net cash provided by operating activities 14,328,000 11,820,000
------------ ------------
INVESTING ACTIVITIES:
Purchases of property and equipment (1,990,000) (1,164,000)
Short-term investments 917,000 -
------------ ------------
Net cash used in investing activities (1,073,000) (1,164,000)
------------ ------------
FINANCING ACTIVITIES:
Repayments of debt (3,231,000) (1,550,000)
Payments on capital lease obligations (291,000) (243,000)
Dividends (9,167,000) (9,828,000)
------------ ------------
Net cash used in financing activities (12,689,000) (11,621,000)
------------ ------------
Net increase (decrease) in cash and cash equivalents 566,000 (965,000)
Cash and cash equivalents at beginning of period 9,491,000 9,034,000
------------ ------------
Cash and cash equivalents at end of period $ 10,057,000 $ 8,069,000
============ ============
</TABLE>
The accompanying introductory notes and notes to financial statements
are an integral part of these financial statements.
26
<PAGE>
HOLLYWOOD CASINO - AURORA, INC.
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(1) ORGANIZATION AND BUSINESS
Hollywood Casino - Aurora, Inc. ("HCA") is an Illinois corporation and a
wholly owned subsidiary of Hollywood Casino Corporation ("HCC"), a Delaware
corporation. HCA was organized and incorporated during December 1990 by certain
relatives of Jack E. Pratt, Edward T. Pratt, Jr. and William D. Pratt
(collectively, the "Pratt Family") for the purpose of developing and holding the
ownership interest in a riverboat gaming operation located in Aurora, Illinois
(the "Aurora Casino"). In May 1992, HCC, which was then wholly owned by
members of the Pratt Family or by certain general partnerships and trusts
controlled by the Pratt Family, acquired all of the outstanding stock of HCA
through the issuance of HCC stock. Prior to December 31, 1996, HCC also owned
approximately 80% of Greate Bay Casino Corporation ("GBCC"), a Delaware
corporation. Prior to April 1, 1997, subsidiaries of GBCC held the management
services contract for the Aurora Casino (see Note 5). A GBCC subsidiary
continues to have a limited partnership interest in the entity which holds such
management contract.
On June 17, 1993, the Illinois Gaming Board (the "IGB") issued HCA a
temporary operating permit and the Aurora Casino commenced operations. The IGB
issued HCA an owner's license on July 20, 1993 pursuant to the Illinois
Riverboat Gambling Act. HCA's current owner's license was renewed in July 1998
for a period of one year. Gaming taxes imposed by the state of Illinois are
determined using a graduated tax rate applied to the licensee's gaming revenues.
HCA expenses such gaming taxes based on its anticipated annual effective tax
rate.
The Aurora Casino consists of two, four-level riverboats having a combined
casino space of approximately 32,000 square feet and a four-level pavilion and
docking facility which houses ticketing, food service, passenger waiting, and
various administrative functions. The Aurora Casino also includes two parking
structures with approximately 1,300 parking spaces. HCA was responsible for the
design and construction of the parking garages; however, it leases the
facilities under long-term lease agreements. The leases are treated as capital
leases for financial reporting purposes (see Note 3).
HCA estimates that a significant amount of the Aurora Casino's revenues are
derived from patrons living in the Chicago area and surrounding northern and
western suburbs. The Aurora Casino faces intense competition from other
riverboat gaming operations in Illinois and Indiana which serve the Chicago area
and management believes that this competition will continue in the future.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
HCA is self insured for a portion of its general liability, certain health
care and other liability exposures. Accrued insurance includes estimates of
such accrued liabilities based on an evaluation of the merits of individual
claims and historical claims experience; accordingly, HCA's ultimate liability
may differ from the amounts accrued.
27
<PAGE>
HOLLYWOOD CASINO - AURORA, INC.
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of"
requires, among other things, that an entity review its long-lived assets and
certain related intangibles for impairment whenever changes in circumstances
indicate that the carrying amount of an asset may not be fully recoverable. As
a result of its review, HCA does not believe that any such changes have
occurred.
The Financial Accounting Standards Board has issued a new standard,
"Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 requires the
presentation and disclosure of comprehensive income, which is defined as the
change in a company's equity resulting from non-owner transactions and events.
SFAS 130 became effective December 15, 1997 and requires the restatement of all
prior periods presented. HCA has adopted the provisions of SFAS 130; however,
the statement provides that an enterprise that has no items of other
comprehensive income for any period presented need only report net income. HCA
has no such other comprehensive income items for any period presented;
accordingly, the presentation and disclosure requirements of SFAS 130 are not
applicable.
The financial statements as of June 30, 1998 and for the three and six
month periods ended June 30, 1998 and 1997 have been prepared by HCA without
audit. In the opinion of management, these financial statements contain all
adjustments (consisting of only normal recurring adjustments) necessary to
present fairly the financial position of HCA as of June 30, 1998, the results of
its operations for the three and six month periods ended June 30, 1998 and 1997
and its cash flows for the six month periods ended June 30, 1998 and 1997.
(2) LONG-TERM DEBT AND PLEDGE OF ASSETS
HCA's long-term indebtedness consists of the following:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
------------ -------------
<S> <C> <C>
12 3/4% Promissory Note to HCC, due on
November 1, 2003 (a) $34,007,000 $36,507,000
Promissory note to bank (b) - 350,000
Equipment loans (c) 32,000 413,000
----------- -----------
Total indebtedness 34,039,000 37,270,000
Less - current maturities (5,032,000) (5,763,000)
----------- -----------
Total long-term debt $29,007,000 $31,507,000
=========== ===========
</TABLE>
- ------------------
(a) The intercompany note accrues interest at the rate of 12 3/4% per annum
payable semiannually on October 15 and April 15 of each year and requires
semiannual principal repayments of $2,500,000
28
<PAGE>
HOLLYWOOD CASINO - AURORA, INC.
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
commencing October 15, 1997 with the balance of the note due November 1,
2003. The note is pledged as security with respect to HCC's 12 3/4% Senior
Secured Notes due in 2003. HCA is not a guarantor of HCC's indebtedness;
however, the indebtedness is secured, in part, by a first mortgage limited
to the outstanding principal amount of the intercompany note on
substantially all of the assets of HCA and by a pledge of the capital stock
of HCA.
(b) The promissory note 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 in 1998.
As of June 30, 1998, future maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
<S> <C>
1998 (six months) $ 2,532,000
1999 5,000,000
2000 5,000,000
2001 5,000,000
2002 5,000,000
Thereafter 11,507,000
-----------
$34,039,000
===========
</TABLE>
Interest paid for the six month periods ended June 30, 1998 and 1997
amounted to $3,169,000 and $3,543,000, 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
29
<PAGE>
HOLLYWOOD CASINO - AURORA, INC.
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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 leased certain equipment under capital lease agreements which
provided for interest at the rate of 11.2% and expired in 1998. Assets under
capital lease agreements with an original cost of $27,358,000 and $2,446,000 are
included in buildings and improvements and in operating equipment, respectively,
on the accompanying balance sheets at both June 30, 1998 and December 31, 1997.
Amortization expense with respect to these assets amounted to $246,000 and
$216,000, respectively, during the three month periods ended June 30, 1998 and
1997 and $491,000 and $597,000, respectively, during the six month periods ended
June 30, 1998 and 1997.
Future minimum lease payments under capital lease obligations as of June
30, 1998 are as follows:
<TABLE>
<CAPTION>
<S> <C>
1998 (six months) $ 1,378,000
1999 2,457,000
2000 2,483,000
2001 2,532,000
2002 2,643,000
Thereafter 24,076,000
-----------
Total minimum lease payments 35,569,000
Less amount representing interest (14,158,000)
-----------
Present value of future minimum lease payments 21,411,000
Current capital lease obligation (849,000)
-----------
Long-term capital lease obligation $20,562,000
===========
</TABLE>
30
<PAGE>
HOLLYWOOD CASINO - AURORA, INC.
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(4) INCOME TAXES
HCA's provision for income taxes consists of the following:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- ------------------------------
1998 1997 1998 1997
----------- ----------- ---------------- -----------
<S> <C> <C> <C> <C>
Current:
Federal $(1,686,000) $(1,673,000) $(2,691,000) $(2,908,000)
State (201,000) (201,000) (321,000) (351,000)
Deferred:
Federal (8,000) (487,000) (361,000) (1,099,000)
State - (56,000) (42,000) (126,000)
----------- ----------- ---------------- -----------
$(1,895,000) $(2,417,000) $(3,415,000) $(4,484,000)
=========== =========== ================ ===========
</TABLE>
HCA is included in HCC's consolidated federal income tax return. Pursuant
to agreements between HCC and HCA, HCA's current provision for federal income
taxes is based on the amount of tax which would be provided if a separate
federal income tax return were filed. HCA paid federal income taxes amounting to
$1,961,000 and $1,826,000, respectively, and state income taxes amounting to
$327,000 and $196,000, respectively, during the six month periods ended June 30,
1998 and 1997. Deferred taxes are computed based on the expected future tax
consequences of temporary differences between the carrying amounts and tax bases
of assets and liabilities, using enacted tax rates.
Deferred income taxes result primarily from the use of the allowance method
rather than the direct write-off method for doubtful accounts, the use of
accelerated methods of depreciation for federal income tax purposes and
differences in the timing of deductions taken between tax and financial
reporting purposes for the amortization of preopening costs and other accruals.
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.
31
<PAGE>
HOLLYWOOD CASINO - AURORA, INC.
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
The components of HCA's net deferred tax liability at June 30, 1998 and
December 31, 1997 are as follows:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
------------ -------------
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts $ 246,000 $ 182,000
Other liabilities and reserves 1,445,000 1,271,000
----------- -----------
Total deferred tax assets 1,691,000 1,453,000
----------- -----------
Deferred tax liabilities:
Depreciation and amortization (4,899,000) (4,258,000)
----------- -----------
Net deferred tax liability $(3,208,000) $(2,805,000)
=========== ===========
</TABLE>
Receivables and payables in connection with the aforementioned tax
allocation agreements at June 30, 1998 and December 31, 1997 are as follows:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
----------- ------------
<S> <C> <C>
Deferred tax assets $ 1,402,000 $ 1,194,000
Due (to) from affiliates (192,000) 538,000
Deferred tax liabilities (4,269,000) (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 $1,279,000 and $1,445,000, respectively, during the three month periods
ended June 30, 1998 and 1997 and $3,825,000 and $4,172,000, respectively, during
the six month periods ended June 30, 1998 and 1997. Management and incentive
fees payable at June 30, 1998 and December 31, 1997 were $607,000 and
$2,130,000, respectively.
32
<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 $1,097,000 and $1,244,000, respectively, for the three
month periods ended June 30, 1998 and 1997 and $2,260,000 and $2,487,000,
respectively, during the six month periods ended June 30, 1998 and 1997.
Interest payable to HCC on such notes amounted to $915,000 and $983,000 at June
30, 1998 and December 31, 1997, respectively, and is included in accrued
interest payable on the accompanying balance sheets.
HCA has acquired computer software and hardware from GBCC and has been
allocated certain other expenses from HCC and GBCC. In addition, HCA is
reimbursed by HCC and GBCC for certain administrative and other services it
performs on their behalf. Such transactions resulted in net charges to HCA
totaling $26,000 and $119,000, respectively, during the three month periods
ended June 30, 1998 and 1997 and $160,000 and $250,000, respectively, during the
six month periods ended June 30, 1998 and 1997. At June 30, 1998 and December
31, 1997, HCA had net receivables of $17,000 and net payables of $36,000,
respectively, with respect to such transactions.
(6) LITIGATION
PLANET HOLLYWOOD LITIGATION -
Planet Hollywood International, Inc., a Delaware corporation, and Planet
Hollywood (Region IV), Inc., a Minnesota corporation (collectively, "PHII"),
filed a complaint in the United States District Court for the Northern District
of Illinois, Eastern Division on July 29, 1996 against HCC, HCA and a member of
the Pratt Family (collectively, the "Original Hollywood Defendants"). The
Original Hollywood Defendants filed with the Court on September 18, 1996 an
answer to PHII's lawsuit, along with numerous counterclaims against PHII, Robert
Earl and Keith Barish (collectively, the "PHII Defendants"). PHII filed with
the Court on January 21, 1997, an amendment to their complaint which, among
other things, added the HCC subsidiary which owns and operates a casino in
Tunica County, Mississippi, HWCC-Tunica, Inc. ("HCT" together with the Original
Hollywood Defendants, the "Hollywood Defendants"), and GBCC as defendants. The
Original Hollywood Defendants filed with the Court on February 4, 1997, and GBCC
and HCT filed with the Court on February 20, 1997, answers and counterclaims to
such amended complaint.
In its lawsuit, PHII alleges, among other things, that the Hollywood
Defendants and GBCC have, in opening and operating the Hollywood Casino concept,
infringed on PHII's trademark, service mark and trade dress and have engaged in
unfair competition and deceptive trade practices. In their counterclaims, the
Hollywood Defendants and GBCC allege, among other things, that the PHII
Defendants have, through their planned use of their mark in connection with
casino services, infringed on certain of HCC's service marks and trade dress and
have engaged in unfair competition.
33
<PAGE>
HOLLYWOOD CASINO - AURORA, INC.
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
Given the uncertainties inherent in litigation, no assurance can be given
that the Hollywood Defendants will prevail in this litigation; however, the
Hollywood Defendants believe that PHII's claims are without merit and intend to
defend their position and pursue their counterclaims vigorously. The
accompanying financial statements do not include any adjustments that might
result from the outcome of the uncertainties described above.
OTHER LITIGATION -
HCA is a party in various legal proceedings with respect to the conduct of
casino operations. Although a possible range of loss can not be estimated, in
the opinion of management, based upon the advice of counsel, settlement or
resolution of the proceedings should not have a material adverse impact on the
financial position or results of operations of HCA.
34
<PAGE>
HWCC - TUNICA, INC. AND SUBSIDIARY
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
------------- -------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 15,041,000 $ 11,851,000
Short-term investments 3,876,000 3,876,000
Accounts receivable, net of allowances of
$788,000 and $705,000, respectively 1,226,000 1,510,000
Inventories 551,000 660,000
Deferred income taxes 1,203,000 1,632,000
Prepaid expenses and other current assets 1,039,000 1,129,000
------------ ------------
Total current assets 22,936,000 20,658,000
------------ ------------
Property and Equipment:
Land 3,456,000 3,456,000
Buildings 73,691,000 73,422,000
Barges 2,524,000 2,524,000
Operating equipment 37,931,000 37,588,000
Construction in progress 1,218,000 688,000
------------ ------------
118,820,000 117,678,000
Less - accumulated depreciation and amortization (35,091,000) (31,760,000)
------------ ------------
Net property and equipment 83,729,000 85,918,000
------------ ------------
Other Assets:
Land rights 7,352,000 7,454,000
Other assets 5,303,000 4,697,000
------------ ------------
Total other assets 12,655,000 12,151,000
------------ ------------
$119,320,000 $118,727,000
============ ============
</TABLE>
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated balance sheets.
35
<PAGE>
HWCC - TUNICA, INC. AND SUBSIDIARY
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
LIABILITIES AND SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
------------- -------------
<S> <C> <C>
Current Liabilities:
Current maturities of long-term debt $ 608,000 $ 485,000
Accounts payable 782,000 1,372,000
Accrued liabilities -
Salaries and wages 1,386,000 1,579,000
Interest 476,000 476,000
Gaming and other taxes 1,105,000 1,230,000
Insurance 1,890,000 1,553,000
Other 2,183,000 1,627,000
Other current liabilities 935,000 1,325,000
------------ ------------
Total current liabilities 9,365,000 9,647,000
------------ ------------
Long-Term Debt 85,188,000 85,198,000
------------ ------------
Commitments and Contingencies
Shareholder's Equity:
Common stock, $.01 par value
per share; 100,000 shares authorized;
1,000 shares issued and outstanding - -
Additional paid-in capital 34,637,000 34,637,000
Accumulated deficit (9,870,000) (10,755,000)
------------ ------------
Total shareholder's equity 24,767,000 23,882,000
------------ ------------
$119,320,000 $118,727,000
============ ============
</TABLE>
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated balance sheets.
36
<PAGE>
HWCC - TUNICA, INC. AND SUBSIDIARY
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
--------------------------
1998 1997
------------ ------------
<S> <C> <C>
Revenues:
Casino $23,788,000 $24,838,000
Rooms 2,501,000 2,553,000
Food and beverage 3,805,000 3,562,000
Other 335,000 310,000
----------- -----------
30,429,000 31,263,000
Less - promotional allowances (4,184,000) (3,909,000)
----------- -----------
Net revenues 26,245,000 27,354,000
----------- -----------
Expenses:
Casino 18,095,000 17,785,000
Rooms 453,000 461,000
Food and beverage 1,052,000 1,001,000
Other 346,000 354,000
General and administrative 1,450,000 1,434,000
Depreciation and amortization 2,040,000 2,680,000
----------- -----------
Total expenses 23,436,000 23,715,000
----------- -----------
Income from operations 2,809,000 3,639,000
----------- -----------
Non-operating income (expenses):
Interest income 146,000 54,000
Interest expense (2,744,000) (2,757,000)
Loss on disposal of assets (58,000) -
----------- -----------
Total non-operating expense, net (2,656,000) (2,703,000)
----------- -----------
Income before income taxes 153,000 936,000
Income tax benefit - 845,000
----------- -----------
Net income $ 153,000 $ 1,781,000
=========== ===========
</TABLE>
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated statements.
37
<PAGE>
HWCC - TUNICA, INC. AND SUBSIDIARY
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------------------------
1998 1997
------------ ------------
<S> <C> <C>
Revenues:
Casino $46,591,000 $49,514,000
Rooms 4,508,000 4,728,000
Food and beverage 7,353,000 6,960,000
Other 615,000 576,000
----------- -----------
59,067,000 61,778,000
Less - promotional allowances (7,750,000) (7,445,000)
----------- -----------
Net revenues 51,317,000 54,333,000
----------- -----------
Expenses:
Casino 34,506,000 34,617,000
Rooms 898,000 919,000
Food and beverage 2,023,000 2,009,000
Other 670,000 685,000
General and administrative 3,007,000 2,880,000
Depreciation and amortization 4,060,000 5,431,000
----------- -----------
Total expenses 45,164,000 46,541,000
----------- -----------
Income from operations 6,153,000 7,792,000
----------- -----------
Non-operating income (expenses):
Interest income 268,000 105,000
Interest expense (5,475,000) (5,530,000)
Loss on disposal of assets (61,000) -
----------- -----------
Total non-operating expense, net (5,268,000) (5,425,000)
----------- -----------
Income before income taxes 885,000 2,367,000
Income tax benefit - 845,000
----------- -----------
Net income $ 885,000 $ 3,212,000
=========== ===========
</TABLE>
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated statements.
38
<PAGE>
HWCC - TUNICA, INC. AND SUBSIDIARY
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------------------
1998 1997
----------------- ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 885,000 $ 3,212,000
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 4,060,000 5,431,000
Provision for doubtful accounts 299,000 240,000
Loss on disposal of assets 61,000 -
Deferred income tax benefit (99,000) (845,000)
(Increase) decrease in accounts receivable (15,000) 34,000
Decrease in accounts payable
and accrued liabilities (15,000) (2,916,000)
Net change in other current assets and liabilities (191,000) (212,000)
Net change in other noncurrent assets and liabilities (184,000) 487,000
----------- -----------
Net cash provided by operating activities 4,801,000 5,431,000
----------- -----------
INVESTING ACTIVITIES:
Purchases of property and equipment (1,739,000) (1,043,000)
Proceeds from disposal of assets 15,000 -
Investment in unconsolidated affiliate - (2,000,000)
----------- -----------
Net cash used in investing activities (1,724,000) (3,043,000)
----------- -----------
FINANCING ACTIVITIES:
Borrowings on credit facility 398,000 -
Repayments of long-term debt (285,000) (177,000)
Payments on capital lease obligations - (951,000)
----------- -----------
Net cash provided by (used in) financing activities 113,000 (1,128,000)
----------- -----------
Net increase in cash and cash equivalents 3,190,000 1,260,000
Cash and cash equivalents at beginning of period 11,851,000 9,321,000
----------- -----------
Cash and cash equivalents at end of period $15,041,000 $10,581,000
=========== ===========
</TABLE>
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated statements.
39
<PAGE>
HWCC - TUNICA, INC. AND SUBSIDIARY
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
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 late 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 June
30, 1998 and December 31, 1997.
HCT estimates that a significant amount of the Tunica Casino's revenues are
derived from patrons living in the Memphis, Tennessee area, northern Mississippi
and Arkansas. The Tunica Casino faces intense competition from other casinos
operating in northern Tunica County and management believes that this
competition will continue in the future.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
HCT is self insured for a portion of its general liability, certain health
care and other liability exposures. Accrued insurance includes estimates of
such accrued liabilities based on an evaluation of the merits of individual
claims and historical claims experience; accordingly, HCT's ultimate liability
may differ from the amounts accrued.
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of"
requires, among other things, that an entity review its long-lived assets and
certain related intangibles for impairment whenever changes in circumstances
indicate that the carrying amount of an asset may not be fully recoverable. As
a result of its review, HCT does not believe that any such changes have
occurred.
The Financial Accounting Standards Board has issued a new standard,
"Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 requires the
presentation and disclosure of comprehensive income, which is defined as the
change in a company's equity resulting from non-owner transactions and events.
40
<PAGE>
HWCC - TUNICA, INC. AND SUBSIDIARY
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
SFAS 130 became effective December 15, 1997 and requires the restatement of all
prior periods presented. HCT has adopted the provisions of SFAS 130; however,
the statement provides that an enterprise that has no items of other
comprehensive income for any period presented need only report net income. HCT
has no such other comprehensive income items for any period presented;
accordingly, the presentation and disclosure requirements of SFAS 130 are not
applicable.
The consolidated financial statements as of June 30, 1998 and for the three
and six month periods ended June 30, 1998 and 1997 have been prepared by HCT
without audit. In the opinion of management, these consolidated financial
statements contain all adjustments (consisting of only normal recurring
adjustments) necessary to present fairly the consolidated financial position of
HCT as of June 30, 1998, the results of its operations for the three and six
month periods ended June 30, 1998 and 1997 and cash flows for the six month
periods ended June 30, 1998 and 1997.
(2) LONG-TERM DEBT AND PLEDGE OF ASSETS
Substantially all of HCT's assets are pledged in connection with its long-
term indebtedness. Long-term debt consists of the following:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
---- ----
<S> <C> <C>
Promissory notes to HCC (a) $84,045,000 $84,045,000
Equipment loans (b) 1,362,000 1,638,000
Bank credit facility (c) 389,000 -
----------- -----------
Total indebtedness 85,796,000 85,683,000
Less - current maturities (608,000) (485,000)
----------- -----------
Total long-term debt $85,188,000 $85,198,000
=========== ===========
</TABLE>
- ---------------
(a) During October 1995, HCC loaned $54,045,000 to HCT to repay its outstanding
mortgage indebtedness, together with the associated call premium and certain
accrued interest thereon, and loaned an additional $30,000,000 to HCT to
finance construction of a 352-room hotel tower and related amenities and to
fund development and construction of a themed gaming area. Such intercompany
loans were made with a portion of the note proceeds from HCC's issue of
$210,000,000 of 12 3/4% Senior Secured Notes (the "Senior Secured Notes")
due November 1, 2003, discounted to yield 13 3/4% per annum. Interest on the
loans from HCC accrues at the rate of 12 3/4% per annum and is payable
semiannually on April 15 and October 15 of each year. The
41
<PAGE>
HWCC - TUNICA, INC. AND SUBSIDIARY
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
Senior Secured Notes are unconditionally guaranteed on a senior secured
basis by HCT and by certain future subsidiaries of HCC. The Senior Secured
Notes and related guarantees are secured by, among other things, (i)
substantially all of the assets of HCT and other future guarantors, (ii) a
first mortgage limited to approximately $39 million on substantially all of
the assets of another gaming facility operated by a wholly owned subsidiary
of HCC, (iii) a pledge of the capital stock of HCT and certain other
subsidiaries of HCC and (iv) the collateral assignment of any future
management contracts entered into by HCC. The limitation on the first
mortgage described in (ii) above is subject to semiannual reductions of $2.5
million commencing October 15, 1997.
The indenture to the Senior Secured Notes contains various provisions
limiting the ability of HCC, HCT and certain defined subsidiaries to, among
other things, pay dividends or make other restricted payments; incur
additional indebtedness or issue preferred stock; create liens; create
dividend or other payment restrictions affecting certain defined
subsidiaries; enter into mergers or consolidations or make sales of all or
substantially all assets of HCC, HCT or any future guarantor; and enter into
transactions with certain affiliates.
(b) The loans outstanding at June 30, 1998 are payable monthly including
interest at effective rates ranging from 7.8% to 12.9% per annum and mature
at various dates between 1999 and 2001.
(c) HCT has a bank credit facility in the amount of $1,300,000 available to
borrow against until September 30, 1998. HCT borrowed $398,000 under the
credit facility in April 1998 at the rate of 8.875% per annum; no borrowings
were outstanding under the credit facility at December 31, 1997. Borrowings
under the credit facility are to be repaid in monthly installments over a
period of 36 months and accrue interest at the bank's prime lending rate
plus 1/4% per annum subject to a minimum of 8.875%. Such borrowings are
collateralized by equipment purchased with the loan proceeds. The line of
credit agreement requires the maintenance of certain balances in addition to
the provision of certain financial reports.
Scheduled payments of long-term debt as of June 30, 1998 are set forth below:
<TABLE>
<S> <C>
1998 (six months) $ 279,000
1999 675,000
2000 632,000
2001 165,000
2002 -
Thereafter 84,045,000
-----------
Total $85,796,000
===========
</TABLE>
42
<PAGE>
HWCC - TUNICA, INC. AND SUBSIDIARY
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
Interest paid amounted to $5,475,000 and $7,316,000, respectively, during
the six month periods ended June 30, 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 June 30, 1998 and December 31, 1997.
Amortization expense was $87,000 and $263,000, respectively, for the three month
periods ended June 30, 1998 and 1997 and $174,000 and $526,000, respectively,
for the six month periods ended June 30, 1998 and 1997. Accumulated amortization
at June 30, 1998 and December 31, 1997 with respect to these assets amounted to
$4,690,000 and $4,516,000, respectively. No future payment obligations exist
with respect to such capital leases.
(4) INCOME TAXES
Components of HCT's benefit for income taxes consist of the following:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------- -----------------------
1998 1997 1998 1997
--------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
(Provision for) benefit in lieu of
federal income taxes:
Current $(46,000) $(235,000) $(114,000) $ (543,000)
Deferred (19,000) 372,000 (215,000) 185,000
Valuation allowance 65,000 708,000 329,000 1,203,000
-------- --------- --------- ----------
$ - $ 845,000 $ - $ 845,000
======== ========= ========= ==========
</TABLE>
State income taxes have not been provided for since a credit for state
gaming taxes based on gross revenues is allowed to offset income taxes incurred.
The credit is the lesser of total gaming taxes paid or the state income tax,
with no credit carryforward permitted.
43
<PAGE>
HWCC - TUNICA, INC. AND SUBSIDIARY
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
HCT is included in HCC's consolidated federal income tax return. HCT's
provision for federal income taxes is based on the amount of tax which would be
provided if a separate federal income tax return were filed. HCT paid federal
taxes in the amount of $57,000 and $158,000, respectively, during the six month
periods ended June 30, 1998 and 1997. HCT paid no state income taxes during
either of the six month periods ended June 30, 1998 or 1997.
Deferred income taxes result primarily from the use of the allowance method
rather than the direct write-off method for doubtful accounts, the use of
accelerated methods of depreciation for federal income 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 six months of 1998 and the expectation
of future taxable income, management believes that it is more likely than not
that at least a portion of the NOL's and deferred tax assets will be utilized.
Accordingly, a valuation allowance has been established which has resulted in
the recording of net deferred tax assets of $2,206,000 and $2,107,000 at June
30, 1998 and December 31, 1997, respectively. The ultimate recognition of the
current amount of deferred tax assets is dependent on HCT's ability to generate
approximately $6,500,000 of taxable income for federal income tax purposes prior
to the expiration dates of the NOL's and the reversal of other temporary
differences.
The Internal Revenue Service is currently examining the consolidated
Federal income tax returns of HCC for the years 1993 and 1994. Management
believes that the results of such examination will not have a material adverse
effect on the consolidated financial position or results of operations of HCT.
44
<PAGE>
HWCC-TUNICA, INC. AND SUBSIDIARY
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
The components of the deferred tax assets are as follows:
JUNE 30, DECEMBER 31,
1998 1997
------------ -------------
Deferred tax assets:
Net operating loss carryforwards $ 5,086,000 $ 5,200,000
Alternative minimum tax credit carryforward 325,000 226,000
Allowance for doubtful accounts 268,000 240,000
Other liabilities and accruals 1,223,000 1,108,000
----------- -----------
Total deferred tax assets 6,902,000 6,774,000
Deferred tax liabilities:
Depreciation and amortization (2,455,000) (2,097,000)
----------- -----------
Net deferred tax asset 4,447,000 4,677,000
Valuation allowance (2,241,000) (2,570,000)
----------- -----------
$ 2,206,000 $ 2,107,000
=========== ===========
Receivables in connection with HCT's federal income taxes are included on
the accompanying consolidated financial statements as follows:
JUNE 30, DECEMBER 31,
1998 1997
---------- ------------
Accounts receivable $ 226,000 $ 268,000
Deferred income taxes 1,203,000 1,632,000
Other noncurrent assets 1,003,000 475,000
(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 June 30,
1998 and 1997 and $600,000 during each of the six month periods ended June 30,
1998 and 1997.
HCT and Advanced Casino Systems Corporation ("ACSC"), an affiliated
company, entered into a Computer Services Agreement dated as of January 1, 1994
and renewed through December 31, 1999. The agreement provides, among other
things, that ACSC will sell HCT computer hardware and information systems
equipment and will license or sublicense to HCT computer software necessary to
operate HCT's casino, hotel and related facilities and business operations. HCT
pays ACSC for such equipment and
45
<PAGE>
HWCC-TUNICA, INC. AND SUBSIDIARY
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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 $232,000 and $133,000, respectively, for the
three month periods ended June 30, 1998 and 1997 and $378,000 and $244,000,
respectively, for the six month periods ended June 30, 1998 and 1997. At June
30, 1998 and December 31, 1997, HCT had payables of $48,000 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,
performed certain administrative and marketing services on behalf of HCT during
most of 1997 and continues to perform limited services. Fees charged to HCT by
GBHC totaled $1,000 and $158,000, respectively, during the three month periods
ended June 30, 1998 and 1997 and $12,000 and $340,000, respectively, during the
six month periods ended June 30, 1998 and 1997.
HCT is charged for certain legal, accounting, and other expenses incurred
by HCC and its subsidiaries that relate to HCT's business. Such charges amounted
to $58,000 and $119,000, respectively, for the three month periods ended June
30, 1998 and 1997 and $102,000 and $215,000, respectively, for the six month
periods ended June 30, 1998 and 1997. At June 30, 1998 and December 31, 1997,
HCT had payables of $63,000 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 June 30, 1998 and 1997, HCT expensed $946,000 and $1,040,000,
respectively, in connection with the ground lease. Such expenses totaled
$1,886,000 and $1,968,000, respectively, during the six month periods ended June
30, 1998 and 1997.
46
<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
47
<PAGE>
HWCC-TUNICA, INC. AND SUBSIDIARY
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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 $1,093,000 and $991,000, respectively, at June 30, 1998 and December
31, 1997.
(8) RECLASSIFICATIONS
Certain reclassifications have been made to the prior year's consolidated
financial statements to conform to the 1998 consolidated financial statement
presentation.
48
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This Quarterly Report on Form 10-Q contains forward-looking statements
about the business, financial condition and prospects of the Company. The actual
results could differ materially from those indicated by the forward-looking
statements because of various competition, economic conditions, tax regulations,
state regulations applicable to the gaming industry in general or the Company in
particular and other risks indicated in the Company's filings with the
Securities and Exchange Commission. Such risks and uncertainties are beyond
management's ability to control and, in many cases, can not be predicted by
management. When used in this Quarterly Report on Form 10-Q, the words
"believes", "estimates", "anticipates" and similar expressions as they relate to
the Company or its management are intended to identify forward-looking
statements.
RESULTS OF OPERATIONS
HCC had net revenues for the three month period ended June 30, 1998 of
$66.4 million, a slight increase from $66.3 million during the same period of
1997. The increase reflects an improvement in net revenues at the Aurora Casino
of $1.2 million (3%) partially offset by a decrease in net revenues at the
Tunica Casino of $1.1 million (4.1%).
Consolidated operating expenses increased by $2.3 million to $58.3 million
during the three month period ended June 30, 1998 from $56 million during the
same period of 1997. Consequently, HCC's income from operations decreased by
$2.2 million (21.9%) during the second quarter of 1998 compared to the same
period of 1997. Income from operations after management fees at the Aurora
Casino decreased by $1.5 million to $6.4 million during the three month period
ended June 30, 1998 compared with the same period of 1997 due primarily to
increases in gaming taxes. Income from operations after consulting fees at the
Tunica Casino decreased by $830,000 to $2.8 million due primarily to increased
competition and a lower than expected table games hold percentage (see "Tunica
Casino - Gaming Operations" below).
Net revenues of HCC for the six month period ended June 30, 1998 amounted
to $130.2 million, a 2.7% decrease from $133.8 million during the same period of
1997. The decrease includes reductions in net revenues at the Aurora Casino of
$468,000 (less than 1%) and at the Tunica Casino of $3 million (5.6%).
HCC's operating expenses decreased by $1.2 million to $113.1 million during
the six month period ended June 30, 1998 from $114.3 million during the same
period of 1997. As a result, HCC's income from operations decreased by $2.5
million (12.6%) during the first six months of 1998 compared to the same period
of 1997. Due to the same reason noted above, income from operations after
management fees at the Aurora Casino decreased by $3.2 million to $12 million
during the six month period ended June 30, 1998 compared with the same period of
1997 and income from operations after consulting fees at the Tunica Casino
decreased by $1.6 million to $6.2 million.
AURORA CASINO
GENERAL
Income from operations at the Aurora Casino, adjusted to exclude management
fees, amounted to $7.7 million and $15.8 million, respectively, for the three
and six month periods ended June 30, 1998
49
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
compared to $9.4 million and $19.4 million, respectively, during the same
periods of 1997. Such decreases are primarily due to an increase in the Illinois
wagering tax rate which took effect on January 1, 1998. The new tax structure
consists of a graduated tax rate system with rates ranging from 15% to 35% based
on total adjusted gross receipts. As a result of the tax rate increase, gaming
revenue taxes for the three and six month periods ending June 30, 1998 were
higher by $2.9 million (38.8%) and $5.1 million (33.3%), respectively, than for
the corresponding periods in 1997. Such increased taxes resulted despite gaming
revenues increasing by only 3% during the three month period ended June 30, 1998
and declining slightly during the six month period ended June 30, 1998 compared
to the corresponding periods of the prior year. The decreases are also
attributable to increased competition from the opening in northern Indiana of
two riverboat gaming operations during April and August 1997. These two
operations added approximately 3,700 new gaming positions to the Chicago market
area, an increase of nearly 35%.
GAMING OPERATIONS
The following table sets forth certain unaudited financial and operating
data for the Aurora Casino's operations for the three and six month periods
ended June 30, 1998 and 1997.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------- -------------------------------
1998 1997 1998 1997
------------ ------------ ------------ ----------------
<S> <C> <C> <C> <C>
REVENUES:
Table games $ 10,756,000 $ 11,634,000 $ 22,166,000 $ 23,968,000
Slot machines 27,253,000 25,577,000 52,277,000 52,102,000
Poker revenues 539,000 166,000 1,208,000 166,000
------------ ------------ ------------ ------------
Total $ 38,548,000 $ 37,377,000 $ 75,651,000 $ 76,236,000
============ ============ ============ ============
TABLE GAMES:
Gross wagering (drop) (1) $ 60,151,000 $ 65,636,000 $123,048,000 $135,321,000
Hold percentage (2) 17.9% 17.7% 18% 17.7%
SLOT MACHINES:
Gross wagering (handle) (1) $492,286,000 $465,501,000 $937,109,000 $936,159,000
Hold percentage (2) 5.5% 5.5% 5.6% 5.6%
- -----------------------
</TABLE>
(1) Gross wagering consists of the total value of chips purchased for table
games ("drop") and coins wagered in slot machines ("handle").
(2) Casino revenues consist of the portion of gross wagering that a casino
retains and, as a percentage of gross wagering, is referred to as the "hold
percentage".
Total gross wagering at the Aurora Casino as measured by table drop and
slot machine handle increased $21.3 million (4%) during the second quarter of
1998 compared to the same period of 1997 offsetting much of the first quarter
1998 decrease of $32.6 million. Consequently, gross wagering
50
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
decreased $11.3 million (1.1%) during the six month period ended June 30, 1998
compared to the same period of 1997. The three month increase results from
increased marketing and promotional programs introduced in the second quarter of
1998 to recapture market share in the Chicago area. The first quarter decrease
resulted from reductions in patron volume due to changes in the Aurora Casino's
cruising schedule. In an effort to reduce unprofitable operations and capitalize
on profitable cruises in response to the increased wagering tax discussed above,
the smaller of the Aurora casino's two riverboats ceased operating daytime
cruises on weekdays during January and February; however, all cruises resumed in
March. The overall 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.
REVENUES
Casino revenues increased $1.2 million (3.1%) during the second quarter of
1998 compared to the same period of 1997, but decreased slightly during the six
month period ended June 30, 1998 compared to the same period of 1997. Table
game revenues decreased $878,000 (7.5%) during the second quarter of 1998
compared to the 1997 period as the 8.4% decrease in drop was partially offset by
an increase in the table game hold percentage to 17.9% from 17.7%. Table game
revenues decreased $1.8 million (7.5%) during the first six months of 1998
compared to the 1997 period as the 9.1% decrease in drop was partially offset by
an increase in the table game hold percentage to 18% from 17.7%. The 5.8%
increase in slot machine handle during the second quarter of 1998 resulted in a
three month slot machine revenue increase of $1.7 million (6.6%) compared to the
same period of 1997. Neither slot machine handle nor the slot machine hold
percentage changed significantly during the first six months of 1998 compared to
the prior year period; consequently, six month slot machine revenues were
virtually flat. Casino revenues were also favorably impacted by the
introduction of poker during the second quarter of 1997, which generated casino
revenues of $539,000 and $1.2 million, respectively, for the three and six month
periods ended June 30, 1998. Such revenues amounted to $166,000 for the three
month period ended June 30, 1997.
Food and beverage revenues at the Aurora Casino did not change
significantly during the three or six month periods ended June 30, 1998 compared
to the same periods of 1997. Other revenues increased $178,000 (39.2%) and
$385,000 (44.3%), respectively, during the three and six month periods ended
June 30, 1998 compared to the same periods of 1997 due to management's decision
to begin charging valet parking and garage fees in 1998.
Promotional allowances represent the estimated value of goods and services
provided free of charge to casino customers under various marketing programs.
These allowances, as a percentage of food and beverage and other revenues at the
Aurora Casino, were 61.4% and 59.8%, respectively, during the three and six
month periods ended June 30, 1998 compared to 60.2% and 60.1%, respectively,
during the three and six month periods ended June 30, 1997. The three month
increase reflects an increase in promotional activities designed to recapture
market share following a decrease in such activities during the first quarter of
1998.
51
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
DEPARTMENTAL EXPENSES
Casino expenses increased $3 million (12.3%) and $3.4 million (6.7%),
respectively, during the three and six month periods ended June 30, 1998
compared to the corresponding periods in 1997. Such increases are attributable
to the wagering tax increase discussed above, partially offset by overall
reductions in payroll and marketing costs. Gaming taxes imposed by the state of
Illinois are determined using a graduated tax rate applied to the licensee's
gaming revenues. The Aurora Casino expenses such gaming taxes based on its
anticipated annual effective tax rate.
Food and beverage expenses decreased $79,000 (6.6%) during the three month
period ended June 30, 1998 compared to the 1997 period and decreased slightly
during the six month period ended June 30, 1998 compared to 1997 due to
increased allocations to the casino department as a result of promotional
activities. Other expenses decreased $114,000 (27.5%) and $193,000 (23.7%),
respectively, during the three and six month periods ended June 30, 1998
compared to the same periods of 1997. Such decreases reflect reductions in
personnel and other expenses resulting from the Aurora Casino's reduced cruising
schedule during the first quarter and increased allocations to the casino
department during the second quarter.
TUNICA CASINO
GENERAL
Income from operations at the Tunica Casino amounted to $2.8 million and
$6.2 million, respectively, for the three and six month periods ended June 30,
1998 compared to $3.6 million and $7.8 million, respectively, during the same
periods of 1997. The decreases are primarily attributable to lower than expected
table games hold percentages and to increased competition in the Tunica market
resulting from the opening of approximately 1,700 new hotel rooms by competitors
in the fourth quarter of 1997 and early 1998.
52
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
GAMING OPERATIONS
The following table sets forth certain unaudited financial and operating
data relating to the operations of the Tunica facility for the three and six
month periods ended June 30, 1998 and 1997.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------- -------------------------------
1998 1997 1998 1997
------------ ------------ ------------ ----------------
<S> <C> <C> <C> <C>
CASINO REVENUES:
Table games $ 2,946,000 $ 4,052,000 $ 6,389,000 $ 8,416,000
Slot machines 20,556,000 20,521,000 39,702,000 40,578,000
Poker revenues 286,000 265,000 500,000 520,000
------------ ------------ ------------ ------------
Total $ 23,788,000 $ 24,838,000 $ 46,591,000 $ 49,514,000
============ ============ ============ ============
TABLE GAMES:
Gross wagering (drop) (1) $ 19,010,000 $ 19,081,000 $ 37,696,000 $ 39,469,000
Hold percentage (2) 15.5% 21.2% 16.9% 21.3%
SLOT MACHINES:
Gross wagering (handle) (1) $390,131,000 $407,248,000 $762,148,000 $791,052,000
Hold percentage (2) 5.3% 5.0% 5.2% 5.1%
</TABLE>
- ------------------------------
(1)(2) See corresponding notes to the table at "Aurora Casino - Gaming
Operations" above.
Total gross wagering at the Tunica Casino as measured by table game drop
and slot machine handle decreased $17.2 million (4%) and $30.7 million (3.7%),
respectively, during the three and six month periods ended June 30, 1998
compared to the same periods of 1997. The decreased patron volume is directly
attributable to increased competition in the Tunica market. Slot machine handle
decreased by $17.1 million (4.2%) and $28.9 million (3.7%), respectively, during
the three and six months ended June 30, 1998 compared to the prior year periods.
Table game drop remained stable during the second quarter of 1998 compared to
the same period of 1997 resulting in an overall decrease in drop of $1.8 million
(4.5%) for the six month period ended June 30, 1998 compared to the 1997 period.
REVENUES
Casino revenues decreased $1.1 million (4.2%) during the three month period
ended June 30, 1998 compared to the like 1997 period and decreased $2.9 million
(5.9%) during the six month period ended June 30, 1998 compared to the 1997
period. Table game revenues decreased 27.3% during the second quarter of 1998
as a result of the significant decline in the hold percentage to 15.5% in 1998
from 21.2% in 1997. Table game revenues decreased 24.1% during the first six
months of 1998 due to the previously discussed decline in table drop coupled
with the significant decline in the hold percentage to 16.9% in 1998
53
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
from 21.3% in 1997. Slot machine revenues did not change significantly during
either the second quarter or first half of 1998 compared to the prior year
periods as the decreases in gross wagering were virtually offset by the impact
of increases in the slot machine hold percentages. Due to increased marketing
efforts in the second quarter of 1998, poker revenues increased 7.9% compared to
the same period of the prior year bringing poker revenues in line for the six
month period ended June 30, 1998 compared to 1997.
Rooms revenue did not change significantly during the second quarter of
1998 compared to the same period of 1997. Such revenues decreased $220,000
(4.7%) during the six month period ended June 30, 1998 compared to the same
period in 1997 due to increased competition for overnight patrons. Hotel
occupancy rates decreased as a result of the additional competition to
approximately 82% in the first quarter of 1998 from approximately 88% during the
same period of 1997. Occupancy rates at the Tunica Casino for the second
quarter rebounded to approximately 95% (compared to 97% in the second quarter of
1997) as the market began to absorb the additional hotel room capacity. Food
and beverage revenues increased $243,000 (6.8%) and $393,000 (5.6%),
respectively, during the three and six month periods ended June 30,1998 and 1997
compared to the same periods of the prior year. Other revenues increased 8.1%
and 6.8%, respectively, during the three and six month periods ended June 30,
1998 and 1997 compared to the prior year periods. The increases in both food
and beverage and other revenues are due to increased patron volume utilizing
these services as a result of expanded promotional activities.
Promotional allowances represent the estimated value of goods and services
provided free of charge to casino customers under various marketing programs.
Such allowances, as a percentage of rooms, food and beverage and other revenues,
increased to 63% from 60.8% and to 62.1% from 60.7% during the three and six
month periods ended June 30, 1998, respectively, compared to the like periods in
1997. The percentage increases are the result of increased complimentary food
and beverage and other services due to increased marketing efforts.
DEPARTMENTAL EXPENSES
Casino, rooms and other expenses did not change significantly during the
three and six month periods ended June 30, 1998 compared to the same 1997
periods. Despite the increases in food and beverage revenues discussed above,
food and beverage expenses only increased $51,000 (5.1%) during the second
quarter of 1998, bringing the six month total in line with the prior year.
54
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
OTHER CONSOLIDATED ITEMS
- ------------------------
GENERAL AND ADMINISTRATIVE
General and administrative expenses increased by $264,000 (6.2%) and
$518,000 (6.2%), respectively, during the three and six month periods ended June
30, 1998 compared to the same periods in 1997. Such expenses at the Aurora
Casino (net of management fees) did not change significantly during either the
three or six month periods ended June 30, 1998 from the prior year periods as a
result of management's efforts to control costs. The corresponding Tunica
Casino cost increases (net of consulting fees) of 1.4% and 5.6%, respectively,
for the three and six month periods ended June 30, 1998 compared to the prior
year result primarily from increased property taxes. The remaining corporate
general and administrative expense increases of 14% and 13.7%, respectively, for
the three and six month periods result from increases in corporate overhead
costs, primarily in legal fees and personnel costs.
MANAGEMENT AND CONSULTING FEES
The six month decrease in management and consulting fees during the 1998
period is attributable to the acquisition by HCC of the general partnership
interest in PML. PML is now included in the consolidated results of operations
of HCC; consequently, management fees earned from the Aurora Casino subsequent
to April 1, 1997 have been eliminated in consolidation.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense decreased $734,000 (14.8%) and $1.4
million (14.6%), respectively, during the three and six month periods ended June
30, 1998 compared to the 1997 periods primarily due to certain operating
equipment at the Tunica Casino becoming fully depreciated during the third
quarter of 1997.
DEVELOPMENT EXPENSES
Development expenses represent costs incurred in connection with HCC's
pursuit of potential gaming opportunities in jurisdictions where gaming has not
been legalized or where additional licenses might be available. Such costs
decreased by $421,000 (71.4%) and $471,000 (52.6%), respectively, during the
three and six month periods ended June 30, 1998 compared to 1997 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; the agreement was subsequently revised
in July 1998 with HCC's ownership interest in the joint venture approximating
50%. This project is subject to the approval of the Louisiana Gaming Control
Board, which approval is expected to be considered during the third quarter of
1998.
55
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
INTEREST
Interest income increased $327,000 (78.2%) and $594,000 (72.2%),
respectively, for the three and six month periods ended June 30, 1998 compared
to the same periods of 1997 as a result of more cash being available for
investment purposes during the 1998 periods. Interest expense did not change
significantly during the three or six month periods ended June 30, 1998 compared
to the same periods of the prior year.
(LOSS) GAIN ON DISPOSAL OF ASSETS
The 1998 loss results from the sale of certain slot machines at the Tunica
Casino as part of its program to update such equipment; the 1997 gain resulted
from the sale of a company-owned aircraft.
INCOME TAX (PROVISION) BENEFIT AND NET OPERATING LOSS CARRYFORWARDS
The Company has recently been advised that it may have to modify its tax
treatment of the spin-off of the stock of GBCC which occurred on December 31,
1996. The revised tax treatment may result in the Company being required to
recognize additional taxable income for 1996 and succeeding periods. The
Company has not yet been able to reasonably estimate the amount of additional
taxable income, if any, that might be required to be recognized for such period;
however, the amount of additional taxable income to be recognized may be
material. To the extent the Company is required to recognize additional taxable
income for 1996 or succeeding periods, the Company's significant net operating
loss carryforwards or other tax attributes may partially offset or mitigate any
additional tax liabilities. The Company has commenced an investigation into and
will continue to review these issues with the assistance of outside advisors and
consultants. Until the Company completes its investigation, the potential impact
of this revised tax treatment on the Company's financial statements, if any, is
uncertain. The Company will disclose the results of this review as soon as
additional information is known.
The discussion which follows is subject to the outcome of the uncertainties
discussed in the preceding paragraph.
HCC and its subsidiaries have tax net operating loss carryforwards
("NOL's") totaling approximately $30.6 million, none of which begin to expire
until the year 2010. Additionally, HCC and its subsidiaries have various tax
credits available totaling approximately $311,000, which do not begin to expire
until the year 2008.
Management believes that it is more likely than not that future
consolidated taxable income of HCC (primarily from the Aurora Casino and the
Tunica Casino) will be sufficient to utilize at least a portion of the NOL's,
tax credits and other deferred tax assets resulting from temporary differences.
Accordingly,
56
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
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 $3.1 million as of June 30, 1998. In the absence of a
"change of control" as discussed below, the ultimate recognition of the current
amount of net deferred tax assets will be dependent on HCC and its subsidiaries'
ability to generate approximately $9.1 million of taxable income for federal tax
purposes prior to the expiration dates of the NOL's and tax credit carryforwards
and the reversal of other temporary differences.
Sales by HCC or existing stockholders of common stock, or securities
convertible into common stock, can cause a "change of control", as defined in
Section 382 of the Internal Revenue Code of 1986, as amended, which would limit
the ability of HCC or its subsidiaries to utilize these loss carryforwards in
later tax periods. Should such a change of control occur, the amount of loss
carryforwards available for use in any one year would most likely be
substantially reduced. Future treasury regulations, administrative rulings or
court decisions may also effect HCC's future utilization of its loss
carryforwards.
YEAR 2000 COMPLIANCE
In the year 2000, computer programs that have date sensitive software may
recognize a date using "00" as the year 1900 rather than 2000. Such an error
could result in a system failure or miscalculations causing disruptions of
operations including, among other things, a temporary inability to process
transactions or engage in similar normal business activities.
Management has initiated a program to prepare the Company's computer
systems and applications for the year 2000. The costs of acquiring, testing and
converting such systems are expected to be less than $1 million. Management
expects its Year 2000 date conversion projects to be completed on a timely
basis. While there can be no assurance that the Company and its suppliers and
customers will fully resolve the Year 2000 issues, neither the estimated costs
nor the outcome of the Year 2000 problem is expected to have a material impact
on the Company's operations, liquidity or financial position.
INFLATION
Management believes that in the near term, modest inflation, together with
increased competition within the gaming industry for qualified and experienced
personnel, will continue to cause increases in operating expenses, particularly
labor and employee benefits costs.
SEASONALITY
Historically, the Aurora Casino's operations have experienced some
seasonality, with the peak activity occurring from May to September.
Consequently, the results of HCC's operations for the first and fourth quarters
are traditionally less profitable than the other quarters of the fiscal year.
Furthermore, management believes that some lesser degree of seasonality also
causes fluctuations in reported results at the Tunica Casino. In addition, the
operations of the Aurora Casino and the Tunica Casino may fluctuate
significantly due to a number of factors, including chance. Such seasonality
and fluctuations may materially affect HCC's casino revenues and overall
profitability.
57
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
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 $14.3 million
of cash flow from operations during the first six months of 1998 after deducting
the payment of $5.3 million of management fees. The Tunica Casino provided $4.9
million of cash from operations during the first six months of 1998 after
deducting the payment of $600,000 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 six months of 1998 included costs to
pursue development opportunities ($424,000) and corporate overhead costs ($3.9
million).
During the first six months of 1998, cash flow from operations ($15.9
million) and collections on notes receivable ($6 million) were used, in part, by
HCC to fund capital expenditures of $3.8 million, to repay third party
indebtedness and make payments under capital lease obligations of $1.6 million
and $291,000, respectively, and to pay distributions amounting to $3.1 million
to GBCC as limited partner in PML.
The Company may have additional taxable income with respect to its
distribution of the common stock of GBCC in 1996. The resulting amount of
additional tax liability, if any, has not yet been determined (see "Results of
Operations - Income Tax (Provision) Benefit and Net Operating Loss
Carryforwards" above).
FINANCING ACTIVITIES
During October 1995, HCC completed the refinancing of certain outstanding
indebtedness through a public offering of $210 million of 12 3/4% Senior Secured
Notes due November 1, 2003, discounted to yield 13 3/4% per annum. Interest on
the Senior Secured Notes is payable semiannually on May 1 and November 1 of each
year commencing on May 1, 1996. The Senior Secured Notes are unconditionally
guaranteed on a senior secured basis by HCT and by certain future subsidiaries
of HCC. Neither HCA nor GBCC and its subsidiaries are guarantors. The Senior
Secured Notes and related guarantees are secured by, among other things, (i)
substantially all of the assets of HCT and future guarantors, (ii) a limited
first mortgage on substantially all of the assets of HCA, (iii) a pledge of the
capital stock of certain subsidiaries of HCC and (iv) the collateral assignment
of any future management contracts entered into by HCC. The limitation on the
first mortgage described in (ii) above is currently $34 million and subject to
reduction for principal payments on an intercompany note between HCC and HCA.
The intercompany note requires semiannual principal payments of $2.5 million
commencing October 15, 1997 with the balance due November 1, 2003.
The Senior Secured Notes are redeemable at the option of HCC any time on or
after November 1, 1999 at 106.375% of the then outstanding principal amount,
decreasing to 103.1875% and 100%, respectively, on November 1, 2000 and 2001.
Commencing with the November 1, 1997 interest payment date and at each
subsequent interest payment date, HCC is required to make an offer to purchase
not more
58
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
than $2.5 million in principal amount of the Senior Secured Notes at a price of
106.375% of the principal amount tendered. HCC made such offers in December 1997
and May 1998 and redeemed a total of $2.8 million principal amount of the Senior
Secured Notes.
The indenture to the Senior Secured Notes contains various provisions
limiting the ability of HCC and certain defined subsidiaries to, among other
things, pay dividends or make other restricted payments; incur additional
indebtedness or issue preferred stock; create liens; create dividend or other
payment restrictions affecting certain defined subsidiaries; enter into mergers
or consolidations or make sales of all or substantially all assets of HCC, HCT
or any future guarantor; and enter into transactions with certain affiliates.
HCT has a $1.3 million bank credit facility available to borrow against
through September 30, 1998 of which $398,000 was outstanding at June 30, 1998.
Borrowings on the line of credit are to be repaid in monthly installments over
36 months and accrue interest at the rate of prime plus 1/4% per annum subject
to a minimum of 8.875%.
Effective as of April 1, 1997, HCC acquired from PPI Corporation, a GBCC
subsidiary, the general partnership interest in the limited partnership which
holds the Aurora management agreement. The acquisition price for the general
partnership interest included a note in the original principal amount of $3.8
million and the assignment of $13.8 million undiscounted principal amount of PPI
Funding Notes and $350,000 accrued interest due from GBCC to PPI Corporation.
Annual principal and interest payments by HCC on the $3.8 million note
approximate the general partner's share of partnership distributions now being
made to HCC.
As of June 30, 1998, HCC's scheduled maturities of long-term debt and
payments under capital leases during the remainder of 1998 are approximately
$3.1 million and $1.4 million, respectively. The estimated long-term debt
maturities include the potential redemption of $2.5 million of Senior Secured
Notes pursuant to the mandatory redemption offers previously described.
CAPITAL EXPENDITURES AND OTHER INVESTING ACTIVITIES
Capital expenditures at the Aurora Casino during the first six months of
1998 were $2 million; management anticipates spending $1.7 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 six months of
1998 amounted to $1.7 million; management anticipates spending $5.4 million
during the remainder of 1998. Projects currently 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.
59
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
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 $140 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.
60
<PAGE>
PART II: OTHER INFORMATION
- ---------------------------
The Registrants did not file any reports on Form 8-K during the quarter
ended June 30, 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: August 13, 1998 By: /s/ Charles F. LaFrano III
----------------- -----------------------------
Charles F. LaFrano III
Vice President of Finance and
Principal Accounting Officer
HWCC - TUNICA, INC.
Date: August 13, 1998 By: /s/ Charles F. LaFrano III
----------------- -----------------------------
Charles F. LaFrano III
Principal Accounting Officer
61
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF HOLLYWOOD CASINO CORPORATION AND
SUBSIDIARIES AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<CIK> 0000888245
<NAME> HOLLYWOOD CASINO CORPORATION
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998
<PERIOD-START> APR-01-1998 JAN-01-1998
<PERIOD-END> JUN-30-1998 JUN-30-1998
<CASH> 52,634 52,634
<SECURITIES> 0 0
<RECEIVABLES> 3,583 3,583
<ALLOWANCES> 1,442 1,442
<INVENTORY> 1,225 1,225
<CURRENT-ASSETS> 73,218 73,218
<PP&E> 240,311 240,311
<DEPRECIATION> 73,174 73,174
<TOTAL-ASSETS> 280,238 280,238
<CURRENT-LIABILITIES> 34,922 34,922
<BONDS> 218,845 218,845
0 0
0 0
<COMMON> 2 2
<OTHER-SE> 17,839 17,839
<TOTAL-LIABILITY-AND-EQUITY> 280,238 280,238
<SALES> 0 0
<TOTAL-REVENUES> 66,353 130,160
<CGS> 0 0
<TOTAL-COSTS> 48,909 94,342
<OTHER-EXPENSES> 9,988 20,983
<LOSS-PROVISION> 226 466
<INTEREST-EXPENSE> 6,711 13,490
<INCOME-PRETAX> 519 879
<INCOME-TAX> 374 665
<INCOME-CONTINUING> 145 214
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 145 214
<EPS-PRIMARY> 0.01 0.01
<EPS-DILUTED> 0.01 0.01
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS CHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL
STATEMENTS OF HWCC-TUNICA, INC. AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000927801
<NAME> HWCC-TUNICA, INC.
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998
<PERIOD-START> APR-01-1998 JAN-01-1998
<PERIOD-END> JUN-30-1998 JUN-30-1998
<CASH> 15,041 15,041
<SECURITIES> 0 0
<RECEIVABLES> 2,014 2,014
<ALLOWANCES> 788 788
<INVENTORY> 551 551
<CURRENT-ASSETS> 22,936 22,936
<PP&E> 118,820 118,820
<DEPRECIATION> 35,091 35,091
<TOTAL-ASSETS> 119,320 119,320
<CURRENT-LIABILITIES> 9,365 9,365
<BONDS> 85,188 85,188
0 0
0 0
<COMMON> 0 0
<OTHER-SE> 24,767 24,767
<TOTAL-LIABILITY-AND-EQUITY> 119,320 119,320
<SALES> 0 0
<TOTAL-REVENUES> 26,245 51,317
<CGS> 0 0
<TOTAL-COSTS> 19,799 37,798
<OTHER-EXPENSES> 3,548 7,128
<LOSS-PROVISION> 147 299
<INTEREST-EXPENSE> 2,598 5,207
<INCOME-PRETAX> 153 885
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 153 885
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 153 885
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
</TABLE>
