<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM-10Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended MARCH 31, 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>
<CAPTION>
Registrant Class Outstanding at May 10, 1999
- ------------------------------ ------------------------------ ---------------------------
<S> <C> <C>
HOLLYWOOD CASINO CORPORATION COMMON STOCK, $.0001 PAR VALUE 24,949,976 SHARES
HWCC-TUNICA, INC. COMMON STOCK, $.01 PAR VALUE 1,000 SHARES
</TABLE>
1
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
PART I: FINANCIAL INFORMATION
- ------------------------------
INTRODUCTORY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------
Hollywood Casino Corporation ("HCC" or the "Company") develops, owns and
operates 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 175
east of Dallas, Texas. Approximately 46% of HCC's outstanding common shares are
listed and traded on the Nasdaq National Market tier of the Nasdaq Stock Market
under the symbol HWCC. The remaining outstanding HCC common shares are owned by
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 both Hollywood Casino -
Aurora, Inc. ("HCA") and HWCC - Tunica, Inc. ("HCT"). HCA is an Illinois
corporation organized by the Pratt Family during 1990 for the purpose of
developing and owning the Aurora Casino. HCT is a Texas corporation formed by
HCC during 1993 to acquire and complete the Tunica Casino. Prior to December
31, 1996, HCC also owned approximately 80% of the common stock of Greate Bay
Casino Corporation ("GBCC"), a Delaware corporation, whose principal assets are
the Sands Hotel and Casino in Atlantic City, New Jersey (the "Sands") and
management and consulting agreements on the Aurora Casino and the Tunica Casino,
respectively. On December 31, 1996, HCC distributed the common stock of GBCC
owned by HCC to its shareholders. As a result of the dividend, GBCC is no
longer a subsidiary of HCC.
As further discussed in the Notes to Consolidated Financial Statements, HCC
issued $210,000,000 of 12 3/4% Senior Secured Notes (the "Senior Secured Notes")
due November 1, 2003, discounted to yield 13 3/4% per annum, through a public
offering in October 1995. The Senior Notes are unconditionally guaranteed on a
senior secured basis by HCT and by certain future subsidiaries of HCC. The
Senior Secured Notes are secured by, among other things, (i) substantially all
of the assets of HCT, (ii) a limited 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.
On April 21, 1999, the Company announced the commencement of a tender offer
for the outstanding Senior Secured Notes at an effective price of approximately
109.7% of face value. The tender offer expires on May 18, 1999; accordingly,
the total principal amount of Senior Secured Notes tendered by noteholders can
not yet be determined. However, in excess of 96% of the total principal amount
outstanding has been tendered to date. Also on April 21, 1999, the Company
announced a proposed private debt offering of $350,000,000 principal amount of
new senior secured notes. Net proceeds of the proposed offering would be used,
among other things, to purchase and discharge the currently outstanding Senior
Secured Notes, to expand the Aurora Casino's operations, to purchase and
terminate the management and consulting agreements on the Aurora and Tunica
casinos and to fund a portion of HCC's equity investment in the Shreveport
Casino.
The consolidated financial statements and financial statements as of March
31, 1999 and for the three month periods ended March 31, 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 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
2
<PAGE>
positions of HCC and HCT and the financial position of HCA as of March 31, 1999,
and the results of their operations and cash flows for the three month periods
ended March 31, 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 three
month period ended March 31, 1999 are not necessarily indicative of the
operating results to be reported for the full year.
3
<PAGE>
INDEPENDENT ACCOUNTANTS' REPORT
To the Board of Directors and Stockholders of
Hollywood Casino Corporation
Dallas, Texas
We have reviewed the accompanying condensed consolidated balance sheet of
Hollywood Casino Corporation and subsidiaries as of March 31, 1999, and the
related condensed consolidated statements of operations and cash flows for the
three month periods ended March 31, 1999 and 1998. These financial statements
are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and of making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to such condensed consolidated financial statements for them to be in
conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Hollywood Casino Corporation and
subsidiaries as of December 31, 1998, and the related consolidated statements of
operations, shareholders' equity (deficit) and cash flows for the year then
ended (not presented herein); and in our report dated February 23, 1999, we
expressed an unqualified opinion on those consolidated financial statements. In
our opinion, the information set forth in the accompanying condensed
consolidated balance sheet as of December 31, 1998 is fairly stated, in all
material respects, in relation to the consolidated balance sheet from which it
has been derived.
DELOITTE & TOUCHE LLP
Dallas, Texas
April 30, 1999
4
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
MARCH 31,
1999 DECEMBER 31,
(UNAUDITED) 1998
------------- -------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 53,481,000 $ 42,118,000
Short-term investments 978,000 3,905,000
Accounts receivable, net of allowances of
$1,552,000 and $1,468,000, respectively 2,818,000 2,368,000
Inventories 1,149,000 1,385,000
Deferred income taxes 845,000 890,000
Refundable deposits and other
current assets 1,971,000 1,908,000
Due from affiliates, net of valuation allowances 8,671,000 8,893,000
------------ ------------
Total current assets 69,913,000 61,467,000
------------ ------------
Investment in unconsolidated affiliates 4,659,000 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 40,353,000 40,166,000
Operating equipment 79,631,000 77,192,000
Construction in progress 4,250,000 3,227,000
------------ ------------
252,106,000 248,457,000
Less - accumulated depreciation
and amortization (84,292,000) (80,642,000)
------------ ------------
Net property and equipment 167,814,000 167,815,000
------------ ------------
Other Assets:
Deferred financing costs 4,582,000 4,792,000
Land rights 7,199,000 7,250,000
Due from affiliates, net of valuation allowances 12,359,000 12,359,000
Land held for sale, net of valuation allowances 5,504,000 6,232,000
Other assets 6,360,000 6,244,000
------------ ------------
Total other assets 36,004,000 36,877,000
------------ ------------
$278,390,000 $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 BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
MARCH 31,
1999 DECEMBER 31,
(UNAUDITED) 1998
-------------- --------------
<S> <C> <C>
Current Liabilities:
Current maturities of long-term debt
and capital lease obligations $ 8,517,000 $ 7,914,000
Accounts payable 3,823,000 4,578,000
Accrued liabilities -
Salaries and wages 3,558,000 5,023,000
Interest 11,503,000 4,872,000
Gaming and other taxes 6,500,000 1,613,000
Insurance 3,014,000 2,940,000
Other 3,828,000 4,503,000
Other current liabilities 2,984,000 3,311,000
------------- -------------
Total current liabilities 43,727,000 34,754,000
------------- -------------
Long-Term Debt 198,138,000 199,667,000
------------- -------------
Capital Lease Obligations 19,800,000 19,948,000
------------- -------------
Other Noncurrent Liabilities 5,774,000 5,755,000
------------- -------------
Commitments and Contingencies
Minority Interest in Limited Partnership 3,109,000 3,104,000
------------- -------------
Shareholders' 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 (209,086,000) (209,416,000)
------------- -------------
Total shareholders' equity 7,842,000 7,512,000
------------- -------------
$ 278,390,000 $ 270,740,000
============= =============
</TABLE>
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated balance sheets.
6
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------------
1999 1998
------------ ------------
<S> <C> <C>
Revenues:
Casino $66,345,000 $59,906,000
Rooms 2,394,000 2,007,000
Food and beverage 6,984,000 6,781,000
Other 970,000 917,000
----------- -----------
76,693,000 69,611,000
Less - promotional allowances (6,920,000) (5,804,000)
----------- -----------
Net revenues 69,773,000 63,807,000
----------- -----------
Expenses:
Casino 48,134,000 42,372,000
Rooms 269,000 445,000
Food and beverage 2,187,000 2,173,000
Other 495,000 683,000
General and administrative 4,585,000 4,305,000
Consulting fees 300,000 300,000
Depreciation and amortization 4,000,000 4,214,000
Development 215,000 255,000
----------- -----------
Total expenses 60,185,000 54,747,000
----------- -----------
Income from operations 9,588,000 9,060,000
----------- -----------
Non-operating income (expense):
Interest income 359,000 672,000
Interest expense (7,389,000) (7,451,000)
Loss on disposal of assets (1,000) (1,000)
----------- -----------
Total non-operating expense, net (7,031,000) (6,780,000)
----------- -----------
Income before income taxes and other item 2,557,000 2,280,000
Income tax provision (205,000) (291,000)
----------- -----------
Income before other item 2,352,000 1,989,000
Minority interest in earnings of Limited Partnership (Note 1) (2,022,000) (1,920,000)
----------- -----------
Net income $ 330,000 $ 69,000
=========== ===========
Basic and diluted net income per common share $.01 $.00
=========== ===========
</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>
THREE MONTHS ENDED
MARCH 31,
--------------------------
1999 1998
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 330,000 $ 69,000
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization, including accretion
of debt discount 4,274,000 4,456,000
Loss on disposal of assets 1,000 1,000
Minority interest in earnings of Limited Partnership 2,022,000 1,920,000
Provision for doubtful accounts 124,000 240,000
Deferred income tax provision 2,000 162,000
Increase in accounts receivable (574,000) (18,000)
Increase in accounts payable and accrued expenses 8,907,000 12,376,000
Net change in other current assets and liabilities 68,000 455,000
Net change in other noncurrent assets and liabilities 399,000 (399,000)
----------- -----------
Net cash provided by operating activities 15,553,000 19,262,000
----------- -----------
INVESTING ACTIVITIES:
Purchases of property and equipment (3,698,000) (1,899,000)
Short-term investments 2,927,000 (917,000)
Collections on notes receivable - 4,400,000
Proceeds from disposal of assets 37,000 -
Investments in unconsolidated affiliates (66,000) -
----------- -----------
Net cash (used in) provided by investing activities (800,000) 1,584,000
----------- -----------
FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt 1,876,000 -
Deferred financing costs (25,000) -
Repayments of long-term debt (3,086,000) (944,000)
Payments on capital lease obligations (138,000) (139,000)
Limited partnership distributions (2,017,000) (2,159,000)
----------- -----------
Net cash used in financing activities (3,390,000) (3,242,000)
----------- -----------
Net increase in cash and cash equivalents 11,363,000 17,604,000
Cash and cash equivalents at beginning of period 42,118,000 38,156,000
----------- -----------
Cash and cash equivalents at end of period $53,481,000 $55,760,000
=========== ===========
</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 both Hollywood Casino -
Aurora, Inc. ("HCA") and HWCC - Tunica, Inc. ("HCT"). 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.
The Company believes that its two gaming operations 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 Notes 6 and 8).
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, 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 "Shreveport
9
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
Casino"). 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%. HCC's 50% investment in the joint venture ($2,500,000) is
reflected on the accompanying consolidated balance sheets as investment in
unconsolidated affiliate (see Note 8).
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
$3,464,000 and $3,432,000, respectively, on the accompanying consolidated
balance sheets at March 31, 1999 and December 31, 1998.
In June 1998, the FASB issued a new statement, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"), effective for fiscal years
beginning after June 15, 1999. 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 March 31, 1999 and for the
three month periods ended March 31, 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 March 31, 1999, and the results of its operations and cash flows for
the three month periods ended March 31, 1999 and 1998.
(2) EARNINGS PER COMMON SHARE -
Basic earnings per common share is calculated by dividing the net income by
the weighted average number of shares of common stock outstanding. Diluted
earnings per common share is calculated for periods in which income from
continuing operations was earned by dividing the components of net income by the
weighted average number of shares of common stock and potential common shares
outstanding. All potential common shares are excluded from the calculation of
diluted net loss per share for periods during which a loss was incurred because
the effect of their inclusion would be antidilutive.
10
<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 earnings per share is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------
1999 1998
---------- ----------
<S> <C> <C>
Shares used in the calculation of:
- ------------------------------------
Basic net income per share 24,949,976 24,935,306
Diluted net income per share 24,950,730 24,950,781
</TABLE>
The number of shares used in the calculation of diluted earnings per share
for the three month periods ended March 31, 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 1,132,000 and 688,334,
respectively, for the three month periods ended March 31, 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>
MARCH 31, DECEMBER 31,
1999 1998
------------- -------------
<S> <C> <C>
Indebtedness of HCC:
12 3/4% Senior Secured Notes, due 2003, net of discount
of $6,739,000 and $7,013,000, respectively (a) $197,973,000 $200,199,000
Promissory note due to affiliate (Note 6) 2,662,000 2,836,000
------------ ------------
200,635,000 203,035,000
------------ ------------
Indebtedness of HCA:
Promissory note to bank (b) 1,748,000 1,900,000
------------ ------------
Indebtedness of HCT :
Equipment loans (c) 2,959,000 1,291,000
Bank credit facility (d) 410,000 462,000
------------ ------------
3,369,000 1,753,000
------------ ------------
Total indebtedness 205,752,000 206,688,000
Less - current maturities (7,614,000) (7,021,000)
------------ ------------
Total long-term debt $198,138,000 $199,667,000
============ ============
</TABLE>
____________________
(a) During October 1995, HCC issued $210,000,000 of 12 3/4% Senior Secured
Notes (the "Senior Secured Notes") due November 1, 2003, discounted to
yield 13 3/4% per annum. Interest on the Senior Secured Notes is payable
semiannually on May 1 and November 1 of each year.
11
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
The Senior Secured Notes are unconditionally guaranteed on a senior secured
basis by HCT and may be guaranteed by certain future subsidiaries of HCC.
HCA is not a guarantor. The Senior Secured Notes and related guarantees
are secured by, among other things, (i) substantially all of the assets of
HCT and future guarantors, (ii) a lien on substantially all of the assets
of HCA, (iii) a pledge of the capital stock of certain subsidiaries of HCC
and (iv) the collateral assignment of any future management contracts
entered into by HCC. The limitation on the lien (ii) above was originally
$39,007,000 and is subject to reduction for principal payments on an
intercompany note between HCC and HCA. The outstanding balance of the
intercompany note was $31,507,000 at both March 31, 1999 and December 31,
1998. The intercompany note requires semiannual principal payments of
$2,500,000 commencing October 15, 1997 with the balance due November 1,
2003.
The Senior Secured Notes are redeemable at the option of HCC any time on or
after November 1, 1999 at 106.375% of the then outstanding principal
amount, decreasing to 103.1875% and 100%, respectively, on November 1, 2000
and 2001. Commencing with the November 1, 1997 interest payment date and
at each subsequent interest payment date, HCC is required to make an offer
within 30 business days to purchase not more than $2,500,000 in principal
amount of the Senior Secured Notes at a price of 106.375% of the principal
amount tendered. During December 1998, HCC made such an offer resulting in
the redemption of $2,500,000 in principal amount of the Senior Secured
Notes in January 1999. On April 21, 1999, HCC announced plans to purchase
and discharge the Senior Secured Notes (see Note 8).
The indenture to the Senior Secured Notes contains various provisions
limiting the ability of HCC and certain defined subsidiaries to, among
other things, pay dividends or make other restricted payments; incur
additional indebtedness or issue preferred stock; create liens; create
dividend or other payment restrictions affecting certain defined
subsidiaries; enter into mergers or consolidations or make sales of all or
substantially all assets of HCC, HCT or any future guarantor; and enter
into transactions with certain affiliates.
(b) During September 1998, HCA entered into a bank loan agreement to borrow up
to $2,000,000 on an unsecured basis. Borrowings under the agreement are
payable in 36 monthly installments including interest at the rate of 7.5%
per annum. HCA borrowed $2,000,000 under the agreement during October
1998.
(c) The equipment loans are payable monthly including interest at effective
rates ranging from 7.8% to 12.9% per annum and mature at various dates
between 1999 and 2002.
(d) 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.
12
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
Scheduled payments of long-term debt as of March 31, 1999 are set forth
below:
1999 (nine months) $ 4,422,000
2000 7,759,000
2001 7,370,000
2002 5,728,000
2003 187,212,000
------------
Total $212,491,000
============
Interest paid amounted to $484,000 and $428,000, respectively, during the
three month periods ended March 31, 1999 and 1998.
(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 5/8% per annum. The second lease has an initial term ending in September
2026 with the right to extend the lease for up to 20 additional years. Rental
payments during the first 15 years equal the lessor's debt service costs related
to the industrial revenue bond issue used to finance a portion of the
construction costs of the parking garage. The remaining construction costs were
funded by HCA. In addition, HCA pays base rent equal to $15,000 per month,
subject to a credit of $615,000 at the rate of $10,000 per month, for
improvements made to the lessor's North Island Center banquet and meeting
facilities. HCA is also responsible for additional rent, consisting of costs
such as 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 March 31, 1999 and December 31,
1998 in the amount of $27,358,000. Assets under capital leases with an original
cost of $7,260,000, are included in operating equipment on the accompanying
consolidated balance sheets at both March 31, 1999 and December 31, 1998.
Amortization expense with respect to these assets amounted to $245,000 and
$332,000 during the three month periods ended March 31, 1999 and 1998,
respectively. Accumulated amortization at March 31, 1999 and December 31, 1998
with respect to these assets amounted to $11,050,000 and $10,805,000,
respectively.
13
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
Future minimum lease payments under capital lease obligations as of March
31, 1999 are as follows:
1999 (nine months) $ 2,088,000
2000 2,483,000
2001 2,532,000
2002 2,643,000
2003 2,660,000
Thereafter 21,417,000
------------
Total minimum lease payments 33,823,000
Less amount representing interest (13,120,000)
------------
Present value of future
minimum lease payments 20,703,000
Current capital lease obligation (903,000)
------------
Long-term capital lease obligation $ 19,800,000
------------
(5) INCOME TAXES
Components of HCC's provision for income taxes consist of the following:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------------
1999 1998
------------ -----------
<S> <C> <C>
Current:
Federal $ - $ -
State (203,000) (129,000)
Deferred:
Federal (153,000) (107,000)
State (2,000) (41,000)
Change in valuation allowance 153,000 (14,000)
------------ -----------
$ (205,000) $ (291,000)
============ ===========
</TABLE>
Federal tax payments of $150,000 were made during the three month period
ended March 31, 1999; no such payments were made during the three month period
ended March 31, 1998. No state tax payments were made during either of the
three month periods ended March 31, 1999 or 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.
14
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
At March 31, 1999, HCC and its subsidiaries have tax net operating loss
carryforwards ("NOL's") totaling approximately $4,300,000, 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
$415,000, respectively. Alternative minimum tax credits do not expire and none
of the other tax credits begin to expire until the year 2010. Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS
109") requires that the tax benefit of such NOL's and credit carryforwards,
together with the tax benefit of deferred tax assets resulting from temporary
differences, be recorded as an asset and, to the extent that management can not
assess that the utilization of all or a portion of such NOL's and deferred tax
assets is more likely than not, a valuation allowance should be recorded.
Management believes that it is more likely than not that future consolidated
taxable income of HCC (primarily from the Aurora Casino and the Tunica Casino)
will be sufficient to utilize a portion of the net deferred tax assets.
Accordingly, valuation allowances have been established which result in net
deferred tax assets of $1,841,000 and $1,843,000 at March 31, 1999 and December
31, 1998, respectively.
The components of the net deferred tax asset and classification on the
accompanying consolidated balance sheets are as follows:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
------------- -------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 1,469,000 $ 1,305,000
Valuation and other allowances 8,271,000 8,241,000
Alternative minimum tax credit 4,913,000 4,913,000
Investment and jobs tax credits 415,000 415,000
Basis in limited partnership 2,890,000 2,890,000
Other liabilities and accruals 3,981,000 4,145,000
Benefits accrual 1,711,000 1,711,000
Other 894,000 724,000
------------ ------------
Total deferred tax assets 24,544,000 24,344,000
------------ ------------
Deferred tax liabilities:
Depreciation and amortization (8,842,000) (8,610,000)
Basis in debt obligations (850,000) (727,000)
------------ ------------
Total deferred tax liabilities (9,692,000) (9,337,000)
------------ ------------
Net deferred tax asset 14,852,000 15,007,000
Valuation allowance (13,011,000) (13,164,000)
------------ ------------
$ 1,841,000 $ 1,843,000
============ ============
Classified as:
Current deferred income tax asset $ 845,000 $ 890,000
Other assets 1,580,000 1,524,000
Other noncurrent liabilities (584,000) (571,000)
</TABLE>
15
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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 March 31,
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 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. Interest receivable
amounting to $1,781,000, net of a valuation allowance of $232,000 in 1999, is
included in due from affiliates on the accompanying consolidated balance sheets
at both March 31, 1999 and December 31, 1998. Interest income earned on loans
and advances to GBCC amounted to $232,000 during the three month period ended
March 31, 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 $94,000 and $116,000, respectively, during the three month periods
ended March 31, 1999 and 1998. Accrued interest of $32,000 and $34,000 with
respect to the note is included in interest payable on the accompanying
consolidated balance sheets at March 31, 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
16
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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 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
during each of the three month periods ended March 31, 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 March 31, 1999 and 1998 amounted to
$289,000 and $297,000, respectively. At March 31, 1999 and December 31, 1998,
unpaid charges of $166,000 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 $157,000 and $296,000, respectively, for the three month periods
ended March 31, 1999 and 1998. Net receivables from GBCC and its subsidiaries
in the amount of $107,000 and $179,000 are included in due from affiliates on
the accompanying consolidated balance sheets at March 31, 1999 and December 31,
1998, respectively.
17
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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 three month
period ended March 31, 1999.
(7) COMMITMENTS AND CONTINGENCIES
GROUND LEASE -
HCT entered into a ground lease covering 70 acres of land on which the
Tunica Casino was constructed. The ground lease is for an initial term of five
years from the opening date of the facility and, at HCT's option, may be renewed
for nine additional five-year periods. Obligations under the ground lease during
the initial term include both minimum monthly fixed payments and percentage
rent, which in the aggregate will be the greater of 4% of Gross Revenues, as
defined, or $1,100,000 per year. HCT is responsible for all operating and other
expenses of the property in accordance with the lease terms. During the three
month periods ended March 31, 1999 and 1998, HCT expensed $995,000 and $940,000,
respectively, in connection with the ground lease.
PLANET HOLLYWOOD LITIGATION -
Planet Hollywood International, Inc., a Delaware corporation, and Planet
Hollywood (Region IV), Inc., a Minnesota corporation (collectively, "PHII"),
filed a complaint in the United States District Court for the Northern District
of Illinois, Eastern Division on July 29, 1996 against HCC, HCA and a member of
the Pratt Family (collectively, the "Original Hollywood Defendants"). The
Original Hollywood Defendants filed with the Court on September 18, 1996 an
answer to PHII's lawsuit, along with numerous counterclaims against PHII, Robert
Earl and Keith Barish (collectively, the "PHII Defendants"). PHII filed with
the Court on January 21, 1997, an amendment to their complaint which, among
other things, added HCT (together with the Original Hollywood Defendants, the
"Hollywood Defendants") and GBCC as defendants. The Original Hollywood
Defendants filed with the Court on February 4, 1997, and GBCC and HCT filed with
the Court on February 20, 1997, answers and counterclaims to such amended
complaint.
In its lawsuit, PHII alleges, among other things, that the Hollywood
Defendants and GBCC have, in opening and operating the Hollywood Casino concept,
infringed on PHII's trademark, service mark and 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
18
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
their planned use of their mark in connection with casino services, infringed on
certain of HCC's service marks and trade dress and have engaged in unfair
competition.
Given the uncertainties inherent in litigation, no assurance can be given
that the Hollywood Defendants will prevail in this litigation; however, the
Hollywood Defendants believe that PHII's claims are without merit and intend to
defend their position and pursue their counterclaims vigorously. The
accompanying consolidated financial statements do not include any adjustments
that might result from the outcome of the uncertainties described above.
OTHER LITIGATION -
On October 8, 1998, HCC filed a complaint in the District Court of Dallas
County, Texas against Arthur Andersen LLP, HCC's 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 initial
stages of discovery.
HCC and its subsidiaries are parties in various legal proceedings with
respect to the conduct of casino and hotel operations. Although a possible
range of loss cannot be estimated, in the opinion of management, based upon the
advice of counsel, settlement or resolution of these proceedings should not have
a material adverse impact on the consolidated financial position or results of
operations of HCC and its subsidiaries.
(8) SUBSEQUENT EVENTS
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
$2,500,000 (the amount the joint venture partner contributed to the project),
$1,000 of which is to be paid at closing and 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, HCC now has a 100% interest in the Shreveport Casino with
the remaining joint venture partner holding a 10% residual interest in the event
the project is sold. Effective with the April 23, 1999 closing of HCC's
acquisition of the additional joint venture interest, the joint venture will be
reflected on a consolidated basis in the financial statements of HCC. The total
estimated cost of the Shreveport Casino is approximately $200,000,000. The
Company anticipates contributing approximately $50,000,000 as an equity
investment in the project with the remaining construction and preopening costs,
estimated at $150,000,000, to come from project specific financing that will be
non-recourse to HCC. The Company anticipates securing financing for a portion
of the equity investment (see below) and all of the project financing and
commencing construction in the summer of 1999 with a planned opening date
approximately 14 months later.
On April 21, 1999, the Company announced the commencement of a tender offer
for the outstanding Senior Secured Notes at an effective price of approximately
109.7% of face value. The tender offer expires on May 18, 1999; accordingly,
the total principal amount of Senior Secured Notes tendered by noteholders can
not yet be determined. However, in excess of 96% of the total principal amount
outstanding has been tendered to date. Also on April 21, 1999, the Company
announced a proposed private debt offering of $350,000,000 principal amount of
new senior secured notes. Net proceeds of the proposed offering would be used,
among other things, to purchase and discharge the currently outstanding
19
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
Senior Secured Notes, to expand the Aurora Casino's operations, to purchase and
terminate the management and consulting agreements on the Aurora and Tunica
casinos by acquiring PCC (see below) and to fund a portion of HCC's equity
investment in the Shreveport Casino.
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 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 would purchase the stock of PCC from GBCC for nominal
consideration and satisfy PCC's obligations as part of a debt restructuring (the
"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 currently plans to satisfy PCC's obligations by
redeeming the newly issued note for approximately $40,300,000; 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 have incurred additional debt
and associated interest with respect to its refinancing (see above) but 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
$2,322,000 for the three month period ended March 31, 1999 and $7,694,000 for
the year ended December 31, 1998.
The successful completion of the Restructuring will require that PCC and PRT
Funding file for protection under Chapter 11 with the above transactions
included as part of a pre-negotiated plan of reorganization. Such plan will
require approval by the bankruptcy court as well as by various gaming regulatory
organizations.
20
<PAGE>
HOLLYWOOD CASINO - AURORA, INC.
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
MARCH 31,
1999 DECEMBER 31,
(UNAUDITED) 1998
------------- -------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 20,302,000 $ 9,718,000
Accounts receivable, net of allowances
of $728,000 and $655,000, respectively 1,108,000 1,128,000
Inventories 532,000 606,000
Deferred income taxes 1,636,000 1,540,000
Due from affiliates 78,000 428,000
Prepaid expenses and other current assets 697,000 1,010,000
------------ ------------
Total current assets 24,353,000 14,430,000
------------ ------------
Property and Equipment:
Land improvements 3,167,000 3,167,000
Buildings and improvements 46,205,000 46,205,000
Riverboats 37,829,000 37,642,000
Operating equipment 37,494,000 37,192,000
Construction in progress 654,000 615,000
------------ ------------
125,349,000 124,821,000
Less - accumulated depreciation and amortization (42,898,000) (41,114,000)
------------ ------------
Net property and equipment 82,451,000 83,707,000
------------ ------------
Other Assets 2,177,000 2,173,000
------------ ------------
$108,981,000 $100,310,000
============ ============
</TABLE>
The accompanying introductory notes and notes to financial statements are an
integral part of these balance sheets.
21
<PAGE>
HOLLYWOOD CASINO - AURORA, INC.
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
BALANCE SHEETS
LIABILITIES AND SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
MARCH 31,
1999 DECEMBER 31,
(UNAUDITED) 1998
------------- ------------
<S> <C> <C>
Current Liabilities:
Current maturities of long-term debt
and capital lease obligations $ 6,539,000 $ 6,517,000
Accounts payable 1,796,000 2,199,000
Accrued liabilities -
Salaries and wages 1,358,000 2,300,000
Interest 2,224,000 1,058,000
Gaming and other taxes 5,515,000 981,000
Insurance 1,123,000 965,000
Other 1,663,000 1,374,000
Due to affiliates 3,401,000 2,109,000
Other current liabilities 773,000 993,000
------------ ------------
Total current liabilities 24,392,000 18,496,000
------------ ------------
Long-Term Debt 27,619,000 27,783,000
------------ ------------
Capital Lease Obligations 19,800,000 19,948,000
------------ ------------
Deferred Income Taxes 5,494,000 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 6,120,000 3,164,000
------------ ------------
Total shareholder's equity 31,676,000 28,720,000
------------ ------------
$108,981,000 $100,310,000
============ ============
</TABLE>
The accompanying introductory notes and notes to financial statements are an
integral part of these balance sheets.
22
<PAGE>
HOLLYWOOD CASINO - AURORA, INC.
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------------
1999 1998
------------ ------------
<S> <C> <C>
Revenues:
Casino $41,809,000 $37,103,000
Food and beverage 3,348,000 3,233,000
Other 654,000 622,000
----------- -----------
45,811,000 40,958,000
Less - promotional allowances (2,418,000) (2,238,000)
----------- -----------
Net revenues 43,393,000 38,720,000
----------- -----------
Expenses:
Casino 30,150,000 25,961,000
Food and beverage 1,282,000 1,202,000
Other 222,000 322,000
General and administrative 3,806,000 3,781,000
Depreciation and amortization 1,785,000 1,924,000
----------- -----------
Total expenses 37,245,000 33,190,000
----------- -----------
Income from operations 6,148,000 5,530,000
----------- -----------
Non-operating income (expense):
Interest income 64,000 36,000
Interest expense (1,434,000) (1,590,000)
Gain on disposal of assets 1,000 2,000
----------- -----------
Total non-operating expense, net (1,369,000) (1,552,000)
----------- -----------
Income before income taxes 4,779,000 3,978,000
Income tax provision (1,823,000) (1,520,000)
----------- -----------
Net income $ 2,956,000 $ 2,458,000
=========== ===========
</TABLE>
The accompanying introductory notes and notes to financial statements
are an integral part of these financial statements.
23
<PAGE>
HOLLYWOOD CASINO - AURORA, INC.
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------------
1999 1998
------------- -----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 2,956,000 $ 2,458,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 1,785,000 1,924,000
Provision for doubtful accounts 75,000 88,000
Gain on disposal of assets (1,000) (2,000)
Deferred income tax provision 35,000 395,000
(Increase) decrease in receivables (55,000) 181,000
Increase in accounts payable and accrued liabilities 4,802,000 7,994,000
Net change in affiliate accounts 1,642,000 1,032,000
Net change in other current assets and liabilities 167,000 481,000
Net change in other assets and liabilities (4,000) (42,000)
----------- -----------
Net cash provided by operating activities 11,402,000 14,509,000
----------- -----------
INVESTING ACTIVITIES:
Purchases of property and equipment (529,000) (1,344,000)
Proceeds from sale of assets 1,000 -
----------- -----------
Net cash used in investing activities (528,000) (1,344,000)
----------- -----------
FINANCING ACTIVITIES:
Repayments of debt (152,000) (636,000)
Payments on capital lease obligations (138,000) (139,000)
Dividends - (5,079,000)
----------- -----------
Net cash used in financing activities (290,000) (5,854,000)
----------- -----------
Net increase in cash and cash equivalents 10,584,000 7,311,000
Cash and cash equivalents at beginning of period 9,718,000 11,594,000
----------- -----------
Cash and cash equivalents at end of period $20,302,000 $18,905,000
=========== ===========
</TABLE>
The accompanying introductory notes and notes to financial statements
are an integral part of these financial statements.
24
<PAGE>
HOLLYWOOD CASINO - AURORA, INC.
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
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.
25
<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"), effective for fiscal years
beginning after June 15, 1999. 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 March 31, 1999 and for the three month
periods ended March 31, 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 March 31, 1999 and the results of its
operations and cash flows for the three month periods ended March 31, 1999 and
1998.
(2) LONG-TERM DEBT AND PLEDGE OF ASSETS
HCA's long-term indebtedness consists of the following:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
------------ -------------
<S> <C> <C>
12 3/4% Promissory Note to HCC, due on
November 1, 2003 (a) $31,507,000 $31,507,000
Promissory note to bank (b) 1,748,000 1,900,000
----------- -----------
Total indebtedness 33,255,000 33,407,000
Less - current maturities (5,636,000) (5,624,000)
----------- -----------
Total long-term debt $27,619,000 $27,783,000
=========== ===========
</TABLE>
_________________
(a) The intercompany note accrues interest at the rate of 12 3/4% per annum
payable semiannually on October 15 and April 15 of each year and requires
semiannual principal repayments of $2,500,000 commencing October 15, 1997
with the balance of the note due November 1, 2003. The note is pledged as
security with respect to HCC's 12 3/4% Senior Secured Notes due in 2003.
HCA is not a guarantor of HCC's indebtedness; however, the indebtedness is
secured, in part, by a lien (limited to the outstanding principal amount of
the intercompany note to HCC) on substantially all of the assets of HCA and
by a pledge of the capital stock of HCA.
26
<PAGE>
HOLLYWOOD CASINO - AURORA, INC.
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(b) During September 1998, HCA entered into a bank loan agreement to borrow up
to $2,000,000 on an unsecured basis. Borrowings under the agreement are
payable in 36 monthly installments including interest at the rate of 7.5%
per annum. HCA borrowed $2,000,000 under the agreement during October 1998.
As of March 31, 1999, future maturities of long-term debt are as follows:
1999 (nine months) $ 5,472,000
2000 5,674,000
2001 5,602,000
2002 5,000,000
2003 11,507,000
-----------
$33,255,000
===========
Interest paid for the three month periods ended March 31, 1999 and 1998
amounted to $268,000 and $257,000, 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 issue includes interest at rates between 7%
and 7 5/8% per annum. The second lease has an initial term ending in September
2026 with the right to extend the lease for up to 20 additional years. Rental
payments during the first 15 years equal the lessor's debt service costs related
to the industrial revenue bond issue used to finance a portion of the
construction costs of the parking garage. The remaining construction costs were
funded by HCA. In addition, HCA pays base rent equal to $15,000 per month,
subject to a credit of $615,000 at the rate of $10,000 per month for
improvements made to the lessor's North Island Center banquet and meeting
facilities. HCA is also responsible for additional rent, consisting of costs
such as 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 March 31, 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 March 31, 1999 and December 31, 1998.
Amortization expense with respect to these assets amounted to $245,000 during
each of the three month
27
<PAGE>
HOLLYWOOD CASINO - AURORA, INC.
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
periods ended March 31, 1999 and 1998. Accumulated amortization at March 31,
1999 and December 31, 1998 with respect to these assets amounted to $6,236,000
and $5,991,000, respectively.
Future minimum lease payments under capital lease obligations as of March
31, 1999 are as follows:
<TABLE>
<S> <C>
1999 (nine months) $ 2,088,000
2000 2,483,000
2001 2,532,000
2002 2,643,000
2003 2,660,000
Thereafter 21,417,000
-----------
Total minimum lease payments 33,823,000
Less - amount representing interest (13,120,000)
-----------
Present value of future minimum lease payments 20,703,000
Current capital lease obligation (903,000)
-----------
Long-term capital lease obligation $19,800,000
===========
</TABLE>
(4) INCOME TAXES
HCA's provision for income taxes consists of the following:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------------
1999 1998
----------- -----------
<S> <C> <C>
Current:
Federal $(1,589,000) $(1,005,000)
State (199,000) (120,000)
Deferred:
Federal (32,000) (353,000)
State (3,000) (42,000)
----------- -----------
$(1,823,000) $(1,520,000)
=========== ===========
</TABLE>
HCA is included in HCC's consolidated federal income tax return. Pursuant
to agreements between HCC and HCA, HCA's current provision for federal income
taxes is based on the amount of tax which would be provided if a separate
federal income tax return were filed. HCA paid no federal or state taxes during
the three month periods ended March 31, 1999 and 1998.
28
<PAGE>
HOLLYWOOD CASINO - AURORA, INC.
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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.
The components of HCA's net deferred tax liability are as follows:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
------------ -------------
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts $ 274,000 $ 246,000
Other liabilities and reserves 1,489,000 1,420,000
----------- -----------
Total deferred tax assets 1,763,000 1,666,000
----------- -----------
Deferred tax liabilities:
Depreciation and amortization (5,621,000) (5,489,000)
----------- -----------
Net deferred tax liability $(3,858,000) $(3,823,000)
----------- ===========
</TABLE>
Receivables and payables to HCC in connection with the aforementioned tax
allocation agreements at March 31, 1999 and December 31, 1998 are as follows:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
----------- -----------
<S> <C> <C>
Deferred tax assets $ 1,457,000 $ 1,373,000
Due (to) from affiliates (1,242,000) 347,000
Deferred tax liabilities (4,910,000) (4,793,000)
</TABLE>
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.
29
<PAGE>
HOLLYWOOD CASINO - AURORA, INC.
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(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 $2,600,000 and $2,546,000, respectively, during the three month
periods ended March 31, 1999 and 1998. Management and incentive fees payable at
March 31, 1999 and December 31, 1998 amounting to $2,094,000 and $2,067,000,
respectively, are included in due to affiliates on the accompanying balance
sheets.
HCA incurred interest with respect to its promissory note payable to HCC
(see Note 2) amounting to $1,004,000 and $1,163,000, respectively, for the three
month periods ended March 31, 1999 and 1998. Interest payable to HCC on such
note amounted to $1,852,000 and $848,000, respectively, at March 31, 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 March 31, 1999 and 1998 totaling $49,000
and $123,000, respectively. At March 31, 1999 and December 31, 1998, HCA had
net receivables of $12,000 and $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.
30
<PAGE>
HOLLYWOOD CASINO - AURORA, INC.
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
NOTES TO 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.
Given the uncertainties inherent in litigation, no assurance can be given
that the Hollywood Defendants will prevail in this litigation; however, the
Hollywood Defendants believe that PHII's claims are without merit and intend to
defend their position and pursue their counterclaims vigorously. The
accompanying financial statements do not include any adjustments that might
result from the outcome of the uncertainties described above.
OTHER LITIGATION -
HCA is a party in various legal proceedings with respect to the conduct of
casino operations. Although a possible range of loss can not be estimated, in
the opinion of management, based upon the advice of counsel, settlement or
resolution of the proceedings should not have a material adverse impact on the
financial position or results of operations of HCA.
31
<PAGE>
HWCC - TUNICA, INC. AND SUBSIDIARY
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
MARCH 31,
1999 DECEMBER 31,
(UNAUDITED) 1998
------------- -------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 12,475,000 $ 16,325,000
Short-term investments 978,000 3,905,000
Accounts receivable, net of allowances of
$824,000 and $813,000, respectively 1,791,000 1,167,000
Inventories 617,000 779,000
Deferred income taxes 1,402,000 1,451,000
Prepaid expenses and other current assets 973,000 770,000
------------ ------------
Total current assets 18,236,000 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 41,279,000 39,169,000
Construction in progress 3,596,000 2,612,000
------------ ------------
125,992,000 122,898,000
Less - accumulated depreciation and amortization (40,759,000) (38,910,000)
------------ ------------
Net property and equipment 85,233,000 83,988,000
------------ ------------
Other Assets:
Land rights 7,199,000 7,250,000
Other assets 4,886,000 4,826,000
------------ ------------
Total other assets 12,085,000 12,076,000
------------ ------------
$115,554,000 $120,461,000
============ ============
</TABLE>
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated balance sheets.
32
<PAGE>
HWCC - TUNICA, INC. AND SUBSIDIARY
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
MARCH 31,
1999 DECEMBER 31,
(UNAUDITED) 1998
------------- -------------
<S> <C> <C>
Current Liabilities:
Current maturities of long-term debt
and capital lease obligations $ 1,310,000 $ 775,000
Accounts payable 1,636,000 1,638,000
Accrued liabilities -
Salaries and wages 1,886,000 1,685,000
Interest 476,000 476,000
Gaming and other taxes 887,000 453,000
Insurance 1,889,000 1,975,000
Other 2,035,000 1,866,000
Other current liabilities 1,152,000 1,283,000
------------ ------------
Total current liabilities 11,271,000 10,151,000
------------ ------------
Long-Term Debt 86,104,000 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 (8,458,000) (9,350,000)
------------ ------------
Total shareholder's equity 18,179,000 25,287,000
------------ ------------
$115,554,000 $120,461,000
============ ============
</TABLE>
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated balance sheets.
33
<PAGE>
HWCC - TUNICA, INC. AND SUBSIDIARY
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------------
1999 1998
------------ ------------
<S> <C> <C>
Revenues:
Casino $24,536,000 $22,803,000
Rooms 2,394,000 2,007,000
Food and beverage 3,636,000 3,548,000
Other 311,000 280,000
----------- -----------
30,877,000 28,638,000
Less - promotional allowances (4,502,000) (3,566,000)
----------- -----------
Net revenues 26,375,000 25,072,000
----------- -----------
Expenses:
Casino 17,984,000 16,411,000
Rooms 269,000 445,000
Food and beverage 905,000 971,000
Other 273,000 324,000
General and administrative 1,479,000 1,557,000
Depreciation and amortization 1,966,000 2,020,000
----------- -----------
Total expenses 22,876,000 21,728,000
----------- -----------
Income from operations 3,499,000 3,344,000
----------- -----------
Non-operating income (expenses):
Interest income 135,000 122,000
Interest expense (2,740,000) (2,731,000)
Loss on disposal of assets (2,000) (3,000)
----------- -----------
Total non-operating expenses, net (2,607,000) (2,612,000)
----------- -----------
Income before income taxes 892,000 732,000
Income tax provision - -
----------- -----------
Net income $ 892,000 $ 732,000
=========== ===========
</TABLE>
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated statements.
34
<PAGE>
HWCC - TUNICA, INC. AND SUBSIDIARY
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------------
1999 1998
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 892,000 $ 732,000
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 1,966,000 2,020,000
Provision for doubtful accounts 49,000 152,000
Loss on disposal of assets 2,000 3,000
Increase in accounts receivable (673,000) (211,000)
Increase (decrease) in accounts payable
and accrued expenses 716,000 (450,000)
Net change in other current assets and liabilities (172,000) (20,000)
Net change in other noncurrent assets and liabilities 2,000 4,000
----------- -----------
Net cash provided by operating activities 2,782,000 2,230,000
----------- -----------
INVESTING ACTIVITIES:
Purchases of property and equipment (3,145,000) (511,000)
Short-term investments 2,927,000 -
Investment in unconsolidated affiliate (66,000) -
Proceeds from sale of assets 36,000 -
----------- -----------
Net cash used in investing activities (248,000) (511,000)
----------- -----------
FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt 1,876,000 -
Repayments of long-term debt (260,000) (154,000)
Dividends (8,000,000) -
----------- -----------
Net cash used in financing activities (6,384,000) (154,000)
----------- -----------
Net (decrease) increase in cash and cash equivalents (3,850,000) 1,565,000
Cash and cash equivalents at beginning of period 16,325,000 11,851,000
----------- -----------
Cash and cash equivalents at end of period $12,475,000 $13,416,000
=========== ===========
</TABLE>
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated statements.
35
<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 March 31,
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"), effective for fiscal years
beginning after June 15, 1999. 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.
36
<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 March 31, 1999 and for the
three month periods ended March 31, 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 March 31, 1999 and the results of its operations and cash flows for
the three month periods ended March 31, 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>
MARCH 31, DECEMBER 31,
1999 1998
----------- ------------
<S> <C> <C>
Promissory notes to HCC due November 1, 2003 (a) $84,045,000 $84,045,000
Equipment loans (b) 2,959,000 1,291,000
Bank credit facility (c) 410,000 462,000
----------- ------------
Total indebtedness 87,414,000 85,798,000
Less - current maturities (1,310,000) (775,000)
----------- ------------
Total long-term debt $86,104,000 $85,023,000
=========== ============
</TABLE>
______________
(a) During October 1995, HCC loaned $54,045,000 to HCT to repay its outstanding
mortgage indebtedness, together with the associated call premium and
certain accrued interest thereon, and loaned an additional $30,000,000 to
HCT to finance construction of a 352-room hotel tower and related amenities
and to fund development and construction of a themed gaming area. Such
intercompany loans were made with a portion of the note proceeds from HCC's
issue of $210,000,000 of 12 3/4% Senior Secured Notes (the "Senior Secured
Notes") due November 1, 2003, discounted to yield 13 3/4% per annum.
Interest on the loans from HCC accrues at the rate of 12 3/4% per annum and
is payable semiannually on April 15 and October 15 of each year. The
Senior Secured Notes are unconditionally guaranteed on a senior secured
basis by HCT and by certain future subsidiaries of HCC. The Senior Secured
Notes and related guarantees are secured by, among other things, (i)
substantially all of the assets of HCT and other future guarantors, (ii) a
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 $31,507,000
subject to semiannual reductions of $2,500,000.
37
<PAGE>
HWCC - TUNICA, INC. AND SUBSIDIARY
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
The indenture to the Senior Secured Notes contains various provisions
limiting the ability of HCC, HCT and certain defined subsidiaries to, among
other things, pay dividends or make other restricted payments; incur
additional indebtedness or issue preferred stock; create liens; create
dividend or other payment restrictions affecting certain defined
subsidiaries; enter into mergers or consolidations or make sales of all or
substantially all assets of HCC, HCT or any future guarantor; and enter
into transactions with certain affiliates.
(b) The equipment loans are payable monthly including interest at effective
rates ranging from 7.8% to 12.9% per annum and mature at various dates
between 1999 and 2002.
(c) HCT had a bank credit facility in the amount of $1,300,000 available to
borrow against until September 30, 1998. HCT borrowed $541,000 under the
credit facility during 1998 at the rate of 8.875% per annum. 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 March 31, 1999 are set forth
below:
1999 (nine months) $ 958,000
2000 1,343,000
2001 915,000
2002 153,000
2003 84,045,000
-----------
Total $87,414,000
===========
Interest paid, net of amounts capitalized, amounted to $2,740,000 and
$2,731,000, respectively, during the three month periods ended March 31, 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 1/4% per annum
and which expired during 1997. Assets under capital leases with an original
cost of $4,814,000 are included in operating equipment in the accompanying
consolidated balance sheets at both March 31, 1999 and at December 31, 1998 and
are fully amortized. Amortization expense for the three month period ended March
31, 1998 was $87,000. No future payment obligations exist with respect to such
capital leases.
38
<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
MARCH 31,
----------------------
1999 1998
---------- ----------
<S> <C> <C>
Provision for deferred federal income taxes $ 429,000 $ 264,000
Valuation allowance (429,000) (264,000)
--------- ---------
$ - $ -
========= =========
</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 three month periods ended March 31,
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 March 31, 1999, HCT had net operating loss carryforwards ("NOL's")
totaling approximately $15,000,000, which do not begin to expire until the year
2010. Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes", requires that the tax benefit of such NOL's, together with the
tax benefit of deferred tax assets resulting from temporary differences, be
recorded as an asset and, to the extent that management can not assess that the
utilization of all or a portion of such deferred tax assets is more likely than
not, a valuation allowance should be recorded. Based on the taxable income
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 a net deferred tax
asset of $1,992,000 at both March 31, 1999 and December 31, 1998.
39
<PAGE>
HWCC - TUNICA, INC. AND SUBSIDIARY
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
The components of HCT's net deferred tax asset are as follows:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
------------ -------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 5,104,000 $ 5,221,000
Alternative minimum tax credit carryforward 688,000 800,000
Allowance for doubtful accounts 280,000 277,000
Other liabilities and accruals 1,188,000 1,286,000
----------- -----------
Total deferred tax assets 7,260,000 7,584,000
Deferred tax liabilities:
Depreciation and amortization (3,197,000) (3,092,000)
----------- -----------
Net deferred tax asset 4,063,000 4,492,000
Valuation allowance (2,071,000) (2,500,000)
----------- -----------
$ 1,992,000 $ 1,992,000
=========== ===========
</TABLE>
Receivables from HCC in connection with HCT's federal income taxes are
included in the accompanying consolidated financial statements as follows:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
---------- ------------
<S> <C> <C>
Deferred income taxes $1,402,000 $1,451,000
Other noncurrent assets 590,000 541,000
</TABLE>
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.
(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 during each of the three 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
40
<PAGE>
HWCC - TUNICA, INC. AND SUBSIDIARY
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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 $198,000 and $146,000, respectively, for the three month periods
ended March 31, 1999 and 1998. At March 31, 1999 and December 31, 1998, HCT had
payables of $94,000 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 March 31, 1999 and 1998 net charges incurred by HCT amounted
to $45,000 and $38,000, respectively. The accompanying consolidated balance
sheets at March 31, 1999 and December 31, 1998 include net receivables from
affiliates of $130,000 and $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. During the three
month periods ended March 31, 1999 and 1998, HCT expensed $995,000 and $940,000,
respectively, in connection with the ground lease.
PLANET HOLLYWOOD LITIGATION -
Planet Hollywood International, Inc., a Delaware corporation, and Planet
Hollywood (Region IV), Inc., a Minnesota corporation (collectively, "PHII"),
filed a complaint in the United States District Court for the Northern District
of Illinois, Eastern Division on July 29, 1996 against HCC, 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.
41
<PAGE>
HWCC - TUNICA, INC. AND SUBSIDIARY
(WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION)
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.
Given the uncertainties inherent in litigation, no assurance can be given
that the Hollywood Defendants will prevail in this litigation; however, the
Hollywood Defendants believe that PHII's claims are without merit and intend to
defend their position and pursue their counterclaims vigorously. The
accompanying consolidated financial statements do not include any adjustments
that might result from the outcome of the uncertainties described above.
OTHER -
HCT is a party in various legal proceedings with respect to the conduct of
casino and hotel operations. Although a possible range of loss can not be
estimated, in the opinion of management, based upon the advice of counsel,
settlement or resolution of the proceedings should not have a material adverse
impact on the consolidated financial position or results of operations of HCT.
42
<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 month period ended March 31, 1999 of $69.8
million, a 9.4% increase from the $63.8 million during the same period of 1998.
The increase is attributable to improved net revenues at the Aurora Casino of
$4.7 million (12.1%) and at the Tunica Casino of $1.3 million (5.2%). Operating
expenses increased by $5.4 million to $60.2 million during the three month
period ended March 31, 1999 from $54.7 million during the same period of 1998.
Consequently, HCC's income from operations increased by $528,000 (5.8%)
during the first quarter of 1999 compared to the same period of 1998. Income
from operations at the Aurora Casino increased by $618,000 to $6.1 million
during the three month period ended March 31, 1999 compared with the same period
of 1998 due to increased patron volume. Income from operations at the Tunica
Casino increased slightly by $155,000 to $3.5 million 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 $8.7 million and $8.1 million, respectively, for the three
month periods ended March 31, 1999 and 1998. The 1999 increase 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.
43
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
GAMING OPERATIONS
The following table sets forth certain unaudited financial and operating data
for the Aurora Casino's operations for the three month periods ended March 31,
1999 and 1998.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------------
1999 1998
------------ ------------
<S> <C> <C>
REVENUES:
Table games $ 10,465,000 $ 11,410,000
Slot machines 30,776,000 25,024,000
Poker revenues 568,000 669,000
------------ ------------
Total $ 41,809,000 $ 37,103,000
============ ============
TABLE GAMES:
Gross wagering (drop) (1) $ 59,408,000 $ 62,897,000
Hold percentage (2) 17.6% 18.1%
SLOT MACHINES:
Gross wagering (handle) (1) $542,397,000 $444,823,000
Hold percentage (2) 5.7% 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 $94.1 million (18.5%) during the first quarter of
1999 compared to the first quarter of 1998. The increase 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 $4.7 million (12.7%) during the first quarter of
1999, compared to the same period of 1998 due to the increases in gross wagering
previously discussed. Table game revenues
44
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION (CONTINUED)
AND RESULTS OF OPERATIONS
decreased $945,000 (8.3%) during the first quarter of 1999 compared to the 1998
period as a result of the 5.5% decrease in drop coupled with the decline in the
table game hold percentage to 17.6% in 1999 from 18.1% in 1998. The 21.9%
increase in slot machine handle together with a slight increase in the slot
machine hold percentage during the first quarter of 1999 resulted in a three
month slot machine revenue increase of $5.8 million (23%) compared to the
corresponding period in 1998. Poker revenues declined $101,000 (15.1%) due to
increased competition from the August 1998 opening of a poker room by a nearby
riverboat operator.
Food and beverage revenues at the Aurora Casino increased $115,000 (3.6%)
during the first quarter of 1999 compared to the prior year period reflecting
the increased patron volume during 1999. Other revenues did not change
significantly during the three month period ended March 31, 1999 compared to the
same period of 1998.
Promotional allowances represent the estimated value of goods and services
provided free of charge to casino customers under various marketing programs.
These allowances, as a percentage of food and beverage and other revenues at the
Aurora Casino, were 60.4% during the three month period ended March 31, 1999
compared to 58.1% during the like period in 1998. The increase from the prior
year period reflects an increase in promotional activities as part of the Aurora
Casino's marketing efforts.
DEPARTMENTAL EXPENSES
Casino expenses increased $4.2 million (16.1%) during the first quarter of
1999 compared to the 1998 period. Such increase 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 $80,000 (6.7%) during the first quarter
of 1999 compared to the same period in 1998 again reflecting the increased
patron volume. Other expenses decreased $100,000 (31.1%) during the first
quarter of 1999 compared to the 1998 period due to reductions in personnel and
other non-departmental operating expenses resulting from management's efforts to
contain costs.
45
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION (CONTINUED)
AND RESULTS OF OPERATIONS
TUNICA CASINO
GENERAL
Income from operations at the Tunica Casino amounted to $3.5 million for the
three month period ended March 31, 1999 compared to $3.3 million during the same
period of 1998. The increase is 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 month periods
ended March 31, 1999 and 1998.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------------------
1999 1998
----------------- -------------
<S> <C> <C>
CASINO REVENUES:
Table games $ 3,803,000 $ 3,443,000
Slot machines 20,491,000 19,146,000
Poker revenues 242,000 214,000
------------ ------------
Total $ 24,536,000 $ 22,803,000
============ ============
TABLE GAMES:
Gross wagering (drop) (1) $ 19,127,000 $ 18,686,000
Hold percentage (2) 19.9% 18.4%
SLOT MACHINES:
Gross wagering (handle) (1) $390,615,000 $372,017,000
Hold percentage (2) 5.2% 5.1%
</TABLE>
____________________
(1)(2) See corresponding notes to the table at "Aurora Casino - Gaming
Operations" above.
Total gross wagering at the Tunica Casino as measured by table game drop
and slot machine handle increased $19 million (4.9%) during the three month
period ended March 31, 1999 compared to the same period of 1998. Slot machine
handle and table game drop increased by $18.6 million (5%) and $441,000 (2.4%),
respectively, during the first quarter of 1999 compared to the prior year
period. 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. Patron volume
declined slightly during the first quarter of 1999 compared to the same period
in 1998 indicating that the Tunica Casino has been successful in attracting
higher value patrons.
46
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION (CONTINUED)
AND RESULTS OF OPERATIONS
REVENUES
Casino revenues increased $1.7 million (7.6%) during the three month period
ended March 31, 1999 compared to the 1998 period. Table game revenues increased
10.5% during the first quarter of 1999 due to the increase in table drop
discussed above combined with an increase in the table game hold percentage to
19.9% in 1999 from 18.4% in 1998. Slot machine revenue increased $1.3 million
(7%) during the first quarter of 1999 compared to the 1998 first quarter
reflecting the increase in gross wagering discussed above coupled with a slight
increase in the slot machine hold percentage to 5.2% in 1999 from 5.1% in 1998.
Poker revenues also increased by 13.1% during the first quarter 1999 period.
Rooms revenue increased $387,000 (19.3%) during the three month period
ended March 31, 1999 compared to the same period in 1998. Hotel occupancy rates
declined slightly to 80.8% in the first quarter of 1999 compared to 82% in the
1998 first quarter period. Renovations to hotel rooms and suites together with
inclement weather in January 1999 negatively impacted occupancy rates; however,
occupancy rates during February and March of 1999 surpassed those of the
corresponding months in 1998. The improvement in room revenues resulted from an
increase in the average daily room rate to $64 during the 1999 period from $51
during the 1998 period. Food and beverage and other revenues did not change
significantly during the first quarter of 1999 compared to the same period 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 71% from 61.1% during the three month period ended March 31, 1999
compared to 1998. The first quarter percentage increase is the result of higher
complimentary room and food and beverage costs due to increased marketing
efforts.
DEPARTMENTAL EXPENSES
Casino expenses increased $1.6 million (9.6%) during the three month period
ended March 31, 1999 compared to the 1998 period reflecting the implementation
of marketing programs. Rooms expense decreased $176,000 (40%) during the first
quarter of 1999 compared to the prior year period reflecting the increased
allocation of hotel costs associated with marketing programs to the casino
department. Food and beverage and other expenses also decreased by $66,000
(6.8%) and $51,000 (15.7%), respectively, for the period ended March 31, 1999
compared to the 1998 period as a result of increased allocations to the casino
department.
OTHER CONSOLIDATED ITEMS
- ------------------------
GENERAL AND ADMINISTRATIVE
General and administrative expenses increased by $280,000 (6.5%) during the
first quarter of 1999 compared to the same period in 1998. Such expenses at the
Aurora Casino (net of management fees) decreased by 2.3% for the 1999 three
month period as a result of management's efforts to control costs. The Tunica
Casino also experienced a reduction in general and administrative expenses of
6.2% (net of consulting fees) for the three month period ended March 31, 1999
compared to the prior year primarily as a result of cost containment efforts.
The remaining corporate general and administrative expense increase of $387,000
(21.3%) for the 1999 three month period results from increases in corporate
overhead costs, primarily in legal fees and personnel costs.
47
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION (CONTINUED)
AND RESULTS OF OPERATIONS
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense decreased $214,000 (5.1%) during the
three month period ended March 31, 1999 compared to the 1998 period primarily
due to certain operating equipment at the Aurora Casino becoming fully
depreciated during June 1998.
DEVELOPMENT EXPENSES
Development expenses represent costs incurred in connection with HCC's
pursuit of potential gaming opportunities in jurisdictions where gaming has not
been legalized. Such costs decreased by $40,000 (15.7%) during the three month
period ended March 31, 1999 compared to the 1998 period primarily as a result of
an overall decrease in prospective venues and projects.
INTEREST
Interest income decreased $313,000 (46.6%) for the three month period ended
March 31, 1999 compared to the same period of 1998 as a result of less cash
being available for investment purposes during the 1999 period and to the
discontinuation of the recording of interest income with respect to outstanding
loans to GBCC. Interest expense did not change significantly during the three
month period ended March 31, 1999 compared to the prior year period.
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 assets of $1.8 million as of March 31, 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.
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
48
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION (CONTINUED)
AND RESULTS OF OPERATIONS
assigned to each system with a factor of one indicating the greatest
significance. Readiness for information technology and non-information
technology systems for the Year 2000 is currently being 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 anticipated to be completed by June
1999. The two major information technology systems identified as not Year 2000-
compliant are being updated, modified or replaced. Management expects the costs
of acquiring, testing and converting such systems will be less than $1 million.
The majority of these costs will be incurred during 1999 and have been included
in management's forecast of capital expenditures (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 recently been completed. Additional
procedures, if necessary, are now being 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 (e.g. 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.
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.
49
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION (CONTINUED)
AND RESULTS OF OPERATIONS
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 $11.4 million of cash flow from operations during the
first three months of 1999 after deducting the payment of $2.6 million of
management fees. The Tunica Casino provided $2.8 million of cash from
operations during the first three months of 1999 after deducting the payment of
$300,000 of consulting fees to GBCC. HCC's other sources of funds include
interest income earned on temporary investments. In addition to operating
expenses at the Aurora Casino and the Tunica Casino, uses of operating cash by
HCC during the first three months of 1999 included costs to pursue development
opportunities ($215,000) and corporate overhead costs ($2.2 million).
During the first three months of 1999, consolidated cash flow from
operations ($15.6 million) and equipment financing ($1.9 million) were used, in
part, by HCC to fund capital expenditures of $3.7 million, to repay third party
indebtedness and make payments under capital lease obligations of $3.1 million
and $138,000, respectively, and to pay distributions amounting to $2.0 million
to GBCC 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 would purchase the stock
of PCC from GBCC for nominal consideration and satisfy 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 currently plans to satisfy PCC's obligations by
redeeming the newly issued note for approximately $40.3 million; 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 have incurred additional
debt (see "Financing Activities") and associated interest, but will no longer
report a minority interest in PML nor pay the Tunica consulting fee to a GBCC
subsidiary. The minority interest and consulting fee expense totaled $2.3
million for the three month period ended March 31, 1999 and $7.7 million for the
year ended December 31, 1998.
The successful completion of the Restructuring will require that PCC and
PRT Funding file for protection under Chapter 11 of the United States Bankruptcy
Code with the above transactions included as part of a pre-negotiated plan of
reorganization. Such plan will require approval of the bankruptcy court as well
as by various gaming regulatory organizations.
FINANCING ACTIVITIES
On April 21, 1999, the Company announced the commencement of a tender offer
for the outstanding 12 3/4% Senior Secured Notes described below at an effective
price of approximately 109.7% of face value. The tender offer expires on May
18, 1999; accordingly, the total principal amount of Senior
50
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION (CONTINUED)
AND RESULTS OF OPERATIONS
Secured Notes tendered by noteholders can not yet be determined. However, in
excess of 96% of the total principal amount outstanding has been tendered to
date. Also on April 21, 1999, the Company announced a proposed private debt
offering of $350 million principal amount of new senior secured notes. Net
proceeds of the proposed offering would be used, among other things, to purchase
and discharge the currently outstanding Senior Secured Notes, to expand the
Aurora Casino's operations (see "Capital Expenditures and Other Investing
Activities"), to purchase and terminate the management and consulting agreements
on the Aurora and Tunica casinos (see "Pratt Casino Corporation Acquisition")
and to fund a portion of HCC's equity investment in the Shreveport Casino (see
"Capital Expenditures and Other Investing Activities").
In October 1995, HCC issued $210 million of 12 3/4% Senior Secured Notes
due November 1, 2003, discounted to yield 13 3/4% per annum. Interest on the
Senior Secured Notes is payable semiannually on May 1 and November 1 of each
year commencing on May 1, 1996. The Senior Secured Notes are unconditionally
guaranteed on a senior secured basis by HCT and by certain future subsidiaries
of HCC. HCA is not a guarantor. The Senior Secured Notes and related
guarantees are secured by, among other things, (i) substantially all of the
assets of HCT and future guarantors, (ii) a limited lien on substantially all of
the assets of HCA, (iii) a pledge of the capital stock of certain subsidiaries
of HCC and (iv) the collateral assignment of any future management contracts
entered into by HCC. The limitation on the lien described in (ii) above is
currently $31.5 million and is subject to reduction for principal payments on an
intercompany note between HCC and HCA. The intercompany note requires
semiannual principal payments of $2.5 million commencing October 15, 1997 with
the balance due November 1, 2003.
The Senior Secured Notes are redeemable at the option of HCC any time on or
after November 1, 1999 at 106.375% of the then outstanding principal amount,
decreasing to 103.1875% and 100%, respectively, on November 1, 2000 and 2001.
Commencing with the November 1, 1997 interest payment date and at each
subsequent interest payment date, HCC is required to make an offer to purchase
not more than $2.5 million in principal amount of the Senior Secured Notes at a
price of 106.375% of the principal amount tendered. As a result of such offers,
HCC has redeemed a total of $5.3 million principal amount of the Senior Secured
Notes, including the payment of $2.5 million during the first quarter of 1999.
The remaining Senior Secured Notes would be purchased and discharged as a result
of the aforementioned tender offer and proposed private debt offering.
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.
HCT had a $1.3 million bank credit facility available to borrow against
through September 30, 1998. Outstanding borrowings on the line of credit
($410,000 at March 31, 1999) are to be repaid in monthly installments over 36
months and accrue interest at the rate of prime plus 1 1/4% per annum subject to
a minimum of 8.75%.
Effective as of April 1, 1997, HCC acquired from PPI Corporation, a GBCC
subsidiary, the general partnership interest in the limited partnership which
holds the Aurora management agreement. The acquisition price for the general
partnership interest included a note in the amount of $3.8 million and the
assignment of $13.8 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.
51
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HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION (CONTINUED)
AND RESULTS OF OPERATIONS
As of March 31, 1999, HCC's scheduled maturities of long-term debt and
payments under capital leases during the remainder of 1999 are approximately
$4.4 million and $2.1 million, respectively. The estimated 1999 long-term debt
maturities include the redemption of $2.5 million of Senior Secured Notes
pursuant to the mandatory redemption offers previously described. It is not
anticipated that there would be mandatory redemption offers under the proposed
$350 million private debt offering.
CAPITAL EXPENDITURES AND OTHER INVESTING ACTIVITIES
Capital expenditures at the Aurora Casino during the first three months of
1999 were $529,000; management anticipates spending $4 million during the
remainder of 1999 primarily for its ongoing capital improvements program.
Significant projects planned for 1999 include new slot machines and casino
equipment, renovations to one of the Aurora Casino's riverboats, new telephone
and point-of-sale systems and the renovation of a restaurant facility. The
Company has also developed plans to replace the smaller of the Aurora Casino's
two riverboats with a larger, newly constructed riverboat. The new riverboat
would increase passenger capacity by approximately 20% and provide a second
premier gaming facility for the Aurora Casino's patrons. The new riverboat is
projected to cost approximately $40 million and would require a construction
period of 14 months. The Company intends to seek financing for this expansion
(see "Financing Activities").
Capital expenditures at the Tunica Casino during the first three months of
1999 amounted to $3.1 million; management anticipates spending $3.9 million
during the remainder of 1999. Such expenditures are part of a two-year capital
improvement plan which includes the upgrading of all 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 $66,000 during the
first quarter of 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 is to be paid at closing and 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, effective as of April 23, 1999,
HCC now has a 100% 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 $200
million. The Company anticipates contributing approximately $50 million as an
equity investment in the project with the remaining construction and preopening
costs, estimated at $150 million, to come from project specific financing which
52
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION (CONTINUED)
AND RESULTS OF OPERATIONS
will be non-recourse to HCC. The Company anticipates securing financing for a
portion of the equity investment (see "Financing Activities") and all of the
project financing and commencing construction in the summer of 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. Funding requirements for a
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 are anticipated to be
met with a portion of the proceeds from an announced private debt offering by
HCC. Additional construction financing for the planned Shreveport Casino would
be provided from project specific, non-recourse financing.
53
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PART II: OTHER INFORMATION
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ITEM 6.(A) EXHIBITS
10.1 Voting Agreement dated as of April 28, 1999 among GBCC, PCC, PRT Funding
Corp., NJMI, HCC and the Consenting Holders of PRT Funding Notes.
ITEM 6.(B) - REPORTS ON FORM 8-K
The Registrants did not file any reports on Form 8-K during the quarter
ended March 31, 1999. The Registrants filed a report on Form 8-K on April 21,
1999 to disclose a proposed refinancing of and an offer to repurchase HCC's 12
3/4% Senior Secured Notes. The Registrants filed their Annual Report on Form
10-K for the year ended December 31, 1998 with the Securities and Exchange
Commission on April 15, 1999.
SIGNATURES
- ----------
Pursuant to the requirements of the Securities Exchange Act of 1934, each
of the Registrants has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HOLLYWOOD CASINO CORPORATION
Date: May 10, 1999 By: /s/ Charles F. LaFrano III
--------------- -----------------------------------------
Charles F. LaFrano III
Vice President of Finance and
Principal Accounting Officer
HWCC - TUNICA, INC.
Date: May 10, 1999 By: /s/ Charles F. LaFrano III
--------------- -----------------------------------------
Charles F. LaFrano III
Principal Accounting Officer
54
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EXHIBIT 10.1
EXECUTION COPY
--------------
VOTING AGREEMENT
DATED AS OF APRIL 28, 1999
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<S> <C>
1. Voting Agreement; Restriction on Transfer................................................... - 2 -
2. Conditions to Consummation of the Financial Restructuring................................... - 5 -
3. Financial Restructuring; The Joint Plan..................................................... - 6 -
4. Payments.................................................................................... - 7 -
5. Representations of the Consenting Holders................................................... - 8 -
6. Representations of the GBCC Group and HCC................................................... - 9 -
7. Forbearance................................................................................. - 15 -
8. Termination of Agreement.................................................................... - 15 -
9. Further Acquisition of Securities........................................................... - 17 -
10. Amendments.................................................................................. - 17 -
11. Governing Law; Jurisdiction................................................................. - 17 -
12. Headings.................................................................................... - 17 -
13. Successors and Assigns...................................................................... - 17 -
14. Prior Negotiations.......................................................................... - 17 -
15. Counterparts................................................................................ - 18 -
16. No Third-Party Beneficiaries................................................................ - 18 -
17. Consideration............................................................................... - 18 -
18. Notices..................................................................................... - 18 -
19. GBHC Payments............................................................................... - 18 -
20. Payments to Indenture Trustee for Existing PRT Notes Prior to Effective Date................ - 18 -
</TABLE>
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<TABLE>
<S> <C>
21. Refinancing................................................................................. - 19 -
22. Professional Fees........................................................................... - 21 -
23. Cooperation in Sands Bankruptcy............................................................. - 21 -
24. Specific Performance........................................................................ - 22 -
25. Survival and Assignment..................................................................... - 22 -
Exhibits and Schedules
- ----------------------
Exhibit A - Form of Joint Reorganization Plan
Exhibit B - Reorganization Budget
Schedule 6(b)(i) - Liens, Claims and Encumbrances and Liabilities of GBHC to HCC
Schedule 6(b)(iv) - Liabilities of PRT, PCC and NJMI
Schedule 6(b)(v) - Contracts of PRT, PCC and NJMI
Exhibit 21(b) - Term Sheet for New PCC Notes and Exchange Alternative
</TABLE>
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<PAGE>
VOTING AGREEMENT
----------------
This Voting Agreement (the "Agreement") is entered into this 28th day of
April, 1999, among Greate Bay Casino Corporation ("GBCC"), Pratt Casino
Corporation ("PCC"), PRT Funding Corp. ("PRT"), New Jersey Management, Inc.
("NJMI," and together with GBCC, PCC and PRT, collectively the "GBCC Group"),
Hollywood Casino Corporation ("HCC") and the undersigned holders, severally and
neither jointly nor jointly and severally (collectively, and together with any
other persons who become signatories hereto, the "Consenting Holders").
R E C I T A L S
- - - - - - - -
A. PRT has issued and there remains outstanding $85 million principal amount
of 11-5/8% Senior Notes (the "Existing PRT Notes").
B. PCC has guaranteed the payment of the Existing PRT Notes (the "PCC
Guarantee").
C. The Consenting Holders hold approximately $82.823 million of the Existing
PRT Notes in the principal amounts, respectively, set forth on the signature
pages hereto.
D. The GBCC Group, HCC and the Consenting Holders desire to implement a
financial restructuring (the "Financial Restructuring") of the Existing PRT
Notes substantially on the terms and conditions set forth in the Joint
Reorganization Plan attached hereto as Exhibit A (the "Joint Plan"). The
principal component of the Financial Restructuring is the payment to the holders
of the Existing PRT Notes, by substantial consummation of a plan of
reorganization, of at least $40,329,375 on the terms provided in Section 6.2(Q)
of the Joint Plan (the "Cash Take-Out").
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<PAGE>
E. In order to implement the Financial Restructuring, PCC, PRT and NJMI will
commence (the date of such commencement being the "Petition Date") proceedings
under Chapter 11 of the Bankruptcy Code (the "Chapter 11 Proceedings") and seek
to obtain court approval of the Joint Plan and a disclosure statement in respect
thereof (the "Disclosure Statement").
F. This Agreement is being entered into in order to facilitate the
implementation of the Financial Restructuring, by the Consenting Holders in
consideration of PCC's, PRT's and NJMI's agreement to commence the Chapter 11
Proceedings and to file and seek confirmation of the Joint Plan and of GBCC's
and HCC's agreement to participate in the Financial Restructuring, and by the
GBCC Group and HCC in consideration of the Consenting Holders' agreement to vote
their claims to accept the Joint Plan and otherwise agree to the terms of the
Financial Restructuring as set forth below.
A G R E E M E N T
- - - - - - - - -
Now, therefore, in consideration of the premises and the mutual covenants
and agreements set forth herein, and for other good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged, the parties hereby
agree as follows:
1. Voting Agreement; Restriction on Transfer.
(a) Each Consenting Holder, severally and neither jointly nor jointly and
severally, hereby agrees that it shall:
(i) Subject to its receipt of appropriate disclosure and solicitation
materials meeting the requirements of the Bankruptcy Code, timely
vote its claims (or claims otherwise subject to such Consenting
Holder's right to vote or
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<PAGE>
direct the disposition thereof) in respect of the Existing PRT
Notes owned on the date hereof or hereafter acquired to accept
the Joint Plan (and not revoke or withdraw such vote);
(ii) Refrain from the sale, transfer, pledge or any other assignment
of any of the Existing PRT Notes, or any voting interest therein
to any person unless such person is a "qualified institutional
buyer" within the meaning of Rule 144A promulgated under the
Securities Act of 1933, as amended (the "Securities Act"), and
such person agrees in writing to become a party to, and be bound
by the terms and conditions of, this Agreement (it being
expressly acknowledged for the avoidance of doubt that any
Consenting Holder may disclose the terms of this Agreement and
any other information relating to the parties hereto to any
transferee or prospective transferee of the PRT Notes);
(iii) Not take any position in the Chapter 11 Proceedings that
conflicts with its obligations hereunder;
(iv) Vote its Existing PRT Notes and any other claims it might have
or acquire to reject any bankruptcy plan of reorganization for
PCC, PRT or NJMI other than the Joint Plan; and
(v) Take such other and further actions as the GBCC Group and HCC
shall reasonably request to effectuate the Financial
Restructuring, including waiving the requirement of New Jersey
Casino Control Commission approval of the Newco Warrants (as
defined in the Joint Plan) if GBCC
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<PAGE>
requests such waiver because it reasonably concludes that such
approval will materially delay the closing of the Financial
Restructuring.
Notwithstanding the foregoing, nothing in this Agreement shall require a
Consenting Holder to take any action which is prohibited by the Bankruptcy Code
or by other applicable law or regulation or by any order or direction of any
court or any federal or state governmental authority.
(b) The obligations of the Consenting Holders under subsection (a) of this
Section 1 shall be at all times subject to the continuing conditions that:
(i) the plan of reorganization being considered in the Chapter 11
Proceedings is substantially in the form of the Joint Plan;
(ii) an Agreement Termination Event (as defined in Section 8 below)
shall not have occurred; and
(iii) HCC shall either (A) be actively pursuing the HCC Refinancing
(defined in Section 21(a) below), on a schedule and with an
intention to close not later than June 30, 1999 or (B) have
consummated the HCC Refinancing and the escrow established in
connection therewith shall still have funds available to fund
the Cash Take-Out.
(c) If GBCC receives a waiver from the Consenting Holders of New Jersey
Casino Control Commission approval of the Newco Warrants and there is
a closing of the Financial Restructuring, GBCC shall cause PPI
Corporation to cause Newco (as defined in the Joint Plan) to use its
reasonable best efforts to obtain such
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<PAGE>
approval until such time as a plan is confirmed in the Sands
Bankruptcy (as defined in Section 2 hereof).
2. Conditions to Consummation of the Financial Restructuring.
Consummation of the Financial Restructuring will be subject to the
following closing conditions:
(i) Receipt of all required government approvals, consents and
authorizations;
(ii) The absence of any pending or threatened action, suit, or
proceeding before any court or quasi-judicial or administrative
agency of any federal, state, local, or foreign jurisdiction
that is reasonably likely to result in an unfavorable
injunction, judgment, order, decree, ruling, or charge that
would (A) prevent the Cash Take-Out or (B) permit any or all of
the payments made in the Cash Take-Out to be rescinded;
(iii) The execution and delivery of all documentation relating to the
liquidating trust contemplated by the Joint Plan (but not the
assets to be delivered into such trust), in form and substance
reasonably satisfactory to the Consenting Holders and consistent
with the terms of the Joint Plan;
(iv) The entry of orders of the Bankruptcy Court, which orders shall
be reasonably satisfactory in form and substance to the
Consenting Holders and, unless finality is waived by the
Consenting Holders, shall have become final and non-appealable:
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<PAGE>
(a) confirming the Joint Plan and, among other things, allowing
the claims in respect of the Existing PRT Notes as the only
allowed general unsecured claims in Class 1 under the Joint
Plan;
(b) disallowing any and all general unsecured claims in Class 8
in the Joint Plan (except for (1) any reasonable unpaid fees
and expenses of the Indenture Trustee for the Existing PRT
Notes (the "Indenture Trustee"), (2) any claims fully
covered by liability insurance and (3) up to $50,000 payable
in connection with claims insurable but subject to NJMI's
deductible under existing insurance policies), including,
without limitation, all claims asserted by the debtors or
any other party acting on behalf of the debtors' estates in
the jointly administered Chapter 11 cases (the "Sands
Bankruptcy") of Greate Bay Hotel and Casino, Inc. ("GBHC"),
GB Holdings, Inc. ("GBH") and GB Property Funding Corp. ("GB
Funding"), Case Nos. 98-10001, 98-10002, 98-10003 (JW) in
the United States Bankruptcy Court for the District of New
Jersey, including estate representatives, examiners or
official committees of creditors; and
(c) allowing or estimating claims of the IRS in an amount not to
exceed $250,000.
3. Financial Restructuring; The Joint Plan. Each member of the GBCC Group
agrees to commence, forthwith after the closing of the HCC Refinancing, the
Chapter 11 Proceedings.
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<PAGE>
Each member of the GBCC Group and HCC agrees (i) to take all such steps as shall
be reasonably necessary and desirable to consummate the Financial Restructuring,
including obtaining confirmation of the Joint Plan, as promptly as practicable
and (ii) to submit this Agreement and the Joint Plan to the appropriate
regulatory authorities for their approval. In the event that it becomes
impractical to pursue the Joint Plan and still consummate the Cash Take-Out by
January 31, 2000, each member of the GBCC Group agrees that it shall use its
reasonable best efforts to cause the Cash Take-Out to be consummated on terms
and conditions as near as possible to those set forth in the Joint Plan; and
will not take any steps that are inconsistent with such terms and conditions
without first consulting with and obtaining the approval of the Consenting
Holders. In the event that it becomes impractical to pursue the Joint Plan and
still consummate the Cash Take-Out by January 31, 2000, HCC agrees that it will
maintain the escrow established in the HCC Refinancing (defined below), for the
purposes of effecting the Cash Take-Out, until the earlier of January 31, 2000
and an Agreement Termination Event.
4. Payments. The Consenting Holders acknowledge and agree (i) that PCC, PRT
or NJMI shall make the payments described in Exhibit "B" (subject to Bankruptcy
Court approval, as necessary) and (ii) that the dollar amounts for the payments
described in Exhibit "B" as restructuring costs and ordinary course corporate
expenses are estimates and may vary from the actual payments that are made.
PCC, PRT and NJMI represent that the dollar amounts set forth in Exhibit "B" for
restructuring costs and ordinary course corporate expenses represent their good
faith estimate of such payments through August 31, 1999 (the assumed date of
consummation of the Financial Restructuring), it being acknowledged that PCC,
PRT
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<PAGE>
and NJMI have relied on the Consenting Holders' estimates of such Consenting
Holders' professional fees and expenses in making such estimate.
5. Representations of the Consenting Holders. Each Consenting Holder,
severally and neither jointly nor jointly and severally, represents and warrants
to the GBCC Group and HCC that each of the following statements is true, correct
and complete:
(a) Corporate Power and Authority. It has all requisite corporate or
trust power and authority to enter into this Agreement and to carry
out the transactions contemplated by, and to perform its respective
obligations under, this Agreement;
(b) Authorization. The execution and delivery of this Agreement and the
performance of its obligations hereunder have been duly authorized by
all necessary corporate or trust action;
(c) No Conflicts. The execution, delivery and performance of this
Agreement do not and shall not (i) subject to receipt of all necessary
governmental approvals, consents or authorizations, violate any
provision of law, rule or regulation applicable to it, or its
certificate of incorporation or its bylaws, or its agreement and
declaration of trust, or (ii) conflict with, result in a breach of or
constitute (with due notice or lapse of time or both) a default under
any of its material contractual obligations;
(d) Binding Obligation. This Agreement has been duly executed and
delivered and is a legal, valid and binding obligation, enforceable
against it in accordance with its terms, except as enforcement may be
limited by bankruptcy, insolvency,
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<PAGE>
reorganization, moratorium or other similar laws relating to or
limiting creditors' rights generally or by equitable principles
relating to enforceability; and
(e) Ownership of Existing PRT Notes. It is the beneficial owner of,
and/or the investment adviser or manager for the beneficial owners of
(with the power to vote and dispose on behalf of such beneficial
owners), the principal amount of Existing PRT Notes set forth opposite
its signature hereto.
6. Representations of the GBCC Group and HCC.
(a) Each member of the GBCC Group and HCC represents and warrants to each
Consenting Holder that each of the following statements is true,
correct and complete with respect to it:
(i) Corporate Power and Authority. It has all requisite corporate
power and authority to enter into this Agreement and to carry
out the transactions contemplated by, and to perform its
respective obligations under, this Agreement;
(ii) Authorization. The execution and delivery of this Agreement and
the performance of its obligations hereunder have been duly
authorized by all necessary corporate action;
(iii) No Conflicts. The execution, delivery and performance of this
Agreement do not and shall not (i) subject to receipt of
required government approvals, consents and authorizations,
violate any provision of law, rule or regulation applicable to
it or any of its subsidiaries or its
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certificate of incorporation or bylaws, or (ii) conflict with,
result in a breach of or constitute (with due notice or lapse of
time or both) a default under any of its material contractual
obligations or those of any of its subsidiaries;
(iv) Binding Obligation. This Agreement has been duly executed and
delivered and is the legal, valid and binding obligation of each
member of the GBCC Group and HCC, enforceable against each in
accordance with its terms, except as enforcement may be limited
by bankruptcy, insolvency, reorganization, moratorium or other
similar laws relating to or limiting creditors' rights generally
or by equitable principles relating to enforceability;
(v) Agreements. Each of (i) the Agreement dated as of September 2,
1998 among GBHC, GBH, GB Funding, certain entities in the GBCC
Group, HCC and certain individual affiliates thereof (the
"Settlement Agreement"), and (ii) the Agreement dated June 27,
--------------------
1998 among GBHC, Advanced Casino Systems International, Inc.,
certain members of the GBCC Group, PCC, PRT, NJMI and HCC (the
"Interim Settlement Agreement") is legal, valid, binding,
----------------------------
enforceable, and in full force and effect. There is no existing
breach or default of either the Interim Settlement Agreement or
the Settlement Agreement. To its knowledge, no regulatory
actions are pending or threatened that would affect the
-10-
<PAGE>
legality, validity or enforceability of either the Interim
Settlement Agreement or the Settlement Agreement;
(vi) Management Contract Payments. The Management Services Agreement
dated as of June 21, 1991 among Aurora Riverboats, Inc. and
Greate Bay Casino Corporation (as amended and in effect, the
"Aurora Management Contract") gives rise to payments each
calendar quarter to Pratt Management, L.P. ("PMLP") and
corresponding distributions in respect of the limited
partnership interest in PMLP owned by PCC under the terms of the
Limited Partnership Agreement of PMLP dated as of February 17,
1994. Those agreements provide that such payments and
corresponding distributions are made not later than the twenty-
fifth day following the end of each calendar quarter. PMLP has
received all such amounts due to it for the first quarter of
1999, and has made all corresponding distributions to PCC, such
that as of April 28, 1999 PMLP has cash not in excess of $330;
(vii) There is no pending or threatened action, suit, or proceeding
before any court or quasi-judicial or administrative agency of
any federal, state, local, or foreign jurisdiction that is
reasonably likely to result in an unfavorable injunction,
judgment, order, decree, ruling, or charge that would (A)
prevent the Cash Take-Out or (B) permit any or all of the cash
payments made in the Cash Take-Out to be rescinded; and
-11-
<PAGE>
(viii) Disclosure. The representations and warranties contained in
this Section 6 by or with respect to it do not contain any
untrue statement of a material fact or omit to state any
material fact necessary in order to make the statements and
information contained in this Section not misleading.
(b) Each member of the GBCC Group represents and warrants to each
Consenting Holder that each of the following statements is true,
correct and complete:
(i) Notes. (A) PRT is the sole legal and beneficial owner, with
marketable title, of a $10 million principal amount
subordinated note dated February 17, 1994, together with
accrued interest as of January 5, 1998 in the approximate
amount of $2,754,375, due from GBHC to PRT; and (B) PCC is the
sole legal and beneficial owner, with marketable title, of a $5
million principal amount subordinated note dated January 14,
1997, together with accrued interest as of January 5, 1998 in
the approximate amount of $728,000, due from GBHC to PCC (the
two notes, collectively, the "Notes"). Except as disclosed on
Schedule 6(b)(i), the Notes are free and clear of all liens,
security interests, or other charges or encumbrances (except
for the subordination provisions of the Notes), or any other
type of preferential arrangement having the practical effect of
constituting a security interest; the Notes are not subject to
any defense, counterclaim or set-off other than those that may
arise solely on account of the Sands Bankruptcy; other than the
Notes, there is no other indebtedness of GBHC owed to any
member of the GBCC Group or any
-12-
<PAGE>
of their affiliates other than indebtedness incurred in the
ordinary course of business or that may arise solely on account
of the Sands Bankruptcy, the "Deferred Fee" provided under the
Interim Settlement Agreement, and the "Confirmation Payment"
provided under the Settlement Agreement;
(ii) Ownership of NJMI. PCC is the sole record and beneficial owner
of, and has good and marketable title to, all of the stock of
NJMI, free and clear of any and all liens, charges,
encumbrances, options and other adverse claims or rights
whatsoever;
(iii) Financial Statements. (A) The audited balance sheets and
statements of operations, changes in stockholders' equity, and
cash flow (collectively, the "Financial Statements") as of and
for the fiscal years ended December 31, 1998 and December 31,
1997 contained in Forms 10-K filed by PCC and PRT with the
Securities and Exchange Commission (the "SEC Reports") have been
prepared in accordance with generally accepted accounting
principles applied on a consistent basis throughout the periods
covered thereby (except as noted therein), are correct and
complete in all material respects and present fairly the
consolidated financial condition of PCC and the financial
condition of PRT as of such dates and the consolidated results
of operations of PCC and the results of operation of PRT for
such periods and are consistent in all material respects with
the books and records of PCC, PRT and NJMI, and (B) the
-13-
<PAGE>
unaudited balance sheet, statement of operations and cash flow as of
and for the fiscal quarter ended March 31, 1999 for PCC on a
consolidated basis, when filed with the SEC, will have been prepared
in accordance with GAAP applied on a consistent basis throughout the
period covered thereby (except as noted therein), will be correct and
complete in all material respects, and will present fairly the
consolidated financial condition of PCC, and the consolidated results
of operations of PCC for such period, and will be consistent in all
material respects with the books and records of PCC;
(iv) Undisclosed Liability. Except as set forth in Schedule 6(b)(iv), none
of PCC, PRT or NJMI has any liability, except for (i) liabilities set
forth on the face of the most recent balance sheets included in the
Financial Statements and (ii) liabilities which have arisen after the
date of the most recent balance sheets included in the Financial
Statements in the ordinary course of business (none of which
liabilities results from, arises out of, related to, is in the nature
of, or was caused by any breach of contract, breach of warranty, tort,
infringement, or violation of law); and
(v) Contracts. Schedule 6(b)(v) lists all contracts and other agreements
to which any of PCC, PRT or NJMI is a party, including any tax sharing
agreements.
(c) Indebtedness. Except as set forth in Schedule 6(b)(i), HCC represents
and warrants to each Consenting Holder that there is no indebtedness of
GBHC,
-14-
<PAGE>
GBH or GB Funding owed to it or any of its affiliates other than
indebtedness incurred in the ordinary course of business or that may arise
solely on account of the Sands Bankruptcy.
7. Forbearance. So long as no Agreement Termination Event shall have
occurred, each of the Consenting Holders hereby agrees, severally and neither
jointly nor jointly and severally, to forbear from enforcing the PRT Notes or
the PCC Guarantee.
8. Termination of Agreement. Except for obligations pursuant to Section 21(b)
and 21(c), all obligations hereunder shall terminate automatically upon the
occurrence of any Agreement Termination Event, unless the occurrence of such
Agreement Termination Event is waived in writing by all of the parties hereto.
If any Agreement Termination Event occurs (and has not been waived) at a time
when court permission shall be required for a Consenting Holder to change or
withdraw (or cause to be changed or withdrawn) its vote in favor of the Joint
Plan, the members of the GBCC Group shall not oppose any attempt by such
Consenting Holder to change or withdraw (or cause to be changed or withdrawn)
such vote.
An "Agreement Termination Event" shall mean any of the following:
(a) HCC shall not have consummated the HCC Refinancing by June 30, 1999;
(b) The Chapter 11 Proceedings shall not have been commenced or the Joint
Plan and Disclosure Statement shall not have been filed by July 2,
1999;
(c) The order of the Bankruptcy Court confirming the Joint Plan shall not
have been entered and the effective date of the Joint Plan shall not
have occurred by January 31, 2000;
-15-
<PAGE>
(d) There shall not have been final approval of the Financial
Restructuring by New Jersey Casino Control Commission by January 31,
2000 (for purposes of this subsection, final approval means that any
applicable appeal period shall have passed, no appeal of such approval
shall be pending, and the approval of the Commission shall not have
been overturned on appeal;)
(e) PCC, PRT or NJMI shall file or support confirmation or fail to
actively oppose confirmation of a plan of reorganization embodying
terms materially different from those contemplated by the Joint Plan;
(f) The Joint Plan shall not have been substantially consummated pursuant
to section 1101(2) of the Bankruptcy Code by January 31, 2000;
(g) The Bankruptcy Court shall have entered an order pursuant to Section
1104 of the Bankruptcy Code appointing a trustee or examiner with
respect to any of PCC, PRT or NJMI;
(h) The Bankruptcy Court shall have entered an order dismissing any of the
Chapter 11 Proceedings or an order pursuant to Section 1112 of the
Bankruptcy Code converting any of the Chapter 11 Proceedings to cases
under Chapter 7 of the Bankruptcy Code;
(i) PRT, PCC and/or NJMI shall not have paid the Accumulated Cash (as
defined in Section 20 below) to the Indenture Trustee as required by
Section 20(a);
(j) PRT, PCC and/or NJMI shall not have paid any Excess Cash (as defined
in Section 20 below) to the Indenture Trustee as required by Section
20(b);
-16-
<PAGE>
(k) An injunction, judgment, order, decree, ruling or charge shall have
been entered which prevents consummation of the Cash Take-Out.
(l) Any breach of this Agreement by the Consenting Bondholders.
9. Further Acquisition of Securities. This Agreement shall in no way be
construed to preclude the Consenting Holders from acquiring additional Existing
PRT Notes.
10. Amendments. This Agreement may not be modified, amended or supplemented
except in writing signed by all of the parties hereto.
11. Governing Law; Jurisdiction. This Agreement shall be governed by and
construed in accordance with the internal laws of the State of New York, without
regard to any conflicts of law provision which would require the application of
the law of any other jurisdiction.
12. Headings. The Headings of the Sections, paragraphs and subsections of this
Agreement are inserted for convenience only and shall not affect the
interpretation hereof.
13. Successors and Assigns. This Agreement is intended to bind and inure to
the benefit of the parties and their respective successors, assigns, heirs,
executors, administrators and representatives. The agreements, representations
and obligations of the Consenting Holders under this Agreement are several and
neither joint nor joint and several in all respects. Except as set forth herein,
no party may assign any of its rights or obligations hereunder without the prior
consent of all other parties.
14. Prior Negotiations. This Agreement supersedes all prior negotiations,
understandings and agreements with respect to the subject matter hereof.
-17-
<PAGE>
15. Counterparts. This Agreement may be executed in one or more counterparts,
each of which shall be deemed an original and all of which shall constitute one
and the same Agreement.
16. No Third-Party Beneficiaries. Unless expressly stated herein, this
Agreement shall be solely for the benefit of the parties hereto and no other
person or entity shall be a third-party beneficiary hereof.
17. Consideration. It is hereby acknowledged by the parties that no
consideration shall be due or paid to the Consenting Holders for their agreement
to vote to accept the Joint Plan and to reject any other plan in accordance with
the terms and conditions of this Agreement other than the GBCC Group's agreement
to commence the Chapter 11 Proceedings and to file and seek confirmation of the
Joint Plan.
18. Notices. All notices and communications in connection with this Agreement
shall be in writing and shall be delivered by hand, overnight courier, certified
mail, return receipt requested, or facsimile transmission, at the addresses set
forth in the signature pages hereto.
19. GBHC Payments. Within two days of execution of this Agreement, NJMI shall
pay amounts owing to GBHC as indicated on the proof of claim of NJMI filed in
the Sands Bankruptcy and miscellaneous postpetition amounts owing, not to exceed
$42,000 in the aggregate.
20. Payments to Indenture Trustee for Existing PRT Notes Prior to Effective
Date.
(a) Within two days of execution of this Agreement, PRT shall pay to the
Indenture Trustee all of the cash held by PCC, PRT and NJMI (the
"Accumulated Cash") after deducting (collectively the "Payables
Reserve") (i) the amounts set forth in
-18-
<PAGE>
Exhibit B, (ii) $250,000 to be delivered to the liquidating trust
contemplated by the Joint Plan, (iii) an additional $50,000 to be held
in reserve exclusively for the payment of any deductible on NJMI's
applicable policies of insurance and (iv) an amount necessary to pay
any ordinary course liabilities of PCC, PRT and NJMI accrued and
outstanding at the time of execution of this Agreement. Such payment
shall be made to the Indenture Trustee for application to outstanding
amounts owed to the holders of the Existing PRT Notes.
(b) Prior to the Effective Date of the Joint Plan, and for so long as no
Agreement Termination Event has occurred, and subject to Bankruptcy
Court approval following the Petition Date, PRT, PCC and NJMI shall
pay to the Indenture Trustee, within 30 days after the end of each
calendar quarter, any cash held by PCC, PRT and/or NJMI ("Excess
Cash") after deducting the Payables Reserve. Such payments shall be
made to the Indenture Trustee for application to outstanding amounts
owed to the holders of the Existing PRT Notes.
21. Refinancing.
(a) Pending Refinancing. HCC hereby confirms and represents that it is
actively pursuing a refinancing (the "HCC Refinancing") of the HCC
Notes (defined below) in an amount sufficient to deposit, and with the
intention of depositing, cash in escrow in the amount of $40,329,375,
which is to be paid to the holders of Class 1 claims in the Chapter 11
Cases pursuant to Sections 4.1(A) and 6.2(Q) of the Joint Plan.
-19-
<PAGE>
(b) Exchange Alternative. The parties to this Agreement hereby agree that
if the HCC Refinancing is no longer being actively pursued or if it is
not consummated by June 30, 1999, then each of them will enter into an
exchange and voting agreement contemplating the issuance of new notes
by PCC (the "New PCC Notes") to the holders of Existing PRT Notes on
the terms set forth in Exhibit 21(b) through a plan of reorganization
substantially similar to the Joint Plan, subject to the recognition by
such parties that certain issues arising under the Investment Company
Act of 1940 shall be resolved on a mutually agreeable basis.
(c) General Agreement. In the event that the parties are obligated to
pursue the transaction contemplated by Section 21(b), HCC hereby
agrees, to the extent permitted by the Indenture relating to its
existing 12 3/4% Senior Secured Notes due 2003 (the "HCC Notes"), that
---------
in the event that it refinances the HCC Notes in full (including
transactions in which 90% or more of the HCC Notes are refinanced with
covenant-stripping amendments to the indenture or defeasance of the
remaining HCC Notes), and in the event that such refinancing occurs
more than 5 1/2 months prior to maturity of the HCC Notes, it will
also refinance the New PCC Notes as part of such refinancing. It is
HCC's intention to refinance the HCC Notes, and to refinance the New
PCC Notes concurrently therewith, as soon as market conditions permit.
In the event of a refinancing of the HCC Notes and the New PCC Notes
by HCC, the holders of the New PCC Notes will have the right to
receive and the obligation to take, in exchange
-20-
<PAGE>
for the New PCC Notes, (i) cash and/or (ii) new notes issued pursuant
to the same indenture as those notes by HCC to the HCC Noteholders
("New Notes"), in an aggregate amount (for these purposes, counting
the New Notes at their issue price), equal to 102.75% of the principal
amount of the New PCC Notes and in the same proportion that holders of
the HCC Notes receive cash and New Notes in the HCC refinancing. If
two or more tranches of New Notes are issued in connection with such
refinancing, the holders of PCC Notes will have the right to a pro
rata participation in each tranche.
22. Professional Fees. PCC, PRT and NJMI jointly and severally agree to pay,
subject to Bankruptcy Court approval if necessary, the reasonable fees and
expenses of Ropes & Gray as counsel for the Consenting Holders, incurred through
the earlier of the effective date of the Joint Plan or the date of an Agreement
Termination Event. PCC, PRT and NJMI also agree to actively support, including
joining in, a motion of the Consenting Holders for payment of such fees as a
substantial contribution to the case pursuant to Bankruptcy Code Section
503(b)(3)(D).
23. Cooperation in Sands Bankruptcy.
(a) Each member of the GBCC Group shall take all actions reasonably
requested by any of PRT, PCC, NJMI and the Consenting Holders, in assisting in
the prosecution of the claims of PCC, PRT and NJMI against the Sands. Except for
reimbursement of actual out of pocket expenses (and not including time), such
assistance shall be provided at no additional cost to PRT, PCC, NJMI or the
Consenting Holders. The GBCC Group shall not be required to have any of their
personnel devote more time to the prosecution of such claims than a reasonable
non-affiliated party would if prosecuting such claims for itself.
-21-
<PAGE>
(b) Without limiting the foregoing, the GBCC Group shall consult with the
Consenting Holders regarding developments in the Sands Bankruptcy and will take
such actions in the Sands Bankruptcy as may reasonably be requested by the
Consenting Holders that do not conflict with fiduciary duties owed to other
creditors or shareholders, applicable laws or regulations, the Interim
Settlement Agreement or the Settlement Agreement.
(c) HCC and NJMI agree that the Services Agreement between them dated as
of January 1, 1994 has been terminated and that HCC hereby releases any claim
for damages, against PCC, PRT or NJMI arising therefrom or related thereto.
24. Specific Performance. It is understood and agreed by each of the parties
hereto that money damages would not be a sufficient remedy for any breach of
this Agreement by any party and each non-breaching party shall be entitled to
specific performance and injunctive or other equitable relief as a remedy of any
such breach.
25. Survival and Assignment. The agreements and covenants contained in
Sections 10, 11, 12, 13, 14, 15, 16, 18, 22, 23 and 24 shall survive substantial
consummation of the Joint Plan. The representation and warranties of HCC and the
GBCC Group contained in Section 6(a)(i)-(v) and the representations and
warranties of the GBCC Group contained in Section 6(b)(i) shall survive
substantial consummation of the Joint Plan. The covenants of HCC, the GBCC Group
and the Consenting Holders contained in Sections 21(b) and 21(c) shall survive
the Agreement Termination Date.
-22-
<PAGE>
SIGNED this 28th day of April, 1999.
GREATE BAY CASINO CORPORATION
Two Galleria Tower, Suite 2200
13455 Noel Road
Dallas, Texas 75240
By: /s/ John C. Hull
--------------------------------------
Its: Chairman
--------------------------------
PRATT CASINO CORPORATION
Two Galleria Tower, Suite 2200
13455 Noel Road
Dallas, Texas 75240
By: /s/ John C. Hull
--------------------------------------
Its: Chairman
--------------------------------
PRT FUNDING CORP.
Two Galleria Tower, Suite 2200
13455 Noel Road
Dallas, Texas 75240
By: /s/ John C. Hull
--------------------------------------
Its: Chairman
--------------------------------
NEW JERSEY MANAGEMENT, INC.
Indiana Avenue and Brighton Park
Atlantic City, NJ 08401
By: /s/ John C. Hull
-----------------------------------
Its: Chairman
--------------------------------
HOLLYWOOD CASINO CORPORATION
Two Galleria Tower, Suite 2200
13455 Noel Road
Dallas, Texas 75240
By: /s/ Jack E. Pratt
--------------------------------------
Its: Chairman
--------------------------------
-23-
<PAGE>
DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION
277 Park Avenue
New York, New York 10172
By: /s/ Howard Shams Existing PRT Notes $ 20,143,000.00
-------------------------------- ---------------
Its: Vice President
-------------------------------
SUNAMERICA INC.
One Sun America Center
38th Floor - Century City
Los Angeles, California 90067
By: /s/ Peter McMillan Existing PRT Notes $ 26,090,000
-------------------------------- ------------
Its: Authorized Agent
--------------------------------
THE PUTNAM ADVISORY COMPANY, INC.
as investment adviser of:
Ameritech Pension Trust
Putnam Offshore Funds (Cayman) Ltd. - Putnam Diversified Income Fund
Strategic Global Fund - High Yield Fixed Income (Putnam) Fund
By: /s/ John R. Verani Existing PRT Notes $350,000
-------------------------------- --------
Its: Senior Vice President
-------------------------------
PUTNAM FIDUCIARY TRUST COMPANY
as investment adviser of:
Putnam High Yield Managed Trust
Putnam High Yield Fixed Income Fund, LLC
By: /s/ John R. Verani Existing PRT Notes $1,295,000.00
-------------------------------- -------------
Its: Senior Vice President
-------------------------------
-24-
<PAGE>
PUTNAM INVESTMENT MANAGEMENT, INC.
as investment adviser of:
Putnam Variable Trust - Putnam VT High Yield Fund
Putnam Asset Allocation Funds - Balanced Portfolio
Putnam High Yield Trust
Putnam Asset Allocation Funds - Conservative Portfolio
Putnam High Yield Advantage Fund
Putnam High Income Convertible and Bond Fund
Putnam Asset Allocation Funds - Growth Portfolio
Putnam Managed High Yield Trust
The George Putnam Fund of Boston
Putnam Convertible Opportunities and Income Trust
Putnam Master Income Trust
Putnam Premier Income Trust
Putnam Master Intermediate Income Trust
Putnam Diversified Income Trust
Putnam Variable Trust - Putnam VT Diversified Income Fund
Putnam Balanced Retirement Fund
Travelers Series Fund, Inc. - Putnam Diversified Income Portfolio
Lincoln National Global Asset Allocation Fund, Inc.
Putnam Variable Trust - Putnam VT Global Asset Allocation Fund
Putnam Strategic Income Fund
Putnam Funds Trust - Putnam High Yield Total Return Fund
By: /s/ John R. Verani Existing PRT Notes $34,945,000.00
------------------------------- --------------
Its: Senior Vice President
----------------------------
-25-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF HOLLYWOOD CASINO CORPORATION AND
SUBSIDIARIES AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<CIK> 0000888245
<NAME> HOLLYWOOD CASINO CORPORATION
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 53,481
<SECURITIES> 0
<RECEIVABLES> 4,370
<ALLOWANCES> 1,552
<INVENTORY> 1,149
<CURRENT-ASSETS> 69,913
<PP&E> 252,106
<DEPRECIATION> 84,292
<TOTAL-ASSETS> 278,390
<CURRENT-LIABILITIES> 43,727
<BONDS> 217,938
0
0
<COMMON> 2
<OTHER-SE> 7,840
<TOTAL-LIABILITY-AND-EQUITY> 278,390
<SALES> 0
<TOTAL-REVENUES> 69,773
<CGS> 0
<TOTAL-COSTS> 50,961
<OTHER-EXPENSES> 11,123
<LOSS-PROVISION> 124
<INTEREST-EXPENSE> 7,030
<INCOME-PRETAX> 535
<INCOME-TAX> 205
<INCOME-CONTINUING> 330
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 330
<EPS-PRIMARY> 0.01
<EPS-DILUTED> 0.01
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF HWCC - TUNICA, INC. AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000927801
<NAME> HWCC-TUNICA INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 12,475
<SECURITIES> 0
<RECEIVABLES> 2,615
<ALLOWANCES> 824
<INVENTORY> 617
<CURRENT-ASSETS> 18,236
<PP&E> 125,992
<DEPRECIATION> 40,759
<TOTAL-ASSETS> 115,554
<CURRENT-LIABILITIES> 11,271
<BONDS> 86,104
0
0
<COMMON> 0
<OTHER-SE> 18,179
<TOTAL-LIABILITY-AND-EQUITY> 115,554
<SALES> 0
<TOTAL-REVENUES> 26,375
<CGS> 0
<TOTAL-COSTS> 19,382
<OTHER-EXPENSES> 3,447
<LOSS-PROVISION> 49
<INTEREST-EXPENSE> 2,605
<INCOME-PRETAX> 892
<INCOME-TAX> 0
<INCOME-CONTINUING> 892
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 892
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
