<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, 1999
-------------------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
----------------------- ----------------------
Commission file number 33-48887
--------------------
HOLLYWOOD CASINO CORPORATION
HWCC-TUNICA, INC.
- --------------------------------------------------------------------------------
(Exact name of each Registrant as specified in its charter)
Delaware 75-2352412
Texas 75-2513808
- ------------------------------------------ ---------------------------------
(States or other jurisdictions of (I.R.S. Employer
incorporation or organization) Identification No.'s)
Two Galleria Tower, Suite 2200
13455 Noel Road, LB 48
Dallas, Texas 75240
- ------------------------------------------ ---------------------------------
(Address of principal executive offices) (Zip Code)
(Registrants' telephone number, including area code) (972) 392-7777
----------------------------
(Not Applicable)
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether each of the Registrants (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that each
of the Registrants was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
<TABLE>
<S> <C> <C>
Registrant Class Outstanding at August 11, 1999
- ------------------------------ ------------------------------ ------------------------------
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 distinctively themed casino entertainment facilities under the service
mark Hollywood Casino(R). Through its subsidiaries, HCC currently owns and
operates a riverboat gaming facility located in Aurora, Illinois (the "Aurora
Casino") approximately 35 miles west of Chicago and a casino and hotel complex
in Tunica County, Mississippi (the "Tunica Casino") approximately 30 miles south
of Memphis, Tennessee. In addition, the Company recently received approval and
has a license to develop, own and operate a destination gaming resort to be
located in Shreveport, Louisiana (the "Shreveport Casino") approximately 180
miles east of Dallas, Texas. HCC's outstanding common shares are listed and
traded on the American Stock Exchange under the symbol HWD. Approximately 54%
of the outstanding HCC common shares are owned by Jack E. Pratt, Edward T.
Pratt, Jr. and William D. Pratt and by certain general partnerships and trusts
controlled by the Pratts and by other family members (collectively, the "Pratt
Family").
HCC owns all of the outstanding common stock of Hollywood Casino - Aurora,
Inc. ("HCA"), HWCC - Tunica, Inc. ("HCT"), HWCC-Louisiana, Inc. ("HCL") and
HWCC-Shreveport, Inc. ("HCS"). 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. HCL is a Louisiana corporation formed by HCC in
1993 to pursue gaming opportunities in Louisiana and will develop and own the
Shreveport Casino. HCS is a Louisiana corporation formed by HCC in 1997 which
will hold the management contract for the Shreveport 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 $310,000,000 of 11.25% Senior Secured Notes due May 1, 2007 and
$50,000,000 of floating rate senior secured notes due May 1, 2006 (collectively,
the "Senior Secured Notes") through a private debt offering in May 1999. A
Registration Statement on Form S-4 to exchange the Senior Secured Notes for
identical registered notes was filed on July 16, 1999 and was declared effective
by the Securities and Exchange Commission during August 1999. The Senior Notes
are unconditionally guaranteed on a senior secured basis by HCT, HCS 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
lien 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. HCS currently has
no operations or significant assets; accordingly, separate financial statements
are not included herein. HCL has been designated an "Unrestricted Subsidiary"
of HCC and the operations of the Shreveport Casino, other than management fees
paid to HCS, will not provide credit support for the Senior Secured Notes.
Proceeds of the debt offering were used to purchase and discharge the
$204,712,000 balance of previously outstanding senior secured notes and to fund
a portion of HCC's equity investment in the Shreveport Casino, and will be used,
among other things, for a proposed expansion of the Aurora Casino's operating
facilities and to purchase and terminate the management and consulting
agreements on the Aurora and Tunica casinos.
The consolidated financial statements and financial statements as of June 30,
1999 and for the three and six month periods ended June 30, 1999 and 1998 have
been prepared by HCC, HCA and HCT without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. In the opinion
2
<PAGE>
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, 1999, the results of their
operations for the three and six month periods ended June 30, 1999 and 1998 and
their cash flows for the six month periods ended June 30, 1999 and 1998.
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 1998 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, 1999 are not necessarily indicative of the operating
results to be reported for the full year.
3
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
June 30,
1999 December 31,
(Unaudited) 1998
----------- ------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $141,162,000 $ 42,118,000
Short-term investments - 3,905,000
Restricted cash 40,733,000 -
Accounts receivable, net of allowances of
$1,667,000 and $1,468,000, respectively 3,466,000 2,368,000
Inventories 1,328,000 1,385,000
Deferred income taxes 591,000 890,000
Refundable deposits and other
current assets 1,939,000 1,908,000
Due from affiliates, net of valuation allowances 8,677,000 8,893,000
------------ ------------
Total current assets 197,896,000 61,467,000
------------ ------------
Investment in unconsolidated affiliates 2,128,000 4,581,000
------------ ------------
Property and Equipment:
Land 7,812,000 7,812,000
Buildings and improvements 120,060,000 120,060,000
Riverboats and barges 40,368,000 40,166,000
Operating equipment 79,391,000 77,192,000
Construction in progress 5,548,000 3,227,000
------------ ------------
253,179,000 248,457,000
Less - accumulated depreciation
and amortization (86,842,000) (80,642,000)
------------ ------------
Net property and equipment 166,337,000 167,815,000
------------ ------------
Other Assets:
Deferred financing costs 10,129,000 4,792,000
Land rights 7,149,000 7,250,000
Due from affiliates, net of valuation allowances 12,359,000 12,359,000
Land held for sale, net of valuation allowances 2,216,000 6,232,000
Other assets 9,939,000 6,244,000
------------ ------------
Total other assets 41,792,000 36,877,000
------------ ------------
$408,153,000 $270,740,000
============ ============
</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 BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' (DEFICIT) EQUITY
<TABLE>
<CAPTION>
June 30,
1999 December 31,
(Unaudited) 1998
----------- -------------
<S> <C> <C>
Current Liabilities:
Current maturities of long-term debt
and capital lease obligations $ 3,738,000 $ 7,914,000
Accounts payable 4,172,000 4,578,000
Accrued liabilities -
Salaries and wages 4,367,000 5,023,000
Interest 5,307,000 4,872,000
Gaming and other taxes 7,760,000 1,613,000
Insurance 3,128,000 2,940,000
Other 4,130,000 4,503,000
Other current liabilities 3,291,000 3,311,000
------------- -------------
Total current liabilities 35,893,000 34,754,000
------------- -------------
Long-Term Debt 365,045,000 199,667,000
------------- -------------
Capital Lease Obligations 19,650,000 19,948,000
------------- -------------
Other Noncurrent Liabilities 5,797,000 5,755,000
------------- -------------
Commitments and Contingencies
Minority Interest in Limited Partnership 2,057,000 3,104,000
------------- -------------
Shareholders' (Deficit) Equity:
Common Stock -
Class A common stock, $.0001 par value per share;
50,000,000 shares authorized; 24,950,000 shares
issued and outstanding 2,000 2,000
Class B, non-voting, $.01 par value per share;
10,000,000 shares authorized; no shares issued - -
Additional paid-in capital 216,926,000 216,926,000
Accumulated deficit (237,217,000) (209,416,000)
------------- -------------
Total shareholders' (deficit) equity (20,289,000) 7,512,000
------------- -------------
$ 408,153,000 $ 270,740,000
============= =============
</TABLE>
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated balance sheets.
5
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
June 30,
---------------------------
1999 1998
------------- ------------
<S> <C> <C>
Revenues:
Casino $ 72,414,000 $62,336,000
Rooms 2,631,000 2,501,000
Food and beverage 7,334,000 7,178,000
Other 1,173,000 982,000
------------ -----------
83,552,000 72,997,000
Less - promotional allowances (7,401,000) (6,644,000)
------------ -----------
Net revenues 76,151,000 66,353,000
------------ -----------
Expenses:
Casino 52,142,000 45,850,000
Rooms 343,000 453,000
Food and beverage 2,166,000 2,173,000
Other 583,000 659,000
General and administrative 4,815,000 4,533,000
Consulting fees 300,000 300,000
Depreciation and amortization 3,858,000 4,210,000
Development and preopening 269,000 169,000
------------ -----------
Total expenses 64,476,000 58,347,000
------------ -----------
Income from operations 11,675,000 8,006,000
------------ -----------
Non-operating income (expense):
Interest income 1,097,000 745,000
Interest expense (9,078,000) (7,456,000)
Loss on disposal of assets (55,000) (64,000)
------------ -----------
Total non-operating expense, net (8,036,000) (6,775,000)
------------ -----------
Income before income taxes, extraordinary and other items 3,639,000 1,231,000
Income tax provision (349,000) (374,000)
------------ -----------
Income before extraordinary and other items 3,290,000 857,000
Minority interest in earnings of Limited Partnership (Note 1) (1,068,000) (712,000)
------------ -----------
Income before extraordinary item 2,222,000 145,000
Extraordinary item - early extinguishment of debt (30,353,000) -
------------ -----------
Net (loss) income $(28,131,000) $ 145,000
============ ===========
Basic (loss) income per share:
Before extraordinary item $ .09 $.01
Extraordinary item (1.22) -
------------ -----------
Net (loss) income $ (1.13) $.01
============ ===========
Diluted (loss) income per share:
Before extraordinary item $ .09 $.01
Extraordinary item (1.21) -
------------ -----------
Net (loss) income $ (1.12) $.01
============ ===========
</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 OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
----------------------------
1999 1998
------------- -------------
<S> <C> <C>
Revenues:
Casino $138,759,000 $122,242,000
Rooms 5,025,000 4,508,000
Food and beverage 14,318,000 13,959,000
Other 2,143,000 1,899,000
------------ ------------
160,245,000 142,608,000
Less - promotional allowances (14,321,000) (12,448,000)
------------ ------------
Net revenues 145,924,000 130,160,000
------------ ------------
Expenses:
Casino 100,276,000 88,222,000
Rooms 612,000 898,000
Food and beverage 4,353,000 4,346,000
Other 1,078,000 1,342,000
General and administrative 9,400,000 8,838,000
Consulting fees 600,000 600,000
Depreciation and amortization 7,858,000 8,424,000
Development and preopening 484,000 424,000
------------ ------------
Total expenses 124,661,000 113,094,000
------------ ------------
Income from operations 21,263,000 17,066,000
------------ ------------
Non-operating income (expense):
Interest income 1,456,000 1,417,000
Interest expense (16,467,000) (14,907,000)
Loss on disposal of assets (56,000) (65,000)
------------ ------------
Total non-operating expense, net (15,067,000) (13,555,000)
------------ ------------
Income before income taxes, extraordinary and other items 6,196,000 3,511,000
Income tax provision (554,000) (665,000)
------------ ------------
Income before extraordinary and other items 5,642,000 2,846,000
Minority interest in earnings of Limited Partnership (Note 1) (3,090,000) (2,632,000)
------------ ------------
Income before extraordinary item 2,552,000 214,000
Extraordinary item - early extinguishment of debt (30,353,000) -
------------ ------------
Net (loss) income $(27,801,000) $ 214,000
============ ============
Basic (loss) income per share:
Before extraordinary item $ .10 $.01
Extraordinary item (1.22) -
------------ ------------
Net (loss) income $ (1.12) $.01
============ ============
Diluted (loss) income per share:
Before extraordinary item $ .10 $.01
Extraordinary item (1.21) -
------------ ------------
Net (loss) income $ (1.11) $.01
============ ============
</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
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
----------------------------
1999 1998
-------------- ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net (loss) income $ (27,801,000) $ 214,000
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Extraordinary item 30,353,000 -
Depreciation and amortization, including accretion
of debt discount 8,282,000 8,928,000
Loss on disposal of assets 56,000 65,000
Minority interest in earnings of Limited Partnership 3,090,000 2,632,000
Provision for doubtful accounts 324,000 466,000
Deferred income tax provision (2,000) 343,000
(Increase) decrease in accounts receivable (1,422,000) 140,000
Increase in accounts payable and accrued expenses 4,833,000 4,643,000
Net change in other current assets and liabilities 222,000 (984,000)
Net change in other noncurrent assets and liabilities (504,000) (522,000)
------------- -----------
Net cash provided by operating activities 17,431,000 15,925,000
------------- -----------
INVESTING ACTIVITIES:
Purchases of property and equipment (5,767,000) (3,795,000)
Short-term investments 3,905,000 -
Restricted cash (40,733,000) -
Project costs (1,318,000) -
Increase in cash from acquisition 1,524,000 -
Collections on notes receivable - 6,000,000
Proceeds from disposal of assets 3,941,000 15,000
Investments in unconsolidated affiliates (75,000) -
------------- -----------
Net cash (used in) provided by investing activities (38,523,000) 2,220,000
------------- -----------
FINANCING ACTIVITIES:
Borrowings on credit facilities - 398,000
Proceeds from issuance of long-term debt 343,044,000 -
Deferred financing costs (10,036,000) -
Repayments of long-term debt (208,456,000) (1,602,000)
Payments on capital lease obligations (279,000) (291,000)
Limited partnership distributions (4,137,000) (3,089,000)
------------- -----------
Net cash provided by (used in) financing activities 120,136,000 (4,584,000)
------------- -----------
Net increase in cash and cash equivalents 99,044,000 13,561,000
Cash and cash equivalents at beginning of period 42,118,000 40,259,000
------------- -----------
Cash and cash equivalents at end of period $ 141,162,000 $53,820,000
============= ===========
</TABLE>
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated statements.
8
<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 Jack E.
Pratt, Edward T. Pratt, Jr. and William D. Pratt (the "Pratt Brothers"), by
certain general partnerships and trusts controlled by the Pratt Brothers and by
other family members (collectively, the "Pratt Family").
HCC owns all of the outstanding common stock of Hollywood Casino - Aurora,
Inc. ("HCA"), HWCC - Tunica, Inc. ("HCT"), HWCC-Louisiana, Inc. ("HCL") and
HWCC-Shreveport, Inc. ("HWCC-Shreveport"). HCA is an Illinois corporation
organized during 1990 which owns and operates a riverboat gaming operation with
approximately 30,000 square feet of gaming space together with docking and other
entertainment facilities under the service mark Hollywood Casino(R) in Aurora,
Illinois (the "Aurora Casino") approximately 35 miles west of Chicago. 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") approximately 30 miles south of Memphis,
Tennessee. The Aurora Casino and the Tunica Casino commenced operations in June
1993 and August 1994, respectively. HCL is a Louisiana corporation formed by
HCC in 1993 to pursue gaming opportunities in Louisiana which will own and
develop a destination gaming resort including a dockside casino, all suite hotel
and other entertainment facilities located in Shreveport, Louisiana (the
"Shreveport Casino") approximately 180 miles east of Dallas, Texas . HWCC-
Shreveport is a Louisiana corporation formed by HCC in 1997 which will hold the
management contract for the Shreveport Casino.
The Company believes that its two currently operating gaming facilities
derive a significant amount of their gaming revenues from patrons living in the
surrounding areas. Competition within the Company's gaming markets is intense
and management believes that this competition will continue or intensify 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").
Effective as of April 1, 1997, HCC acquired the general partnership
interest in Pratt Management L.P. ("PML") from PPI Corporation, a wholly owned
subsidiary of GBCC. PML holds the management contract on and 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 Pratt Casino Corporation ("PCC"), a wholly owned subsidiary of
GBCC, and is reflected on the accompanying consolidated financial statements as
a minority interest. PCC also has a consulting contract with the Tunica Casino
(see Note 6).
On April 28, 1999, HCC entered into a voting agreement with GBCC and
certain of its wholly owned subsidiaries, including PCC and PRT Funding Corp.
("PRT Funding"), and the holders of
9
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
substantially all of the $85,000,000 of unsecured senior notes (the "PRT Funding
Notes") issued by PRT Funding and guaranteed by PCC. The PRT Funding Notes are
currently in default. Under the terms of the agreement, HCC will purchase the
stock of PCC from GBCC for nominal consideration and fund the payment of PCC's
obligations as part of a debt restructuring of PRT Funding, PCC and other
subsidiaries of PCC. When acquired by HCC, PCC's assets will consist of its
limited partnership interest in PML and a consulting contract for the Tunica
Casino and its liabilities will consist of a newly issued promissory note
payable to the Trustee for the PRT Funding Notes. The Company will fund the
payment of PCC's obligations by redeeming the newly issued note for $40,329,000;
such payment will result in a charge to expense by the Company as no asset value
will be attributed to the management contract and consulting agreement when
acquired. After the acquisition of PCC, the Company will no longer report a
minority interest in PML nor pay the Tunica consulting fee to a subsidiary of
GBCC. The minority interest and consulting fee expense totaled $1,368,000 and
$3,690,000, respectively, for the three and six month periods ended June 30,
1999 and $7,694,000 for the year ended December 31, 1998.
In order to complete the restructuring, PCC and PRT Funding filed for
protection under Chapter 11 on May 25, 1999 with the above transactions included
as part of a pre-negotiated plan of reorganization. Such plan requires approval
by the bankruptcy court as well as by various gaming regulatory organizations.
Management presently anticipates that all necessary approvals will be obtained
by early in the fourth quarter of 1999.
The accompanying consolidated financial statements also reflect HCT's 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 was completed and opened
for play in November 1998.
In September 1998, HCL received a preliminary license to develop, own and
operate the Shreveport Casino. HCL originally planned to develop the Shreveport
Casino with two partners in a joint venture in which it would have had an
interest of approximately 50%. HCL's 50% investment in the joint venture
($2,500,000) was reflected on the accompanying consolidated balance sheet at
December 31, 1998 as investment in unconsolidated affiliate.
On March 31, 1999, HCL entered into a definitive agreement with one of the
joint venture partners to acquire its interest in the Shreveport Casino. The
acquisition price was $2,500,000 (the amount the joint venture partner
contributed to the project), $1,000 of which was paid at closing with the
remainder to be paid six months after the opening of the Shreveport Casino. The
revised structure of the joint venture received approval by the Louisiana Gaming
Control Board on April 20, 1999. As a result, HCL now has an effective 100%
ownership interest in the Shreveport Casino with the remaining joint venture
partner holding a 10% residual interest in the event the project is ever sold.
The acquisition has been accounted for under the purchase method of accounting.
Accordingly, effective with the April 23, 1999 closing of HCL's acquisition of
the additional joint venture interest, the joint venture is included in the
consolidated financial statements of HCC. The acquired company had no
significant operating activities prior to the acquisition date.
The total estimated cost of the Shreveport Casino is approximately
$230,000,000 which will be financed with a combination of equity contributions,
project specific debt financing that is non-recourse
10
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
to HCC and furniture, fixture and equipment financing (see Note 10). HCL
anticipates commencing construction in August 1999 with a planned opening date
approximately 14 months later.
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
$3,084,000 and $3,432,000, respectively, on the accompanying consolidated
balance sheets at June 30, 1999 and December 31, 1998.
In June 1998, the FASB issued a new statement, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"), which has been amended to be
effective for fiscal years beginning after June 15, 2000. SFAS 133 requires,
among other things, that derivatives be recorded on the balance sheet at fair
value. Changes in the fair value of derivatives may, depending on
circumstances, be recognized in earnings or deferred as a component of
shareholders' equity until a hedged transaction occurs. The Company does not
believe the adoption of SFAS 133 will have a significant impact on its financial
position or results of operations.
The consolidated financial statements as of June 30, 1999 and for the three
and six month periods ended June 30, 1999 and 1998 have been prepared by HCC
without audit. In the opinion of management these consolidated financial
statements contain all adjustments (consisting of only normal recurring
adjustments) necessary to present fairly the consolidated financial position of
HCC as of June 30, 1999, the results of its operations for the three and six
month periods ended June 30, 1999 and 1998 and its cash flows for the six month
periods ended June 30, 1999 and 1998.
(2) (Loss) Earnings per common share -
Basic (loss) earnings per common share is calculated by dividing the net
income by the weighted average number of shares of common stock outstanding.
Diluted (loss) 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 potential
common shares outstanding.
11
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The weighted average number of shares of common stock and potential common
shares outstanding used for the calculation of (loss) earnings per share is as
follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Shares used in the calculation of:
- ---------------------------------
Basic net (loss) income per share 24,949,976 24,949,976 24,949,976 24,942,682
Diluted net (loss) income per share 25,119,701 24,952,485 25,035,734 24,952,213
</TABLE>
The number of shares used in the calculation of diluted earnings per share
for the three and six month periods ended June 30, 1999 and 1998 has been
adjusted to include potential common shares arising from stock options held by
certain employees and directors. The calculation of diluted earnings per share
excludes certain options to purchase common stock. These options have been
excluded as they would be antidilutive to the diluted earnings per share
calculation. The weighted average number of options excluded was 1,132,500 and
772,418, respectively, for the three month periods ended June 30, 1999 and 1998
and 1,132,500 and 713,204, respectively, for the six months periods ended June
30, 1999 and 1998.
(3) Long-Term Debt and Pledge of Assets
Substantially all of HCC's assets are pledged in connection with its long-
term indebtedness.
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
------------ -------------
<S> <C> <C>
Indebtedness of HCC:
11.25% Senior Secured Notes, due 2007 (a) $310,000,000 $ -
Floating rate Senior Secured Notes, due 2006 (a) 50,000,000 -
12.75% Senior Secured Notes, due 2003, net of discount
of $7,013,000 at December 31, 1998 (b) - 200,199,000
Promissory note due to affiliate (Note 6) 2,484,000 2,836,000
------------ ------------
362,484,000 203,035,000
------------ ------------
Indebtedness of HCA:
Promissory note to bank (c) 2,334,000 1,900,000
------------ ------------
Indebtedness of HCT :
Equipment loans (d) 2,676,000 1,291,000
Bank credit facility (e) 377,000 462,000
------------ ------------
3,053,000 1,753,000
------------ ------------
Total indebtedness 367,871,000 206,688,000
Less - current maturities (2,826,000) (7,021,000)
------------ ------------
Total long-term debt $365,045,000 $199,667,000
============ ============
</TABLE>
- --------------------
12
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(a) During May 1999, HCC completed the refinancing of its outstanding 12.75%
senior secured notes (see (b) below) through a private debt offering of
$310,000,000 of 11.25% Senior Secured Notes due May 1, 2007 and $50,000,000
of floating rate Senior Secured Notes due May 1, 2006 (collectively, the
"Senior Secured Notes"). The floating rate notes have an initial interest
rate of 11.36% per annum which will be adjusted semiannually based on LIBOR
plus 628 basis points. In addition to refinancing existing debt, the
Company plans to use proceeds from the debt offering to finance
construction of a new, dockside gaming facility at the Aurora Casino, to
fund a portion of the Company's equity investment in the Shreveport Casino
(see Note 1), to acquire the management and consulting contracts on the
Aurora and Tunica casinos (see Note 1), and, to the extent available, for
working capital purposes. The funds needed to acquire the management and
consulting contracts have been placed in escrow and are reflected as
restricted cash on the accompanying consolidated balance sheet at June 30,
1999. If it is determined that the Company can not complete the
acquisition of such contracts or if it has not completed the acquisition by
January 31, 2000, the $40,733,000 restricted cash will be used to redeem
$40,329,000 principal amount of the Senior Secured Notes at 101% of face
value. Interest on the Senior Secured Notes is payable semiannually on May
1 and November 1 commencing on November 1, 1999. The Senior Secured Notes
are unconditionally guaranteed on a senior secured basis by HCT and HCS and
may be guaranteed by certain future subsidiaries of HCC. Neither HCA nor
HCL 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 lien not to exceed approximately $108,000,000
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
the management contract for the Shreveport Casino.
The fixed rate Senior Secured notes are redeemable at the option of HCC any
time on or after May 1, 2003 at 107% of the then outstanding principal
amount, decreasing to 104.666%, 102.333% and 100%, respectively, on May 1,
2004, 2005 and 2006. The Company may also redeem up to 35% of the fixed
rate Senior Secured Notes at a redemption price of 111.25% plus accrued
interest at any time prior to May 1, 2002 with the proceeds from an
offering of HCC's common stock if net proceeds to the Company from any such
offering are at least $20 million.
The floating rate Senior Secured Notes may be redeemed at the option of HCC
at any time at an initial redemption price of 105% plus accrued interest
with the redemption premium decreasing by 1% on May 1 of each year
beginning May 1, 2000.
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, HCS or any future guarantor; or enter
into certain transactions with affiliates. The indenture also requires
certain financial reporting information (see Note 8).
(b) During October 1995, HCC issued $210,000,000 of 12 .75% Senior Secured
Notes (the "12.75% Senior Secured Notes") due November 1, 2003, discounted
to yield 13 3/4% per annum. Interest
13
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
on the 12.75% Senior Secured Notes was payable semiannually on May 1 and
November 1 of each year.
Commencing with the November 1, 1997 interest payment date and at each
subsequent interest payment date, HCC was required to make an offer to
purchase not more than $2,500,000 in principal amount of the 12.75% Senior
Secured Notes at a price of 106.375% of the principal amount tendered. A
total of $5,288,000 of 12.75% Senior Notes were purchased by the Company.
The remaining 12.75% Senior Secured Notes were repaid in May 1999 with a
portion of the proceeds of the Senior Secured Notes (see (a) above).
(c) During September 1998, HCA entered into a bank loan agreement to borrow up
to $2,000,000 on an unsecured basis. Borrowings under the agreement are
payable in 36 monthly installments including interest at the rate of 7.5%
per annum. HCA borrowed $2,000,000 under the agreement during October
1998.
On May 19, 1999, HCA borrowed an additional $750,000 from the bank on an
unsecured basis. The loan is payable in monthly installments of $15,000
including interest at the rate of 7.5% per annum.
(d) The equipment loans are payable monthly including interest at effective
rates ranging from 8.5% to 12.9% per annum and mature at various dates
between 1999 and 2002.
(e) HCT had a bank credit facility in the amount of $1,300,000 available to
borrow against through September 30, 1998. HCT borrowed $541,000 under the
credit facility during 1998 at the rate of 8.875% per annum. Borrowings
under the credit facility are to be repaid in monthly installments over a
period of 36 months and are collateralized by equipment purchased with the
loan proceeds. The credit facility was not renewed by HCT.
Scheduled payments of long-term debt as of June 30, 1999 are set forth
below:
1999 (six months) $ 1,357,000
2000 2,896,000
2001 2,519,000
2002 856,000
2003 168,000
Thereafter 360,075,000
------------
Total $367,871,000
============
Interest paid amounted to $15,608,000 and $14,425,000, respectively, during
the six month periods ended June 30, 1999 and 1998.
14
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(4) Capital Leases
HCA leases two parking garages under capital lease agreements. The first
lease has an initial 30-year term ending in June 2023 with the right to extend
the term under renewal options for an additional 67 years. Rental payments
through June 2012 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 7.625% per annum. The second lease has an initial term ending in September
2026 with the right to extend the lease for up to 20 additional years. Rental
payments during the first 15 years equal the lessor's debt service costs related
to the industrial revenue bond issue used to finance a portion of the
construction costs of the parking garage. The remaining construction costs were
funded by HCA. In addition, HCA pays base rent equal to $15,000 per month,
subject to a credit of $615,000 at the rate of $10,000 per month, for
improvements made to the lessor's North Island Center banquet and meeting
facilities. HCA is also responsible for additional rent, consisting of costs
such as 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% per annum and expired in 1998.
The original cost of HCA's parking garages is included in buildings on the
accompanying consolidated balance sheets at both June 30, 1999 and December 31,
1998 in the amount of $27,358,000. Assets under capital leases with an original
cost of $7,091,000 and $7,260,000, respectively, are included in operating
equipment on the accompanying consolidated balance sheets at June 30, 1999 and
December 31, 1998. Amortization expense with respect to these assets amounted
to $245,000 and $333,000 during the three month periods ended June 30, 1999 and
1998, respectively, and $491,000 and $665,000 during the six month periods ended
June 30, 1999 and 1998, respectively. Accumulated amortization at June 30, 1999
and December 31, 1998 with respect to these assets amounted to $11,127,000 and
$10,805,000, respectively.
Future minimum lease payments under capital lease obligations as of June
30, 1999 are as follows:
1999 (six months) $ 1,390,000
2000 2,483,000
2001 2,532,000
2002 2,643,000
2003 2,660,000
Thereafter 21,417,000
------------
Total minimum lease payments 33,125,000
Less amount representing interest (12,563,000)
------------
Present value of future
minimum lease payments 20,562,000
Current capital lease obligation (912,000)
------------
Long-term capital lease obligation $ 19,650,000
------------
15
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(5) Income Taxes
HCC's provision for income taxes consists of the following:
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
1999 1998 1999 1998
----------- --------- ----------- ---------
Current:
Federal $ - $ - $ - $ -
State (349,000) (193,000) (552,000) (322,000)
Deferred:
Federal 9,645,000 (180,000) 9,492,000 (287,000)
State - (1,000) (2,000) (42,000)
Change in valuation allowance (9,645,000) - (9,492,000) (14,000)
----------- --------- ----------- ---------
$ (349,000) $(374,000) $ (554,000) $(665,000)
=========== ========= =========== =========
Federal tax payments of $150,000 were made during the six month period
ended June 30, 1999; no such payments were made during the six month period
ended June 30, 1998. State tax payments of $250,000 and $328,000, respectively,
were made during the six month periods ended June 30, 1999 and 1998.
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 taxes are
computed based on the expected future tax effects of differences between the
financial statement 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.
At June 30, 1999, HCC and its subsidiaries have tax net operating loss
carryforwards ("NOL's") totaling approximately $29,500,000, none of which begin
to expire until the year 2018. Additionally, HCC and its subsidiaries have
alternative minimum and other tax credits available totaling $4,913,000 and
$571,000, respectively. Alternative minimum tax credits do not expire and none
of the other tax credits begin to expire until the year 2010. Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS
109") requires that the tax benefit of such NOL's and credit carryforwards,
together with the tax benefit of deferred tax assets resulting from temporary
differences, be recorded as an asset and, to the extent that management can not
assess that the utilization of all or a portion of such NOL's and deferred tax
assets is more likely than not, a valuation allowance should be recorded.
Management believes that it is more likely than not that future consolidated
taxable income of HCC (primarily from the Aurora Casino and the Tunica Casino)
will be sufficient to utilize a portion of the net deferred tax assets.
Accordingly, valuation allowances have been established which result in net
deferred tax assets of $1,845,000 and $1,843,000 at June 30, 1999 and December
31, 1998, respectively.
16
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The components of the net deferred tax asset and classification on the
accompanying consolidated balance sheets are as follows:
June 30, December 31,
1999 1998
------------- -------------
Deferred tax assets:
Net operating loss carryforwards $ 10,013,000 $ 1,305,000
Valuation and other allowances 9,357,000 8,241,000
Alternative minimum tax credit 4,913,000 4,913,000
Investment and jobs tax credits 571,000 415,000
Basis in limited partnership 2,890,000 2,890,000
Other liabilities and accruals 3,983,000 4,145,000
Benefits accrual 1,715,000 1,711,000
Other 1,026,000 724,000
------------ ------------
Total deferred tax assets 34,468,000 24,344,000
------------ ------------
Deferred tax liabilities:
Depreciation and amortization (9,117,000) (8,610,000)
Basis in debt obligations (850,000) (727,000)
------------ ------------
Total deferred tax liabilities (9,967,000) (9,337,000)
------------ ------------
Net deferred tax asset 24,501,000 15,007,000
Valuation allowance (22,656,000) (13,164,000)
------------ ------------
$ 1,845,000 $ 1,843,000
============ ============
Classified as:
Current deferred income tax asset $ 591,000 $ 890,000
Other assets 1,849,000 1,524,000
Other noncurrent liabilities (595,000) (571,000)
Sales by HCC or existing shareholders of common stock can cause a "change
of control", as defined in Section 382 of the Internal Revenue Code of 1986, as
amended (the "Code"), which would limit the ability of HCC or its subsidiaries
to utilize these loss carryforwards in later tax periods. Should such a change
of control occur, the amount of loss carryforwards available for use in any one
year would most likely be substantially reduced. Future treasury regulations,
administrative rulings or court decisions may also effect HCC's utilization of
its loss carryforwards.
The Internal Revenue Service is currently examining the consolidated
Federal income tax returns of HCC for the years 1993 through 1996. 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.
(6) Transactions with Related Parties
HCC has advanced funds to GBCC totaling $6,750,000 as of both June 30, 1999
and December 31, 1998. During the third quarter of 1996, HCC loaned $6,500,000
to GBCC 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
17
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
bear interest at the rate of 14% per annum, payable semiannually. Effective as
of January 1, 1999, interest earned on the outstanding obligations from GBCC is
being fully reserved for the same reasons as discussed below with respect to the
PPI Funding Notes. Interest receivable amounting to $1,781,000, net of a
valuation allowance of $464,000 in 1999, is included in due from affiliates on
the accompanying consolidated balance sheets at both June 30, 1999 and December
31, 1998. Interest income earned on loans and advances to GBCC amounted to
$232,000 and $464,000, respectively, during the three and six month periods
ended June 30, 1998.
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 $89,000 and $113,000, respectively, during the three month periods
ended June 30, 1999 and 1998 and $183,000 and $229,000, respectively, during the
six month periods ended June 30, 1999 and 1998. Accrued interest of $29,000 and
$34,000 with respect to the note is included in interest payable on the
accompanying consolidated balance sheets at June 30, 1999 and December 31, 1998,
respectively.
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 was
anticipated that GBCC's equity ownership of GBHC would be significantly reduced
in the reorganization under Chapter 11 and, as a consequence, HCC forgave
$37,000,000 undiscounted principal amount of the PPI Funding Notes at December
31, 1997, further reducing the maturity value to $47,603,000. Payment of
interest is deferred through February 17, 2001 at which time interest will
become payable semiannually, with the unpaid principal balance due on February
17, 2006. The PPI Funding Notes are collateralized by a pledge of all of the
common stock of a subsidiary of GBCC.
Prior to December 31, 1996, when GBCC and its subsidiaries were members of
the HCC consolidated group, it was anticipated that one of HCC's primary methods
of realizing the carrying value of the PPI Funding Notes would be through the
utilization of NOL's of GBCC. As a result of HCC's distribution of GBCC stock
at December 31, 1996, GBCC's NOL's are no longer available for utilization in
HCC's consolidated federal income tax returns. Accordingly, HCC provided a
valuation allowance in 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 the 1997
forgiveness
18
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
of debt discussed above, the carrying amount of the PPI Funding Notes has been
further reduced to an estimated realizable value of $12,322,000. Management
presently anticipates that the remaining balance will be realized through a
combination of repayments from GBCC and additional asset acquisitions from GBCC
and its subsidiaries.
HCT incurs a monthly consulting fee of $100,000 pursuant to a consulting
agreement expiring December 31, 2003 with PCC. Such fees amounted to $300,000
and $600,000, respectively, during each of the three and six month periods ended
June 30, 1999 and 1998.
Advanced Casino Systems Corporation ("ACSC"), a subsidiary of GBCC,
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 costs 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 to HCC and its subsidiaries for such products and services during the
three month periods ended June 30, 1999 and 1998 amounted to $291,000 and
$352,000, respectively; such billings amounted to $580,000 and $649,000,
respectively, during the six month periods ended June 30, 1999 and 1998. At June
30, 1999 and December 31, 1998, unpaid charges of $155,000 and $109,000,
respectively, are included in due to affiliates on the accompanying consolidated
balance sheets.
HCC allocates certain general and administrative costs to GBCC and its
subsidiaries pursuant to services agreements. Such allocated costs and fees
amounted to $309,000 and $546,000, respectively, for the three month periods
ended June 30, 1999 and 1998; such costs and fees amounted to $152,000 and
$260,000, respectively, during the six month periods ended June 30, 1999 and
1998. Net receivables from GBCC and its subsidiaries in the amount of $5,000
and $172,000 are included in due from affiliates on the accompanying
consolidated balance sheets at June 30, 1999 and December 31, 1998,
respectively.
During 1998, the Company determined that it should revise its tax treatment
of the spin-off of the stock of GBCC which occurred on December 31, 1996. As a
result of the revised tax treatment for the spin-off of GBCC stock to HCC's
shareholders, shareholders of the Company on the distribution date would also
have been required to revise their method of reporting the distribution received
on their separate federal income tax returns. The Company committed to assume
the obligation for additional federal income taxes owed by its shareholders
arising from the revised tax treatment. Consequently, the Company reached an
agreement with the Internal Revenue Service to settle such obligations on behalf
of its shareholders, exclusive of the Pratt Family, for $100,000 and to issue
new tax reporting forms to the Pratt Family. Such forms required the Pratt
Family members to amend their federal income tax returns for 1996 resulting in
substantial additional tax obligations totaling approximately $790,000. The
shareholder obligations assumed by the Company are included in other accrued
liabilities on the accompanying consolidated balance sheet at December 31, 1998;
substantially all of these obligations were settled during the first quarter of
1999.
19
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(7) Commitments and Contingencies
Ground Leases -
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. HCT expensed
$1,061,000 and $946,000, respectively, during the three month periods ended June
30, 1999 and 1998 and $2,056,000 and $1,886,000, respectively, during the six
month periods ended June 30, 1999 and 1998 in connection with the ground lease.
In May 1999, the joint venture partnership formed to develop the Shreveport
Casino entered into a ground lease with the City of Shreveport for the land on
which the Shreveport Casino will be built. The term of the lease begins when
construction commences and ends on the tenth anniversary of the date the
Shreveport Casino opens. The partnership has options to renew the lease on the
same terms for up to an additional forty years. The lease may be further
renewed after that time at prevailing rates and terms for similar leases. The
City of Shreveport may terminate the lease if construction has not begun by
November 19, 1999 and the partnership may terminate the lease at any time if the
operation of the Shreveport Casino becomes uneconomic. Rental payments under
the lease are $10,000 per month during the construction period increasing to
$450,000 per year upon opening and continuing at that amount for the remainder
of the initial lease term. During the first five-year renewal term, the annual
rental will be $402,500. Subsequent renewal period rental payments will
increase by 15% during each of the next four five-year renewal terms with no
further increases. In addition to the base rent, the partnership will pay
monthly percentage rent of not less than $500,000 per year equal to 1% of
monthly adjusted gross revenues and the amount, if any, by which monthly
parking facilities net income exceeds the parking income credit, as all such
terms are defined in the lease agreement.
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.
20
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
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.
Trial before a magistrate judge commenced on July 19, 1999 and concluded on
July 26, 1999. The judge has not yet issued a ruling and has provided no
definitive date by which such a ruling will be issued. 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 have defended their position and pursued
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 -
On October 8, 1998, HCC filed a complaint in the District Court of Dallas
County, Texas against Arthur Andersen LLP, HCC's former independent accountants,
and selected partners alleging negligent advice and breach of contract with
respect to the tax consequences resulting from the spin-off of GBCC's stock to
HCC's shareholders on December 31, 1996. The lawsuit is currently in the
discovery stage.
Third parties could assert obligations against the partnership developing
the Shreveport Casino for liabilities that have arisen or that might arise
against its predecessors or the partners of its predecessors with respect to any
period prior to September 22, 1998, the date on which the partnership was
reconstituted in its current form. Management believes that in the event such a
claim arises, it would be adequately covered under either existing
indemnification agreements with the former partners or insurance policies
maintained by the partnership's predecessors or their partners.
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.
21
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(8) Supplemental Cash Flow Information
In connection with the acquisition of one of its joint venture partner's
interest in the Shreveport Casino project during April 1999, the joint venture
became a consolidated subsidiary of HCC. The acquisition of the joint venture
interest and consolidation of the joint venture resulted in the assumption of
liabilities as follows:
Fair value of assets acquired $ 4,069,000
Cash acquired 1,525,000
Elimination of investment in HCC's unconsolidated
joint venture (2,546,000)
Contingent liability for purchase (2,499,000)
Preacquisition earnings attributable to joint venture
partner (46,000)
Cash paid for capital stock (1,000)
-----------
Liabilities assumed $ 502,000
===========
(9) Unrestricted Subsidiaries
Under the terms of the indenture to the Senior Secured Notes (see Note 3),
certain subsidiaries and investees of HCC have been designated as "Unrestricted
Subsidiaries." Unrestricted Subsidiaries generally do not provide credit
support for the Senior Secured Notes and obligations of Unrestricted
Subsidiaries are non-recourse to HCC. Unrestricted Subsidiaries of HCC
presently consist of HCL and its subsidiaries; HWCC-Holdings, Inc.; HWCC-Golf
Course Partners, Inc.; and PML. The following presentation
22
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
summarizes the financial position and results of operations of the Company
reflecting its Unrestricted Subsidiaries under the equity method of accounting.
Such information is not intended to be a presentation in conformity with
generally accepted accounting principles and is included for purposes of
complying with certain reporting requirements as contained in the indenture to
the Senior Secured Notes.
Condensed Balance Sheet
June 30, 1999
(amounts in thousands)
<TABLE>
<S> <C> <C> <C>
Current Assets: Current Liabilities:
Cash and cash items $139,432 Current maturities of long-
Restricted cash 40,733 term debt and capital leases $ 3,738
Accounts receivable, net of allowance Accounts payable and accrued
of $1,667 3,466 liabilities 28,976
Inventories 1,328 Other current liabilities 3,291
Prepaid expenses and other --------
current assets 2,530 36,005
Due from affiliates 8,677 --------
--------
196,166 Long-term debt 365,045
-------- --------
Investment in and advances to
Unrestricted Subsidiaries 7,010 Capital lease obligations 19,650
-------- --------
Property and equipment, net of Other noncurrent liabilities 5,797
accumulated depreciation and --------
amortization of $86,842 166,200 Minority interest in limited partnership 2,057
-------- --------
Shareholders' equity:
Other Assets: Common stock 2
Deferred finance costs 10,129 Additional paid-in capital 216,926
Due from affiliates, net of valuation Accumulated deficit (237,217)
allowances 12,359 --------
Other assets 16,401
-------- (20,289)
38,889 --------
--------
$408,265
$408,265 ========
========
</TABLE>
23
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Condensed Statements of Operations
(amounts in thousands)
<TABLE>
<CAPTION>
Three Months Six Months
Ended Ended
June 30, 1999 June 30, 1999
------------- -------------
<S> <C> <C>
Net revenues $ 76,151 $145,924
-------- --------
Expenses:
Departmental expenses 55,234 106,319
General and administrative 4,504 8,770
Management and consulting fees 1,912 4,812
Depreciation and amortization 3,858 7,858
Development 166 374
-------- --------
Total expenses 65,674 128,133
-------- --------
Income from operations 10,477 17,791
Non-operating expense, net (8,094) (15,144)
-------- --------
Income before taxes, extraordinary and other items 2,383 2,647
Provision for taxes (348) (553)
-------- --------
Income before extraordinary and other items 2,035 2,094
Equity in income of unrestricted subsidiaries 187 458
-------- --------
Income before extraordinary item 2,222 2,552
Extraordinary item - loss from early
extinguishment of debt (30,353) (30,353)
-------- --------
Net loss $(28,131) $(27,801)
======== ========
</TABLE>
(10) Subsequent Events and Partnership Agreements
During August 1999, the partnership formed to develop the Shreveport Casino
issued $150,000,000 of 13% First Mortgage Notes, with contingent interest (the
"Shreveport First Mortgage Notes"), which are non-recourse to HCC. The
Shreveport First Mortgage Notes, together with a total of $49,000,000 of capital
contributions from HCC, a $1,000,000 capital contribution from HCC's joint
venture partner made with funds loaned by HCC and $30,000,000 in furniture,
fixture and equipment financing for which a commitment letter has been obtained
are expected to provide the estimated $230,000,000 needed to construct and open
the Shreveport Casino. In addition, HCC has agreed to contribute up to an
additional $5,000,000 in equity to the Shreveport Casino under certain
circumstances which include cost overruns or delays. As currently planned, the
Shreveport Casino will consist of a three-level riverboat casino with
approximately 1,370 slot machines and 75 table games; a 405-room, all
24
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
suite, art deco style hotel; and approximately 42,000 square feet of retail,
restaurant and entertainment facilities.
Interest on the Shreveport First Mortgage Notes is payable semiannually on
February 1 and August 1 of each year commencing in February 2000. In addition,
contingent interest will be payable on each interest payment date after the
opening of the Shreveport Casino. The amount of the contingent interest will be
equal to 5% of the Shreveport Casino's cash flow, as defined, for the prior two
fiscal quarters up to a maximum of $5,000,000 for any four consecutive fiscal
quarters. The notes are collateralized by a first priority secured interest in
substantially all of the partnership's existing and future assets other than
furniture and equipment for which up to $35,000,000 of equipment financing has
been or will be obtained as well as by a pledge of the common stock of the HCC
subsidiaries which hold the partnership interests.
The Shreveport First Mortgage Notes are redeemable at the option of the
partnership at any time on or after August 1, 2003 at 106.5% of the then
outstanding principal amount, decreasing to 103.25% on August 1, 2004 and 100%
on or after August 1, 2005. Up to 35% of the original aggregate amount of the
Shreveport First Mortgage Notes may also be redeemed at any time prior to August
1, 2002 with proceeds of contributions to the partnership made by HCC from
certain offerings of equity securities by HCC.
The indenture to the Shreveport First Mortgage Notes contains various
provisions limiting the ability of the partnership to borrow money, pay
dividends, make investments, pledge or sell its assets or enter into mergers or
consolidations. The indenture also limits the ability of certain HCC
subsidiaries which guarantee the debt to acquire additional assets, become
liable for additional obligations or engage in any business activities other
than holding the partnership interests or acting as managing general partner of
the partnership.
In accordance with the amended and restated partnership agreement, HCL
agreed that upon the closing of the Shreveport First Mortgage Notes, it would
loan $1,000,000 to its joint venture partner which they will use to make a
$1,000,000 capital contribution to the partnership. The loan accrues interest at
the rate of prime commencing with the opening of the Shreveport Casino and will
be payable monthly. Principle on the loan is payable on the tenth anniversary of
the opening of the Shreveport Casino. The joint venture partner was also given
credit for an additional $1,000,000 capital contribution upon the closing of the
Shreveport First Mortgage Notes and payment of the $5,000,000 obligation to the
partnership's former partner as discussed in the following paragraph. The credit
was in recognition of guarantees provided by an affiliate of the partner which
were necessary for the partnership to obtain approval of its license. The
$2,000,000 equity interest of the partner will be reflected as minority interest
in the consolidated financial statements of HCC in subsequent periods.
The former partners of the partnership's predecessor conducted riverboat
gaming operations in New Orleans. In connection with the change in site to
Shreveport, the former partners entered into a Compromise Agreement with the
City of New Orleans under which the city would be paid a fee of $10,000,000.
One of the former partners paid $5,000,000 of the amount to the City of New
Orleans. The current partners agreed that the Shreveport Casino would pay the
remaining $5,000,000 upon securing financing for its construction. In
addition, the current partners agreed that the Shreveport Casino would reimburse
the former partner $2,000,000 of the amount it paid to the city; such repayment
is to be paid upon the earlier of the termination of construction of the
Shreveport Casino or in monthly installments of
25
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
$200,000 commencing with the opening of the Shreveport Casino. Because the
$5,000,000 and $2,000,000 did not become obligations until the August 1999
closing of the Shreveport First Mortgage Notes, these contingent obligations and
associated project costs in the aggregate of $7,000,000 were not reflected in
the accompanying consolidated financial statements of HCC at June 30, 1999.
HCL's joint venture partner will receive, among other things, an amount
equal to 1% of "complex net revenues" of the Shreveport Casino, as defined,
which approximates net revenues, in exchange for the assignment by the partner
of its interest in the partnership to HCL.
The partnership has also entered into an agreement with HCL's joint venture
partner to provide certain marine services. The Marine Services Agreement
became effective on September 22, 1998 and, in addition to the reimbursement of
the partner for its direct expenses incurred, the Shreveport Casino will pay a
monthly fee of $30,000 effective with its opening.
26
<PAGE>
HOLLYWOOD CASINO - AURORA, INC.
(wholly owned by Hollywood Casino Corporation)
BALANCE SHEETS
ASSETS
June 30,
1999 December 31,
(Unaudited) 1998
------------ ------------
Current Assets:
Cash and cash equivalents $ 18,670,000 $ 9,718,000
Accounts receivable, net of allowances
of $795,000 and $655,000, respectively 1,136,000 1,128,000
Inventories 579,000 606,000
Deferred income taxes 1,728,000 1,540,000
Due from affiliates 30,000 428,000
Prepaid expenses and other current assets 743,000 1,010,000
------------ ------------
Total current assets 22,886,000 14,430,000
------------ ------------
Property and Equipment:
Land improvements 3,167,000 3,167,000
Buildings and improvements 46,205,000 46,205,000
Riverboats 37,844,000 37,642,000
Operating equipment 38,019,000 37,192,000
Construction in progress 956,000 615,000
------------ ------------
126,191,000 124,821,000
Less - accumulated depreciation and amortization (44,669,000) (41,114,000)
------------ ------------
Net property and equipment 81,522,000 83,707,000
------------ ------------
Other Assets 2,509,000 2,173,000
------------ ------------
$106,917,000 $100,310,000
============ ============
The accompanying introductory notes and notes to financial statements are an
integral part of these balance sheets.
27
<PAGE>
HOLLYWOOD CASINO - AURORA, INC.
(wholly owned by Hollywood Casino Corporation)
BALANCE SHEETS
LIABILITIES AND SHAREHOLDER'S EQUITY
June 30,
1999 December 31,
(Unaudited) 1998
------------ ------------
Current Liabilities:
Current maturities of long-term debt
and capital lease obligations $ 1,690,000 $ 6,517,000
Accounts payable 1,834,000 2,199,000
Accrued liabilities -
Salaries and wages 2,141,000 2,300,000
Interest 588,000 1,058,000
Gaming and other taxes 6,376,000 981,000
Insurance 1,218,000 965,000
Other 1,555,000 1,374,000
Due to affiliates 3,887,000 2,109,000
Other current liabilities 1,078,000 993,000
------------ ------------
Total current liabilities 20,367,000 18,496,000
------------ ------------
Long-Term Debt 30,563,000 27,783,000
------------ ------------
Capital Lease Obligations 19,650,000 19,948,000
------------ ------------
Deferred Income Taxes 5,591,000 5,363,000
------------ ------------
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 25,541,000 25,541,000
Retained earnings 5,190,000 3,164,000
------------ ------------
Total shareholder's equity 30,746,000 28,720,000
------------ ------------
$106,917,000 $100,310,000
============ ============
The accompanying introductory notes and notes to financial statements are an
integral part of these balance sheets.
28
<PAGE>
HOLLYWOOD CASINO - AURORA, INC.
(wholly owned by Hollywood Casino Corporation)
STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
June 30,
-------------------------
1999 1998
----------- -----------
Revenues:
Casino $46,193,000 $38,548,000
Food and beverage 3,602,000 3,373,000
Other 832,000 632,000
----------- -----------
50,627,000 42,553,000
Less - promotional allowances (2,763,000) (2,460,000)
----------- -----------
Net revenues 47,864,000 40,093,000
----------- -----------
Expenses:
Casino 32,140,000 27,755,000
Food and beverage 1,198,000 1,121,000
Other 302,000 301,000
General and administrative 2,878,000 2,571,000
Depreciation and amortization 1,770,000 1,899,000
----------- -----------
Total expenses 38,288,000 33,647,000
----------- -----------
Income from operations 9,576,000 6,446,000
----------- -----------
Non-operating income (expense):
Interest income 89,000 26,000
Interest expense (1,319,000) (1,511,000)
Loss on disposal of assets - (5,000)
----------- -----------
Total non-operating expense, net (1,230,000) (1,490,000)
----------- -----------
Income before income taxes 8,346,000 4,956,000
Income tax provision (3,156,000) (1,895,000)
----------- -----------
Net income $ 5,190,000 $ 3,061,000
=========== ===========
The accompanying introductory notes and notes to financial statements
are an integral part of these financial statements.
29
<PAGE>
HOLLYWOOD CASINO - AURORA, INC.
(wholly owned by Hollywood Casino Corporation)
STATEMENTS OF OPERATIONS
(Unaudited)
Six Months Ended
June 30,
-------------------------
1999 1998
----------- -----------
Revenues:
Casino $88,002,000 $75,651,000
Food and beverage 6,950,000 6,606,000
Other 1,486,000 1,254,000
----------- -----------
96,438,000 83,511,000
Less - promotional allowances (5,181,000) (4,698,000)
----------- -----------
Net revenues 91,257,000 78,813,000
----------- -----------
Expenses:
Casino 62,290,000 53,716,000
Food and beverage 2,480,000 2,323,000
Other 524,000 623,000
General and administrative 6,684,000 6,352,000
Depreciation and amortization 3,555,000 3,823,000
----------- -----------
Total expenses 75,533,000 66,837,000
----------- -----------
Income from operations 15,724,000 11,976,000
----------- -----------
Non-operating income (expense):
Interest income 153,000 62,000
Interest expense (2,753,000) (3,101,000)
Gain (loss) on disposal of assets 1,000 (3,000)
----------- -----------
Total non-operating expense, net (2,599,000) (3,042,000)
----------- -----------
Income before income taxes 13,125,000 8,934,000
Income tax provision (4,979,000) (3,415,000)
----------- -----------
Net income $ 8,146,000 $ 5,519,000
=========== ===========
The accompanying introductory notes and notes to financial statements
are an integral part of these financial statements.
30
<PAGE>
HOLLYWOOD CASINO - AURORA, INC.
(wholly owned by Hollywood Casino Corporation)
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
----------------------------
1999 1998
------------ -------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 8,146,000 $ 5,519,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 3,555,000 3,823,000
Provision for doubtful accounts 150,000 167,000
Gain (loss) on disposal of assets (1,000) 3,000
Deferred income tax provision 40,000 403,000
(Increase) decrease in receivables (158,000) 210,000
Increase in accounts payable and accrued liabilities 4,835,000 5,251,000
Net change in affiliate accounts 2,176,000 (1,037,000)
Net change in other current assets and liabilities 379,000 (31,000)
Net change in other assets and liabilities (336,000) 20,000
------------ ------------
Net cash provided by operating activities 18,786,000 14,328,000
------------ ------------
INVESTING ACTIVITIES:
Purchases of property and equipment (1,370,000) (1,990,000)
Proceeds from sale of assets 1,000 -
------------ ------------
Net cash used in investing activities (1,369,000) (1,990,000)
------------ ------------
FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt 29,757,000 -
Repayments of debt (31,823,000) (3,231,000)
Payments on capital lease obligations (279,000) (291,000)
Dividends (6,120,000) (9,167,000)
------------ ------------
Net cash used in financing activities (8,465,000) (12,689,000)
------------ ------------
Net increase (decrease) in cash and cash equivalents 8,952,000 (351,000)
Cash and cash equivalents at beginning of period 9,718,000 11,594,000
------------ ------------
Cash and cash equivalents at end of period $ 18,670,000 $ 11,243,000
============ ============
</TABLE>
The accompanying introductory notes and notes to financial statements
are an integral part of these financial statements.
31
<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") approximately 35 miles west of Chicago. 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. A GBCC subsidiary continues to
have a limited partnership interest in the entity which holds the management
services contract for the Aurora Casino (see Note 5).
The Aurora Casino consists of two, four-level riverboats having a combined
gaming space of approximately 30,000 square feet and a four-level pavilion and
docking facility which houses ticketing, food service, passenger waiting, and
various administrative functions. The Aurora Casino also includes two parking
structures with approximately 1,350 parking spaces. HCA was responsible for the
design and construction of the parking garages; however, it leases the
facilities under long-term lease agreements. The leases are treated as capital
leases for financial reporting purposes (see Note 3).
The Aurora Casino commenced operations on June 17, 1993. HCA's current
owner's license was renewed by the Illinois Gaming Board in July 1998 for a
period of one year and subsequently extended to December 1999. Gaming taxes
imposed by the state of Illinois are determined using a graduated tax rate
applied to the licensee's adjusted gaming revenues. HCA expenses such gaming
taxes based on its anticipated annual effective tax rate.
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 intensify 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.
32
<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.
In June 1998, the FASB issued a new statement, "Accounting for Derivative
Instruments and Hedging Activities," ("SFAS 133"), which has been amended to be
effective for fiscal years beginning after June 15, 2000. SFAS 133 requires,
among other things, that derivatives be recorded on the balance sheet at fair
value. Changes in the fair value of derivatives may, depending on
circumstances, be recognized in earnings or deferred as a component of
shareholders' equity until a hedged transaction occurs. HCA does not believe
the adoption of SFAS 133 will have a significant impact on its financial
position or results of operations.
The financial statements as of June 30, 1999 and for the three and six
month periods ended June 30, 1999 and 1998 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, 1999, the results of
its operations for the three and six month periods ended June 30, 1999 and 1998
and its cash flows for the six month periods ended June 30, 1999 and 1998.
(2) Long-Term Debt and Pledge of Assets
HCA's long-term indebtedness consists of the following:
June 30, December 31,
1999 1998
------------ -------------
11.25% Promissory note to HCC, due on
May 1, 2007 (a) $29,007,000 $ -
12.75% Promissory note to HCC, due on
November 1, 2003 (b) - 31,507,000
Promissory notes to bank (c) 2,334,000 1,900,000
----------- -----------
Total indebtedness 31,341,000 33,407,000
Less - current maturities (778,000) (5,624,000)
----------- -----------
Total long-term debt $30,563,000 $27,783,000
=========== ===========
(a) The intercompany note was issued as of May 19, 1999 and accrues interest at
the rate of 11.25% per annum. The initial borrowing on the note replaced
the previous intercompany note with HCC
33
<PAGE>
HOLLYWOOD CASINO - AURORA, INC.
(wholly owned by Hollywood Casino Corporation)
NOTES TO FINANCIAL STATEMENTS (Continued)
(Unaudited)
described in (b) below. HCA may borrow up to $108,000,000 under the
intercompany note agreement. Interest on advances is payable semiannually on
October 15 and April 15 of each year. The intercompany note is pledged as
security with respect to HCC's $360,000,000 Senior Secured Notes due in 2006
and 2007. HCA is not a guarantor of HCC's indebtedness; however, the
indebtedness is secured, in part, by a lien limited to the outstanding
principal amount on the intercompany note to HCC on substantially all of the
assets of HCA and by a pledge of the capital stock of HCA.
(b) The intercompany note accrued interest at the rate of 12 .75% per annum
payable semiannually on October 15 and April 15 of each year and required
semiannual principal repayments of $2,500,000 commencing October 15, 1997
with the balance of the note due November 1, 2003. The note was refinanced
on May 19, 1999 (see (a) above).
(c) During September 1998, HCA entered into a bank loan agreement to borrow up
to $2,000,000 on an unsecured basis. Borrowings under the agreement are
payable in 36 monthly installments including interest at the rate of 7.5%
per annum. HCA borrowed $2,000,000 under the agreement during October 1998.
On May 19, 1999, HCA borrowed an additional $750,000 from the bank on an
unsecured basis. The loan is payable in 60 monthly installments of $15,000
including interest at the rate of 7.5% per annum.
As of June 30, 1999, future maturities of long-term debt are as follows:
1999 (six months) $ 381,000
2000 808,000
2001 747,000
2002 156,000
2003 168,000
Thereafter 29,081,000
-----------
$31,341,000
===========
Interest paid for the six month periods ended June 30, 1999 and 1998
amounted to $3,223,000 and $3,169,000, respectively.
(3) Capital Leases
HCA leases two parking garages under capital lease agreements. The first
lease has an initial 30-year term ending in June 2023 with the right to extend
the term under renewal options for an additional 67 years. Rental payments
through June 2012 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
34
<PAGE>
HOLLYWOOD CASINO - AURORA, INC.
(wholly owned by Hollywood Casino Corporation)
NOTES TO FINANCIAL STATEMENTS (Continued)
(Unaudited)
issue includes interest at rates between 7% and 7 .625% per annum. The second
lease has an initial term ending in September 2026 with the right to extend the
lease for up to 20 additional years. Rental payments during the first 15 years
equal the lessor's debt service costs related to the industrial revenue bond
issue used to finance a portion of the construction costs of the parking garage.
The remaining construction costs were funded by HCA. In addition, HCA pays base
rent equal to $15,000 per month, subject to a credit of $615,000 at the rate of
$10,000 per month for improvements made to the lessor's North Island Center
banquet and meeting facilities. HCA is also responsible for additional rent,
consisting of costs such as 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.
The original cost of HCA's parking garages is included in buildings and
improvements on the accompanying balance sheets at both June 30, 1999 and
December 31, 1998 in the amount of $27,358,000. Assets under capital leases with
an original cost of $2,446,000 are included in operating equipment on the
accompanying balance sheets at both June 30, 1999 and December 31, 1998.
Amortization expense with respect to these assets amounted to $246,000 during
each of the three month periods ended June 30, 1999 and 1998 and $491,000 during
each of the six month periods ended June 30, 1999 and 1998. Accumulated
amortization at June 30, 1999 and December 31, 1998 with respect to these assets
amounted to $6,482,000 and $5,991,000, respectively.
Future minimum lease payments under capital lease obligations as of June 30,
1999 are as follows:
1999 (six months) $ 1,390,000
2000 2,483,000
2001 2,532,000
2002 2,643,000
2003 2,660,000
Thereafter 21,417,000
-----------
Total minimum lease payments 33,125,000
Less - amount representing interest (12,563,000)
-----------
Present value of future minimum lease payments 20,562,000
Current capital lease obligation (912,000)
-----------
Long-term capital lease obligation $19,650,000
===========
35
<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>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- -------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Current:
Federal $(2,816,000) $(1,686,000) $(4,405,000) $(2,691,000)
State (335,000) (201,000) (534,000) (321,000)
Deferred:
Federal (6,000) (8,000) (38,000) (361,000)
State 1,000 - (2,000) (42,000)
----------- ----------- ----------- -----------
$(3,156,000) $(1,895,000) $(4,979,000) $(3,415,000)
=========== =========== =========== ===========
</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 taxes amounting to $956,000 and
$1,961,000, respectively, and state income taxes amounting to $231,000 and
$327,000, respectively, during the six month periods ended June 30, 1999 and
1998.
Deferred taxes are computed based on the expected future tax effects of
differences between the financial statement 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 other accruals.
36
<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 are as follows:
June 30, December 31,
1999 1998
------------ -------------
Deferred tax assets:
Allowance for doubtful accounts $ 299,000 $ 246,000
Other liabilities and reserves 1,469,000 1,420,000
----------- -----------
Total deferred tax assets 1,768,000 1,666,000
----------- -----------
Deferred tax liabilities:
Depreciation and amortization (5,631,000) (5,489,000)
----------- -----------
Net deferred tax liability $(3,863,000) $(3,823,000)
----------- ===========
Receivables and payables to HCC in connection with the aforementioned tax
allocation agreements at June 30, 1999 and December 31, 1998 are as follows:
June 30, December 31,
1999 1998
--------- ------------
Deferred tax assets $ 1,540,000 $ 1,373,000
Due (to) from affiliates (3,102,000) 347,000
Deferred tax liabilities (4,996,000) (4,793,000)
The Internal Revenue Service is currently examining the consolidated Federal
income tax returns of HCC for the years 1993 through 1996. Management believes
that the results of such examination will not have a material adverse effect on
the financial position or results of operations of HCA.
(5) Transactions with Related Parties
Pursuant to a management services agreement, HCA pays base management and
incentive fees to Pratt Management, L.P. ("PML"), a limited partnership of which
HCC is the general partner and a subsidiary of GBCC is the limited partner. 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 income taxes). HCA incurred such fees
totaling $1,612,000 and $1,279,000, respectively, during the three month
periods ended June 30, 1999 and 1998 and $4,212,000 and $3,825,000,
respectively, during the six month periods ended June 30, 1999 and 1998.
Management and incentive fees payable at June 30, 1999 and December 31, 1998
37
<PAGE>
HOLLYWOOD CASINO - AURORA, INC.
(wholly owned by Hollywood Casino Corporation)
NOTES TO FINANCIAL STATEMENTS (Continued)
(Unaudited)
amounting to $719,000 and $2,067,000, respectively, are included in due to
affiliates on the accompanying balance sheets.
HCA incurred interest with respect to its promissory notes payable to HCC
(see Note 2) amounting to $887,000 and $1,097,000, respectively, for the three
month periods ended June 30, 1999 and 1998 and $1,891,000 and $2,260,000,
respectively, for the six month periods ended June 30, 1999 and 1998. Interest
payable to HCC on such notes amounted to $381,000 and $848,000, respectively, at
June 30, 1999 and December 31, 1998 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
during the three month periods ended June 30, 1999 and 1998 totaling $47,000 and
$67,000, respectively, and during the six month periods ended June 30, 1999 and
1998 totaling $96,000 and $190,000, respectively. At June 30, 1999 and
December 31, 1998, HCA had net payables of $36,000 and net receivables of
$37,000, respectively, in connection with such charges.
(6) Commitments and Contingencies
Planet Hollywood Litigation -
Planet Hollywood International, Inc., a Delaware corporation, and Planet
Hollywood (Region IV), Inc., a Minnesota corporation (collectively, "PHII"),
filed a complaint in the United States District Court for the Northern District
of Illinois, Eastern Division on July 29, 1996 against HCC, HCA and a member of
the Pratt Family (collectively, the "Original Hollywood Defendants"). The
Original Hollywood Defendants filed with the Court on September 18, 1996 an
answer to PHII's lawsuit, along with numerous counterclaims against PHII, Robert
Earl and Keith Barish (collectively, the "PHII Defendants"). PHII filed with
the Court on January 21, 1997, an amendment to their complaint which, among
other things, added HWCC-Tunica, Inc., the HCC subsidiary which owns and
operates a casino in Tunica, Mississippi ("HCT", and 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.
38
<PAGE>
HOLLYWOOD CASINO - AURORA, INC.
(wholly owned by Hollywood Casino Corporation)
NOTES TO FINANCIAL STATEMENTS (Continued)
(Unaudited)
Trial before a magistrate judge commenced on July 19, 1999 and concluded on
July 26, 1999. The judge has not yet issued a ruling and has provided no
definitive date by which such a ruling will be issued. 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 have defended their position and pursued
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.
39
<PAGE>
HWCC - TUNICA, INC. AND SUBSIDIARY
(wholly owned by Hollywood Casino Corporation)
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
June 30,
1999 December 31,
(Unaudited) 1998
------------- -------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 14,499,000 $ 16,325,000
Short-term investments - 3,905,000
Accounts receivable, net of allowances of
$872,000 and $813,000, respectively 1,892,000 1,167,000
Inventories 749,000 779,000
Deferred income taxes 1,533,000 1,451,000
Prepaid expenses and other current assets 890,000 770,000
------------ ------------
Total current assets 19,563,000 24,397,000
------------ ------------
Property and Equipment:
Land and improvements 4,645,000 4,645,000
Buildings 73,948,000 73,948,000
Barges 2,524,000 2,524,000
Operating equipment 40,510,000 39,169,000
Construction in progress 4,593,000 2,612,000
------------ ------------
126,220,000 122,898,000
Less - accumulated depreciation and amortization (41,526,000) (38,910,000)
------------ ------------
Net property and equipment 84,694,000 83,988,000
------------ ------------
Other Assets:
Land rights 7,149,000 7,250,000
Other assets 4,841,000 4,826,000
------------ ------------
Total other assets 11,990,000 12,076,000
------------ ------------
$116,247,000 $120,461,000
============ ============
</TABLE>
The accompanying introductory notes and notes to consolidated financial
statements
are an integral part of these consolidated balance sheets.
40
<PAGE>
HWCC - TUNICA, INC. AND SUBSIDIARY
(wholly owned by Hollywood Casino Corporation)
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
June 30,
1999 December 31,
(Unaudited) 1998
------------- -------------
<S> <C> <C>
Current Liabilities:
Current maturities of long-term debt $ 1,354,000 $ 775,000
Accounts payable 1,263,000 1,638,000
Accrued liabilities -
Salaries and wages 1,520,000 1,685,000
Interest 422,000 476,000
Gaming and other taxes 1,314,000 453,000
Insurance 1,908,000 1,975,000
Other 2,476,000 1,866,000
Other current liabilities 1,334,000 1,283,000
------------ ------------
Total current liabilities 11,591,000 10,151,000
------------ ------------
Long-Term Debt 85,744,000 85,023,000
------------ ------------
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 26,637,000 34,637,000
Accumulated deficit (7,725,000) (9,350,000)
------------ ------------
Total shareholder's equity 18,912,000 25,287,000
------------ ------------
$116,247,000 $120,461,000
============ ============
</TABLE>
The accompanying introductory notes and notes to consolidated financial
statements
are an integral part of these consolidated balance sheets.
41
<PAGE>
HWCC - TUNICA, INC. AND SUBSIDIARY
(wholly owned by Hollywood Casino Corporation)
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
June 30,
--------------------------
1999 1998
------------ ------------
<S> <C> <C>
Revenues:
Casino $26,221,000 $23,788,000
Rooms 2,631,000 2,501,000
Food and beverage 3,732,000 3,805,000
Other 341,000 335,000
----------- -----------
32,925,000 30,429,000
Less - promotional allowances (4,638,000) (4,184,000)
----------- -----------
Net revenues 28,287,000 26,245,000
----------- -----------
Expenses:
Casino 20,002,000 18,095,000
Rooms 343,000 453,000
Food and beverage 968,000 1,052,000
Other 281,000 346,000
General and administrative 1,572,000 1,450,000
Depreciation and amortization 1,792,000 2,040,000
----------- -----------
Total expenses 24,958,000 23,436,000
----------- -----------
Income from operations 3,329,000 2,809,000
----------- -----------
Non-operating income (expenses):
Interest income 72,000 146,000
Interest expense (2,613,000) (2,744,000)
Loss on disposal of assets (55,000) (58,000)
----------- -----------
Total non-operating expenses, net (2,596,000) (2,656,000)
----------- -----------
Income before income taxes 733,000 153,000
Income tax provision - -
----------- -----------
Net income $ 733,000 $ 153,000
=========== ===========
</TABLE>
The accompanying introductory notes and notes to consolidated financial
statements
are an integral part of these consolidated statements.
42
<PAGE>
HWCC - TUNICA, INC. AND SUBSIDIARY
(wholly owned by Hollywood Casino Corporation)
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
--------------------------
1999 1998
------------ ------------
<S> <C> <C>
Revenues:
Casino $50,757,000 $46,591,000
Rooms 5,025,000 4,508,000
Food and beverage 7,368,000 7,353,000
Other 652,000 615,000
----------- -----------
63,802,000 59,067,000
Less - promotional allowances (9,140,000) (7,750,000)
----------- -----------
Net revenues 54,662,000 51,317,000
----------- -----------
Expenses:
Casino 37,986,000 34,506,000
Rooms 612,000 898,000
Food and beverage 1,873,000 2,023,000
Other 554,000 670,000
General and administrative 3,051,000 3,007,000
Depreciation and amortization 3,758,000 4,060,000
----------- -----------
Total expenses 47,834,000 45,164,000
----------- -----------
Income from operations 6,828,000 6,153,000
----------- -----------
Non-operating income (expenses):
Interest income 207,000 268,000
Interest expense (5,353,000) (5,475,000)
Loss on disposal of assets (57,000) (61,000)
----------- -----------
Total non-operating expenses, net (5,203,000) (5,268,000)
----------- -----------
Income before income taxes 1,625,000 885,000
Income tax provision - -
----------- -----------
Net income $ 1,625,000 $ 885,000
=========== ===========
</TABLE>
The accompanying introductory notes and notes to consolidated financial
statements
are an integral part of these consolidated statements.
43
<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,
---------------------------
1999 1998
------------- ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 1,625,000 $ 885,000
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 3,758,000 4,060,000
Provision for doubtful accounts 174,000 299,000
Loss on disposal of assets 57,000 61,000
Increase in accounts receivable (899,000) (114,000)
Increase (decrease) in accounts payable
and accrued expenses 810,000 (15,000)
Net change in other current assets and liabilities (121,000) (191,000)
Net change in other noncurrent assets and liabilities (46,000) (184,000)
------------ -----------
Net cash provided by operating activities 5,358,000 4,801,000
------------ -----------
INVESTING ACTIVITIES:
Purchases of property and equipment (4,367,000) (1,739,000)
Short-term investments 3,905,000 -
Investment in unconsolidated affiliate (75,000) -
Proceeds from sale of assets 53,000 15,000
------------ -----------
Net cash used in investing activities (484,000) (1,724,000)
------------ -----------
FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt 85,921,000 398,000
Repayments of long-term debt (84,621,000) (285,000)
Dividends (8,000,000) -
------------ -----------
Net cash (used in) provided by financing activities (6,700,000) 113,000
------------ -----------
Net (decrease) increase in cash and cash equivalents (1,826,000) 3,190,000
Cash and cash equivalents at beginning of period 16,325,000 11,851,000
------------ -----------
Cash and cash equivalents at end of period $ 14,499,000 $15,041,000
============ ===========
</TABLE>
The accompanying introductory notes and notes to consolidated financial
statements
are an integral part of these consolidated statements.
44
<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 30 miles
south of Memphis, Tennessee. The facility (the "Tunica Casino") was completed
and commenced operations on August 8, 1994 under the service mark Hollywood
Casino(R). The Tunica Casino currently includes a casino with 54,000 square
feet of gaming space, 506 hotel rooms and suites, a 123-space recreational
vehicle park and related amenities. 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 opened for
business in November 1998. Golf's investment in Tunica Golf Course, LLC is
accounted for under the equity method of accounting and is included in other
noncurrent assets on the accompanying consolidated balance sheets at June 30,
1999 and December 31, 1998.
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.
In June 1998, the FASB issued a new statement, "Accounting for Derivative
Instruments and Hedging Activities," ("SFAS 133"), which has been amended to be
effective for fiscal years beginning after June 15, 2000. SFAS 133 requires,
among other things, that derivatives be recorded on the balance sheet at fair
value. Changes in the fair value of derivatives may, depending on
circumstances, be recognized in earnings or deferred as a component of
shareholders' equity until a hedged transaction occurs. HCT does not believe
the adoption of SFAS 133 will have a significant impact on its financial
position or results of operations.
45
<PAGE>
HWCC - TUNICA, INC. AND SUBSIDIARY
(wholly owned by Hollywood Casino Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The consolidated financial statements as of June 30, 1999 and for the three
and six month periods ended June 30, 1999 and 1998 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, 1999, the results of its operations for the three and six
month periods ended June 30, 1999 and 1998 and its cash flows for the six month
periods ended June 30, 1999 and 1998.
(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,
1999 1998
----------- -----------
<S> <C> <C>
Promissory note to HCC due May 1, 2007 (a) $84,045,000 $ -
Promissory notes to HCC due November 1, 2003 (b) - 84,045,000
Equipment loans (c) 2,676,000 1,291,000
Bank credit facility (d) 377,000 462,000
----------- -----------
Total indebtedness 87,098,000 85,798,000
Less - current maturities (1,354,000) (775,000)
----------- -----------
Total long-term debt $85,744,000 $85,023,000
=========== ===========
</TABLE>
- -----------------------------
(a) The intercompany note was issued as of May 19, 1999 and accrues interest at
the rate of 11.25% per annum. The initial borrowing on the note replaced
the previous intercompany notes with HCC (see (b) below). HCT may borrow
up to $87,045,000 under the intercompany note agreement. Interest on
advances is payable semiannually on April 15 and October 15 of each year.
The intercompany note is pledged as security with respect to HCC's
$360,000,000 Senior Secured Notes due in 2006 and 2007 which are
unconditionally guaranteed on a senior secured basis by HCT and by certain
other current and future subsidiaries of HCC. HCC's 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
limited lien 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 lien described in (ii) above is currently $29,007,000;
however, such lien may be increased with additional borrowings up to a
maximum of $108,000,000.
46
<PAGE>
HWCC - TUNICA, INC. AND SUBSIDIARY
(wholly owned by Hollywood Casino Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The indenture to HCC's 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; or enter into
certain transactions with affiliates.
(b) The intercompany note accrued interest at the rate of 12.75% per annum
payable semiannually on October 15 and April 15 of each year. The note was
refinanced on May 19, 1999 (see (a) above).
(c) The equipment loans are payable monthly including interest at effective
rates ranging from 8.5% to 12.9% per annum and mature at various dates
between 1999 and 2002.
(d) HCT had a bank credit facility in the amount of $1,300,000 available to
borrow against until September 30, 1998. HCT borrowed $541,000 under the
credit facility during 1998 at the rate of 8.875% per annum. Borrowings
under the credit facility are to be repaid in monthly installments over a
period of 36 months and are collateralized by equipment purchased with the
loan proceeds. The credit facility was not renewed by HCT.
Scheduled payments of long-term debt as of June 30, 1999 are set forth
below:
1999 (six months) $ 642,000
2000 1,343,000
2001 915,000
2002 153,000
2003 -
Thereafter 84,045,000
-----------
Total $87,098,000
===========
Interest paid, net of amounts capitalized, amounted to $5,407,000 and
$5,475,000, respectively, during the six month periods ended June 30, 1999 and
1998.
(3) Capital Leases
HCT leased certain gaming and other equipment under capital lease
agreements which provided for interest at rates ranging up to 13 .25% per annum
and which expired during 1997. Assets under capital leases with an original
cost of $4,645,000 and $4,814,000, respectively, are included in operating
equipment in the accompanying consolidated balance sheets at June 30, 1999 and
at December 31, 1998 and are fully amortized. Amortization expense for the
three and six month periods ended June 30, 1998 was $87,000 and $174,000,
respectively. No future payment obligations exist with respect to such capital
leases.
47
<PAGE>
HWCC - TUNICA, INC. AND SUBSIDIARY
(wholly owned by Hollywood Casino Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(4) Income Taxes
HCT's provision for income taxes consists of the following:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------- ------------------------------
1999 1998 1999 1998
-------------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
Provision for current federal
income taxes $(152,000) $ - $(152,000) $ -
(Provision) benefit for deferred
federal income taxes 239,000 34,000 (190,000) (230,000)
Change in valuation allowance (87,000) (34,000) 342,000 230,000
-------------- ------------ ------------- -------------
$ - $ - $ - $ -
============== ============ ============= =============
</TABLE>
State income taxes have not been provided for since a credit for state
gaming taxes based on gross revenues is allowed to offset income taxes incurred.
The credit is the lesser of total gaming taxes paid or the state income tax,
with no credit carryforward permitted.
HCT is included in HCC's consolidated federal income tax return. HCT's
provision for federal income taxes is based on the amount of tax which would be
provided if a separate federal income tax return were filed. HCT paid no
federal or state taxes during either of the six month periods ended June 30,
1999 or 1998.
Deferred taxes are computed based on the expected future tax effects of
differences between the financial statement 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.
At June 30, 1999, HCT had net operating loss carryforwards ("NOL's")
totaling approximately $14,500,000, which do not begin to expire until the year
2010. Additionally, HCT has alternative minimum tax and other tax credits
available totalling $952,000 and $237,000, respectively. Alternative minimum
tax credits do not expire and none of the other tax credits expire before the
year 2009. Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes", requires that the tax benefit of such NOL's, together with the
tax benefit of deferred tax assets resulting from temporary differences, be
recorded as an asset and, to the extent that management can not assess that the
utilization of all or a portion of such deferred tax assets is more likely than
not, a valuation allowance should be recorded.
48
<PAGE>
HWCC - TUNICA, INC. AND SUBSIDIARY
(wholly owned by Hollywood Casino Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Based on the taxable income currently being earned by HCT and the expectation of
future taxable income, management believes that it is more likely than not that
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 $2,144,000 and $1,992,000, respectively, at June 30,
1999 and December 31, 1998.
The components of HCT's net deferred tax asset are as follows:
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
------------ -------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 4,937,000 $ 5,221,000
Alternative minimum tax credit carryforward 952,000 800,000
Allowance for doubtful accounts 297,000 277,000
Other liabilities and accruals 1,256,000 1,286,000
Other 237,000 -
----------- -----------
Total deferred tax assets 7,679,000 7,584,000
Deferred tax liabilities:
Depreciation and amortization (3,377,000) (3,092,000)
----------- -----------
Net deferred tax asset 4,302,000 4,492,000
Valuation allowance (2,158,000) (2,500,000)
----------- -----------
$ 2,144,000 $ 1,992,000
=========== ===========
</TABLE>
Receivables from and (payables to) HCC in connection with HCT's federal
income taxes are included in the accompanying consolidated financial statements
as follows:
June 30, December 31,
1999 1998
----------- ------------
Deferred income taxes $1,533,000 $1,451,000
Other noncurrent assets 611,000 541,000
Due to affiliates (152,000) -
The Internal Revenue Service is currently examining the consolidated
Federal income tax returns of HCC for the years 1993 through 1996. Management
believes that the results of such examination will not have a material adverse
effect on the financial position or results of operations of HCT.
49
<PAGE>
HWCC - TUNICA, INC. AND SUBSIDIARY
(wholly owned by Hollywood Casino Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(5) Transactions with Related Parties
Pursuant to a consulting agreement expiring December 31, 2003 with Pratt
Casino Corporation, an affiliated company, HCT incurs a monthly consulting fee
of $100,000. Such fees amounted to $300,000 and $600,000, respectively, during
each of the three and six month periods ended March 31, 1999 and 1998.
HCT and Advanced Casino Systems Corporation ("ACSC"), an affiliated
company, entered into a Computer Services Agreement dated as of January 1, 1994
and renewed through December 31, 1999. The agreement provides, among other
things, that ACSC will sell HCT computer hardware and information systems
equipment and will license or sublicense to HCT computer software necessary to
operate HCT's casino, hotel and related facilities and business operations. HCT
pays ACSC for such equipment and licenses such software at amounts and on terms
and conditions that ACSC provides to unrelated third parties. HCT also pays ACSC
a fixed license fee of $33,600 per month and reimburses ACSC for its direct
costs and expenses incurred under the agreement. ACSC also performs and bills
HCT for certain administrative and marketing services. Total charges incurred by
HCT amounted to $201,000 and $223,000, respectively, for the three month periods
ended June 30, 1999 and 1998 and $399,00 and $369,000, respectively, for the six
month periods ended June 30, 1999 and 1998. At June 30, 1999 and December 31,
1998, HCT had payables of $69,000 and $44,000, respectively, included in
accounts payable with respect to such charges.
HCT is charged for certain legal, accounting, and other expenses incurred
by HCC and its subsidiaries that relate to HCT's business. HCT also bills HCC
and its subsidiaries for services provided to those companies. For the three
month periods ended June 30, 1999 and 1998 net charges incurred by HCT amounted
to $44,000 and $47,000, respectively. For the six month periods ended June 30,
1999 and 1998, such charges amounted to $89,000 and $85,000, respectively. The
accompanying consolidated balance sheets at June 30, 1999 and December 31, 1998
include net payables to affiliates of $6,000 and net receivables from affiliates
of $97,000, respectively, for such charges.
(6) Commitments and Contingencies
Ground Lease -
HCT entered into a ground lease covering 70 acres of land on which the
Tunica Casino was constructed. The ground lease is for an initial term of five
years from the opening date of the facility and, at HCT's option, may be renewed
for nine additional five-year periods. Obligations under the ground lease during
the initial term include both minimum monthly fixed payments and percentage
rent, which in the aggregate will be the greater of 4% of Gross Revenues, as
defined, or $1,100,000 per year. HCT is responsible for all operating and other
expenses of the property in accordance with the lease terms. HCT expensed
$1,061,000 and $946,000, respectively, during the three month periods ended June
30, 1999 and 1998, and $2,056,000 and $1,886,000, respectively, during the six
month periods ended June 30, 1999 and 1998 in connection with the ground lease.
50
<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.
Trial before a magistrate judge commenced on July 19, 1999 and concluded on
July 26, 1999. The judge has not yet issued a ruling and has provided no
definitive date by which such a ruling will be issued. 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 have defended their position and pursued
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.
51
<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, results of operations, cash flows, 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 and six month periods ended June 30, 1999
of $76.2 million and $145.9 million, respectively, representing increases of
14.8% and 12.1%, respectively, from the corresponding periods of 1998. The
increases are attributable to improved net revenues at the Aurora Casino of $7.8
million (19.4%) and $12.4 million (15.8%), respectively, and at the Tunica
Casino of $2 million (7.8%) and $3.3 million (6.5%), respectively. Operating
expenses increased by $6.1 million and $11.6 million to $64.5 million and $124.7
million, respectively, during the three and six month periods ended June 30,
1999 from $58.3 million and $113.1 million, respectively, during the same
periods of 1998.
Consequently, HCC's income from operations increased by $3.7 million (45.8%)
and $4.2 million (24.6%), respectively, during the second quarter and first half
of 1999 compared to the same periods of 1998. Income from operations at the
Aurora Casino increased by $3.1 million to $9.6 million and by $3.7 million to
$15.7 million during the three and six month periods ended June 30, 1999,
respectively, compared with the same periods of 1998 due to increased patron
volume and improved hold percentages. Income from operations at the Tunica
Casino increased by $520,000 to $3.3 million and by $675,000 to $6.8 million,
respectively, during the 1999 three and six month periods due primarily to a
refocusing of marketing efforts and to improved hold percentages.
Aurora Casino
General
Income from operations at the Aurora Casino, adjusted to exclude management
fees, amounted to $11.2 million and $19.9 million, respectively, for the three
and six month periods ended June 30, 1999 compared to $7.7 million and $15.8
million, respectively, during the same periods in 1998. The 1999 increases
results from improvement in casino revenues as a result of increased marketing
efforts and, as explained below, to an increase in the number of daily cruises
during the first quarter of 1999 compared to 1998. On June 26, 1999, dockside
gaming began at the Aurora Casino eliminating the existing cruising requirements
and enabling patrons to enter and exit the boats without restrictions.
Management anticipates a significant increase in gaming revenues in future
periods as a result of this change and has announced plans to construct a new
dockside facility to capitalize on this regulatory change (see "Liquidity and
Capital Resources - Capital Expenditures and Other Investing Activities").
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
for the Aurora Casino's operations for the three and six month periods ended
June 30, 1999 and 1998.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------- ----------------------------------
1999 1998 1999 1998
------------- ------------- --------------- -----------------
<S> <C> <C> <C> <C>
Revenues:
Table games $ 11,089,000 $ 10,756,000 $ 21,554,000 $ 22,166,000
Slot machines 34,501,000 27,253,000 65,277,000 52,277,000
Poker revenues 603,000 539,000 1,171,000 1,208,000
------------ ------------ -------------- ------------
Total $ 46,193,000 $ 38,548,000 $ 88,002,000 $ 75,651,000
============ ============ ============== ============
Table games:
Gross wagering (drop) (1) $ 60,229,000 $ 60,151,000 $ 119,637,000 $123,048,000
Hold percentage (2) 18.4% 17.9% 18% 18%
Slot machines:
Gross wagering (handle) (1) $590,848,000 $492,286,000 $1,133,245,000 $937,109,000
Hold percentage (2) 5.8% 5.5% 5.8% 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 $98.6 million (17.9%) and $192.7 million (18.2%),
respectively, during the second quarter and first half of 1999 compared to the
like periods during 1998. The increases reflects increased patron volume
primarily in slot machine wagering as a result of an aggressive marketing
campaign which began in 1998. Additionally, during January and February of 1998,
the smaller of the Aurora Casino's two riverboats ceased operating daytime
cruises on weekdays in an effort to reduce less profitable operations in
response to an unprecedented increase in gaming taxes imposed by the state of
Illinois effective January 1, 1998. All cruises resumed in March 1998; however,
patron volume during the first quarter of 1998 was approximately 25,000 less
than in the first quarter of 1999.
Revenues
Casino revenues increased $7.6 million (19.8%) and $12.4 million (16.3%),
respectively, during the three and six month periods ended June 30, 1999
compared to the same periods of 1998 due primarily to the increases in gross
wagering previously discussed. Table game revenues increased $333,000 (3.1%)
53
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
during the second quarter of 1999 compared to the same period in 1998, but could
not overcome the first quarter decline in table game revenues compared to the
prior year. As a result, table game revenues decreased $612,000 (2.8%) during
the first six months of 1999 compared to the like period in 1998. The second
quarter increase resulted from a slight increase in drop coupled with an
improvement in the table game hold percentage to 18.4% in 1999 from 17.9% in
1998. The six month decrease reflects the 2.8% decrease in drop while the table
game hold percentage remained unchanged at 18%. The 20% and 20.9% increases in
slot machine handle together with increases in the slot machine hold percentages
during 1999 resulted in three and six month slot machine revenue increases of
$7.2 million (26.6%) and $13 million (24.9%), respectively, compared to the
corresponding periods in 1998. Poker revenues increased $64,000 (11.9%) during
the second quarter, but remained lower by $37,000 (3.1%) for the six month
period. Poker revenues declined in the first quarter of 1999 as a result of
increased competition from the August 1998 opening of a poker room by a nearby
riverboat operator. These declines were virtually offset, however, in the
second quarter through increased marketing efforts by the Aurora Casino.
Food and beverage revenues at the Aurora Casino increased $229,000 (6.8%) and
$344,000 (5.2%), respectively, during the second quarter and first half of 1999
compared to the prior year periods reflecting increased patron volume during
1999. Other revenues increased $200,000 (31.6%) and $232,000 (18.5%) during the
three and six month periods ended June 30, 1999 compared to the same periods of
1998 reflecting increases in parking fees and entertainment revenues.
Promotional allowances represent the estimated value of goods and services
provided free of charge to casino customers under various marketing programs.
These allowances, as a percentage of food and beverage and other revenues at the
Aurora Casino, were 62.3% and 61.4%, respectively, during the three and six
month periods ended June 30, 1999 compared to 61.4% and 59.8%, respectively,
during the like periods in 1998. The increases from the prior year periods
reflect increases in promotional activities as part of the Aurora Casino's
marketing efforts.
Departmental Expenses
Casino expenses increased $4.4 million (15.8%) and $8.6 million (16%),
respectively, during the second quarter and first half of 1999 compared to the
1998 periods. Such increases results from additional gaming taxes associated
with the increase in casino revenues as well as to the higher marketing expenses
previously discussed.
Food and beverage expenses increased $77,000 (6.9%) and $157,000 (6.8%),
respectively, during the three and six month periods ended June 30, 1999
compared to the same periods in 1998 again reflecting the increased patron
volume combined with slightly higher food and beverage costs. Other expenses
were virtually unchanged during the second quarter resulting in an overall six
month decrease of $99,000 (15.9%) due to reductions in personnel and other non-
departmental operating expenses resulting from management's efforts to contain
costs.
54
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Tunica Casino
General
Income from operations at the Tunica Casino amounted to $3.3 million and $6.8
million, respectively, for the three and six month periods ended June 30, 1999
compared to $2.8 million and $6.2 million, respectively, during the same periods
of 1998. The increases are primarily attributable to increases in gross
wagering and to improvement in the slot machine and table games hold
percentages.
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, 1999 and 1998.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------- -------------------------------
1999 1998 1999 1998
------------- ------------- ----------------- ------------
<S> <C> <C> <C> <C>
Casino Revenues:
Table games $ 3,758,000 $ 2,946,000 $ 7,561,000 $ 6,389,000
Slot machines 22,243,000 20,556,000 42,734,000 39,702,000
Poker revenues 220,000 286,000 462,000 500,000
------------ ------------ ------------ ------------
Total $ 26,221,000 $ 23,788,000 $ 50,757,000 $ 46,591,000
============ ============ ============ ============
Table games:
Gross wagering (drop) (1) $ 20,799,000 $ 19,010,000 $ 39,926,000 $ 37,696,000
Hold percentage (2) 18.1% 15.5% 18.9% 16.9%
Slot machines:
Gross wagering (handle) (1) $419,408,000 $390,131,000 $810,022,000 $762,148,000
Hold percentage (2) 5.3% 5.3% 5.3% 5.2%
</TABLE>
- --------------------------
(1)(2) See corresponding notes to the table at "Aurora Casino - Gaming
Operations" above.
55
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Total gross wagering at the Tunica Casino as measured by table game drop
and slot machine handle increased $31.1 million (7.6%) and $50.1 million (6.3%),
respectively, during the three and six month periods ended June 30, 1999
compared to the same periods of 1998. Slot machine handle increased by $29.3
million (7.5%) and $47.9 million (6.3%), respectively, during the second quarter
and first half of 1999 compared to the prior year periods. Table game drop
increased by $1.8 million (9.4%) and $2.2 million (5.9%), respectively, during
the 1999 periods compared to the 1998 periods. Management believes such
increases are attributable to the implementation of a new, more aggressive
marketing campaign designed to reposition the Tunica Casino within the Tunica
gaming market. Such marketing efforts have been supplemented with increased use
of the Tunica Casino's jointly operated golf course and the addition of
headliner entertainment to attract higher value patrons. Improvement in slot
machine handle has also resulted from a significant increase in the number of
slot machines available and to management's program of updating machines to
enhance the patrons' gaming experience. Patron volume declined slightly during
the first and second quarters of 1999 compared to the same periods in 1998
indicating that the Tunica Casino has been successful in attracting higher value
patrons.
Revenues
Casino revenues increased $2.4 million (10.2%) and $4.2 million (8.9%),
respectively, during the three and six month periods ended June 30, 1999
compared to the 1998 periods. Table game revenues increased 27.6% during the
second quarter of 1999 and 18.3% during the first half of 1999 due to the
increases in table drop discussed above combined with increases in the table
game hold percentage to 18.1% and 18.9% during the 1999 three and six month
periods from 15.5% and 16.9% during the 1998 periods. Slot machine revenue
increased $1.7 million (8.2%) and $3 million (7.6%), respectively, during the
second quarter and first half of 1999 compared to the 1998 periods reflecting
the increases in gross wagering discussed above coupled with a slight increase
in the slot machine hold percentages to 5.3% in the first half of 1999 from 5.2%
in 1998. The slot machine hold percentage remained unchanged at 5.3% during the
second quarter of 1999. Poker revenues decreased by 23.1% and 7.6%,
respectively, during the three and six month periods ended June 30, 1999
compared to the 1998 periods.
Rooms revenue increased $130,000 (5.2%) and $517,000 (11.5%), respectively,
during the three and six month periods ended June 30, 1999 compared to the same
periods in 1998. Hotel occupancy rates declined slightly to 85.4% in the first
half of 1999 compared to 88.5% in 1998. Renovations to hotel rooms and suites
together with inclement weather in January 1999 negatively impacted first
quarter 1999 occupancy rates. Second quarter occupancy rates declined to 90% in
1999 from 95% in 1998 due to increased competition for overnight patrons
resulting from the completion and opening of an additional 600 guest rooms early
in the second quarter of 1999. Accordingly, the improvement in room revenues
resulted from an increase in the average daily room rate to $63 during the first
half of 1999 from $53 during the 1998 period. Food and beverage and other
revenues did not change significantly during either of the 1999 periods compared
to the same periods in 1998.
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 69.2% and 70.1%, respectively, during the three and six month
periods ended June 30, 1999 from 63% and 62.1%, respectively, during 1998. The
increases and are the result of higher complimentary room and food and beverage
costs due to increased marketing efforts and increased competition for overnight
guests.
56
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Departmental Expenses
Casino expenses increased $1.9 million (10.5%) and $3.5 million (10.1%),
respectively, during the three and six month periods ended June 30, 1999
compared to the 1998 periods reflecting the implementation of marketing
programs. Rooms expense decreased $110,000 (24.3%) and $286,000 (31.8%),
respectively, during the second quarter and first half of 1999 compared to the
prior year periods reflecting the increased allocation to the casino department
of hotel costs associated with marketing programs. Food and beverage expenses
also decreased by $84,000 (8%) and $150,000 (7.4%), respectively, for the
periods ended June 30, 1999 compared to the 1998 periods as a result of
increased allocations to the casino department. Other departmental expenses
also decreased by 18.8% and 17.3%, respectively, during the three and six month
periods in 1999 due to increased allocations to the casino department.
Other Consolidated Items
- ------------------------
General and Administrative
General and administrative expenses increased by $282,000 (6.2%) and by
$562,000 (6.4%), respectively, during the second quarter and first six months of
1999 compared to the same periods in 1998. Such expenses at the Aurora Casino
(net of management fees) decreased by 2% and 2.2%, respectively, for the 1999
three and six month periods as a result of management's efforts to control
costs. The Tunica Casino experienced increases in general and administrative
expenses (net of consulting fees) of 10.6% and 1.8%, respectively, for the three
and six month periods ended June 30, 1999 compared to the prior year periods
primarily as a result of increases in personnel costs and professional fees.
The remaining corporate general and administrative expense increases of $186,000
(8.9%) and $573,000 (14.7%), respectively, for the 1999 three and six month
periods result from increases in corporate overhead costs, primarily in legal
fees and personnel costs.
Depreciation and Amortization
Depreciation and amortization expense decreased $352,000 (8.4%) and
$566,000 (6.7%), respectively, during the three and six month periods ended June
30, 1999 compared to the 1998 periods primarily due to certain operating
equipment at the Aurora and Tunica casinos becoming fully depreciated.
Development Expenses
Development expenses represent costs incurred in connection with HCC's
pursuit of potential gaming opportunities in jurisdictions where gaming has not
been legalized. Such costs increased by $100,000 (59.2%) and $60,000 (14.2%),
respectively, during the three and six month periods ended June 30, 1999
compared to the 1998 periods primarily as a result of predevelopment activities
with respect to the Company's planned casino in Shreveport, Louisiana.
57
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Interest
Interest income increased $352,000 (47.2%) and $39,000 (2.8%),
respectively, for the three and six month periods ended June 30, 1999 compared
to the same periods of 1998. The second quarter increase reflects interest on
the unexpended cash proceeds of HCC's private placement of debt on May 19, 1999
(see "Liquidity and Capital Resources - Financing Activities"). Such increases
were substantially offset by reductions in interest income during the first
quarter of 1999 as a result of less cash being available for investment purposes
and to the discontinuation of the recording of interest income with respect to
outstanding loans to GBCC.
Interest expense increased by $1.6 million (21.8%) and $1.6 million
(10.5%), respectively, during the three and six month periods ended June 30,
1999 compared to the prior year periods due to the increase in HCC's long-term
indebtedness from the May 1999 issuance of the Senior Secured Notes, as defined
below. Although the refinancing of HCC's indebtedness increased the amount
borrowed from a face value $204.7 million to $360 million, the effective
interest rate fell from 13.75% to 11.27%.
Income Taxes
Management believes that it is more likely than not that future
consolidated taxable income of HCC (primarily from the Aurora Casino and the
Tunica Casino) will be sufficient to utilize at least a portion of the NOL's,
tax credits and other deferred tax assets resulting from temporary differences.
Accordingly, under the provisions of Statement of Financial Accounting Standards
No. 109, "Accounting for Income Taxes", the consolidated balance sheet reflects
a net deferred tax asset of $1.8 million as of June 30, 1999.
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.
Minority Interest in Earnings of Limited Partnership
The minority interest in the earnings of the limited partnership which
holds the management contract for the Aurora Casino increased by $356,000 (50%)
and $458,000 (17.4%), respectively, during the three and six month periods ended
June 30, 1999 compared to the same periods in 1998. The increases result
primarily from increases in the management fees paid by the Aurora Casino to the
limited partnership as a result of improved operating revenues and profits on
which such fees are based, coupled with a slight decline in the limited
partnership's operating expenses during the 1999 periods.
Extraordinary Item
During May 1999, HCC completed the refinancing of its 12.75% Senior Secured
Notes. The extraordinary loss from early retirement of debt includes the
premium paid and redemption fees associated with the debt retired together with
the write off of related unamortized financing costs.
58
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
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 as well as its non-information technology (embedded
microchip) systems for the Year 2000. The initial stage of the program
consisted of identifying those systems which might be at risk. All identified
systems were categorized as (1) those necessary for regulatory compliance
purposes, (2) essential systems and (3) non-essential systems. Within the
essential systems group, an additional rating factor of one to five was assigned
to each system with a factor of one indicating the greatest significance.
Readiness of information technology and non-information technology systems for
the Year 2000 has been investigated or has been determined by means of vendor
certification or internal testing. System readiness for the Year 2000 is
anticipated to be completed by September 1999 with the essential and regulatory
systems completed during the second quarter of 1999. The two major information
technology systems identified as not Year 2000-compliant have been replaced.
Management expects the total costs of acquiring, testing and converting such
systems will be less than $1 million. The majority of these costs have been
included in capital expenditures during 1999 (see "Liquidity and Capital
Resources - Capital Expenditures and Other Investing Activities" below).
The Company has also initiated formal communication with its significant
suppliers to determine the extent to which its operating and information systems
are vulnerable to those third parties' failure to resolve their Year 2000
compliance issues. An initial determination of the Company's exposure with
respect to third-party supplied systems has been completed and additional
procedures have been taken to remediate potential vulnerabilities.
Contingency plans are also being developed by management with respect to
internally developed systems not fully tested prior to the Year 2000.
Accordingly, the Company does not anticipate any internal systems failures will
have a material impact on its operations or financial condition. The Company
will continue its efforts to ensure that major third party vendors as well as
public and private providers of infrastructure services such as utilities and
communication services will be Year 2000 compliant. The failure of such
infrastructure services could result in a "worst case" scenario in which
operations relying on such services such as mechanical gaming devices would be
temporarily disrupted. The Company can not presently estimate either the
likelihood or the potential cost of such failures.
While there can be no assurance that the Company and its suppliers and
customers will fully resolve their Year 2000 compliance 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.
59
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Seasonality and Other Fluctuations
Historically, the Aurora Casino's operations have experienced some
seasonality due to severe winter weather. Consequently, the results of HCC's
operations for the first and fourth quarters have traditionally been less
profitable than the other quarters of the fiscal year. Furthermore, management
believes that seasonality may also cause fluctuations in reported results at the
Tunica Casino. In addition, the operations of the Aurora Casino and the Tunica
Casino may fluctuate significantly due to a number of factors, including chance.
Such seasonality and fluctuations may materially affect HCC's casino revenues
and overall profitability.
LIQUIDITY AND CAPITAL RESOURCES
Operating Activities
The operations of the Aurora Casino and Tunica Casino continue to be HCC's
primary sources of liquidity and capital resources. The Aurora Casino
contributed approximately $18.8 million of cash flow from operations during the
first six months of 1999 after deducting the payment of $5.6 million of
management fees. The Tunica Casino provided $5.4 million of cash from
operations during the first six months of 1999 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 half of 1999 included preopening costs with respect to the
Shreveport Casino and other costs to pursue development opportunities ($484,000)
and corporate overhead costs ($2.3 million).
During the first six months of 1999, consolidated cash flow from operations
($17.4 million) and equipment financing ($2.6 million) were used, in part, by
HCC to fund capital expenditures of $5.8 million, to fund project costs for the
Shreveport Casino of $1.3 million, to repay third party indebtedness (other than
HCC's 12.75% Senior Secured Notes) of $1.2 million, to make payments under
capital lease obligations of $279,000 and to pay distributions amounting to $4.1
million to PCC as limited partner in PML.
Pratt Casino Corporation Acquisition
On April 28, 1999, the Company entered into a voting agreement with GBCC
and certain of its wholly owned subsidiaries, including PRT Funding and PCC, and
the holders of substantially all of the $85 million of senior notes issued by
PRT Funding and guaranteed by PCC. The PRT Funding Notes are currently in
default. Under the terms of the agreement, the Company will purchase the stock
of PCC from GBCC for nominal consideration and fund the payment of PCC's
obligations as part of a debt restructuring of PRT Funding, PCC and other
subsidiaries of PCC. When acquired by HCC, PCC's assets will consist of its
limited partnership interest in PML and a consulting agreement for the Tunica
Casino and its liabilities will consist of a newly issued promissory note
payable to the Trustee for the PRT Funding Notes. The Company will fund the
payment of PCC's obligations by redeeming the newly issued note for
approximately $40.3 million; the funds necessary to make such payment have been
placed in escrow. The satisfaction of PCC's obligations will result in a $40.3
million charge to expense by the Company as no asset value will be attributed to
the management contract and consulting agreement when acquired.
60
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
The acquisition of PCC will result in additional debt (see "Financing
Activities") and associated interest, but will eliminate both the minority
interest in PML and the Tunica consulting fee paid to a GBCC subsidiary. The
minority interest and consulting fee expense totaled $3.7 million for the six
month period ended June 30, 1999 and $7.7 million for the year ended December
31, 1998.
In order to complete the Restructuring, PCC and PRT Funding filed for
protection under Chapter 11 of the United States Bankruptcy Code on May 25, 1999
with the above transactions included as part of a pre-negotiated plan of
reorganization. Such plan requires approval of the bankruptcy court as well as
by various gaming regulatory organizations. Management presently anticipates
that all necessary approvals will be obtained by early in the fourth quarter of
1999.
Financing Activities
During May 1999, HCC completed the refinancing of its outstanding 12.75%
Senior Secured Notes through a private debt offering of $310 million of 11.25%
Senior Secured Notes due May 1, 2007 and $50 million of floating rate Senior
Secured Notes due May 1, 2006 (collectively, the "Senior Secured Notes"). The
floating rate notes have an initial interest rate of 11.36% per annum which will
be adjusted semiannually based on LIBOR plus 628 basis points. In addition to
refinancing existing debt, the Company plans to use proceeds from the debt
offering to finance construction of a new, dockside gaming facility at the
Aurora Casino, to fund a portion of the Company's equity investment in the
Shreveport Casino, to acquire the management and consulting contracts on the
Aurora and Tunica casinos, and, to the extent available, for working capital
purposes. The funds needed to acquire the management and consulting contracts
have been placed in escrow. If it is determined that the Company can not
complete the acquisition of such contracts or if it has not completed the
acquisition by January 31, 2000, the $40.7 million restricted cash will be used
to redeem $40.3 million principal amount of the Senior Secured Notes at 101% of
face value. Interest on the Senior Secured Notes is payable semiannually on May
1 and November 1 commencing on November 1, 1999. The Senior Secured Notes are
unconditionally guaranteed on a senior secured basis by HCT and HCS and may be
guaranteed by certain future subsidiaries of HCC. Neither HCA nor HCL 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 lien not to exceed approximately $108 million on
substantially all of the assets of HCA, (iii) a pledge of the capital stock of
certain subsidiaries of HCC and (iv) the collateral assignment of the management
contract for the Shreveport Casino.
The fixed rate Senior Secured notes are redeemable at the option of HCC any
time on or after May 1, 2003 at 107% of the then outstanding principal amount,
decreasing to 104.666%, 102.333% and 100%, respectively, on May 1, 2004, 2005
and 2006. The Company may also redeem up to 35% of the fixed rate Senior
Secured Notes at a redemption price of 111.25% plus accrued interest at any time
prior to May 1, 2002 with the proceeds from an offering of the HCC's common
stock if net proceeds to the Company from any such offering are at least $20
million.
The floating rate Senior Secured Notes may be redeemed at the option of HCC
at any time at an initial redemption price of 105% plus accrued interest with
the redemption premium decreasing by 1% on May 1 of each year beginning May 1,
2000.
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;
61
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HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
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, HCS or any future guarantor; or enter into certain
transactions with affiliates.
On August 10, 1999 Hollywood Casino Shreveport, a Louisiana general
partnership in which subsidiaries of HCC have an effective 100% operating
interest, issued $150 million of 13% First Mortgage Notes due 2006 with
contingent interest, the net proceeds of which, together with capital
contributions from HCC and $30 million of furniture, fixture and equipment
financing for which a commitment has been obtained, will provide the
approximately $230 million of funds necessary to build, equip and open the
Shreveport Casino (see "Liquidity and Capital Resources - Capital Expenditures
and Other Investing Activities"). The Shreveport First Mortgage Notes are non-
recourse to HCC. Fixed interest on the Shreveport First Mortgage Notes is
payable semiannually on February 1 and August 1 of each year commencing on
February 1, 2000. In addition, contingent interest will be payable on each
interest payment date after the opening of the Shreveport Casino. The amount of
the contingent interest will be equal to 5% of the Shreveport Casino's cash
flow, as defined, for the prior two fiscal quarters up to a maximum of $5
million for any four consecutive fiscal quarters. The notes are collateralized
by a first priority security interest in substantially all of Hollywood Casino
Shreveport's existing and future assets other than furniture and equipment for
which up to $35 million of equipment financing has been or will be obtained as
well as by a pledge of the common stock of the HCC subsidiaries which hold the
partnership interests.
The Shreveport First Mortgage Notes are redeemable at the option of
Hollywood Casino Shreveport any time on or after August 1, 2003 at 106.5% of the
then outstanding principal amount, decreasing to 103.25% on August 1, 2004 and
100% on or after August 1, 2005. Up to 35% of the original aggregate amount of
the Shreveport First Mortgage Notes may also be redeemed at any time or prior to
August 1, 2002 with proceeds of contributions to Hollywood Casino Shreveport
made by HCC from certain offerings of equity securities by HCC.
The indenture to the Shreveport First Mortgage Notes contains various
provisions limiting the ability of Hollywood Casino Shreveport to borrow money,
pay dividends, make investments, pledge or sell its assets or enter into mergers
or consolidations. The indenture also limits the ability of certain HCC
subsidiaries which guarantee the debt to acquire additional assets, become
liable for additional obligations or engage in any business activities other
than holding the partnership interests or acting as managing general partner of
Hollywood Casino Shreveport.
During September 1998, HCA entered into a bank loan agreement to borrow up
to $2 million on an unsecured basis. Borrowings under the agreement are payable
in 36 monthly installments including interest at the rate of 7.5% per annum.
HCA borrowed $2 million under the agreement during October 1998. During May
1999, HCA borrowed an additional $750,000 from the bank on an unsecured basis to
be repaid over 60 months. Interest on such loan is at 7.5% per annum.
HCT had a $1.3 million bank credit facility available to borrow against
through September 30, 1998. Outstanding borrowings on the line of credit
($377,000 at June 30, 1999) are being repaid in monthly installments over 36
months and accrue interest at the rate of 8.75% per annum.
Effective as of April 1, 1997, HCC acquired from PPI Corporation, a GBCC
subsidiary, the general partnership interest in the limited partnership which
holds the Aurora management agreement. The acquisition price for the general
partnership interest included a note in the amount of $3.8 million and the
62
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HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
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, 1999, HCC's scheduled maturities of long-term debt and
payments under capital leases during the remainder of 1999 are each
approximately $1.4 million.
Capital Expenditures and Other Investing Activities
Capital expenditures at the Aurora Casino during the first six months of
1999 were $1.4 million; management anticipates spending $3 million during the
remainder of 1999 toward its ongoing capital improvements program. Significant
projects planned for 1999 include new slot machines and casino equipment new
telephone and point-of-sale systems and the renovation of a restaurant facility.
In addition, the Company is finalizing plans to replace the Aurora Casino's two
riverboats with a new dockside facility. As currently planned, the new facility
will significantly increase passenger capacity and provide a premier gaming and
entertainment facility for the Aurora Casino's patrons. The new facility is
projected to cost approximately $40 million and will require a construction
period of 14 months. Final design plans are subject to the approval of various
regulatory authorities. Upon the finalization of plans and the receipt of all
required approvals, the Aurora Casino will write down the net book value of its
existing riverboats (approximately $32 million at June 30, 1999) to an amount
representing their fair market value based on the estimated remaining 14-month
economic life. The resulting value will then be amortized over the construction
period prior to the boats being removed from service. Management currently
anticipates, that such write down to fair market value could exceed $25 million.
The estimated $40 million in project costs for the proposed dockside facility
were obtained from HCC's debt offering completed in May 1999.
Capital expenditures at the Tunica Casino during the first half of 1999
amounted to $4.4 million; management anticipates spending $2.6 million during
the remainder of 1999. Such expenditures are part of a two-year capital
improvement plan which includes the upgrading of hotel accommodations and public
areas, the replacement of certain slot machines and the development of a new VIP
check-in and private entertainment lounge to enhance the level of service
provided to premium gaming patrons. Projects completed in 1998 as part of the
two year plan included upgrades to hotel rooms, the completion of an 18-hole
championship golf course and the expansion of the recreational vehicle parking
area.
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 have totalled $2.1 million, including $75,000 during
1999.
In September 1998, the Company received a preliminary license to develop,
own and operate a Hollywood-themed hotel and casino complex on the Red River in
Shreveport, Louisiana. The Company originally planned to develop the Shreveport
Casino with two partners in a joint venture in which HCC would have had an
interest of approximately 50%. On March 31, 1999, HCC entered into a definitive
agreement with one of the joint venture partners to acquire their interest in
the Shreveport Casino for $2.5 million (the amount the joint venture partner
contributed to the project), $1,000 of which was paid at closing with the
remainder to be paid six months after the opening of the Shreveport Casino. The
revised structure of the joint venture received approval by the Louisiana Gaming
Control Board on
63
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
April 20, 1999. As a result, effective as of April 23, 1999, HCC now has an
effective 100% operating interest in the Shreveport Casino with the remaining
joint venture partner holding a 10% residual interest in the event the project
is sold.
The total estimated cost of the Shreveport Casino is approximately $230
million. The Company has contributed approximately $49 million as an equity
investment in the project with the other joint venture partner having
contributed $1 million to the project with the proceeds of a loan from HCC. The
loan accrues interest at the rate of prime commencing with the opening of the
Shreveport Casino and will be payable monthly. Principle on the loan is payable
on the tenth anniversary of the opening of the Shreveport Casino. The joint
venture partner was also given credit for an additional $1 million capital
contribution upon the closing of the Shreveport First Mortgage Notes and payment
of the $5 million obligation to the partnership's former partner as discussed in
the following paragraph. The credit was in recognition of guarantees provided
by an affiliate of the partner which were necessary for the partnership to
obtain approval of its license. The $2 million equity interest of the partner
will be reflected as minority interest in the consolidated financial statements
of HCC in subsequent periods.
The former partners of the partnership's predecessor conducted riverboat
gaming operations in New Orleans. In connection with the change in site to
Shreveport, the former partners entered into a Compromise Agreement with the
City of New Orleans under which the city would be paid a fee of $10 million.
One of the former partners paid $5 million of the amount to the City of New
Orleans. The current partners agreed that the Shreveport Casino would pay the
remaining $5 million upon securing financing for its construction. In
addition, the current partners agreed that the Shreveport Casino would reimburse
the former partner $2 million of the amount it paid to the city; such repayment
is to be paid upon the earlier of the termination of construction of the
Shreveport Casino or in monthly installments of $200,000 commencing with the
opening of the Shreveport Casino. Because the $5 million and $2 million did not
become obligations until the August 1999 closing of the Shreveport First
Mortgage Notes, these contingent obligations and associated project costs in the
aggregate of $7 million were not reflected in the accompanying consolidated
financial statements of HCC at June 30, 1999. The remaining construction and
preopening costs, estimated at $180 million, will come from $150 million of
project specific financing issued on August 10, 1999 which is non-recourse to
HCC (see "Liquidity and Capital Resources -Financing Activities") with the
remainder to be provided by a $30 million furniture, fixture and equipment
financing for which a commitment letter has been obtained. In addition, HCC has
agreed to contribute up to an additional $5 million in equity to the Shreveport
Casino under certain circumstances which include cost overruns or delays. The
Company anticipates commencing construction in August 1999 with a planned
opening date approximately 14 months later.
HCC continues to pursue several additional potential gaming opportunities.
HCC intends to finance any future ventures with cash flow from operations,
together with third party financing, including non-recourse project financing.
Conclusion
Management anticipates that HCC's funding requirements for its operating
activities for the next twelve months will be satisfied by existing cash and
cash generated by the Aurora and Tunica casinos. Proceeds from the private debt
offering completed by HCC in May 1999 are expected to meet the funding
requirements for the planned expansion of the Aurora Casino, for a portion of
HCC's equity investment in the Shreveport Casino and for the acquisition of the
management and consulting agreements for the Aurora and Tunica casinos.
Construction financing for the planned Shreveport Casino will be provided from
the August 1999 issuance of project specific, non-recourse financing together
with capital contributions and equipment financing.
64
<PAGE>
PART II: OTHER INFORMATION
- ---------------------------
Item 6.(a) - Exhibits
10.1 Management Services Agreement dated as of September 22, 1998 by
and between QNOV and HWCC - Shreveport, Inc.
10.2 Amendment to Management Services Agreement dated as of August 2,
1999 by and between Hollywood Casino Shreveport (formerly QNOV)
and HWCC - Shreveport, Inc.
Item 6.(b) - Reports on Form 8-K
The Registrants filed a report on Form 8-K on April 23, 1999 to disclose a
proposed refinancing of and an offer to purchase HCC's 12 3/4% Senior Secured
Notes.
SIGNATURES
- ----------
Pursuant to the requirements of the Securities Exchange Act of 1934, each of
the Registrants has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HOLLYWOOD CASINO CORPORATION
Date: August 12, 1999 By: /s/ Charles F. LaFrano III
------------------- ------------------------------
Charles F. LaFrano III
Vice President of Finance and
Principal Accounting Officer
HWCC - TUNICA, INC.
Date: August 12, 1999 By: /s/ Charles F. LaFrano III
------------------- ------------------------------
Charles F. LaFrano III
Principal Accounting Officer
65
<PAGE>
EXHIBIT 10.1
_______________________________________
MANAGEMENT SERVICES AGREEMENT
_______________________________________
THIS MANAGEMENT SERVICES AGREEMENT (this "Agreement") is made and entered
into as of the 22nd day of September, 1998, by and between QNOV, a Louisiana
joint venture ("Owner"), and HWCC-SHREVEPORT, INC., a Louisiana corporation
("Operator").
W I T N E S S E T H:
-------------------
WHEREAS, Owner is or will become (i) the lessee of those certain premises
located on or adjacent to the Red River in the City of Shreveport, State of
Louisiana owned by the City of Shreveport and more particularly described on
Exhibit "A" which is attached hereto and made a part hereto by reference (the
- -----------
"Property"), (ii) owner in fee of a pavilion, hotel, parking garages and other
facilities to be located on the Property and (iii) owner in fee or lessee of a
riverboat to be located in a coffer dam on the Property which upon receipt of
certain approvals from the Louisiana Gaming Control Board (the "Board") will be
entitled to conduct gaming activities thereon (collectively referred to as the
"Complex"); and
WHEREAS, Operator and its affiliates have extensive experience in casino
operations and management and have the knowledge and expertise to manage and
operate the Complex on behalf of Owner; and,
WHEREAS, Owner desires to benefit from the Operator's expertise in the
management and operation of the Complex and Operator is willing to manage and
operate the Complex on behalf of Owner, all in accordance with the terms and
pursuant to the conditions set forth in this Agreement;
NOW, THEREFORE, in consideration of the foregoing recitals and of the
mutual promises, representations, warranties, understandings, undertakings and
covenants herein contained, and intending to be legally bound thereby, Owner and
Operator hereby covenant and agree as follows:
ARTICLE ONE
-----------
APPOINTMENT OF OPERATOR
-----------------------
l.01 Appointment and Term. Owner hereby appoints and employs Operator, and
---------------------
Operator agrees, to act as its sole and exclusive agent for the supervision,
direction and control of the management of the Complex (or any additions or
expansions thereto) on the Owner's behalf, upon the terms and conditions
hereinafter set forth for a term commencing as of the date the Louisiana Gaming
Control Board approves of the development of the Complex (the "Commencement
Date") through the date Owner no longer holds a riverboat gaming license in
Louisiana, subject to earlier termination in accordance with Article Eleven of
this Agreement (the "Term"). Upon termination of the Term or any early
termination as provided herein, Owner shall forthwith pay to Operator any
<PAGE>
and all amounts due to Operator as of such termination date.
1.02 Relation of the Parties. In taking any action pursuant to this
-----------------------
Agreement, Operator will be acting only as the appointed agent or representative
of Owner, and nothing in this Agreement shall be construed as creating a
tenancy, partnership, joint venture or any other relationship between the
parties hereto, except that of principal and agent. All debts and liabilities
properly incurred by Operator in the course of its management and operation of
the Complex hereunder shall be the debts and obligations of the Owner only, and
Operator shall not be liable therefor, except as specifically stated to the
contrary herein.
ARTICLE TWO
-----------
PRE-OPENING PROGRAM
-------------------
2.01 Construction of the Complex. Owner hereby warrants and represents
----------------------------
that it is presently preparing for the construction of the Complex. During such
construction, and prior to the Opening Date (as hereafter defined), Operator
shall perform the following project development services for Owner, provided
Owner separately provides Operator reimbursement of (i) all expenses incurred by
Operator under the provisions of this Section 2.01, and (ii) the compensation
------------
(including any and all salaries, expenses, benefits, and the like) paid to
Operator's employees or those employees of Operator's affiliates assigned to the
Complex on a full-time basis for the purpose of providing the following project
development services until the Opening Date:
(a) Pre-opening sales office set-up, together with a pre-opening marketing
plan to be approved in advance by Owner, which approval shall not be
unreasonably withheld or unduly delayed; and,
(b) Hiring of personnel in accordance with the provisions of this
Agreement; and,
(c) Coordination of initial inventories purchases; and,
(d) Establishment of operating policies and procedures for the entire
Complex; and,
(e) Establishment of Complex security systems for assets, personnel and
patrons; and,
(f) Establishment of accounting and internal control systems and
procedures; and,
(g) Establishment of a preventative maintenance program; and,
(h) Establishment of risk management policies and procedures; and,
(i) Training of all staff.
Notwithstanding the foregoing, the aggregate amount of all reimbursements
paid by Owner to Operator for project development services shall not exceed the
amount included for such reimbursements in the Pre-Opening Budget described in
Section 4.10(a)(i).
- ------------------
2
<PAGE>
2.02 Construction, Furnishings and Equipment of the Complex. Owner
-------------------------------------------------------
warrants and represents:
(a) That the Complex will be professionally designed, fully-furnished and
provided with all necessary accessories, including but not limited to casino
equipment and supplies, and will meet all fire, security and alarm requirements
of all applicable building codes; and,
(b) That Owner will provide, initially and throughout the Term, and at
Owner's sole cost and expense, full and adequate inventories of food and
beverage and of consumable items utilized in operating the Complex, such as
soap, cleaning materials, matches, stationery and all other similar items; and,
(c) That Owner will provide, initially and throughout the Term, and at
Owner's sole cost and expense, sufficient working capital, as contemplated in
Section 4.09, for the operation of the Complex.
- ------------
2.03 Technical Services Agreement. Simultaneous with the execution of this
----------------------------
Agreement, Owner and Operator or one of its affiliates shall have entered into a
Technical Services Agreement, a form of which is attached hereto as Exhibit "B"
-----------
(the "Technical Services Agreement").
2.04 Title to Complex. Owner covenants and agrees that it will have and it
----------------
will maintain throughout the Term of this Agreement:
(a) A leasehold interest in the Property (and the riverboat, if the Owner
shall so elect), and full ownership of and title to the improvements of the
Complex, except for such mortgages or other encumbrances related to Owner's
financing of the purchase and refurbishment of the Complex to be constructed on
the Property (the "Project Financing"); and,
(b) Full ownership of the furnishings, fixtures and equipment located on
the Property ("FF&E"), free and clear of any liens, encumbrances, covenants,
charges, burdens or claims, except: (i) such as do not materially and adversely
affect the use thereof by Operator; (ii) mortgages or other encumbrances related
to the financing of the Complex and the FF&E; (iii) leases of personal property
and equipment; and (iv) purchase money mortgages. This Agreement shall not be
subject to forfeiture or termination under any financing documents relating to
the Complex, except in accordance with the provisions of this Agreement,
notwithstanding that there shall be a default under such financing documents.
Owner further covenants and agrees to pay and discharge any ground rents, any
other rental payments, concession charges or any other charges payable by Owner
in respect of the Complex, and, at its own expense, to undertake and prosecute
all appropriate actions, judicial or otherwise, to facilitate the quiet and
peaceable operation of the Complex by Operator. Owner also agrees to pay, prior
to delinquency, all taxes and assessments of whatever type which may become a
lien on the Complex and which may be due and payable during the Term, unless (i)
payment thereof is in good faith being contested by Owner, (ii) enforcement of
any purported lien is stayed, and (iii) Owner maintains adequate reserves in a
separate account with a reputable financial institution in order to discharge
any such lien upon five (5) days notice of the existence of
3
<PAGE>
such lien.
ARTICLE THREE
-------------
NOTICES
-------
Any and all written notices required by this Agreement shall be either
hand-delivered or mailed, certified mail, return receipt requested, telecopied,
or sent via commercial courier, addressed to:
TO OPERATOR: HWCC-Louisiana, Inc.
------------
Two Galleria Tower, Suite 2200
13455 Noel Road, LB 48
Dallas, Texas 75240
Attention: President
Telecopier No. (972) 386-7411
TO OWNER: Shreveport Paddlewheels, L.L.C.
---------
New Orleans Paddlewheels, Inc.
610 S. Peters
New Orleans, Louisiana 70130
Attention: Duane Smith
Telecopier No. (504) 587-1698
Sodak Louisiana, L.L.C.
5301 South Highway 16
Rapid City, South Dakota 57701
Attention: General Counsel
Telecopier No. (605) 355-4976
HWCC-Louisiana, Inc.
Two Galleria Tower, Suite 2200
13455 Noel Road, LB 48
Dallas, Texas 75240
Attention: President
Telecopier No. (972) 386-7411
4
<PAGE>
All notices hand-delivered shall be deemed delivered as of the date actually
delivered. All notices mailed shall be deemed delivered as of three (3)
business days after the date postmarked. All notices telecopied shall be deemed
delivered as of the business day immediately following the date receipt of the
telecopy is confirmed. All notices sent via commercial courier shall be deemed
delivered as of the business day immediately following the date the notice is
entrusted to the commercial courier service with directions for service within
one (1) day. Any changes in any of the addresses listed herein shall be made by
notice as provided in this Article Three.
ARTICLE FOUR
------------
OPERATION
---------
4.01 Standards.
---------
(a) With respect to the operation of the Complex pursuant to this and every
other applicable Section of this Agreement, subject to the terms of Section 4.11
------------
of this Agreement, Operator shall manage the Complex in a manner consistent with
both a first class entertainment complex and the standards and procedures
exercised by Operator, its subsidiaries and affiliates, in the management of
other casinos owned and operated by affiliates of Operator of the same or
similar type, class and quality as the Complex, as such standards and procedures
may be reasonably modified or revised by Operator from time to time, all in a
professional manner and in the exercise of good faith.
(b) In order for Operator to meet or exceed the aforementioned standards
and procedures in a professional manner, and to comply with any legal
requirements, Owner hereby agrees that, subject to the terms of Section 4.11 of
------------
this Agreement, (i) Operator shall have uninterrupted control and operation of
the Complex during the Term of this Agreement, (ii) Owner will not interfere or
involve itself with the day-to-day operation of the Complex, and (iii) Operator
may operate the Complex free of molestation, eviction or disturbance by Owner or
any third party claiming by, through or under Owner. Examples of the matters
which Operator in its sole and exclusive discretion shall determine from time to
time hereunder include, but shall not be limited to: rates; prices; charges to
guests for other services performed by Operator at the Complex; the issuance of
credit or other like decisions; the granting of complementaries or other like
decisions; the terms of admittance to the Complex for purposes of entertainment;
the labor policies of the Complex; and the type and character of publicity and
promotion.
4.02 Permits. Owner, with the assistance of Operator, shall obtain and
-------
maintain in full force and effect all necessary licenses and permits as may be
required for the operation of the Complex by Operator including, without
limitation, casino, liquor, bar, restaurant, sign, coast guard and hotel
licenses. All licenses and permits are to be in effect as of the date the
Complex opens for business (the "Opening Date"). Operator undertakes to comply
fully with any and all reasonably imposed conditions set out in any such
licenses and permits.
4.03 Personnel.
---------
5
<PAGE>
(a) All personnel of the Complex, except those mentioned in Section
-------
4.03(b), shall be personnel of Owner. As agent for Owner, Operator shall have
the sole and absolute discretion to hire, supervise, direct the work of,
discharge and determine the compensation and other benefits of all personnel
working in the Complex. Owner shall not interfere with or give orders or
instructions to personnel employed at the Complex. Operator, in its sole and
absolution discretion, shall determine the fitness and qualification of such
personnel. Operator shall in no way be liable to said personnel or to Owner for
any and all claims for wages, compensation or other benefits (including, without
limitation, severance, pension, superannuation, retirement and termination pay)
asserted by or on behalf of such personnel. The salaries, other compensation
and benefits of such personnel shall be paid by Owner.
(b) Operator shall employ, in Operator's name but as agent of Owner and at
Owner's sole expense, the General Manager of the Complex. Such General Manager
shall be selected through a process by which the Operator (i) provides Owner
with up to three (3) candidates for such position and (ii) selects the candidate
of its choice, subject to Owner's approval, which approval shall not be
unreasonably withheld. The Operator shall present the General Manager
compensation package to the Owner for approval and inclusion in the Annual
Budget (as hereafter defined). Operator shall pay the salary, other
compensation and benefits of such General Manager (as approved in the Annual
Budget), for which Operator shall be reimbursed by Owner each month as a charge
against Complex operations. Upon any termination of this Agreement, Operator
shall have the right, but not the obligation, to remove or terminate General
Manager from his or her duties at the Complex simultaneously with the
termination hereof; Owner hereby covenants and agrees that, unless Operator
terminates the employment of the General Manager, it shall not hire or otherwise
retain such General Manager either prior to or after removal by Operator,
without Operator's prior written consent thereto, which consent may be
unreasonably withheld. As an expense of Complex operations, Operator shall have
the right to grant the General Manager (i) such complimentary privileges usual
and customary in the industry to similar positions, (ii) housing and meal
allowances, including complimentary housing and meals at or near the Complex as
is usual and customary in the hospitality industry for similar positions, or
(iii) both (i) and (ii).
(c) Owner shall pay monthly to Operator all reasonable travel, lodging and
meal costs and expenses incurred by Operator's employees, and those of
subsidiaries and Operator's affiliated entities, prior to and after the Complex
is opened to the public as the same are incurred in the performance of duties
imposed under this Agreement solely for the benefit of the Project and as agreed
to by Owner in the Annual Budget. Operator shall have the right, which right
shall not be unreasonably exercised, to determine the advisability of such
travel. Operator's employees shall be furnished and provided with rooms and
food, as an expense of Complex operations, whenever such employees are located
at the Complex in the performance of this Agreement.
(d) Operator shall, as agent for Owner and at Owner's sole expense, employ
third-party specialists to perform services for the Complex related to the
operation, maintenance and/or protection of the Complex, such as engineers,
designers, attorneys and the like.
4.04 Sales and Promotions.
--------------------
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(a) Operator shall cause the Complex to participate in sales and
promotional campaigns and, as appropriate, activities involving complimentary
items to hotels, casinos, travel agents, tourist officials and airline
representatives and other hospitality industry representatives. Operator shall
have the sole right to entitle the key personnel and the personnel employed by
Owner and Operator to grant complimentary items when the same is customary in
the travel, hospitality or gaming industry or in Operator's standard practice or
policy.
(b) Owner and Operator shall establish certain standards relating to the
granting or extension of credit and, unless and until Owner and Operator agree
to revise such standards, Owner agrees to bring no influence on Operator or the
General Manager with respect to requests from Owner to deviate from such
standards.
(c) Subject to the terms of Section 4.11 of this Agreement, Operator, on
------------
behalf of Owner, shall institute and supervise a sales and marketing program and
shall coordinate and cooperate with the local and national sales and marketing
programs of Operator and its affiliated entities and shall also coordinate with
tour programs marketed by airlines, travel agents and government tourist
departments when Operator determines such programs are in the best interest of
Owner.
4.05 Maintenance and Capital Replacement.
-----------------------------------
(a) Owner recognizes the necessity of a program of replacement of FF&E and
the need to cause the Complex to continue to be furnished, equipped and
landscaped in accordance with the standards described herein. Both parties
recognize that the particular properties or particular articles of FF&E may not
require expenditure for maintenance and repairs in any given year, but average
costs thereof shall be reflected in the Budgets (as defined in Section 4.10(a)).
---------------
During the first year of operations hereunder, a reserve of not less than one
and one-half percent (1.5%) of the gross revenues of the Complex shall be
established for replacements, substitutions and additions to FF&E, such reserve
to be established by setting aside each month from operating profits an amount
equal to one and one-half percent (1.5%) of the gross revenues of the Complex
for such month; for the second operating year (and for each operating year
thereafter), the respective percentages shall be increased to two percent (2%),
respectively. In determining the Annual Budget (as defined in Section
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4.10(a)(iii)) of the second operating year (and for each operating year
- ------------
thereafter), Owner and Operator shall mutually agree as to whether such reserve
should be increased or decreased, it being understood that the account of such
reserve must always be sufficient to meet the standards established hereunder.
(b) Operator, as agent of Owner, is authorized to make and enter into such
agreements as are in Operator's reasonable opinion necessary for the operation,
supply and maintenance of the Complex as required by this Agreement.
Notwithstanding the foregoing, Operator agrees to use its best efforts to enter
into agreements for the provision of goods and/or services to the Complex at the
fair market value of the goods and/or services provided or rendered.
(c) Operator shall have the right, without prior approval of Owner, to make
alterations, additions or improvements in or to the Complex as are consistent
with the standards established hereunder, provided that prior approval of Owner
is required for any single expenditure having a cost
7
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in excess of $50,000, or for aggregate expenditures in any calendar year in
excess of $250,000. The cost of such alterations, additions or improvements
shall be charged directly to current expenses of the Complex or shall be
capitalized and amortized on the books of account of the Complex in accordance
with Operator's standard accounting practices consistently applied.
(d) In the event that, at any time during the Term of this Agreement,
repairs or additions to or changes in the Complex shall be required by reason of
any laws, ordinances, rules or regulations now or hereafter in force, or by
proper and lawful order of any governmental or municipal power, department,
agency, authority, or officer, such repairs or changes shall be made at the
discretion of Operator, without the prior approval of Owner; provided that
Operator shall use its best efforts to consult, in advance, with Owner with
respect to such changes, additions or repairs.
4.06 Accounting Services.
-------------------
(a) Operator, at Owner's sole cost and expense, shall maintain a complete
accounting system in connection with the management of the Complex. The books
and records shall be kept in accordance with generally accepted accounting
principles consistently applied ("GAAP"), as applied by Operator or its
subsidiaries or Operator's affiliated entities in other gaming operations
similar to the Complex and as approved by the Owner, which approval shall not
unreasonably be withheld. Books and accounts shall be maintained at the
Complex. Title to such books and accounts shall vest jointly in Owner and
Operator, while possession of such books and records shall vest solely in
Operator; provided, however, that upon proper termination of this Agreement and
proper and timely payment to Operator of all sums due to or accrued for the
benefit of Operator under this Agreement, title to and possession of such books
and accounts shall vest in Owner. Owner shall have the right and privilege of
examining and copying said books and records at any reasonable time during
regular business hours.
(b) Operator, at Owner's sole cost and expense, shall cause a certified
audit of the Complex to be performed annually by such reputable accounting firm
mutually acceptable to Owner and Operator, and at least three (3) copies thereof
shall be furnished to each party not later than ninety (90) days from the end of
Owner's fiscal year, with Operator utilizing its good faith efforts to ensure
that such accounting firm "signs off" on the numbers contained therein within
forty-five (45) days from the end of Owner's fiscal year. Nothing herein
contained shall prevent Owner, at its sole expense, from designating a reputable
accounting firm to, upon reasonable prior written notice, examine the books and
records of the Complex during regular business hours.
(c) On or before the twenty-fifth (25th) day of each month, for the first
six (6) months following the Opening Date and on or before the fifteenth (15th)
day of each month thereafter, Operator shall furnish Owner with an unaudited
operating statement for the prior calendar month detailing (i) Statistical Data,
(ii) Gaming Revenue Data (broken down by departmental or revenue source by line
item), (iii) Gaming Operating Expense Data (broken down by departmental or
expense source by line item) (iv) Food & Beverage Department Data, (v) Other
Income Data, (vi) Overhead Departments Data, (vii) Fixed Charges, (viii) Gross
Operating Profit, and (ix) Net Income or Loss, including management fees and
other amounts paid to Operator. Any adjustment required to make
8
<PAGE>
up an underpayment or to refund an overpayment of the monthly payments to
Operator, as revealed in any monthly operating statement, shall be made by way
of an adjustment in the payment during the month following the furnishing of
said monthly operating statement. Likewise, any adjustments predicated on the
annual audited statements for the Complex, will be made during the first month
following completion of the annual audit.
4.07 Bank Accounts.
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(a) Operator shall establish at reputable financial institution(s)
reasonably approved by Owner such Complex bank accounts as Operator deems
necessary for the operation of the Complex. The accounts shall be styled "name
of Complex-type of account" (e.g., operations, payroll), and all bank accounts
shall provide that Operator's designees shall be the only parties authorized to
draw upon said accounts. At least thirty (30) days prior to the Opening Date,
Owner shall deposit an amount no less than Two Million Five Hundred Thousand and
No/100 Dollars ($2,500,000.00) into the operating bank account, as designated by
Operator, to serve as a minimum bank account to use as the Complex's initial
operating capital in accordance with the approved Budgets. After the Opening
Date, Operator shall deposit, not less frequently than monthly, any cash on hand
in excess of its reasonably anticipated operating capital needs for the next
thirty (30) days and of any reserves required hereunder in such bank accounts or
other depositories as may be designated by Owner. It is understood that
Operator shall maintain funds at the Complex and shall make payments therefrom
as the same are usually and customarily made in the hospitality and gaming
industry.
(b) During the Term hereof, Owner shall furnish to Operator true and
correct copies of all property tax statements and insurance policies and all
financing documents (including notes and mortgages) relating to the Complex.
Without in any way diminishing Owner's responsibility hereunder, Operator shall
be authorized, if Owner so requests in writing, to pay from the Complex bank
accounts the amounts indicated by said statements and/or documents, provided
sufficient funds are in such Complex accounts.
4.08 Concessions. Operator shall have the exclusive right to consummate,
-----------
in the name of and for the benefit of Owner, arrangements and leases with
concessioners, licensees, tenants and other users of any commercial space in the
garage or with respect to a gift shop, beauty shop or the like in the hotel or
pavilion, at then-prevailing commercially reasonable rates.
4.09 Expenses.
--------
(a) All costs, expenses, funding of operating deficits and working capital,
and other obligations and liabilities hereunder ("Owner's Financial
Obligations") shall be the sole and exclusive responsibility and obligation of
Owner, except for those instances herein where it is expressly and specifically
stated that such item shall be for the accounts of Operator. It is understood
that statements herein indicating that Operator shall "furnish," "provide" or
otherwise supply, present or contribute items or services hereunder shall not be
interpreted or construed to mean that Operator is liable or responsible to fund
or pay for such items or services, except in those specific instances mentioned
above.
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(b) With respect to Owner's Financial Obligations, the same shall be funded
and/or paid for as follows: (i) First, from monies which may be available in the
Complex accounts maintained by Operator hereunder; and (ii) Second, if such
Complex accounts maintained by Operator hereunder do not contain monies
sufficient to fund and/or pay Owner's Financial Obligations, from monies which
shall be deposited by Owner in such Complex accounts within fifteen (15) days
after request therefor by Operator in writing. If such monies are not so
deposited by Owner (and Operator's affiliate that is a joint venturer in Owner
has tendered its required share of such requested capital) in the amounts
requested by Operator within such fifteen (15) day period, Operator shall have
the right, but not the obligation, to terminate this Agreement upon thirty (30)
days prior written notice to Owner and, in the event of two (2) consecutive such
defaults in any calendar year, upon five (5) days prior written notice to Owner.
It is understood that Owner shall have the opportunity to cure such default by
depositing such monies during the respective thirty (30) day or five (5) day
notice period. It is agreed that any such termination shall not cause or create
any liability, responsibility, duty or obligation by Operator to Owner, and
Owner shall be deemed to have waived any rights or remedies it may have with
respect to such termination. In the event (x) EBITDA (as hereafter defined in
Section 5.03 of this Agreement) less capital expenditures, interest expense and
- ------------
scheduled amortization of principal for indebtedness owing under the first
mortgage financing and equipment financing obtained by Owner prior to the
Opening Date, if any, and taxes ("Cash Flow") for the Complex is in excess of $1
for the immediately preceding twelve months and (y) Operator elects to terminate
this Agreement in accordance with this Section 4.09(b), in addition to any and
---------------
all other payments and monies owed to Operator, including without limitation,
accrued charges with respect to insurance procured by Operator for Owner in
accordance with Article Six and accrued and unpaid Basic Management Fees (as
hereafter defined) and Complex Incentive Fees (as hereafter defined), Owner
shall be obligated to pay to Operator an amount equal to two (2) times the sum
of the Basic Management Fees and Complex Incentive Fees payable by Owner for the
immediately preceding fiscal year of Owner.
(c) It is understood and agreed that Operator shall have no obligation or
duty to fund and/or pay for any of Owner's Financial Obligations.
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<PAGE>
4.10 Budgets.
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(a) Operator shall be obligated to furnish Owner with the following budgets
in a form agreed to by Owner and Operator (collectively "Budgets") during the
Term hereof:
(i) A pre-opening budget ("Pre-Opening Budget") at least ninety (90)
days prior to the Opening Date, which Pre-Opening Budget shall detail all costs
and expenses reasonably anticipated by Operator for the actions described in
Section 2.01.
- ------------
(ii) A commencement budget ("Opening Budget") at least sixty (60) days
prior to the Opening Date to be updated within thirty (30) days after the
Opening Date, which Opening Budget shall detail all costs, expenses and reserves
reasonably anticipated by Operator, or contemplated in this Agreement, during
the remainder of the first calendar year of the Term of this Agreement,
including but not limited to, working capital, initial operating equipment and
supplies, expenditures for recruiting, training, advertising and promotion and
other similar costs and expenses.
(iii) An annual budget ("Annual Budget") at least forty-five (45) days
prior to the end of the first calendar year in which the Complex opened and each
succeeding calendar year of the Term hereunder. Each Annual Budget shall detail
all costs, expenses on a line item basis and reserves reasonably anticipated by
Operator, or contemplated in this Agreement, for the next succeeding year.
Annual Budgets may be amended from time to time, after submission by Operator to
Owner of such amendments.
(b) Operator makes no guarantee, warranty or representation whatsoever in
regard to Budgets, same being intended as reasonable estimates only.
(c) With respect to any deficits which may arise as a result of operations
hereunder, Owner shall be obligated to fund and pay such deficits which are not
covered by Complex income within fifteen (15) days after written request
therefor by Operator. If Owner fails or delays in furnishing funds to cover
deficits as aforesaid (by failure to approve or delay in approving Budgets in a
timely manner or otherwise), Operator shall have no responsibility or liability
therefor, and Owner shall indemnify and hold harmless Operator with respect to
any liability, however arising, which may arise out of or relate to, directly or
indirectly, such failure or delay in funding such obligations.
(d) All Budgets submitted by Operator to Owner under this Section 4.10
------------
shall (i) be prepared generally in accordance with GAAP, (ii) be presented
substantially in the format of the operating statements required of Operator
pursuant to Section 4.06(c) of this Agreement, (iii) include detailed business
---------------
and market plans, and (iv) be subject to Owner's prior express approval, which
approval shall not be unreasonably withheld or unduly delayed. For any period
during which Owner and Operator are unable to agree on any given Budget, Owner
and Operator shall be deemed to have
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<PAGE>
agreed to the applicable Budget for the immediately preceding period, plus 5%
for each line item thereof. If thirty (30) days have elapsed during any period
for which Owner and Operator are unable to agree on a Budget, Owner and Operator
hereby appoint Arthur Andersen & Co. (or any other independent accounting firm
with gaming and hotel experience, as mutually agreed by Owner and Operator) as
an independent arbiter which shall determine the appropriate Budget no later
than four (4) weeks after its receipt of written notice of such a dispute. The
arbiter's Budget shall be binding upon Owner and Operator. All expenses incurred
as a result of the invocation of such independent arbiter provision shall be
borne solely by the Owner, subordinated to the payment of all fees and expenses
due to or accrued for the benefit of Operator pursuant to this Agreement. The
provisions of this Section 4.10(d) are to be carried out in tandem with, and not
---------------
as an alternative for, the arbitration provisions of Section 13.07 of this
-------------
Agreement.
(e) The foregoing notwithstanding, Operator may incur expenses in excess of
the amounts set forth in the Budgets provided:
(i) the actual total expenditures for the operating department within
which any given expense is allocable will not exceed one hundred ten percent
(110%) of the total budgeted expenditures for such operating department approved
in the then-applicable Budget; or
(ii) such expenditure is expressly authorized in this Agreement; or,
(iii) Operator obtains Owner's prior approval of such expenditure,
which approval shall not be unreasonably withheld or unduly delayed; or,
(iv) such expenditure is warranted by increased levels of business;
or,
(v) such expenditure is required to meet emergency conditions and
Owner is promptly advised thereof; or,
(vi) subject to the terms of Section 4.11 of this Agreement,
------------
additional expenditures are incurred by reason of the occurrence of an event or
events not reasonably foreseeable by Operator; or,
(vii) subject to the terms of Section 4.11 of this Agreement, such
------------
expenditure is caused by the occurrence of an event or events outside Operator's
reasonable control.
4.11 Owner Opportunity to Discuss with Operator. The Owner shall have the
------------------------------------------
right to call a meeting with Operator in the event: (a) the Adjusted EBITDA
Margin (as defined in Section 11.02 of this Agreement) for Owner for two
-------------
consecutive fiscal quarters is less than 75% of the Average Adjusted Competitor
EBITDA Margin (as defined in Section 11.02 of this Agreement); or (b)
-------------
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EBITDA (as defined in Section 11.02 of this Agreement) for the Owner for two
-------------
consecutive fiscal quarters is less than 75% of that set forth in the Annual
Budget; or (c) EDITDA for the Owner is less than $1 for two consecutive fiscal
quarters; or (d) in the event of a cash call; or (e) the Owner is unable to make
a payment due under the Project Financing. The Operator shall attend, and shall
cause the General Manager or the Chief Financial Officer of the Complex and the
representative of Operator or its affiliate serving on Owner's management
committee to attend, the meeting scheduled pursuant to this Section 4.11 and, if
------------
Operator, the General Manager or the Chief Financial Officer of the Complex fail
to attend such meeting, Owner shall be entitled to withhold Basic Management Fee
payments due to Operator until such parties attend such meeting.
4.12 Delivery of Notices. Operator shall promptly deliver to Owner any
-------------------
written citation, notification or other written communication from any
regulatory entity that alleges or relates to any violation or alleged violation
of any applicable law, rule or regulation with respect to the Complex or
Operator's operation thereof.
ARTICLE FIVE
------------
COMPENSATION OF OPERATOR
------------------------
5.01 Forms of Compensation. For and in consideration of the services
---------------------
rendered by Operator pursuant to this Agreement, Owner agrees to pay to Operator
(a) the Basic Management Fee (as defined below), (b) the Complex Incentive Fee
(as defined below) (subject to the terms and conditions set forth in Section 6.1
of the Amended and Restated Joint Venture Agreement dated as of July 31, 1998
(as amended) by and among HWCC-Louisiana, Inc., Sodak Louisiana, L.L.C. and
Shreveport Paddlewheels, L.L.C. (the "Joint Venture Agreement")) and (c) all
reimbursables set forth elsewhere in this Agreement.
5.02 Basic Management Fee defined. The term "Basic Management Fee" shall
----------------------------
mean a fee equal to two percent (2%) of the gross revenues from casino
operations, hotel operations and all other Complex facilities and amenities
managed by the Operator, including without limitation, all revenues and proceeds
from business interruption or other loss of income insurance, less promotional
allowances and less the items set forth below ("Complex Net Revenues"):
(a) Any gratuities, or service charges added to a customer's bill or
statement in lieu of gratuities, which are payable to Complex employees;
(b) An amount equal to all credits or refunds made to customers, guests or
patrons;
(c) All sums and credits received in settlement of claims for loss or
damage of FF&E or to the physical plant of the Complex;
(e) Any and all income from the sale of FF&E and any capital assets;
(f) Any compensation payments for claims against third parties arising out
of or during the course of the operation of the Complex; and
(g) Investment income.
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The Basic Management Fee shall (i) be computed monthly before the payment
of any and all gaming, income, franchise, federal, state or municipal taxes, and
(ii) be paid monthly in arrears on the tenth (10th) day of each month. The
Basic Management Fee shall be included in all operating statements which
Operator furnishes to Owner hereunder, and adjusted annually in accordance with
the audited financial statements for the Complex.
5.03 Complex Incentive Fee defined. The term "Complex Incentive Fee" shall
-----------------------------
mean a fee equal to the sum of (a) 5% of EBITDA in excess of $25 million and up
to $35 million, (b) 7% of EBITDA in excess of $35 million and up to $40 million
and (c) 10% of EBITDA in excess of $40 million. For the purpose of computing
the Complex Incentive Fee, the term "EBITDA" shall equal Complex Net Revenues,
less all Complex operating expenses (including the Basic Management Fee payable
to Operator as set forth in Section 5.02 of this Agreement, but excluding any
------------
fees payable to Sodak Gaming, Inc. and/or its affiliates under the Consulting
Agreement dated as of the date hereof between Sodak Gaming, Inc. and Owner and
the fees payable to Shreveport Paddlewheels, L.L.C. ("SPL") and/or its
affiliates under the Marine Services Agreement dated as of the date hereof
between Owner and SPL and/or its affiliate and the Amended and Restated
Assignment of Joint Venture Interest dated the hereof among Sodak Louisiana,
L.L.C., HWCC-Louisiana, Inc. and New Orleans Paddlewheels, Inc. ("NOP") or any
other agreement providing for the payment to SPL, NOP, or their affiliates of a
fee equal to 1% of Complex Net Revenues) calculated in accordance with GAAP;
provided, however, that the following shall not be deducted from Complex Net
---
Revenues:
(a) Depreciation and amortization of the Complex, FF&E or other assets of
the Complex;
(b) Lease payments for the Complex;
(c) Payments with respect to capital or operating leases;
(d) Financing costs, including bank or insurance company interest charges,
principal payments and other debt services;
(e) Amortization of pre-opening expenses;
(f) Capital expenditures, including replacement of FF&E except for normal
maintenance and repairs;
(g) The Complex Incentive Fee provided in this Section 5.03;
------------
(h) All franchise, federal, state or municipal taxes; or
(i) Any unusual or extraordinary items.
With respect to each fiscal year of Owner during the Term of this
Agreement, commencing with the first calendar quarter of any fiscal year of
Owner during which the EBITDA for the elapsed
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portion of such fiscal year exceeds $25 million and for each calendar quarter of
such fiscal year thereafter, that portion of the Complex Incentive Fee which has
accrued but remains unpaid shall be paid by Owner to Operator in arrears on the
fifteenth (15th) day of the first month immediately succeeding any such calendar
quarter. If for any fiscal year the aggregate amount of quarterly installments
paid to Operator shall be more or less than the annual Complex Incentive Fee
payable for such fiscal year, then, by way of year-end adjustment within fifteen
(15) days after delivery of such audited statements to Owner, Operator shall
either pay into the Complex operating account for the benefit of Owner pursuant
to this Agreement the amount of the overpayment, or shall withdraw from the
Complex operating account the amount of any underpayment, as the case may be.
5.04 Losses. Losses in any year shall be borne exclusively by Owner and
------
shall not reduce the amount of any compensation which Operator may be entitled
to receive hereunder for any prior, present, or subsequent years. No part of
such losses shall be charged against, recaptured out of or otherwise serve to
diminish or affect the EBITDA of the Complex for prior, present, or subsequent
years.
ARTICLE SIX
-----------
INSURANCE AND INDEMNITY
-----------------------
6.01 Property Insurance. Operator shall procure and maintain, and Owner
------------------
shall pay for, from the Opening Date (or such earlier date mutually agreed to by
Owner and Operator) and thereafter at all times during the Term hereof property
insurance, equal to at least one hundred percent (100%) of the insurable value
thereof on a replacement cost basis, or such lesser amount to which Operator,
subject to the terms of Section 6.03 of this Agreement, may determine, against
------------
loss or damage to the Complex and its contents from fire, boiler explosion and
such other extended coverage risks and casualties as Operator shall deem
necessary. Operator shall also procure and maintain, and Owner shall pay for,
business interruption insurance against loss or damage by fire and other hazards
customarily included in an extended coverage endorsement, including riot, civil
commotion and insurrection, all of said business interruption insurance to be
effective from the Opening Date and during the Term hereof. Such liability and
property insurance coverage shall list Operator as an additional insured, with a
right to thirty (30) days prior written notice in the event of cancellation or
modification of coverage.
6.02 Liability Insurance/Miscellaneous Coverages. Subject to the terms
-------------------------------------------
of Section 6.03 of this Agreement, Operator shall procure and maintain, and
------------
Owner shall pay for, during the Term hereof, the following insurance, which
insurance shall list Operator and Operator's subsidiaries, affiliates, officers,
directors, agents, servants, workmen, and employees (all collectively referred
to herein as "Operator") as additional insured, with a right to thirty (30) days
prior written notice in the event of cancellation or modification of coverage:
(a) Comprehensive General Liability Insurance at a limit of at least $1
million per occurrence/$2 million aggregate, including, but not limited to,
liquor liability and innkeepers liability coverage to protect against theft of
or damage to guests' property;
15
<PAGE>
(b) Automobile Liability and Physical Damage Insurance for at least $1
million combined single limit to include broad form drive other car coverage;
(c) Comprehensive Crime Insurance including, but not limited to, Employee
Dishonesty and Depositor's Forgery Coverages;
(d) Worker's Compensation Insurance and Employer's Liability, including the
Maritime Employers Liability Endorsement, U.S.L.& H., and similar insurances as
may be required by law;
(e) Group Benefits Insurance including major medical and hospitalization
for Complex employees;
(f) Fiduciary Liability Insurance, as required by the Employment Retirement
Income Security Act of 1974 covering pension and benefit plans, in a limit
sufficient to cover the assets at risk;
(g) Marine Hull and Machinery and Property Insurance in an amount equal to
at least 100% of the agreed insurable value including all gaming equipment
thereof on a replacement cost basis;
(h) Marine Business Interruption Insurance against loss of profits measured
by net income of the Owner;
(i) Builder's Risk Insurance, if required, including delayed opening
coverage;
(j) Protection and Indemnity coverage, if required, including Jones Act, in
an amount of at least $1 million with Excess Protection and Indemnity coverage
in an amount of not less than $25 million;
(k) Vessel Pollution Insurance, if required;
(l) Media/Memorabilia Professional Liability Insurance affording protection
for liabilities which may arise from the use and display of Hollywood themed
media and memorabilia at the Complex of at least $2 million;
(m) Any insurance which Owner or Operator may be required to obtain
pursuant to any franchise covering the Complex;
(n) Umbrella (Excess Liability) Insurance in an amount of not less than
$100 million;
(o) Any other insurance required by the terms of the Project Financing; and
(p) Insurance against such other insurable risks as may reasonably be
required.
6.03 Insurance Standards and Requirements.
------------------------------------
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(a) It is agreed that all insurance hereunder shall fully and adequately
protect Owner and Operator, and shall meet or exceed any requirements of
applicable laws, rules or regulations, insurance underwriters, or other third
parties having the right to determine insurance requirements for the Complex.
Owner and Operator shall each approve all insurance required for the Complex
with respect to amount and types of coverage, and the terms and conditions
thereof; provided that, in making determinations hereunder with respect to
insurance, Owner and Operator shall take into account Operator's advice derived
from its experience as a casino and hotel manager. Insurance procured
hereunder shall be placed with reputable, financially sound insurance companies
acceptable to Owner and Operator, and shall be obtained in the name of Owner or
Operator (as agent for Owner), as the parties may mutually agree. All insurance
hereunder shall name Operator and Owner as co-insureds and/or additional
insureds. If Owner should refuse or delay in approving the procuring or
maintaining of insurance which Operator reasonably deems to be advisable to
obtain for the Complex, Operator shall have (i) the right, upon five (5) days
prior written notice to Owner, to procure such insurance in Operator's own name
but at Owner's sole cost and expense, and (ii) the right to terminate this
Agreement upon sixty (60) days prior written notice to Owner, unless such
insurance is procured by Owner within such notice period.
(b) Operator shall submit to Owner each year a summary of the insurance
coverage maintained by Operator with respect to the Complex, certified by an
officer of Operator, and Owner shall have thirty (30) days thereafter to give
its comments thereon to the other. If Operator receives no written comments
from Owner within said period, the insurance program shall be deemed approved
for that year.
6.04 Indemnity. Owner agrees:
---------
(a) To indemnify and hold Operator free and harmless from any liability for
injury or death to persons or damage or destruction of property due to any cause
whatsoever, either in or about the Complex or elsewhere, as a result of the
performance of this Agreement by Operator, its agents, workmen, servants,
officers, directors or employees, irrespective of whether caused, wholly or
partially, by the negligence of Operator, its agents, officers, directors or
employees; and,
(b) To reimburse Operator upon demand for any money or other property which
Operator is required to pay out for any reason whatsoever in performing its
duties hereunder or as a consequence thereof, whether the payment is required by
law to settle labor claims, for operating expenses or any other charges or debts
incurred or assumed by Operator or any other party, or judgments, settlements,
or expenses in defense of any claim, civil or criminal action, proceeding,
charge, or prosecution made, instituted or maintained against Operator or Owner,
jointly or severally, because of the condition or use of the Complex, or acts or
failures to act of Operator, its employees, officers, directors or agents,
Owner, its employees, officers or agents, or arising out of or based upon any
law, regulation, requirement, contract or award; and,
(c) To defend any claim, action, suit or proceeding brought against
Operator or Owner, jointly or severally, arising out of or connected with any of
the foregoing, and to hold harmless and fully indemnify Operator from any
judgment, loss or settlement on account thereof, regardless of the jurisdiction
in which any such claims, actions, suits or proceedings may be brought.
17
<PAGE>
(d) Notwithstanding the foregoing, Owner shall not be liable to indemnify
and hold Operator harmless from any liability described above which results from
the gross negligence or willful misconduct of Operator, its agents, employees,
officers or directors.
6.05 Operator Insurance. Any insurance provide by Operator under this
------------------
Article Six may be effected under policies of blanket insurance which cover
other properties of Operator's affiliated entities, and the pro rata portion of
such premiums shall be charged and allocated to the Complex on the same basis as
allocated to other participating operations of Operator's affiliated entities.
Any policies of insurance maintained by Operator pursuant to the provisions of
this Section 6.05 may contain deductible provisions in such amounts as are
------------
maintained with respect to other operations of Operator's affiliated entities,
taking into account local standards and practices. Further, in lieu of all or a
part of comprehensive public liability insurance and worker's compensation and
employer's liability insurance under clauses (a) and (d) of Section 6.02, any or
------------
all of the risks covered by such insurance may be self-insured or self-assumed
by the Owner under a self-insurance or assumption of risk program similar to
those in effect at other operations of affiliates of Operator, up to such
amounts as such risks are assumed or self-insured at other operations of
Operator's affiliated entities.
ARTICLE SEVEN
-------------
GROUP SERVICES BY OPERATOR
--------------------------
7.01 Group Services. Operator shall provide to the Complex, from other
--------------
offices or casinos managed by Operator or its affiliates or subsidiaries, the
following services:
(a) General Administrative Service, in connection with:
(i) Operation:
----------
Quality Control and Inspection;
General Supervision;
Supervision of Employee Hiring and Training;
Sales Coordination;
Coordination of a System-wide Preventive Maintenance
Program;
Coordination of Advertising and Promotional Program;
Renovating and Redecoration of Complex;
Purchasing of Furnishings and Equipment.
(ii) Accounting:
-----------
Coordination of the Accounting System, and the
procuring of a Computer Program (Software) for the
same;
General Supervision of Accounting Reports;
18
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Internal Audits.
(b) Specific services, whereby personnel might be loaned to the Complex as
may be deemed reasonable by Operator from other hotel and/or casinos from time
to time for the Complex's benefit.
7.02 Costs of Services. The cost of the services referred to in Section
----------------- -------
7.01 shall be reimbursed to Operator as a Complex operating expense on a direct
- ----
cost basis. Such costs for services include:
(a) Actual out-of-pocket expenses (excluding salary and other
compensation) for the personnel necessary to coordinate the above services
directly attributable to the Complex operation, including, without limitation,
telecommunication and travel expenses; and
(b) In the case of specific services described in Section 7.01(b), the
---------------
actual pro rata compensation cost and out-of-pocket reimbursable
---------
telecommunication and travel expenses of personnel while loaned to the Complex
for its sole benefit.
In the event employees of the Owner at the Complex are loaned to Operator
or Operator's affiliated entities, for their sole benefit (as opposed to that of
the Complex), the actual pro rata compensation cost and out-of-pocket
reimbursable telecommunication and travel expenses of such loaned personnel
shall be reimbursed to the Owner by Operator or such Operator affiliated entity.
7.03 Software.
--------
(a) Software. Operator and Owner acknowledge that, through the experience
--------
of Operator's affiliated entities, Operator has developed or directed the
development of data processing computer software for hotel and casino operations
(the "Software"). As part of the services furnished by Operator under this
Agreement, Operator shall procure for the Complex Operator's data processing
computer software for the operation of the Complex from Operator's affiliates.
The cost and expense of such Software and any ordinary course updates thereto
shall be deemed to be included within the Basic Management Fee; provided,
however, special requests for Software specially developed for the Complex shall
be procured by the Operator at Owner's sole cost and expense. In addition, Owner
agrees that Operator shall purchase, at Owner's sole cost and expense, the
necessary data processing hardware equipment to use the computer software in the
operation of the Complex. Owner further agrees that, as an operating expense of
the Complex and at Owner's sole cost and expense, Operator shall procure such
installation, training, retraining and maintenance assistance from Operator's
affiliates as Operator, in its sole discretion, deems advisable. For purposes
of this Section 7.03(a), the term "Owner's cost and expense" is defined as a
---------------
cost which is cost competitive in the marketplace with other comparable
available date processing software and hardware.
(b) Title to the Software. Owner hereby acknowledges that the exclusive
---------------------
right of ownership in the Software, as well as any subsequent improvements,
modifications or updates to the Software, vests solely in Operator. Owner
hereby disclaims any right to ownership, possession
19
<PAGE>
or use of the Software and related materials. Owner hereby acknowledges the
unique proprietary nature of the Software and does hereby covenant that Owner
shall maintain the strict confidential nature of the Software and related
materials provided for use pursuant to this Agreement and Owner shall not
disseminate such Software or related materials to any other person or entity
without the express written consent of Operator thereto. Owner hereby further
covenants that it shall not, and it shall not suffer any other person or entity
to, violate the provisions of this Section 7.03(b), which Owner hereby consents
---------------
shall be enforceable in equity, in a summary fashion, by Operator or its
assignees without proof of harm other than an unauthorized disclosure.
(c) Return of the Software. Upon termination of this Agreement, for
----------------------
whatever reason, Owner shall, within sixty (60) days of such termination,
discontinue the use of the Software and/or related materials and certify to
Owner that (i) the use of the Software and related materials has been
discontinued, (ii) all originals and copies of the Software have been returned
to Operator, and (iii) no person or entity has retained any portion, in original
or duplicate, of the Software or related material. The provisions of Sections
--------
7.03(b) and 7.03(c) of this Agreement shall survive any termination of this
- ------- -------
Agreement.
7.04 Intellectual Property. Operator shall procure for the Complex and
---------------------
maintain during the Term of this Agreement the use of the "Hollywood Casino"
name and related trademarks and trade dress, including those marks which may
from time to time be developed and implemented in operating Hollywood Casino
establishments in the United States (the "Intellectual Property") to the extent
that the use of such additional marks are appropriate (as determined by the
Operator) for use at the Complex. The cost and expense of such Intellectual
Property shall be deemed to be included within the Basic Management Fee. Usage
of the Intellectual Property during the Term of this Agreement shall be governed
by a license agreement to be entered into by and between the owner of such marks
and Owner. In the event of any termination of this Agreement by Owner in
accordance with Section 11.02 of this Agreement, Owner shall have the option to
-------------
continue the term of the foregoing license agreement for a term not to exceed
ninety (90) days provided Owner pays to the owner of such marks an annual
royalty fee equal to 1% of Complex Net Revenues. Operator shall at all times
during the Term of this Agreement operate the Complex (including all gaming
facilities) with the Intellectual Property and shall not, in any manner, operate
the Complex (including all gaming facilities) in or under any other theme, style
or motif without the express written consent of the Owner.
7.05 Memorabilia. Operator shall procure for the Complex, at the cost of
-----------
purchase plus delivery to the Complex, certain items of memorabilia in keeping
with the "Hollywood Casino" theme that will be either affixed to the Complex so
as to become a fixture or so unique to the Complex that there is no intention to
move such memorabilia to any other "Hollywood Casino" property (the "Owner
Memorabilia"). The Owner Memorabilia shall be owned by the Owner and the cost
of which shall be included in the Budgets and shall satisfy the terms of Section
-------
4.10 of this Agreement. In addition, Operator and/or its affiliates from time
- ----
to time will procure the use of certain other moveable memorabilia which
periodically may be transferred by and between various "Hollywood Casino"
properties (the "Non-Owner Memorabilia"). Owner agrees and acknowledges that
Owner shall have no right to, title in or interest in the Non-Owner Memorabilia.
20
<PAGE>
Upon termination of this Agreement, for whatever reason, Owner shall, within the
earlier to occur of expiration of the license agreement referred to in the last
sentence of Section 7.04 of this Agreement or sixty (60) days from termination
------------
of this Agreement, certify to Operator that all Non-Owner Memorabilia has been
returned to Operator.
ARTICLE EIGHT
-------------
DAMAGE TO AND DESTRUCTION OF THE COMPLEX
----------------------------------------
8.01 Owner to Restore. Owner agrees that, under the circumstances set
----------------
forth in the provisions of this Article Eight, to repair, restore, rebuild or
replace any insured damage to, or impairment or destruction of the Complex from
fire or other casualty. If Owner is obligated hereunder to undertake such work
and shall fail to do so, Operator may, but shall not be obligated to, undertake
or complete such work for the account of Owner and shall be entitled to be
repaid therefor, and proceeds of insurance shall be made available to Operator.
8.02 Limitation on Restoration. If the Complex shall be totally destroyed
-------------------------
or substantially destroyed during the Term of this Agreement by fire or other
casualty and (a) the insurance required by Article Six of this Agreement shall
have been maintained, and (b) the cost of repairing, restoring, rebuilding and
replacing the same shall exceed one hundred percent (100%) of the proceeds of
the insurance collectible by Owner for and on account thereof, Owner shall have
the right and option, upon notice served upon Operator within sixty (60) days
after such fire or other casualty, to terminate this Agreement. If the cost of
repairing, restoring, rebuilding or replacing the damage, impairment or
destruction resulting from such fire or other casualty shall be less than one
hundred percent (100%) of the proceeds of the insurance collectible by Owner,
Owner shall repair, restore, rebuild or replace such damage, impairment or
destruction, unless and to the extent that Owner and Operator shall otherwise
agree. If Owner fails to undertake such work within ninety (90) days after a
fire or other casualty, or shall fail to complete the same diligently, Operator,
without prejudice to its rights to repair, restore, rebuild or replace such
damage, impairment or destruction for and on behalf of Owner and its rights and
remedies upon undertaking any such work provided for in this Article, may at its
election, terminate this Agreement upon notice to Owner.
ARTICLE NINE
------------
CONDEMNATION
------------
9.01 Total Condemnation. If the whole of the Complex shall be taken or
------------------
condemned in any eminent domain, condemnation, compulsory acquisition or like
proceeding by any competent authority for any public or quasi-public use or
purpose, or if such a portion hereof shall be taken or condemned so as to make
it imprudent or unfeasible, in Operator's reasonable opinion, to use the
remaining portion as a Complex of type and class immediately preceding such
taking or condemnation, then, in either of such events, Operator, in its sole
discretion, may determine that the Term of this Agreement shall cease and
terminate as of the date of such taking or condemnation, and, in any such event,
each of Operator, with respect to its interest in this Agreement, and Owner,
with respect to the value of its constituent partners' interest in Owner, shall
seek a valuation of such
21
<PAGE>
respective interest, and share in such award proportionally in accordance with
such valuations.
9.02 Partial Condemnation. If only a part of the Complex shall be taken or
--------------------
condemned and the taking or condemnation of such part does not make it
unfeasible or imprudent, in Operator's reasonable opinion, to operate the
remainder as a Complex of the type and class immediately preceding such taking
or condemnation, this Agreement shall not terminate, but out of the award to
Owner, so much thereof as shall be reasonable necessary to repair any damage to
the Complex, or any part thereof, or to alter or modify the Complex, or any part
thereof, so as to render the Complex a complete and satisfactory architectural
unit as a Complex of the same type and class as it was immediately preceding the
taking or condemnation shall be used by Owner for that purpose. The balance of
the award, after deduction of the sum necessary for restoration, shall be fairly
and equitably apportioned between Owner and Operator so as to compensate
Operator for any loss of income resulting from or as the result of the taking or
condemnation.
ARTICLE TEN
-----------
RELATIONSHIP AND AUTHORITY
--------------------------
The provisions of this Agreement relating to the Basic Management Fees and
Complex Incentive Fees payable hereunder is included solely for the purpose of
providing a method whereby the said fees can be measured and ascertained.
Operator and Owner shall not be construed as joint venturers or partners of each
other and neither shall have the power to bind or obligate the other except as
set forth in this Agreement. Operator is, however, clothed with such additional
authority and powers as agent of Owner as may be necessary to carry out the
spirit and intent of this Agreement.
ARTICLE ELEVEN
--------------
TERMINATION
-----------
11.01 Reciprocal Termination. Notwithstanding any other provision of this
----------------------
Agreement to the contrary, each party shall have the right to terminate this
Agreement on forty-five (45) days prior written notice (or such lesser period
mandated by the Board) to the other in the event such other party shall cause,
commit or suffer to exist with respect to:
(a) A material breach of this Agreement which is not cured within the
aforementioned forty-five (45) day period of written notice thereof;
(b) The institution of any statute, regulation, rule or ruling rendering
the conduct of gaming in the United States or at the Complex illegal;
(c) The Board shall deem Operator unsuitable;
(d) Service mark registrations No. 1,851,759 or 1,903,858 for "Hollywood
Casino" shall be rescinded by the U. S. Patent and Trademark Office.
or a court of competent jurisdiction shall have entered a final non-
appealable order enjoining or otherwise
22
<PAGE>
preventing the Operator from utilizing the "Hollywood Casino" mark at
the Complex; or
(e) HWCC-Louisiana, Inc. or its assignee or transferee ("HWCC") fails to
contribute the lesser of (i) the portion of capital for which it is
obligated under the terms of the Amended and Restated Master
Agreement dated July 31, 1998, by and among New Orleans Paddlewheels,
Inc., Shreveport Paddlewheels, L.L.C., Sodak Louisiana, L.L.C. and
HWCC (the "Master Agreement") or the Joint Venture Agreement and (ii)
the amount of capital contributed at such time by Sodak Louisiana,
L.L.C., its affiliate or their assignee or transferee.
11.02 Owner's Right to Terminate. If, beginning with the second full
--------------------------
fiscal year after the Opening Date, for any two (2) consecutive fiscal years,
Adjusted EBITDA Margin (as defined below) for the Complex is less than seventy-
five percent (75%) of the Average Adjusted Competitor EBITDA Margin (as defined
below), Owner may terminate this Agreement by providing Operator with ninety
(90) days prior written notice, and Operator shall be deemed to have waived any
rights or remedies it may have with respect to such termination, other than
those set forth in this Agreement.
The "Adjusted EBITDA Margin" shall be (i) EBITDA divided by Complex Net
Revenues, multiplied by (ii) the Hotel Adjustment Factor. In calculating the
Adjusted EBITDA Margin for any riverboat gaming operation with gaming taxes
calculated according to a formula different from that to which the Complex is
subject, the Adjusted EBITDA Margin for such other riverboat gaming operation
shall be calculated as if the gaming taxes for such operation were calculated
according to the same formula to which the Complex is subject.
The "Average Adjusted Competitor EBITDA Margin" shall be the median of the
Adjusted EBITDA Margins that are publicly available for all riverboat gaming
operations in the Bossier City/Shreveport market. In the event there is an even
number of riverboat gaming operations, the mean shall be the average of the two
middle Adjusted EBITDA Margins for such riverboat gaming operations.
The "Hotel Adjustment Factor" shall be the quotient of (i) 100 minus the
number of increments of 100 hotel rooms (rounded to the nearest hundredth) at
such riverboat gaming operation, divided by (ii) 100.
-------
11.03 Operator's Right to Terminate Under Certain Circumstances.
---------------------------------------------------------
Notwithstanding any other provision of this Agreement to the contrary, Operator
shall have the right to terminate this Agreement upon written notice to the
Owner in the event of the occurrence of any of the events or circumstances
described in Sections 4.09(b), 11.05, 12.02, or 13.13 of this Agreement.
---------------- ----- ----- ------
11.04 Operator's and Owner's Right to Terminate for License Issues.
------------------------------------------------------------
(a) Notwithstanding any other provision of this Agreement to the contrary,
each of Operator and Owner shall have the right to terminate this Agreement upon
written notice to the
23
<PAGE>
other in the event of the occurrence of any event or the existence of any facts
with respect to the ownership or management of the Complex which, in the
terminating party's good faith opinion, would jeopardize any gaming license or
application for gaming license of such terminating party or its affiliated
entities anywhere in the United States or Canada. Within twenty (20) days after
notice of termination under this Section 11.04 is given, the party receiving
-------------
such notice shall give a notice (a "Buy/Sell Notice") to the terminating party
and to the terminating party's accountants of its election to either sell all
(but not less than all) of the non-terminating party's (or its affiliate's)
interest in the Owner (and in this Agreement, with respect to the Operator) to
the terminating party (or its affiliate) or to buy all (but not less than all)
of the terminating party's (or its affiliate's) interest in the Owner (and in
this Agreement, with respect to the Operator), in either case at a purchase
price mutually agreed upon by such parties or at the fair market value of such
interest in the Owner (and in the Management Agreement, with respect to the
Operator) as determined by an appraiser selected by the terminating party and
reasonably acceptable to the non-terminating party.
(b) Without limiting reasonableness to such circumstances, a determination
made by the terminating party referred to in Section 11.04(a) of this Agreement
----------------
shall be deemed to be reasonable if based upon: (i) any written communication
from a gaming regulatory authority of the applicable state; or (ii) written
evidence that, if true, the terminating party's participation in, or involvement
with, this Management Agreement and/or Operator's management of the Complex
would violate any law, rule or regulation administrated by any gaming regulatory
authority, so long as such evidence is not induced in bad faith by its
recipient.
(c) The closing of any transfer of an interest in Owner (or in the
Management Agreement, with respect to the Operator) under this Section 11.04
-------------
shall take place at the principal office of the Owner or such other place as may
be agreed upon by the Operator and Owner on the first business day that is at
least ten (10) days after the date on which the purchase price is determined
under Section 11.04(a) of this Agreement, or such other date as may be agreed by
----------------
the Operator and the Owner.
(d) Notwithstanding any provision of this Agreement to the contrary, any
transfer of an interest in the Owner or this Agreement is subject to the prior
approval of the Board and all other applicable authorities.
11.05 Operator's Right to Fund Necessary Funds or Terminate. Upon the
-----------------------------------------------------
failure of Owner to furnish the funds required for Operator to properly manage
the Complex as contemplated herein or the failure of Owner to either compensate
or reimburse Operator as stipulated in this Agreement, Operator shall have the
right, but not the obligation, to either (a) advance the necessary funds to the
Owner as a loan, which loan will bear interest at a market rate of interest plus
400 basis points, or (b) terminate this Agreement (but only if such failure is
not solely as a result of any failure on the part of Operator's affiliate that
is a joint venturer of the Owner to fund its applicable portion of such funds),
said termination to become effective upon the expiration of the notice period
otherwise provided in this Agreement, unless cured by Owner within such period.
In the event Operator elects to exercise its rights under clause (a) of the
preceding sentence, Owner will, if requested by Operator, execute and deliver a
negotiable promissory note in form and substance satisfactory to Operator
evidencing such obligation. In the event (i) Cash Flow for the Complex
24
<PAGE>
is in excess of $1 for the immediately preceding fiscal quarter and (ii)
Operator elects to exercise its rights under clause (b) of the preceding
sentence, (x) it is agreed that any such termination shall not cause or create
any liability, responsibility, duty or obligation by Operator to Owner, and
Owner shall be deemed to have waived any rights or remedies it may have with
respect to such termination and (y) in addition to any and all other payments
and monies owed to Operator, including without limitation, accrued charges with
respect to insurance procured by Operator for Owner in accordance with Article
Six and accrued and unpaid Basic Management Fees and Complex Incentive Fees,
Owner shall be obligated to pay to Operator an amount equal to two (2) times the
sum of the Basic Management Fees and Complex Incentive Fees payable by Owner for
the immediately preceding twelve months of Owner.
11.06 Termination Buy-Out Offer. In the event of a termination of this
-------------------------
Agreement in accordance with the provisions of Sections 11.01 (other than
--------------
Section 11.01(b) at any time and Section 11.01(e) at any time prior to the
- ---------------- ----------------
Opening Date), 11.03 (other than with respect to a termination under Section
----- -------
13.13 where an approval described therein is not granted or is revoked or
- -----
suspended because of unsuitability on the part of Operator or its affiliates),
or 11.05, Owner will be deemed to have made an offer on the part of the Owner
-----
and/or its constituent partners (other than Operator and its affiliate) to
purchase Operator's or its affiliate's interest in Owner (the "Termination Buy-
out Offer") for an amount equal to (a) if Owner is terminating as a result of
Operator's breach of Sections 11.01(a), (c), (d) or (e) (with respect to Section
----------------- --- --- --- -------
11.01(e), only after the Opening Date), the lesser of Appraised Value (as
- --------
defined below) or book value of such interest, and (b) in the case of all other
instances of termination under Sections 11.01 (other than Section 11.01(b) at
-------------- ----------------
any time and Section 11.01(e) at any time prior to the Opening Date), 11.02,
---------------- -----
11.03 (other than with respect to a termination under Section 13.13 where an
- ----- -------------
approval described therein is not granted or is revoked or suspended because of
unsuitability on the part of Operator or its affiliates) or 11.05, the Appraised
-----
Value of such interest. Operator or its affiliate owning such interest in Owner,
in its sole and absolute discretion, may elect to accept or reject the
Termination Buy-out Offer. If Operator or its affiliate elects to accept the
Termination Buy-out Offer, it shall notify Owner in writing within thirty (30)
days of the giving of a notice of termination of this Agreement. The closing of,
and payment to Operator or its affiliate for, such Termination Buy-out Offer
shall occur no later than the effective date of Operator's termination as
manager of the Complex. The "Appraised Value" of Operator's or its affiliate's
ownership interest in Owner will be determined by an independent investment
banking firm of national standing chosen by Operator or its affiliate. All
costs (including investment banking fees) attributable to obtaining the
foregoing investment banking valuation shall be borne by the Owner and shall not
reduce the payment due to Operator or its Affiliate. If any party disputes the
Appraised Value as determined above, it may retain a second independent
investment banking firm of national standing to perform a second valuation. The
average of the initial valuation and any such subsequent valuation shall be the
Appraised Value and shall be binding on all parties. All costs (including
investment banking fees) attributable to obtaining any subsequent investment
banking valuation shall be paid solely by the party requesting such additional
valuation.
ARTICLE TWELVE
--------------
SUCCESSORS AND ASSIGNS
----------------------
25
<PAGE>
12.01 Assignments by Operator. Owner's consent shall not be required for
-----------------------
Operator to assign this Agreement or its rights and interest in the operation of
the Complex to any entity in which Hollywood Casino Corporation, either directly
or indirectly maintains a controlling interest and such assignment shall serve
to fully relieve and discharge Operator from any further duties or obligations
pursuant to this Agreement. In addition, Owner's consent shall not be required
for Operator to collaterally assign this Agreement or its rights and interest in
the operation of the Complex to any entity as security for indebtedness. Except
as hereinabove provided, neither Operator nor Owner shall assign this Agreement
or in any manner sell, assign or transfer its rights and interests in the
Complex without the prior written consent of the non-assigning party. It is
understood and agreed that any consent granted by the non-assigning party to any
such assignment shall not be deemed a waiver of the covenant herein contained
against assignment in any subsequent case.
12.02 Transfers by Owner. Any assignment, transfer or disposition by
------------------
Owner or any of its constituent partners of any interest in this Agreement or
the Complex, whether voluntary or involuntary, shall require that the assignee,
purchaser or recipient thereunder attorn to and be bound by this Agreement. In
addition, no assignment, transfer or other disposition of any interest in this
Agreement or the Complex shall be permitted if, in the good faith opinion of the
Operator, any such proposed assignment, transfer or disposition would
jeopardize, restrict, limit or create a right of cancellation of any approval,
consent or licensing of Operator or its affiliates by any gaming authorities or
other regulatory authorities. Owner agrees to notify Operator in writing at
least sixty (60) days prior to any such contemplated assignment, transfer or
disposition. In the event of a breach by Owner of the obligations set forth in
this Section 12.02, Operator shall have the right, in its sole and absolute
-------------
discretion, to elect to terminate this Agreement upon ninety (90) days prior
written notice to Owner and it is agreed that any such termination shall not
cause or create any liability, responsibility, duty or obligation by Operator to
Owner, and Owner shall be deemed to have waived any rights or remedies it may
have with respect to such termination. In the event of Operator's election to
terminate this Agreement in accordance with the preceding sentence, in
additional to any and all other payments and monies owed to Operator, including
without limitation, accrued charges with respect to insurance procured by
Operator for Owner in accordance with Article Six and accrued and unpaid Basic
Management Fees and Complex Incentive Fees, Owner shall be obligated to pay to
Operator an amount equal to two (2) times the sum of the Basic Management Fees
and Complex Incentive Fees payable by Owner for the immediately preceding fiscal
year of Owner.
12.03 Assigns Bound. Subject to the provisions of this Agreement
-------------
regarding and/or restricting sale or assignments as set forth elsewhere in this
Agreement, the terms, provisions, covenants, undertakings, agreements,
obligations and conditions of this Agreement shall be binding upon and shall
inure to the benefit of the successors in interest and the assigns of the
parties hereto with the same effect as if mentioned in each instance where the
party hereto is named or referred to, except that no assignment, transfer
pledge, mortgage, lease or sublease by or through Operator or by or through
Owner, as the case may be, in violation of the provision of this Agreement shall
vest any rights in the assignee, transferee, mortgagee, pledge, lessee,
sublessee or occupant.
ARTICLE THIRTEEN
----------------
26
<PAGE>
GENERAL PROVISIONS
------------------
13.01 Best Evidence. This Agreement shall be executed in original and
-------------
"Xerox" or photostatic copies and each copy bearing original signatures of the
parties hereto in ink shall be deemed an original.
13.02 Amendment or Modification. This Agreement may not be amended or
-------------------------
modified except by a writing signed by all parties hereto.
13.03 Governing Law. This Agreement shall be governed by and construed
-------------
under the laws of the State of Louisiana in effect on the date of the execution
of this Agreement. Notwithstanding the foregoing, this Agreement shall, as
required, be governed by and construed in accordance with the Louisiana Gaming
Control Act and the rules and regulations of the Louisiana Gaming Control Board
promulgated thereunder.
13.04 Interpretation. The preamble recitals of this Agreement are
--------------
incorporated into and made a part of this Agreement; titles of Sections and
Articles are for convenience only and are not to be considered a part of this
Agreement. All references to years shall mean a year commencing as of the first
day of January of each year. All references to the singular shall include the
plural and all references to gender shall, as appropriate, include other
genders.
13.05 Severability. In the event any one or more provisions of this
------------
Agreement is judicially declared null and void or otherwise unenforceable, the
remainder of this Agreement shall survive, unless such survival vitiates the
intent of the parties hereto.
13.06 Prohibition on Recordation/Covenant of Disclosure.
-------------------------------------------------
(a) Operator hereby covenants and agrees that it shall take no
action, nor authorize or suffer any one to take any action, the result of which
would be to cause this Agreement, or a memorandum thereof, to be filed of record
against the realty of the Complex. This covenant prohibiting recordation shall
not apply to the filing of a judgment lien by reason of an action or cause of
action arising from this Agreement or the breach thereof.
(b) Owner hereby covenants and agrees that it shall disclose the
existence, terms, provisions and conditions of this Agreement to any and all
prospective purchasers and mortgagees of the realty of the Complex.
13.07 Arbitration. Any dispute, controversy or claim arising out of or
-----------
related to this Agreement, shall be resolved in the following manner; provided,
however, that any dispute, controversy or claim arising out of or related to the
intellectual property rights of Operator (or Operator's parent, subsidiary or
affiliates) will not be subject to arbitration. The parties hereto shall refer
the matter to their chief executive officers for the negotiation of a mutually
satisfactory resolution. If no such resolution is reached, then at any time
after fifteen (15) days following the date the matter was referred to the chief
executive officers of the parties, either party hereto may notify the other of
its intention to have the claim finally settled by confidential arbitration in
27
<PAGE>
Denver, Colorado, in accordance with the Commercial Arbitration Rules of the
American Arbitration Association and in accordance with the Federal Rules of
Civil Procedure and Evidence applicable thereto. This agreement to arbitrate
shall be specifically enforceable in any court of competent jurisdiction.
13.08 Force Majeure. With the exception of payment obligations imposed
-------------
under this Agreement (which obligations are not subject to suspension,
extinguishment or cancellation as a consequence of this Section 13.08 or
-------------
otherwise), the parties to this Agreement shall be excused from the performance
of any obligation under this Agreement in the event such performance is hindered
or prevented by strike, boycott, lockout or other labor trouble; and storm,
fire, earthquake or Act of God; any riot, civil disturbance, or any act of war
or of the public enemy; the shortage, unavailability or disruption in the supply
of labor, materials, fuels or the disruption of postal, electrical, telephone or
other utility service; any present or future governmental law, ordinance, order
rule or regulation; or any other cause or contingency beyond the respective
parties' control, but only during such time as such party is unable due to a
specified reason herein to perform its obligations hereunder.
13.09 Waiver. None of the terms of this Agreement, including this Section
------ -------
13.09, or any term, right or remedy hereunder shall be deemed waived unless such
- -----
waiver is in writing and signed by the party to be charged therewith and in no
event by reason of any failure to assert or delay in asserting any such term,
right or remedy or similar term, right or remedy hereunder.
13.10 General Warranties. Each party hereto warrants and represents to
------------------
the other as follows:
(a) Each party has or will diligently pursue all necessary governmental
licenses and permits required to satisfy its obligations under this Agreement;
and,
(b) Each party has the right, power, title and authority to enter into
this Agreement.
13.11 Parol. This Agreement constitutes the entire agreement and
-----
understanding of the parties hereto with respect to the subject matter hereof,
and this Agreement supersedes any prior understandings, agreements, or
undertakings.
13.12 Effectiveness of Agreement. This Agreement shall be rendered void
---------------------------
and of no further force or effect if the Board fails to grant the Approval (as
defined in the Master Agreement).
13.13 Regulatory Approvals. This Agreement is subject to the approval
--------------------
of Operator's participation as manager of the Complex by the gaming authorities
in the States of Illinois, Mississippi and New Jersey or any other jurisdiction
in which either Operator or any of Operator's affiliated entities has a gaming
license, or an application for a gaming license, if any such approvals are
required. In the event that any of such approvals are not obtained, or are
revoked
28
<PAGE>
or suspended, Operator shall have the right to terminate this Agreement.
29
<PAGE>
IN WITNESS WHEREOF, the parties hereto have duly executed and delivered
this Agreement as of the day and year first above written.
QNOV
By: HWCC-Louisiana, Inc.
By: /s/ Jack E. Pratt
---------------------------
Name: Jack E. Pratt
-------------------------
Title: Chairman and President
------------------------
By: Sodak Louisiana, L.L.C.
By: /s/ Kevin L. Buntrock
---------------------------
Name: Kevin L. Buntrock
-------------------------
Title: Manager
------------------------
HWCC-SHREVEPORT, INC.
By: /s/ Jack E. Pratt
---------------------------
Name: Jack E. Pratt
-------------------------
Title: Chairman and President
------------------------
Exhibits:
- --------
A - Description of Complex
B- Technical Services Agreement
30
<PAGE>
EXHIBIT "A"
-----------
DESCRIPTION OF THE COMPLEX
[Not included]
Exhibit "A" - Page 1
<PAGE>
EXHIBIT "B"
-----------
TECHNICAL SERVICES AGREEMENT
[Not included]
Exhibit "B" - Page 1
<PAGE>
EXHIBIT 10.2
AMENDMENT TO MANAGEMENT SERVICES AGREEMENT
THIS AMENDMENT TO MANAGEMENT SERVICES AGREEMENT (this "Amendment") is made
and entered into as of the 2nd day of August, 1999, by and between HOLLYWOOD
CASINO SHREVEPORT (formerly QNOV), a Louisiana general partnership ("HCS") and
HWCC-SHREVEPORT, INC., a Louisiana corporation ("HWCC").
RECITALS:
--------
WHEREAS, HCS and HWCC previously entered into that certain Management
Services Agreement made and entered into as of September 22, 1998 (the
"Management Services Agreement");
WHEREAS, HCS and HWCC desire to amend the Management Services Agreement as
hereinafter set forth;
AGREEMENT:
---------
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
1. Amendment to Section 2.01. Clause (ii) of Section 2.01 of the
Management Services Agreement is hereby deleted and replaced with the
following:
"(ii) a pro rata portion of the compensation (including any and all
salaries, expenses, benefits, and the like) paid to Operator's employees or
those employees of Operator's affiliates for periods up to the Opening Date
during which they are performing project development services related to
the Complex."
2. Amendment to Section 7.03. The second and third sentences of Section
-------------------------
7.03(a) of the Management Services Agreement are hereby deleted and
replaced with a sentence which reads in its entirety as follows:
"As part of the services furnished by Operator under this Agreement,
Operator shall procure for the Complex, at Owner's sole cost and expense,
Operator's data processing computer software for the operation of the
Complex from Operator's affiliates."
3. Amendment to Section 7.04. Section 7.04 is hereby deleted and replaced
-------------------------
with the following:
"7.04 Intellectual Property. Operator shall procure for the Complex the
---------------------
use of the 'Hollywood Casino' name and related trademarks and trade dress
according to the terms and conditions of a license agreement to be entered
into by and between the owner of such marks and Owner."
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Amendment as of the date
first above written.
HCS:
By: HCS I, INC., its managing general
partner
By: /s/ Jack E. Pratt
--------------------
Name: Jack E. Pratt
Title: Chairman of the Board and Chief
Executive Officer
HWCC-SHREVEPORT, INC.
By: /s/ William D. Pratt
-----------------------
Name: William D. Pratt
Title: Executive Vice President, General
Counsel and Secretary
2
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF HOLLYWOOD CASINO CORPORATION AND
SUBSIDIARIES AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<CIK> 0000888245
<NAME> HOLLYWOOD CASINO CORPORATION
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1999
<PERIOD-START> APR-01-1999 JAN-01-1999
<PERIOD-END> JUN-30-1999 JUN-30-1999
<CASH> 141,162 141,162
<SECURITIES> 0 0
<RECEIVABLES> 5,133 5,133
<ALLOWANCES> 1,667 1,667
<INVENTORY> 1,328 1,328
<CURRENT-ASSETS> 197,896 197,896
<PP&E> 253,179 253,179
<DEPRECIATION> 86,842 86,842
<TOTAL-ASSETS> 408,153 408,153
<CURRENT-LIABILITIES> 35,893 35,893
<BONDS> 384,695 384,695
0 0
0 0
<COMMON> 2 2
<OTHER-SE> (20,291) (20,291)
<TOTAL-LIABILITY-AND-EQUITY> 408,153 408,153
<SALES> 0 0
<TOTAL-REVENUES> 76,151 145,924
<CGS> 0 0
<TOTAL-COSTS> 55,034 105,995
<OTHER-EXPENSES> 10,365 21,488
<LOSS-PROVISION> 200 324
<INTEREST-EXPENSE> 7,981 15,011
<INCOME-PRETAX> 2,571 3,106
<INCOME-TAX> 349 554
<INCOME-CONTINUING> 2,222 2,552
<DISCONTINUED> 0 0
<EXTRAORDINARY> (30,353) (30,353)
<CHANGES> 0 0
<NET-INCOME> (28,131) (27,801)
<EPS-BASIC> (1.13) (1.12)
<EPS-DILUTED> (1.12) (1.11)
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF HWCC - TUNICA, INC. AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000927801
<NAME> HWCC-TUNICA INC.
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1999
<PERIOD-START> APR-01-1999 JAN-01-1999
<PERIOD-END> JUN-30-1999 JUN-30-1999
<CASH> 14,499 14,499
<SECURITIES> 0 0
<RECEIVABLES> 2,764 2,764
<ALLOWANCES> 872 872
<INVENTORY> 749 749
<CURRENT-ASSETS> 19,563 19,563
<PP&E> 126,220 126,220
<DEPRECIATION> 41,526 41,526
<TOTAL-ASSETS> 116,247 116,247
<CURRENT-LIABILITIES> 11,591 11,591
<BONDS> 85,744 85,744
0 0
0 0
<COMMON> 0 0
<OTHER-SE> 18,912 18,912
<TOTAL-LIABILITY-AND-EQUITY> 116,247 116,247
<SALES> 0 0
<TOTAL-REVENUES> 28,287 54,662
<CGS> 0 0
<TOTAL-COSTS> 21,469 40,851
<OTHER-EXPENSES> 3,419 6,866
<LOSS-PROVISION> 125 174
<INTEREST-EXPENSE> 2,541 5,146
<INCOME-PRETAX> 733 1,625
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 733 1,625
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 733 1,625
<EPS-BASIC> 0 0
<EPS-DILUTED> 0 0
</TABLE>
