<PAGE>
Filed pursuant to Rule 424(b)(4)
SEC File No. 333-83081,
333-83081-01, 333-83081-002
[HOLLYWOOD CASINO LOGO APPEARS HERE]
Offer to Exchange All Outstanding
Original 11 1/4% Senior Secured Notes due 2007
for
Registered 11 1/4% Senior Secured Notes due 2007
and
Original Floating Rate Senior Secured Notes due 2006
for
Registered Floating Rate Senior Secured Notes due 2006
of
Hollywood Casino Corporation
. The exchange offer will . You will not owe
expire at 5:00 p.m., New additional federal income
York City time, on taxes if you exchange your
September 14, 1999, unless original notes.
we extend this date.
. If you fail to tender your
. If you decide to original notes, you will
participate in this continue to hold
exchange offer, the unregistered securities
registered notes you and your ability to
receive will be the same transfer them could be
as your original notes, adversely affected.
except that, unlike your
original notes, you will
be able to offer and sell
the registered notes
freely to any potential
buyer in the United
States.
. No public market currently
exists for the notes. We
do not intend to list the
notes on any securities
exchange and, therefore,
no active public market is
anticipated.
. We will not receive any
proceeds from the exchange
offer.
----------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is
a criminal offense.
We urge you to read the "Risk Factors" section of this prospectus beginning on
page 12, which describes information you should consider before participating
in the exchange offer.
----------------
The date of this prospectus is August 13, 1999.
<PAGE>
PROSPECTUS SUMMARY
This brief summary highlights selected information contained elsewhere in
this prospectus. Because it is a summary, it does not contain all the
information you should consider before exchanging your original notes. You
should read the entire prospectus carefully, including the text under the
section entitled "Risk Factors" and the consolidated financial statements and
the notes relating to those statements. Except where otherwise noted, the words
"we," "our," "ours," "us" and "Hollywood Casino" mean Hollywood Casino
Corporation and all of its subsidiaries.
The Company
We develop, own and operate highly themed casino entertainment facilities
under the service mark Hollywood Casino(R). We currently own and operate two
casinos, one in Aurora, Illinois, and the other in Tunica County, Mississippi.
Our properties enjoy leading market positions in two of the five largest gaming
markets in the United States. The Aurora casino, located approximately 35 miles
west of downtown Chicago, features two riverboat casinos and a large land-based
pavilion. The Tunica casino, located approximately 30 miles south of Memphis,
Tennessee, includes a dockside casino and a hotel and entertainment complex.
Our facilities feature our unique Hollywood theme, which incorporates the
excitement and glamour of the motion picture industry by utilizing designs
inspired by famous movies, displays of motion picture memorabilia and movie-
themed gaming, entertainment and dining areas. In addition to our existing
properties, we recently received approval and have a license to develop, own
and operate a destination gaming resort in Shreveport, Louisiana, located
approximately 180 miles east of Dallas, Texas. We believe the Shreveport
casino, which will also incorporate our Hollywood theme, will be the premier
gaming facility in the market offering customers the largest riverboat casino
and numerous entertainment amenities. We believe that our unique Hollywood
theme differentiates our properties from those of our competitors by providing
a high quality gaming and entertainment environment, which has enabled us to
develop strong customer loyalty. For the year ended December 31, 1998, we
generated net revenues of $268.8 million, a net loss of $1.6 million and
earnings before interest, tax, depreciation and amortization expenses, adjusted
to give effect to the anticipated termination of management and consulting
agreements in connection with our acquisition of Pratt Casino Corporation
("Adjusted Pro Forma EBITDA"), of $52.3 million.
Recent Transactions
We have recently entered into or completed the following transactions:
. Acquisition and Termination of Management and Consulting Contracts. We
intend to use $40.3 million of the proceeds from the original offering
of the notes to finance the acquisition of the Aurora management and
Tunica consulting contracts by acquiring the stock of Pratt Casino
Corporation and satisfying its obligations. On April 28, 1999, we
entered into a voting agreement to effect these transactions. On May 25,
1999, Pratt Casino Corporation, PRT Funding Corp. and New Jersey
Management, Inc. filed for bankruptcy under a joint plan of
reorganization, as required by the terms of the voting agreement. We
expect to purchase Pratt Casino Corporation when it emerges from
bankruptcy.
. Tender Offer for our 12 3/4% Senior Secured Notes. In connection with
the original offering of the notes, we consummated a tender offer for
our 12 3/4% Senior Secured Notes due 2003. Tenders representing
approximately 97% of the aggregate outstanding principal amount of the
12 3/4% Senior Secured Notes were received by the depositary.
Simultaneous with the completion of the original offering of the notes,
we deposited government securities in an amount sufficient to
immediately discharge our obligations with respect to the 12 3/4% Senior
Secured Notes not tendered in the tender offer through an irrevocable
redemption of those notes on November 1, 1999.
1
<PAGE>
. Aurora Expansion. We intended to use $40 million of the proceeds from
the offering of the original notes to replace our smaller riverboat at
our Aurora casino with a larger, newly constructed riverboat. However,
on June 25, 1999, the Governor of Illinois signed into law legislation
passed by the Illinois legislature that allows dockside gaming for
existing licensees. As a result of this legislation, we now plan to
replace our two existing riverboats with a single, two level dockside
gaming facility. We believe the $40 million in proceeds from the
offering of the original notes will be sufficient for the construction
of our dockside facility. Pending receipt of regulatory approvals, we
expect to commence construction in the fourth quarter of 1999. Once
commenced, we expect construction to be completed in approximately 14
months.
. Shreveport Casino Financing. On August 10, 1999, Hollywood Casino
Shreveport and Shreveport Capital Corporation, two of our subsidiaries,
completed an offering of $150 million aggregate principal amount of
first mortgage notes. The net proceeds of the first mortgage notes
offering will be utilized to fund the development of our riverboat
casino, hotel and entertainment resort in Shreveport, Louisiana. The
first mortgage notes have a fixed interest rate of 13% and will accrue
contingent interest after the Shreveport casino begins operating. With
the completion of the first mortgage notes offering and $30 million in
committed furniture, fixtures and equipment financing to be provided by
a group led by Bank of America, Hollywood Casino Shreveport has all of
the required financing to construct, equip and open the Shreveport
casino. The funding for the development of the Shreveport casino also
includes $50 million in equity which has been already contributed to the
project by us.
Principal Executive Offices and Telephone Number
Our principal executive offices are located at Two Galleria Tower, Suite
2200, 13455 Noel Road, Dallas, Texas 75240, and our telephone number is (972)
392-7777.
2
<PAGE>
The Exchange Offer
Securities to be On May 19, 1999, we issued $310 million aggregate
Exchanged............... principal amount of 11 1/4% senior secured notes and
$50 million aggregate principal amount of floating
rate senior secured notes to the initial purchasers
in the original offering in a transaction exempt
from the registration requirements of the Securities
Act of 1933. The terms of the original notes and the
registered notes will be the same, except that,
unlike the original notes, you will be able to offer
and sell the registered notes freely to any
potential buyer in the United States. For more
details, see the section entitled "Description of
the Registered Notes."
The Exchange Offer....... You must properly tender your original notes in
accordance with the procedures described on page 78
of this prospectus. We will exchange all original
notes that you properly tender and do not withdraw.
If we exchange your original notes, we will issue
registered notes promptly after the expiration date
of the exchange offer.
Registration Rights We sold the original notes to the initial
Agreement................ purchasers, in a transaction exempt from the
registration requirements of the Securities Act. The
original notes were immediately resold by the
initial purchasers in reliance on Rule 144A under
the Securities Act. In connection with the sale, we
and those of our subsidiaries that are guarantors
entered into a registration rights agreement with
the initial purchasers requiring us to make the
exchange offer. The registration rights agreement
further provides that we, together with the
guarantors, must use our reasonable best efforts to:
. file the registration statement with respect
to the exchange offer on or before July 18,
1999;
. cause the registration statement with respect
to the exchange offer to be declared
effective on or before October 16, 1999;
. consummate the exchange offer within 30
business days after the registration
statement with respect to the exchange offer
becomes effective; and
. file a shelf registration statement for the
resale of the original notes with respect to
any original notes for which we cannot effect
an exchange offer within the above time
periods or if any holders of original notes
are legally prohibited from participating in
the exchange offer.
Ability to Resell New Based on interpretations by the Staff of the SEC set
Notes................... forth in published no-action letters, we believe you
may offer for resale, resell and otherwise freely
transfer the registered notes without registration
or delivering a prospectus to a buyer if:
. you acquire the registered notes in the
ordinary course of your business;
. you are not participating, do not intend to
participate and have no arrangement or
understanding with any person to participate
in the distribution of registered notes; and
. you are not related to us.
3
<PAGE>
However, the SEC has not considered this exchange
offer in the context of a no-action letter and we
cannot be sure that the staff of the SEC would make
the same determination with respect to the exchange
offer as in other circumstances. Furthermore, you
must, unless you are a broker-dealer, acknowledge
that you are not engaged in, and do not intend to
engage in, a distribution of your registered notes
and have no arrangement or understanding to
participate in a distribution of registered notes.
If you are a broker-dealer that receives registered
notes for your own account pursuant to the exchange
offer you must acknowledge that you will comply with
the prospectus delivery requirements of the
Securities Act in connection with any resale of your
registered notes. If you are a broker-dealer who
acquired original notes directly from us and not as
a result of market-making activities or other
trading activities, you may not rely on the SEC
staff's interpretations discussed above or
participate in the exchange offer and must comply
with the prospectus delivery requirements of the
Securities Act in order to resell the registered
notes.
The exchange offer is not being made to:
. holders of original notes in any jurisdiction
in which the exchange offer or its acceptance
would not comply with the securities or blue
sky laws of that jurisdiction; and
. holders of original notes who we control.
No Minimum Required......
There is no minimum amount of original notes that
you must tender in the exchange offer.
Procedures for
Exchanging Your If you wish to exchange your original notes for
Original Notes.......... registered notes you must transmit to State Street
Bank and Trust Company, our exchange agent, on or
before the expiration date either:
. a properly completed and executed letter of
transmittal, which we have provided to you
with this prospectus, or a facsimile of the
letter of transmittal, together with your
original notes and any other documentation
requested by the letter of transmittal;
. a computer generated message, in which you
acknowledge and agree to be bound by the
terms of the letter of transmittal,
transmitted by means of the Depository Trust
Company's Automated Tender Offer Program
system; or
. a notice of guaranteed delivery, in
accordance with the procedures described
under the heading "Description of the
Exchange Offer--Guaranteed Delivery
Procedures."
By agreeing to be bound by the terms of the letter
of transmittal, you will be deemed to have made the
representations described on page 76 under the
heading "Description of the Exchange Offer--
Procedures for Tendering Your Notes."
4
<PAGE>
Guaranteed Delivery If you wish to exchange your original notes for
Procedures.............. registered notes and time will not permit the
documents required by the letter of transmittal to
reach the exchange agent before the expiration date
of the exchange offer, or you cannot complete the
procedure for book-entry transfer on a timely basis,
you must exchange your original notes according to
the guaranteed delivery procedures described on page
81 under the heading "Description of the Exchange
Offer--Guaranteed Delivery Procedures."
Special Procedures for
Beneficial Owners....... If you are a beneficial owner whose original notes
are registered in the name of a broker, dealer,
commercial bank, trust company or other nominee and
you wish to exchange your original notes for
registered notes, you should contact the registered
holder promptly and instruct the registered holder
to exchange the original notes for you. If you wish
to exchange your original notes for registered notes
on your own behalf, you must either make appropriate
arrangements to register ownership of the original
notes in your name or obtain a properly completed
bond power from the registered holder.
The transfer of registered ownership may take
considerable time and you may not be able to be
complete the transfer before the expiration date of
the exchange offer.
Expiration Date.......... The exchange offer will expire at 5:00 p.m., New
York City time, on September 14, 1999 or such later
date and time to which it is extended.
Withdrawal Rights........ Unless we extend the date, you may withdraw your
tendered original notes at any time before 5:00
p.m., New York City time, on the expiration date of
the exchange offer.
Interest on the
Registered Notes and Interest on your registered notes will accrue from
the Original Notes...... the date of the original issuance of the original
notes or from the date of the last periodic payment
of interest on the original notes, whichever is
later. Interest will not be paid on original notes
that are tendered and accepted for exchange.
Exchange Agent........... State Street Bank and Trust Company is serving as
exchange agent in connection with the exchange
offer.
Material Federal Income
Tax Considerations...... The exchange of your original notes for registered
notes in connection with the exchange offer should
not constitute a sale or an exchange for federal
income tax purposes. See "Material Federal Income
Tax Considerations."
Effect of Not If you fail to tender your original notes, you will
Tendering............... continue to hold unregistered securities and your
ability to transfer them could be adversely
affected.
Please review the information on page 76 under the heading "Description of
the Exchange Offer" for more detailed information concerning the exchange
offer.
5
<PAGE>
The Registered Notes
The summary below describes the principal terms of the registered notes. Some
of the terms and conditions described below are subject to important
limitations and exceptions. The "Description of the Registered Notes" section
of this prospectus beginning on page 83 contains a more detailed description of
all of the material terms and conditions of the registered notes.
Issuer.................. Hollywood Casino Corporation
Notes Offered........... $310 million in aggregate principal amount of 11 1/4%
registered fixed rate senior secured notes due 2007.
$50 million in aggregate principal amount of
registered floating rate senior secured notes due
2006.
The registered fixed rate notes and registered
floating rate notes are referred to collectively as
the "registered notes." The original notes and the
registered notes are referred to collectively as the
"notes."
Maturity................ The fixed rate notes will mature on May 1, 2007. The
floating rate notes will mature on May 1, 2006.
Interest................ Interest on the notes will be payable semi-annually
on each May 1 and November 1, commencing November 1,
1999. The fixed rate notes will bear interest at a
rate of 11.250% per annum. The floating rate notes
will bear interest at a rate per annum equal to LIBOR
plus 628 basis points. The initial rate of interest
on the floating rate notes will be 11.360% and will
be reset semi-annually.
Subsidiary Guarantors... The registered notes will be unconditionally
guaranteed on a senior secured basis by HWCC-Tunica,
Inc., HWCC-Shreveport, Inc. and in the future by
certain of our U.S. subsidiaries. Hollywood Casino-
Aurora, Inc. and HWCC-Louisiana, Inc. will not be
guarantors. If we cannot make payments on the notes
when they are due, the guarantors must make them
instead.
Ranking................. The registered notes will be our senior secured
obligations. The registered notes will rank equal in
right of payment with all of our existing and future
senior debt and will rank senior in right of payment
to any of our future subordinated debt. The
guarantees will be senior secured obligations of the
guarantors. The guarantees will rank equal in right
of payment with all of the guarantors' existing and
future senior debt and will rank senior in right of
payment to any of their future subordinated debt. The
registered notes will be structurally subordinated to
all indebtedness and other liabilities of Hollywood
Casino-Aurora, except to the extent of the principal
balance of the Hollywood Casino-Aurora intercompany
note described below, and to all indebtedness and
other liabilities of HWCC-Louisiana and each other
non-guarantor subsidiary.
Security................ The registered notes will be secured by:
. a pledge of the capital stock of some of our
U.S. subsidiaries, including Hollywood Casino-
Aurora, HWCC-Tunica, HWCC- Shreveport, HWCC-
Louisiana and all of the capital stock of future
U.S. subsidiaries and up to 65% of the capital
stock of any foreign subsidiaries that guarantee
the notes;
6
<PAGE>
. a pledge of the intercompany note payable to us
and issued by HWCC-Tunica and the intercompany
note payable to us and issued by Hollywood
Casino-Aurora, which has a balance of $31.5
million and will increase as additional amounts
are loaned by us to Hollywood Casino-Aurora up
to $108 million;
. a collateral assignment of the security
documents relating to the Hollywood Casino-
Aurora intercompany note, including a first
priority lien on substantially all of its assets
limited to the then outstanding amount of the
intercompany note of Hollywood Casino-Aurora;
. a first priority security interest in the $40.7
million of the net proceeds of the original
offering that were deposited into escrow,
pending release in connection with completion of
the acquisition of Pratt Casino Corporation or
the special mandatory redemption; and
. a first priority security interest in the
Company's trademarks and service marks.
HWCC-Tunica's guarantee will be secured by
substantially all of the assets of HWCC-Tunica. HWCC-
Shreveport's guarantee will be secured by a
collateral assignment of the management contract for
the planned Shreveport casino. Although Hollywood
Casino-Aurora will not guarantee the registered
notes, the indenture provides that Hollywood Casino-
Aurora may not, directly or indirectly, create,
incur, assume or suffer to exist any lien on any
asset owned now or in the future, or on any income or
profits from any of its assets, or assign or convey
any right to receive income from any of its assets,
except permitted liens. For more information on the
collateral securing the notes, see the discussion
under the section entitled "Description of the
Registered Notes--Security."
Optional Redemption..... At any time on or prior to May 1, 2002, we may redeem
up to 35% of the original aggregate principal amount
of the fixed rate notes with the net cash proceeds of
qualified equity offerings, at a redemption price
equal to 111.250% of the principal amount thereof,
plus accrued interest and any liquidated damages to
the date of redemption; provided that at least 65% of
the original aggregate principal amount of fixed rate
notes remains outstanding immediately after any
redemption. In addition, at any time on or after May
1, 2003, we may, at our option, redeem the fixed rate
notes in whole or in part at the prices set forth in
this prospectus under the heading "Description of the
Registered Notes--Optional redemption."
At any time, we may, at our option, redeem the
floating rate notes, in whole or in part, at the
redemption prices set forth in this prospectus under
the heading "Description of the Registered Notes--
Optional redemption," plus accrued and unpaid
interest to the date of redemption. For more
information on our optional redemption rights, see
the discussion under the section entitled
"Description of the Registered Notes--Optional
redemption."
Special Mandatory We have deposited $40.7 million in a special account
Redemption............. with the trustee to secure our obligation to redeem
$40.3 million of the notes at 101% of their principal
amount if we determine that we cannot consummate our
acquisition of Pratt Casino Corporation or, in any
event, if it has not been completed by January 31,
2000.
7
<PAGE>
Covenants of We will issue the registered notes under an indenture
Indenture.............. with State Street Bank and Trust Company. The
indenture, among other things, restricts our ability
and the ability of our restricted subsidiaries to:
. borrow money;
. pay dividends on stock or repurchase stock;
. make investments;
. use assets as security in other transactions;
and
. sell certain assets or merge with or into other
companies.
For more details on these restrictive covenants, see
the discussion under the section entitled
"Description of the Registered Notes--Restrictive
Covenants."
Form of Registered The registered notes will be represented by one or
Notes.................. more permanent global notes in definitive, fully
registered form. The global notes will be registered
in the name of a nominee of The Depository Trust
Company and will be deposited with State Street Bank
and Trust Company, as custodian for The Depository
Trust Company's nominee.
For more details, see the discussion under the
section entitled "Description of the Registered
Notes--Book-Entry; Delivery and Form."
Use of Proceeds......... We will not receive any cash proceeds from the
issuance of the registered notes in connection with
the exchange offer.
Risk Factors
We urge you to carefully review the risk factors beginning on page 12 for a
discussion of factors you should consider before exchanging your original notes
for registered notes.
8
<PAGE>
Summary Financial and Operating Data
The following table summarizes certain of our selected historical income
statement data for fiscal years 1998, 1997 and 1996 that have been derived from
our financial statements, which have been audited by Deloitte & Touche LLP,
independent auditors, and are included elsewhere in this prospectus. On
December 31, 1996, we distributed our approximate 80% ownership interest in
Greate Bay to our stockholders. The adjusted 1996 column has been derived from
our audited financial statements and adjusted to exclude the operations of
Greate Bay and its subsidiaries. For a presentation of the consolidated
financial information for the year ended December 31, 1996 and prior periods,
which include the results of operations of Greate Bay, see "Selected
Consolidated Financial Information" and our financial statements and notes
thereto. In 1998, our results of operations were negatively impacted by a
significant increase in gaming taxes imposed by the Illinois legislature.
Gaming taxes incurred by the Aurora casino increased by $11.6 million in 1998.
Financial data as of March 31, 1999 and for the three months ended March 31,
1999 and 1998 have been derived from our unaudited financial statements, and in
our opinion, include all normal recurring adjustments necessary for a fair
presentation of such information. Operating results for the three months ended
March 31, 1999 are not necessarily indicative of the results that may be
achieved for the year ended December 31, 1999. The summary pro forma operating
data for the three months ended March 31, 1999 and for the year ended
December 31, 1998 give effect to the offering of the original notes, the
acquisition of Pratt Casino Corporation, and the tender offer for and
satisfaction and discharge of our 12 3/4% Senior Secured Notes, as if these
transactions had occurred on January 1, 1998. The summary pro forma balance
sheet data at March 31, 1999 gives effect to the offering of the original
notes, the acquisition of Pratt Casino Corporation, and the tender offer for
and satisfaction and discharge of our 12 3/4% Senior Secured Notes, as if these
transactions had occurred on March 31, 1999. The summary financial and
operating data set forth below should be read in conjunction with the financial
statements and notes thereto and with "Capitalization," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business."
<TABLE>
<CAPTION>
Three Months
Ended March 31, Year Ended December 31,
---------------- -----------------------------------------
Adjusted
1999 1998 1998 1997(1) 1996(2) 1996
------- ------- --------- --------- --------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Net revenues........... $69,773 $63,807 $ 268,760 $ 267,757 $ 258,487 $530,580
Operating expenses(3).. (60,185) (54,747) (234,155) (226,851) (238,145) (505,839)
Income from operations
before write down of
assets................ 9,588 9,060 34,605 40,906 20,342 24,741
Write down of assets... -- -- -- (19,678) (22,141) (22,141)
Income (loss) from
operations............ 9,588 9,060 34,605 21,228 (1,799) 2,600
Interest income........ 359 672 2,844 1,896 2,299 3,101
Interest expense....... (7,389) (7,451) (30,260) (30,437) (28,862) (59,090)
Net income (loss)...... 330 69 (1,605) (17,347) (29,103) (55,293)
Other Financial Data:
Adjusted EBITDA(4):
Aurora casino EBITDA
before management
fees(3)............... $10,534 $10,002 $ 39,228 $ 46,724 $ 44,100 $ 44,100
Tunica casino EBITDA
before consulting fees
and land lease........ 6,758 6,601 25,666 29,577 20,601 20,601
Greate Bay EBITDA...... -- -- -- -- -- 10,914
Tunica land lease...... (995) (940) (3,899) (3,935) (3,486) (3,486)
Management and
consulting fees....... (2,900) (2,846) (10,072) (10,809) (10,560) --
General Partnership
interest.............. 259 304 1,097 711 -- --
Development expenses... (215) (255) (779) (1,480) (1,065) (1,065)
Corporate expenses..... (1,876) (1,513) (6,629) (5,441) (8,288) (7,328)
------- ------- --------- --------- --------- --------
Total Adjusted
EBITDA(3)(4).......... $11,565 $11,353 $ 44,612 $ 55,347 $ 41,302 $ 63,736
======= ======= ========= ========= ========= ========
Cash provided by
operating activities.. $15,553 $19,262 $ 16,751 $ 31,613 $ 13,673 $ 12,309
Cash (used in) provided
by investing
activities............ (800) 1,584 (8,490) 1,961 (15,056) (42,143)
Cash used in financing
activities............ (3,390) (3,242) (6,402) (14,803) (5,555) (5,216)
Capital
expenditures(5)....... (3,698) (1,899) (12,037) (5,101) (45,035) (53,078)
Depreciation and
amortization.......... (4,000) (4,214) (16,562) (18,901) (21,006) (40,836)
Ratio of earnings to
fixed charges(6)...... 1.1x 1.1x -- -- -- --
Pro Forma Operating
Data(7):
Pro Forma Adjusted
EBITDA(4)(8).......... $13,887 $ 52,306
Cash interest
expense(9)............ 10,565 43,273
Ratio of Pro Forma
Adjusted EBITDA to
cash interest
expense............... 1.3x 1.2x
Ratio of total pro
forma debt to Pro
Forma Adjusted
EBITDA................ N/A 7.4x
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
As of March 31,
1999
-----------------
Pro
Actual Forma
-------- --------
(in thousands)
<S> <C> <C>
Balance Sheet Data:
Cash and cash equivalents(10).............................. $ 53,481 $125,072
Total assets............................................... 278,390 355,837
Total debt................................................. 226,455 388,482
Shareholders' equity (deficit)(11)......................... 7,842 (62,754)
</TABLE>
- --------
(1) Restated to reflect the modification of our income tax treatment resulting
from the distribution of the common stock of Greate Bay.
(2) Adjusted to exclude the financial information of Greate Bay and its
subsidiaries.
(3) In 1998, the Illinois gaming tax rate changed from a flat rate of 20% to a
graduated rate that increases from 15% to a maximum rate of 35%. Gaming
taxes incurred by the Aurora casino in 1998 increased by $11.6 million, or
38%, from 1997.
(4) Adjusted EBITDA for the periods presented represents earnings before
interest, taxes, depreciation and amortization, extraordinary items and
write down of assets of $19.7 million and $22.1 million for the years ended
December 31, 1997 and 1996, respectively and tax settlement costs of $1.1
million for the year ended December 31, 1998. Adjusted EBITDA is presented
because we believe it is frequently used by securities analysts, investors
and other interested parties in the evaluation of companies in our
industry. However, other companies in our industry may calculate EBITDA
differently than we do. Adjusted EBITDA is not a measurement of financial
performance under generally accepted accounting principles and should not
be considered as an alternative to cash flow from operating activities or
as a measure of liquidity or an alternative to net income as indicators of
our operating performance or any other measures of performance derived in
accordance with generally accepted accounting principles.
(5) Capital expenditures in 1998 included the partial funding of our
$13 million upgrade of the Tunica casino and the cost of the five year hull
inspection of the Aurora casino. Capital expenditures in 1996 included the
costs of completing the new hotel tower and other significant improvements
at the Tunica casino and a new parking garage and banquet space at the
Aurora casino.
(6) Earnings were insufficient to cover fixed charges by $0.3 million, $11.6
million and $55.7 million in each of 1998, 1997 and 1996, respectively, and
by $29.2 million in 1996 as adjusted. For purposes of computing the ratio
of earnings to fixed charges, fixed charges consist of interest expensed
and capitalized, amortized premiums, discounts and capitalized expenses
relating to debt and 33% of rent expense, which management believes is
representative of the interest component of rent expense. Earnings consist
of income from continuing operations before income taxes and equity in
earnings of unconsolidated affiliates, plus fixed charges, other than
capitalized interest, but excluding the amortization thereof.
(7) If we do not acquire Pratt Casino Corporation and we redeem $40.3 million
of the notes pursuant to the special mandatory redemption, pro forma
operating data for the periods presented would have been: (i) Three months
ended March 31, 1999: Pro forma adjusted EBITDA of $11.6 million, cash
interest expense of $9.4 million and total pro forma debt of $348.2 million
and (ii) Year ended December 31, 1998: Pro Forma adjusted EBITDA of $44.6
million, cash interest expense of $38.7 million and total pro forma debt of
$347 million.
(8) Pro Forma adjusted EBITDA gives effect to the consummation of the
acquisition of Pratt Casino Corporation and was computed as follows:
<TABLE>
<CAPTION>
Three Months Ended Year Ended
March 31, 1999 December 31, 1998
------------------ -----------------
(in thousands)
<S> <C> <C>
Total adjusted EBITDA................... $11,565 $44,612
Adjustment for effective purchase of
Aurora management contract
(represents the limited partnership
interest in the partnership that
manages the Aurora casino)........... 2,022 6,494
Adjustment for effective purchase of
Tunica consulting contract
(consulting fee paid under the Tunica
consulting contract)................. 300 1,200
------- -------
Pro Forma adjusted EBITDA........... $13,887 $52,306
======= =======
</TABLE>
10
<PAGE>
(9) Cash interest expense represents cash interest that would have been paid on
the notes at a blended interest rate of 11.3% and actual cash interest that
was paid on our outstanding indebtedness other than the 12 3/4% Senior
Secured Notes being refinanced in this offering.
(10) Pro forma cash and cash equivalents includes (a) unapplied net offering
proceeds of $40 million for the Aurora casino expansion and (b) unapplied
net offering proceeds of $25 million and cash on hand of $22.5 million to
fund the remainder of our $50 million contribution to the planned
Shreveport casino.
(11) Pro forma accumulated deficit includes the following: a $39.9 million net
charge from the acquisition of Pratt Casino Corporation and a $30.7
million extraordinary loss on the early retirement of our 12 3/4% Senior
Secured Notes.
11
<PAGE>
RISK FACTORS
We urge you to carefully consider the following factors, as well as the
other matters described in this prospectus.
Leverage--We have a substantial amount of debt, which could adversely affect
our financial condition and results of operations and prevent us from
fulfilling our obligations under the notes.
We currently have a large amount of indebtedness when compared to the equity
of our stockholders. In fact, primarily as a result of the loss on the early
retirement of our 12 3/4% Senior Secured Notes and the related write-off of
the deferred financing fees on those notes, the acquisition of Pratt Casino
Corporation and the tender offer and satisfaction and discharge of our 12 3/4%
Senior Secured Notes, we have a significant negative net worth. Moreover, the
terms of the indenture governing the notes limit, but do not prohibit, the
incurrence of additional indebtedness. If new debt is added to our current
debt levels, the related risks that we now face could intensify. After giving
pro forma effect to the offering of the original notes and the use of proceeds
as contemplated, we would have had total debt and stockholders' deficit at
March 31, 1999 as set forth below:
<TABLE>
<CAPTION>
As of March 31, 1999
--------------------
(in thousands)
<S> <C>
Pro forma total long-term indebtedness.................. $384,965
Pro forma stockholders' deficit......................... (62,754)
</TABLE>
Pro forma earnings would have been insufficient to cover pro forma fixed
charges for the 12 months ended December 31, 1998 by $5.9 million and for the
three months ended March 31, 1999 by $518,000. If we do not complete the
acquisition of Pratt Casino Corporation and instead redeem $40.3 million of
the notes pursuant to the special mandatory redemption, pro forma earnings
would have been insufficient to cover pro forma fixed charges for the 12
months ended December 31, 1998 by $8.9 million and for the three months ended
March 31, 1999 by $1.7 million.
Our large amount of indebtedness could, for example:
. make it more difficult for us to satisfy our obligations with
respect to the notes or other indebtedness and, if we fail to comply
with the requirements of this indebtedness, could result in an event
of default;
. require us to use a substantial portion of our cash flow from
operations to pay indebtedness and reduce the availability of this
cash flow to fund working capital, capital expenditures and other
general corporate activities;
. limit our ability to obtain additional financing in the future for
capital expenditures, working capital and other general corporate
activities;
. impair our ability to successfully withstand a downturn in our
business or the economy in general; and
. place us at a competitive disadvantage against other less leveraged
competitors.
The occurrence of any one of these events could have a material adverse
effect on our financial condition, results of operations and ability to
satisfy our obligations under the notes. In addition, we will face interest
rate risk since interest expense on our floating rate notes will vary based on
changes in LIBOR. As a result, our interest rates could increase, which could
have a material adverse effect on our financial condition, results of
operations and ability to satisfy our obligations under the notes. For more
information on the requirements of the notes and our other indebtedness, see
the discussion under the sections entitled "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources" and "Description of the Registered Notes."
12
<PAGE>
Ability to Service Debt--We may not be able to generate sufficient cash flow
to meet our debt service obligations.
Our ability to make payments on and to refinance our indebtedness, including
the notes, and to fund planned capital expenditures depends on our ability to
generate cash flow in the future. This, to a certain extent, is subject to
general economic, financial, competitive, legislative and regulatory factors
and other factors, including weather, that are beyond our control. We cannot
assure you that our business will generate cash flow from operations in an
amount sufficient to enable us to pay our indebtedness, including the notes,
or to fund our other liquidity needs. As a result, we may need to refinance
all or a portion of our indebtedness, including the notes, on or before
maturity. We cannot assure you that we will be able to refinance any of our
indebtedness on commercially reasonable terms or at all. Our inability to
generate sufficient cash flow or refinance our indebtedness on commercially
reasonable terms would have a material adverse effect on our financial
condition, results of operations and ability to satisfy our obligations under
the notes.
Limits on Collateral--The trustee's ability to realize on the collateral
securing the notes and the guarantees may be limited.
The registered notes will be secured by:
. a pledge of promissory notes payable to us and issued by HWCC-Tunica
and Hollywood Casino- Aurora;
. a collateral assignment of the security documents relating to the
Hollywood Casino-Aurora intercompany note, including a first
priority lien on the assets of Hollywood Casino-Aurora limited to
the then outstanding balance of the intercompany note, which will
initially be $31.5 million and will increase up to $108 million as
additional advances are made from us to Hollywood Casino-Aurora; and
. a pledge of the capital stock of certain of our U.S. subsidiaries,
including Hollywood Casino-Aurora, HWCC-Tunica, HWCC-Shreveport and
HWCC-Louisiana, and up to 65% of the capital stock of our foreign
subsidiaries.
HWCC-Tunica's guarantee will be secured by substantially all of the assets
of HWCC-Tunica. HWCC-Shreveport's guarantee will be secured by a collateral
assignment of the management contract for the planned Shreveport casino.
The liens securing the Hollywood Casino-Aurora intercompany note
collaterally assigned to the trustee to secure the notes is limited to the
balance under the Hollywood Casino-Aurora intercompany note, which as of the
date of the indenture was $31.5 million. The liens will be increased from time
to time to secure additional amounts loaned by us to Hollywood Casino-Aurora,
including upon the expected advances of $37 million in connection with the
acquisition of Pratt Casino Corporation and up to approximately $40 million in
connection with the Aurora casino expansion, up to a principal amount of $108
million. We intend to loan the funds as needed to Hollywood Casino-Aurora for
use in connection with the Aurora casino expansion. We granted a first
priority security interest in the account to the trustee for the benefit of
the holders of the notes. However, we are not obligated to loan the funds
deposited in the account to Hollywood Casino-Aurora to finance the planned
Aurora casino expansion or to maintain a minimum balance in the account
pending any loan, and we may use the funds for any purpose permitted by the
terms of the indenture, including as general working capital. Accordingly, in
the event of a default, we cannot assure you that any funds will be available
in the account to meet our obligations under the notes or that the Aurora
intercompany note or the liens securing the intercompany note will be
increased in the future.
We cannot be sure that upon an event of default the proceeds of any sale of
the collateral in whole under the indenture and the related security documents
would be sufficient to satisfy our obligations under the notes or the
guarantors' obligations under the guarantees. If the proceeds were
insufficient, the deficiency would represent an unsecured obligation of
Hollywood Casino and the guarantors and we cannot be sure that you would
recover the deficiency. Neither we nor the guarantors prepared an appraisal of
the collateral securing the notes, and the value of the collateral at any time
will depend on market and other economic conditions including the availability
of suitable buyers for the collateral. For more information, see the
discussion under the section entitled "Description of the Registered Notes--
Security."
13
<PAGE>
The trustee's ability to foreclose on the collateral upon an acceleration of
the notes will be limited by applicable gaming laws, which generally require
that persons who own or operate a casino, receive payments under a management
contract or purchase, possess or sell gaming equipment, hold a valid gaming
license. No person may hold a license in Illinois, Louisiana or Mississippi
unless the person is found qualified or suitable by the relevant gaming
authorities. In order for the trustee to be found qualified or suitable, such
gaming authorities would have discretionary authority to require the trustee
and any or all of the holders of the notes to file applications and be
investigated and found qualified or suitable as an owner or operator of gaming
establishments or supplier of gaming equipment. If the trustee is unable or
chooses not to qualify, be found suitable or be licensed to own, operate or
sell the assets, it would have to retain an entity licensed to operate or sell
the assets. In addition, in any foreclosure sale or subsequent resale by the
trustee, licensing requirements under the relevant gaming laws may limit the
number of potential bidders and may delay any sale, which could have an
adverse effect on the sale price of the collateral. Therefore, the economic
benefits of realizing on the collateral may, without the appropriate
approvals, be limited. For more information, see the discussion under the
section entitled "Business--Casino Regulation."
The right of the trustee to repossess and dispose of the collateral upon
acceleration of the notes is also likely to be significantly impaired by
applicable bankruptcy law if a bankruptcy proceeding were to be commenced by
or against us or any guarantor prior to or possibly even after the trustee has
repossessed and disposed of the collateral.
Holding Company Structure--We must depend on the business of our subsidiaries
to satisfy our obligations under the notes.
We conduct substantially all of our business through our subsidiaries. Our
ability to satisfy our obligations under the notes depends on dividends or
other intercompany transfers from our subsidiaries. Although Hollywood Casino-
Aurora and HWCC-Tunica will be obligated to make interest payments to us under
the intercompany notes, none of our subsidiaries are obligated to make
distributions to us merely as a result of our ownership interest in order for
us to satisfy all of our obligations under the notes. In addition, state
regulators could limit or prohibit the ability of our subsidiaries to make
distributions to us.
HWCC-Tunica and HWCC-Shreveport will, and some of our other U.S. restricted
subsidiaries in the future may, unconditionally guarantee our obligations
under the notes. However, because our operating cash flows and our ability to
service debt, including the notes, is dependent upon the operating cash flows
of our subsidiaries, the guarantees by our subsidiaries do not provide you
with significant additional assurance that we will be able to satisfy our
obligations under the notes.
Hollywood Casino-Aurora and certain of our other subsidiaries, including
HWCC-Louisiana which will indirectly own the planned Shreveport casino, do not
guarantee our obligations under the notes. The notes are effectively
subordinated to all indebtedness and other liabilities of each subsidiary that
is not a guarantor, including of Hollywood Casino-Aurora, except to the extent
of the pledge to the trustee of the Hollywood Casino-Aurora intercompany note
and the collateral assignment of the related security documents. This security
interest will be limited to the then outstanding amount of the Hollywood
Casino-Aurora intercompany note, which was initially $31.5 million. At March
31, 1999, Hollywood Casino-Aurora had outstanding approximately $22.5 million
of indebtedness, including $20.7 million in capitalized lease obligations,
owed to third party creditors, which is structurally senior in right of
payment to the notes to the extent the aggregate principal amount of the notes
exceeds the principal balance of the Hollywood Casino-Aurora intercompany
note.
In the event of a bankruptcy, liquidation or reorganization of any of the
non-guarantor subsidiaries, holders of their indebtedness and their trade
creditors would, after repayment of our secured intercompany notes, generally
be entitled to payment of their claims from the assets of those subsidiaries
before any additional assets are made available for distribution to us. At
March 31, 1999, our non-guarantor subsidiaries had indebtedness of
approximately $25.1 million, excluding secured intercompany debt, trade
payables and accrued expenses.
14
<PAGE>
Enforcement of the guarantees against our subsidiaries or any future
guarantors is subject to defenses available to guarantors generally, including
the right to force the trustee to exercise its remedies against us prior to
commencing any action on the guarantee. The guarantors will waive these
defenses to the guarantees to the extent it may legally do so.
History of Net Losses--We have a history of net losses and cannot be sure that
we will have earnings in the future.
We incurred net losses of $1.6 million in 1998, $17.3 million in 1997 and
$55.3 million in 1996 on net revenues of $268.8 million, $267.8 million and
$530.6 million, respectively. These losses reflect, among other factors:
. interest incurred on indebtedness;
. non-recurring, non-cash charges related to tax settlement costs of
$1.1 million in 1998 and the write down of receivables from Greate
Bay, totalling $15.7 million in 1997 and $18.7 million in 1996; and
. the 1996 consolidated operating results of Greate Bay Casino
Corporation, an 80%-owned subsidiary of ours until December 31,
1996.
Prior to our spin off of Greate Bay to our stockholders, we operated the
Sands Hotel and Casino in Atlantic City through our 80% ownership of Greate
Bay. On January 5, 1998, the entities that owned the Sands filed for
protection under Chapter 11 of the United States Bankruptcy Code.
Operating costs will increase as we expand our operations. Interest expense
will increase if interest rates rise on our variable rate indebtedness or if
we incur other indebtedness outside this offering. We cannot be sure that we
will attain profitable operations on an annual basis or at all.
Aurora Expansion Risks--The failure to complete the planned Aurora expansion
on time and on budget could adversely affect us.
We intended to use $40 million of the proceeds from the offering of the
original notes to replace our smaller riverboat at our Aurora casino with a
larger, newly constructed riverboat. However, on June 25, 1999, the Governor
of Illinois signed into law legislation passed by the Illinois legislature
that allows dockside gaming for existing licensees. As a result of this
legislation, we now plan to replace our existing riverboats with a single, two
level dockside gaming facility. Construction of our dockside facility is
expected to take approximately 14 months from the commencement of
construction. Construction of our dockside facility could be delayed while we
obtain all other required regulatory approvals. We expect the construction
cost to be approximately $40 million for the dockside expansion.
The construction of our dockside facility is subject to significant
development and construction risks that could affect the cost of and time to
complete the project, including the following:
. regulatory delay, including the approval of applications, plans and
specifications by the U.S. Army Corps of Engineers and the Illinois
Gaming Board;
. labor disputes;
. shortages of material and skilled labor;
. adverse weather conditions;
. engineering problems;
. environmental issues;
. fire, flood and other natural disasters; and
. geological, construction, demolition, excavation, regulatory or
equipment problems.
The occurrence of any of these events could delay the construction of our
dockside facility and may cause unanticipated cost increases. In addition,
although construction activities related to the construction of our dockside
facility are designed to minimize disruption, construction noise and debris
and the temporary closing of
15
<PAGE>
certain facilities may disrupt our current operations. Any construction delays
could exacerbate or magnify these disruptions. Any significant delay in the
construction of our dockside facility or failure to complete construction
within the budget or on schedule could have a material adverse effect on our
business, results of operations, financial condition and ability to satisfy
our obligations under the notes.
Shreveport Casino Uncertainties--The planned Shreveport project faces many
uncertainties relating to developing, financing, constructing, opening,
operating and licensing the casino.
We plan to construct the Shreveport casino. In the early stages of
development, we must overcome the uncertainties associated with developing,
financing, constructing, opening, operating and licensing the casino.
We currently estimate that the total cost of constructing and opening the
casino will be approximately $230 million. The funding for the construction
consists of a $50 million equity contribution by us to Hollywood Casino
Shreveport, the net proceeds of the first mortgage notes offering by Hollywood
Casino Shreveport and Shreveport Capital Corporation and $30 million in
committed furniture, fixtures and equipment financing to be provided by a
group led by Bank of America. The terms of that indebtedness limit Hollywood
Casino Shreveport's ability to pay us management fees under our management
contract. In connection with the first mortgage notes offering, we agreed to
limitations imposed on Hollywood Casino Shreveport's ability to pay us
management fees pursuant to a manager subordination agreement. Further, the
indenture governing the first mortgage notes limit Hollywood Casino
Shreveport's ability to pay us dividends. It is also possible that the payment
of management fees or dividends from the planned Shreveport casino could be
limited or prohibited by any regulatory or gaming authorities.
Events that can affect the final cost and time to complete the project
include:
. regulatory delay, including the approval of applications, plans and
specifications by the U.S. Army Corps of Engineers and the Louisiana
Gaming Control Board;
. labor disputes;
. shortages of materials and skilled labor;
. adverse weather conditions;
. engineering problems;
. environmental issues;
. fire, flood and other natural disasters; and
. geological, construction, demolition, excavation, regulatory or
equipment problems.
Significant cost overruns or delays in completing the Shreveport project may
result in us contributing up to an additional $5 million in equity capital to
the Shreveport project and may have a material adverse effect on our ability
to receive management fees under the Shreveport management contract and equity
distributions, which could have a material adverse effect on our financial
condition, results of operations and ability to service our obligations under
the notes.
The license to own and operate the Shreveport casino is subject to annual
renewal by the Louisiana Gaming Control Board in October of each year, and we
cannot assure you that the license will be renewed.
Upon completion of our Shreveport resort, we will compete directly with
Binion's Horseshoe, Harrah's, the Isle of Capri and Casino Magic in the
Shreveport/Bossier City market. Some of these competitors have higher profile
brand names in the Shreveport/Bossier City market and greater financial
resources than we do. We cannot assure you that we will be able to effectively
compete against these four established casinos, three of which have been in
operation since 1994, or that the Shreveport/Bossier City market is large
enough to allow more than four casinos to operate profitably. Furthermore,
although the Louisiana Gaming Control Board has expressed no intent to grant
the fifteenth and final riverboat gaming license at this time, the remaining
riverboat gaming license could ultimately be granted in, or one or more of the
current operators in other parts of Louisiana could relocate to, the
Shreveport/Bossier City market which would directly increase competition in
our market.
16
<PAGE>
Also, we cannot be sure that we will be able to effectively compete against
any other future gaming operations that Louisiana or other authorities may
authorize in the gaming market in which the Shreveport casino will operate.
For example, in 1997, the Louisiana legislature adopted legislation permitting
up to 15,000 square feet of slot machine gaming at pari-mutuel wagering
facilities located in parishes in Louisiana that approve slot machine gaming
in a referendum election. Shortly thereafter, a referendum election was held
that approved slot machine gaming at Louisiana Downs, which is located in
Bossier City, approximately nine miles from the site of the Shreveport casino.
The Shreveport casino will also face competition from other forms of gaming,
such as state-sponsored lotteries and video lottery terminals, pari-mutuel
betting on horse and dog racing and bingo parlors, as well as other forms of
entertainment in Louisiana and other places from which we will draw customers.
Our inability to successfully operate the Shreveport casino and compete in
the market may have a material adverse effect on our ability to receive
management fees under the Shreveport management contract and equity
distributions, which could have a material adverse effect on our financial
condition, results of operations and ability to satisfy our obligations under
the notes.
Pratt Casino Corporation Acquisition Uncertainties--We may not be able to
acquire the Aurora and Tunica management and consulting agreements.
We intend to acquire the Aurora management and the Tunica consulting
contracts by acquiring the stock of Pratt Casino Corporation and satisfying
Pratt Casino Corporation's obligations. On April 28, 1999, we entered into a
voting agreement with Pratt Casino Corporation and various other parties to
effect these transactions. On May 25, 1999, Pratt Casino Corporation, PRT
Funding Corp. and New Jersey Management, Inc. filed for bankruptcy pursuant to
a joint plan of reorganization. This plan will be subject to approval by the
bankruptcy court. Moreover, Pratt Casino Corporation is currently subject to
regulatory review by New Jersey gaming authorities that must approve the
transaction. We cannot assure you that either the bankruptcy court or these
gaming authorities will approve the agreement that we have reached with Pratt
Casino Corporation and its creditors on the same or similar terms, or at all.
If we are unable to consummate this transaction, $40.3 million aggregate
principal amount of the new notes will be subject to the special mandatory
redemption at a redemption price of 101% of their principal amount, as
discussed under the section entitled "Description of the Registered Notes--
Special Mandatory Redemption." Moreover, if we are unable to acquire the
Aurora management and Tunica consulting contracts, those casinos will continue
to be obligated to pay management and consulting fees until the Tunica
consulting contract expires in December 2003 and the Aurora management
contract expires in July 2090, or until they are otherwise terminated.
Management fees under the Aurora management contract are paid to a limited
partnership that is subject to annual license renewal. There can be no
assurance that the Illinois Gaming Board will continue to renew the license of
that entity or permit future payments under the Aurora management contract,
which could result in disputes or litigation. We incurred net expenses under
these contracts totalling approximately $7.7 million in 1998.
Tunica Land Lease Risks--The termination of the lease for the Tunica casino
could have an adverse effect on the notes.
The land underlying the Tunica casino is subject to a lease, and the
leasehold interest will be subject to a deed of trust securing the guarantee
of the notes by HWCC-Tunica. Thus, the leasehold deed of trust will be subject
and subordinate to the lessor's interest in the real estate subject to the
leasehold. If the lease were to be terminated by the lessor as the result of a
default by HWCC-Tunica under the lease, HWCC-Tunica would lose possession of
the land subject to the lease and the improvements on the land, thereby
extinguishing the leasehold deed of trust for the benefit of the notes as well
as making it impossible for HWCC-Tunica to operate the Tunica casino. The
extinguishment of the leasehold deed of trust would in turn impair the value
of the security instruments that will secure the guarantee of HWCC-Tunica.
Moreover, the termination of the lease for the Tunica casino would require us
to terminate or attempt to relocate those operations, which could have a
material adverse effect on our financial condition, results of operations and
ability to satisfy our obligations under the notes.
17
<PAGE>
Competition--The competitive nature of the gaming industry could threaten our
position.
The gaming industry is highly fragmented and characterized by a high degree
of competition among a number of participants, some of which have greater
financial and other resources than we do. Competitive gaming activities
include:
. land-based casinos;
. dockside casinos;
. riverboat casinos;
. video lottery terminals; and
. other forms of legalized gaming in the United States and other
jurisdictions.
Legalized gambling is currently permitted in various forms throughout the
United States, in several Canadian provinces, and on Native American
reservations in particular states, including Louisiana and Mississippi. Other
jurisdictions may legalize gaming in the near future. Various states have
proposals to legalize gaming either introduced or being prepared for
introduction to their state legislatures. Additionally, established gaming
jurisdictions could award new gaming licenses or permit the expansion of
existing gaming operations. New or expanded operations by other persons in the
markets we serve, or in new markets, can be expected to further increase
competition for our present and proposed gaming operations and could have a
material adverse effect on our financial condition, results of operations and
ability to satisfy our obligations under the notes.
The Aurora Casino. The Illinois Riverboat Gambling Act and the rules
promulgated by the Illinois Gaming Board under that act authorize only ten
owner's licenses for riverboat gaming operations in Illinois and permit a
maximum of 1,200 gaming positions at any time for each of the ten licensed
sites. All authorized owners' licenses have been granted and no additional
licenses or gaming positions are permitted without further state legislation.
One licensed site ceased gaming operations in 1997. As a result of the recent
legislation, we believe that this license will likely be relocated and will
commence operations at a new site in Cook County, which would increase
competition in our principal market. We directly compete with three riverboat
sites which are licensed in Illinois within 50 miles of downtown Chicago. In
addition, we directly compete with five riverboat sites opened since 1996 in
northern Indiana. Increased competition from casinos in Indiana has resulted
in greater competition for patrons from the downtown Chicago market and from
the suburban Chicago market and we could face increased competitive pressure
in the near future. It is possible that the Illinois legislature could pass
legislation increasing the number of licenses in Illinois in the future, which
could increase competition in our principal market. Also, Native American
tribes are seeking to open casino facilities in northwestern Indiana and
Michigan under the Indian Gaming Regulatory Act. The opening of additional
casinos in the Chicago market could have a material adverse impact on the
operations of the Aurora casino which would have a material adverse effect on
our financial condition, results of operations and ability to satisfy our
obligations under the notes.
The Tunica Casino. The Tunica casino faces intense competition from the nine
other casinos currently operating in the Tunica market. Moreover, because the
Mississippi Gaming Control Act does not limit the number of licenses that may
be granted, the Tunica casino may face increased competition in the future
from new operators in the Tunica market. Increases in gaming and hotel
capacity have negatively affected the Tunica casino in the past and could have
an adverse impact in the future. Operators have opened casinos and hotels in
north Tunica County, closer to the Memphis market than our Tunica casino,
including the largest casino in the market, which has had a negative impact on
the Tunica casino. Additional casino and hotel capacity in the Tunica market,
such as the reopening of a casino by Isle of Capri Casinos, Inc. in July,
1999, could further increase competition for the Tunica casino in attracting
visitors. Also, although we do not believe we face significant competition
from casinos outside of the Tunica market, gaming operations have been
established in other areas of Mississippi, including a large casino complex on
the Gulf Coast. The increase in competition in the Tunica market and, to a
lesser extent, the Gulf Coast, could have a material adverse effect on the
Tunica casino which could have a material adverse effect on our financial
condition, results of operations and ability to satisfy our obligations under
the notes.
18
<PAGE>
Regulatory Compliance--We must adhere to various regulations and maintain our
licenses to continue our operations.
We, as well as some of our key employees, are required to obtain and hold
various licenses and approvals in Illinois, Louisiana and Mississippi and will
be subject to licensing in each other jurisdiction in which we may conduct a
gaming operation in the future. Our failure or the failure of any of our key
personnel to obtain or retain a license in any jurisdiction could have a
material adverse effect on us and our ability to obtain or retain licenses in
other jurisdictions. Generally, regulatory authorities have broad discretion
in granting, renewing and revoking licenses.
We are subject to a variety of regulations in the states in which we
operate. If additional gaming regulations are adopted in a state in which we
operate, these regulations could impose restrictions or costs that could have
a material adverse effect on us. From time to time, various proposals have
been introduced in the Illinois, Louisiana and Mississippi legislatures that,
if enacted, would affect the tax, regulatory, operational or other aspects of
the gaming industry. We cannot be sure whether new legislation will be
enacted, and, if enacted, the effect that the legislation would have on our
financial condition, results of operations and ability to satisfy our
obligations under the notes.
In 1997, the U.S. Congress created the National Gambling Impact Study
Commission to conduct a comprehensive study of all matters relating to the
economic and social impact of gaming in the United States. In accordance with
the legislation creating the commission, the commission recently released a
report on its findings and issued its recommendations for the future of gaming
in the United States. Overall, the commission determined that, with only a few
exceptions such as Internet gambling, gaming is an issue to be settled at
state and local levels rather than by the federal government. Over the course
of its two year study, the commission discovered a lack of information
regarding the costs and benefits of gaming. Consequently, the commission
recommended a pause in the expansion of gaming operations to provide time to
develop impartial, objective research on the impact of gaming.
Gaming Taxes--Any increase in federal, state or local taxes could have a
negative impact on us.
From time to time, certain legislators have proposed the imposition of a
federal tax on gross gaming revenues. In March 1996, tax legislation was
introduced in Congress which included a proposal to impose a 15% federal tax
on taxable gaming services, defined as gross gaming receipts less total gaming
payoffs. Although no action has been taken on such legislation, we cannot
assure you that such tax or any similar tax will not be imposed in the future.
In addition, gaming companies are currently subject to significant state and
local taxes and fees in addition to normal federal and state corporate income
taxes, and these taxes and fees are subject to increase at any time. For
example, our operating results were negatively impacted in 1998 by a
significant increase in gaming taxes imposed in Illinois. The introduction of
new taxes or the increase in the rates of existing taxes could have a material
adverse effect on our financial condition, results of operations and ability
to satisfy our obligations under the notes.
Anti-Gaming Initiatives--Anti-gaming initiatives have been proposed in
Mississippi and Louisiana.
The regulatory environment in any particular jurisdiction may change in the
future and any such change could have a material adverse effect on our results
of operations. In Mississippi, a proposal was filed on March 22, 1999 for a
referendum to ban gaming in Mississippi within two years of enactment. Two
similar referenda were proposed in 1998 which, if approved, would have amended
the Mississippi Constitution to ban gaming in Mississippi and would have
required all currently legal gaming entities to cease operations within two
years of the ban. A Mississippi state circuit court judge ruled that the first
of the proposed referenda was illegal because, among other reasons, it failed
to include required information regarding its anticipated effect on government
revenues. The Mississippi Supreme Court affirmed the circuit court ruling, but
only on procedural grounds. The second referendum proposal also failed to
include the same language on government revenues as the first referendum and
was struck down by another Mississippi state circuit court judge on the same
grounds as the first. The recently filed referendum must be approved by the
Mississippi Secretary of State and signatures of
19
<PAGE>
approximately 98,000 registered voters must be gathered and certified in order
for such a proposal to be included on a statewide ballot for consideration by
the voters. The next election for which the proponents could place such a
proposal on the ballot would be in November 2000. It has not yet been
determined whether the recently filed initiative adequately addresses the
issues regarding the effect on government revenues of a prohibition of gaming
in Mississippi. If such referenda were approved or if legislation were enacted
prohibiting gaming in Mississippi, it would have a material adverse effect on
our financial condition, results of operations and ability to satisfy our
obligations under the notes.
Also, in 1996, the State of Louisiana adopted a statute in connection with
which voter referenda on the continuation of gaming were held locally where
gaming operations are conducted and which, had the continuation of gaming been
rejected by the voters, might have resulted in the termination of operations
at the end of their current license terms. Louisiana's parishes voted to
continue riverboat gaming in all parishes where such operations are currently
conducted. Proposals to amend or supplement the Louisiana Riverboat Economic
Development and Gaming Control Act are frequently introduced in the Louisiana
State legislature. In addition, the State legislature, from time to time,
considers proposals to repeal the act. If such proposals were approved or if
legislation were enacted prohibiting gaming in Louisiana, it would have a
material adverse effect on our financial condition, results of operations and
ability to satisfy our obligations under the notes.
Gaming Redemptions--We may require you to dispose of your new notes or redeem
your new notes if any gaming authority finds you unsuitable to hold them.
Under certain circumstances, we have the right, at our option, to cause a
holder to dispose of its notes or to redeem its notes in order to comply with
gaming laws to which we are subject. For more information, see the discussion
under the section entitled "Description of the Registered Notes--Optional
Redemption."
Business Interruptions--We may temporarily lose the service of our casinos.
Our profitability is dependent upon the continued operations of our casino
facilities. Any temporary closure of our casinos would negatively impact our
profitability. The Aurora casino's gaming vessels could be lost from service
due to casualty, mechanical failure or extended or extraordinary maintenance
or inspection, or severe weather conditions, including floods. In addition,
each vessel is subject to U.S. Coast Guard regulations requiring periodic hull
inspections every three to five years, which could result in a temporary loss
from service of the vessel. We currently maintain business interruption
insurance on our Aurora and Tunica operations in amounts we consider adequate,
but we cannot be sure that we will be able to maintain this insurance in the
future in sufficient amounts on terms we consider commercially reasonable, or
at all. The loss of service of any one of our casinos would have a material
adverse effect on our financial condition, results of operations and ability
to meet our obligations under the notes.
Key Personnel--We depend on our key personnel and skilled employees for our
success. The loss of their services and the inability to hire and retain them
could have a negative impact on us.
The success of our casinos is largely dependent upon the efforts and skills
of certain executive officers. The loss of any of these officers could have a
material adverse effect on us. A shortage of skilled labor exists in the
gaming industry, in general, and may be particularly acute in rural areas such
as Tunica County, which may make it more difficult and expensive to attract
and retain qualified employees. We cannot be sure that we will be able to hire
and retain the necessary skilled labor to meet all of our needs.
Controlling Stockholders--The Pratt family is our principal stockholder and
exercises control over us.
As of December 31, 1998, the Pratt family owned approximately 54% of our
outstanding common stock. As long as the Pratt family continues to
beneficially own a significant percentage of the outstanding shares of our
common stock, it will be able to control the election of our directors and
exercise a controlling influence over our business and affairs.
20
<PAGE>
Change of Control--We may not have the ability to raise the funds necessary to
finance the change of control offer required by the indenture.
Upon the occurrence of certain specific kinds of change of control events,
we will be required to offer to repurchase all outstanding notes. However, it
is possible that we will not have sufficient funds at the time of the change
of control to make the required repurchase of the notes. For more information,
see the discussion under the section entitled "Description of the Registered
Notes--Repurchase at the Option of Holders."
Lack of Public Market--No active trading market exists for the notes and one
may not develop.
No active trading market exists for the notes. We have been informed by the
initial purchasers that they intend to make a market in the notes. However,
the initial purchasers may cease their market-making at any time. In addition,
the liquidity of the trading market in the notes, and the market price quoted
for the notes, may be adversely affected by changes in the overall market for
high yield securities and by changes in our financial performance or prospects
or in the prospects for companies in our markets and in the gaming industry in
general. As a result, you cannot be sure that an active trading market will
develop for the notes.
Year 2000 Issues--Our business and our suppliers' businesses are highly
dependent on computer systems and any computer problems due to the Year 2000
may adversely affect our business.
We use computer systems in virtually all areas of our operations. Should we
or certain of our vendors not be "Year 2000 compliant," the operations of our
casinos could be disrupted for an indeterminate period of time, potentially
having a material adverse impact on our results of operations. Possible
consequences of our not being Year 2000 compliant include, but are not limited
to, problems with hotel reservations, operations, hotel check-in/check-out
procedures, point-of-sale transactions in food, beverage and retail areas and
the updating and accumulation of slot machine player marketing information.
Additionally, disruptions could occur to the compiling of financial
information in our back-office accounting, purchasing, inventory and payroll
systems. Embedded microchips in certain systems such as elevators, escalators
and the heating, ventilation and air conditioning could lead to interruptions
in service. All of these problems could inconvenience hotel and casino
customers and have a material adverse effect on our financial condition,
results of operations and ability to meet our obligations under the notes.
We could also be exposed to Year 2000 problems should certain of our
suppliers have disruptions to their operations due to Year 2000 problems. We
do not consider these problems to be as significant as those with our own
systems because in most instances we believe we could find alternate vendors
for our supplies. However, Year 2000 problems for certain suppliers, such as
utility providers, could result in disruptions to our casino operations for an
indeterminate period of time. Additionally, should providers of financial
services such as ATMs, credit card processing and credit card cash advance
experience Year 2000 problems, our operations could be adversely affected. See
the discussion under the section entitled "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Consolidated
Items--Year 2000 Compliance."
Failure to Exchange Original Notes--You may suffer adverse consequences if you
fail to exchange your original notes.
If you do not exchange your original notes for registered notes in
connection with the exchange offer, you will continue to be subject to the
provisions of the indenture regarding transfer and exchange of the original
notes and the restrictions on transfer of the original notes. In general, the
original notes may not be offered or sold, unless registered under the
Securities Act and applicable state securities laws. We do not currently
intend to register the original notes.
Forward-Looking Information--You should not place undue reliance on forward-
looking information.
This prospectus contains certain forward-looking statements about our
financial condition, results of operations and business within the meaning of
Section 27A of the Securities Act and Section 21E of the Securities Exchange
Act of 1934, as amended. You can find many of these statements by looking for
words like "believes," "expects," "anticipates," "estimates," "intends,"
"may," "will," "could," "pro forma," or
21
<PAGE>
similar expressions used in this prospectus. These forward-looking statements
are subject to numerous assumptions, risks and uncertainties, including, among
other things, those discussed above.
All forward-looking statements speak only as of the date of this prospectus.
Because these statements are subject to risks and uncertainties, actual
results may differ materially from those expressed or implied by the forward-
looking statements. You are cautioned not to place undue reliance on these
statements, which speak only as of the date of this prospectus.
We do not undertake any responsibility to release publicly any revisions to
these forward-looking statements to take into account events or circumstances
that occur after the date of this prospectus. Additionally, we do not
undertake any responsibility to update you on the occurrence of any
unanticipated events which may cause actual results to differ from those
expressed or implied by the forward-looking statements contained in this
prospectus.
22
<PAGE>
USE OF PROCEEDS
The net proceeds from the offering of the original notes were used to
refinance our existing 12 3/4% Senior Secured Notes, and will be used to fund
the Aurora casino expansion, to acquire Pratt Casino Corporation and to
partially fund our equity investment in the planned Shreveport casino. The
following table sets forth the sources and uses of the proceeds from the
offering of the original notes (dollars in millions):
<TABLE>
<CAPTION>
Sources
- ----------------------------------------------------------------------------------
<S> <C>
11 1/4% Senior Secured Notes............................................... $310.0
50.0
Floating Rate Senior Secured Notes......................................... ------
Total Sources............................................................ $360.0
======
</TABLE>
<TABLE>
<CAPTION>
Uses
- ------------------------------------------------------------------------------
<S> <C>
Tender Offer, Satisfaction and Discharge of 12 3/4% Senior Secured
Notes(1).............................................................. $224.0
Aurora Casino Expansion................................................ 40.0
Escrow for Acquisition of Pratt Casino Corporation(2).................. 40.7
Partial Equity Investment in the Shreveport Casino..................... 25.0
General Corporate Purposes............................................. 19.6
Estimated Fees and Expenses(3)......................................... 10.7
------
Total Uses........................................................... $360.0
======
</TABLE>
- --------
(1) Includes the tender premium on our 12 3/4% Senior Secured Notes and
assumes that all of our outstanding 12 3/4% Senior Secured Notes are
repurchased in the tender offer.
(2) If we determine that we cannot consummate the acquisition of Pratt Casino
Corporation, or in any event, if it has not been consummated by January
31, 2000, we must redeem $40.3 million of the notes at 101% of their
principal amount.
(3) Includes the discount to initial purchasers and offering and tender offer
expenses payable by us.
We will not receive any cash proceeds from the exchange of the original
notes for registered notes. In consideration for issuing the registered notes
as contemplated in this prospectus, we will receive in exchange original notes
in like principal amount, which will be cancelled and as such will not result
in any increase in our indebtedness.
23
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of March 31, 1999 on an
actual basis and on a pro forma basis after giving effect to the offering of
the original notes, the acquisition of Pratt Casino Corporation, and the
tender offer for and satisfaction and discharge of our 12 3/4% Senior Secured
Notes, as if these transactions had occurred on March 31, 1999. Primarily as a
result of the accounting treatment for our acquisition of Pratt Casino
Corporation, the loss on the early retirement of our 12 3/4% Senior Secured
Notes and the related write-off of the deferred financing fees on those notes,
we have a significant negative net worth. The information set forth below
should be read in conjunction with our unaudited quarterly consolidated
financial statements, together with the related notes to the financial
statements, included elsewhere in this prospectus.
<TABLE>
<CAPTION>
As of March 31,
1999
--------------------
Actual Pro Forma
--------- ---------
(in thousands)
<S> <C> <C>
Current maturities of long-term debt and capital lease
obligations:
Current maturities of long-term debt.................... $ 7,614 $ 2,614
Capital lease obligations............................... 903 903
--------- ---------
Total current maturities of long-term debt and capital
lease obligations..................................... 8,517 3,517
--------- ---------
Long-term debt:
11 1/4% Senior Secured Notes due 2007................... -- 310,000
Floating Rate Senior Secured Notes due 2006............. -- 50,000
12 3/4% Senior Secured Notes due 2003, net of
unamortized discount of $6,739......................... 192,973 --
Other................................................... 5,165 5,165
Long-term capital lease obligations..................... 19,800 19,800
--------- ---------
Total long-term debt................................... 217,938 384,965
--------- ---------
Minority interest........................................ 3,109 --
--------- ---------
Shareholders' equity (deficit):
Common stock, $.0001 par value; authorized 50,000,000
shares; issued and outstanding 24,950,000 shares....... 2 2
Additional paid-in capital.............................. 216,926 216,926
Accumulated deficit(1).................................. (209,086) (279,682)
--------- ---------
Total shareholders' equity (deficit)................... 7,842 (62,754)
--------- ---------
Total capitalization.................................. $ 237,406 $ 325,728
========= =========
</TABLE>
- --------
(1) Pro forma accumulated deficit includes the following: a $39.9 million net
charge from the acquisition of Pratt Casino Corporation and a $30.7
million extraordinary loss on the early retirement of our 12 3/4% Senior
Secured Notes.
24
<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION
The following selected consolidated financial information and the following
selected financial information of Hollywood Casino-Aurora and Hollywood
Casino-Tunica for each of the five years in the period ended December 31, 1998
is derived from our audited, consolidated financial statements. The financial
information for 1996, 1995 and 1994 includes the operating results of Greate
Bay. On December 31, 1996, we distributed our approximate 80% ownership
interest in Greate Bay to our stockholders. In 1998, our results of operations
were negatively impacted by a significant increase in gaming taxes imposed by
the Illinois legislature. Gaming taxes incurred by the Aurora casino increased
by $11.6 million in 1998. The following financial information should be read
in conjunction with the text under the heading "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and our
consolidated financial statements and the notes relating to those statements
included in this prospectus.
HOLLYWOOD CASINO CORPORATION AND ITS SUBSIDIARIES
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------
1998 1997(1) 1996 1995 1994
-------- -------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Net revenues............ $268,760 $267,757 $530,580 $539,943 $464,384
-------- -------- -------- -------- --------
Expenses:
Departmental........... 197,836 185,753 426,769 396,157 338,776
General and
administrative........ 17,778 16,790 37,169 36,914 33,189
Management and
consulting fees....... 1,200 3,927 -- -- --
Depreciation and
amortization.......... 16,562 18,901 40,836 40,955 30,960
Amortization of
preopening costs...... -- -- -- -- 11,002
Development............ 779 1,480 1,065 6,765 5,154
-------- -------- -------- -------- --------
Total expenses........ 234,155 226,851 505,839 480,791 419,081
-------- -------- -------- -------- --------
Income from operations
before write down of
assets................. 34,605 40,906 24,741 59,152 45,303
Write down of assets.... -- (19,678) (22,141) -- --
-------- -------- -------- -------- --------
Income from operations.. 34,605 21,228 2,600 59,152 45,303
-------- -------- -------- -------- --------
Non-operating income
(expenses):
Interest income........ 2,844 1,896 3,101 3,708 4,227
Interest expense....... (30,260) (30,437) (59,090) (55,558) (46,233)
Tax settlement costs... (1,087) -- -- -- --
(Loss) gain on disposal
of assets............. (61) 552 (1,841) (514) (26)
-------- -------- -------- -------- --------
Total non-operating
expenses, net......... (28,564) (27,989) (57,830) (52,364) (42,032)
-------- -------- -------- -------- --------
Income (loss) before
income taxes,
extraordinary and other
items.................. 6,041 (6,761) (55,230) 6,788 3,271
Income tax provision.... (816) (5,359) (63) (268) (1,527)
-------- -------- -------- -------- --------
Income (loss) before
extraordinary and other
items.................. 5,225 (12,120) (55,293) 6,520 1,744
Minority interest in
earnings of Limited
Partnership............ (6,494) (5,012) -- -- --
-------- -------- -------- -------- --------
(Loss) income before
extraordinary items.... (1,269) (17,132) (55,293) 6,520 1,744
Extraordinary items:
Early extinguishment of
debt, net of related
tax benefits(2)....... (336) (215) -- (23,808) 126
-------- -------- -------- -------- --------
Net (loss) income....... $ (1,605) $(17,347) $(55,293) $(17,288) $ 1,870
======== ======== ======== ======== ========
Basic (loss) income per
common share(3):
(Loss) income before
extraordinary items... $ (.05) $ (.69) $ (2.24) $ .27 $ .07
Extraordinary items.... (.01) (.01) -- (.97) .01
-------- -------- -------- -------- --------
Net (loss) income...... $ (.06) $ (.70) $ (2.24) $ (.70) $ .08
======== ======== ======== ======== ========
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------
1998 1997(1) 1996 1995 1994
-------- -------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C>
Diluted (loss) income per
common share(3):
(Loss) income before
extraordinary items........ $ (.05) $ (.69) $ (2.24) $ .26 $ .07
Extraordinary items......... (.01) (.01) -- (.96) .01
-------- -------- -------- -------- --------
Net (loss) income........... $ (.06) $ (.70) $ (2.24) $ (.70) $ .08
======== ======== ======== ======== ========
Other Financial Data:
Adjusted EBITDA(4):
Aurora casino EBITDA before
management fees............ $ 39,228 $ 46,724 $ 44,100 $ 44,754 $ 50,588
Tunica casino EBITDA before
consulting fees and land
lease...................... 25,666 29,577 20,601 29,166 9,775
Greate Bay EBITDA........... -- -- 10,914 41,091 40,240
Tunica land lease........... (3,899) (3,935) (3,486) (3,608) (1,210)
Management and consulting
fees....................... (10,072) (10,809) -- -- --
General Partnership
interest................... 1,097 711 -- -- --
Development expenses........ (779) (1,480) (1,065) (6,765) (5,154)
Corporate expenses.......... (6,629) (5,441) (7,328) (5,045) (7,000)
-------- -------- -------- -------- --------
Total Adjusted EBITDA(4)..... $ 44,612 $ 55,347 $ 63,736 $ 99,593 $ 87,239
======== ======== ======== ======== ========
Cash provided by operating
activities.................. $ 16,751 $ 31,613 $ 12,309 $ 53,527 $ 40,439
Cash (used in) provided by
investing activities........ (8,490) 1,961 (42,143) (99,186) (115,416)
Cash (used in) provided by
financing activities........ (6,402) (14,803) (5,216) 35,706 52,817
Capital expenditures......... (12,037) (5,101) (53,078) (55,009) (101,729)
Depreciation and
amortization................ (16,562) (18,901) (40,836) (40,955) (41,962)
Ratio of earnings to fixed
charges(5).................. -- -- -- 1.1x --
<CAPTION>
As of December 31,
------------------------------------------------
1998 1997(1) 1996(1) 1995 1994
-------- -------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Total assets................. $270,740 $276,218 $308,158 $514,463 $464,135
Total debt, including capital
lease obligations........... 227,529 226,922 232,046 496,847 432,117
Shareholders' equity
(deficit)................... 7,512 9,117 38,836 (57,233) (39,947)
</TABLE>
- --------
(1) Restated to reflect the modification of our income tax treatment resulting
from the distribution of the common stock of Greate Bay--see Note 3 of
notes to our consolidated financial statements.
(2) Includes the following items: (i) for 1998 and 1997, costs associated with
our mandatory semi-annual offer to repurchase our 12 3/4% Senior Secured
Notes, net of related tax benefit, and (ii) for 1995, costs associated
with the October 1995 issuance of our 12 3/4% Senior Secured Notes.
(3) During 1997, we adopted the provisions of Financial Accounting Standards
No. 128, "Earnings per Share." The earnings per share calculation has been
restated for all prior periods presented.
(4) Adjusted EBITDA for the periods presented represents earnings before
interest, taxes, depreciation and amortization, extraordinary items, write
down of assets of $19.7 million and $22.1 million for the years ended
December 31, 1997 and 1996, respectively, and tax settlement costs of $1.1
million for the year ended December 31, 1998. Adjusted EBITDA is presented
because we believe it is frequently used by securities analysts, investors
and other interested parties in the evaluation of companies in our
industry. However, other companies in our industry may calculate EBITDA
differently than we do. Adjusted EBITDA is not a
26
<PAGE>
measurement of financial performance under generally accepted accounting
principles and should not be considered as an alternative to cash flow from
operating activities or as a measure of liquidity or an alternative to net
income as indicators of our operating performance or any other measures of
performance derived in accordance with generally accepted accounting
principles.
(5) Earnings were insufficient to cover fixed charges by $0.3 million, $11.6
million, $55.7 million and $0.2 million in each of 1998, 1997, 1996 and
1994, respectively. For purposes of computing the ratio of earnings to
fixed charges, fixed charges consist of interest expensed and capitalized,
amortized premiums, discounts and capitalized expenses relating to debt
and 33% of rent expense, which management believes is representative of
the interest component of rent expense. Earnings consist of income from
continuing operations before income taxes and equity in earnings of
unconsolidated affiliates, plus fixed charges, other than capitalized
interest, but excluding the amortization thereof.
27
<PAGE>
HOLLYWOOD CASINO--AURORA, INC.
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Net revenues................ $162,947 $160,307 $163,391 $152,508 $148,000
-------- -------- -------- -------- --------
Expenses:
Departmental.............. 118,459 108,653 114,006 102,780 95,495
General and
administrative........... 14,136 14,673 14,645 14,406 11,926
Depreciation and
amortization............. 7,350 7,491 8,834 9,172 7,121
Amortization of preopening
costs.................... -- -- -- -- 5,863
-------- -------- -------- -------- --------
Total expenses........... 139,945 130,817 137,485 126,358 120,405
-------- -------- -------- -------- --------
Income from operations...... 23,002 29,490 25,906 26,150 27,595
-------- -------- -------- -------- --------
Non-operating income
(expense):
Interest income........... 112 156 205 306 458
Interest expense.......... (6,046) (6,847) (6,704) (6,493) (6,654)
Gain on disposal of
assets................... 4 134 -- -- --
-------- -------- -------- -------- --------
Total non-operating
expense, net............ (5,930) (6,557) (6,499) (6,187) (6,196)
-------- -------- -------- -------- --------
Income before income taxes
and extraordinary item..... 17,072 22,933 19,407 19,963 21,399
Income tax provision........ (6,559) (8,419) (6,883) (7,554) (7,557)
-------- -------- -------- -------- --------
Income before extraordinary
item....................... 10,513 14,514 12,524 12,409 13,842
Extraordinary item.......... -- -- -- (989) --
-------- -------- -------- -------- --------
Net income.................. $ 10,513 $ 14,514 $ 12,524 $ 11,420 $ 13,842
======== ======== ======== ======== ========
<CAPTION>
As of December 31,
------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Total assets................ $100,310 $104,071 $107,449 $ 93,196 $ 73,356
Total debt, including
capital lease obligations.. 54,248 58,972 65,430 55,829 50,141
Shareholder's equity........ 28,720 28,948 28,033 25,549 14,071
</TABLE>
28
<PAGE>
HWCC--TUNICA, INC.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------
1998 1997 1996 1995 1994(1)
-------- -------- -------- -------- -------
(in thousands)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net revenues................. $105,773 $107,263 $ 94,524 $ 94,416 $32,413
-------- -------- -------- -------- -------
Expenses:
Departmental................ 79,328 77,058 72,602 63,842 22,623
General and administrative.. 5,813 5,769 5,962 5,711 2,425
Depreciation and
amortization............... 8,123 9,916 10,906 10,356 3,610
Amortization of preopening
costs...................... -- -- -- -- 5,939
-------- -------- -------- -------- -------
Total expenses............. 93,264 92,743 89,470 79,909 34,597
-------- -------- -------- -------- -------
Income (loss) from
operations.................. 12,509 14,520 5,054 14,507 (2,184)
-------- -------- -------- -------- -------
Non-operating income
(expenses):
Interest income............. 587 281 835 637 374
Interest expense............ (10,937) (10,980) (10,060) (10,792) (4,454)
(Loss) gain on disposal of
assets..................... (65) 6 (45) (505) --
-------- -------- -------- -------- -------
Total non-operating
expenses, net............. (10,415) (10,693) (9,270) (10,660) (4,080)
-------- -------- -------- -------- -------
Income (loss) before income
taxes and
extraordinary items......... 2,094 3,827 (4,216) 3,847 (6,264)
Income tax (provision)
benefit..................... (689) 845 -- 694 --
-------- -------- -------- -------- -------
Income (loss) before
extraordinary items......... 1,405 4,672 (4,216) 4,541 (6,264)
Extraordinary items.......... -- -- -- (9,614) 126
-------- -------- -------- -------- -------
Net income (loss)............ $ 1,405 $ 4,672 $ (4,216) $ (5,073) $(6,138)
======== ======== ======== ======== =======
<CAPTION>
As of December 31,
-----------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- -------
(in thousands)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Total assets................. $120,461 $118,727 $116,620 $122,240 $99,889
Total debt, including capital
lease obligations........... 85,798 85,683 86,645 88,340 61,789
Shareholder's equity......... 25,287 23,882 19,210 23,426 28,499
</TABLE>
- --------
(1) The Tunica casino commenced operations on August 8, 1994.
29
<PAGE>
SELECTED QUARTERLY CONSOLIDATED FINANCIAL INFORMATION
The following selected quarterly consolidated financial information and the
following selected quarterly financial information of Hollywood Casino-Aurora
and Hollywood Casino-Tunica for the three month periods ended March 31, 1999
and 1998 are derived from our unaudited, consolidated financial statements
and, in our opinion, include normal recurring adjustments necessary for a fair
presentation of the information. Operating results for the three month period
ended March 31, 1999 are not necessarily indicative of the results that may be
achieved for the year ending December 31, 1999. The following financial
information should be read in conjunction with the text under the heading
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our unaudited quarterly consolidated financial statements and
the notes relating to those statements included in this prospectus.
HOLLYWOOD CASINO CORPORATION AND ITS SUBSIDIARIES
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
----------------
1999 1998
------- -------
(IN THOUSANDS)
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues.................................................. $69,773 $63,807
------- -------
Expenses:
Departmental................................................. 51,085 45,673
General and administrative................................... 4,585 4,305
Consulting fees.............................................. 300 300
Depreciation and amortization................................ 4,000 4,214
Development.................................................. 215 255
------- -------
Total expenses.............................................. 60,185 54,747
------- -------
Income from operations........................................ 9,588 9,060
------- -------
Non-operating income (expenses):
Interest income.............................................. 359 672
Interest expense............................................. (7,389) (7,451)
Loss on disposal of assets................................... (1) (1)
------- -------
Total non-operating expenses, net............................ (7,031) (6,780)
------- -------
Income before income taxes and other item..................... 2,557 2,280
Income tax provision.......................................... (205) (291)
------- -------
Income before other item...................................... 2,352 1,989
Minority interest in earnings of Limited Partnership.......... (2,022) (1,920)
------- -------
Net income.................................................... $ 330 $ 69
======= =======
Basic and diluted income per common share..................... $ .01 $ .00
======= =======
</TABLE>
30
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------
1999 1998
-------------- -------
(in thousands)
<S> <C> <C>
Other Financial Data:
Adjusted EBITDA(1):
Aurora casino EBITDA before management fees........... $ 10,534 $10,002
Tunica casino EBITDA before consulting fees and land
lease................................................ 6,758 6,601
Tunica land lease..................................... (995) (940)
Management and consulting fees........................ (2,900) (2,846)
General Partnership interest.......................... 259 304
Development expenses.................................. (215) (255)
Corporate expenses.................................... (1,876) (1,513)
-------- -------
Total Adjusted EBITDA(1)............................... $ 11,565 $11,353
======== =======
Cash provided by operating activities.................. $ 15,553 $19,262
Cash (used in) provided by investing activities........ (800) 1,584
Cash used in financing activities...................... (3,390) (3,242)
Capital expenditures................................... (3,698) (1,899)
Depreciation and amortization.......................... (4,000) (4,214)
Ratio of earnings to fixed charges(2).................. 1.1x 1.1x
<CAPTION>
March 31, 1999
--------------
(in thousands)
<S> <C> <C>
Balance Sheet Data:
Total assets........................................... $278,390
Total debt, including capital lease obligations........ 226,455
Shareholders' equity................................... 7,842
</TABLE>
- --------
(1) Adjusted EBITDA for the periods presented represents earnings before
interest, taxes, depreciation and amortization. Adjusted EBITDA is
presented because we believe it is frequently used by securities analysts,
investors and other interested parties in the evaluation of companies in
our industry. However, other companies in our industry may calculate
EBITDA differently than we do. Adjusted EBITDA is not a measurement of
financial performance under generally accepted accounting principles and
should not be considered as an alternative to cash flow from operating
activities or as a measure of liquidity or an alternative to net income as
indicators of our operating performance or any other measures of
performance derived in accordance with generally accepted accounting
principles.
(2) For purposes of computing the ratio of earnings to fixed charges, fixed
charges consist of interest expensed and capitalized, amortized premiums,
discounts and capitalized expenses relating to debt and 33% of rent
expense, which management believes is representative of the interest
component of rent expense. Earnings consist of income from continuing
operations before income taxes and equity in earnings of unconsolidated
affiliates, plus fixed charges, other than capitalized interest, but
excluding the amortization thereof.
31
<PAGE>
HOLLYWOOD CASINO--AURORA, INC.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------
1999 1998
-------------- -------
(IN THOUSANDS)
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues............................................ $ 43,393 $38,720
-------- -------
Expenses:
Departmental........................................... 31,654 27,485
General and administrative............................. 3,806 3,781
Depreciation and amortization.......................... 1,785 1,924
-------- -------
Total expenses........................................ 37,245 33,190
-------- -------
Income from operations.................................. 6,148 5,530
-------- -------
Non-operating income (expense):
Interest income........................................ 64 36
Interest expense....................................... (1,434) (1,590)
Gain on disposal of assets............................. 1 2
-------- -------
Total non-operating expense, net...................... (1,369) (1,552)
-------- -------
Income before income taxes.............................. 4,779 3,978
Income tax provision.................................... (1,823) (1,520)
-------- -------
Net income.............................................. $ 2,956 $ 2,458
======== =======
<CAPTION>
MARCH 31, 1999
--------------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Total assets............................................ $108,981
Total debt, including capital lease obligations......... 53,958
Shareholder's equity.................................... 31,676
</TABLE>
32
<PAGE>
HWCC--TUNICA, INC.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------
1999 1998
-------------- -------
(IN THOUSANDS)
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues............................................ $ 26,375 $25,072
-------- -------
Expenses:
Departmental........................................... 19,431 18,151
General and administrative............................. 1,479 1,557
Depreciation and amortization.......................... 1,966 2,020
-------- -------
Total expenses........................................ 22,876 21,728
-------- -------
Income from operations.................................. 3,499 3,344
-------- -------
Non-operating income (expenses):
Interest income........................................ 135 122
Interest expense....................................... (2,740) (2,731)
Loss on disposal of assets............................. (2) (3)
-------- -------
Total non-operating expenses, net..................... (2,607) (2,612)
-------- -------
Income before income taxes ............................. 892 732
Income tax provision.................................... -- --
-------- -------
Net income.............................................. $ 892 $ 732
======== =======
<CAPTION>
MARCH 31, 1999
--------------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Total assets............................................ $115,554
Total debt, including capital lease obligations......... 87,414
Shareholder's equity.................................... 18,179
</TABLE>
33
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following should be read in conjunction with our consolidated financial
statements and the notes relating to those statements included in this
prospectus.
Results of Operations for the Three Month Periods Ended March 31, 1999 and
1998
Our net revenues for the three month period ended March 31, 1999 of $69.8
million, represent 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, or 12.1%, and at the Tunica casino of $1.3
million, or 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, our income from operations increased by $528,000, or 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.
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, or 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
34
<PAGE>
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, or 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 decreased $945,000,
or 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, or 23%, compared to the
corresponding period in 1998. Poker revenues declined $101,000, or 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, or 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, or 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, or 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, or 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.
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.
35
<PAGE>
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, or 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, or 5%, and $441,000, or
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.
Revenues. Casino revenues increased $1.7 million, or 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, or 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, or 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.
36
<PAGE>
Departmental Expenses. Casino expenses increased $1.6 million, or 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, or 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, or 6.8%, and $51,000, or 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 Items
Our operating expenses, exclusive of the Aurora casino and Tunica casino,
consist primarily of general and administrative expenses and expenses incurred
in connection with the pursuit of additional gaming venues.
General and Administrative. General and administrative expenses increased by
$280,000, or 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, or 21.3%, for the 1999 three
month period results from increases in corporate overhead costs, primarily in
legal fees and personnel costs.
Depreciation and Amortization. Depreciation and amortization expense
decreased $214,000, or 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 our pursuit of potential gaming opportunities in jurisdictions
where gaming has not been legalized. Such costs decreased by $40,000, or
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, or 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 Greate Bay. 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 our
future consolidated taxable income (primarily from the Aurora casino and the
Tunica casino) will be sufficient to utilize at least a portion of the net
operating loss carryforwards, tax credits and other deferred tax assets
resulting from temporary differences. Accordingly, under the provisions of
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes", the consolidated balance sheet reflects a net deferred tax asset of
$1.8 million as of March 31, 1999.
Results of Operations for the Years ended December 31, 1998, 1997 and 1996
The following presentation is adjusted to present all periods on a
comparable basis by reflecting the following:
On December 31, 1996, we distributed all of the common stock of Greate Bay
held by us to our stockholders, which resulted in Greate Bay no longer being
our subsidiary. For the year ended December 31, 1996, however, the operations
of Greate Bay are included in our consolidated results of operations. The
following table sets forth
37
<PAGE>
our pro forma losses before income taxes and other items, exclusive of Greate
Bay and its subsidiaries, for the year ended December 31, 1996 as if the
distribution of Greate Bay common stock had occurred at December 31, 1995 and,
as a result, Greate Bay and its subsidiaries had not been consolidated with
us.
On April 1, 1997, we acquired the general partnership interest in the
limited partnership that manages the Aurora casino. Prior to that date, the
limited partnership was wholly owned by subsidiaries of Greate Bay. As a
result of the purchase, the limited partnership is now consolidated with us,
and earnings attributable to the limited partnership interest not owned by us
are deducted from our operating income as minority interest. The 1997
financial information set forth below is adjusted from the consolidated
financial statements presented elsewhere to include only the earnings
attributable to us as general partner in income before taxes, nonrecurring,
extraordinary and other items.
Except for this presentation, the impact of Greate Bay's exclusion from the
1998 and 1997 results of operations will not be addressed in the discussion
that follows.
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
1998(1) 1997(2) 1996
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
Casino revenues................................. $252,863 $251,471 $244,485
Other departmental revenues..................... 42,425 41,454 36,660
Less--promotional allowances.................. (26,528) (25,168) (22,658)
-------- -------- --------
Net revenues................................ 268,760 267,757 258,487
-------- -------- --------
Casino expenses................................. 184,589 171,623 174,032
Other departmental expenses..................... 13,247 14,130 12,716
General and administrative expenses............. 16,497 15,631 18,766
Management and consulting fees.................. 10,072 10,809 10,560
Depreciation and amortization................... 16,562 18,901 21,006
Development expenses............................ 779 1,480 1,065
-------- -------- --------
Total expenses.............................. 241,746 232,574 238,145
-------- -------- --------
Operating income before write down of assets.... 27,014 35,183 20,342
Write down of assets............................ -- (19,678) (22,141)
-------- -------- --------
Income (loss) from operations................... 27,014 15,505 (1,799)
Interest expense, net........................... (27,385) (28,453) (26,563)
Tax settlement costs............................ (1,087) -- --
(Loss) gain on disposal of assets............... (61) 552 (46)
Equity in earnings of general partnership....... 1,066 800 --
-------- -------- --------
Loss before income taxes, extraordinary and
other items.................................... $ (453) $(11,596) $(28,408)
======== ======== ========
</TABLE>
- --------
(1) As presented in consolidated financial statements except for the general
partnership interest.
(2) The adjusted financial information for 1997 has been restated to reflect
changes resulting from our modification of the tax treatment for the
distribution of Greate Bay common stock. See Note 3 of Notes to
Consolidated Financial Statements.
Our net revenues for 1998 reflect an increase of $1 million, or less than
1%, from the $267.8 million earned during 1997. The 1998 increase was realized
by improved net revenues at the Aurora casino which more than offset the
decline in net revenues at the Tunica casino. Net revenues for the year ended
December 31, 1997 were $267.8 million, an increase of 3.6% from net revenues
of $258.5 million in 1996. The 1997 increase is directly attributable to the
$12.7 million, or 13.5%, increase in net revenues at the Tunica casino, offset
by a $3.1 million, or 1.9%, decline in net revenues at the Aurora casino.
The 1998 decline in income from ongoing operations of $8.2 million, or
23.2%, compared to 1997 reflects the slight increase in net revenues offset by
a $9.2 million, or 3.9%, increase in operating expenses other than
38
<PAGE>
asset write downs. The increase in ongoing operating expenses primarily
resulted from increased gaming taxes at the Aurora casino as well as higher
marketing and promotional expenses in response to increased competition at
both the Aurora casino and the Tunica casino. The 1997 increase in net
revenues over the prior year, coupled with a 2.3% decline in operating
expenses, exclusive of asset write downs, results in our ongoing income from
operations improving by $14.8 million, or 73%, to $35.2 million in 1997 from
$20.3 million in 1996.
Aurora Casino
General. Income from operations at the Aurora casino, adjusted to exclude
management fees, amounted to $31.9 million for the year ended December 31,
1998 compared to $39.1 million and $35.3 million, respectively, during 1997
and 1996. The 1998 decrease from the prior year is primarily due to an
increase in the Illinois wagering tax rate which took effect on January 1,
1998. The new tax structure consists of a graduated tax rate system with rates
ranging from 15% to 35% based on total adjusted gross receipts. For the years
ended December 31, 1998 and 1997, the Aurora casino paid or accrued wagering
taxes of $42.4 million and $30.7 million, respectively. Had the new rates been
in effect during 1997, the wagering tax for the Aurora casino would have been
$41.3 million. Management has pursued an operating strategy of implementing
changes to its cruising schedule and curtailing marginally profitable
operations in response to the increased taxes. The 1998 increase in wagering
taxes also reflects the 1.6% increase in gaming revenues compared to the prior
year. The operating income decrease is also attributable to increased
competition from the opening in northern Indiana of two riverboat gaming
operations during April and August 1997. These two operations added
approximately 3,700 new gaming positions to the Chicago market area, an
increase of nearly 35%.
Income from operations increased 10.9% during 1997, as compared to 1996,
despite increased competition from the opening in northern Indiana of three
riverboat gaming operations during June 1996 and two additional operations in
April and August 1997 which more than doubled gaming capacity in the Chicago
area. The new facilities added approximately 9,100 gaming positions to the
Chicago area; the four existing Illinois riverboats in the Chicago area have
less than 5,300 gaming positions. The Chicago area riverboats in general, and
the Aurora casino in particular, continued to adjust and respond to this
increased competition as demonstrated by the Aurora casino's increase in net
revenue during both the third and fourth quarters of 1997 compared to the same
periods in 1996. The second half of the 1996 period was also negatively
impacted by severe local flooding in July 1996 which caused the cancellation
of several cruises. Local economic conditions were also negatively impacted
for a period of time as a result of extensive flood damage in the surrounding
area.
Gaming Operations. The following table sets forth selected unaudited
financial and operating data for the Aurora casino's operations for the years
ended December 31, 1998, 1997 and 1996.
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1998 1997 1996
---------- ---------- ----------
(in thousands, except
percentages)
<S> <C> <C> <C>
Revenues:
Table games............................... $ 42,942 $ 47,206 $ 51,230
Slot machines............................. 111,192 105,413 105,894
Poker revenues............................ 2,270 1,346 --
---------- ---------- ----------
Total................................... $ 156,404 $ 153,965 $ 157,124
========== ========== ==========
Table games:
Gross wagering (drop)(1).................. $ 247,911 $ 273,689 $ 304,851
Hold percentages(2)....................... 17.3% 17.3% 16.8%
Slot machines:
Gross wagering (handle)(1)................ $1,983,873 $1,866,687 $1,902,642
Hold percentages(2)....................... 5.6% 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."
39
<PAGE>
Total gross wagering at the Aurora casino as measured by table drop and slot
machine handle increased by $91.4 million, or 4.3%, during 1998 compared to
1997. The increase results from the continuation of aggressive marketing and
promotional programs introduced in the second quarter of 1998 to recapture
market share in the Chicago area. Declines in gross wagering during the 1998
first quarter resulted from reductions in patron volume due to changes in the
Aurora casino's cruising schedule. In an effort to reduce unprofitable
operations and capitalize on profitable cruises in response to the increased
wagering tax discussed above, the smaller of the Aurora casino's two
riverboats ceased operating daytime cruises on weekdays during January and
February; however, all cruises resumed in March. Increased competition in the
Chicago market due to the opening of two new casinos in northern Indiana in
April and August 1997 has also limited growth in casino wagering.
Total gross wagering decreased by $67.1 million, or 3%, during 1997 compared
to 1996. The decrease is directly attributable to the competition from the
five new casinos mentioned above. The 1997 decline in total gross wagering
reflects a slot handle decline of $36 million, or 1.9%, and a table drop
decrease of $31.1 million, or 10.2%. For the second half of 1997, total gross
wagering was $34.1 million, or 3.3%, greater than the comparable period in
1996. The second half 1997 increase reflects the Aurora casino's adjustment to
the increased competition (the comparable 1996 period includes operations
subsequent to the opening of three of the five new Indiana riverboat
operations) as well as the impact of local flooding in 1996. The 1997 annual
period decrease in casino wagering continues to reflect the significance of
the additional gaming competition in the Chicago market area from the Indiana
gaming operations. However, the Illinois-based riverboat operators located
closer to the new Indiana facilities and which drew a greater percentage of
their customers from areas now more conveniently served by the Indiana
facilities suffered a greater loss of patronage than the Aurora casino. The
Aurora casino's 1997 decrease in gross wagering compares favorably with the
decrease in gross wagering for the two Joliet, Illinois riverboat operators
which, based on information published by the Illinois Gaming Board, suffered a
combined decrease in gross wagering of 15% during the year ended December 31,
1997 compared to 1996. Accordingly, the Aurora casino's location and resulting
customer base west of Chicago together with the success of its facility
improvements program, including the completion of a new 500-space parking
garage facility during September 1996, have helped maintain patron volume.
Revenues. Casino revenues increased by 1.6% during 1998 compared to 1997.
Table game revenues decreased $4.3 million, or 9%, during 1998 compared to
1997 reflecting the 9.4% decrease in drop. Slot machine revenues during 1998
increased $5.8 million, or 5.5%, compared to 1997 reflecting the 6.3% increase
in slot wagering partially offset by the decline in the slot machine hold
percentage to 5.6% from 5.7%. Casino revenues were also favorably impacted by
the introduction of poker during the second quarter of 1997, which generated
casino revenues of $2.3 million during 1998 compared to $1.3 million during
1997.
Casino revenues decreased $3.2 million, or 2%, during the year ended
December 31, 1997 compared to 1996. The 1997 decrease reflects a decline in
table game revenues of $4 million, or 7.9%, resulting from the decrease in
table drop mentioned above, lessened somewhat by an increase in the hold
percentage to 17.3% in 1997 from 16.8% in 1996. Slot machine revenue declined
only slightly, less than 1%, in 1997 compared to 1996 despite the $36 million
decline in slot machine handle as the slot machine hold percentage increased
slightly to 5.7% in 1997 from 5.6% in 1996.
Food and beverage revenues did not change significantly during 1998 compared
to 1997 or during 1997 compared to 1996.
Other revenues increased $897,000, or 46.7%, during 1998 compared to 1997
after declining by $2 million, or 50.7%, during 1997 compared to 1996
primarily due to management's decision to reinstate valet and parking garage
fees in 1998 which had been eliminated during 1997 due to competitive
pressures.
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 60.6%, 60.7% and 64.5%, respectively, during the years
ended December 31, 1998, 1997 and 1996. The 1998 change is not significant;
the 1997 decrease represents the reduction of promotional activity with
respect to parking as mentioned above.
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Departmental Expenses. Casino expenses increased $10.1 million, or 9.9%,
during 1998 compared to 1997 primarily due to the wagering tax increase
discussed above. Higher marketing costs, partially offset by reductions in
payroll costs, also contributed to the increase. Gaming taxes imposed by the
State of Illinois are determined using a graduated tax rate applied to the
licensee's gaming revenues. The Aurora casino expenses such gaming taxes based
on its anticipated annual effective tax rate. Casino expenses in 1997
decreased $5.9 million, or 5.5%, from the prior year reflecting management's
success at controlling personnel costs and improving overall profitability.
Food and beverage expenses did not change significantly during 1998 compared
to 1997 or during 1997 compared to 1996.
Other expenses decreased $309,000, or 18.8%, during 1998 compared to 1997
reflecting reductions in personnel and other operating expenses. Other
expenses increased $575,000, or 53.9%, in 1997 compared to 1996 as fewer
expenses were allocated to the casino department, primarily as a result of
reduced parking costs.
Tunica Casino
General. The Tunica casino earned income from operations, adjusted to
exclude consulting fees payable to a subsidiary of Greate Bay, of $13.7
million in 1998 compared to $15.7 million in 1997 and $6.3 million in 1996.
The 1998 decrease is attributable to a lower than expected table games hold
percentages and to increased competition in the Tunica market which has
resulted in increased marketing costs. The competitive pressure has resulted
from the opening of approximately 1,700 new hotel rooms by other casino
operators during the fourth quarter of 1997 and early 1998. The increase in
1997 was primarily due to the opening of the Tunica casino's new 352-room
hotel tower in September 1996, which increased room capacity by over 225% and
added luxury suites, meeting spaces, and other amenities.
Gaming Operations. The following table sets forth certain unaudited
financial and operating data relating to the operations of the Tunica facility
for the years ended December 31, 1998, 1997 and 1996.
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1998 1997 1996
---------- ---------- ----------
(in thousands, except
percentages)
<S> <C> <C> <C>
Casino Revenues:
Table games............................... $ 13,658 $ 15,083 $ 16,650
Slot machines............................. 81,801 81,404 69,644
Poker revenues............................ 1,000 1,019 1,067
---------- ---------- ----------
Total................................... $ 96,459 $ 97,506 $ 87,361
========== ========== ==========
Table games:
Gross wagering (drop)(1).................. $ 76,366 $ 78,115 $ 82,350
Hold percentage(2)........................ 17.9% 19.3% 20.2%
Slot machines:
Gross wagering (handle)(1)................ $1,555,316 $1,595,645 $1,332,949
Hold percentage(2)........................ 5.3% 5.1% 5.2%
</TABLE>
- --------
(1)(2)See corresponding notes to the table at "Aurora Casino--Gaming
Operations" above.
Total gross wagering at the Tunica casino as measured by table game drop and
slot machine handle decreased by $42.1 million, or 2.5%, during 1998 compared
to 1997. The decreased patron volume is directly attributable to increased
competition in the Tunica market. Slot machine handle decreased by $40.3
million, or 2.5%, and table game drop decreased by $1.8 million, or 2.2%,
during 1998 compared to 1997.
Total gross wagering increased $258.5 million, or 18.3%, during 1997
compared to 1996. The additional patron volume is directly attributable to the
hotel expansion mentioned above. This increase reflects an increase in slot
machine handle of $262.7 million, or 19.7%, offset by a decline in table game
drop of $4.2 million, or 5.1%.
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Revenues. Casino revenues decreased $1 million, or 1.1%, during 1998
compared to 1997. Table game revenues decreased 9.4% during 1998 due to the
previously discussed decline in table drop coupled with an overall decline in
the hold percentage to 17.9% in 1998 from 19.3% in 1997. Slot machine revenues
did not change significantly during 1998 compared to the prior year as the
change in gross wagering was virtually offset by the impact of the change in
the slot machine hold percentage. Poker revenues decreased 1.9% during 1998
compared to the prior year primarily from a reduction in the number of poker
tables during the period from ten to six.
Total casino revenues in 1997 increased $10.1 million, or 11.6%, compared to
1996. Slot machine revenues increased $11.8 million, or 16.9%, as a result of
the increase in slot handle described above. This increase in revenue was
partially offset by a 9.4% decrease in table game revenues, to $15.1 million
in 1997 from $16.7 million in 1996. The decrease in table game revenues is
attributable to a decline in table drop of $4.2 million, as discussed above,
coupled with a drop in the hold percentage to 19.3% in 1997 from 20.2% in
1996.
Rooms revenue decreased $265,000, or 2.7%, during 1998 compared to 1997 due
to increased competition for overnight patrons. Hotel occupancy rates
decreased as a result of the additional competition to approximately 82% in
the first quarter of 1998 from approximately 88% during the same period of
1997. Occupancy rates at the Tunica casino for the second, third and fourth
quarters of 1998 rebounded to approximately 92%, compared to 93% during the
corresponding period of 1997, as the market began to absorb the additional
hotel room capacity. Occupancy rates during the period from September through
December 1998 were also negatively impacted by rooms being taken out of
service for maintenance and upgrading. Room revenues increased in 1997 by $4.3
million, or 81.1%, compared to 1996 as a result of the opening of the Tunica
casino's new 352-room hotel tower during the third quarter of 1996, increasing
the number of guest rooms by over 225%. Hotel occupancy rates decreased
slightly as a result of the additional room capacity, declining to an average
of 92% for 1997 and 88% for the period from August through December 1996, from
an average of 99.7% from January through July 1996. The addition of
recreational vehicle parking spaces has also contributed to the increases in
rooms revenue. Additions of 51 and 22 parking spaces, respectively, were made
to the RV Park at the Tunica casino in 1998 and 1997 bringing the total
current number of parking spaces to 123.
Food and beverage revenues increased $719,000, or 5%, during 1998 compared
to 1997 as a result of increases in both food prices and in the number of
dining patrons resulting from increased promotional activities. Food and
beverage revenues in 1997 increased $2.3 million, or 19.5%, principally due to
additional patron volume, increased marketing efforts and the opening of a new
casual dining outlet. Other revenues increased $209,000, or 18%, during 1998
compared to the prior year due to increased patron volume using such services.
Other revenues increased by 6.1% during 1997 compared to 1996 due to increased
patron volume with respect to such ancillary services as telephones, cable
television and vending machines.
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 rooms, food and beverage and other
revenues, increased to 63.9% in 1998 from 61.2% during 1997 and 61.1% in 1996.
The 1998 increase results from increased complimentary food and beverage and
other services due to increased marketing efforts. Although the dollar amount
of promotional allowances increased by $4.1 million, or 36.7%, the stability
of the percentage of promotional allowances in 1997 compared to 1996 indicates
that management's efforts to increase revenues while controlling the cost of
promotional activities were successful.
Departmental Expenses. Casino expenses increased by $2.8 million, or 4.1%,
during 1998 compared to 1997 as a result of additional promotional activities
instituted during the third quarter of 1998 in response to competitive
pressures. Casino expenses in 1997 increased $3.5 million, or 5.3%, due to
additional patron volume as evidenced by the 11.6% increase in casino
revenues.
Rooms expense did not change significantly during 1998 compared to 1997.
Rooms expense in 1997 increased $262,000, or 16.7%, compared to the prior year
primarily due to the additional patron volume associated with the opening of
the new hotel tower.
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<PAGE>
Despite the increases in food and beverage revenues discussed above, food
and beverage expenses decreased by $402,000, or 9.3%, during 1998 compared to
1997. Such decrease results from the previously noted increase in marketing
activities with respect to food and beverage programs, the costs of which are
allocated to casino expenses. Food and beverage expense increased $573,000, or
15.3%, during 1997 compared to the prior year primarily due to increased
patron volume associated with the opening of the new hotel tower and
additional dining outlets. Such increase was partially offset by increased
promotional activity, the cost of which is allocated to the casino department.
The decrease in other expenses during 1998 compared to 1997 was not
significant from a monetary amount. The increase in other expenses of
$143,000, or 11.4%, during 1997 compared to the prior year reflects increased
costs associated with merchandise sales and lounge entertainment.
Other Items
Our operating expenses, exclusive of the Aurora casino and the Tunica
casino, consist primarily of general and administrative expenses and expenses
incurred in connection with the pursuit of additional gaming venues.
General and Administrative. General and administrative expenses increased
$866,000, or 5.5%, during 1998 compared to 1997. Increases in such costs at
the Aurora casino of 3.9% and at the Tunica casino of 1.0% were not
significant; the remaining increase of $622,000 in corporate overhead costs
resulted primarily from increases in professional fees. General and
administrative expenses decreased $3.1 million, or 16.7%, in 1997 compared to
the prior year. Such expenses decreased 4.2% at the Aurora casino and 4.1% at
the Tunica casino due to management's cost containment efforts. The remaining
corporate decline in general and administrative expense of $2.7 million is due
to reductions in corporate overhead costs, primarily in travel costs and
professional fees.
Depreciation and Amortization. Depreciation and amortization decreased by
$2.3 million, or 12.4%, in 1998 compared to 1997 and by $2.1 million, or 10%,
in 1997 compared to 1996. The 1998 decrease results primarily from certain
operating equipment at the Tunica casino becoming fully depreciated during the
third quarter of 1998. Although completion of a parking garage at the Aurora
casino and a new hotel tower at the Tunica casino during the third quarter of
1996 significantly increased the amount of depreciable assets, the revision in
estimated useful lives of buildings, barges and certain operating equipment
effective October 1, 1996 resulted in an overall decrease in depreciation and
amortization during 1997 compared to 1996.
Development Expenses. Development expenses represent costs incurred in
connection with our pursuit of potential gaming opportunities in jurisdictions
where additional gaming licenses may be available as well as those where
gaming has not been legalized. The $701,000, or 47.4%, decrease in 1998
development costs compared to 1997 reflects an unusually high level of
spending in 1997 not repeated in the current year. Such costs in 1997
increased $415,000, or 39%, compared to 1996 primarily as a result of our
efforts in obtaining a gaming site in Louisiana. A gaming project in
Shreveport, Louisiana was approved by the Louisiana Gaming Control Board
during the third quarter of 1998. See "--Liquidity and Capital Resources--
Capital Expenditures and Other Investing Activities."
Write Down of Assets. In connection with a refinancing of its indebtedness
in 1994, Greate Bay issued $40.5 million discounted principal amount (face
amount of $110.6 million) of deferred interest notes (the "PPI Funding Notes")
to us in exchange for $38.8 million principal amount of 15 1/2% notes issued
by another Greate Bay subsidiary and held by us. It was anticipated that one
of our primary methods of realizing the carrying value of the new notes would
be through the utilization of existing tax net operating losses of Greate Bay
and its subsidiaries. As a result of our distribution of Greate Bay stock at
December 31, 1996 to our stockholders, Greate Bay's tax net operating losses
are no longer available for utilization in our consolidated tax returns.
Accordingly, at December 31, 1996, we provided a valuation allowance in the
amount of $18.7 million which reduced the carrying amount of the PPI Funding
Notes to their estimated realizable value of $35.6 million at that date. As a
result of the filing for protection under Chapter 11 of the United States
Bankruptcy Code by Greate Bay's most significant operating subsidiary on
January 5, 1998, we took an additional write down during 1997 further reducing
the carrying amount of the PPI Funding Notes at both December 31, 1998 and
1997 to an estimated
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<PAGE>
realizable value of $12.3 million. Management presently anticipates that the
remaining balance will be realized through a combination of repayments from
Greate Bay and asset acquisitions from Greate Bay and its subsidiaries.
During November 1995, we loaned $10 million of the proceeds from the 12 3/4%
Senior Secured Notes to an unaffiliated gaming company in the form of two $5
million notes. See "--Liquidity and Capital Resources--Financing Activities."
On February 27, 1998, both parties agreed to settle the outstanding
obligations with the payment of $4.4 million and the issuance of two new,
short-term obligations totaling $1.6 million, which were paid in April 1998.
The $4 million difference between the $10 million carrying amount of the notes
receivable and the agreed upon settlement was reflected as a write down of the
notes receivable as of December 31, 1997.
During 1996, management determined that certain properties in Texas acquired
as potential sites for future development should be offered for sale. An
evaluation of the net realizable value for such sites resulted in a write down
for the anticipated loss on disposal of the properties of $3.4 million for the
year ended December 31, 1996. No additional write downs were recorded in 1998
or 1997.
Net Interest Expense. Net interest expense did not change significantly
during 1998 compared to 1997. Net interest expense increased $1.9 million, or
7.1%, during 1997 compared to the prior year. The 1997 increase is primarily
attributable to additional interest incurred with respect to the new parking
garage at the Aurora casino which is treated as a capital lease for financial
reporting purposes and to the capitalization of interest at the Tunica casino
with respect to construction of its new hotel tower during 1996.
(Loss) Gain on Disposal of Assets. The 1998 loss results primarily from the
sale of certain slot machines at the Tunica casino as part of its program to
update such equipment; the 1997 gain resulted primarily from the sale of a
company-owned aircraft.
Consolidated Items
Income Taxes. As previously disclosed in our quarterly report on Form 10-Q
for the period ended September 30, 1998, and subsequent to the issuance of our
1997 consolidated financial statements, we determined that we should revise
our tax treatment of the spin-off of the stock of Greate Bay which occurred on
December 31, 1996. As a result, the 1997 and 1996 consolidated financial
statements have been restated from amounts previously reported to record the
appropriate amounts for income taxes, deferred taxes, interest and penalties
due to the recognition of additional taxable income resulting from the revised
tax treatment of the spin-off.
For the year ended December 31, 1996, we utilized approximately $9 million
of our available net operating loss carryforwards as a result of the
additional taxable income we recognized from the spin-off. For alternative
minimum tax purposes, the revised tax treatment resulted in us utilizing all
of our remaining alternative minimum tax loss carryforwards and being liable
for the payment of approximately $2.2 million in additional alternative
minimum taxes. We paid our $2.2 million alternative minimum tax obligation for
1996 plus accrued interest thereon during the fourth quarter of 1998. As a
result of the obligation for alternative minimum tax payments and the impact
on net deferred tax assets, we restated our consolidated statement of changes
in shareholders' equity (deficit) from amounts previously reported to provide
an additional $6.3 million charge to paid-in capital consistent with the
treatment of other effects of the spin-off transaction.
For the year ended December 31, 1997, the revised tax treatment resulted in
our recognition of additional income tax expense of $2.1 million in addition
to the accrual of interest on the underpayment of our federal tax obligations.
We paid $4.7 million during September 1998 with respect to our revised
estimated 1997 federal income tax obligation.
In connection with the revised tax treatment, we have commenced litigation
against our former independent accountants and tax advisors alleging negligent
advice and breach of contract.
44
<PAGE>
Management believes that it is more likely than not that our future
consolidated taxable income, primarily from the Aurora casino and the Tunica
casino, will be sufficient to utilize a portion of the net operating loss
carryforwards, tax credits and other deferred tax assets resulting from
temporary differences. Accordingly, under the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes," the
consolidated balance sheet reflects net deferred tax assets of $1.8 million as
of December 31, 1998.
Sales by us or existing stockholders of common stock by a five percent
stockholder, as defined in the Internal Revenue Code of 1986, as amended (the
"Code"), can cause a "change of control," as defined in Section 382 of the
Code, which would limit our ability or that of our 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 our future
utilization of our loss carryforwards.
Tax Settlement Costs. Tax settlement costs of $1.1 million represent both
costs incurred to date as well as management's estimate of probable costs to
be incurred arising from and directly related to the modification of our tax
treatment of the spin-off of Greate Bay stock previously discussed.
Extraordinary Item. We were required to make an offer to purchase not more
than $2.5 million in principal amount of our 12 3/4% Senior Secured Notes at
each semiannual interest payment date. During 1998, we made two redemption
offers and redeemed $2.8 million of the 12 3/4% Senior Secured Notes resulting
in an extraordinary loss of $336,000. During 1997, we made one such offer and
redeemed $2.5 million of the 12 3/4% Senior Secured Notes. The 1997 redemption
resulted in an extraordinary loss of $326,000, reduced by an estimated income
tax benefit of $111,000.
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 our computer systems and
applications as well as our 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:
. those necessary for regulatory compliance purposes;
. essential systems; and
. non-essential systems.
Within the essential systems group, an additional rating factor of one to
five was assigned to each system with a factor of one indicating the greatest
significance. Readiness of information technology and non-information
technology systems for the Year 2000 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 the
discussion under the section entitled "--Liquidity and Capital Resources--
Capital Expenditures and Other Investing Activities."
We have also initiated formal communication with our significant suppliers
to determine the extent to which our operating and information systems are
vulnerable to those third parties' failure to resolve their Year 2000
compliance issues. An initial determination of our exposure with respect to
third-party supplied systems has recently been completed. Additional
procedures, if necessary, are now being taken to remediate potential
vulnerabilities.
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<PAGE>
Contingency plans are also being developed by management with respect to
internally developed systems not fully tested prior to the Year 2000.
Accordingly, we do not anticipate any internal systems failures will have a
material impact on our operations or financial condition. We will continue our
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 services like mechanical gaming devices would be temporarily disrupted. We
cannot presently estimate either the likelihood or the potential cost of such
failures.
While we cannot be sure that we and our suppliers and customers will fully
resolve the Year 2000 compliance issues, neither the estimated costs nor the
outcome of the Year 2000 problem is expected to have a material impact on our
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 our 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 our casino revenues and overall
profitability.
Liquidity and Capital Resources
Operating Activities. The operations of the Aurora and Tunica casinos
constitute our primary sources of liquidity and capital resources. The Aurora
casino contributed approximately $11.4 million of cash flow from operations
during the first quarter 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 quarter of 1999 after deducting the payment of
$300,000 of consulting fees to Greate Bay. Our 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
us during the first quarter of 1999 included costs to pursue development
opportunities of $215,000 and corporate overhead costs of $2.2 million.
The Internal Revenue Service is currently examining our consolidated federal
income tax returns for the years 1993 through 1996. Management believes that
the results of such examination will not have a material adverse effect on our
consolidated financial position or results of operations.
During the first quarter of 1999, consolidated cash flow from operations of
$15.6 million and equipment financing of $1.9 million were used, in part, by
us 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 million
to Greate Bay as limited partner in the entity which currently holds the
management contract on the Aurora casino.
Acquisition and Termination of Management and Consulting Contracts. On April
28, 1999, we entered into a voting agreement with Greate Bay, Pratt Casino
Corporation and substantially all of the holders of $85 million of senior
notes currently in default which were issued by PRT Funding Corp., a wholly
owned subsidiary of Pratt Casino Corporation, and guaranteed by Pratt Casino
Corporation. Under the terms of the agreement, we would purchase the stock of
Pratt Casino Corporation from Greate Bay as part of a debt restructuring of
PRT Funding, Pratt Casino Corporation and other subsidiaries of Pratt Casino
Corporation. On May 25, 1999, Pratt
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<PAGE>
Casino Corporation, PRT Funding Corp. and New Jersey Management, Inc. filed
for bankruptcy pursuant to a joint plan of reorganization in accordance with
the terms of our agreement. On the date on which Pratt Casino Corporation
emerges from bankruptcy proceedings, we would acquire its stock for nominal
consideration and satisfy Pratt Casino Corporation's obligations for $40.3
million in cash.
Upon completion of the restructuring, Pratt Casino Corporation's only assets
would be a consulting contract with our Tunica casino and its limited
partnership interest in a partnership that manages the Aurora casino under a
long-term management contract. The acquisition of Pratt Casino Corporation
when it emerges from bankruptcy will enable us to terminate the Aurora
management and Tunica consulting contracts. We incurred net expenses pursuant
to those contracts totalling $2.3 million during the first quarter of 1999.
Our acquisition of Pratt Casino Corporation will also result in a charge of
approximately $40.3 million during 1999, as no asset value will be attributed
to the Aurora management and Tunica consulting contracts. Upon completion of
this offering, we will deposit $40.7 million of proceeds into a special
account with the trustee to secure our obligation to redeem $40.3 million of
the notes at 101% of their principal amount in the event that the acquisition
of Pratt Casino Corporation has not been completed by January 31, 2000.
The plan will require the approval of the bankruptcy court as well as by
various gaming regulatory organizations.
Financing Activities. During October 1995, we issued $210 million of 12 3/4%
Senior Secured Notes due November 1, 2003, discounted to yield 13 3/4% per
annum. The 12 3/4% Senior Secured Notes were refinanced and discharged with a
portion of the proceeds from the original offering of the notes.
During September 1998, Hollywood Casino-Aurora 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. Hollywood Casino-Aurora borrowed $2 million under the
agreement during October 1998.
HWCC-Tunica had a $1.3 million bank credit facility available to borrow
against through September 30, 1998. Outstanding borrowings on the line of
credit of $462,000 at December 31, 1998 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, we acquired from PPI Corporation, a Greate
Bay 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 Greate Bay to PPI Corporation.
Our annual principal and interest payments on the $3.8 million note
approximate the general partner's share of partnership distributions now being
made to us.
As of March 31, 1999, our 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 debt maturities
include the potential redemption of $2.5 million principal amount of 12 3/4%
Senior Secured Notes pursuant to the mandatory redemption offer previously
described. No such redemptions will be required as a result of the discharge
of our 12 3/4% Senior Secured Notes with a portion of the proceeds from this
offering.
Capital Expenditures and Other Investing Activities. Capital expenditures at
the Aurora casino during the first three months of 1999 were $529,000. We plan
to use approximately $40 million of the proceeds from this offering to replace
our two existing riverboats with a newly constructed dockside gaming facility
to provide a more spacious and comfortable gaming experience to our patrons.
Management also anticipates spending $4 million during the remainder of 1999
primarily for its ongoing capital improvements program which will 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.
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<PAGE>
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 as part of a two-year capital improvements
program. We have substantially completed the following improvements to the
Tunica casino: the upgrade of all of our hotel rooms, suites and public
spaces, including the installation of a new marble floor in the hotel lobby;
the development of a new VIP check-in and private entertainment lounge to
enhance the level of service we provide our premium gaming patrons; the
addition of 400 new state of the art slot machines; the expansion of the
number of recreational vehicle spaces; and the opening of the 18-hole
championship golf course with our joint venture partners.
HWCC-Tunica entered into an agreement with Harrah's Entertainment and Boyd
Gaming during 1996 providing for the joint construction and ownership of a
golf course. Contributions by HWCC-Tunica to the limited liability corporation
formed to develop and operate the golf course have totaled approximately $2.1
million, including $66,000 during the first quarter of 1999.
In September 1998, we received a license to develop a Hollywood-themed hotel
and casino complex on the Red River in Shreveport, Louisiana. We originally
planned to develop the Shreveport casino in a joint venture in which we would
have had an interest of approximately 50%. On April 23, 1999, we acquired the
interest of our joint venture partner in the Shreveport casino for $2.5
million, $1,000 of which was paid at closing, with the remainder to be paid
six months after the opening of the Shreveport casino. As a result, we have a
100% interest in the Shreveport casino with the exception that our remaining
joint venture partner holds a 10% residual interest in the event the project
is ever sold. The total estimated cost of the Shreveport casino is
approximately $230 million. We have contributed approximately $50 million as
an equity investment in the project with the remaining construction and
preopening costs, estimated at $180 million, to come from non-recourse project
financing. We have secured the project financing and anticipate commencing
construction in the summer of 1999 with a planned opening date approximately
14 months later.
We continue to pursue several additional potential gaming opportunities. We
intend to finance any future ventures with cash flow from operations, together
with third party financing, including non-recourse project financing.
Conclusion. Management anticipates that our funding requirements for the
next twelve months will be satisfied by existing cash and cash generated by
the Aurora and Tunica casinos.
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BUSINESS
General
We develop, own and operate highly themed casino entertainment facilities
under the service mark Hollywood Casino. We currently own and operate two
casinos, one in Aurora, Illinois, and the other in Tunica County, Mississippi.
Our properties enjoy leading market positions in two of the five largest
gaming markets in the United States. The Aurora casino, located approximately
35 miles west of downtown Chicago, features two riverboat casinos and a large
land-based pavilion. The Tunica casino, located approximately 30 miles south
of Memphis, Tennessee, includes a dockside casino and a hotel and
entertainment complex. Our facilities feature our unique Hollywood theme,
which incorporates the excitement and glamour of the motion picture industry
by utilizing designs inspired by famous movies, displays of motion picture
memorabilia and movie-themed gaming, entertainment and dining areas. In
addition to our existing properties, we recently received approval and have a
license to develop, own and operate a destination gaming resort in Shreveport,
Louisiana, located 180 miles east of Dallas, Texas. We believe the Shreveport
casino, which will also incorporate our Hollywood theme, will be the premier
gaming facility in the market offering customers the largest riverboat casino
and numerous entertainment amenities. We believe that our unique Hollywood
theme differentiates our properties from those of our competitors by providing
a high quality gaming and entertainment environment, which has enabled us to
develop strong customer loyalty.
We believe we have an opportunity to significantly increase our operating
cash flow and enhance our value by: (1) expanding our Aurora casino by
replacing our two riverboats with a significantly larger and more luxurious
dockside gaming facility; (2) developing and operating a large riverboat
casino and resort complex in the Shreveport/Bossier City gaming market through
an unrestricted subsidiary which will be obligated to pay us fees under the
Shreveport management contract; (3) acquiring the management and consulting
contracts that require the payment of fees by our Aurora and Tunica casinos to
third parties; and (4) continuing to refine and execute our operating and
marketing strategies to enhance the market positions of our Tunica and Aurora
casinos. These four elements, together with this offering, comprise our five
point strategic plan. In addition to enhancing our operating performance, we
believe that the successful execution of this plan will improve our financial
flexibility and simplify our organizational structure.
The Aurora Casino. The Aurora casino commenced operations in June 1993. The
Aurora casino's primary market is the affluent suburbs north and west of
Chicago. Approximately 5.7 million adults live within a 50-mile radius and
approximately 8 million adults live within a 100-mile radius of Chicago. The
facility is easily accessible from major highways, can be reached by train
from downtown Chicago in approximately 50 minutes and is approximately 30
miles away from both the O'Hare International and Midway airports.
The property's two riverboat casinos, City of Lights I and City of Lights
II, contain an aggregate of approximately 29,550 square feet of gaming space,
approximately 975 slot machines and approximately 55 table games. The Aurora
casino also includes an approximately 64,000 square foot, land-based pavilion
featuring a glass-domed, four-story atrium with two upscale lounges, our
award-winning Fairbanks gourmet steakhouse, the Hollywood Epic Buffet, a
1950s-style diner, a high-end customer lounge and a new, private, intimate
dining room, called the "Gold Room," for our premium players. The Aurora
casino's two parking garages provide convenient access for approximately 1,340
cars. The Aurora casino also offers retail items at the Hollywood Casino
Studio Store, a highly-themed shopping facility that offers movies on video,
soundtrack CDs and logo merchandise from major Hollywood studios.
The Aurora casino was the first of our properties to feature the distinctive
Hollywood theme. We believe that the use of the Hollywood theme throughout the
Aurora casino's gaming, dining and entertainment facilities provides a
uniquely entertaining atmosphere for our patrons and encourages both initial
and repeat visits. The Aurora casino currently features numerous displays of
motion picture memorabilia including Don Corleone's car
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from The Godfather, the motorcycle from The Great Escape, Elliot Ness' car
from the movie version of The Untouchables, the Mirthmobile from Wayne's World
2, the space buggy from Armageddon, Luke Skywalker's lightsaber from Star Wars
and a lifeboat and other memorabilia from the Academy Award(R) winning picture
Titanic. The Aurora casino also includes themed gaming areas featuring slot
machines with custom graphics and the use of movie star look-alikes to
entertain guests. The pavilion's dining and entertainment facilities
extensively utilize our Hollywood theme, and include the following:
. Club Harlow(R), an upscale lounge which caters primarily to the
facility's high-end customers and provides direct VIP access to a gaming
area emphasizing higher limit table games and slot machines;
. the Living Room at Harlows, a private area where premium customers can
relax and enjoy complimentary hors d'oeuvres prior to and after boarding
the casino;
. the award-winning Fairbanks gourmet steakhouse, which has been heralded
as the best steakhouse in the western suburbs;
. the "Gold Room," a private and beautifully-appointed, intimate dining
room which offers a specially-designed menu and the ultimate in guest
service for our premium players;
. the Hollywood Epic Buffet, a buffet-style restaurant which features a
large collection of movie memorabilia; and
. Louie Dombrowski's, a 1950s style diner offering everything from blue
plate specials and Chicago Dogs to ice cream sundaes and soda fountain
treats.
The Aurora casino is also located near the Paramount Arts Center. This
1,900-seat, art deco-style theater was completely renovated by the City of
Aurora in 1992. We use the Paramount Theater to provide headliner
entertainment for our customers. Entertainers we have booked at the Paramount
include: Frank Sinatra, Tom Jones, Ann-Margret, The Temptations, Howie Mandel,
Willie Nelson, Engelbert Humperdinck, Paul Anka, Bill Cosby, Smokey Robinson,
The Beach Boys, Aretha Franklin, Kenny Rogers, Frankie Valli, Liza Minelli and
Steve Lawrence & Eydie Gorme.
We believe that the Aurora casino is one of the market leaders in the
Chicago gaming market, the fourth largest gaming market in the United States
after Las Vegas, Atlantic City and the Connecticut Native American casinos.
Based upon published reports, we generated 10.4% of total gaming revenues in
the Chicago gaming market with only 9.1% of the market's gaming positions,
resulting in the Aurora casino capturing 114% of its "fair share" of the
market's gaming revenues in 1998. The Chicago gaming market consists of four
Illinois casinos, including the Aurora casino, and five northern Indiana
casinos located within 50 miles of downtown Chicago. The Chicago gaming market
has experienced a significant increase in gaming revenues due to the
substantial increase in capacity from the opening of the five northern Indiana
riverboats in 1996 and 1997. In 1998, the Chicago gaming market generated
approximately $1.5 billion in gaming revenues, an increase of approximately
100% from 1995.
On June 25, 1999, the Governor of Illinois signed into law legislation
passed by the Illinois legislature that allows dockside gaming for existing
licensees. As a result of this legislation, the Aurora casino's riverboats no
longer cruise, but are operating as dockside gaming facilities. The Aurora
casino's patrons are now able to freely enter and exit the docked riverboats
during the Aurora casino's operating hours.
The Aurora Casino Expansion. We currently operate two riverboat casinos,
City of Lights I and City of Lights II, with approximately 29,550 combined
square feet of gaming space. City of Lights I is significantly larger than
City of Lights II. We believe that the operating results of the Aurora casino
have been limited by the small size of City of Lights II. We originally
planned to replace the smaller and less spacious City of Lights II with a
larger, newly constructed riverboat. As a result of the recent legislation, we
now plan to replace both City of Lights I and City of Lights II with a single,
two level dockside facility which will feature a 50,000 square foot main
gaming level with high ceilings and wide aisles for customer comfort. Our
plans also currently provide for a 25,000 square foot mezzanine level that
will include a poker room, a 150-seat Hollywood Diner, a 30-seat walk-up
delicatessen and a 200-seat show lounge. We believe that the $40 million in
proceeds
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from the offering of the original notes designated for the development of a
new riverboat casino will be sufficient for the development of the dockside
gaming facility. Commencement of construction of the dockside casino could be
delayed pending receipt of required regulatory approvals. While it may take us
longer to complete and open, we believe that a dockside gaming facility would
provide us with an even greater economic benefit than a new riverboat.
The Tunica Casino. The Tunica casino commenced operations in August 1994.
Tunica is the closest gaming jurisdiction to, and easily accessible from, the
Memphis metropolitan area. Approximately 4.9 million adults live within a 200-
mile radius of Tunica County, approximately 867,000 of whom reside within 50
miles of Memphis. In addition, Memphis hosted approximately 8 million visitors
in 1998. The Tunica market has become a regional destination resort,
attracting customers from markets such as Nashville, Atlanta, St. Louis,
Little Rock and Tulsa. The Tunica casino is accessible to its customers via
Highway 61 and Interstate 55.
The Tunica casino features a 54,000 square foot, single-level casino with
approximately 1,500 slot machines and approximately 50 table games. The
facility's 506-room hotel and 123-space recreational vehicle park provide
overnight accommodations for the Tunica casino's patrons. The casino includes
the award-winning, highly-themed Adventure Slots gaming area, featuring
special effects, multimedia displays of memorabilia from famous adventure
motion pictures and over 200 slot machines. Additional quality entertainment
amenities provided by the Tunica casino include our award-winning Fairbanks
gourmet steakhouse, The Hollywood Epic Buffet, a 1950s-style diner, an
entertainment lounge, a themed bar facility, an indoor pool, and showroom,
banquet and meeting facilities. Also, in November 1998, we opened an 18-hole
championship golf course adjacent to our facility through a joint venture with
Harrah's Entertainment and Boyd Gaming. The Tunica casino also offers parking
for 1,850 cars.
Our Hollywood theme is utilized throughout the Tunica casino, which is
designed to resemble a large motion picture sound stage complete with catwalks
and movie-set style lighting. In addition, numerous movie props and pieces of
motion picture memorabilia are displayed throughout the facility, including
the Stay-Puft Marshmallow Man from Ghostbusters, Elvis Presley's car from
Spinout, the helicopter and Harrier "jump jet" from True Lies and the DeLorean
time travel machine from the Back to the Future movies. The aircraft from True
Lies and memorabilia from other motion pictures are dramatically suspended
from the ceiling. In 1998, we installed one of our largest and most dramatic
memorabilia pieces--a model which was used in the filming of the Academy Award
winning movie Titanic. The 28-foot long model of the Titanic is depicted
sinking into the Atlantic Ocean. In addition to offering an entertaining
gaming atmosphere, the Tunica casino also provides overnight and extended stay
facilities in the hotel and recreational vehicle park. The Tunica casino also
provides headliner entertainment for its customers. Entertainers who have
performed at the Tunica casino include the Commodores, Collin Raye, the
Spinners, the Smothers Brothers, Al Hirt, Bill Haley and the Comets and Little
Anthony and the Imperials. We believe that the Tunica casino delivers a
comprehensive range of gaming, entertainment, dining and lodging facilities to
its patrons, all in an easily accessible, uniquely themed atmosphere.
The Tunica casino continues to be one of the leading operators in the Tunica
gaming market. Based upon published market information, we generated 9.1% of
the total gaming revenues in the Tunica gaming market with only 8.8% of the
market's gaming positions, resulting in the Tunica casino capturing
approximately 104% of its "fair share" of the market's gaming revenues in
1998. There are currently ten casinos operating in the Tunica gaming market,
including the Tunica casino. The market has rapidly become the fifth largest
gaming market in the United States after Las Vegas, Atlantic City, the
Connecticut Native American Casinos and Chicago, generating approximately $1.1
billion in gaming revenues in 1998.
The Tunica casino is located in a cluster with gaming facilities operated by
Harrah's Entertainment and Boyd Gaming. We have named our three casino cluster
"Casino Strip" in order to establish a marketing identity for the cluster. The
three properties operate a free shuttle bus service among the casinos and have
also conducted joint marketing programs including a billboard campaign and
radio advertising. Furthermore, the three properties conduct joint special
events to attract customers to the cluster. Every year the three properties
host an extensive Fourth of July fireworks display, which is one of the
largest in the South. In the second quarter of 1999, the
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three casinos will be hosting a major professional bull riding competition,
which will include the construction of a 6,000 seat temporary stadium. The
event will also include a musical performance by the widely acclaimed country
band Brooks & Dunn.
In 1998, we launched a $13 million upgrade of the Tunica casino which we
believe will enhance our position as one of the highest quality facilities in
the Tunica gaming market. As of March 31, 1999, we have added approximately
255 new state of the art slot machines, upgraded all of our hotel rooms and
public areas, enhanced the facility's exterior through landscaping and
lighting improvements, substantially increased the number of spaces at our
recreational vehicle park and opened the 18-hole championship golf course. By
the end of the second quarter of 1999, we intend to substantially complete the
upgrade all of our hotel suites, replace an additional 136 slot machines, the
development of a new, VIP check-in and a private premium players' lounge to
enhance the level of service we provide our premium gaming patrons, and the
installation of a new marble floor in our hotel lobby.
The Shreveport Casino. We recently received approval and have a license to
develop, own and operate a casino and hotel resort in Shreveport, Louisiana.
The destination resort is currently designed to include a 405-room, all suite,
art deco-style hotel, and a 3-level riverboat casino. The resort is also
designed to include a large land-based pavilion housing numerous restaurants
and entertainment amenities, an 85-foot wide seamless entrance to the
riverboat from the land-based pavilion on all three levels, which will give it
the feel of a land-based casino, and over 40,000 square feet of retail space.
We plan to have the retail space developed by a group that includes the
principal developer of Beale Street in Memphis, Tennessee. The Shreveport
casino will feature our unique Hollywood theme, which will be utilized
throughout the resort.
The Shreveport resort will be located next to Harrah's existing riverboat
facility, which will form the first cluster in the Shreveport/Bossier City
market. The primary feeder markets for Shreveport/Bossier City are Dallas/Ft.
Worth and East Texas. Once completed, the Shreveport casino will be the fifth
casino operating in the Shreveport/Bossier City gaming market. The existing
four operators generated approximately $600 million in gaming revenues in
1998.
Our principal target market for our Shreveport casino will be patrons from
the Dallas/Ft. Worth metroplex. There are approximately 7.1 million adults who
reside within 200 miles of Shreveport/Bossier City. We believe that the
location of our executive offices in Dallas will provide us with a competitive
advantage in attracting customers to the Shreveport casino from this market.
We originally intended to develop the Shreveport casino as a joint venture
with Sodak Gaming, Inc. and New Orleans Paddlewheels. Under the terms of the
joint venture agreement, all of the equity capital for the project was to be
provided by us and Sodak, resulting in each of us owning 50% of the joint
venture, with New Orleans Paddlewheels holding a 10% residual interest payable
in the event that the project is ever sold in the future. On April 23, 1999,
we acquired Sodak's interest in the joint venture, giving us complete control
of the development of the Shreveport casino. Under the terms of the agreement,
we will pay Sodak $2.5 million for its interest, which represents the amount
of capital contributed by Sodak to the project, $1,000 of which was paid at
closing, with the remainder to be paid six months after we open the Shreveport
casino. New Orleans Paddlewheels will retain its 10% residual interest. In
July 1999, Sodak Louisiana, L.L.C., the entity we acquired from Sodak, was
merged into HWCC-Louisiana.
The Shreveport casino will be owned by a general partnership named Hollywood
Casino Shreveport, which is in turn indirectly owned by our unrestricted
subsidiary, HWCC-Louisiana. HWCC-Louisiana and Hollywood Casino Shreveport
will not be subject to the limitations imposed by the terms of the indenture
governing the notes. HWCC-Shreveport, a restricted subsidiary, will operate
the Shreveport casino under a management agreement with Hollywood Casino
Shreveport, which will be assigned to secure the notes. The management
agreement provides that Hollywood Casino Shreveport will pay a management fee
to HWCC-Shreveport of 2% of net revenues plus an increasing percentage (5-10%)
of the Shreveport casino's annual EBITDA above $25 million. However, in
connection with the first mortgage notes offering, we agreed to limitations
imposed on Hollywood Casino
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Shreveport's ability to pay us management fees pursuant to a manager
subordination agreement. We currently anticipate that it will cost
approximately $230 million to develop and open the Shreveport casino. We have
invested approximately $50 million of equity in Hollywood Casino Shreveport,
of which approximately $25 million was funded from the proceeds of the
offering of the original notes and $25 million was funded from our existing
cash. We have raised $150 million in project debt, and have received a
commitment from a group led by Bank of America to provide approximately $30
million in equipment financing, to fund the construction of the Shreveport
casino. The project debt financing is recourse only to our unrestricted
subsidiaries that own the Shreveport casino. In connection with the first
mortgage notes offering, we have entered into a completion capital agreement
that requires us to contribute to Hollywood Casino Shreveport up to $5 million
in cash if at any time there are insufficient funds available to enable the
Shreveport resort to be operating by April 30, 2001. In addition, if the
Shreveport resort is not operating by April 30, 2001, we will contribute $5
million in cash less any amounts previously contributed under the completion
capital agreement. We anticipate commencing construction later this summer and
we expect that it will take us approximately 14 months to construct and open
the Shreveport casino.
Upon completion of our Shreveport resort, we will compete directly with
Binion's Horseshoe, Harrah's, the Isle of Capri and Casino Magic in the
Shreveport/Bossier City market. Some of these competitors have higher profile
brand names in the Shreveport/Bossier City market and greater financial
resources than we do. We cannot assure you that we will be able to effectively
compete against these four established casinos, three of which have been in
operation since 1994, or that the Shreveport/Bossier City market is large
enough to allow more than four casinos to operate profitably. Furthermore,
although the Louisiana Gaming Control Board has expressed no intent to grant
the fifteenth and final riverboat gaming license at this time, the remaining
riverboat gaming license could ultimately be granted in, or one or more of the
current operators in other parts of Louisiana could relocate to, the
Shreveport/Bossier City market which would directly increase competition in
our market.
Also, we cannot be sure that we will be able to effectively compete against
any other future gaming operations that Louisiana or other authorities may
authorize in the gaming market in which the Shreveport casino will operate.
For example, in 1997, the Louisiana legislature adopted legislation permitting
up to 15,000 square feet of slot machine gaming at pari-mutuel wagering
facilities located in parishes in Louisiana that approve slot machine gaming
in a referendum election. Shortly thereafter, a referendum election was held
that approved slot machine gaming at Louisiana Downs, which is located in
Bossier City, approximately nine miles from the site of the Shreveport casino.
The Shreveport casino will also face competition from other forms of gaming,
such as state-sponsored lotteries and video lottery terminals, pari-mutuel
betting on horse and dog racing and bingo parlors, as well as other forms of
entertainment in Louisiana and other places from which we will draw customers.
Acquisition and Termination of Management and Consulting Contracts
On April 28, 1999, we entered into a voting agreement with Greate Bay, Pratt
Casino Corporation and substantially all of the holders of $85 million of
senior notes currently in default which were issued by PRT Funding Corp., a
wholly owned subsidiary of Pratt Casino Corporation, and guaranteed by Pratt
Casino Corporation. Under the terms of the agreement, we would purchase the
stock of Pratt Casino Corporation from Greate Bay as part of a debt
restructuring of PRT Funding, Pratt Casino Corporation and other subsidiaries
of Pratt Casino Corporation. On May 25, 1999, Pratt Casino Corporation, PRT
Funding and New Jersey Management, Inc., filed for bankruptcy pursuant to a
joint plan of reorganization in accordance with the terms of our agreement. On
the date on which Pratt Casino Corporation emerges from Chapter 11 bankruptcy
proceedings, we would acquire its stock for nominal consideration and obtain a
release of Pratt Casino Corporation's obligations for $40.3 million in cash.
Upon completion of the restructuring, Pratt Casino Corporation's only assets
would be a consulting contract with our Tunica casino and its limited
partnership interest in a partnership that manages the Aurora casino under a
long-term management contract. The acquisition of Pratt Casino Corporation
will enable us to terminate the Aurora management and Tunica consulting
contracts when it emerges from bankruptcy. We incurred net expenses pursuant
to those contracts totalling $7.7 million in 1998. Our acquisition of Pratt
Casino Corporation will also result in a
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charge of approximately $40.3 million during 1999, as no asset value will be
attributed to the Aurora management and Tunica consulting contracts. Upon
completion of this offering, we will deposit $40.7 million of the proceeds
into a special account with the trustee to secure our obligation to redeem
$40.3 million of the notes at 101% of their principal amount if we determine
that we cannot consummate our acquisition of Pratt Casino Corporation or, in
any event, if it has not been completed by January 31, 2000.
The plan will require the approval of the bankruptcy court as well as the
various gaming regulatory organizations having jurisdiction over the Aurora
management and Tunica consulting contracts.
Operating Strategy
We seek to deliver a high quality and high value entertainment experience to
our customers. We believe our strategy has allowed both our Aurora and Tunica
casinos to capture gaming revenues in their markets in excess of their "fair
share" by offering comprehensive, easily accessible and highly-themed casino
entertainment facilities, a high level of customer service and attention,
extensive player incentive, promotion and reward programs, liberal slot
machine payouts and aggressive table game policies and headliner
entertainment. We also utilize our sophisticated casino information technology
systems that enable us to track and monitor individual patron play on a "real
time" basis, identify high value patrons and specifically tailor incentives,
promotions and rewards, often during a customer's same visit. We believe our
ability to provide timely and highly personalized service and attention to our
customers is important in developing a loyal basis of higher value patrons.
In addition to providing an exciting and unique gaming environment, our
facilities provide a broad range of amenities to our customers. Both of our
Aurora and Tunica facilities provide both casual and award-winning, gourmet
dining in a variety of attractive restaurants featuring the Hollywood theme.
The Tunica casino offers an adjacent 506-room hotel and 123-space recreational
vehicle park which enable us to market the facility to tourists and other
overnight guests. We believe that our high quality, non-gaming facilities
provide customers entertainment and lodging options that encourage repeat
visits and customer loyalty and expand our patron mix to include those
customers who seek or require certain non-gaming amenities.
We use sophisticated casino information technology developed by Advanced
Casino Systems Corporation, a subsidiary of our former affiliate Greate Bay.
The technology includes table game and slot machine monitoring systems which
enable our casinos to track and rate patron play through the use of a casino
player's card. These systems provide our management with the key
characteristics of patron play as slot machines and table games are connected
with its data base monitoring system. When patrons use the casino player's
card at slot machines or table games, the information is immediately available
to our management and allows management to implement marketing programs to
recognize and reward patrons during their visits to the casino. Such
promotions and complementaries are generally provided through direct mail
programs and specialized invitations and include food, hotel accommodations,
special player events, retail merchandise, sweepstake giveaways and "cash-
back" programs based on patrons' gross wagering. We believe that our ability
to reward our customers on a same-visit basis is valuable in developing a
loyal base of higher value patrons. Our systems also allow management to
monitor, analyze and control the granting of gaming credit, promotional
expenses and other marketing costs. Our casino system also enables our
properties to capture and maintain patron information necessary in
implementing its casino player's card and other database marketing programs.
We use our databases to focus our marketing efforts on patrons who have been
identified as higher value patrons. This focus is particularly important at
the Aurora casino where the number of gaming positions available on each daily
casino excursion is limited. We believe that our process of identifying higher
value patrons, encouraging participation in its casino player's card program
and tailoring promotions and special events to cater to this market segment
enhances the profitability of our casinos.
We also market to the "mass" casino patron market segment through various
forms of advertising media as well as through group and bus tour packages.
Once new patrons are introduced to our gaming facilities and the casino
player's card program, we use our database capabilities to direct market to
these patrons in an attempt to convert them into higher value patrons.
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Competition
The gaming industry is highly fragmented and characterized by a high degree
of competition among a large number of participants, some of which have
greater financial and other resources than we do. Competitive gaming
activities include:
. land-based casinos;
. dockside casinos;
. riverboat casinos;
. video lottery terminals; and
. other forms of legalized gaming in the United States and other
jurisdictions.
Legalized gambling is currently permitted in various forms throughout the
United States, in several Canadian provinces, as well as on Native American
reservations in certain states, including in Louisiana and Mississippi. Other
jurisdictions may legalize gaming in the near future through the introduction
of proposals to legalize gaming in their state legislatures. In addition,
established gaming jurisdictions could award additional gaming licenses or
permit the expansion of existing gaming operations. New or expanded operations
by other persons can be expected to increase competition for our present and
proposed gaming operations and could have a material adverse impact on us.
The Aurora Casino. The Illinois Riverboat Gambling Act and the rules
promulgated by the Illinois Gaming Board under the act authorize only ten
owner's licenses for riverboat gaming operations in Illinois and permit a
maximum of 1,200 gaming positions at any time for each of the ten licensed
sites. All authorized owner's licenses have been granted and no additional
licenses or gaming positions can be permitted without further state
legislation. One licensed site ceased gaming operations in 1997. As a result
of the recent legislation, we believe that this license will likely be
relocated and will commence operations at a new site in Cook County, which
would increase competition in our principal market. Four riverboat sites,
including the Aurora casino, are currently licensed in Illinois within 50
miles of downtown Chicago. Two of these riverboat sites are in Joliet,
approximately 40 miles southwest of downtown Chicago, and a third is in Elgin,
Illinois, approximately 20 miles from Aurora, 40 miles from downtown Chicago
and amid the affluent northern and western suburbs. In addition, the Aurora
casino competes directly with five riverboat operations opened since 1996 in
northwestern Indiana within 50 miles of downtown Chicago. Increased
competition from casinos in Indiana has resulted in greater competition for
patrons from the downtown Chicago market and from the suburban Chicago market.
The next closest operating casinos are in Milwaukee, Wisconsin,
approximately 90 miles from downtown Chicago, and in Peoria, and Rock Island,
Illinois, approximately 160 miles from downtown Chicago. In addition,
legislation authorizing three casinos in the Detroit, Michigan area has been
approved. Native American tribes are seeking to open casino facilities in
northwestern Indiana, Michigan and Wisconsin under the Indian Gaming
Regulatory Act. The opening of additional casinos proximate to Chicago could
have a material adverse impact on the Aurora casino.
The Tunica Casino. The Tunica casino faces intense competition from the
other nine casinos operating in north Tunica County and Coahoma County. Within
the Casino Strip cluster, the Tunica casino competes with Sam's Town and
Harrah's Mardi Gras. A second casino owned by Harrah's in the Casino Strip
closed during 1997, but was reopened by Isle of Capri Casinos, Inc. in July,
1999. A three casino cluster, called "Casino Center," consisting of Binion's
Horseshoe, Sheraton Casino and Goldstrike Casino is located north of the
Casino Strip cluster and closer to the Memphis market. Bally's operates a
casino and hotel adjacent to, but not connected with, the Casino Center.
Fitzgeralds is located between Casino Center and the Casino Strip cluster. In
addition, Lady Luck operates a casino in Coahoma County which is located
approximately 40 miles south of the Casino Strip cluster.
During July 1996, Grand Casinos opened a casino complex immediately north of
Casino Center with 140,000 square feet of gaming space including approximately
3,270 slot machines and 120 table games. Three
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hotels with an aggregate of 1,366 rooms, a conference center and a golf course
are currently available and other amenities are scheduled for later
completion. The opening of this casino space, now the largest casino in
Mississippi, increased casino capacity in Tunica County by 24%.
We believe the shortage of hotel rooms was a restriction to growth in prior
years. However, a number of casino operations have completed and opened hotel
facilities from 1996 through the present. During 1997 and early 1998, the
Goldstrike Casino completed a 31-story, 1,200-room hotel tower and Binion's
opened a 300-room hotel tower. Sheraton Casino also completed construction of
150 hotel rooms. The total number of hotel rooms in Tunica County has
increased to approximately 5,700 rooms from 1,250 at the end of 1995, an
increase of more than 350%. The additional hotel capacity has made the Casino
Center increasingly competitive in attracting overnight visitors.
The Mississippi Gaming Control Act does not limit the number of licenses
that may be granted. Any significant increase in new capacity in the Tunica
gaming market could negatively impact the operations of the Tunica casino.
Although we do not believe that we face significant competition from casinos
outside of the Tunica gaming market, legalized gaming operations are
established in and around Mississippi, including twelve casinos in the Gulf
Coast. Beau Rivage, a large casino complex, was recently opened on the Gulf
Coast and could potentially compete for customers with the casinos in the
Tunica gaming market. In addition, the Tunica casino may eventually face
competition from the opening of gaming casinos closer to Memphis, including
DeSoto County, Mississippi, which is the only county between Tunica County and
the Tennessee border. DeSoto County has defeated gaming proposals on three
separate occasions, most recently in November 1996, and by statute cannot vote
on such issue again until 2004. Casino gaming is not currently legalized in
Tennessee or Arkansas. Although we do not anticipate such legislation in the
near term, the legalization of gaming in either Tennessee or Arkansas could
have a material adverse impact on the Tunica casino.
Trademarks
We use the service mark Hollywood Casino which is registered with the United
States Patent and Trademark Office. We consider our rights to the Hollywood
Casino service mark to be well established and to have significant competitive
value to our business. The loss of our right to use the Hollywood Casino
service mark and to prevent others from using the same or a deceptively
similar mark could have a material adverse effect on us. In July 1996, Planet
Hollywood filed a complaint against us regarding our trademarks. The trial has
recently been completed and we are currently awaiting a determination by the
judge overseeing the case. See the discussion under "--Legal Proceedings."
We also use the service mark "Hollywood" and other "Hollywood-formative"
marks to promote our casino and related services. These marks are either
registered or are the subject of pending registration applications with the
United States Patent and Trademark Office.
Development Activities
We maintain a proactive business development strategy in order to enhance
our long-term growth. We are currently pursuing various development
opportunities, including in jurisdictions which are considering legalizing
gaming. If we were to proceed with the development of any of these
opportunities, we would likely pursue them through an unrestricted subsidiary.
As a result, the amount of capital we would be able to invest in these
developments would be limited by the terms of the indenture governing the
notes.
Properties
The Aurora Casino. The Aurora casino consists of two, four-level riverboats
named City of Lights I and II, which have combined casino space of
approximately 29,550 square feet and approximately 1,200 gaming
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positions. The complex also includes the four-story, approximately 64,000
square foot land-based pavilion and two parking garages under capital lease
agreements.
The first parking garage contains approximately 31,000 square feet of office
space of which approximately 22,600 square feet are currently being used for
administrative offices. The Aurora casino leases the parking garage, including
the office space, from the City of Aurora under a 30-year lease ending June
2023, with the Aurora casino having the right to extend the term under renewal
options for an additional 67 years. The second garage, completed in 1996, has
approximately 500 parking spaces and includes approximately 1,500 square feet
of retail space. The facility is owned by a governmental agency and operated
by the Aurora casino pursuant to a lease with an initial term expiring in 2026
with the right to extend the lease for up to 20 additional years.
The Tunica Casino. The Tunica casino consists of a 60,000 square foot,
single level casino with 54,000 square feet of gaming space, 506 hotel rooms
and suites and support facilities that include two restaurants, a buffet, an
arcade and a gift shop, banquet space, an enclosed pool and atrium, a showroom
and administrative offices. An eight-story, 350-room hotel tower was completed
in 1996. The Tunica facility also includes a 123-space recreational vehicle
park and a 1,850-space surface parking area.
The ground lease for the Tunica site has an initial term of five years from
the date gaming operations commenced, and an option to extend the lease for
nine successive five-year terms. Because the ground lease for the Tunica site
covers approximately 70 acres, there is sufficient land for future expansion
should circumstances warrant an expansion.
Other Properties. We hold an option to purchase approximately 159 acres of
land in Palmer, Massachusetts for possible development of a gaming resort
complex in the event that gaming is approved by the state legislature. We also
hold land for resale in the Houston, Texas area.
Employees
At June 30, 1999, we employed approximately 2,850 persons, principally at
the Aurora and Tunica casinos. None of our employees are represented by a
labor union or covered by a collective bargaining agreement. We consider our
relationships with our employees to be good.
Casino Regulation
Illinois
The Illinois Riverboat Gambling Act currently authorizes riverboat gaming
upon any water within or forming a boundary of the State of Illinois, except
for Lake Michigan. The Illinois Riverboat Gambling Act strictly regulates the
facilities, persons, associations and practices related to gaming operations
pursuant to the police powers of the State of Illinois, including
comprehensive law enforcement supervision. The Illinois Riverboat Gambling Act
grants the Illinois Gaming Board specific powers and duties, and all other
powers necessary and proper to fully and effectively execute the Illinois
Riverboat Gambling Act for the purpose of administering, regulating and
enforcing the system of riverboat gaming. The Illinois Gaming Board's
jurisdiction extends to every person, association, corporation, partnership
and trust involved in riverboat gaming operations in the State of Illinois.
Owner's Licenses. The Illinois Riverboat Gambling Act requires the owner of
a riverboat gaming operation to hold an owner's license issued by the Illinois
Gaming Board. The Aurora casino's owner's license was renewed in 1998 and
expires in December 1999. The Illinois Gaming Board is authorized to issue ten
owner's licenses statewide. Each owner's license permits up to two boats as a
part of the riverboat gaming operation. An entity may be licensed as the owner
of more than one riverboat gaming operation in Illinois, subject to Illinois
Gaming Board approval. In addition to the ten owner's licenses which may be
authorized under the Illinois Riverboat Gambling Act, the Illinois Gaming
Board may issue special event licenses allowing persons
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who are not otherwise licensed to conduct riverboat gaming to conduct such
gaming on a specified date or series of dates. Riverboat gaming under such a
license may take place on a riverboat not normally used for riverboat gaming.
An owner's license is issued for an initial period of three years and must
be renewed every four years thereafter, unless the Illinois Gaming Board sets
a shorter period. An owner's license is eligible for renewal upon payment of
the applicable fee and a determination by the Illinois Gaming Board that the
licensee continues to meet all of the requirements of the Illinois Riverboat
Gambling Act, the Illinois Gaming Board's rules and any conditions placed on a
prior license renewal. Any bankruptcy, liquidation, reorganization, cessation
of gaming operations, or substantial change in the ownership or control of an
owner's license, or an event which adversely affects the character, reputation
or financial integrity of the licensee, during the term of a license may cause
the Illinois Gaming Board to suspend, restrict or revoke the license or impose
other discipline. The Illinois Gaming Board also requires that officers,
directors and employees of a gaming operation and suppliers of gaming
equipment, devices and supplies and certain other suppliers be licensed.
Licenses issued by the Illinois Gaming Board may not be transferred to another
person or entity. All licensees must maintain their suitability for licensure
and have a continuing duty to disclose any material changes in information
provided to the Illinois Gaming Board.
Applicants for and holders of an owner's license are required to obtain
formal prior approval from the Illinois Gaming Board for changes proposed in
the following areas: key persons; type of entity; equity and debt
capitalization of the entity; investors and/or debt holders; source of funds;
economic development plans or proposals; riverboat cruising schedules or
routes, capacity or significant design change; gaming positions; anticipated
economic impact; or agreements, oral or written, relating to the acquisition
or disposition of property (real or personal) of a value greater than $1
million.
A holder of an owner's license is allowed to make distributions to its
partners, stockholders or itself only to the extent that such distribution
would not impair the financial viability of the gaming operation. Factors to
be considered by the licensee include, but are not limited to, the following:
. cash flow, casino cash and working capital requirements;
. debt service obligations and covenants associated with financial
instruments;
. requirements for repairs, maintenance and capital improvements;
. employment or economic development requirements of the Illinois
Riverboat Gambling Act; and
. a licensee's financial projections.
The Illinois Gaming Board will require a business entity or personal
disclosure form and approval as a key person for any business entity or
individual with an ownership interest or voting rights of more than 5% in a
licensee, the trustee of any trust holding such ownership interest or voting
rights, the directors of the licensee and its chief executive officer,
president and chief operating officer, as well as any other individual or
entities deemed by the Illinois Gaming Board to hold a position or a level of
ownership, control or influence that is material to the regulatory concerns
and obligations of the Illinois Gaming Board. Each key person must file, on an
annual basis, a disclosure affidavit, updated personal and background
information, and updated tax and financial information. Key persons are
required to promptly disclose to the Illinois Gaming Board any material
changes in status or information previously provided to the Illinois Gaming
Board, and to maintain their suitability as key persons. In order for the
Illinois Gaming Board to identify potential key persons, each holder of an
owner's license is required to file a table of organization, ownership and
control with the Illinois Gaming Board to identify the individuals or entities
that through direct or indirect means manage, own or control the interests and
assets of the applicant or licensee. Based upon findings from an investigation
into the character, reputation, experience, associations, business probity and
financial integrity of a key person, the Illinois Gaming Board may enter an
order upon the licensee to require economic disassociation of a key person.
Each licensee is required to provide a means for the economic disassociation
of a key person in the event such disassociation is required.
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An "institutional investor," as defined in the regulations under the
Illinois Riverboat Gambling Act, that individually or jointly with others,
cumulatively acquires, directly or indirectly, 5% or more of any class of
voting securities of a publicly-traded licensee or a licensee's publicly-
traded parent corporation shall, within no less than ten days after acquiring
the securities, notify the Administrator of the Illinois Gaming Board of the
ownership and shall provide any additional information as may be required. If
an institutional investor acquires 10% or more of any class of voting
securities of a publicly-traded licensee or a licensee's publicly-traded
parent corporation, it shall file an Institutional Investor Disclosure Form
within 45 days after acquiring that level of ownership interest, unless such
requirement is waived by the Administrator. The licensee shall notify the
Administrator as soon as possible after it becomes aware that it or its parent
is involved in an ownership acquisition by an institutional investor.
Notwithstanding the foregoing, the institutional investor's obligation shall
be independent of the licensee's obligation to notify the Administrator.
An ownership interest in a holder of an owner's license may be transferred
or pledged as collateral only with the consent of the Illinois Gaming Board.
Regulation of Gaming Operations. The Illinois Riverboat Gambling Act does
not limit the maximum bet or per patron loss and licensees may set any maximum
or minimum bets or other limits on wagering. No person under the age of 21 is
permitted to wager. Vessels must have the capacity to hold a minimum of 500
persons if operating on the Mississippi River or the Illinois River south of
Marshall County, and a minimum of 400 persons on any other waterway. The
number of gaming positions are limited to a maximum of 1,200 per license. A
licensee may conduct riverboat gambling regardless of whether it conducts
excursion cruises. A licensee may permit the continuous ingress and egress of
passengers for the purpose of gambling.
A $2 per person admission tax is imposed on the owner of a riverboat
operation. Such admission tax for the Aurora casino amounted to $6.6 million,
$7.2 million and $6.4 million, respectively, during 1998, 1997 and 1996.
Additionally, a wagering tax is imposed on the adjusted gross receipts, as
defined in the Illinois Riverboat Gambling Act. This gaming tax increased
significantly in 1998. The tax rate changed from a flat 20% to graduated rates
ranging from 15% to 35%. The licensee is required to wire transfer all such
gaming tax payments to the Illinois Gaming Board. The wagering tax for the
Aurora casino amounted to $42.4 million, $30.7 million and $31.3 million,
respectively, for the years 1998, 1997 and 1996.
The Illinois Gaming Board is authorized to conduct investigations into the
conduct of gaming employees and into alleged violations of the Illinois
Riverboat Gambling Act and to take such disciplinary and enforcement action as
it may deem necessary and proper. Employees and agents of the Illinois Gaming
Board have access to and may inspect any facilities relating to the riverboat
gaming operations at all times.
A holder of any license is subject to imposition of penalties and fines,
suspension or revocation of the license, or other action for any act or
failure to act by the holder or his or her agents or employees, that is
injurious to the public health, safety, morals, good order and general welfare
of the people of the State of Illinois, or that would discredit or tend to
discredit the Illinois gaming industry or the State of Illinois. Any riverboat
operation not conducted in compliance with the Illinois Riverboat Gambling Act
may constitute an illegal gaming place and consequently may be subject to
criminal penalties, which penalties include possible seizure, confiscation and
destruction of illegal gaming devices and seizure and sale of riverboats and
dock facilities to pay any unsatisfied judgment that may be recovered and any
unsatisfied fine that may be levied. The Illinois Riverboat Gambling Act also
provides for civil penalties equal to the amount of gross receipts derived
from wagering on the gaming, whether unauthorized or authorized, conducted on
the day of any violation. The Illinois Gaming Board may revoke or suspend
licenses, as the Board may see fit and in compliance with applicable laws of
Illinois regarding administrative procedures, and may suspend an owner's
license, without notice or hearing, upon a determination that the safety or
health of patrons or employees is jeopardized by continuing a riverboat's
operation. The suspension may remain in effect until the Illinois Gaming Board
determines that the cause for suspension has been abated and it may revoke the
owner's license upon a determination that the owner has not made satisfactory
progress toward abating the hazard.
The Illinois Gaming Board may waive any licensing requirement or procedure
provided by rule if it determines that such waiver is in the best interests of
the public and the gaming industry.
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Mississippi
The ownership and operation of casino gaming facilities in Mississippi are
subject to extensive state and local regulation, including the Mississippi
Gaming Control Act. Gaming in Mississippi can be legally conducted only on
vessels of a certain minimum size in navigable waters of counties bordering
the Mississippi River or in waters of the State of Mississippi which lie
adjacent to the coastline of the three counties bordering the Gulf of Mexico
and counties in which gaming has been approved by the voters. Mississippi's
gaming operations are subject to the licensing and regulatory control of the
Mississippi Gaming Commission and various federal, state, and county
regulatory agencies.
The Mississippi Gaming Control Act does not restrict the amount or
percentage of space on a vessel that may be utilized for gaming nor does it
limit the number of licenses that the Mississippi Gaming Commission can grant
for a particular area. The Mississippi Gaming Control Act provides for
legalized dockside gaming at the discretion of the fourteen counties that
either border the Gulf Coast or the Mississippi River, but only if the voters
in such counties have not voted to prohibit gaming in that county. An
amendment to the Mississippi Constitution has been proposed for adoption
through the initiative and referendum process which, if a sufficient number of
signatures are gathered to place the matter on the ballot and if adopted by
the voters of the state, would prohibit gaming in Mississippi. See "Risk
Factors--Anti-Gaming Initiatives."
Each of HWCC-Tunica's directors, officers and certain key employees who are
actively and directly engaged in the administration or supervision of gaming
in Mississippi, or who have any other significant involvement with the gaming
activities of the Tunica casino, must be found suitable therefor and may be
required to be licensed by the Mississippi Gaming Commission. All personnel
responsible for the direction and management of the Tunica casino have been
found suitable by the Mississippi Gaming Commission. The finding of
suitability is comparable to licensing, and both require submission of
detailed personal financial information followed by a thorough investigation.
An application for licensing may be denied for any cause deemed reasonable by
the issuing agency. Changes in licensed positions must be reported to the
issuing agency and the Mississippi Gaming Commission has jurisdiction to
disapprove a change in licensed positions. If the Mississippi Gaming
Commission were to find a director, officer or key employee unsuitable for
licensing or unsuitable to continue having a relationship with HWCC-Tunica,
HWCC-Tunica would have to suspend, dismiss and sever all relationships with
the person or lose its license. HWCC-Tunica would have similar obligations
with regard to any person who refuses to file appropriate applications. Each
gaming employee must obtain a work permit.
The licenses obtained by HWCC-Tunica are not transferable and will need to
be renewed periodically. The ownership license for the Tunica Casino has been
renewed through October 18, 1999. Presently, the policy of the Mississippi
Gaming Commission is to award casino licenses for two-year periods, subject to
renewal. The Mississippi Gaming Commission has the power to deny, limit,
condition, revoke and suspend any license, finding of suitability or
registration, and to fine any person as it deems reasonable and in the public
interest, subject to an opportunity for a hearing.
Any individual who is found to have a material relationship to, or material
involvement with, HWCC-Tunica may be required to be investigated in order to
be found suitable or to be licensed as a business associate of HWCC-Tunica.
Key employees, controlling persons or others who exercise significant
influence upon the management or affairs of HWCC-Tunica may also be deemed to
have such a relationship or involvement. Additionally, certain beneficial
owners, lenders and landlords of HWCC-Tunica may be required to be licensed.
The landlord under the ground lease for the Tunica casino has been found
suitable by the Mississippi Gaming Commission.
The statutes and regulations give the Mississippi Gaming Commission the
discretion to require a suitability finding with respect to anyone who
acquires any debt or equity security of HWCC-Tunica regardless of the
percentage of ownership. In addition, the Mississippi Gaming Commission has
discretionary authority to require a holder of any debt to file an
application, to be investigated and to be found suitable. While the
Mississippi Gaming Commission generally does not require the individual
holders of obligations to be investigated and found
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suitable, the Mississippi Gaming Commission retains the discretion to do so
for any reason, including but not limited to a default or where the holder of
a debt instrument exercises a material influence over the gaming operations of
the entity in question. The applicant is required to pay all costs of
investigation.
Any owner of debt or equity securities found unsuitable and who holds,
directly or indirectly, any beneficial ownership of debt or equity interests
in HWCC-Tunica beyond such period of time as may be prescribed by the
Mississippi Gaming Commission may be guilty of a misdemeanor. Any person who
fails or refuses to apply for a finding of suitability or a license within 30
days after being ordered to do so by the Mississippi Gaming Commission may be
found unsuitable. HWCC-Tunica is subject to disciplinary action if, after it
receives notice that a person is unsuitable to be an owner of its debt or
equity securities or to have any other relationship with it, HWCC-Tunica:
. pays the unsuitable person any distributions or interest upon any
securities of HWCC-Tunica or any payments or distribution of any
kind whatsoever;
. recognizes the exercise, directly or indirectly, of any voting
rights in its securities by the unsuitable person; or
. pays the unsuitable person any remuneration in any form for services
rendered or otherwise, except in certain limited and specific
circumstances.
In addition, if the Mississippi Gaming Commission finds any owner
unsuitable, such owner must immediately offer all of the owner's securities in
HWCC-Tunica for purchase, and HWCC-Tunica shall, in turn, purchase the
securities so offered, for cash at fair market value, within 10 days of the
date of such offer.
The Mississippi Gaming Commission has the power to impose additional
restrictions on the holders of HWCC-Tunica's securities at any time through
its power to regulate licensees.
Mississippi gaming regulations provide that a change in control of HWCC-
Tunica may not occur without the prior approval of the Mississippi Gaming
Commission. Mississippi law prohibits HWCC-Tunica from making a public
offering of its securities without the approval of the Mississippi Gaming
Commission if any part of the proceeds of the offering is to be used to
finance the construction, acquisition or operation of gaming facilities in
Mississippi, or to retire or extend obligations incurred for one or more of
such purposes.
Because HWCC-Tunica is licensed to conduct gaming in Mississippi, neither
HWCC-Tunica nor any affiliates may engage in gaming activities outside of
Mississippi without the prior approval of the Mississippi Gaming Commission.
The Mississippi Gaming Commission has adopted regulations related to foreign
gaming approval, and HWCC-Tunica has been approved by the Mississippi Gaming
Commission under its regulations to engage in gaming activities in certain
jurisdictions outside of Mississippi.
License fees and taxes are based upon a percentage of the gross gaming
revenues received by a casino operation, the number of slot machines operated
by the casino and the number of table games operated by the casino. In
particular, gaming licensees must pay an annual $5,000 license fee and an
additional fee based on the number of gaming devices. A state gross revenues
fee of 8% is due on adjusted gross gaming revenues. Several local governments
have been authorized to impose additional gross fees on adjusted gross gaming
revenues of up to 4% and annual license fees based on the number of gaming
devices on board. Tunica County imposes a fee of 4% on adjusted gross gaming
revenues. These gaming taxes for the Tunica casino amounted to $11.7 million,
$11.9 million and $10.7 million during 1998, 1997 and 1996, respectively.
Gross gaming taxes paid to the state are allowed as a credit against
Mississippi state income tax liability.
During January 1999, the Mississippi Gaming Commission adopted a regulation
requiring that new casino applicants invest a minimum of 100% of the higher of
the appraised value of their casino or the construction cost of their casino
in land-based facilities. These facilities shall include any of the following:
the construction of a minimum of 250 hotel rooms for each casino, a theme
park, golf courses, marinas, a tennis complex, entertainment facilities or any
other facility approved by the Mississippi Gaming Commission. The regulation
will apply to all new casino projects.
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Louisiana
The ownership and operation of a riverboat gaming vessel is subject to the
Louisiana Riverboat Economic Development and Gaming Control Act. As of May 1,
1996, gaming activities are regulated by the Louisiana Gaming Control Board.
The Louisiana Gaming Control Board is responsible for issuing the riverboat
gaming license and enforcing the laws, rules and regulations relative to
riverboat gaming activities. The Louisiana Gaming Control Board is empowered
to issue up to 15 riverboat gaming licenses to conduct gaming activities on a
riverboat of new construction in accordance with applicable law. However, no
more than six riverboat gaming licenses may be granted to riverboats operating
from any one parish. Shreveport and Bossier City are located in two adjacent
parishes.
The laws and regulations of Louisiana seek to prevent unsavory or unsuitable
persons from having any direct or indirect involvement with gaming at any time
or in any capacity; establish and maintain responsible accounting practices
and procedures; maintain effective control over the financial practices of
riverboat gaming licensees, including establishing procedures for reliable
record keeping and making periodic reports to the Louisiana Gaming Control
Board; prevent cheating and fraudulent practices; provide a source of state
and local revenues through fees; and ensure that riverboat gaming licensees,
to the extent practicable, employ and contract with Louisiana residents, women
and minorities.
The Louisiana Riverboat Economic Development and Gaming Control Act
specifies certain restrictions and conditions relating to the operation of
riverboat gaming, including but not limited to the following:
. in parishes bordering the Red River, such as our property in
Shreveport, gaming may be conducted dockside; however, in all other
authorized locations gaming is not permitted while a riverboat is
docked, other than for forty-five minutes between excursions, unless
dangerous weather or water conditions exist as certified by the
riverboat's master;
. each round trip riverboat cruise may not be less than three nor more
than eight hours in duration, subject to specified exceptions;
. agents of the Louisiana Gaming Control Board are permitted on board
at any time during gaming operations;
. gaming devices, equipment and supplies may be purchased or leased
only from permitted suppliers;
. gaming may only take place in the designated gaming area while the
riverboat is upon a designated river or waterway;
. gaming equipment may not be possessed, maintained, or exhibited by
any person on a riverboat except in the specifically designated
gaming area, or a secure area used for inspection, repair, or
storage of such equipment;
. wagers may be received only from a person present on a licensed
riverboat;
. persons under 21 are not permitted on gaming vessels;
. except for slot machine play, wagers may be made only with tokens,
chips, or electronic cards purchased from the licensee aboard a
riverboat;
. licensees may only use docking facilities and routes for which they
are licensed and may only board and discharge passengers at the
riverboat's licensed berth;
. licensees must have adequate protection and indemnity insurance;
. licensees must have all necessary federal and state licenses,
certificates and other regulatory approvals prior to operating a
riverboat; and
. gaming may only be conducted in accordance with the terms of the
riverboat gaming license, the Louisiana Riverboat Economic
Development and Gaming Control Act and the rules and regulations
adopted by the Louisiana Gaming Control Board.
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No person may receive any percentage of the profits from our operations in
Louisiana without first being found suitable. In September 1998, we, our
officers, key personnel, partners and persons holding a 5% or greater interest
in the partnership were found suitable by the Louisiana Gaming Control Board.
A riverboat gaming license is deemed to be a privilege under Louisiana law and
as such may be denied, revoked, suspended, conditioned or limited at any time
by the Louisiana Gaming Control Board. In issuing a riverboat gaming license,
the Louisiana Gaming Control Board must find that the applicant is a person of
good character, honesty and integrity and that the applicant is a person whose
prior activities, criminal record, if any, reputation, habits and associations
do not pose a threat to the public interest of the State of Louisiana or to
the effective regulation and control of gaming, or create or enhance the
dangers of unsuitable, unfair or illegal practices, methods, and activities in
the conduct of gaming or the carrying on of business and financial
arrangements in connection therewith. The Louisiana Gaming Control Board will
not grant any riverboat gaming licenses unless it finds that:
. the applicant is capable of conducting gaming operations, which
means that the applicant can demonstrate the capability, either
through training, education, business experience, or a combination
of the above, to operate a gaming casino;
. the proposed financing of the riverboat and the gaming operations is
adequate for the nature of the proposed operation and from a source
suitable and acceptable to the Louisiana Gaming Control Board;
. the applicant demonstrates a proven ability to operate a vessel of
comparable size, capacity and complexity to a riverboat in its
application for a riverboat gaming license so as to ensure the
safety of its passengers;
. the applicant designates the docking facilities to be used by the
riverboat;
. the applicant shows adequate financial ability to construct and
maintain a riverboat;
. the applicant submits a detailed plan of design of the riverboat in
its application for a riverboat gaming license;
. the applicant has a good faith plan to recruit, train and upgrade
minorities in all employment classifications; and
. the applicant is of good moral character.
The Louisiana Gaming Control Board may not award a riverboat gaming license
to any applicant who fails to provide information and documentation to reveal
any fact material to qualifications or who supplies information which is
untrue or misleading as to a material fact pertaining to the qualification
criteria; who has been convicted of or pled nolo contendere to an offense
punishable by imprisonment of more than one year; who is currently being
prosecuted for or regarding whom charges are pending in any jurisdiction of an
offense punishable by more than one year imprisonment; or if any holder of 5%
or more in the profits and losses of the applicant has been convicted of or
pled guilty or nolo contendere to an offense which at the time of conviction
is punishable as a felony.
The transfer of a riverboat gaming license is prohibited. The sale,
assignment, transfer, pledge, or disposition of securities which represent 5%
or more of the total outstanding shares issued by a holder of a riverboat
gaming license is subject to prior Louisiana Gaming Control Board approval. A
security issued by a holder of a riverboat gaming license must generally
disclose these restrictions.
Section 2501 of the regulations enacted by the Louisiana State Police
Riverboat Gaming Division under the Louisiana Riverboat Economic Development
and Gaming Control Act requires prior written approval of the Louisiana Gaming
Control Board of all persons involved in the sale, purchase, assignment,
lease, grant or foreclosure of a security interest, hypothecation, transfer,
conveyance or acquisition of an ownership interest, other than in a
corporation, or economic interest of 5% or more in any licensee.
Section 2523 of the regulations requires notification to and prior approval
from the Louisiana Gaming Control Board of the application for, receipt,
acceptance or modification of a loan; use of any cash, property, credit, loan
or line of credit, or guarantee or granting of other forms of security for a
loan by a licensee or person acting on a licensee's behalf.
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Exceptions to prior written approval apply to any transaction for less than
$2.5 million in which all of the lending institutions are federally regulated,
or if the transaction involves publicly registered debt and securities sold
pursuant to a firm underwriting agreement.
The failure of a licensee to comply with the requirements set forth above
may result in the suspension or revocation of that licensee's riverboat gaming
license. Additionally, if the Louisiana Gaming Control Board finds that the
individual owner or holder of a security of a corporate licensee or
intermediary company or any person with an economic interest in a licensee is
not qualified under the Louisiana Riverboat Economic Development and Gaming
Control Act, the Louisiana Gaming Control Board may require, under penalty of
suspension or revocation of the riverboat gaming license, that the person not
receive dividends or interest on securities of the corporation; exercise
directly or indirectly a right conferred by securities of the corporation;
receive remuneration or economic benefit from the licensee; or continue in an
ownership or economic interest in the licensee.
A licensee must periodically report the following information to the
Louisiana Gaming Control Board, which is not confidential and is to be
available for public inspection: the licensee's net gaming proceeds from all
authorized games; the amount of net gaming proceeds tax paid; and all
quarterly and annual financial statements presenting historical data that are
submitted to the Louisiana Gaming Control Board, including annual financial
statements that have been audited by an independent certified public
accountant.
The Louisiana Gaming Control Board has adopted rules governing the method
for approval of the area of operations and the rules and odds of authorized
games and devices permitted, and prescribing grounds and procedures for the
revocation, limitation or suspension of licenses and permits.
On April 19, 1996, the Louisiana legislature adopted legislation requiring
statewide local elections on a parish-by-parish basis to determine whether to
prohibit or continue to permit licensed riverboat gaming, licensed video poker
gaming, and licensed land-based gaming in Louisiana parishes. The applicable
local election took place on November 5, 1996, and the voters in the parishes
in which riverboats are currently located voted to continue licensed riverboat
gaming. However, it is noteworthy that the current legislation does not
provide for any moratorium on future local elections on gaming.
As a result of the Justice Department's recent indictment of former
Louisiana Governor Edwin Edwards and certain other persons, on charges
relating to, among other things, riverboat gaming licenses in Louisiana, the
Louisiana regulators are applying greater scrutiny to the suitability and
business practices of the licensee.
Non-Gaming Regulation
We are subject to certain federal, state and local safety and health laws,
regulations and ordinances that apply to non-gaming businesses generally, such
as the Clean Air Act, Clean Water Act, Occupational Safety and Health Act,
Resource Conservation Recovery Act and the Comprehensive Environmental
Response, Compensation and Liability Act. We have not made, and do not
anticipate making, material expenditures with respect to the environmental
laws and regulations. However, the coverage and attendant compliance costs
associated with the laws, regulations and ordinances may result in future
additional costs to our operations. For example, in 1990 the U.S. Congress
enacted the Oil Pollution Act to consolidate and rationalize mechanisms under
various oil spill response laws. The Department of Transportation has proposed
regulations requiring owners and operators of certain vessels to establish
through the U.S. Coast Guard evidence of financial responsibility in the
amount of $5.5 million for clean-up of oil pollution. This requirement would
be satisfied by either proof of adequate insurance, including self-insurance,
or the posting of a surety bond or guaranty.
The riverboats operated by us must comply with U.S. Coast Guard requirements
as to boat design, on-board facilities, equipment, personnel and safety. Each
of them must hold a Certificate of Seaworthiness or must be approved by the
American Bureau of Shipping for stabilization and flotation, and may also be
subject to local zoning and building codes. The U.S. Coast Guard requirements
establish design standards, set limits on the operation of the vessels and
require individual licensing of all personnel involved with the operation of
the vessels. Loss of a vessel's Certificate of Seaworthiness or American
Bureau of Shipping approval would preclude its use as a floating casino.
64
<PAGE>
All of our shipboard employees, even those who have nothing to do with the
marine operations of the vessel, like dealers, waiters and security personnel,
may be subject to the Jones Act which, among other things, exempts those
employees from state limits on workers' compensation awards.
Legal Proceedings
Planet Hollywood Litigation. Planet Hollywood International, Inc. and Planet
Hollywood (Region IV), Inc. filed a complaint in the United State District
Court for the Northern District of Illinois, Eastern Division on July 29,
1996, against us, Hollywood Casino-Aurora and a member of the Pratt family. On
September 18, 1996, we filed an answer to the Planet Hollywood lawsuit, along
with numerous counterclaims against Planet Hollywood, Robert Earl and Keith
Barish. Planet Hollywood filed an amendment to their complaint on January 21,
1997, which, among other things, added HWCC-Tunica and Greate Bay as
defendants. Shortly thereafter, we and Greate Bay filed answers and
counterclaims to their amended complaint.
In its complaint, Planet Hollywood alleges, among other things, that we and
Greate Bay have, in operating the Hollywood Casino concept, infringed on their
trademark, service mark and trade dress and have engaged in unfair competition
and deceptive trade practices. In our counterclaims, we and Greate Bay allege,
among other things, that Planet Hollywood has, through their planned use of
their mark in connection with casino services, infringed on our service marks
and trade dress and have engaged in unfair competition. The trial has recently
been completed and we are currently awaiting a determination by the judge
overseeing the case.
Given the uncertainties inherent in litigation, we cannot be sure that we
will prevail in this matter. However, we believe that Planet Hollywood's
claims are without merit.
Arthur Andersen Litigation. On October 8, 1998, we filed a complaint in the
district court of Dallas County, Texas against Arthur Andersen LLP, our former
independent accountants, and selected partners alleging negligent advice and
breach of contract with respect to the tax consequences resulting from the
spin-off of Greate Bay's stock to our shareholders on December 31, 1996. In
1998, we resolved any potential disputes with the Internal Revenue Service and
our stockholders that could arise in connection with the adverse tax treatment
of the distribution of Greate Bay's stock. The estimated cost of such
settlements is $.9 million and we have included this amount as damages in our
complaint against Arthur Andersen. The lawsuit is currently in the initial
stages of discovery.
Other Litigation. Although we are involved in other legal proceedings
arising in the ordinary course of our business, we are not involved in any
other legal proceeding that we believe will result, individually or in the
aggregate, in a material adverse effect upon our financial condition or
results of operations.
65
<PAGE>
MANAGEMENT
Set forth below is certain information concerning our directors and
executive officers:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Jack E. Pratt.............. 72 Chief Executive Officer and Chairman of the
Board of Directors
Edward T. Pratt, Jr........ 75 Vice President, Treasurer and Vice Chairman of
the Board of Directors
William D. Pratt........... 70 Executive Vice President, Secretary, General
Counsel and Director
Edward T. Pratt III........ 44 President, Chief Operating Officer and Director
Paul C. Yates.............. 37 Executive Vice President and Chief Financial
Officer
Charles F. LaFrano III..... 44 Vice President of Finance
James A. Colquitt.......... 80 Director
Theodore H. Strauss........ 74 Director
Oliver B. Revell III....... 60 Director
</TABLE>
Set forth below is a description of the backgrounds of our directors and
executive officers. Jack E. Pratt, Edward T. Pratt, Jr. and William D. Pratt
are brothers and Edward T. Pratt III is the son of Edward T. Pratt, Jr. There
is no other family relationship between any of our directors and any of our
executive officers or any of our subsidiaries or affiliates. Our officers are
elected by the Board of Directors and hold office until their respective
successors are duly elected and qualified.
Jack E. Pratt has been Chief Executive Officer and Chairman of the Board
since 1993. From 1990 to May 1995, he also served as our President. Mr. Pratt
also served as Chairman of the Board of Directors and Chief Executive Officer
of Greate Bay for more than five years prior to his resignation from such
positions on January 2, 1998. Mr. Pratt served as Chairman of the Board of
Directors and Chief Executive Officer of GB Holdings, Inc. and Greate Bay
Hotel and Casino, Inc. and as Chairman of the Board of Directors, President
and Chief Executive Officer of GB Property Funding until his resignation from
such positions on January 2, 1998. On January 5, 1998, these Greate Bay
subsidiaries filed petitions for relief under Chapter 11 of the United States
Bankruptcy Code. Mr. Pratt served until his resignation from such positions in
January 1998 as Chairman of the Board of Directors and Chief Executive Officer
of Pratt Casino Corporation, Chairman of the Board of Directors, President and
Chief Executive Officer of PRT Funding Corp. and Chairman of the Board of
Directors and President of New Jersey Management, Inc. On May 25, 1999, Pratt
Casino, PRT Funding and New Jersey Management filed petitions for relief under
Chapter 11 of the United States Bankruptcy Code.
Edward T. Pratt, Jr. has been Vice President, Treasurer and Vice Chairman of
the Board of Directors since 1990 and has served for more than five years as
Treasurer and Vice Chairman of the Board of Directors of Greate Bay. Mr. Pratt
also served until his resignation from such positions on January 2, 1998 as
Vice Chairman of the Board of Directors of GB Holdings and of GB Property
Funding and as a director of Greate Bay Hotel and Casino. On January 5, 1998,
these Greate Bay subsidiaries filed petitions for relief under Chapter 11 of
the United States Bankruptcy Code. Mr. Pratt has been Chief Financial Officer,
Principal Accounting Officer and a director of Pratt Casino, PRT Funding and
New Jersey Management since January 2, 1998 and also served as Vice Chairman
of the Board of Directors of Pratt Casino and PRT Funding from September 1993
to January 1, 1998 and as Executive Vice President, Treasurer and a director
of New Jersey Management for more than five years prior to January 1, 1998. On
May 25, 1999, Pratt Casino, PRT Funding and New Jersey Management filed
petitions for relief under Chapter 11 of the United States Bankruptcy Code.
66
<PAGE>
William D. Pratt has served as Executive Vice President, Secretary, General
Counsel and a director since 1990 and has served as Executive Vice President,
Secretary, General Counsel and director of Greate Bay for more than five
years. Mr. Pratt also served until his resignation from such positions on
January 2, 1998 as Executive Vice President, General Counsel and Secretary of
GB Holdings and of GB Property Funding and as a director of Greate Bay Hotel
and Casino. On January 5, 1998, these Greate Bay subsidiaries filed petitions
for relief under Chapter 11 of the United States Bankruptcy Code. Mr. Pratt
also served until his resignation from such positions in January 1998 as
Executive Vice President, Secretary, General Counsel and a director of Pratt
Casino and PRT Funding and as Vice President, Secretary and a director of New
Jersey Management. On May 25, 1999, Pratt Casino, PRT Funding and New Jersey
Management filed petitions for relief under Chapter 11 of the United States
Bankruptcy Code.
Edward T. Pratt III has served on the Board of Directors since 1992. From
1992 to July 1993, he served as our Vice President, from July 1993 to May
1995, he served as Executive Vice President, and in May 1995, Mr. Pratt was
elected President and Chief Operating Officer. Mr. Pratt served as Executive
Vice President-Development and Corporate Affairs of Greate Bay for more than
five years until November 1995 when he was elected President and Chief
Operating Officer of Greate Bay. He also served until his resignation from
such positions on January 2, 1998 as President, Chief Operating Officer and a
director of GB Holdings, and as Executive Vice President and a director of GB
Property Funding. On January 5, 1998, these Greate Bay subsidiaries filed
petitions for relief under Chapter 11 of the United States Bankruptcy Code.
Mr. Pratt has been Executive Vice President and Secretary of Pratt Casino, PRT
Funding and New Jersey Management since January 2, 1998 and also served as
President, Chief Operating Officer and a director of Pratt Casino and as
Executive Vice President and a director of PRT Funding from September 1993 to
January 1, 1998. On May 25, 1999, Pratt Casino, PRT Funding and New Jersey
Management filed petitions for relief under Chapter 11 of the United States
Bankruptcy Code.
Paul C. Yates has served as Executive Vice President and Chief Financial
Officer since May 1998. Prior to August 1997, Mr. Yates served as a Managing
Director of Bear, Stearns & Co. Inc., a leading national investment banking
firm, for a period of more than five years. Bear, Stearns & Co. served as an
underwriter with respect to the October 1995 offering of our 12 3/4% Senior
Secured Notes and is an initial purchaser of the notes offered in this
Offering Memorandum and the August 1999 offering of 13% first mortgage notes
due 2006 by Hollywood Casino Shreveport and Shreveport Capital Corporation.
Charles F. LaFrano III has served as Vice President of Finance since 1994
and has served as Vice President of Greate Bay for more than five years. Mr.
LaFrano also served until his resignation from such positions on January 2,
1998 as Vice President and Assistant Secretary of GB Holdings and GB Property
Funding. On January 5, 1998, these Greate Bay subsidiaries filed petitions for
relief under Chapter 11 of the United States Bankruptcy Code. Mr. LaFrano
served until his resignation from such positions in January 1998 as Vice
President and Assistant Secretary of Pratt Casino and PRT Funding. On May 25,
1999, Pratt Casino and PRT Funding filed petitions for relief under Chapter 11
of the United States Bankruptcy Code.
James A. Colquitt is self-employed as an insurance consultant and was
elected to the Board of Directors in December 1995. Until 1983, Mr. Colquitt
was Chairman of the Board of Colquitt, Owens & Stephens, a general insurance
agency based in Marietta, Georgia. From 1986 until November 1995, Mr. Colquitt
served on the Board of Directors of Greate Bay.
Theodore H. Strauss has served on the Board of Directors since 1993. Mr.
Strauss has been a Senior Managing Director of Bear, Stearns & Co. for more
than five years. He also serves on the Board of Directors of Clear Channel
Communications, Inc. and Sizeler Property Investors, Inc. Bear, Stearns & Co.
served as an underwriter with respect to the October 1995 offering of our 12
3/4% Senior Secured Notes and is an initial purchaser of the notes offered in
this Offering Memorandum and the August 1999 offering of 13% first mortgage
notes due 2006 by Hollywood Casino Shreveport and Shreveport Capital
Corporation.
Oliver B. Revell III was elected to fill an existing vacancy on the Board of
Directors on September 12, 1997. Mr. Revell has been President of Revell Group
International, a security consulting business, since September 1994. From May
1991 until September 1994, Mr. Revell was a Special Agent in Charge for the
Federal Bureau of Investigation.
67
<PAGE>
Compensation Committee Interlocks and Insider Participation
The compensation committee of the Board of Directors is comprised of William
D. Pratt, James A. Colquitt and Theodore H. Strauss. Mr. Pratt also serves as
an executive officer and director of Greate Bay. Mr. Strauss is a Senior
Managing Director of Bear, Stearns & Co., which served as underwriters with
respect to our offering of the 12 3/4% Senior Secured Notes and is an initial
purchaser of the notes offered in this Offering Memorandum and the August 1999
offering of 13% first mortgage notes due 2006 by Hollywood Casino Shreveport
and Shreveport Capital Corporation.
Compensation of Directors
Our non-employee directors receive an annual fee of $50,000 for service on
the Board of Directors as well as grants of stock options under the Hollywood
Casino Corporation 1996 Non-Employee Director Stock Plan (the "Directors'
Plan"). Directors who are our officers, employees or otherwise affiliated with
us are not presently expected to receive compensation for their services as
directors. Directors are entitled to reimbursement of their reasonable out-of-
pocket expenses in connection with their travel to and attendance at meetings
of the Board of Directors or committees of the Board of Directors.
Compensation of Executive Officers
The following table provides certain summary information concerning
compensation we paid or accrued to or on behalf of our Chief Executive Officer
and each of the four other most highly compensated executive officers
determined as of the end of the last fiscal year for the fiscal years ended
December 31, 1998, 1997 and 1996.
<TABLE>
<CAPTION>
Annual Compensation Long-term
------------------------------ Compensation
Name and Principal Other Annual Awards/ All Other
Position Year Salary Bonus Compensation Options Compensation(1)
------------------ ---- -------- -------- ------------ ------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
Jack E. Pratt(2)........ 1998 $643,729 $170,208 $ -- 150,000 $ 19,270
Chief Executive Officer
and 1997 643,235 228,476 -- 150,000 33,920
Chairman of the Board 1996 646,770 -- 14,000 150,000 279,984
Edward T. Pratt III(2).. 1998 423,860 170,208 -- 150,000 4,000
President and Chief
Operating 1997 423,840 228,476 -- 150,000 3,500
Officer 1996 426,167 -- -- 150,000 1,980
Edward T. Pratt,
Jr.(2)................. 1998 323,425 73,012 -- -- 4,000
Vice President,
Treasurer and 1997 324,312 101,545 -- -- 3,500
Vice Chairman of the
Board 1996 325,891 -- 18,500 -- 171,150
William D. Pratt(2)..... 1998 293,373 73,012 -- -- 11,240
Executive Vice
President, 1997 294,195 101,545 -- -- 11,547
Secretary and General
Counsel 1996 295,811 -- 14,000 -- 215,208
Paul C. Yates(3)........ 1998 164,113 75,000 -- 150,000 --
Executive Vice
President and
Chief Financial Officer
</TABLE>
- --------
(1) Includes our matching contributions to The Hollywood Casino Corporation
Retirement Savings Plan (the "Savings Plan") on behalf of the named
executive officer. See "--Employee Retirement Savings Plan." Amounts set
forth above for Jack E. Pratt, Edward T. Pratt, Jr. and William D. Pratt
also include pension benefit accruals on their behalf. See also "--
Employment Contracts."
(2) Jack E. Pratt held and Edward T. Pratt, Jr., William D. Pratt and Edward
T. Pratt III concurrently hold positions as officers of Greate Bay.
Through September 1998, Greate Bay reimbursed us for that portion of
salary, bonus and other compensation which relates to services provided to
Greate Bay. Effective October 1, 1998, Greate Bay pays us a monthly
service fee which approximates its portion of shared overhead costs.
(3) Mr. Yates began his employment in May 1998 and, therefore, the amounts
reflected above represent only the period from the commencement of his
employment through the end of the year.
68
<PAGE>
Option Grants in Last Fiscal Year
The following table contains information concerning the grant of stock
options under the Hollywood Casino Corporation 1996 Long-Term Incentive Plan
(the "1996 Plan") to the named executive officers. No grants of stock options
under the 1992 Hollywood Casino Corporation Stock Option Plan (the "1992
Plan") were made to the named executive officers during the fiscal year ended
December 31, 1998.
<TABLE>
<CAPTION>
Potential
Realizable Value
at Assumed
Annual Rates of
Stock Price
Appreciation for
Option Grants in Last Fiscal Year Individual Grants Option Term
------------------------------------------------------------ ----------------
% of
Total Options
Options/ Granted to Market Price
SAR'S Employees in Exercise or on Date of Expiration
Name Granted(1) Fiscal Year Base Price Grant Date 5% 10%
---- ---------- ------------- ----------- ------------ ---------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Jack E. Pratt........... 150,000 31.9 $1.75 $1.75 6/19/03 $72,524 $160,259
Edward T. Pratt III..... 150,000 31.9 1.75 1.75 6/19/03 72,524 160,259
Edward T. Pratt, Jr..... -- -- -- -- -- -- --
William D. Pratt........ -- -- -- -- -- -- --
Paul C. Yates........... 150,000 31.9 1.91 1.91 5/11/05 116,405 271,274
</TABLE>
- --------
(1) Options are granted "at market" on the date of grant and first become
exercisable six months from the date of grant for Jack E. Pratt and Edward
T. Pratt III. The options granted to Mr. Yates were awarded on May 11,
1998 and become exercisable as follows: 50,000 shares on the first
anniversary of the date of grant, an additional 34,000 shares two years
after such date, an additional 33,000 shares three years after such date
and the remaining 33,000 shares four years after such date.
Option Exercises and Holdings
The following table provides information, with respect to the named
executive officers, concerning options outstanding under the 1992 Plan and the
1996 Plan during the last fiscal year and unexercised options held as of the
end of the fiscal year:
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year End Option
Values
<TABLE>
<CAPTION>
Value of Unexercised
in the Money Options
at Fiscal Year-End
Value Realized Number of Unexercised (Market Price of Shares
(Market Price Options at Fiscal Year at Fiscal Year End($1.03)
Shares at Exercise End Less Exercise Price)
Acquired Less ------------------------- -------------------------
Name on Exercise Exercise Price) Exercisable Unexercisable Exercisable Unexercisable
---- ----------- --------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Jack E. Pratt........... -- $ -- 450,000 -- $-- $--
Edward T. Pratt III..... 40,008 64,989 450,000 -- -- --
Edward T. Pratt, Jr..... -- -- -- -- -- --
William D. Pratt........ -- -- -- -- -- --
Paul C. Yates........... -- -- -- 150,000 -- --
</TABLE>
On June 19, 1998, our Board of Directors approved the repricing of all
options granted under the Directors' Plan prior to January 1, 1998. The
exercise price on such options was reset at $1.75 per share, the market value
of our stock at the date of repricing. All of the options repriced remain
fully vested. The following table presents certain information concerning the
repricing of options to all of our executive officers and directors since our
inception.
69
<PAGE>
Ten Year Option Repricing Table
<TABLE>
<CAPTION>
Length of
Number of Original
Securities Market Price Option Term
Underlying of Stock Exercise Price New Remaining at
Date of Options at Time at Time of of Exercise Date of
Name Repricing Required of Repricing Repricing Price Repricing
---- --------- ---------- ------------ -------------- -------- ------------
<S> <C> <C> <C> <C> <C> <C>
James A. Colquitt....... 6/19/98 10,000 $1.75 $6.25 $1.75 8 yr.
James A. Colquitt....... 6/19/98 2,500 1.75 3.88 1.75 8 yr., 7 mo.
Theodore H. Strauss..... 6/19/98 10,000 1.75 6.25 1.75 8 yr.
Theodore H. Strauss..... 6/19/98 2,500 1.75 3.88 1.75 8 yr., 7 mo.
Oliver B. Revell III.... 6/19/98 10,000 1.75 2.81 1.75 9 yr., 3 mo.
</TABLE>
Employment Contracts
Jack E. Pratt, Chairman of the Board and Chief Executive Officer, Edward T.
Pratt, Jr., Vice Chairman of the Board, Vice President and Treasurer, and
William D. Pratt, Executive Vice President, Secretary and General Counsel, are
under employment contracts with us and have provided services to Greate Bay
under intercompany service and allocation agreements ratified by the
respective non-interested directors of the Boards of Directors. Their
employment contracts were executed during October 1989 and originally expired
on September 30, 1992, but have subsequently been extended by amendment
through December 31, 2001 with respect to Jack E. Pratt and to December 31,
2000 with respect to Edward T. Pratt, Jr. and William D. Pratt. Services to
Greate Bay will continue to be provided pursuant to intercompany service
agreements. The terms of the contracts may be extended again by mutual
agreement of the parties and the extended term, or any further extension
thereof, will be followed immediately by a four-year period as consultants to
us. Upon expiration of the consulting term, each of the Pratt brothers will be
entitled to receive a lifetime pension benefit and his designated beneficiary
is entitled to receive a death benefit, throughout the term of the employment,
consulting and pension benefit periods.
The terms of the employment contracts provide for an annual base salary in
the first year for Jack E. Pratt, Edward T. Pratt, Jr. and William D. Pratt of
$350,000, $223,000 and $191,000, respectively, subject to annual review and
increase by the compensation committee of the Board of Directors. Compensation
under the consulting and pension benefit provisions of the employment
contracts of each of the Pratt brothers will be 75% of their respective
highest annual salaries during the employment term of each contract. The death
benefit is derived by multiplying each Pratt brother's highest annual salary
during his employment term by 50% and such benefit will be paid annually to
his designated beneficiary for a period of ten years after his death. The
estimated annual pension benefit payable to Jack E. Pratt, Edward T. Pratt,
Jr. and William D. Pratt is currently $484,000, $244,000 and $221,000,
respectively.
Edward T. Pratt III, President and Chief Operating Officer, is under an
employment contract dated as of May 1, 1996 in such capacities continuing
through April 30, 2000 unless sooner terminated by either party. The terms of
Mr. Pratt's agreement provide for a minimum annual base salary effective
January 1, 1996 of $425,000, subject to annual review and increase by the
compensation committee of the Board of Directors. In the event of a change in
control, the agreement provides that if Mr. Pratt's employment were to be
terminated, he would receive the greater of the remaining compensation under
his employment contract or three times his then annual base salary, payable in
a lump sum or in equal monthly installments over the applicable period.
Paul C. Yates, Executive Vice President and Chief Financial Officer, is
under an employment contract dated as of May 11, 1998 in such capacities
continuing through May 10, 2000, unless sooner terminated by either party. The
expiration date of the contract is then subject to an automatic one-year
renewal unless either party provides 90-day notice not to renew. The terms of
Mr. Yates agreement provide for a minimum annual base compensation of
$250,000. In addition, Mr. Yates participates in our incentive bonus plans;
however, the employment agreement provides for a minimum annual bonus of
$75,000. In the event of a change in control, the agreement provides that if
Mr. Yates' employment were to be terminated, he would receive the remaining
compensation and minimum bonus under his employment agreement payable in a
lump sum or in equal monthly installments over the applicable period.
70
<PAGE>
Stock Option Plans
The Hollywood Casino Corporation 1996 Long-Term Incentive Plan. During 1996,
our stockholders approved the adoption of the Hollywood Casino Corporation
1996 Long-Term Incentive Plan. We have reserved 3,000,000 shares of our class
A common stock for grants of nonqualified stock options, stock options
qualified for special tax treatment under the Code and restricted stock awards
(collectively, "awards") to our employees and those of our subsidiaries.
Awards under the 1996 Plan, together with the exercise price, vesting
schedule and restrictions and conditions, if any, are determined by a
committee of the Board of Directors. However, any common stock acquired
pursuant to an award to a director, executive officer or 10% or greater
stockholder must be held by that participant for at least six months from the
date of the award, unless the committee determines that a disposition would
not violate the federal securities laws. The exercise price must be at least
100%, or at least 110% in the case of incentive stock options granted to
certain employees who own greater than 10% of our outstanding common stock, of
the fair market value of the common stock on the date of grant and may be paid
in cash or in shares of our common stock valued at fair market value on the
date of exercise.
No participant in the 1996 Plan may currently receive awards during any
fiscal year covering an aggregate of more than 500,000 shares of common stock.
The grant of incentive stock options is also subject to a $100,000 calendar
year limit for each participant. Upon termination of a participant's
employment for any reason, the participant will forfeit the nonvested portions
of all awards he or she holds. Awards which have not yet vested are not
transferable or assignable other than by will, by the laws of descent and
distribution or as otherwise allowed by the 1996 Plan. The 1996 Plan also
provides that in the event of a "Change in Control," as such term is defined
in the 1996 Plan, all unmatured installments of awards will become fully
accelerated and exercisable in full.
The Hollywood Casino Corporation 1996 Non-Employee Director Stock
Plan. During 1996, our stockholders approved the adoption of the Hollywood
Casino Corporation 1996 Non-Employee Director Stock Plan. We have reserved
150,000 shares of our class A common stock for grants of nonqualified stock
options to directors who are not our employees ("outside directors") in order
to attract and retain such individuals and encourage their performance.
Under the Directors' Plan, an option to purchase 10,000 shares of common
stock was granted to each outside director upon adoption of the Directors'
Plan in 1996. Each person becoming an outside director subsequent to adoption
of the Directors' Plan will automatically receive an option to purchase 10,000
shares on the date that person becomes a director. Additionally, outside
directors will receive a nonqualified option to purchase 2,500 shares of
common stock on January 15 of each year. The exercise price for all options
under the Directors' Plan is 100% of the fair market value of the common stock
on the date of grant and may be paid in cash or in shares of our common stock
valued at fair market value on the date of exercise. An outside director may
also elect to receive all or part of his or her retainer fee in the form of
common stock based on the market value of the common stock as of the end of
the period for which such fee applies. Common stock received in lieu of a
retainer fee is fully vested upon receipt.
Options granted under the Directors' Plan extend for ten years from and may
be exercised any time after six months from the date of grant. Upon
termination of a participant's service as a director due to death or total
disability, outstanding options may be exercised for a period of 12 months
after the termination unless the original expiration date of the option is
sooner. Upon termination of a participant's service as a director for reason
of retirement, outstanding options may be exercised for a period of three
months after retirement. Options granted under the Directors' Plan are not
transferable or assignable other than by will, by the laws of descent and
distribution or as otherwise allowed by the Directors' Plan.
The 1992 Hollywood Casino Corporation Stock Option Plan. During 1992, we
reserved 1,197,000 shares of our class B common stock for the purpose of
establishing the Hollywood Casino Corporation 1992 Stock
71
<PAGE>
Option Plan for our key executives. After the completion of our initial public
offering in June 1993, all stock options outstanding under the 1992 Plan
became exercisable for class A common stock and any options granted under the
1992 Plan after that date are to purchase class A common stock.
Options granted under the 1992 Plan vest in equal annual installments over a
period of three years. In the event of the death, disability or retirement of
a participant in the 1992 Plan, the participant's options will accelerate and
be exercisable in full. If the participant's employment with us is terminated
for cause, as defined in the 1992 Plan, the options held by that participant
shall automatically terminate. Options granted under the 1992 Plan are not
assignable except by will, the laws of descent and distribution or pursuant to
a qualified domestic relations order. The 1992 Plan provides that if any
person or group, other than certain members of the Pratt family, becomes the
beneficial owner of 51% or more of the total voting power of each class of our
capital stock, subject to particular exceptions, the vesting of all
outstanding options will accelerate and be exercisable in full. The exercise
of incentive stock options granted under the 1992 Plan is subject to a
$100,000 calendar-year limit for each option holder based on the fair market
value of the our common stock at the time the option was granted. The exercise
price of options granted under the 1992 Plan may be paid in cash or in shares
of class A common stock valued at fair market value on the date of exercise.
Employee Retirement Savings Plan
During 1993, we adopted The Hollywood Casino Corporation and Subsidiaries
Retirement Savings Plan, a qualified defined contribution plan for the benefit
of all of our employees who satisfy certain eligibility requirements. The
Savings Plan is qualified under the requirements of Section 401(k) of the Code
allowing participating employees to benefit from the tax deferral
opportunities provided therein. All of our employees who have completed one
year of service, as defined, and who have attained the age of 21, are eligible
to participate in the Savings Plan.
The Savings Plan provides for us to make matching contributions based upon
certain criteria, including levels of participation by our employees. We
accrued matching contributions totaling approximately $778,000 for the year
ended December 31, 1998.
72
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of our common stock by (1) each person who is known by us to own
beneficially more than 5% of our common stock, (2) each of our directors and
named executive officers and (3) all current directors and named executive
officers as a group.
<TABLE>
<CAPTION>
Shares of Percentage of
Common Stock Outstanding
Beneficial Owner Beneficially Owned(1) Common Stock
- ---------------- --------------------- -------------
<S> <C> <C>
Jack E. Pratt............................. 8,669,377(2) 33.5%
Edward T. Pratt III....................... 3,272,525(3) 12.7%
Edward T. Pratt, Jr....................... 1,091,544 4.4%
William D. Pratt.......................... 1,354,447(4) 5.4%
Paul C. Yates............................. 160,000(5) *
Theodore H. Strauss....................... 20,500(6) *
James A. Colquitt......................... 27,500(6) *
Oliver B. Revell III...................... 15,000(6) *
All directors and officers as a group (9
individuals)............................. 14,637,893(7) 54.5%
</TABLE>
- --------
* Less than 1%
(1) Except as otherwise described, each individual has the sole power to vote
and dispose of the common stock beneficially owned by him.
(2) Mr. Pratt's address is Two Galleria Tower, Suite 2200, 13455 Noel Road,
Dallas, Texas 75240. Beneficial ownership is attributable to the
following: (a) C. A. Pratt Partners, Ltd., a Texas limited partnership of
which Jack E. Pratt is the General Partner, owns 1,642,001 shares, or
6.6%, of our outstanding stock, (b) the MEP Family Partnership and the CLP
Family Partnership, both Texas general partnerships for which Mr. Pratt is
the Managing General Partner, own 14,000 and 7,000 shares, respectively,
both less than 1% of our outstanding stock (c) 1,079,632 shares, or 4.3%,
of our outstanding stock owned of record by adult children of Mr. Pratt
and subject to a proxy giving him the right to vote such shares and
prohibiting the transfer of such shares without his approval and (d)
975,136 shares, or 3.9%, of our outstanding common stock held by Mr. Pratt
as custodian for his minor children. Also includes options to purchase
900,000 shares of our common stock exercisable within 60 days of the date
hereof under the 1996 Plan.
(3) Mr. Pratt's address is Two Galleria Tower, Suite 2200, 13455 Noel Road,
Dallas, Texas 75240. Beneficial ownership is attributable to 1,438,812
shares, or 5.8%, of our common stock owned of record by siblings of Mr.
Pratt and subject to a proxy giving him the right to vote such shares and
prohibiting the transfer of such shares without his approval. Also
includes options to purchase 900,000 shares of our common stock
exercisable within 60 days of the date hereof under the 1996 Plan.
(4) Mr. Pratt's address is Two Galleria Tower, Suite 2200, 13455 Noel Road,
Dallas, Texas 75240. Beneficial ownership is attributable to the
following: (a) 381,088 shares, or 1.5%, of our outstanding stock owned of
record by adult children of Mr. Pratt and subject to a proxy giving him
the right to vote such shares and prohibiting the transfer of such shares
without his approval and (b) WDP Jr. Family Trust, for which Mr. Pratt is
the Managing Trustee, owns 200,294 shares, less than 1% of our outstanding
stock.
(5) Includes options to purchase 50,000 shares of our common stock exercisable
within 60 days of the date hereof under the 1996 Plan.
(6) Includes 17,500 shares of our common stock for each of Mr. Strauss and Mr.
Colquitt and 15,000 shares of our common stock for Mr. Revell subject to
options exercisable within 60 days of the date hereof under the Directors'
Plan.
(7) Includes 1,005,000 shares of our common stock subject to options
exercisable within 60 days of the date hereof.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Greate Bay Casino Corporation
As a result of our distribution of our approximate 80% interest in Greate
Bay stock to our stockholders on December 31, 1996, Greate Bay is no longer a
consolidated subsidiary. Greate Bay, however, remains approximately 36% owned
by the Pratt family and we have a number of common officers and directors.
During 1990, we acquired approximately $38.8 million of unsecured notes (the
"PCPI Notes") issued by PCPI Funding Corp., a subsidiary of Greate Bay. As
part of a refinancing in February 1994, PPI Funding Corp., a newly formed
subsidiary of Greate Bay, issued approximately $40.5 million discounted
principal amount of new deferred interest notes, referred to as the PPI
Funding Notes, in exchange for the $38.8 million principal amount of PCPI
Notes held by us.
It was anticipated that one of our primary methods of collection with
respect to the PPI Funding Notes would be through the utilization of tax net
operating losses generated in prior years by Greate Bay. As Greate Bay is no
longer a consolidated subsidiary for federal income tax purposes, this means
of collection is no longer available to us. At December 31, 1998, we evaluated
the collectability of the PPI Funding Notes. Such evaluation was based, in
part, on our determination of the potential for repayment of the PPI Funding
Notes by means of the available cash and noncash assets of PPI Funding Corp.
and its affiliates. We concluded that a valuation allowance in the amount of
$22.7 million was necessary to reduce the carrying amount of the PPI Funding
Notes to their estimated realizable value of $12.3 million. Management
anticipates that this balance will be realized through a combination of asset
acquisitions and repayments from Greate Bay.
Prior to distributing our approximate 80% interest in Greate Bay to our
stockholders in 1996, Greate Bay borrowed funds on a demand basis from us for
various purposes. As of December 31, 1998, the outstanding balance on such
borrowings was $6.8 million. Of the amounts borrowed, $250,000 was due on
April 1, 1998, for which payment has not been received. Such borrowing from us
continues to bear interest at the rate of 14% per annum, payable semiannually.
The remaining $6.5 million was borrowed from us during 1996 on a demand basis
with interest at the rate of 13 3/4% per annum payable quarterly commencing
October 1, 1996. Interest receivable in connection with such borrowings
amounted to $1.8 million at December 31, 1998. Payment of interest by Greate
Bay on borrowings from us is subject to the approval of New Jersey gaming
authorities.
As of April 1, 1997, HWCC-Aurora Management acquired the general partnership
interest in Pratt Management, which holds the management contract on the
Aurora casino, from a subsidiary of Greate Bay. As general partner, we receive
99% of the first $84,000 of net income earned by the partnership each month
and 1% of any income earned above such amount. Distributions made to the
Greate Bay subsidiary that retained the limited partnership interest amounted
to $5.6 million during 1998. We issued to the Greate Bay subsidiary a five-
year note in the original amount of $3.8 million, assigned $7.6 million
principal amount of PPI Funding Notes and assigned certain accrued interest
receivable in exchange for the general partnership interest. The $3.8 million
note is payable in monthly installments of $83,000, including interest at the
rate of 14% per annum, commencing on May 1, 1997 in an amount equal to our
share of quarterly cash distributions from Pratt Management. The outstanding
principal amount of the note at December 31, 1998 was $2.8 million. We
incurred interest expense on the note amounting to $439,000 during the year
ended December 31, 1998.
Pursuant to a ten-year consulting agreement with HWCC-Tunica, Greate Bay
receives monthly consulting fees of $100,000.
We and our subsidiaries share certain general and administrative costs with
Greate Bay under a services agreement. Net allocated costs and fees charged to
Greate Bay amounted to $1.0 million during the year ended December 31, 1998. A
receivable in the amount of $179,000 in connection with such allocated costs
and fees was due to us at December 31, 1998.
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Advanced Casino Systems Corporation, a subsidiary of Greate Bay, provides
computer-related, marketing and other administrative services to our casino
facilities. Advanced Casino Systems Corporation has an agreement with the
Tunica casino through December 31, 1999. This agreement provides for the sale
of computer hardware and information systems equipment and the licensing of
software necessary to operate the facility. The Tunica casino pays prices and
fees in amounts and on terms and conditions that Advanced Casino Systems
Corporation provides to unrelated third parties as well as a fixed license and
consulting fee of $33,600 per month. Advanced Casino Systems Corporation is
also reimbursed for its direct costs and expenses incurred under this
agreement. Advanced Casino Systems Corporation also provides similar services
and hardware to the Aurora casino which it charges for direct costs and
expenses. Total billing to us and to the two casinos for such products and
services amounted to $1.1 million during the year ended December 31, 1998.
Payables to Advanced Casino Systems Corporation at December 31, 1998 totaled
$109,000.
As a result of revising the tax treatment for the spin-off of Greate Bay's
stock to our stockholders at December 31, 1996, our stockholders 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. We committed to assume the obligation for additional federal income
taxes owed by our stockholders arising from the revised tax treatment.
Consequently, we reached an agreement with the Internal Revenue Service to
settle the obligations on behalf of our stockholders, exclusive of the Pratt
family, for $100,000 and to issue new tax reporting forms to the Pratt family.
Such forms will require the Pratt family members to amend their federal income
tax returns for 1996 resulting in substantial additional taxes and interest.
We have agreed to reimburse the Pratt family for these additional tax
obligations which total approximately $790,000.
On April 28, 1999, we entered into a voting agreement with Greate Bay, Pratt
Casino Corporation and substantially all of the holders of $85 million of
senior notes currently in default which were issued by PRT Funding Corp., a
wholly owned subsidiary of Pratt Casino Corporation, and guaranteed by Pratt
Casino Corporation. Under the terms of the agreement, we would purchase the
stock of Pratt Casino Corporation from Greate Bay as part of a debt
restructuring of PRT Funding, Pratt Casino Corporation and other subsidiaries
of Pratt Casino Corporation. On May 25, 1999, Pratt Casino Corporation, PRT
Funding Corp. and New Jersey Management, Inc. filed for bankruptcy pursuant to
a joint plan of reorganization in accordance with the terms of our agreement.
On the date on which Pratt Casino Corporation emerges from bankruptcy
proceedings, we would acquire its stock for nominal consideration and satisfy
Pratt Casino Corporation's obligations for $40.3 million in cash.
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DESCRIPTION OF THE EXCHANGE OFFER
Purpose and Effect
On May 19, 1999, we sold the original notes to the initial purchasers. In
connection with the sale of the original notes, we entered a registration
rights agreement with the initial purchasers requiring us to register the
notes with the SEC and offer to exchange the registered notes for original
notes. A copy of the registration rights agreement has been filed as an
exhibit to the registration statement of which this prospectus is a part and
we urge you to read the text of the registration rights agreement. We
expressly qualify all of our discussions of the registration rights agreement
by the terms of the agreement itself. As a result of the timely filing and the
effectiveness of the registration statement, we will not owe liquidated
damages provided for in the registration rights agreement.
The registration rights agreement further provides that we will use our
reasonable best efforts to, among other things, cause to be filed with the SEC
this registration statement under the Securities Act with respect to an offer
to exchange your original notes for newly issued registered notes. Except as
discussed below, upon the completion of the exchange offer we will have no
further obligations to register your original notes. Any original notes not
tendered will continue to be subject to particular restrictions on transfer.
Accordingly, the liquidity of the market for the original notes could be
adversely affected upon consummation of the exchange offer.
In order to participate in the exchange offer, we require that you represent
to us that:
. you are acquiring the registered notes in the ordinary course of
your business;
. you are not engaging in, and do not intend to engage, in a
distribution of the registered notes;
. you do not have an arrangement or understanding with any person to
participate in the distribution of the registered notes;
. you are not our "affiliate," or an "affiliate" of the guarantors, as
that term is defined under Rule 405 of the Securities Act; and
. if you are a broker-dealer, you will receive registered notes for
your own account, your registered notes will be acquired as a result
of market-making activities or other trading activities, and you
acknowledge that you will deliver a prospectus in connection with
any resale of your registered notes.
You may be entitled to "shelf" registration rights. In accordance with the
registration rights agreement, we are required to file a shelf registration
statement covering your original notes for a continuous offering in accordance
with Rule 415 of the Securities Act if:
. we determine that we are not permitted to effect the exchange offer
because of any change in law or applicable interpretations of the
staff of the SEC; or
. any holder of Transfer Restricted Securities notifies us within 20
business days following the date the exchange offer is consummated
that:
(1) it is prohibited by law or SEC policy from participating in the
exchange offer; or
(2) it may not resell the registered notes acquired by it in the
exchange offer to the public without delivering a prospectus and
that this prospectus is not appropriate or available for such
resales; or
(3) it is a broker-dealer and owns original notes acquired directly
from us or any of our affiliates; or
. we do not consummate the exchange offer within 30 business days
after the exchange offer becomes effective.
For purposes of the foregoing, "Transfer Restricted Securities" means each
original note until the earliest to occur of:
. the date on which the original note has been exchanged in the
exchange offer for a new note which is entitled to be resold to the
public without complying with the prospectus delivery requirements
of the Securities Act,
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. the date on which the original note has been disposed of in
accordance with a Shelf Registration Statement and the purchasers
thereof have been issued a registered note, or
. the date on which the registered note is distributed to the public
pursuant to Rule 144 under the Securities Act and each registered
note held by a broker-dealer until the date on which the registered
note is disposed of by a broker-dealer pursuant to the "Plan of
Distribution" contemplated by this registration statement, including
the delivery of the prospectus contained herein.
In the event that we are obligated to file a shelf registration statement,
we will be required to keep the shelf registration statement effective until
May 20, 2001. Other than as described above, you will not have the right to
participate in the shelf registration or require that we register your notes
in accordance with the Securities Act.
Based on interpretations of the SEC's staff set forth in no-action letters
issued to third parties unrelated to us and the guarantors, we believe that,
with the exceptions set forth below, your registered notes issued in
connection with the exchange offer in exchange for your original notes may be
offered for resale, resold, and otherwise transferred by you without
compliance with the registration and prospectus delivery requirements of the
Securities Act if:
. the registered notes acquired in connection with the exchange offer
are being obtained in the ordinary course of your business;
. you are not engaging in and do not intend to engage in a
distribution of the registered notes;
. you do not have an arrangement or understanding with any person to
participate in a distribution of the registered notes; and
. you are not our "affiliate," as defined in Rule 405 under the
Securities Act, or an "affiliate" of the guarantors.
If you tender in the exchange offer for the purpose of participating in a
distribution of the registered notes, you cannot rely on this interpretation
by the SEC's staff and must comply with the registration and prospectus
delivery requirements of the Securities Act in connection with your secondary
resale transaction. If you are a broker-dealer that receives registered notes
for your own account in exchange for your original notes, where such original
notes were acquired by you as a result of market-making activities or other
trading activities, you must acknowledge that you will deliver a prospectus in
connection with any resale of your registered notes. See "Plan of
Distribution." If you are a broker-dealer who acquired original notes directly
from us and not as a result of market-making activities or other trading
activities, you may not rely on the SEC's interpretations discussed above or
participate in the exchange offer and must comply with the prospectus delivery
requirements of the Securities Act in order to sell your registered notes.
Consequences of Failure to Exchange
Following the completion of the exchange offer, except as provided above and
in the registration rights agreement we refer to, you will not have any
further registration rights and your original notes will continue to be
subject to certain restrictions on transfer. Accordingly, if you do not
participate in the exchange offer, your ability to sell your original notes
could be adversely affected. You may suffer adverse consequences if you fail
to exchange your original notes. See "Risk Factors--Failure to Exchange
Original Notes."
Terms of the Exchange Offer
Upon the terms and subject to the conditions set forth in this prospectus
and in the letter of transmittal, we will accept any validly tendered original
notes which are not withdrawn prior to 5:00 p.m., New York City time, on the
expiration date of the exchange offer. We will issue $1,000 principal amount
of registered notes in exchange for each $1,000 principal amount of your
original notes. You may tender some or all of your notes in the exchange
offer. However, you may tender your original notes only in integral multiples
of $1,000 in principal amount.
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The form and terms of the registered notes will be the same as the form and
terms of your original notes except that:
. interest on the registered notes will accrue from the last interest
payment date on which interest was paid on your original notes, or,
if no interest was paid, from the date of the original issuance of
your original notes; and
. the registered notes have been registered under the Securities Act
and will not bear a legend restricting their transfer.
This prospectus, together with the letter of transmittal you received with
this prospectus, is being sent to DTC's nominee and to others believed to have
beneficial interests in the original notes. You do not have any appraisal or
dissenters' rights under the General Corporation Law of the State of Delaware
or under the indenture governing your notes. We intend to conduct the exchange
offer in accordance with the requirements of the Securities Act and the rules
and regulations of the SEC under the Securities Act.
We will have accepted your validly tendered original notes when we have
given oral or written notice to the exchange agent. The exchange agent will
act as agent for the tendering holders for the purpose of receiving the
registered notes from us. If the exchange agent does not accept any tendered
original notes for exchange because of an invalid tender or for any other
valid reason, the exchange agent will return the certificates, without
expense, to the tendering holder as promptly as practicable after the
expiration date of the exchange offer.
If you participate in the exchange offer, you will not be required to pay
brokerage commissions, fees, or, subject to the instructions in the letter of
transmittal, transfer taxes in connection with the exchange of your original
notes for registered notes. We will pay all charges and expenses, other than
particular applicable taxes you may incur in connection with the exchange
offer.
Expiration Date; Extensions; Amendments
The exchange offer will expire at 5:00 p.m., New York City time, on
September 14, 1999, unless we, in our sole discretion, extend it. In any
event, we will hold the exchange offer open for at least twenty business days.
If we decide to extend the exchange offer, we will notify the exchange agent
and each registered holder by oral or written notice before 9:00 a.m., New
York City time, on the next business day after the previously scheduled
expiration date.
We reserve the right, in our sole discretion:
. to delay accepting your original notes;
. to extend the exchange offer;
. to terminate the exchange offer if any of the conditions were not
satisfied by giving oral or written notice of delay, extension or
termination to the exchange agent; or
. to amend the terms of the exchange offer in any manner.
In the event that we make a material or fundamental change to the terms of
the exchange offer, we will file a post effective amendment to the
registration statement.
Procedures for Tendering Your Notes
Only you may tender your original notes in the exchange offer. Except as
stated on page 80 under the heading "--Book Entry Transfer," to tender in the
exchange offer, you must:
. complete, sign and date the enclosed letter of transmittal, or a
copy of it;
. have the signature on the letter of transmittal guaranteed, if
required by the letter of transmittal; and
. mail, fax or otherwise deliver the letter of transmittal or copy to
the exchange agent on or before the expiration date.
In addition, either:
. the exchange agent must receive certificates for your original notes
and the letter of transmittal before on or the expiration date;
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. the exchange agent must receive a timely confirmation of a book-
entry transfer of your original notes, if that procedure is
available, into the account of the exchange agent at the Depositary
Trust Company under the procedure for book-entry transfer described
below before the expiration date of the exchange offer; or
. you must comply with the guaranteed delivery procedures described
below.
For your original notes to be tendered effectively, the exchange agent must
receive the letter of transmittal and other required documents at the address
set forth under "--Exchange Agent" before the expiration date of the exchange
offer at the address set forth under "--Exchange Agent."
If you do not withdraw your tender before the expiration date, it will
constitute an agreement between you and us in accordance with the terms and
conditions in this prospectus and in the letter of transmittal.
The method of delivery to the exchange agent of your original notes, your
letter of transmittal and all other required documents is at your election and
risk. Instead of delivery by mail, we recommend that you use an overnight or
hand delivery service. In all cases, you should allow sufficient time to
assure delivery to the exchange agent before the expiration date of the
exchange offer. Do not send either a letter of transmittal or your original
notes directly to us. You may request your broker, dealer, commercial bank,
trust company or nominee to make the exchange on your behalf.
Procedure if your Original Notes are not Registered in your Name
Any beneficial owner whose original notes are registered in the name of a
broker, dealer, commercial bank, trust company, or other nominee and who
wishes to tender the original notes in the exchange offer should contact the
registered holder promptly and instruct the registered holder to tender the
original notes on the beneficial owner's behalf. If the beneficial owner
wishes to tender on the owner's own behalf, the owner must, before completing
and executing a letter of transmittal and delivering the owner's original
notes, either make appropriate arrangements to register ownership of the
original notes in the beneficial owner's name or obtain a properly completed
bond power or other proper endorsement from the registered holder. We strongly
urge you to act immediately since the transfer of registered ownership may
take considerable time.
Signature Requirements and Signature Guarantees
Unless you are a registered holder who requests that the registered notes be
mailed to you and issued in your name, or unless you are a member of, or
participant in, the Securities Transfer Agents Medallion Program, the New York
Stock Exchange Medallion Signature Program, the Stock Exchange Medallion
Program, or an "Eligible Guarantor Institution" within the meaning of Rule
17Ad-15 under the Exchange Act, each an "Eligible Institution," you must
guarantee your signature on a letter of transmittal or a notice of withdrawal
by an Eligible Guarantor Institution.
If a trustee, executor, administrator, guardian, attorney-in-fact, officer
of a corporation, or other person acting in a fiduciary or representative
capacity signs the letter of transmittal or any notes or bond powers on your
behalf, that person must indicate their capacity when signing, and submit
satisfactory evidence to us with the letter of transmittal demonstrating their
authority to act on your behalf.
Conditions to the Exchange Offer
We will decide all questions as to the validity, form, eligibility,
acceptance, and withdrawal of tendered original notes and our determination
will be final and binding on you. We reserve the absolute right to reject any
and all original notes not properly tendered or the acceptance of which would
be unlawful in the opinion of our counsel. We also reserve the right to waive
any defects, irregularities, or conditions of tender as to particular original
notes. Our interpretation of the terms and conditions of the exchange offer,
including the instructions in a letter of transmittal, will be final and
binding on all parties. You must cure any defects or irregularities in
connection with tenders of original notes as we shall determine. Although we
intend to notify holders of defects or irregularities with respect to tenders
of original notes, we, the exchange agent, or any other person will not
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incur any liability for failure to give this notification. Tenders of original
notes will not be deemed to have been made until any defects or irregularities
have been cured or waived. Any original notes received by the exchange agent
that are not properly tendered and as to which defects or irregularities have
not been cured or waived will be returned by the exchange agent to the
tendering holders, unless otherwise provided in the letter of transmittal, as
soon as practicable following the expiration date of the exchange offer.
We reserve the right to purchase or to make offers for any original notes
that remain outstanding after the expiration date of the exchange offer or to
terminate the exchange offer and, to the extent permitted by law, purchase
original notes in the open market, in privately negotiated transactions or
otherwise. The terms of any of these purchases or offers could differ from the
terms of the exchange offer.
These conditions are for our sole benefit and we may assert them at any time
or for any reason. We may waive in whole or in part at any time and from time
to time these conditions in our sole discretion. Our failure to exercise any
of our rights will not be a waiver of our rights and each such right shall be
deemed an ongoing right which may be asserted at any time and from time to
time.
We will not accept for exchange any original notes tendered, and no
registered notes will be issued in exchange for any original notes, if at the
time any stop order is threatened or in effect with respect to the
registration statement or the qualification of the indenture relating to the
registered notes under the Trust Indenture Act. We are required to use every
reasonable effort to obtain the withdrawal of any stop order at the earliest
possible time.
In all cases, the issuance of registered notes will be made only after
timely receipt by the exchange agent of certificates for original notes or a
timely book-entry confirmation of the original notes into the exchange agent's
account at DTC's book-entry transfer facility, a properly completed and duly
executed letter of transmittal or, with respect to DTC and its participants,
electronic instructions of the holder agreeing to be bound by the letter of
transmittal, and any other required documents. If we do not accept any
tendered original notes for a valid reason or if you submit original notes for
a greater principal amount than you desire to exchange, we will return the
unaccepted or non-exchanged original notes to you at our expense. In the case
of original notes tendered by book-entry transfer into the exchange agent's
account at DTC's book-entry transfer facility under the book-entry transfer
procedures described below, the non-exchanged original notes will be credited
to an account maintained with the book-entry transfer facility. This will
occur as promptly as practicable after the expiration or termination of the
exchange offer for the original notes.
Notwithstanding any other provision of the exchange offer, we will not be
required to accept for exchange, or to issue registered notes in exchange for,
any notes and may terminate or amend the exchange offer if at any time before
the acceptance of the notes for exchange or the exchange of the registered
notes for the original notes, we determine that the exchange offer violates
applicable law, any applicable interpretation of the staff of the SEC or any
order of any governmental agency or court of competent jurisdiction.
Book-Entry Transfer
The exchange agent will make requests to establish accounts at DTC's book-
entry transfer facility for purposes of the exchange offer within two business
days after the date of this prospectus. Any financial institution that is a
participant in the book-entry transfer facility's systems may make book-entry
delivery of original notes being tendered by causing the book-entry transfer
facility to transfer the original notes into the exchange agent's account at
the book-entry transfer facility in accordance with the appropriate procedures
for transfer. However, although delivery of original notes may be effected
through book-entry transfer at the book-entry transfer facility, a letter of
transmittal or copy thereof, with any required signature guarantees and any
other required documents, must, except as provided in the following paragraph,
be transmitted to and received by the exchange agent on or before the
expiration date of the exchange offer or the guaranteed delivery procedures
below must be complied with.
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DTC's Automated Tender Offer Program, referred to by us as ATOP, is the only
method of processing the exchange offer through DTC. To accept the exchange
offer through ATOP, participants in DTC must send electronic instructions to
DTC through DTC's communication system instead of sending a signed, hard copy
letter of transmittal. DTC is obligated to communicate those electronic
instructions to the exchange agent. To tender notes through ATOP, the
electronic instructions sent to DTC and transmitted by DTC to the exchange
agent must contain the participant's acknowledgment of its receipt of and
agreement to be bound by the letter of transmittal for those notes.
Guaranteed Delivery Procedures
If a registered holder of original notes desires to tender any original
notes and the original notes are not immediately available, or time will not
permit the holder's original notes or other required documents to reach the
exchange agent before the expiration date of the exchange offer, or the
procedure for book-entry transfer cannot be completed on a timely basis, a
tender may be effected if:
. the tender is made through an Eligible Institution;
. before the expiration date of the exchange offer, the exchange agent
received from the Eligible Institution a properly completed and duly
executed letter of transmittal and notice of guaranteed delivery, in
form provided by us the notice of guaranteed delivery must state the
name and address of the holder of the original notes and the amount
of original notes tendered, that the tender is being made and
guaranteeing that within three New York Stock Exchange trading days
after the date of execution of the notice of guaranteed delivery,
the certificates for all physically tendered original notes, in
proper form for transfer, or a book-entry confirmation and any other
documents required by the letter of transmittal will be deposited by
the Eligible Institution with the exchange agent; and
. the certificates for all physically tendered original notes, in
proper form for transfer, or a book-entry confirmation and all other
documents required by the applicable letter of transmittal are
received by the exchange agent within three New York Stock Exchange
trading days after the date of execution of the Notice of Guaranteed
Delivery.
Withdrawal Rights
You may withdraw your tender of original notes at any time before 5:00 p.m.,
New York City time, on the expiration date of the exchange offer.
For a withdrawal to be effective, a written or, for a DTC participant,
electronic ATOP transmission notice of withdrawal, must be received by the
exchange agent at its address provided in this prospectus before 5:00 p.m.,
New York City time, on the expiration date of the exchange offer.
The notice of withdrawal must:
. specify the name of the person who deposited the original notes to
be withdrawn;
. identify the original notes to be withdrawn, including the
certificate number or numbers and principal amount of the original
notes;
. be signed by the holder in the same manner as the original signature
on the letter of transmittal by which the original notes were
tendered or be accompanied by documents of transfer sufficient to
have the trustee of the original notes register the transfer of the
original notes into the name of the person withdrawing the tender;
and
. specify the name in which any original notes are to be registered,
if different from that of the holder who tendered the original
notes.
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We will determine all questions as to the validity, form and eligibility of
your notice and our determination will be final and binding on all parties.
Any original notes withdrawn will not be considered to have been validly
tendered. We will return any original notes which have been tendered but not
exchanged without cost to the holder as soon as practicable after withdrawal,
rejection of tender or termination of the exchange offer. Properly withdrawn
original notes may be retendered by following one of the above procedures
before the expiration date.
Exchange Agent
You should direct all executed letters of transmittal to State Street Bank
and Trust Company, the exchange agent for the exchange offer. Questions,
requests for assistance and requests for additional copies of the prospectus
or a letter of transmittal should be directed to the exchange agent addressed
as follows:
By Mail: Overnight Courier:
State Street Bank and Trust Company State Street Bank and Trust Company
Corporate Trust Department Corporate Trust Department
P.O. Box 778 2 Avenue de Lafayette
Boston, Massachusetts 02102 Fifth Floor, Corporate Trust Window
Attention: Mackenzie Elijah Boston, Massachusetts 02111-1724
Attention: Mackenzie Elijah
By Hand in New York (as Drop Agent)
State Street Bank and Trust Company By Hand in Boston:
61 Broadway State Street Bank and Trust Company
15th Floor, Corporate Trust Window 2 Avenue de Lafayette
New York, New York 10006 Fifth Floor, Corporate Trust Window
Boston, Massachusetts 02111-1724
Facsimile Transmission Number
(for Eligible Institutions Only) Confirm by telephone:
(617) 662-1452 (617) 662-1525
Fees and Expenses
We currently do not intend to make any payments to brokers, dealers or
others to solicit acceptances of the exchange offer. The principal
solicitation is being made by mail. However, additional solicitations may be
made in person or by telephone by our officers and employees.
Our estimated cash expenses incurred in connection with the exchange offer
will be paid by us and are estimated to be $100,000 in the aggregate. This
amount includes fees and expenses of the trustee for the new and old notes,
accounting, legal, printing and related fees and expenses.
Transfer Taxes
If you tender original notes for exchange you will not be obligated to pay
any transfer taxes. However, if you instruct us to register registered notes
in the name of, or request that your original notes not tendered or not
accepted in the exchange offer be returned to, a person other than you, you
will be responsible for the payment of any transfer tax owed.
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DESCRIPTION OF THE REGISTERED NOTES
You can find the definitions of capitalized terms used in this description
under the subheading "Certain Definitions." In this description, the word
"Company" refers only to Hollywood Casino Corporation and not to any of its
subsidiaries.
The Company will issue the registered fixed rate notes and registered
floating rate notes together as a single series under a single indenture
entered into among the Company, HWCC-Tunica and HWCC-Shreveport, each as
guarantors, and State Street Bank and Trust Company, as trustee. The
registered fixed rate notes and the registered floating rate notes are
collectively referred to as the "registered notes." The original notes and the
registered notes are collectively referred to as the "notes." The terms of the
notes include those stated in the indenture and the Collateral Documents and
those made part of the indenture by reference to the Trust Indenture Act of
1939, as amended. The terms of the notes and the provisions of the indenture
are subject to compliance by the Company and its Restricted Subsidiaries with
the provisions of applicable gaming laws, unless in conflict with the Trust
Indenture Act in which case the provisions of the Trust Indenture Act will
control. The Collateral Documents referred to under the caption "Security"
define the terms of the agreements that secure the notes.
The following description is a summary of the material provisions of the
indenture, the registration rights agreement and the Collateral Documents. It
does not restate those agreements in their entirety. We urge you to read the
indenture, the registration rights agreement and the Collateral Documents
because they, and not this description, define your rights as holders of the
notes. Certain defined terms used in this description but not defined below
under "--Certain Definitions" have the meanings assigned to them in the
indenture.
Except as otherwise set forth below, the terms of the fixed rate notes and
the floating rate notes will be identical. The fixed rate notes and the
floating rate notes will vote together as a single class on all matters.
Brief description of common terms of the fixed rate notes and the floating
rate notes and the guarantees
The Notes
The notes:
. are senior secured obligations of the Company;
.are secured by:
(1) a first priority pledge of the Capital Stock of Hollywood Casino-
Aurora, HWCC-Tunica, HWCC--Louisiana, HWCC-Shreveport and each future
guarantor;
(2) a first priority pledge of the Aurora Intercompany Note payable to
the Company by Hollywood Casino-Aurora in an initial principal amount of
$31.5 million, which will increase from time to time as additional amounts
are loaned by the Company to Hollywood Casino-Aurora up to $108 million;
(3) a collateral assignment of the security documents related to the
Aurora Intercompany Note, including a first priority lien (limited to the
then outstanding balance of the Aurora Intercompany Note and subject to
liens as permitted by the Collateral Documents) on substantially all of
the assets of Hollywood Casino-Aurora securing its obligation under the
Aurora Intercompany Note;
(4) a first priority security interest in the $40.7 million of Escrowed
Funds to be deposited into escrow pending release in connection with
completion of the Pratt Casino Corporation Acquisition or the Special
Mandatory Redemption; and
(5) a first priority security interest in trademarks and service marks
of the Company, subject to liens permitted by the Collateral Documents;
. are pari passu in right of payment to all existing and future senior
indebtedness of the Company;
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. are senior in right of payment to any existing and future
subordinated Indebtedness of the Company; and
. are unconditionally guaranteed by the guarantors, as described
below.
The notes are effectively subordinated to all indebtedness and other
liabilities of each Subsidiary that is not a guarantor, including Hollywood
Casino-Aurora, except to the extent of the pledge to the trustee of the Aurora
Intercompany Note and the collateral assignment of the related security
documents, which security interest will be limited to the then outstanding
amount of the Aurora Intercompany Note and was initially $31.5 million. See
"Security." At March 31, 1999, Hollywood Casino-Aurora had outstanding
approximately $22.5 million of Indebtedness, including $20.7 million in
capitalized lease obligations, owed to third party creditors, which will be
structurally senior in right of payment to the notes to the extent the
aggregate principal amount of the notes exceeds the principal balance of the
Aurora Intercompany Note.
The Guarantees
The notes are jointly, severally and unconditionally guaranteed by HWCC-
Tunica and HWCC-Shreveport and will be guaranteed in the future by any
domestic Restricted Subsidiaries and up to 65% of any foreign Restricted
Subsidiary of the Company having a Tangible Consolidated Net Worth in excess
of $2.5 million. See "Certain Definitions--Guarantors."
Each Guarantee of the notes:
. is a senior secured obligation of the guarantor;
. is senior in right of payment to all existing and future
subordinated indebtedness of each guarantor;
. is pari passu in right of payment with all existing and future
senior indebtedness of each guarantor; and
. is secured by substantially all of the assets of each guarantor,
including substantially all of the personal and material real
property assets comprising HWCC-Tunica, subject to liens permitted
by the Collateral Documents, and by the Shreveport Management
Agreement held by HWCC-Shreveport.
As of March 31, 1999, on a pro forma basis after giving effect to the
offering of the original notes, the acquisition of Pratt Casino Corporation
and the tender offer for and satisfaction and discharge of our 12 3/4% Senior
Secured Notes, the Company would have had no outstanding Indebtedness that
ranked pari passu in right of payment with the notes and HWCC-Tunica would
have had outstanding approximately $3.4 million of Indebtedness that ranked
pari passu in right of payment with HWCC-Tunica's Guarantee. See "--Security"
and "--Certain Definitions--Guarantors." As of the date of the Indenture,
HWCC-Shreveport will have no liabilities other than the guarantee of the notes
and will have no assets other than the Shreveport Management Agreement
relating to the management of the planned Shreveport Casino.
The guarantors jointly and severally guarantee the Company's obligations
under the notes on a senior secured basis. The obligations of each guarantor
under its Guarantee will be limited as necessary to prevent the Guarantee from
constituting a fraudulent conveyance under applicable law. See "Risk Factors--
Fraudulent Conveyance."
Subsidiaries
The Company is a holding company that operates its riverboat and dockside
casinos, casino hotels and related facilities through its Subsidiaries.
Repayment of the Intercompany Notes and other obligations and payment of
dividends from its Subsidiaries are the Company's principal sources of cash to
pay operating expenses, capital expenditures and principal of and interest on
its debt. The Company anticipates that the primary source of cash to pay the
Company's obligations will be derived from the Aurora Casino and the Tunica
Casino. See "Risk Factors--Holding Company Structure."
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Under the circumstances described below under the subheading "--Certain
Covenants--Designation of Restricted and Unrestricted Subsidiaries," the
Company will be permitted to designate certain of its subsidiaries as
"Unrestricted Subsidiaries." The Company's Unrestricted Subsidiaries will not
be subject to most of the restrictive covenants in the indenture and will not
guarantee the registered notes. As of the issue date of the original notes,
the Company expected to designate the following as Unrestricted Subsidiaries:
. HWCC-Louisiana and its Subsidiaries;
. Pratt Management, L.P.;
. HWCC-Holdings; and
. HWCC-Golf Course Partners, Inc.
Principal, maturity and interest
The indenture provides for the issuance by the Company of notes with a
maximum aggregate principal amount of $360.0 million, of which $310.0 million
was issued as fixed rate notes and $50.0 million was issued as floating rate
notes. The Company was issued notes in denominations of $1,000 and integral
multiples of $1,000. The fixed rate notes will mature on May 1, 2007 and the
floating rate notes will mature on May 1, 2006.
Fixed rate notes
Interest on the fixed rate notes will accrue at the rate of 11.250% per
annum and will be payable semi-annually in arrears on May 1 and November 1,
commencing on November 1, 1999. The Company will make each interest payment to
the holders of record on the immediately preceding April 15 and October 15.
Interest on the fixed rate notes will accrue from the date of original
issuance or, if interest has already been paid, from the date it was most
recently paid. Interest will be computed on the basis of a 360-day year
comprised of twelve 30-day months.
Floating rate notes
The floating rate notes will initially bear interest at a rate per annum
equal to LIBOR plus 628 basis points, which will be reset semi-annually, as
determined by the calculation agent. Interest on the floating rate notes will
be payable semi-annually in arrears on May 1 and November 1, commencing on
November 1, 1999. The Company will make each interest payment to the holders
of record on the immediately preceding April 15 and October 15. Interest will
be computed on the basis of a 360-day year comprised of twelve 30-day months.
The amount of interest for each day of a 30-day month that the floating rate
notes are outstanding (the "Daily Interest Amount") will be calculated by
dividing the interest rate in effect for such day by 360 and multiplying the
result by the principal amount of the floating rate notes. The amount of
interest to be paid on the floating rate notes for each Interest Period will
be calculated by adding the Daily Interest Amounts for each day in the
Interest Period.
All percentages resulting from any of the above calculations will be
rounded, if necessary, to the nearest one hundred-thousandth of a percentage
point, with five one-millionths of a percentage point rounded upwards (e.g.,
9.876545% being rounded to 9.87655%) and all dollar amounts used in or
resulting from such calculations will be rounded to the nearest cent (with
one-half cent being rounded upwards).
The calculation agent will, upon the request of the holder of any new
floating rate note, provide the interest rate then in effect with respect to
the new floating rate notes. All calculations made by the calculation agent in
the absence of manifest error will be conclusive for all purposes and binding
on the Company and the holders of the floating rate notes.
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Methods of receiving payments on the notes
If a holder has given wire transfer instructions to the Company, the Company
will pay all principal, interest and premium and liquidated damages, if any,
on that holder's notes in accordance with those instructions. All other
payments on notes will be made at the office or agency of the paying agent and
registrar within the City and State of New York unless the Company elects to
make interest payments by check mailed to the holders at their addresses set
forth in the register of holders.
Paying agent and registrar for the notes
The trustee will initially act as paying agent and registrar. The Company
may change the paying agent or registrar without prior notice to the holders,
and the Company or any of its Subsidiaries may act as paying agent or
registrar.
Transfer and exchange
A holder may transfer or exchange notes in accordance with the indenture.
The registrar and the trustee may require a holder, among other things, to
furnish appropriate endorsements and transfer documents and the Company may
require a holder to pay any taxes and fees required by law or permitted by the
indenture. The Company is not required to transfer or exchange any note
selected for redemption. Also, the Company is not required to transfer or
exchange any note for a period of 15 days before a selection of new notes to
be redeemed.
The registered holder of a note will be treated as the owner of it for all
purposes.
Security
The notes will be secured by, among other things,
(1) a first priority pledge by the Company to the trustee for the benefit
of the holders of the notes of the Capital Stock of each of Hollywood
Casino-Aurora, HWCC-Tunica, HWCC-Shreveport, HWCC-Louisiana and each future
guarantor;
(2) a first priority pledge by the Company to the trustee for the benefit
of the holders of the notes of the Aurora Intercompany Note and a
collateral assignment of the security documents related to the Aurora
Intercompany Note, reflecting a first priority Lien of the Company on
substantially all of the assets of Hollywood Casino-Aurora, subject to
liens permitted by the Collateral Documents, to secure the Aurora
Intercompany Note. The Aurora Intercompany Note will initially have an
outstanding principal balance of $31.5 million, which will increase from
time to time as additional amounts are loaned by the Company to Hollywood
Casino-Aurora up to $108 million. For example, the balance would increase
upon the advance by the Company of funds to Hollywood Casino-Aurora in
connection with the Aurora casino expansion and upon the advance of funds
in connection with the Pratt Casino Corporation Acquisition. In the event
that Gaming Authorities approve intercompany loans to Hollywood Casino-
Aurora in excess of $108 million, such additional intercompany loans and
any security therefore will be pledged to the trustee;
(3) a first priority pledge by the Company to the trustee for the benefit
of the holders of the notes of the Tunica Intercompany Note and a
collateral assignment of the related security documents, reflecting a
second priority Lien of the Company on substantially all of the assets of
HWCC-Tunica, subject to liens permitted by the Collateral Documents, to
secure the Tunica Intercompany Note;
(4) a first priority security interest in the $40.7 million of Escrowed
Funds to be deposited into escrow pending release in connection with
completion of the Pratt Casino Corporation Acquisition or the Special
Mandatory Redemption; and
(5) a first priority security interest in the Company's trademarks and
service marks, subject to liens permitted by the Collateral Documents.
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The notes will also be secured by a first priority lien in the Aurora
Expansion Cash Account so long as there are funds in such account. The Company
will be permitted to use the funds in the Aurora Expansion Cash Account for
working capital purposes and any other purposes permitted under the indenture
unless and until the trustee exercises its remedies with respect to that
account.
The guarantees will be secured by, among other things,
(1) a first priority Lien on substantially all of the assets (whether now
owned or hereafter acquired or constructed) of HWCC-Tunica represented by
(a) a ship mortgage and other security interests, as applicable, on or in
the Tunica Casino vessel and improvements thereon, (b) a leasehold mortgage
on the Tunica Casino hotel and related assets, and (c) a Lien on
substantially all personal property owned and used in the operation of the
Tunica Casino, in each case, subject to liens permitted by the Collateral
Documents;
(2) a collateral assignment of the Shreveport Management Agreement and
the Substitute Management Agreement, if applicable;
(3) the collateral assignment of the Aurora Management Agreement and the
Tunica Consulting Agreement if the Company consummates the Pratt Casino
Corporation Acquisition and does not terminate the Aurora Management
Agreement and the Tunica Consulting Agreement; and
(4) a first priority Lien on substantially all of the assets (whether now
owned or hereafter acquired or constructed) of any future guarantors,
subject to liens permitted by the Collateral Documents.
Although Hollywood Casino-Aurora will not guarantee the notes, the indenture
will provide that Hollywood Casino-Aurora may not, directly or indirectly,
create, incur, assume or suffer to exist any Lien on any asset now owned or
hereafter acquired, or any income or profits therefrom, or assign or convey
any right to receive income therefrom, except Permitted Liens. See "--Certain
Covenants--Limitation on Liens." Hollywood Casino-Aurora will also covenant
not to make any principal prepayments with respect to the Aurora Intercompany
Note for so long as it is not a guarantor of the new notes or unless otherwise
required by Gaming Authorities. If Hollywood Casino-Aurora becomes a guarantor
pursuant to a Guarantee secured by a first priority lien on substantially all
of the assets of Hollywood Casino-Aurora, subject to liens permitted by the
Collateral Documents, it may make principal payments on the Aurora
Intercompany Note as permitted by the indenture.
The indenture will provide that, except as otherwise provided therein, the
Company will, and will cause each of HWCC-Tunica and any future Subsidiaries
of the Company that become guarantors to, grant to the trustee a valid first
priority security interest in substantially all of its assets, except working
capital (subject to liens permitted by the Collateral Documents) to the extent
required by the Collateral Documents, enforceable against all third parties,
and to execute and deliver all documents and to take all action necessary or
desirable to perfect and protect such a security interest in favor of the
trustee. See "--Certain Covenants--Additional Subsidiary Guarantees."
The Company, the guarantors (as applicable) and the trustee will enter into
the Collateral Documents, including the security agreement and the pledge
agreement of the Company securing the notes, the security agreements, pledge
agreements, leasehold mortgages and fleet mortgages, as applicable, securing
the Guarantees, and the collateral assignment of the security agreement,
pledge agreement, leasehold mortgages, mortgages and fleet mortgages securing
the Aurora Intercompany Note, which together define the security interests of
the holders in the notes and the Guarantees. These Collateral Documents will
secure the payment and performance when due of all of the Obligations of the
Company under the indenture and the notes.
The trustee's ability to foreclose upon the Collateral will be limited by
relevant gaming laws, which generally require that persons who own or operate
a casino, receive payments under a management contract or purchase, possess or
sell gaming equipment hold a valid gaming license. In addition, the right of
the trustee to repossess and dispose of the Collateral upon the occurrence of
an Event of Default is likely to be significantly impaired by applicable
bankruptcy law if a bankruptcy proceeding were to be commenced by or against
the Company and the guarantors prior to or even possibly after the trustee has
repossessed and disposed of the Collateral. See "Risk Factors--Limits on
Collateral."
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Fraudulent Conveyance--Federal and state statutes allow courts, under specific
circumstances, to void guarantees or other debt and require noteholders to
return payments received from guarantors.
Under the federal bankruptcy laws and comparable provisions of state
fraudulent transfer laws, a guarantee or other debt obligations could be
voided, or claims in respect of a guarantee or other debt obligations could be
subordinated to all other debts of that guarantor or debtor if, among other
things, the guarantor or debtor, at the time it incurred the indebtedness
evidenced by its guarantee or other debt obligations, received less than
reasonably equivalent value or fair consideration for the incurrence of the
guarantee and:
. was insolvent or rendered insolvent by reason of the incurrence;
. was engaged in a business or transaction for which the guarantor's
remaining assets constituted unreasonably small capital; or
. intended to incur, or believed that it would incur, debts beyond its
ability to pay as they mature.
In this event, any payment by a guarantor in connection with its guarantee or
a debtor in connection with the debt obligations could be voided and required
to be returned to the guarantor or debtor or to a fund for the benefit of the
creditors of that guarantor or debtor.
The measures of insolvency for purposes of these fraudulent transfer laws
vary depending upon the law applied to determine whether a fraudulent transfer
has occurred. Generally, however, a guarantor or debtor would be considered
insolvent if:
. the sum of its debts, including contingent liabilities, were greater
than the fair saleable value of all of its assets; or
. the present fair saleable value of its assets were less than the
amount that would be required to pay the probable liability on its
existing debts, including contingent liabilities, as they become
absolute and mature; or
. it could not pay its debts as they came due.
On the basis of historical financial information, recent operating history and
other factors, we believe that each guarantor and each of our subsidiaries
that has or will have intercompany debt obligations to us, after giving effect
to its guarantee of the notes or receipt of funds underlying the intercompany
debt, will not be insolvent, will not have unreasonably small capital for the
business in which it is engaged and will not have incurred debts beyond its
ability to pay as they mature. We cannot be sure, however, what standard a
court would apply in making its determination or that a court would agree with
our conclusions.
Optional redemption
Fixed rate notes
At any time prior to May 1, 2002, the Company may on any one or more
occasions redeem up to 35% of the original aggregate principal amount of fixed
rate notes issued under the indenture at a redemption price of 111.250% of the
principal amount thereof, plus accrued and unpaid interest and liquidated
damages, if any, to the redemption date, with the net cash proceeds of one or
more Qualified Equity Offerings; provided, however that:
(1) at least 65% of the original aggregate principal amount of the fixed
rate notes issued under the indenture remains outstanding immediately after
the occurrence of such redemption (excluding fixed rate notes held by the
Company and its Subsidiaries); and
(2) the redemption must occur within 60 days of the date of the closing
of such Qualified Equity Offering.
Except pursuant to the preceding paragraph, the fixed rate notes will not be
redeemable at the Company's option prior to May 1, 2003.
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After May 1, 2003, the Company may redeem all or a part of the fixed rate
notes upon not less than 30 nor more than 60 days' notice, at the following
redemption prices (expressed as percentages of principal amount) plus accrued
and unpaid interest and liquidated damages, if any, thereon, to the applicable
redemption date, if redeemed during the twelve-month period beginning on May 1
of the years indicated below:
<TABLE>
<CAPTION>
Year Percentage
---- ----------
<S> <C>
2003........................................................... 107.000%
2004........................................................... 104.666%
2005........................................................... 102.333%
2006 and thereafter............................................ 100.000%
</TABLE>
Floating rate notes
The floating rate notes will be redeemable, in whole or in part, at any time
and from time to time, at the option of the Company upon not less than 30 nor
more than 60 days' prior notice, at the following redemption prices (expressed
as percentages of principal amount), plus accrued and unpaid interest and
liquidated damages, if any, to the applicable redemption date (subject to the
right of holders of record on the relevant record date to receive interest due
on the relevant interest payment date), if redeemed during the twelve-month
period beginning on May 1 of the years indicated below:
<TABLE>
<CAPTION>
Year Percentage
---- ----------
<S> <C>
1999........................................................... 105.000%
2000........................................................... 104.000%
2001........................................................... 103.000%
2002........................................................... 102.000%
2003........................................................... 101.000%
2004 and thereafter............................................ 100.000%
</TABLE>
Mandatory redemption
Except as described below, the Company is not required to make mandatory
redemption or sinking fund payments with respect to the notes.
Mandatory disposition pursuant to gaming laws
Each holder, by accepting a note, shall be deemed to have agreed that if any
Gaming Authority requires that a person who is a holder or the beneficial
owner of the notes be licensed, qualified or found suitable under applicable
gaming laws, the holder or beneficial owner, as the case may be, shall apply
for a license, qualification or a finding of suitability within the required
time period. If the holder or beneficial owner fails to apply for such
license, qualification or finding of suitability within the required time
period, such holder or beneficial owner, as the case may be, shall be required
to dispose of its notes within the specified time and the Company shall have
the right to redeem the notes of such holder or beneficial owner, subject to
approval of any applicable Gaming Authority, at the lesser of:
(1) the principal amount thereof,
(2) the amount that such holder or beneficial owner paid for the notes or
(3) the fair market value of the notes.
Any holder of notes required to apply for a finding of suitability must pay
all investigative fees and costs of the applicable Gaming Authorities in
connection with such investigation. Immediately upon the imposition of a
requirement to dispose of notes by a Gaming Authority, such holder or
beneficial owner shall, to the extent required by applicable law, have no
further right:
(1) to exercise, directly or indirectly, through any trustee or nominee
or any other person or entity, any right conferred by the notes or
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(2) to receive any interest, dividends, economic interests or any other
distributions or payments with respect to the notes or any remuneration in
any form with respect to the notes from the Company or the trustee. Under
the indenture, the Company is not required to pay or reimburse any holder
of the notes or beneficial owner who is required to apply for such license,
qualification or finding of suitability for the costs of the licensure or
investigation for such qualification or finding of suitability. Such
expense will, therefore, be the obligation of such holder or beneficial
owner. The Company shall notify the trustee in writing of any such
redemption as soon as practicable. The Company shall not be responsible for
any costs or expenses any such holder may incur in connection with its
application or a license, qualification or a finding or suitability. The
indenture will require the trustee to report the names of the record
holders of the notes to any Gaming Authority when required by law.
Special mandatory redemption
The Company deposited into escrow the $40.7 million of Escrowed Funds, which
will be held by the trustee pursuant to an Escrow Agreement as collateral to
secure the obligations of the Company under the notes. The Escrow Agreement
will provide for release of the Escrowed Funds to the Company upon receipt by
the trustee of an officers' certificate, certifying that:
(1)the final order of the United States Bankruptcy Court has been
approved providing for the Pratt Casino Corporation Acquisition;
(2)all necessary approvals from Gaming Authorities for the consummation
of the Pratt Casino Corporation Acquisition have been obtained;
(3)substantially concurrently with the release of such Escrowed Funds,
the Aurora Intercompany Note and the related mortgage will be increased by
an amount equal to approximately $37.0 million in connection with the Pratt
Casino Corporation Acquisition and that any necessary documentation
evidencing such increase will be collaterally assigned to the trustee for
the benefit of the holders of the notes; and
(4)HWCC-Aurora Management, Pratt Casino Corporation and Pratt Management
will be designated as Restricted Subsidiaries, and that the Board of
Directors has approved that, within five business days following the
consummation of the Pratt Casino Corporation Acquisition, and subject to
the approval of applicable Gaming Authorities
(a) (i) these Restricted Subsidiaries will become guarantors and will
execute a supplemental indenture and deliver an opinion of counsel to
the trustee to such effect, and will grant a first priority security
interest in substantially all of their assets to secure their
obligations under the Guarantees, subject to liens permitted by the
Collateral Documents, and (ii) the Company will pledge the Capital
Stock of these guarantors to the trustee for the benefit of the holders
to secure the Company's obligations under the notes, or
(b) these Restricted Subsidiaries will be dissolved, terminated or
otherwise merged out of existence with the Company or any other
Restricted Subsidiary as the successor entity and the Tunica Consulting
Agreement and the Aurora Management Agreement will be terminated.
The Company will also deliver an officers' certificate and an opinion of
counsel stating that all of the conditions for the release of the Escrowed
Funds have been satisfied. Following the release of funds, the trustee will no
longer have a security interest in the Escrowed Funds pursuant to the Escrow
Agreement and the Escrow Agreement shall terminate.
If, prior to January 31, 2000, the Company determines in its sole discretion
(as evidenced by a resolution of the Company's Board of Directors certified by
an officer of the Company and delivered to the trustee) that it is unable to
consummate the Pratt Casino Corporation Acquisition by January 31, 2000, the
Company shall redeem $40.3 million aggregate principal amount of notes (the
"Special Mandatory Redemption") at a redemption price equal to 101% of the
principal amount of the notes, plus accrued and unpaid interest and liquidated
damages, if
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any, to the date of redemption; provided, however, that such redemption will
occur on January 31, 2000 if the Pratt Casino Corporation Acquisition has not
been consummated and the officer's certificate mentioned in the preceding
paragraph has not been delivered to the trustee by January 31, 2000. The
redemption date for the Special Mandatory Redemption shall be the earlier of
(1) five days after the date that the certified resolutions are delivered to
the trustee pursuant to the preceding sentence, or (2) January 31, 2000. Any
such redemption shall be made on a pro rata basis between the floating rate
notes and the fixed rate notes. The trustee will release the Escrowed Funds
for use toward the Special Mandatory Redemption on the redemption date. Notice
of any Special Mandatory Redemption will be mailed to each holder not less
than five days prior to the redemption date.
Pending release of the Escrowed Funds pursuant to the Escrow Agreement, the
Escrowed Funds will be invested in "cash equivalent investments" (as defined
in the Escrow Agreement and generally will consist of short-term, high-quality
investments including United States government securities, certificates of
deposit and highly rated commercial paper) as directed by the Company. Any
interest or other profit resulting from such investment will be used to pay
premium and interest due on the notes upon the Special Mandatory Redemption if
required, or otherwise released to the Company.
Repurchase at the option of holders
Change of Control
If a Change of Control occurs, each holder of notes will have the right to
require the Company to repurchase all or any part (equal to $1,000 or an
integral multiple thereof) of that holder's notes pursuant to an offer on the
terms set forth in the indenture (a "Change of Control Offer"). In the Change
of Control Offer, the Company will offer a payment (the "Change of Control
Payment") in cash equal to 101% of the aggregate principal amount of notes
repurchased plus accrued and unpaid interest and liquidated damages, if any,
thereon, to the date of purchase. Within ten days following any Change of
Control, the Company will mail a notice to each holder describing the
transaction or transactions that constitute the Change of Control and offering
to repurchase notes on the date (the "Change of Control Payment Date")
specified in such notice, which date shall be no earlier than 30 days and no
later than 60 days from the date such notice is mailed, pursuant to the
procedures required by the indenture and described in such notice.
On the Change of Control Payment Date, the Company will, to the extent
lawful:
(1) accept for payment all notes or portions thereof properly tendered
pursuant to the Change of Control Offer;
(2) deposit with the paying agent an amount equal to the Change of
Control Payment in respect of all notes or portions thereof so tendered;
and
(3) deliver or cause to be delivered to the trustee the new notes so
accepted together with an Officers' Certificate stating the aggregate
principal amount of notes or portions thereof being purchased by the
Company.
The paying agent will promptly mail to each holder of notes so tendered the
Change of Control Payment for such notes, and the trustee will promptly
authenticate and mail (or cause to be transferred by book entry) to each
holder a note equal in principal amount to any unpurchased portion of the
notes surrendered, if any; provided, however that each such note will be in a
principal amount of $1,000 or an integral multiple thereof.
The Company will publicly announce the results of the Change of Control
Offer on or as soon as practicable after the Change of Control Payment Date.
The provisions described above that require the Company to make a Change of
Control Offer following a Change of Control will be applicable regardless of
whether any other provisions of the indenture are applicable. Except as
described above with respect to a Change of Control, the indenture does not
contain provisions that permit the holders of the notes to require that the
Company repurchase or redeem the notes in the event of a
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takeover, recapitalization or similar transaction. No assurance can be given
that the Company will have sufficient funds at the time of a Change of Control
in order to consummate a Change of Control Offer.
The Company will not be required to make a Change of Control Offer upon a
Change of Control if a third party makes the Change of Control Offer in the
manner, at the times and otherwise in compliance with the requirements set
forth in the indenture applicable to a Change of Control Offer made by the
Company and purchases all notes validly tendered and not withdrawn under such
Change of Control Offer.
The definition of Change of Control includes a phrase relating to the direct
or indirect sale, lease, transfer, conveyance or other disposition of "all or
substantially all" of the properties or assets of the Company and its
Subsidiaries taken as a whole. Although there is a limited body of case law
interpreting the phrase "substantially all," there is no precise established
definition of the phrase under applicable law. Accordingly, the ability of a
holder of notes to require the Company to repurchase such notes as a result of
a sale, lease, transfer, conveyance or other disposition of less than all of
the assets of the Company and its Subsidiaries taken as a whole to another
person or group may be uncertain.
Asset sales
The Company will not, and will not permit any of its Restricted Subsidiaries
to, consummate an Asset Sale unless:
(1) the Company (or the Restricted Subsidiary, as the case may be)
receives consideration at the time of such Asset Sale at least equal to the
fair market value of the assets or Equity Interests issued or sold or
otherwise disposed of;
(2) such fair market value is determined by the Company's Board of
Directors and evidenced by a resolution of the Board of Directors set forth
in an officers' certificate delivered to the trustee; and
(3) at least 75% of the consideration therefor received by the Company or
such Restricted Subsidiary is in the form of cash. For purposes of this
provision and not for purposes of the definition of "Net Proceeds" (except
to the extent set forth in such definition with respect to the conversion
of non-cash proceeds to cash), each of the following shall be deemed to be
cash:
(a) the assumption of Indebtedness or liabilities of the Company (as
shown on the Company's most recent balance sheet) that are pari passu
in right of payment to the notes or, in the case of an Asset Sale by
any Restricted Subsidiary, the assumption of Indebtedness or
liabilities of such Restricted Subsidiary (as shown on the Restricted
Subsidiary's most recent balance sheet) that are pari passu in right of
payment with the Guarantees that are assumed by the transferee of any
such assets, in each case, pursuant to a customary novation agreement
that releases the Company or such Restricted Subsidiary from further
liability; and
(b) any securities, notes or other obligations received by the
Company or any such Restricted Subsidiary from such transferee that are
contemporaneously (subject to ordinary settlement periods) converted by
the Company or such Restricted Subsidiary into cash (to the extent of
the cash received in that conversion).
Within 270 days after the receipt of any Net Proceeds from an Asset Sale,
the Company or the Restricted Subsidiary may apply such Net Proceeds:
(1) to acquire all or substantially all of the assets of, or a majority
of the Voting Stock of, a Gaming Related Business;
(2) to make a capital expenditure with respect to its existing
operations; or
(3) to acquire other long-term assets that are used or useful in a Gaming
Related Business; provided, however, that the Company or the Restricted
Subsidiary, as the case may be, grants to the collateral agent, on behalf
of the holders, a first priority security interest, subject to Permitted
Liens, on any property or assets (including a pledge of any Voting Stock
required under the terms of the indenture) acquired or constructed with the
Net Proceeds of any Asset Sale on the terms set forth in the indenture and
the Collateral Documents
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to the extent permitted by applicable Gaming Authorities. Pending the final
application of any Net Proceeds, the Company or the Restricted Subsidiary
shall invest the Net Proceeds in Cash Equivalents held in an account in
which the trustee shall have a first priority security interest (subject to
Permitted Liens) for the benefit of the holders of the new notes.
Any Net Proceeds from Asset Sales that are not applied or invested as
provided in the preceding paragraph will constitute "Excess Proceeds." Within
ten days following the date that the aggregate amount of Excess Proceeds
exceeds $10.0 million, the Company will make an offer (an "Asset Sale Offer")
to all holders of notes with the Excess Proceeds from any Asset Sales in an
amount equal to the maximum principal amount of notes that may be purchased
out of the Excess Proceeds. The offer price in any Asset Sale Offer will be
equal to 100% of principal amount plus accrued and unpaid interest and
liquidated damages, if any, to the date of purchase, and will be payable in
cash. If any Excess Proceeds remain after consummation of an Asset Sale Offer,
the Company may use such Excess Proceeds for any purpose not otherwise
prohibited by the indenture or the Collateral Documents. If the aggregate
principal amount of notes tendered into such Asset Sale Offer exceeds the
amount of Excess Proceeds, the trustee shall select the notes to be purchased
in the manner described under "--Selection and notice." Upon completion of
each Asset Sale Offer, the amount of Excess Proceeds shall be reset at zero.
Event of loss
Within 270 days after any Event of Loss with respect to any Collateral
comprising the Aurora Casino or the Tunica Casino with a fair market value (or
replacement cost, if greater) in excess of $1.0 million, the Company or the
affected Restricted Subsidiary of the Company, as the case may be, may apply
the Net Loss Proceeds for such Event of Loss: (1) to acquire all or
substantially all of the assets of or a majority of the Voting Stock in a
Gaming Related Business; (2) to make a capital expenditure with respect to its
existing operations; or (3) to acquire other long-term assets that are used or
useful in a Gaming Related Business.
In addition, within 360 days after any Event of Loss with respect to any
Collateral comprising the Aurora Casino or the Tunica Casino with a fair
market value (or replacement cost, if greater) in excess of $1 million, the
Company or the affected Restricted Subsidiary of the Company, as the case may
be, may apply the Net Loss Proceeds for such Event of Loss to the rebuilding,
repair, replacement or construction of improvements to the respective casino,
with no concurrent obligation to make any purchase of any notes. Any Net Loss
Proceeds for an Event of Loss with respect to any Collateral that are not
reinvested as provided in the first or second sentences of this paragraph will
be deemed "Excess Loss Proceeds." Within ten days following the date that the
aggregate amount of Excess Loss Proceeds exceeds $10 million, the Company
shall make an offer to all holders of notes with the Excess Loss Proceeds from
any Event of Loss (an "Event of Loss Offer"). The Event of Loss Offer shall be
made in an amount equal to the maximum principal amount of new notes that may
be purchased out of the Excess Loss Proceeds, at a purchase price in cash in
an amount equal to 100% of the principal amount thereof, plus accrued and
unpaid interest and liquidated damages, if any, thereon to the date of
purchase, in accordance with the procedures set forth under "Selection and
notice." To the extent that the aggregate amount of notes tendered pursuant to
any Event of Loss Offer is less than the Excess Loss Proceeds, the Company
may, subject to the other provisions of the indenture and the Collateral
Documents, use any remaining Excess Loss Proceeds for any purpose not
prohibited by the indenture or the Collateral Documents. Upon completion of
any such Event of Loss Offer, the amount of Excess Loss Proceeds shall be
reset at zero. Pending the final application of the Net Loss Proceeds, such
proceeds shall be invested in Cash Equivalents held in an account in which the
trustee shall have a first priority security interest (subject to Permitted
Liens) for the benefit of the holders of the notes. Such pledged funds will be
released to the Company to pay for or reimburse the Company for the actual
cost of such permitted application of Net Loss Proceeds as provided above or
permitted rebuilding, repair, replacement or construction, or such Event of
Loss Offer, pursuant to the terms of the Collateral Documents relating to the
respective Casino property. The indenture will also require the Company or the
Restricted Subsidiary to grant to the trustee, on behalf of the holders, a
first priority security interest, subject to liens permitted by the Collateral
Documents, on any property or assets (including a pledge of any Voting Stock
required under the terms of the indenture) acquired or constructed with the
Net Loss Proceeds on the terms set forth in the indenture and the Collateral
Documents to the extent permitted by applicable Gaming Authorities.
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Compliance with Securities Laws
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with each
repurchase of notes pursuant to a Change of Control Offer, an Asset Sale Offer
and Event of Loss Offer. To the extent that the provisions of any securities
laws or regulations conflict with the Change of Control, Asset Sales or Event
of Loss provisions of the indenture, the Company will comply with the
applicable securities laws and regulations and will not be deemed to have
breached its obligations under these provisions of the indenture by virtue of
such conflict.
The agreements governing the Company's other Indebtedness may contain
prohibitions of certain events, including events that would constitute a
Change of Control or an Asset Sale. In addition, the exercise by the holders
of notes of their right to require the Company to repurchase the notes upon a
Change of Control, or in the case of an Asset Sale Offer or an Event of Loss
Offer, could cause a default under these other agreements, even if the Change
of Control Offer, Asset Sale Offer or Event of Loss Offer itself does not, due
to the financial effect of such repurchases on the Company. Finally, the
Company's ability to pay cash to the holders of notes upon a repurchase under
a Change of Control Offer may be limited by the Company's then existing
financial resources. See "Risk Factors--Change of Control."
Selection and notice
If less than all of the notes are to be redeemed or repurchased at any time,
the trustee will select notes for redemption or repurchase as follows:
(1) if the notes are listed, in compliance with the requirements of the
principal national securities exchange on which the notes are listed; or
(2) if the notes are not so listed, on a pro rata basis between the fixed
rate notes and the floating rate notes, if applicable, by lot or by such
method as the trustee shall deem fair and appropriate.
No notes of $1,000 or less shall be redeemed in part. Notices of redemption
shall be mailed by first class mail at least 30 but not more than 60 days
before the redemption date to each holder of notes to be redeemed at its
registered address. Notices of redemption may not be conditional.
If any note is to be redeemed in part only, the notice of redemption that
relates to that note shall state the portion of the principal amount thereof
to be redeemed. A note or notes in principal amount equal to the unredeemed
portion of the original note will be issued in the name of the holder thereof
upon cancellation of the original note. Notes called for redemption become
irrevocably due and payable on the date fixed for redemption. On and after the
redemption date, interest ceases to accrue on notes or portions of them called
for redemption.
Restrictive covenants
Restricted payments
The Company will not, and will not permit any of its Restricted Subsidiaries
to, directly or indirectly:
(1) declare or pay any dividend or make any other payment or distribution
on account of the Company's or any of its Restricted Subsidiaries' Equity
Interests (including, without limitation, any payment in connection with
any merger or consolidation involving the Company or any of its Restricted
Subsidiaries) or to the direct or indirect holders of the Company's or any
of its Restricted Subsidiaries' Equity Interests in their capacity as such
(other than dividends or distributions payable:
(a) in Equity Interests (other than Disqualified Stock) of the
Company or
(b) to the Company or a Restricted Subsidiary of the Company);
(2) purchase, redeem or otherwise acquire or retire for value (including,
without limitation, in connection with any merger or consolidation
involving the Company) any Equity Interests of the Company or any direct or
indirect parent of the Company;
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(3) make any payment on or with respect to, or purchase, redeem, defease
or otherwise acquire or retire for value any Indebtedness that is
subordinated to the new notes or that is subordinated to the Guarantees,
except:
(a) a payment of interest or principal at the Stated Maturity thereof
and
(b) a payment of interest or principal of intercompany Indebtedness
permitted by clause (6) of the second paragraph under the covenant
entitled "--Incurrence of indebtedness and issuance of preferred
stock"; or
(4) make any Restricted Investment (all such payments and other actions
set forth in clauses (1) through (4) above being collectively referred to
as "Restricted Payments"),
unless, at the time of and after giving effect to such Restricted Payment:
(1) no Default or Event of Default shall have occurred and be continuing
or would occur as a consequence thereof;
(2) the Company would, at the time of such Restricted Payment and after
giving pro forma effect thereto as if such Restricted Payment had been made
at the beginning of the applicable four-quarter period, have been permitted
to incur at least $1.00 of additional Indebtedness pursuant to the Fixed
Charge Coverage Ratio test set forth in the first paragraph of the covenant
described below under the caption "--Incurrence of indebtedness and
issuance of preferred stock"; and
(3) such Restricted Payment, together with the aggregate amount of all
other Restricted Payments and any Shreveport Casino Investment treated as a
Restricted Payment as set forth in the definition of "Shreveport Casino
Investment," made by the Company and its Restricted Subsidiaries after the
date of the indenture (excluding Restricted Payments permitted by clauses
(2) and (3) of the next succeeding paragraph) is less than the sum, without
duplication, of:
(a) 50% of the Consolidated Net Income of the Company for the period
(taken as one accounting period) from the date of the indenture to the
end of the Company's most recently ended fiscal quarter for which
internal financial statements are available at the time of such
Restricted Payment (or, if such Consolidated Net Income for such period
is a deficit, less 100% of such deficit), plus
(b) 100% of the aggregate net cash proceeds received by the Company
since the date of the indenture as a contribution to its common equity
capital or from the issue or sale of Equity Interests of the Company
(other than Disqualified Stock) or from the issue or sale of
convertible or exchangeable Disqualified Stock or convertible or
exchangeable debt securities of the Company that have been converted
into or exchanged for such Equity Interests (other than Equity
Interests (or Disqualified Stock or debt securities) sold to any
Subsidiary of the Company), plus
(c) 50% of any cash dividends received by the Company, Hollywood
Casino-Aurora or any other Restricted Subsidiary that is a guarantor
after the date of the indenture from an Unrestricted Subsidiary of the
Company, to the extent such dividends were not otherwise included in
Consolidated Net Income of the Company for such period, plus
(d) to the extent that any Restricted Investment that was made after
the date of the indenture is sold for cash or otherwise liquidated or
repaid for cash, the sum of (i) 50% of the cash proceeds with respect
to such Restricted Investment in excess of the aggregate amount
invested in such Restricted Investment (less the cost of disposition,
if any) and (ii) the aggregate amount invested in such Restricted
Investment, plus
(e) to the extent that any Subsidiary that was designated as an
Unrestricted Subsidiary after the date of the indenture is redesignated
as a Restricted Subsidiary, the lesser of (i) the amount of the
Investment in the Subsidiary treated as a Restricted Payment at and
since the time that the Subsidiary was designated as an Unrestricted
Subsidiary, as determined by the last paragraph of this covenant, and
(ii) the fair market value of the Investment in the Subsidiary as of
the date that it is redesignated as a Restricted Subsidiary.
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So long as no Default has occurred and is continuing or would be caused
thereby, the preceding provisions will not prohibit:
(1) the payment of any dividend within 60 days after the date of
declaration thereof, if at said date of declaration such payment would have
complied with the provisions of the indenture;
(2) the redemption, repurchase, retirement, defeasance or other
acquisition of any subordinated Indebtedness of the Company or any
Guarantor or of any Equity Interests of the Company in exchange for, or out
of the net cash proceeds of the substantially concurrent sale (other than
to a Subsidiary of the Company) of, Equity Interests of the Company (other
than Disqualified Stock); provided, however, that the amount of any such
net cash proceeds that are utilized for any such redemption, repurchase,
retirement, defeasance or other acquisition shall be excluded from clause
(3) (b) of the preceding paragraph;
(3) the defeasance, redemption, repurchase or other acquisition of
subordinated Indebtedness of the Company or any guarantor with the net cash
proceeds from an incurrence of Permitted Refinancing Indebtedness;
(4) the repurchase, redemption or other acquisition or retirement for
value of any Equity Interests of the Company or any Restricted Subsidiary
of the Company held by any member of the Company's (or any of its
Restricted Subsidiaries') management (or the estate or trust for the
benefit of any such member of management) pursuant to any management equity
subscription agreement or stock option agreement; provided, however, that
the aggregate price paid for all such repurchased, redeemed, acquired or
retired Equity Interests shall not exceed $250,000 in any calendar year and
$1 million in the aggregate; and
(5) the redemption or repurchase of any debt or equity securities of the
Company or any Restricted Subsidiary required by, and in accordance with,
any order of any Gaming Authority, provided, however, that the Company has
used its reasonable best efforts to effect a disposition of such securities
to a third-party and has been unable to do so.
The amount of all Restricted Payments (other than cash) shall be the fair
market value on the date of the Restricted Payment of the asset(s) or
securities proposed to be transferred or issued to or by the Company or such
Restricted Subsidiary, as the case may be, pursuant to the Restricted Payment.
The fair market value of any assets or securities that are required to be
valued by this covenant shall be determined by the Board of Directors whose
resolution with respect thereto shall be delivered to the trustee. Not later
than the date of making any Restricted Payment, the Company shall deliver to
the trustee an officers' certificate stating that such Restricted Payment is
permitted and setting forth the basis upon which the calculations required by
this "Restricted Payments" covenant were computed, together with a copy of any
fairness opinion or appraisal required by the indenture.
Incurrence of indebtedness and issuance of preferred stock
The Company will not, and will not permit any of its Restricted Subsidiaries
to, directly or indirectly, create, incur, issue, assume, guarantee or
otherwise become directly or indirectly liable, contingently or otherwise,
with respect to (collectively, "incur") any Indebtedness (including Acquired
Debt), and the Company will not issue any Disqualified Stock and will not
permit any of its Restricted Subsidiaries to issue any shares of preferred
stock; provided, however, that the Company may incur Indebtedness (including
Acquired Debt) or issue Disqualified Stock, and the Company's Restricted
Subsidiaries may incur Indebtedness, if the Fixed Charge Coverage Ratio for
the Company's most recently ended four full fiscal quarters for which internal
financial statements are available immediately preceding the date on which
such additional Indebtedness is incurred or such Disqualified Stock or
preferred stock is issued would have been at least 2 to 1, determined on a pro
forma basis (including a pro forma application of the net proceeds therefrom),
as if the additional Indebtedness had been incurred or the preferred stock or
Disqualified Stock had been issued, as the case may be, at the beginning of
such four-quarter period.
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The first paragraph of this covenant will not prohibit the incurrence of any
of the following items of Indebtedness (collectively, "Permitted Debt"):
(1) the incurrence by the Company or any of its Restricted Subsidiaries
of additional Indebtedness in an aggregate principal amount at any one time
outstanding under this clause (1), including all Permitted Refinancing
Indebtedness incurred to refund, refinance or replace any Indebtedness
incurred pursuant to this clause (1), not to exceed $12.5 million at any
one time outstanding;
(2) the incurrence by the Company and its Restricted Subsidiaries of the
Existing Indebtedness;
(3) the incurrence by the Company and the Guarantors of Indebtedness
represented by the notes and the related Guarantees to be issued on the
date of the indenture and the exchange notes and the related Guarantees to
be issued pursuant to the registration rights agreement;
(4) the incurrence by the Company or any of its Restricted Subsidiaries
of FF&E Financing or Indebtedness represented by Capital Lease Obligations,
mortgage financings or purchase money obligations, in each case, incurred
for the purpose of financing all or any part of the purchase price or cost
of construction or improvement of property, plant or equipment used in any
Casino owned and either operated or to be operated by the Company or such
Restricted Subsidiary, in an aggregate principal amount, (including all
Permitted Refinancing Indebtedness incurred to refund, refinance or replace
any Indebtedness incurred pursuant to this clause (4)) with respect to any
such Casino not to exceed $7 million in aggregate principal amount for each
Casino owned or operated by the Company at any time outstanding;
(5) the incurrence by the Company or any of its Restricted Subsidiaries
of Permitted Refinancing Indebtedness in exchange for, or the net proceeds
of which are used to refund, refinance or replace Indebtedness (other than
intercompany Indebtedness) that was permitted by the indenture to be
incurred under the first paragraph of this covenant or clauses (2), (3),
(4) or (5) of this paragraph;
(6) the issuance by any Restricted Subsidiary of preferred stock to the
Company or the incurrence by the Company or any of its Restricted
Subsidiaries of intercompany Indebtedness between or among the Company and
any of its Restricted Subsidiaries as provided in the covenant entitled
"Advances to Restricted Subsidiaries"; provided, however, that with respect
to intercompany Indebtedness: (a) any subsequent issuance or transfer of
Equity Interests that results in any such Indebtedness being held by a
person other than the Company or a Restricted Subsidiary thereof and (b)
any sale or other transfer of any such Indebtedness to a person that is not
either the Company or a Restricted Subsidiary thereof, shall be deemed, in
each case, to constitute an incurrence of such Indebtedness by the Company
or such Restricted Subsidiary, as the case may be, that was not permitted
by this clause (6);
(7) the incurrence by the Company or any of its Restricted Subsidiaries
of Hedging Obligations that are incurred for the purpose of fixing or
hedging interest rate risk with respect to any floating rate Indebtedness
that is permitted by the terms of the Indenture to be outstanding;
(8) the guarantee by the Company or any of the Guarantors of Indebtedness
of the Company or a Restricted Subsidiary of the Company that was permitted
to be incurred by another provision of this covenant;
(9) the accrual of interest, the accretion or amortization of original
issue discount, the payment of interest on any Indebtedness in the form of
additional Indebtedness with the same terms, and the payment of dividends
on Disqualified Stock in the form of additional shares of the same class of
Disqualified Stock will not be deemed to be an incurrence of Indebtedness
or an issuance of Disqualified Stock for purposes of this covenant;
provided, however, in each such case, that the amount thereof is included
in Fixed Charges of the Company as accrued;
(10) the incurrence by the Company or any of its Restricted Subsidiaries
of Indebtedness in respect of performance, surety or appeal bonds provided
in the ordinary course of business; and
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(11) the assumption of the obligations under the Pratt Casino Corporation
Notes in connection with the Pratt Casino Corporation Acquisition,
provided, however, that such Indebtedness is retired or repaid within five
business days following the assumption of such Indebtedness.
The Company will not incur any Indebtedness (including Permitted Debt) that
is contractually subordinated in right of payment to any other Indebtedness of
the Company unless such Indebtedness is also contractually subordinated in
right of payment to the notes on substantially identical terms; provided,
however, that no Indebtedness of the Company shall be deemed to be
contractually subordinated in right of payment to any other Indebtedness of
the Company solely by virtue of being unsecured.
For purposes of determining compliance with this covenant, in the event that
an item of proposed Indebtedness meets the criteria of more than one of the
categories of Permitted Debt described in clauses (1) through (11) above, or
is entitled to be incurred pursuant to the first paragraph of this covenant,
the Company will be permitted to classify such item of Indebtedness on the
date of its incurrence, or later reclassify all or a portion of such item of
Indebtedness, in any manner that complies with this covenant.
Liens
The Company will not, and will not permit any of its Restricted Subsidiaries
to, directly or indirectly, create, incur, assume or suffer to exist any Lien
of any kind on any asset now owned or hereafter acquired, except Permitted
Liens.
Dividend and other payment restrictions affecting subsidiaries
The Company will not, and will not permit any of its Restricted Subsidiaries
to, directly or indirectly, create or permit to exist or become effective any
consensual encumbrance or restriction on the ability of any Restricted
Subsidiary to:
(1) pay dividends or make any other distributions on its Capital Stock to
the Company or any of its Restricted Subsidiaries, or with respect to any
other interest or participation in, or measured by, its profits, or pay any
indebtedness owed to the Company or any of its Restricted Subsidiaries;
(2) make loans or advances to the Company or any of its Restricted
Subsidiaries; or
(3) transfer any of its properties or assets to the Company or any of its
Restricted Subsidiaries.
However, the preceding restrictions will not apply to encumbrances or
restrictions existing under or by reason of:
(1) Existing Indebtedness as in effect on the date of the Indenture and
any amendments, modifications, restatements, renewals, increases,
supplements, refundings, replacements or refinancings thereof, provided
that such amendments, modifications, restatements, renewals, increases,
supplements, refundings, replacement or refinancings are no more
restrictive, taken as a whole, with respect to such dividend and other
payment restrictions than those contained in such Existing Indebtedness, as
in effect on the date of the indenture;
(2) the indenture, the new notes, the Guarantees and the Collateral
Documents;
(3) applicable law;
(4) any instrument governing Indebtedness or Capital Stock of a person
acquired by the Company or any of its Restricted Subsidiaries as in effect
at the time of such acquisition (except to the extent such Indebtedness was
incurred in connection with or in contemplation of such acquisition), which
encumbrance or restriction is not applicable to any person, or the
properties or assets of any person, other than the person, or the property
or assets of the person, so acquired, provided, however, that, in the case
of Indebtedness, such Indebtedness was permitted by the terms of the
indenture to be incurred;
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(5) customary non-assignment provisions in leases entered into in the
ordinary course of business and consistent with past practices;
(6) purchase money obligations for property acquired in the ordinary
course of business that impose restrictions on the property so acquired of
the nature described in clause (3) of the preceding paragraph;
(7) any agreement for the sale or other disposition of a Restricted
Subsidiary that restricts distributions by that Restricted Subsidiary
pending its sale or other disposition;
(8) Permitted Refinancing Indebtedness, provided, however, that the
restrictions contained in the agreements governing such Permitted
Refinancing Indebtedness are no more restrictive, taken as a whole, than
those contained in the agreements governing the Indebtedness being
refinanced;
(9) Liens securing Indebtedness that limit the right of the debtor to
dispose of the assets subject to such Lien;
(10) provisions with respect to the disposition or distribution of assets
or property in joint venture agreements, assets sale agreements, stock sale
agreements and other similar agreements entered into in the ordinary course
of business; and
(11) restrictions on cash or other deposits or net worth imposed by
customers under contracts entered into in the ordinary course of business.
Merger, consolidation or sale of assets
Neither the Company nor any guarantor may, directly or indirectly: (1)
consolidate or merge with or into another person (whether the Company or the
Guarantor is the surviving corporation); or (2) sell, assign, transfer, convey
or otherwise dispose of all or substantially all of the properties or assets
of the Company and its Subsidiaries taken as a whole, in one or more related
transactions, to another person; unless:
(1) either (a) the Company or the guarantor is the surviving corporation
or (b) the person formed by or surviving any such consolidation or merger
(if other than the Company or the guarantor) or to which such sale,
assignment, transfer, conveyance or other disposition shall have been made
is a corporation organized or existing under the laws of the United States,
any state thereof or the District of Columbia;
(2) the person formed by or surviving any such consolidation or merger
(if other than the Company or the guarantor) or the person to which such
sale, assignment, transfer, conveyance or other disposition shall have been
made assumes all the obligations of the Company or the guarantor under the
new notes, the indenture, the registration rights agreement and the
Collateral Documents pursuant to agreements reasonably satisfactory to the
trustee;
(3) immediately after such transaction no Default or Event of Default
exists; and
(4) the Company or the guarantor, as the case may be, or the person
formed by or surviving any such consolidation or merger (if other than the
Company or such guarantor), or to which such sale, assignment, transfer,
conveyance or other disposition shall have been made will, on the date of
such transaction after giving pro forma effect thereto and any related
financing transactions as if the same had occurred at the beginning of the
applicable four-quarter period, be permitted to incur at least $1.00 of
additional Indebtedness pursuant to the Fixed Charge Coverage Ratio test
set forth in the first paragraph of the covenant described above under the
caption "--Incurrence of Indebtedness and Issuance of Preferred Stock."
This "Merger, Consolidation or Sale of Assets" covenant will not apply to a
sale, assignment, transfer, conveyance or other disposition of assets between
or among the Company and any of its Restricted Subsidiaries or any of the
guarantors. The Company anticipates that, in connection with its acquisition
of Pratt Casino Corporation and the termination of the Aurora Management
Agreement and the Tunica Consulting Agreement, it will cause each of HWCC-
Aurora Management, Pratt Management, L.P. and Pratt Casino Corporation to be
merged, dissolved or otherwise terminated. The indenture will permit each of
these contemplated transactions.
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Transactions with affiliates
The Company will not, and will not permit any of its Restricted Subsidiaries
to, make any payment to, or sell, lease, transfer or otherwise dispose of any
of its properties or assets to, or purchase any property or assets from, or
enter into or make or amend any transaction, contract, agreement,
understanding, loan, advance or guarantee with, or for the benefit of, any
Affiliate (each, an "Affiliate Transaction"), unless:
(1) such Affiliate Transaction is on terms that are no less favorable to
the Company or the relevant Restricted Subsidiary than those that would
have been obtained in a comparable transaction by the Company or such
Restricted Subsidiary with an unrelated person; and
(2) the Company delivers to the trustee:
(a) with respect to any Affiliate Transaction or series of related
Affiliate Transactions involving aggregate consideration in excess of
$1 million, a resolution of the Board of Directors set forth in an
officers' certificate certifying that such Affiliate Transaction
complies with this covenant and that such Affiliate Transaction has
been approved by a majority of the disinterested members of the Board
of Directors; and
(b) with respect to any Affiliate Transaction or series of related
Affiliate Transactions involving aggregate consideration in excess of
$10 million, an opinion as to the fairness to the holders of such
Affiliate Transaction from a financial point of view issued by an
accounting, appraisal or investment banking firm of national standing,
other than in connection with
(i) any transaction or series of transactions involving the
approval, amendment, restatement, replacement or modification of a
management or consulting agreement between the Company or any
Restricted Subsidiary of the Company, on the one hand, and an
Unrestricted Subsidiary, on the other hand, so long as such
agreement is on terms and conditions comparable to those that each
of the Company or such Restricted Subsidiary and such Unrestricted
Subsidiary would negotiate on an arm's-length basis with third
parties, as determined by the Board of Directors of the Company, and
(ii) any transaction or series of transactions involving the
approval, amendment, restatement, replacement or modification of a
management or consulting agreement between the Company or any
Restricted Subsidiary of the Company, on the one hand, and any
Affiliate, on the other hand, other than a Subsidiary of the
Company.
The following items shall not be deemed to be Affiliate Transactions and,
therefore, will not be subject to the provisions of the prior paragraph:
(1) any employment agreement or arrangement entered into by the Company
or any of its Restricted Subsidiaries in the ordinary course of business
and consistent with the past practice of the Company or such Restricted
Subsidiary;
(2) transactions between or among the Company and/or its Restricted
Subsidiaries;
(3) payment of reasonable directors fees and expenses to persons who are
not otherwise Affiliates of the Company;
(4) sales of Equity Interests (other than Disqualified Stock) to
Affiliates of the Company;
(5) Restricted Payments that are permitted by the provisions of the
indenture described above under the caption "--Restricted Payments";
(6) existing agreements as in effect on the date of the indenture between
the Company and its Affiliates, as such agreements may be amended,
restated, replaced or otherwise modified, as long as the amendment,
restatement, replacement or modified agreement is neither materially more
favorable to the Affiliate nor materially less favorable to the Company, as
determined by the non-interested members of the Board of Directors; and
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(7) any other transactions that do not involve, in the aggregate for all
such transactions, the payment of more than $250,000 in consideration in
any one calendar year.
Additional subsidiary guarantees
If any Restricted Subsidiary attains, or if the Company or any of its
Restricted Subsidiaries acquires or creates a Restricted Subsidiary after the
date of the Indenture that has, a Tangible Consolidated Net Worth of $2.5
million or more, then that Restricted Subsidiary or newly acquired or created
Restricted Subsidiary must become a guarantor and execute a supplemental
indenture and Collateral Documents securing the Guarantee and deliver an
opinion of counsel to the trustee within 20 business days of the date on which
it was acquired or created. Any Restricted Subsidiary that becomes a guarantor
shall remain a guarantor unless designated an Unrestricted Subsidiary by the
Company in accordance with the indenture or is otherwise released from its
obligations as a guarantor as provided in the indenture.
Designation of restricted and unrestricted subsidiaries
The Board of Directors may designate any Restricted Subsidiary to be an
Unrestricted Subsidiary if that designation would not cause a Default;
provided, however, that in no event shall the business currently operated by
Hollywood Casino-Aurora or HWCC-Tunica be transferred to or held by an
Unrestricted Subsidiary. If a Restricted Subsidiary is designated as an
Unrestricted Subsidiary, the aggregate fair market value of all outstanding
Investments owned by the Company and its Restricted Subsidiaries in the
Restricted Subsidiary so designated will be deemed to be an Investment made as
of the time of such designation and will either reduce the amount available
for Restricted Payments under the first paragraph of the covenant described
above under the caption "--Restricted Payments" or reduce the amount available
for future Investments under one or more clauses of the definition of
Permitted Investments, as the Company shall determine. That designation will
only be permitted if such Investment would be permitted at that time and if
such Restricted Subsidiary otherwise meets the definition of an Unrestricted
Subsidiary. The Board of Directors may redesignate any Unrestricted Subsidiary
to be a Restricted Subsidiary if the redesignation would not cause a Default.
Limitation on issuances and sales of equity interests in Subsidiaries
All of the Company's Restricted Subsidiaries shall be wholly owned by the
Company, by one or more of its Restricted Subsidiaries or by the Company and
one or more of its Restricted Subsidiaries.
The Company will not, and will not permit any of its Restricted Subsidiaries
to, transfer, convey, sell, lease or otherwise dispose of any Equity Interests
in any Restricted Subsidiary of the Company to any person (other than the
Company or a Restricted Subsidiary of the Company), unless:
(1) such transfer, conveyance, sale, lease or other disposition is of all
the Equity Interests in such Restricted Subsidiary; and
(2) the cash Net Proceeds from such transfer, conveyance, sale, lease or
other disposition are applied in accordance with the covenant described
above under the caption "--Repurchase at the Option ofHolders--Asset
Sales."
In addition, the Company will not permit any Restricted Subsidiary of the
Company to issue any of its Equity Interests (other than, if necessary, shares
of its Capital Stock constituting directors' qualifying shares) to any person
other than to the Company or a Restricted Subsidiary of the Company.
Change in management contracts
The indenture will provide that the Company shall not, and shall not permit
any of its Restricted Subsidiaries to, enter into any amendment to the Aurora
Management Agreement or the Tunica Consulting Agreement or grant any consent
with respect to, or waiver of, any of the terms of these agreements, except
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amendments, consents and waivers to cure ambiguities, defects or
inconsistencies, or make changes that do not adversely affect the rights of
any holder of the Notes; provided, however, that the Aurora Management
Agreement and the Tunica Consulting Agreement may be terminated in connection
with or subsequent to the Pratt Casino Corporation Acquisition.
Business activities
The Company will not, and will not permit any Restricted Subsidiary to,
engage in any business other than a Gaming Related Business, except to such
extent as would not be material to the Company and its Subsidiaries taken as a
whole.
Advances to Restricted Subsidiaries
All advances to Restricted Subsidiaries made by the Company after the date
of the Indenture will be evidenced by intercompany notes in favor of the
Company, other than equity contributions made by the Company to any of its
Restricted Subsidiaries. These intercompany notes will be pledged pursuant to
the Collateral Documents as Collateral to secure the Notes. Each intercompany
note other than the Aurora Intercompany Note will be payable upon demand and
will bear interest at the same rate as the new notes. The Company agrees that
it shall not permit Hollywood Casino-Aurora to prepay principal under the
Aurora Intercompany Note for so long as Hollywood Casino-Aurora is not a
guarantor of the new notes unless otherwise required by Government
Authorities.
Payments for consent
The Company will not, and will not permit any of its Restricted Subsidiaries
to, directly or indirectly, pay or cause to be paid any consideration to or
for the benefit of any holder of new notes for or as an inducement to any
consent, waiver or amendment of any of the terms or provisions of the
indenture or the new notes unless such consideration is offered to be paid and
is paid to all holders of the new notes that consent, waive or agree to amend
in the time frame set forth in the solicitation documents relating to such
consent, waiver or agreement.
Reports
Whether required by the SEC, so long as any new notes are outstanding, the
Company will furnish to the holders of new notes, within 15 days following the
time periods specified in the SEC's rules and regulations:
(1) all quarterly and annual financial information that would be required
to be contained in a filing with the SEC on Forms 10-Q and 10-K if the
Company were required to file such Forms, including a "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
and, with respect to the annual information only, a report on the annual
financial statements by the Company's independent public accountants; and
(2) all current reports that would be required to be filed with the SEC
on Form 8-K if the Company were required to file such reports.
In addition, following the consummation of the exchange offer contemplated
by the registration rights agreement, whether or not required by the SEC, the
Company will file a copy of all of the information and reports referred to in
clauses (1) and (2) above with the SEC for public availability within the time
periods specified in the SEC's rules and regulations (unless the SEC will not
accept such a filing) and make such information available to securities
analysts and prospective investors upon request. In addition, the Company and
the guarantors have agreed that, for so long as any new notes remain
outstanding, they will furnish to the holders and to securities analysts and
prospective investors, upon their request, the information required to be
delivered pursuant to Rule 144A(d)(4) under the Securities Act.
Whether required by the SEC, for so long as HWCC-Louisiana, or any successor
thereto, is an Unrestricted Subsidiary, the quarterly and annual financial
information required by the preceding paragraph shall include a reasonably
detailed presentation, either on the face of the financial statements or in
the footnotes thereto, of the financial condition and results of operations of
the Company and its Restricted Subsidiaries separate from the financial
condition and results of operations of HWCC-Louisiana, or any successor
thereto, and its consolidated
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subsidiaries, with an indication that such entities are Unrestricted
Subsidiaries and that any Indebtedness of such entities is non-recourse to the
Company.
Events of default and remedies
Each of the following is an Event of Default:
(1) default for 30 days in the payment when due of interest on, or
liquidated damages with respect to, the notes;
(2) default in payment when due of the principal of, or premium, if any,
on the notes;
(3)(i) default in the payment of principal of, premium, if any, and
interest on notes required to be purchased pursuant to the Special
Mandatory Redemption, or with respect to a Change of Control Offer, Asset
Sale Offer or Event of Loss Offer, when due and payable; or (ii) failure to
perform or comply with the provisions described under (a) "Limitation on
Merger, Consolidation or Sale of Assets" or (b) "Restricted Payments" (but
only if the failure under this clause (b) is caused by a Restricted Payment
described in the first set of clauses (1) through (3) of the first
paragraph of the covenant entitled "Restricted Payments");
(4) failure by the Company or any of its Restricted Subsidiaries for 60
days after notice to comply with any of the other agreements in the
Indenture or the Collateral Documents;
(5) default under any mortgage, indenture or instrument under which there
may be issued or by which there may be secured or evidenced any
Indebtedness for money borrowed by the Company or any of its Restricted
Subsidiaries (or the payment of which is guaranteed by the Company or any
of its Restricted Subsidiaries) whether such Indebtedness or guarantee now
exists, or is created after the date of the indenture, if that default:
(a) is caused by a failure to pay principal of, or interest or
premium, if any, on such Indebtedness prior to the expiration of the
grace period provided in such Indebtedness on the date of such default
(a "Payment Default"); or
(b) results in the acceleration of such Indebtedness prior to its
express maturity,
and, in each case, the principal amount of any such Indebtedness,
together with the principal amount of any other such Indebtedness under
which there has been a Payment Default or the maturity of which has
been so accelerated, aggregates $8 million or more;
(6) failure by the Company or any of its Restricted Subsidiaries to pay
final judgments aggregating in excess of $8 million, which judgments are
not paid, discharged or stayed for a period of 60 days;
(7) failure to perform or breach by the Company or any guarantor of any
material representation or warranty or agreement in the Collateral
Documents, the repudiation by any party of any of its obligations under any
of the Collateral Documents or the unenforceability of any of the
Collateral Documents against any party for any reason, continued for 30
days after written notice from the trustee or holders of at least 25% in
principal amount of the outstanding new notes as provided in the indenture;
(8) except as permitted by the indenture, a default by any guarantor of
the obligations of such guarantor and its Guarantee, any Guarantee by HWCC-
Tunica, HWCC-Shreveport or any other guarantor that has a Tangible
Consolidated Net Worth of $8 million shall be held in any judicial
proceeding to be unenforceable or invalid or shall cease for any reason to
be in full force and effect or any such guarantor, or any Person acting on
behalf of any such guarantor, shall deny or disaffirm its obligations under
its Guarantee;
(9) certain events of bankruptcy or insolvency with respect to the
Company or any of its Restricted Subsidiaries that is a Significant
Subsidiary; and
(10) any revocation, suspension or loss of any gaming license which
results in the cessation or suspension of business at any Casino owned by
the Company or any of its Restricted Subsidiaries for a period of more than
120 consecutive days.
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In the case of an Event of Default arising from certain events of bankruptcy
or insolvency, with respect to the Company, any Restricted Subsidiary that is
a Significant Subsidiary or any group of Restricted Subsidiaries that, taken
together, would constitute a Significant Subsidiary, all outstanding notes
will become due and payable immediately without further action or notice. If
any other Event of Default occurs and is continuing, the trustee or the
holders of at least 25% in principal amount of the then outstanding new notes
may declare all the notes to be due and payable immediately.
Holders of the notes may not enforce the indenture or the notes except as
provided in the indenture. Subject to certain limitations, holders of a
majority in principal amount of the then outstanding notes may direct the
trustee in its exercise of any trust or power. The trustee may withhold from
holders of the notes notice of any continuing Default or Event of Default
(except a Default or Event of Default relating to the payment of principal or
interest or liquidated damages) if it determines that withholding notice is in
their interest.
The holders of a majority in aggregate principal amount of the notes then
outstanding by notice to the trustee may on behalf of the holders of all of
the notes waive any existing Default or Event of Default and its consequences
under the indenture except a continuing Default or Event of Default in the
payment of principal of, premium and liquidated damages, if any, and interest
on the notes.
In the case of any Event of Default occurring by reason of any willful
action or inaction taken or not taken by or on behalf of the Company with the
intention of avoiding payment of the premium that the Company would have had
to pay if the Company then had elected to redeem the notes pursuant to the
optional redemption provisions of the indenture, an equivalent premium shall
also become and be immediately due and payable to the extent permitted by law
upon the acceleration of the notes. If an Event of Default occurs prior to May
1, 2003, by reason of any willful action (or inaction) taken (or not taken) by
or on behalf of the Company with the intention of avoiding the prohibition on
redemption of the notes prior to May 1, 2003, then the premium specified in
the indenture shall also become immediately due and payable to the extent
permitted by law upon the acceleration of the notes.
The Company is required to deliver to the trustee annually a statement
regarding compliance with the indenture. Upon becoming aware of any Default or
Event of Default, the Company is required to deliver to the trustee a
statement specifying such Default or Event of Default.
No personal liability of directors, officers, employees and stockholders
No director, officer, employee, incorporator or stockholder of the Company
or any guarantor, as such, shall have any liability for any obligations of the
Company or the guarantors under the notes, the indenture, the Guarantees, the
Collateral Documents or for any claim based on, in respect of, or by reason
of, such obligations or their creation. Each holder of new notes by accepting
a new note waives and releases all such liability. The waiver and release are
part of the consideration for issuance of the notes. The waiver may not be
effective to waive liabilities under the federal securities laws.
Legal defeasance and covenant defeasance
The Company may, at its option and at any time, elect to have all of its
obligations discharged with respect to the outstanding notes and all
obligations of the guarantors discharged with respect to their subsidiary
guarantees ("Legal Defeasance") except for:
(1) the rights of holders of outstanding notes to receive payments in
respect of the principal of, or interest or premium and liquidated damages,
if any, on such notes when such payments are due from the trust referred to
below;
(2) the Company's obligations with respect to the notes concerning
issuing temporary notes, registration of notes, mutilated, destroyed, lost
or stolen notes and the maintenance of an office or agency for payment and
money for security payments held in trust;
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(3) the rights, powers, trusts, duties and immunities of the trustee, and
the Company's and the guarantor's obligations in connection therewith; and
(4) the Legal Defeasance provisions of the indenture.
In addition, the Company may, at its option and at any time, elect to have
the obligations of the Company and the guarantors released with respect to
certain covenants that are described in the indenture ("Covenant Defeasance")
and thereafter any omission to comply with those covenants shall not
constitute a Default or Event of Default with respect to the new notes. In the
event Covenant Defeasance occurs, certain events (not including non-payment,
bankruptcy, receivership, rehabilitation and insolvency events) described
under "Events of Default" will no longer constitute an Event of Default with
respect to the new notes.
In order to exercise either Legal Defeasance or Covenant Defeasance:
(1) the Company must irrevocably deposit with the trustee, in trust, for
the benefit of the holders of the new notes, cash in U.S. dollars, non-
callable Government Securities, or a combination thereof, in such amounts
as will be sufficient, in the opinion of a nationally recognized firm of
independent public accountants, to pay the principal of, or interest and
premium and liquidated damages, if any, on the outstanding notes on the
stated maturity or on the applicable redemption date, as the case may be,
and the Company must specify whether the notes are being defeased to
maturity or to a particular redemption date;
(2) in the case of Legal Defeasance, the Company shall have delivered to
the trustee an opinion of counsel reasonably acceptable to the trustee
confirming that:
(a) the Company has received from, or there has been published by,
the Internal Revenue Service a ruling or
(b) since the date of the indenture, there has been a change in the
applicable federal income tax law, in either case to the effect that,
and based thereon such opinion of counsel shall confirm that, the
holders of the outstanding notes will not recognize income, gain or
loss for federal income tax purposes as a result of such Legal
Defeasance and will be subject to federal income tax on the same
amounts, in the same manner and at the same times as would have been
the case if such Legal Defeasance had not occurred;
(3) in the case of Covenant Defeasance, the Company shall have delivered
to the trustee an opinion of counsel reasonably acceptable to the trustee
confirming that the holders of the outstanding notes will not recognize
income, gain or loss for federal income tax purposes as a result of such
Covenant Defeasance and will be subject to federal income tax on the same
amounts, in the same manner and at the same times as would have been the
case if such Covenant Defeasance had not occurred;
(4) no Default or Event of Default shall have occurred and be continuing
either:
(a) on the date of such deposit (other than a Default or Event of
Default resulting from the borrowing of funds to be applied to such
deposit); or
(b) or insofar as Events of Default from bankruptcy or insolvency
events are concerned, at any time in the period ending on the 91st day
after the date of deposit;
(5) such Legal Defeasance or Covenant Defeasance will not result in a
breach or violation of, or constitute a default under any material
agreement or instrument (other than the indenture) to which the Company or
any of its Subsidiaries is a party or by which the Company or any of its
Subsidiaries is bound;
(6) the Company must have delivered to the trustee an opinion of counsel
to the effect that, assuming no intervening bankruptcy of the Company or
any guarantor between the date of deposit and the 91st day following the
deposit and assuming that no holder is an "insider" of the Company under
applicable bankruptcy law, after the 91st day following the deposit, the
trust funds will not be subject to the effect of any applicable bankruptcy,
insolvency, reorganization or similar laws affecting creditors' rights
generally;
(7) the Company must deliver to the trustee an officers' certificate
stating that the deposit was not made by the Company with the intent of
preferring the holders of new notes over the other creditors of the Company
with the intent of defeating, hindering, delaying or defrauding creditors
of the Company or others; and
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(8) the Company must deliver to the trustee an officers' certificate and
an opinion of counsel, each stating that all conditions precedent relating
to the Legal Defeasance or the Covenant Defeasance have been satisfied.
Amendment, supplement and waiver
Except as provided in the next three succeeding paragraphs, the indenture,
the notes, the Guarantees or the Collateral Documents may be amended or
supplemented by the Company and the trustee with the consent of the holders of
at least a majority in principal amount of the notes then outstanding
(including, without limitation, consents obtained in connection with a
purchase of, or tender offer or exchange offer for, notes), and any existing
default or compliance with any provision of the indenture, the notes, the
Guarantees or the Collateral Documents may be waived with the consent of the
holders of a majority in principal amount of the then outstanding notes
(including, without limitation, consents obtained in connection with a
purchase of, or tender offer or exchange offer for, the notes).
Without the consent of each holder affected, an amendment or waiver may not
(with respect to any notes held by a non-consenting holder):
(1) reduce the principal amount of new notes whose holders must consent
to an amendment, supplement or waiver;
(2) reduce the principal of or change the fixed maturity of any note or
alter the provisions with respect to the redemption of the notes (other
than provisions relating to the covenants described above under the caption
"--Repurchase at the Option of Holders");
(3) reduce the rate of or change the time for payment of interest on any
note;
(4) waive a Default or Event of Default in the payment of principal of,
or interest or premium, or liquidated damages, if any, on the notes (except
a rescission of acceleration of the notes by the holders of at least a
majority in aggregate principal amount of the notes and a waiver of the
payment default that resulted from such acceleration);
(5) make any note payable in money other than that stated in the notes;
(6) make any change in the provisions of the indenture relating to
waivers of past Defaults or the rights of holders of notes to receive
payments of principal of, or interest or premium or liquidated damages, if
any, on the notes;
(7) waive a redemption payment with respect to any note (other than a
payment required by one of the covenants described above under the section
entitled "--Repurchase at the Option of Holders");
(8) release any guarantor from any of its obligations under its Guarantee
or the indenture, except in accordance with the terms of the indenture;
(9) release all or substantially all of the Collateral from the Lien of
the indenture or the Collateral Documents (except in accordance with the
provisions thereof); or
(10) make any change in the preceding amendment and waiver provisions.
Any amendment to, or waiver of the provisions of any of the Collateral
Documents relating to the covenant described under "--Liens" or the security
provisions of the indenture will require the consent of the holders of at
least 85% in aggregate principal amount of notes then outstanding.
Notwithstanding the preceding, without the consent of any holder of notes,
the Company, the guarantors and the trustee may amend or supplement the
indenture, the notes, the Guarantees or the Collateral Documents:
(1) to cure any ambiguity, defect or inconsistency;
(2) to provide for uncertificated new notes in addition to or in place of
certificated notes;
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(3) to provide for the assumption of the Company's obligations to holders
of notes in the case of a merger or consolidation or sale of all or
substantially all of the Company's assets;
(4) to make any change that would provide any additional rights or
benefits to the holders of notes or that does not adversely affect the
legal rights under the indenture of any such holder;
(5) to comply with requirements of the SEC in order to effect or maintain
the qualification of the indenture under the Trust Indenture Act; or
(6) to enter into additional or supplemental Collateral Documents or an
intercreditor agreement.
Satisfaction and discharge
The indenture will be discharged and will cease to be of further effect as
to all new notes issued thereunder, when:
(1) either:
(a) all notes that have been authenticated (except lost, stolen or
destroyed new notes that have been replaced or paid and new notes for
whose payment money has theretofore been deposited in trust and
thereafter repaid to the Company) have been delivered to the trustee
for cancellation; or
(b) all notes that have not been delivered to the trustee for
cancellation have become due and payable by reason of the making of a
notice of redemption or otherwise or will become due and payable within
one year and the Company or any guarantor has irrevocably deposited or
caused to be deposited with the trustee as trust funds in trust solely
for the benefit of the holders, cash in U.S. dollars, non-callable
Government Securities, or a combination thereof, in such amounts as
will be sufficient without consideration of any reinvestment of
interest, to pay and discharge the entire indebtedness on the new notes
not delivered to the trustee for cancellation for principal, premium
and liquidated damages, if any, and accrued interest to the date of
maturity or redemption;
(2) no Default or Event of Default shall have occurred and be continuing
on the date of such deposit or shall occur as a result of such deposit and
such deposit will not result in a breach or violation of, or constitute a
default under, any other instrument to which the Company or any guarantor
is a party or by which the Company or any guarantor is bound;
(3) the Company or any guarantor has paid or caused to be paid all sums
payable by it under the indenture; and
(4) the Company has delivered irrevocable instructions to the trustee
under the indenture to apply the deposited money toward the payment of the
new notes at maturity or the redemption date, as the case may be.
In addition, the Company must deliver an officers' certificate and an
opinion of counsel to the trustee stating that all conditions precedent to
satisfaction and discharge have been satisfied.
Concerning the trustee
If the trustee becomes a creditor of the Company or any guarantor, the
indenture limits its right to obtain payment of claims in certain cases, or to
realize on certain property received in respect of any such claim as security
or otherwise. The trustee will be permitted to engage in other transactions;
however, if it acquires any conflicting interest it must eliminate such
conflict within 90 days, apply to the SEC for permission to continue or
resign.
The holders of a majority in principal amount of the then outstanding notes
will have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the trustee, subject to
certain exceptions. The indenture provides that in case an Event of Default
shall occur and be continuing, the trustee will be required, in the exercise
of its power, to use the degree of care of a prudent man in the conduct of his
own affairs. Subject to such provisions, the trustee will be under no
obligation to exercise any of its rights or powers under the indenture at the
request of any holder of notes, unless such holder shall have offered to the
trustee security and indemnity satisfactory to it against any loss, liability
or expense.
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Additional information
Anyone who receives this prospectus may obtain a copy of the indenture and
registration rights agreement without charge by writing to William D. Pratt,
Executive Vice President, Secretary and General Counsel, Hollywood Casino
Corporation, Two Galleria Tower, 13455 Noel Road, Suite 2200, Dallas, Texas
75240.
Book-entry, delivery and form
Except as set forth below, your notes will be issued in registered, global
form in minimum denominations of $1,000 and integral multiples of $1,000 in
excess thereof.
The notes will be represented by one or more notes in registered, global
form without interest coupons (the "Global Notes"). The Global Notes will be
deposited upon issuance with the trustee as custodian for The Depository Trust
Company ("DTC"), in New York, New York, and registered in the name of DTC or
its nominee, in each case for credit to an account of a direct or indirect
participant in DTC as described below.
Depository Procedures
The following description of the operations and procedures of DTC are
provided solely as a matter of convenience. These operations and procedures
are solely within the control of DTC and are subject to changes by them. The
Company takes no responsibility for these operations and procedures and urges
investors to contact the DTC or its participants directly to discuss these
matters.
DTC has advised the Company that DTC is a limited-purpose trust company
created to hold securities for its participating organizations (collectively,
the "Participants") and to facilitate the clearance and settlement of
transactions in those securities between Participants through electronic book-
entry changes in accounts of its Participants. The Participants include
securities brokers and dealers (including the Initial Purchasers), banks,
trust companies, clearing corporations and certain other organizations. Access
to DTC's system is also available to other entities such as banks, brokers,
dealers and trust companies that clear through or maintain a custodial
relationship with a Participant, either directly or indirectly (collectively,
the "Indirect Participants"). Persons who are not Participants may
beneficially own securities held by or on behalf of DTC only through the
Participants or the Indirect Participants. The ownership interests in, and
transfers of ownership interests in, each security held by or on behalf of DTC
are recorded on the records of the Participants and Indirect Participants.
DTC has also advised the Company that, pursuant to procedures established by
it:
(1) upon deposit of the Global Notes, DTC will credit the accounts of
Participants designated by the Initial Purchasers with portions of the
principal amount of the Global Notes; and
(2) ownership of these interests in the Global Notes will be shown on,
and the transfer of ownership thereof will be effected only through,
records maintained by DTC (with respect to the Participants) or by the
Participants and the Indirect Participants (with respect to other owners of
beneficial interest in the Global Notes).
Investors in the Global Notes who are Participants in DTC's system may hold
their interests therein directly through DTC. Investors in the Global Notes
who are not Participants may hold their interests therein indirectly through
organizations which are Participants in such system. All interests in a Global
Note may be subject to the procedures and requirements of DTC. The laws of
some states require that certain Persons take physical delivery in definitive
form of securities that they own. Consequently, the ability to transfer
beneficial interests in a Global Note to such persons will be limited to that
extent. Because DTC can act only on behalf of Participants, which in turn act
on behalf of Indirect Participants, the ability of a person having beneficial
interests in a Global Note to pledge such interests to persons that do not
participate in the DTC system, or otherwise take actions in respect of such
interests, may be affected by the lack of a physical certificate evidencing
such interests.
Except as described below, owners of interest in the Global Notes will not
have notes registered in their names, will not receive physical delivery of
notes in certificated form and will not be considered the registered owners or
"holders" thereof under the indenture for any purpose.
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Payments in respect of the principal of, and interest and premium and
liquidated damages, if any, on a Global Note registered in the name of DTC or
its nominee will be payable to DTC in its capacity as the registered holder
under the indenture. Under the terms of the indenture, the Company and the
trustee will treat the persons in whose names the new notes, including the
Global Notes, are registered as the owners thereof for the purpose of
receiving payments and for all other purposes. Consequently, neither the
Company, the trustee nor any agent of the Company or the trustee has or will
have any responsibility or liability for:
(1) any aspect of DTC's records or any Participant's or Indirect
Participant's records relating to or payments made on account of beneficial
ownership interest in the Global Notes or for maintaining, supervising or
reviewing any of DTC's records or any Participant's or Indirect
Participant's records relating to the beneficial ownership interests in the
Global Notes; or
(2) any other matter relating to the actions and practices of DTC or any
of its Participants or Indirect Participants.
DTC has advised the Company that its current practice, upon receipt of any
payment in respect of securities such as the new notes (including principal
and interest), is to credit the accounts of the relevant Participants with the
payment on the payment date unless DTC has reason to believe it will not
receive payment on such payment date. Each relevant Participant is credited
with an amount proportionate to its beneficial ownership of an interest in the
principal amount of the relevant security as shown on the records of DTC.
Payments by the Participants and the Indirect Participants to the beneficial
owners of new notes will be governed by standing instructions and customary
practices and will be the responsibility of the Participants or the Indirect
Participants and will not be the responsibility of DTC, the trustee or the
Company. Neither the Company nor the trustee will be liable for any delay by
DTC or any of its Participants in identifying the beneficial owners of the new
notes, and the Company and the trustee may conclusively rely on and will be
protected in relying on instructions from DTC or its nominee for all purposes.
Transfers between Participants in DTC will be effected in accordance with
DTC's procedures, and will be settled in same-day funds.
DTC has advised the Company that it will take any action permitted to be
taken by a holder of new notes only at the direction of one or more
Participants to whose account DTC has credited the interests in the Global
Notes and only in respect of such portion of the aggregate principal amount of
the Notes as to which such Participant or Participants has or have given such
direction. However, if there is an Event of Default under the new notes, DTC
reserves the right to exchange the Global Notes for legended new notes in
certificated form, and to distribute such new notes to its Participants.
Although DTC has agreed to the foregoing procedures to facilitate transfers
of interests in the Global Notes among participants in DTC, it is under no
obligation to perform or to continue to perform such procedures, and may
discontinue such procedures at any time. Neither the Company nor the trustee
nor any of their respective agents will have any responsibility for the
performance by DTC or its respective participants or indirect participants of
its respective obligations under the rules and procedures governing its
operations.
Exchange of Global Notes for Certificated Notes
A Global Note is exchangeable for definitive new notes in registered
certificated form ("Certificated Notes") if:
(1) DTC (a) notifies the Company that it is unwilling or unable to
continue as depositary for the Global Notes and the Company fails to
appoint a successor depositary or (b) has ceased to be a clearing agency
registered under the Exchange Act;
(2) the Company, at its option, notifies the trustee in writing that it
elects to cause the issuance of the Certificated Notes; or
(3) there shall have occurred and be continuing a Default or Event of
Default with respect to the new notes.
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In addition, beneficial interests in a Global Note may be exchanged for
Certificated Notes upon prior written notice given to the trustee by or on
behalf of DTC in accordance with the indenture. In all cases, Certificated
Notes delivered in exchange for any Global Note or beneficial interests in
Global Notes will be registered in the names, and issued in any approved
denominations, requested by or on behalf of the depositary in accordance with
its customary procedures.
Same Day Settlement and Payment
The Company will make payments in respect of the new notes represented by
the Global Notes (including principal, premium, if any, interest and
liquidated damages, if any) by wire transfer of immediately available funds to
the accounts specified by the Global Note holder. The Company will make all
payments of principal, interest and premium and liquidated damages, if any,
with respect to Certificated Notes by wire transfer of immediately available
funds to the accounts specified by the holders thereof or, if no such account
is specified, by mailing a check to each such holder's registered address. The
new notes represented by the Global Notes are expected to be eligible to trade
in the PORTAL market and to trade in DTC's Same-Day Funds Settlement System,
and any permitted secondary market trading activity in such new notes will,
therefore, be required by DTC to be settled in immediately available funds.
The Company expects that secondary trading in any Certificated Notes will also
be settled in immediately available funds.
Certain definitions
Set forth below are certain defined terms used in the indenture. Reference
is made to the indenture for a full disclosure of all such terms, as well as
any other capitalized terms used herein for which no definition is provided.
"Acquired Debt" means, with respect to any specified person:
(1) Indebtedness of any other person existing at the time such other
person is merged with or into or became a Subsidiary of such specified
person, whether or not such Indebtedness is incurred in connection with, or
in contemplation of, such other person merging with or into, or becoming a
Subsidiary of, such specified person; and
(2) Indebtedness secured by a Lien encumbering any asset acquired by such
specified person.
"Affiliate" of any specified person means any other person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified person. For purposes of this definition,
"control," as used with respect to any person, shall mean the possession,
directly or indirectly, of the power to direct or cause the direction of the
management or policies of such person, whether through the ownership of voting
securities, by agreement or otherwise; provided, however, that beneficial
ownership of 10% or more of the Voting Stock of a person shall be deemed to be
control. For purposes of this definition, the terms "controlling," "controlled
by" and "under common control with" shall have correlative meanings.
"Asset Sale" means:
(1) the sale, lease, conveyance or other disposition of any assets or
rights for value, other than sales of inventory in the ordinary course of
business consistent with past practices; provided, however, that the sale,
conveyance or other disposition of all or substantially all of the assets
of the Company and its Subsidiaries taken as a whole will be governed by
the provisions of the Indenture described above under the caption "--
Repurchase at the Option of Holders--Change of Control" and/or the
provisions described above under the caption "--Certain Covenants--Merger,
Consolidation or Sale of Assets" and not by the provisions of the Asset
Sale covenant; and
(2) the issuance of Equity Interests in any of the Company's Restricted
Subsidiaries or the sale of Equity Interests in any of its Subsidiaries.
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Notwithstanding the preceding, the following items shall not be deemed to be
Asset Sales:
(1) the sale or other disposition of City of Lights I and/or City of
Lights II in connection with the replacement or expansion of the Aurora
casino, to the extent of the non-cash proceeds received;
(2) any single transaction or series of related transactions that
involves assets having a fair market value of $1 million or less as
determined by the Board of Directors;
(3) a transfer of assets between or among the Company and its Restricted
Subsidiaries;
(4) an issuance of Equity Interests by a Restricted Subsidiary to the
Company or to another Restricted Subsidiary;
(5) the sale or lease of equipment, inventory, accounts receivable,
memorabilia or other assets in the ordinary course of business;
(6) the sale or other disposition of cash or Cash Equivalents; and
(7) a Restricted Payment or Permitted Investment that is permitted by the
covenant described above under the caption "--Certain Covenants--Restricted
Payments."
"Aurora Casino" means that certain riverboat casino complex and related
facilities located in Aurora, Illinois and owned, leased or otherwise held by
Hollywood Casino-Aurora.
"Aurora Expansion Cash Account" means a segregated cash account pledged to
the trustee for the benefit of the holders of the notes.
"Aurora Intercompany Note" means that certain promissory note dated as of
the date of the indenture issued by Hollywood Casino-Aurora to the Company
initially in a principal amount of $31.5 million, as may be increased from
time to time upon advances to Hollywood Casino-Aurora from the Company,
subject to the approval of Gaming Authorities for aggregate amounts in excess
of $108 million.
"Aurora Management Agreement" means the Management Services Agreement dated
as of June 21, 1991, and as amended through the date of the indenture, between
Hollywood Casino-Aurora and Pratt Management, L.P.
"Beneficial Owner" has the meaning assigned to such term in Rule 13d-3 and
Rule 13d-5 under the Exchange Act, except that in calculating the beneficial
ownership of any particular "person" (as that term is used in Section 13(d)(3)
of the Exchange Act), such "person" shall be deemed to have beneficial
ownership of all securities that such "person" has the right to acquire by
conversion or exercise of other securities, whether such right is currently
exercisable or is exercisable only upon the occurrence of a subsequent
condition. The terms "Beneficially Owns" and "Beneficially Owned" shall have a
corresponding meaning.
"Board of Directors" means:
(1) with respect to a corporation, the Board of Directors of the
corporation;
(2) with respect to a partnership, the Board of Directors of the general
partner of the partnership; and
(3) with respect to any other person, the board or committee of such
person serving a similar function.
"Capital Lease Obligation" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that
would at that time be required to be capitalized on a balance sheet in
accordance with GAAP.
"Capital Stock" means:
(1) in the case of a corporation, corporate stock;
(2) in the case of an association or business entity, any and all shares,
interests, participations, rights or other equivalents (however designated)
of corporate stock;
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(3) in the case of a partnership or limited liability company,
partnership or membership interests (whether general or limited); and
(4) any other interest or participation that confers on a person the
right to receive a share of the profits and losses of, or distributions of
assets of, the issuing person.
"Cash Equivalents" means:
(1) United States dollars;
(2) securities issued or directly and fully guaranteed or insured by the
United States government or any agency or instrumentality thereof (provided
that the full faith and credit of the United States is pledged in support
thereof) having maturities of not more than one year from the date of
acquisition;
(3) certificates of deposit and eurodollar time deposits with maturities
of one year or less from the date of acquisition, bankers' acceptances with
maturities not exceeding six months and overnight bank deposits, in each
case, with any lender party to any Credit Facility or with any domestic
commercial bank having capital and surplus in excess of $500 million and a
Thomson Bank Watch Rating of "B" or better;
(4) repurchase obligations with a term of not more than seven days for
underlying securities of the types described in clauses (2) and (3) above
entered into with any financial institution meeting the qualifications
specified in clause (3) above;
(5) commercial paper rated at least P-1 or the equivalent thereof by
Moody's Investors Service, Inc. or at least A-1 or the equivalent thereof
by Standard & Poor's Rating Services and in each case maturing within one
year after the date of acquisition; and
(6) money market funds at least 95% of the assets of which constitute
Cash Equivalents of the kinds described in clauses (1) through (5) of this
definition.
"Casino" means any gaming establishment and other property or assets
directly ancillary thereto or used in connection therewith, including any
buildings, restaurants, hotels, theaters, parking facilities, retail shops,
land, golf courses and other recreation and entertainment facilities, vessels,
barges, ships and equipment.
"Change of Control" means the occurrence of any of the following events:
(1) the sale, lease, transfer, conveyance or other disposition (other
than to the Company), in one or a series of related transactions, of all or
substantially all of the assets of the Company and its Subsidiaries, taken
as a whole;
(2) the liquidation or dissolution of the Company;
(3) the Company becoming aware of (by way of a report or any other filing
pursuant to Section 13(d) of the Exchange Act, proxy vote, written notice
or otherwise) the acquisition by any person or related group (within the
meaning of Section 13(d)(3) or Section 14(d)(2) of the Exchange Act, or any
successor provision to either of the foregoing, including any "group"
acting for the purpose of acquiring, holding or disposing of securities
within the meaning of Rule 13d-5(b)(1) under the Exchange Act), other than
the Principals, in a single transaction or in a related series of
transactions, by way of merger, consolidation or other business combination
or purchase of beneficial ownership (within the meaning of Rule 13d-3 under
the Exchange Act, or any successor provision) of 30% or more of the total
voting power entitled to vote in the election of the Board of Directors of
the Company or such other person surviving the transaction and, at such
time, the Principals collectively shall fail to beneficially own, directly
or indirectly, securities representing greater than the combined voting
power of the Company's or such other person's Voting Stock as is
beneficially owned by such person or group;
(4) during any period of two consecutive years, individuals who at the
beginning of such period constituted the Company's Board of Directors
(together with any new directors whose election or appointment by such
board or whose nomination for election by the stockholders of the Company
was approved by a vote of a majority of the directors then still in office
who were either directors at the
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beginning of such period or whose election or nomination for election was
previously so approved) ceasing for any reason to constitute a majority of
the Company's Board of Directors then in office; or
(5) the Company consolidates with, or merges with or into, any person, or
any person consolidates with, or merges with or into, the Company, in any
such event pursuant to a transaction in which any of the outstanding Voting
Stock of the Company is converted into or exchanged for cash, securities or
other property, other than any such transaction where the Voting Stock of
the Company outstanding immediately prior to such transaction is converted
into or exchanged for Voting Stock (other than Disqualified Stock) of the
surviving or transferee person constituting a majority of the outstanding
shares of such Voting Stock of such surviving or transferee person
immediately after giving effect to such issuance.
"Collateral" means all "collateral" referred to in the Collateral Documents
and all other property or assets that become subject to a Lien in favor of the
trustee or the holders of the notes.
"Collateral Documents" means each Security Agreement between the trustee and
each of the Company, HWCC-Tunica, HWCC-Shreveport and any other guarantor, as
the case may be, and each stock pledge, deed of trust, mortgage and fleet
mortgage executed by the Company or any of its Restricted Subsidiaries
creating a lien that secures the notes and the Guarantees, each collateral
assignment of any other documents creating a Lien that, after giving effect to
such collateral assignment, secures the new notes or any Guarantee, and any
other document creating a Lien that secures the notes or any Guarantee.
"Consolidated Cash Flow" means, with respect to any specified person for any
period, the Consolidated Net Income of such person for such period plus:
(1) an amount equal to any extraordinary loss plus any net loss realized
by such person or any of its Restricted Subsidiaries in connection with an
Asset Sale, to the extent such losses were deducted in computing such
Consolidated Net Income; plus
(2) provision for taxes based on income or profits of such person and its
Restricted Subsidiaries for such period, to the extent that such provision
for taxes was deducted in computing such Consolidated Net Income; plus
(3) consolidated interest expense of such person and its Restricted
Subsidiaries for such period, whether paid or accrued and whether or not
capitalized (including, without limitation, amortization of debt issuance
costs and original issue discount, non-cash interest payments, the interest
component of any deferred payment obligations, the interest component of
all payments associated with Capital Lease Obligations, commissions,
discounts and other fees and charges incurred in respect of letter of
credit or bankers' acceptance financings, and net of the effect of all
payments made or received pursuant to Hedging Obligations), to the extent
that any such expense was deducted in computing such Consolidated Net
Income; plus
(4) any preopening expenses to the extent that such preopening expenses
were deducted in computing Consolidated Net Income on a consolidated basis
and determined in accordance with GAAP, and
(5) depreciation, amortization (including amortization of goodwill and
other intangibles but excluding amortization of prepaid cash expenses that
were paid in a prior period) and other non-cash expenses (excluding any
such non-cash expense to the extent that it represents an accrual of or
reserve for cash expenses in any future period or amortization of a prepaid
cash expense that was paid in a prior period) of such person and its
Restricted Subsidiaries for such period to the extent that such
depreciation, amortization and other non-cash expenses were deducted in
computing such Consolidated Net Income; minus
(6) non-cash items increasing such Consolidated Net Income for such
period, other than the accrual of revenue in the ordinary course of
business, in each case, on a consolidated basis and determined in
accordance with GAAP.
Notwithstanding the preceding, the provision for taxes based on the income
or profits of, and the depreciation and amortization and other non-cash
expenses of, a Restricted Subsidiary of the Company shall be
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added to Consolidated Net Income to compute Consolidated Cash Flow of the
Company only to the extent that a corresponding amount would be permitted at
the date of determination to be dividended to the Company by such Restricted
Subsidiary without prior governmental approval (that has not been obtained),
and without direct or indirect restriction pursuant to the terms of its
charter and all agreements, instruments, judgments, decrees, orders, statutes,
rules and governmental regulations applicable to that Restricted Subsidiary or
its stockholders.
"Consolidated Net Income" means, with respect to any specified person for
any period, the aggregate of the Net Income of such person and its Restricted
Subsidiaries for such period, on a consolidated basis, determined in
accordance with GAAP; provided that:
(1) the Net Income (but not loss) of any person that is not a Subsidiary
or that is accounted for by the equity method of accounting shall be
included only to the extent of the amount of dividends or distributions
paid in cash to the specified person or a Restricted Subsidiary thereof;
(2) the Net Income of any Restricted Subsidiary shall be excluded to the
extent that the declaration or payment of dividends or similar
distributions by that Restricted Subsidiary of that Net Income is not at
the date of determination permitted without any prior governmental approval
(that has not been obtained) or, directly or indirectly, by operation of
the terms of its charter or any agreement, instrument, judgment, decree,
order, statute, rule or governmental regulation applicable to that
Restricted Subsidiary or its stockholders;
(3) the Net Income of any person acquired in a pooling of interests
transaction for any period prior to the date of such acquisition shall be
excluded;
(4) the cumulative effect of a change in accounting principles shall be
excluded;
(5) the Net Income of any Unrestricted Subsidiary shall be excluded,
whether or not distributed to the specified person or one of its Restricted
Subsidiaries; and
(6) Extraordinary Non-Cash Items shall be excluded.
"Continuing Directors" means, as of any date of determination, any member of
the Board of Directors of the Company who:
(1) was a member of such Board of Directors on the date of the Indenture;
or
(2) was nominated or ratified for election or elected to such Board of
Directors with the approval of a majority of the Continuing Directors who
were members of such Board at the time of such nomination or election.
"Credit Facilities" means, one or more debt facilities or commercial paper
facilities, in each case with banks or other institutional lenders providing
for revolving credit loans, term loans, receivables financing (including
through the sale of receivables to such lenders or to special purpose entities
formed to borrow from such lenders against such receivables) or letters of
credit, in each case, as amended, restated, modified, renewed, refunded,
replaced or refinanced in whole or in part from time to time.
"Default" means any event that is, or with the passage of time or the giving
of notice or both would be, an Event of Default.
"Determination Date," with respect to an Interest Period, means the second
London Banking Day preceding the first day of the Interest Period.
"Disqualified Stock" means any Capital Stock that, by its terms (or by the
terms of any security into which it is convertible, or for which it is
exchangeable, in each case at the option of the holder thereof), or upon the
happening of any event, matures or is mandatorily redeemable, pursuant to a
sinking fund obligation or otherwise, or redeemable at the option of the
holder thereof, in whole or in part, on or prior to the date that is 91 days
after the date on which any outstanding Notes mature. Notwithstanding the
preceding sentence, any Capital Stock that would constitute Disqualified Stock
solely because the holders thereof have the right to require the Company to
repurchase such Capital Stock upon the occurrence of a change of control or an
asset sale shall
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not constitute Disqualified Stock if the terms of such Capital Stock provide
that the Company may not repurchase or redeem any such Capital Stock pursuant
to such provisions unless such repurchase or redemption complies with the
covenant described above under the caption "--Certain Covenants--Restricted
Payments."
"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"Escrow Agreement" means that certain agreement dated as of the date of the
indenture between the trustee and the Company with respect to the Escrowed
Funds.
"Escrowed Funds" means the $40.7 million of the net proceeds from the sale
of the original notes deposited into escrow with the trustee under the Escrow
Agreement.
"Event of Loss" means, with respect to any property or asset, any (i) loss,
destruction or damage of such property or asset or (ii) any condemnation,
seizure or taking, by exercise of the power of eminent domain or otherwise, of
such property or asset, or confiscation or requisition of the use of such
property or asset.
"Existing Indebtedness" means Indebtedness of the Company and its
Subsidiaries in existence on the date of the indenture, until such amounts are
repaid.
"Extraordinary Non-Cash Items" means any loss from the purchase of the
Aurora Management Agreement and the Tunica Consulting Agreement, loss from the
early retirement of the 12 3/4% Senior Secured Notes, loss from the write-off
of the original issue discount on the 12 3/4% Senior Secured Notes, loss from
the write-off of unamortized deferred charges and financing fees from the 12
3/4% Senior Secured Notes, loss from any write-downs associated with the
disposition of certain real estate assets currently owned by the Company in
Houston, Texas, any losses from the write-down from receivables with respect
to the Greate Bay Casino Corporation and PPI Funding Corp. notes in favor of
the Company and the loss from the retirement or disposition of the riverboats
comprising the Aurora Casino in connection with the replacement or expansion
of the Aurora Casino.
"FF&E Financing" means Indebtedness, the proceeds of which are used solely
to finance the acquisition or lease by the Company or any of its Restricted
Subsidiaries of furniture, fixtures or equipment ("FF&E") used in the ordinary
course of the operation of the business of the Company or its Restricted
Subsidiaries.
"Fixed Charges" means, with respect to any specified person for any period,
the sum, without duplication, of:
(1) the consolidated interest expense of such person and its Restricted
Subsidiaries for such period, whether paid or accrued, including, without
limitation, amortization of debt issuance costs and original issue
discount, non-cash interest payments, the interest component of any
deferred payment obligations, the interest component of all payments
associated with Capital Lease Obligations, commissions, discounts and other
fees and charges incurred in respect of letter of credit or bankers'
acceptance financings, and net of the effect of all payments made or
received pursuant to Hedging Obligations; plus
(2) the consolidated interest of such person and its Restricted
Subsidiaries that was capitalized during such period; plus
(3) any interest expense on Indebtedness of another person that is
guaranteed by such person or one of its Restricted Subsidiaries or secured
by a Lien on assets of such person or one of its Restricted Subsidiaries,
whether or not such guarantee or Lien is called upon; plus
(4) the product of
(a) all dividends, whether paid or accrued and whether or not in
cash, on any series of preferred stock of such person or any of its
Restricted Subsidiaries, other than dividends on Equity Interests
payable solely in Equity Interests of the Company (other than
Disqualified Stock) or to the Company or a Restricted Subsidiary of the
Company, times
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(b) a fraction, the numerator of which is one and the denominator of
which is one minus the then current combined federal, state and local
statutory tax rate of such person and any of its Restricted
Subsidiaries, expressed as a decimal, in each case, on a consolidated
basis and in accordance with GAAP.
In calculating Fixed Charges on a pro forma basis, any Indebtedness bearing
a floating interest rate shall be computed as if the rate in effect on the
date of computation had been the applicable rate for the entire period.
"Fixed Charge Coverage Ratio" means with respect to any specified person for
any period, the ratio of the Consolidated Cash Flow of such person and its
Restricted Subsidiaries for such period to the Fixed Charges of such person
for such period. In the event that the specified person or any of its
Restricted Subsidiaries incurs, assumes, guarantees, repays, repurchases or
redeems any Indebtedness (other than ordinary working capital borrowings) or
issues, repurchases or redeems preferred stock subsequent to the commencement
of the period for which the Fixed Charge Coverage Ratio is being calculated
and on or prior to the date on which the event for which the calculation of
the Fixed Charge Coverage Ratio is made (the "Calculation Date"), then the
Fixed Charge Coverage Ratio shall be calculated giving pro forma effect to
such incurrence, assumption, guarantee, repayment, repurchase or redemption of
Indebtedness, or such issuance, repurchase or redemption of preferred stock,
and the use of the proceeds therefrom as if the same had occurred at the
beginning of the applicable four-quarter reference period.
In addition, for purposes of calculating the Fixed Charge Coverage Ratio:
(1) acquisitions that have been made by the specified person or any of
its Restricted Subsidiaries, including through mergers or consolidations
and including any related financing transactions, during the four-quarter
reference period or subsequent to such reference period and on or prior to
the Calculation Date shall be given pro forma effect as if they had
occurred on the first day of the four-quarter reference period and
Consolidated Cash Flow for such reference period shall be calculated on a
pro forma basis in accordance with Regulation S-X under the Securities Act,
but without giving effect to clause (3) of the proviso set forth in the
definition of Consolidated Net Income;
(2) the Consolidated Cash Flow attributable to discontinued operations,
as determined in accordance with GAAP, and operations or businesses
disposed of prior to the Calculation Date, shall be excluded; and
(3) the Fixed Charges attributable to discontinued operations, as
determined in accordance with GAAP, and operations or businesses disposed
of prior to the Calculation Date, shall be excluded, but only to the extent
that the obligations giving rise to such Fixed Charges will not be
obligations of the specified person or any of its Restricted Subsidiaries
following the Calculation Date.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, which are in effect from time to time.
"Gaming Authority" means any agency, authority, board, bureau, commission,
department, office or instrumentality of any nature whatsoever of the United
States or any foreign government, any state, province or any city or other
political subdivision or otherwise and whether now or hereafter in existence,
or any officer or official thereof, including, without limitation, the
Illinois Gaming Board, the Louisiana Gaming Control Board and the Mississippi
Gaming Commission, with authority to regulate any gaming operation (or
proposed gaming operation) owned, managed or operated by the Company or any of
its Subsidiaries.
"Gaming Related Business" means the gaming business and other businesses
necessary for, incident to, connected with, arising out of, or developed or
operated to permit or facilitate the conduct or pursuit of the gaming business
(including developing and operating lodging facilities, restaurants, sports or
entertainment facilities, transportation services or other related activities
or enterprises and any additions or improvements thereto) and potential
opportunities in the gaming business.
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"Governmental Authority" means any agency, authority, board, bureau,
commission, department, office or instrumentality of any nature whatsoever
(including, without limitation, any Gaming Authority) of the United States or
foreign government, any state, any province or any city or other political
subdivision or otherwise and whether now or hereafter in existence, or any
officer or official thereof, and any maritime authority.
"Government Securities" means securities that are (a) direct obligations of
the United States of America for the timely payment of which its full faith
and credit is pledged or (b) obligations of a person controlled or supervised
by and acting as an agency or instrumentality of the United States of America
the timely payment of which is unconditionally guaranteed as a full faith and
credit obligation by the United States of America, which, in either case, are
not callable or redeemable at the option of the issuer thereof, and also
includes a depository receipt issued by a bank (as defined in Section 3(a)(2)
of the Securities Act of 1933, as amended), as custodian with respect to any
such Government Security or a specific payment of principal of or interest on
any such Government Security held by such custodian for the account of the
holder of such depository receipt; provided that (except as required by law)
such custodian is not authorized to make any deduction from the amount payable
to the holder of such depository receipt from any amount received by the
custodian in respect of the Government Security or the specific payment of
principal of or interest on the Government Security evidenced by such
depository receipt.
"Guarantee" means a guarantee other than by endorsement of negotiable
instruments for collection in the ordinary course of business, direct or
indirect, in any manner including, without limitation, by way of a pledge of
assets or through letters of credit or reimbursement agreements in respect
thereof, of all or any part of any Indebtedness.
"Hedging Obligations" means, with respect to any specified person, the
obligations of such person under:
(1) interest rate swap agreements, interest rate cap agreements and
interest rate collar agreements; and
(2) other agreements or arrangements designed to protect such person
against fluctuations in interest rates.
"Hollywood Casino-Aurora" means Hollywood Casino-Aurora, Inc., an Illinois
corporation, all of the Capital Stock of which is owned by the Company.
"HWCC-Aurora Management" means HWCC Aurora Management, Inc., an Illinois
corporation, all of the Capital Stock of which is owned by the Company.
HWCC-Aurora Management Note" means that certain promissory note, dated as of
April 1, 1997, in the original aggregate principal amount of $3.8 million,
issued to PPI Corporation.
"HWCC-Holdings" means HWCC-Holdings, Inc., a Texas corporation, all of the
Capital Stock of which is owned by the Company.
"HWCC-Louisiana" means HWCC-Louisiana, Inc., a Louisiana corporation, all of
the Capital Stock of which is owned by the Company.
"HWCC-Shreveport" means HWCC-Shreveport, Inc., a Louisiana corporation, all
of the Capital Stock of which is owned by the Company.
"HWCC-Tunica" means HWCC-Tunica, Inc., a Texas corporation, all of the
capital stock of which is owned by the Company.
"Indebtedness" means, with respect to any specified person, any indebtedness
of such person, whether or not contingent, in respect of:
(1) borrowed money;
(2) obligations evidenced by bonds, notes, debentures or similar
instruments or letters of credit (or reimbursement agreements in respect
thereof);
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(3) banker's acceptances;
(4) Capital Lease Obligations;
(5) the balance deferred and unpaid of the purchase price of any
property, except any such balance that constitutes an accrued expense or
trade payable or other amounts (other than accounts payable or other
obligations to trade creditors which have remained unpaid for greater than
90 days past their original due date or that are being contested in good
faith and for which adequate reserves have been made) incurred in the
ordinary course of business that ordinarily would constitute a trade
payable to trade creditors;
(6) any Hedging Obligations;
(7) all Indebtedness of others secured by a Lien on any asset of the
specified person (whether or not such Indebtedness is assumed by the
specified person); provided, however, that the amount of such Indebtedness
shall be limited to the lesser of the fair market value of the assets or
property to which such Lien attaches and the amount of the Indebtedness so
secured; and
(8) to the extent not otherwise included, the guarantee by the specified
person of any indebtedness of any other person,
and any and all deferrals, renewals, extensions, refinancings and refundings
(whether direct or indirect) thereof and any amendments, modifications or
supplements thereto, if and to the extent any of the preceding items (other
than letters of credit and Hedging Obligations) would appear as a liability
upon a balance sheet of the specified person prepared in accordance with GAAP.
The amount of any Indebtedness outstanding as of any date shall be:
(1) the accreted value thereof, in the case of any Indebtedness issued
with original issue discount; and
(2) the principal amount thereof, together with any interest thereon that
is more than 30 days past due, in the case of any other Indebtedness.
"Intercompany Notes" means (i) the Aurora Intercompany Note, (ii) the Tunica
Intercompany Note and (iii) any other promissory notes issued by Restricted
Subsidiaries of the Company in favor of the Company or a guarantor to evidence
advances by the Company or such guarantor.
"Interest Period" means the period commencing on and including an interest
payment date and ending on and including the day immediately preceding the
next succeeding interest payment date.
"Investments" means, with respect to any person, all direct or indirect
investments by such person in other persons (including Affiliates) in the
forms of loans (including guarantees or other obligations), advances or
capital contributions (excluding commission, travel and similar advances to
officers and employees made in the ordinary course of business), purchases or
other acquisitions for consideration of Indebtedness, Equity Interests or
other securities, together with all items that are or would be classified as
investments on a balance sheet prepared in accordance with GAAP. If the
Company or any Subsidiary of the Company sells or otherwise disposes of any
Equity Interests of any direct or indirect Subsidiary of the Company such
that, after giving effect to any such sale or disposition, such person is no
longer a Subsidiary of the Company, the Company shall be deemed to have made
an Investment on the date of any such sale or disposition equal to the fair
market value of the Equity Interests of such Subsidiary not sold or disposed
of in an amount determined as provided in the final paragraph of the covenant
described above under the caption "--Certain Covenants--Restricted Payments."
The acquisition by the Company or any Subsidiary of the Company of a person
that holds an Investment in a third person shall be deemed to be an Investment
by the Company or such Subsidiary in such third person in an amount equal to
the fair market value of the Investment held by the acquired person in such
third person in an amount determined as provided in the final paragraph of the
covenant described above under the caption "--Certain Covenants--Restricted
Payments."
"LIBOR," with respect to an Interest Period, means the rate (expressed as a
percentage per annum) for deposits in United States dollars for a six-month
period beginning on the second London Banking Day after the
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Determination Date that appears on Telerate Page 3750 as of 11:00 a.m., London
time, on the Determination Date. If Telerate Page 3750 does not include such a
rate or is unavailable on a Determination Date, LIBOR for the Interest Period
shall be the arithmetic mean of the rates (expressed as a percentage per
annum) for deposits in a Representative Amount in United States dollars for a
six-month period beginning on the second London Banking Day after the
Determination Date that appears on Reuters Screen LIBO Page as of 11:00 a.m.,
London time, on the Determination Date. If Reuters Screen LIBO Page does not
include two or more rates or is unavailable on a Determination Date, the
Calculation Agent shall request the principal London office of each of four
major banks in the London interbank market, as selected by the Calculation
Agent, to provide such bank's offered quotation (expressed as a percentage per
annum), as of approximately 11:00 a.m., London time, on such Determination
Date, to prime banks in the London interbank market for deposits in a
Representative Amount in United States dollars for a six-month period
beginning on the second London Banking Day after the Determination Date. If at
least two such offered quotations are so provided, LIBOR for the Interest
Period shall be the arithmetic mean of such quotations. If fewer than two such
quotations are so provided, the Calculation Agent shall request each of three
major banks in New York City, as selected by the Calculation Agent, to provide
such bank's rate (expressed as a percentage per annum), as of approximately
11:00 a.m., New York City time, on such Determination Date, for loans in a
Representative Amount in United States dollars to leading European banks for a
six-month period beginning on the second London Banking Day after the
Determination Date. If at least two such rates are so provided, LIBOR for the
Interest Period will be the arithmetic mean of such rates. If fewer than two
such rates are so provided, then LIBOR for the Interest Period will be LIBOR
in effect with respect to the immediately preceding Interest Period.
"Lien" means, with respect to any asset, any mortgage, lien, pledge, charge,
security interest or encumbrance of any kind in respect of such asset, whether
or not filed, recorded or otherwise perfected under applicable law, including
any conditional sale or other title retention agreement, any lease in the
nature thereof, any option or other agreement to sell or give a security
interest in and any filing of or agreement to give any financing statement
under the Uniform Commercial Code (or equivalent statutes) of any
jurisdiction.
"London Banking Day" means any day in which dealings in United States
dollars are transacted or, with respect to any future date, are expected to be
transacted in the London interbank market.
"Net Income" means, with respect to any specified person, the net income
(loss) of such person, determined in accordance with GAAP and before any
reduction in respect of preferred stock dividends, excluding, however:
(1) any gain (but not loss), net of any related provision for taxes on
such gain (but not loss), realized in connection with: (a) any Asset Sale;
or (b) the disposition of any securities by such person or any of its
Restricted Subsidiaries or the extinguishment of any Indebtedness of such
person or any of its Restricted Subsidiaries; and
(2) any extraordinary gain (but not loss), together with any related
provision for taxes on such extraordinary gain (but not loss).
"Net Loss Proceeds" means the aggregate cash proceeds received by the
Company or any of its Restricted Subsidiaries in respect of any Event of Loss,
including, without limitation, insurance proceeds from condemnation awards or
damages awarded by any judgment, net of the direct costs in recovery of such
Net Loss Proceeds (including, without limitation, legal, accounting, appraisal
and insurance adjuster fees and any relocation expenses incurred as a result
thereof), amounts required to be applied to the repayment of Indebtedness
secured by a Lien on the asset or assets that were the subject of such Event
of Loss, and any taxes paid or payable as a result thereof.
"Net Proceeds" means the aggregate cash proceeds received by the Company or
any of its Restricted Subsidiaries in respect of any Asset Sale (including,
without limitation, any cash received upon the sale or other disposition of
any non-cash consideration received in any Asset Sale), net of the direct
costs relating to such Asset Sale, including, without limitation, legal,
accounting and investment banking fees, and sales commissions, and any
relocation expenses incurred as a result thereof, taxes paid or payable as a
result thereof, in each case,
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after taking into account any available tax credits or deductions and any tax
sharing arrangements, and amounts required to be applied to the repayment of
Indebtedness secured by a Lien on the asset or assets that were the subject of
such Asset Sale and any reserve for adjustment in respect of the sale price of
such asset or assets established in accordance with GAAP.
"Non-Recourse Debt" means Indebtedness:
(1) as to which neither the Company nor any of its Restricted
Subsidiaries (a) provides credit support of any kind (including any
undertaking, agreement or instrument that would constitute Indebtedness),
(b) is directly or indirectly liable as a Guarantor or otherwise, or (c)
constitutes the lender;
(2) no default with respect to which (including any rights that the
holders thereof may have to take enforcement action against an Unrestricted
Subsidiary) would permit upon notice, lapse of time or both any holder of
any other Indebtedness (other than the Notes) of the Company or any of its
Restricted Subsidiaries to declare a default on such other Indebtedness or
cause the payment thereof to be accelerated or payable prior to its stated
maturity; and
(3) as to which the lenders have been notified in writing that they will
not have any recourse to the stock or assets of the Company or any of its
Restricted Subsidiaries.
"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"Operating" means, with respect to the Shreveport Casino, the time that (i)
all Gaming Licenses have been granted and have not been revoked or suspended,
(ii) the Shreveport Casino is in a condition (including installation of
furnishings, fixtures and equipment) to receive guests in the ordinary course
of business, (iii) gaming and other operations in accordance with applicable
law are open to the general public and are being conducted at the Shreveport
Casino, (iv) a permanent or temporary certificate of occupancy has been issued
for the Shreveport Casino by the parish in Louisiana in which the Shreveport
Casino will operate, (v) a notice of termination of work relating to the
Shreveport Casino has been duly recorded in accordance with Louisiana law, and
(vi) the Shreveport Casino has been documented by the U.S. Coast Guard in the
name of QNOV or any successor and the U.S. Coast Guard has issued a
Certificate of Inspection for the Shreveport Casino.
"Permitted Investments" means:
(1) any Investment in the Company or in a Restricted Subsidiary of the
Company;
(2) any Investment in Cash Equivalents;
(3) any Investment by the Company or any Restricted Subsidiary of the
Company in a person engaged in any Gaming Related Business, if as a result
of such Investment:
(a) such person becomes a Restricted Subsidiary of the Company; or
(b) such person is merged, consolidated or amalgamated with or into,
or transfers or conveys substantially all of its assets to, or is
liquidated into, the Company or a Restricted Subsidiary of the Company;
(4) any Investment made as a result of the receipt of non-cash
consideration from an Asset Sale that was made pursuant to and in
compliance with the covenant described above under the caption "--
Repurchase at the Option of Holders--Asset Sales";
(5) any acquisition of assets solely in exchange for the issuance of
Equity Interests (other than Disqualified Stock) of the Company;
(6) Hedging Obligations;
(7) any Investment by the Company or any of its Restricted Subsidiaries
in persons required in order to secure liquor and/or other licenses or
permits under applicable law incident to the operation by the Company or
any of its Restricted Subsidiaries of a Gaming Related Business, provided
the aggregate amount of such Investment shall at no time exceed $100,000;
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(8) any Investment made in settlement of gambling debts incurred by
patrons of any of the Casinos owned or operated by the Company or any of
its Restricted Subsidiaries which settlements have been entered into in the
ordinary course of business;
(9) a Shreveport Casino Investment;
(10) the transfer, sale, contribution or other conveyance to any
Subsidiary of those certain notes by Greate Bay Casino Corporation and PPI
Funding Corp. in favor of the Company; and
(11) Investments not otherwise permitted by the foregoing clauses (1)
through (10) in an aggregate outstanding amount of not more than $250,000.
"Permitted Liens" means:
(1) Liens on the assets of the Company and any guarantor created by the
indenture and the Collateral Documents securing the new notes and the
Guarantees;
(2) Liens in favor of the Company or the guarantors;
(3) Liens on property of a person existing at the time such person is
merged with or into or consolidated with the Company or any Restricted
Subsidiary of the Company; provided, however, that such Liens were in
existence prior to the contemplation of such merger or consolidation and do
not extend to any assets other than those of the person merged into or
consolidated with the Company or the Restricted Subsidiary;
(4) Liens on property existing at the time of acquisition thereof by the
Company or any Restricted Subsidiary of the Company, provided that such
Liens were in existence prior to the contemplation of such acquisition;
(5) Liens to secure the performance of statutory obligations, surety or
appeal bonds, performance bonds or other obligations of a like nature
incurred in the ordinary course of business;
(6) Liens to secure Indebtedness permitted by clause (1) of the second
paragraph of the covenant entitled "--Certain Covenants--Incurrence of
Indebtedness and Issuance of Preferred Stock" covering only inventory and
accounts receivable;
(7) Liens to secure Indebtedness (including Capital Lease Obligations)
permitted by clause (4) of the second paragraph of the covenant entitled
"--Certain Covenants--Incurrence of Indebtedness and Issuance of Preferred
Stock" covering only the assets acquired with such Indebtedness;
(8) Liens existing on the date of the indenture, including Liens related
to the HWCC-Aurora Management Note;
(9) Liens for taxes, assessments or governmental charges or claims that
are not yet delinquent or that are being contested in good faith by
appropriate proceedings promptly instituted and diligently concluded,
provided that any reserve or other appropriate provision as shall be
required in conformity with GAAP shall have been made therefor;
(10) Liens incurred in the ordinary course of business of the Company or
any Restricted Subsidiary of the Company with respect to obligations that
do not exceed $5 million at any one time outstanding;
(11) Liens on assets of Unrestricted Subsidiaries that secure Non-
Recourse Debt of Unrestricted Subsidiaries;
(12) Ground leases in respect of the real property on which facilities
owned or leased by the Company or any of its Restricted Subsidiaries are
located;
(13) Liens arising from UCC financing statements regarding property
leased by the Company or any of its Restricted Subsidiaries;
(14) Easements, rights-of-way, navigational servitudes, zoning
restrictions, minor defects or irregularities in title and other similar
charges or encumbrances which do not interfere in any material respect with
the ordinary conduct of business of the Company and its Restricted
Subsidiaries;
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(15) Liens incurred and pledges made in the ordinary course of business
in connection with workers' compensation, unemployment insurance and social
security benefits;
(16) Liens of carriers, warehouse men, mechanics, landlords, material
men, repairmen or other like Liens arising by operation of law or in the
ordinary course of business and consistent with industry practices and
Liens on deposits made to obtain the release of such Liens if
(a) the underlying obligations are not overdue for a period of more
than 60 days, or
(b) such Liens are being contested in good faith and by appropriate
proceedings by the Company and adequate reserves with respect thereto
are maintained on the books of the Company in accordance with GAAP, and
(c) the Company is in compliance with the terms of the security
documents applicable to such Liens; and
(17) Without limiting the ability of the Company or any of its
Subsidiaries to create, incur, assume or suffer to exist any Lien otherwise
permitted under any of the foregoing clauses, any extension, renewal or
replacement, in whole or in part, of any Lien described in the foregoing
clauses; provided, however, that any such extension, renewal or replacement
Lien is limited to the property or assets covered by the Lien extended,
renewed or replaced or substitute property or assets, the value of which is
(and, for property or assets having an aggregate fair market value of more
than $100,000, as determined by the Board of Directors of the Company to
be) not materially greater than the value of the property or assets for
which the substitute property or assets are substituted.
"Permitted Refinancing Indebtedness" means any Indebtedness of the Company
or any of its Restricted Subsidiaries issued in exchange for, or the net
proceeds of which are used to extend, refinance, renew, replace, defease or
refund other Indebtedness of the Company or any of its Restricted Subsidiaries
(other than intercompany Indebtedness); provided that:
(1) the principal amount (or accreted value, if applicable) of such
Permitted Refinancing Indebtedness does not exceed the principal amount (or
accreted value, if applicable) of the Indebtedness so extended, refinanced,
renewed, replaced, defeased or refunded (plus all accrued interest thereon
and the amount of all expenses and premiums incurred in connection
therewith);
(2) such Permitted Refinancing Indebtedness has a final maturity date
later than the final maturity date of, and has a Weighted Average Life to
Maturity equal to or greater than the Weighted Average Life to Maturity of,
the Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded;
(3) if the Indebtedness being extended, refinanced, renewed, replaced,
defeased or refunded is subordinated in right of payment to the new notes,
such Permitted Refinancing Indebtedness has a final maturity date later
than the final maturity date of, and is subordinated in right of payment
to, the Notes on terms at least as favorable to the holders of new notes as
those contained in the documentation governing the Indebtedness being
extended, refinanced, renewed, replaced, defeased or refunded; and
(4) such Indebtedness is incurred either by the Company or by the
Restricted Subsidiary who is the obligor on the Indebtedness being
extended, refinanced, renewed, replaced, defeased or refunded.
"Pratt Casino Corporation Acquisition" means the acquisition by the Company
of all of the capital stock of Pratt Casino Corporation pursuant to and in
accordance with the terms set forth in the Voting Agreement by and among the
Company, Pratt Casino Corporation, PRT Funding Corp., New Jersey Management,
Inc., Greate Bay Casino Corporation and certain creditors of PRT Funding named
therein.
"Pratt Casino Corporation Notes" means those certain notes, debt instruments
or other obligations to be issued by Pratt Casino Corporation to its creditors
pursuant to the joint plan of reorganization relating to the bankruptcy
proceedings of Pratt Casino Corporation, PRT Funding Corp. and New Jersey
Management, Inc. under Chapter 11 of the Bankruptcy Code.
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"Pratt Management, L.P." means Pratt Management, L.P., a Delaware limited
partnership.
"Principals" means:
(1) Jack Pratt, Edward T. Pratt, Jr., William D. Pratt, Crystal A. Pratt,
Maria A. Pratt and Edward T. Pratt, III, their respective estates and
members of the immediate family (including adopted children) of any of them
who acquire Voting Stock of the Company from any such estates,
(2) C.A. Pratt Partners, Ltd., a Texas limited partnership, provided,
however, that, in each case, the majority of the voting equity interests of
the partnership is Beneficially Owned by a person named in clause (1), and
(3) the WDP, Jr. Family Trust, provided, however, that a person named in
clause (1) is
(a) the Beneficial Owner of a majority of the Voting Stock held by
such trust, or
(b) if the trust is irrevocable, the trustee of the irrevocable trust
is a person named in clause (1).
"QNOV" means QNOV, a Louisiana general partnership.
"Qualified Equity Offering" means an offering of the Company's common stock
which results in net proceeds to the Company of at least $20 million.
"Representative Amount" means a principal amount of not less than U.S.
$1,000,000 for a single transaction in the relevant market at the relevant
time.
"Restricted Investment" means an Investment other than a Permitted
Investment.
"Restricted Subsidiary" of a person means any Subsidiary of the referent
person that is not an Unrestricted Subsidiary.
"Reuters Screen LIBO Page" means the display designated as page "LIBO" on
The Reuters Monitor Money Rates Service (or such other page as may replace the
LIBO page on that service).
"Shreveport Casino" means that certain casino, hotel complex and related
facilities located in Shreveport, Louisiana, and owned, leased or otherwise
held and to be developed and constructed by the Company or any of its
Subsidiaries.
"Shreveport Casino Investment" means an Investment in a Subsidiary solely
for the purpose of developing, constructing and opening the Shreveport Casino
in an amount not to exceed $65 million from the date of the Indenture;
provided, however, that to be eligible to make a Shreveport Casino Investment,
the Company, not later than March 31, 2000, must have obtained substantially
all of the funds for the development and construction, other than financing
for furniture, fixtures or equipment to be incurred prior to opening of the
Shreveport Casino. If in any event the Shreveport Casino is not operating on
or prior to June 1, 2001, any Investment made or to be made by the Company in
the Shreveport Casino, which when taken together with all other Investments
made in the Shreveport Casino, exceeds $25 million in the aggregate, shall
count as a Restricted Payment as of the date the Investment is made for
purposes of determining the aggregate amount of all Restricted Payments made
by the Company since the date of the Indenture as set forth in the first
paragraph of the covenant described under the caption "--Certain Covenants--
Restricted Payments," provided, however, that the amounts treated as
Restricted Payments pursuant to this sentence shall only be treated as
Restricted Payments until the date that the Shreveport Casino is Operating.
Notwithstanding the foregoing, if the Company has made aggregate Investments
of less than $25 million in a Shreveport Casino Investment and the Company at
any time determines by resolution duly adopted by the Board of Directors to
terminate the development of the Shreveport Casino, the Company may make one
or more Investments in an alternative opportunity in a Gaming Related Business
in an amount which shall not exceed $25 million when taken together with all
other Investments made or to be made in the Shreveport Casino and in a Gaming
Related Business pursuant to this sentence.
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"Shreveport Management Agreement" means any agreement between the Company or
any of its Affiliates, including, without limitation, HWCC-Shreveport, with
QNOV or any of its Affiliates, relating to the operation and management of the
Shreveport Casino.
"Significant Subsidiary" means any Subsidiary that would be a "significant
subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X, promulgated
pursuant to the Securities Act, as such Regulation is in effect on the date of
the Indenture.
"Stated Maturity" means, with respect to any installment of interest or
principal on any series of Indebtedness, the date on which such payment of
interest or principal was scheduled to be paid in the original documentation
governing such Indebtedness, and shall not include any contingent obligations
to repay, redeem or repurchase any such interest or principal prior to the
date originally scheduled for the payment thereof.
"Subsidiary" means, with respect to any specified person:
(1) any corporation, association or other business entity of which more
than 50% of the total voting power of shares of Capital Stock entitled
(without regard to the occurrence of any contingency) to vote in the
election of directors, managers or trustees thereof is at the time owned or
controlled, directly or indirectly, by such person or one or more of the
other Subsidiaries of that person (or a combination thereof); and
(2) any partnership (a) the sole general partner or the managing general
partner of which is such person or a Subsidiary of such person or (b) the
only general partners of which are such person or one or more Subsidiaries
of such person (or any combination thereof).
"Substitute Management Agreement" means any management contract between the
Company and any of its affiliates relating to the operation and management of
a Gaming Related Business in which the Company has made an Investment pursuant
to the last sentence of the definition of "Shreveport Casino Investment."
"Tangible Consolidated Net Worth" means, with respect to a Restricted
Subsidiary, such Restricted Subsidiary's Total Consolidated Net Worth,
adjusted (i) to include the principal amount of all loans and advances made to
such Restricted Subsidiary by the Company or any other Restricted Subsidiary
of the Company and (ii) to exclude the Intangible Assets of such Restricted
Subsidiary and its consolidated subsidiaries. For purposes of this definition,
"Intangible Assets" means the amount (to the extent reflected in computing the
Restricted Subsidiary's Total Consolidated Net Worth) of (a) all Investments
in persons which are not Restricted Subsidiaries of the Company (except, in
each case, Investments which are readily marketable, valued at the lower of
cost or market), and (ii) all unamortized debt discounts and expense,
unamortized deferred charges, goodwill, patents, trademarks, service marks,
trade names, copyrights, organization and capitalized development expenses and
other intangible assets, all as determined in accordance with GAAP.
"Telerate Page 3750" means the display designated as "Page 3750" on the Dow
Jones Telerate Service (or such other page as may replace Page 3750 on that
service).
"Total Consolidated Net Worth" means, with respect to any person, the
aggregate of capital, surplus and retained earnings of such person and its
consolidated subsidiaries, as would be shown on the consolidated balance sheet
of such person prepared in accordance with GAAP adjusted to exclude (to the
extent included in calculating such equity),
(1)the amount of capital, surplus and accrued but unpaid dividends
attributable to any Disqualified Stock or treasury stock of such person or
any of its consolidated subsidiaries;
(2)all upward revaluations and other write-ups in the book value of any
asset of such person or a consolidated subsidiary of such person subsequent
to the date of the Indenture;
(3)all investments in subsidiaries that are not consolidated subsidiaries
and in persons that are not subsidiaries; and
(4)minority interests.
124
<PAGE>
"Tunica Casino" means that certain casino, hotel complex and related
facilities located in Tunica, Mississippi and owned, leased or otherwise held
by HWCC-Tunica.
"Tunica Consulting Agreement" means the Consulting Agreement dated as of
January 1, 1994, between HWCC-Tunica and Pratt Casino Corporation.
"Tunica Intercompany Note" means that certain amended and restated
promissory note dated as of the date of the Indenture issued by HWCC-Tunica to
the Company.
"Unrestricted Subsidiary" means HWCC-Holdings, HWCC-Golf Course Partners,
HWCC-Louisiana, Pratt Management, L.P., QNOV and any other Subsidiary of the
Company that is designated by the Board of Directors as an Unrestricted
Subsidiary pursuant to a resolution of the Board of Directors, but only to the
extent that such Subsidiary:
(1) has no Indebtedness other than Non-Recourse Debt;
(2) is not party to any agreement, contract, arrangement or understanding
with the Company or any Restricted Subsidiary of the Company unless the
terms of any such agreement, contract, arrangement or understanding are no
less favorable to the Company or such Restricted Subsidiary than those that
might be obtained at the time from persons who are not Affiliates of the
Company;
(3) is a person with respect to which neither the Company nor any of its
Restricted Subsidiaries has any direct or indirect obligation (a) to
subscribe for additional Equity Interests or (b) to maintain or preserve
such person's financial condition or to cause such person to achieve any
specified levels of operating results; and
(4) has not guaranteed or otherwise directly or indirectly provided
credit support for any Indebtedness of the Company or any of its Restricted
Subsidiaries.
Any designation of a Subsidiary of the Company as an Unrestricted Subsidiary
shall be evidenced to the trustee by filing with the trustee a certified copy
of the resolution of the Board of Directors giving effect to such designation
and an officers' certificate certifying that such designation complied with
the preceding conditions and was permitted by the covenant described above
under the caption "--Certain Covenants--Restricted Payments." If, at any time,
any Unrestricted Subsidiary would fail to meet the preceding requirements as
an Unrestricted Subsidiary, it shall thereafter cease to be an Unrestricted
Subsidiary for purposes of the indenture and any Indebtedness of such
Subsidiary shall be deemed to be incurred by a Restricted Subsidiary of the
Company as of such date and, if such Indebtedness is not permitted to be
incurred as of such date under the covenant described under the caption "--
Certain Covenants--Incurrence of Indebtedness and Issuance of Preferred
Stock," the Company shall be in default of such covenant. The Board of
Directors of the Company may at any time designate any Unrestricted Subsidiary
to be a Restricted Subsidiary; provided that such designation shall be deemed
to be an incurrence of Indebtedness by a Restricted Subsidiary of the Company
of any outstanding Indebtedness of such Unrestricted Subsidiary and such
designation shall only be permitted if
(1) such Indebtedness is permitted under the covenant described under the
caption "--Certain Covenants--Incurrence of Indebtedness and Issuance of
Preferred Stock," calculated on a pro forma basis as if such designation
had occurred at the beginning of the four-quarter reference period; and
(2) no Default or Event of Default would be in existence following such
designation.
"Voting Stock" of any person as of any date means the Capital Stock of such
person that is at the time entitled to vote in the election of the Board of
Directors of such person.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing:
(1) the sum of the products obtained by multiplying (a) the amount of
each then remaining installment, sinking fund, serial maturity or other
required payments of principal, including payment at final maturity, in
125
<PAGE>
respect thereof, by (b) the number of years (calculated to the nearest one-
twelfth) that will elapse between such date and the making of such payment;
by
(2) the then outstanding principal amount of such Indebtedness; provided,
however, that with respect to any revolving Indebtedness, the foregoing
calculation of Weighted Average Life to Maturity shall be determined based
upon the total available commitments and the required reductions of
commitments in lieu of the outstanding principal amount and the required
payments of principal, respectively.
UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following is a general discussion of the material United States federal
income tax considerations relevant to the exchange of your original notes for
registered notes. This discussion is a summary for general information
purposes only, and does not consider all aspects of federal income taxation
that may be relevant to a particular investor in light of his, her or its
personal circumstances.
This discussion is based upon the United States federal tax law now in
effect, which is subject to change, possibly retroactively. The description
does not consider the effect of any applicable foreign, state, local or other
tax laws or estate or gift tax considerations.
You should consult your own tax advisors regarding the particular United
States federal tax consequences to you of exchanging your original notes for
registered notes, as well as any tax consequences that may arise under the
laws of any foreign, state, local or other taxing jurisdiction.
Exchange of Original Notes for Registered Notes
The exchange of your original notes for registered notes pursuant to the
exchange offer should not constitute a sale or an exchange for federal income
tax purposes. Accordingly, not only should the exchange offer have no federal
income tax consequences to you if you exchange your original notes for
registered notes (i.e., there should be no change in your tax basis, and your
holding period should carry over to the registered notes), but the federal
income tax consequences of holding and disposing of the registered notes
should also be the same as those that would apply to your original notes.
PLAN OF DISTRIBUTION
If you are a broker-dealer that receives registered notes for your own
account in exchange for your original notes pursuant to the exchange offer,
where your original notes were acquired by such broker-dealer as a result of
market-making activities or other trading activities, you must acknowledge
that you will deliver a prospectus in connection with any resale of your
registered notes. This prospectus, as it may be amended or supplemented from
time to time, may be used by you in connection with resales of registered
notes received in exchange for your original notes where your original notes
were acquired as a result of market-making activities or other trading
activities. We have agreed that, for a period of one year after the
consummation of the exchange offer, we will make this prospectus, as amended
or supplemented, available to you for use in connection with any such resale.
In addition, until November 10, 1999, if you effect a transaction in the new
notes you may be required to deliver a prospectus.
Neither we nor the guarantors will receive any proceeds from any sale of
registered notes by broker-dealers. If you are a broker-dealer, registered
notes you receive for your own account in connection with the exchange offer
may be sold from time to time in one or more transactions in the over-the-
counter market, in negotiated transactions, through the writing of options on
the registered notes or a combination of such methods of resale, at market
prices prevailing at the time of resale, at prices related to such prevailing
market prices or negotiated prices. You may make resales directly to
purchasers or to or through brokers or dealers who may receive compensation in
the form of commissions or concessions from any such broker-dealer or the
purchasers of any such registered notes. If you are a broker-dealer that
resells registered notes that we received by you for your own account in
connection with
126
<PAGE>
the exchange offer and you participate in a distribution of your registered
notes, you may be deemed to be an "underwriter" within the meaning of the
Securities Act, and any profit on any resale of registered notes and any
commissions or concessions received by you may be deemed to be underwriting
compensation under the Securities Act. The letter of transmittal states that
by acknowledging that you will deliver and by delivering a prospectus, you
will not be deemed to admit that you are an "underwriter" within the meaning
of the Securities Act.
For a period of one year after the registration statement is declared
effective, we will promptly send additional copies of this prospectus and any
amendment or supplement to this prospectus to you, if you are a broker-dealer
that requests these documents in the letter of transmittal or otherwise. We
have agreed to pay all expenses incident to the exchange offer, including the
expenses of one counsel for the holders of the notes, other than commissions
or concessions of any broker-dealers and will indemnify you, including any
broker-dealers, against certain liabilities, including certain liabilities
under the Securities Act.
LEGAL MATTERS
The validity of the registered notes offered by this prospectus will be
passed upon for us by Weil, Gotshal & Manges LLP, Dallas, Texas and New York,
New York.
EXPERTS
The consolidated financial statements of Hollywood Casino Corporation and
subsidiaries (except for GB Holdings, Inc. and subsidiaries for the year ended
December 31, 1996) and of HWCC-Tunica, Inc. and subsidiary and the financial
statements of Hollywood Casino-Aurora, Inc. as of December 31, 1998 and 1997
and for each of the three years in the period ended December 31, 1998 included
in this prospectus and the related financial statement schedules included
elsewhere in the registration statement have been audited by Deloitte & Touche
LLP as stated in their reports appearing herein and elsewhere in the
registration statement (which report on Hollywood Casino Corporation and
subsidiaries expresses an unqualified opinion and contains an explanatory
paragraph regarding the restatement of the Company's 1997 and 1996 financial
statements). The consolidated financial statements of GB Holdings, Inc. and
subsidiaries for the year ended December 31, 1996 (consolidated with those of
Hollywood Casino Corporation) have been audited by Arthur Andersen LLP, as
stated in their report included herein. Such financial statements of the
companies and, where applicable, their consolidated subsidiaries are included
herein in reliance upon the respective reports of such firms given upon their
authority as experts in accounting and auditing. Both of the foregoing firms
are independent auditors.
CHANGES IN ACCOUNTANTS
Subsequent to the filing of our complaint against Arthur Andersen on October
8, 1998, the Audit Committee of our Board of Directors voted on October 16,
1998 to dismiss Arthur Andersen as our accountants. Arthur Andersen's report
on the 1997 financial statements did not contain an adverse opinion or
disclaimer of opinion nor was it modified as to an uncertainty, audit scope or
accounting principle. There was no disagreement with Arthur Andersen of the
type that would require disclosure under Item 304 of Regulation S-K.
WHERE YOU CAN FIND MORE INFORMATION
We file (File No. 000-2075) annual, quarterly and special reports, proxy
statements and other information with the SEC. You may read and copy any
reports, statements and other information filed by us at the SEC's public
reference room, at 450 Fifth Street, N.W., Washington, D.C., as well as at
public reference rooms in New York, New York and Chicago, Illinois. Please
call (800) SEC-0330 for further information on the public reference rooms. Our
filings are also available to the public from commercial document retrieval
services and at the internet web site maintained by the SEC at
http://www.sec.gov.
127
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Annual Financial Statements:
Hollywood Casino Corporation and Subsidiaries:
Report of Independent Auditors.......................................... F-2
Report of Independent Public Accountants................................ F-3
Consolidated Balance Sheets as of December 31, 1998 and 1997
(restated)............................................................. F-4
Consolidated Statements of Operations for the Years Ended December 31,
1998, 1997 (restated) and 1996......................................... F-6
Consolidated Statement of Changes in Shareholders' Equity (Deficit) for
the Three Years Ended December 31, 1998 (restated)..................... F-7
Consolidated Statements of Cash Flows for the Years Ended December 31,
1998, 1997 (restated) and 1996......................................... F-8
Notes to Consolidated Financial Statements.............................. F-9
Hollywood Casino-Aurora, Inc.
Report of Independent Auditors.......................................... F-29
Balance Sheets as of December 31, 1998 and 1997......................... F-30
Statements of Operations for the Years Ended December 31, 1998, 1997 and
1996................................................................... F-31
Statement of Changes in Shareholder's Equity for the Three Years Ended
December 31, 1998...................................................... F-32
Statements of Cash Flows for the Years Ended December 31, 1998, 1997,
and 1996............................................................... F-33
Notes to Financial Statements........................................... F-34
HWCC-Tunica, Inc.
Report of Independent Auditors.......................................... F-43
Consolidated Balance Sheets as of December 31, 1998 and 1997............ F-44
Consolidated Statements of Operations for the Years Ended December 31,
1998, 1997 and 1996.................................................... F-46
Consolidated Statement of Changes in Shareholder's Equity for the Three
Years Ended December 31, 1998.......................................... F-47
Consolidated Statements of Cash Flows for the Years Ended December 31,
1998, 1997 and 1996.................................................... F-48
Notes to Consolidated Financial Statements.............................. F-49
Quarterly Financial Statements (unaudited):
Hollywood Casino Corporation and Subsidiaries:
Consolidated Balance Sheets as of March 31, 1999 and December 31, 1998.. F-58
Consolidated Statements of Operations for the Three Month Periods Ended
March 31, 1999 and 1998................................................ F-60
Consolidated Statements of Cash Flows for the Three Month Periods Ended
March 31, 1999 and 1998................................................ F-61
Notes to Consolidated Financial Statements.............................. F-62
Hollywood Casino-Aurora, Inc.
Balance Sheets as of March 31, 1999 and December 31, 1998............... F-72
Statements of Operations for the Three Month Periods Ended March 31,
1999 and 1998.......................................................... F-73
Statements of Cash Flows for the Three Month Periods Ended March 31,
1999 and 1998.......................................................... F-74
Notes to Financial Statements........................................... F-75
HWCC-Tunica, Inc.
Consolidated Balance Sheets as of March 31, 1999 and December 31, 1998.. F-81
Consolidated Statements of Operations for the Three Month Periods Ended
March 31, 1999 and 1998................................................ F-83
Consolidated Statements of Cash Flows for the Three Month Periods Ended
March 31, 1999 and 1998................................................ F-84
Notes to Consolidated Financial Statements.............................. F-85
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To Hollywood Casino Corporation:
We have audited the accompanying consolidated balance sheets of Hollywood
Casino Corporation (the Company and a Delaware corporation) and subsidiaries
as of December 31, 1998 and 1997, and the related consolidated statements of
operations, changes in shareholders' equity (deficit) and cash flows for each
of the three years in the period ended December 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. We did not audit the consolidated financial statements of GB
Holdings, Inc. (a consolidated subsidiary until December 31, 1996 when it was
spun-off to the Company's shareholders, see Note 2), which statements for the
year ended December 31, 1996 reflect net revenues constituting approximately
50% of consolidated net revenues and a net loss (adjusted to exclude
intercompany transactions) constituting approximately 47% of consolidated net
loss for the year then ended. Those statements were audited by other auditors
whose report has been furnished to us, and our opinion, insofar as it relates
to the amounts included for GB Holdings, Inc. and subsidiaries, is based
solely on the report of such other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits and the report of the other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors,
the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Hollywood Casino Corporation and
subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1998 in conformity with generally accepted accounting
principles.
As discussed in Note 3, the accompanying 1997 and 1996 financial statements
have been restated.
Deloitte & Touche LLP
Dallas, Texas
February 23, 1999
F-2
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To GB Holdings, Inc.:
We have audited the consolidated statements of operations, changes in
shareholder's deficit and cash flows of GB Holdings, Inc. (the Company and a
Delaware Corporation) and subsidiaries for the year ended December 31, 1996.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated statements of operations, changes in
shareholder's deficit and cash flows referred to above present fairly, in all
material respects, the results of operations and cash flows of GB Holdings,
Inc. and subsidiaries for the year ended December 31, 1996 in conformity with
generally accepted accounting principles.
Arthur Andersen LLP
Roseland, New Jersey
March 21, 1997
F-3
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
December 31,
----------------------------
1997
(As Restated--
1998 Note 3)
------------ --------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents......................... $ 42,118,000 $ 40,259,000
Short-term investments............................ 3,905,000 3,876,000
Accounts receivable, net of allowances of
$1,468,000 and $1,188,000, respectively.......... 2,368,000 2,747,000
Inventories....................................... 1,385,000 1,454,000
Deferred income taxes............................. 890,000 2,481,000
Refundable deposits and other current assets...... 1,908,000 2,274,000
Due from affiliates, net of valuation allowance... 8,893,000 7,811,000
------------ ------------
Total current assets............................ 61,467,000 60,902,000
------------ ------------
Investment in unconsolidated affiliates............. 4,581,000 2,000,000
------------ ------------
Property and Equipment:
Land.............................................. 7,812,000 6,621,000
Buildings and improvements........................ 120,060,000 119,534,000
Riverboats and barges............................. 40,166,000 39,494,000
Operating equipment............................... 77,192,000 70,390,000
Construction in progress.......................... 3,227,000 1,222,000
------------ ------------
248,457,000 237,261,000
Less--accumulated depreciation and amortization... (80,642,000) (66,099,000)
------------ ------------
Net property and equipment...................... 167,815,000 171,162,000
------------ ------------
Other Assets:
Deferred financing costs.......................... 4,792,000 5,558,000
Notes receivable, net of allowance................ -- 6,000,000
Land rights....................................... 7,250,000 7,454,000
Due from affiliates, net of valuation allowance... 12,359,000 12,322,000
Land held for sale, net of valuation allowance.... 6,232,000 6,264,000
Other assets...................................... 6,244,000 4,556,000
------------ ------------
Total other assets.............................. 36,877,000 42,154,000
------------ ------------
$270,740,000 $276,218,000
============ ============
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these consolidated balance sheets.
F-4
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
December 31,
----------------------------
1997
(As Restated--
1998 Note 3)
------------ --------------
<S> <C> <C>
Current Liabilities:
Current maturities of long-term debt and capital
lease obligations............................... $ 7,914,000 $ 7,661,000
Accounts payable................................. 4,578,000 3,724,000
Accrued liabilities--
Salaries and wages.............................. 5,023,000 4,916,000
Interest........................................ 4,872,000 4,792,000
Gaming and other taxes.......................... 1,613,000 2,469,000
Insurance....................................... 2,940,000 2,667,000
Other........................................... 4,503,000 2,748,000
Federal income taxes payable..................... -- 6,878,000
Other current liabilities........................ 3,311,000 2,549,000
------------ ------------
Total current liabilities..................... 34,754,000 38,404,000
------------ ------------
Long-Term Debt.................................... 199,667,000 198,420,000
------------ ------------
Capital Lease Obligations......................... 19,948,000 20,841,000
------------ ------------
Other Noncurrent Liabilities...................... 5,755,000 7,180,000
------------ ------------
Commitments and Contingencies
Minority Interest in Limited Partnership.......... 3,104,000 2,256,000
------------ ------------
Shareholders' Equity:
Common Stock--
Class A common stock, $.0001 par value per
share; 50,000,000 shares authorized; 24,950,000
and 24,910,000 shares issued and outstanding,
respectively................................... 2,000 2,000
Class B, non-voting, $.01 par value per share;
10,000,000 shares authorized; no shares
issued......................................... -- --
Additional paid-in capital....................... 216,926,000 216,926,000
Accumulated deficit.............................. (209,416,000) (207,811,000)
------------ ------------
Total shareholders' equity.................... 7,512,000 9,117,000
------------ ------------
$270,740,000 $276,218,000
============ ============
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these consolidated balance sheets.
F-5
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------
1997
(As Restated--
1998 Note 3) 1996
------------ -------------- ------------
<S> <C> <C> <C>
Revenues:
Casino............................. $252,863,000 $251,471,000 $487,374,000
Rooms.............................. 9,386,000 9,651,000 18,834,000
Food and beverage.................. 28,810,000 28,533,000 61,620,000
Other.............................. 4,229,000 3,270,000 13,339,000
------------ ------------ ------------
295,288,000 292,925,000 581,167,000
Less--promotional allowances....... (26,528,000) (25,168,000) (50,587,000)
------------ ------------ ------------
Net revenues...................... 268,760,000 267,757,000 530,580,000
------------ ------------ ------------
Expenses:
Casino............................. 184,589,000 171,623,000 393,022,000
Rooms.............................. 1,752,000 1,835,000 6,029,000
Food and beverage.................. 8,778,000 9,210,000 20,708,000
Other.............................. 2,717,000 3,085,000 7,010,000
General and administrative......... 17,778,000 16,790,000 37,169,000
Management and consulting fees..... 1,200,000 3,927,000 --
Depreciation and amortization...... 16,562,000 18,901,000 40,836,000
Development........................ 779,000 1,480,000 1,065,000
------------ ------------ ------------
Total expenses.................... 234,155,000 226,851,000 505,839,000
------------ ------------ ------------
Income from operations before write
down of assets..................... 34,605,000 40,906,000 24,741,000
Write down of assets................ -- (19,678,000) (22,141,000)
------------ ------------ ------------
Income from operations.............. 34,605,000 21,228,000 2,600,000
------------ ------------ ------------
Non-operating income (expenses):
Interest income.................... 2,844,000 1,896,000 3,101,000
Interest expense, net of
capitalized interest of $1,006,000
in 1996........................... (30,260,000) (30,437,000) (59,090,000)
Tax settlement costs............... (1,087,000) -- --
(Loss) gain on disposal of assets.. (61,000) 552,000 (1,841,000)
------------ ------------ ------------
Total non-operating expenses,
net.............................. (28,564,000) (27,989,000) (57,830,000)
------------ ------------ ------------
Income (loss) before income taxes,
extraordinary and other items...... 6,041,000 (6,761,000) (55,230,000)
Income tax provision................ (816,000) (5,359,000) (63,000)
------------ ------------ ------------
Income (loss) before extraordinary
and other items.................... 5,225,000 (12,120,000) (55,293,000)
Minority interest in earnings of
Limited Partnership (Note 1)....... (6,494,000) (5,012,000) --
------------ ------------ ------------
Loss before extraordinary item...... (1,269,000) (17,132,000) (55,293,000)
Extraordinary item:
Loss on early extinguishment of
debt, net of related tax benefit
in 1997........................... (336,000) (215,000) --
------------ ------------ ------------
Net loss............................ $ (1,605,000) $(17,347,000) $(55,293,000)
============ ============ ============
Basic and diluted net loss per
common share:
Loss before extraordinary item..... $ (.05) $ (.69) $ (2.24)
Extraordinary item................. (.01) (.01) --
------------ ------------ ------------
Net loss........................... $ (.06) $ (.70) $ (2.24)
============ ============ ============
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these consolidated statements.
F-6
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
For the Three Years Ended December 31, 1998
<TABLE>
<CAPTION>
Class A
Common Stock
-----------------
Additional
Paid-in Accumulated
Shares Amount Capital Deficit
---------- ------ ------------ -------------
<S> <C> <C> <C> <C>
Balance, January 1, 1996........ 24,720,000 $2,000 $ 77,936,000 $(135,171,000)
Distribution of Greate Bay
Casino Corporation common
stock(1)...................... -- -- 151,362,000 --
Exercise of stock options...... 40,000 -- -- --
Net loss....................... -- -- -- (55,293,000)
---------- ------ ------------ -------------
Balance, December 31, 1996(1)... 24,760,000 2,000 229,298,000 (190,464,000)
Stock issued for loan
commitment.................... 100,000 -- 375,000 --
Acquisition of general
partnership interest.......... -- -- (12,747,000) --
Exercise of stock options...... 50,000 -- -- --
Net loss(1).................... -- -- -- (17,347,000)
---------- ------ ------------ -------------
Balance, December 31, 1997(1)... 24,910,000 2,000 216,926,000 (207,811,000)
Exercise of stock options...... 40,000 -- -- --
Net loss....................... -- -- -- (1,605,000)
---------- ------ ------------ -------------
Balance, December 31, 1998...... 24,950,000 $2,000 $216,926,000 $(209,416,000)
========== ====== ============ =============
</TABLE>
- --------
(1) Restated--see Note 3.
The accompanying notes to consolidated financial statements
are an integral part of this consolidated statement.
F-7
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------
1997 1996
(As Restated - (As Restated--
1998 Note 3) Note 3)
----------- -------------- --------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss........................... $(1,605,000) $(17,347,000) $(55,293,000)
Adjustments to reconcile net loss
to net cash provided by operating
activities:
Extraordinary item............... 336,000 215,000 --
Depreciation and amortization,
including accretion of debt
discount........................ 17,581,000 19,801,000 41,621,000
Write down of assets............. -- 19,678,000 22,141,000
Loss (gain) on disposal of
assets.......................... 61,000 (552,000) 1,841,000
Minority interest in earnings of
Limited Partnership............. 6,494,000 5,012,000 --
Provision for doubtful accounts.. 845,000 698,000 3,031,000
Deferred income tax provision
(benefit)....................... 81,000 592,000 (2,154,000)
Increase in accounts receivable.. (377,000) (305,000) (769,000)
Increase in accounts payable and
accrued expenses................ 2,035,000 116,000 649,000
(Decrease) increase in federal
taxes payable................... (6,878,000) 4,678,000 2,200,000
Net change in other current
assets and liabilities.......... (11,000) (1,107,000) (677,000)
Net change in other noncurrent
assets and liabilities.......... (1,811,000) 134,000 (281,000)
----------- ------------ ------------
Net cash provided by operating
activities.................... 16,751,000 31,613,000 12,309,000
----------- ------------ ------------
INVESTING ACTIVITIES:
Purchases of property and
equipment......................... (12,037,000) (5,101,000) (53,078,000)
Collections on notes receivable.... 6,000,000 -- 9,361,000
Proceeds from sale of assets....... 129,000 12,487,000 2,699,000
Obligatory investments............. -- -- (3,062,000)
Short-term investments............. (29,000) (3,876,000) (2,000,000)
Investments in unconsolidated
affiliates........................ (2,553,000) (2,000,000) (2,946,000)
Increase in cash from purchase of
limited partnership interest...... -- 451,000 --
Distribution of GBCC cash and cash
equivalents....................... -- -- (22,991,000)
Decrease in cash restricted for
construction projects............. -- -- 29,874,000
----------- ------------ ------------
Net cash (used in) provided by
investing activities............ (8,490,000) 1,961,000 (42,143,000)
----------- ------------ ------------
FINANCING ACTIVITIES:
Proceeds from issuance of long-term
debt.............................. 2,687,000 601,000 2,203,000
Net borrowings on short-term credit
facilities........................ -- -- 2,000,000
Deferred financing costs........... (248,000) (24,000) (126,000)
Repayments of long-term debt....... (2,334,000) (8,548,000) (6,840,000)
Payments on capital lease
obligations....................... (861,000) (1,976,000) (2,453,000)
Limited partnership distributions.. (5,646,000) (4,856,000) --
----------- ------------ ------------
Net cash used in financing
activities...................... (6,402,000) (14,803,000) (5,216,000)
----------- ------------ ------------
Net increase (decrease) in cash
and cash equivalents............ 1,859,000 18,771,000 (35,050,000)
Cash and cash equivalents at
beginning of year............. 40,259,000 21,488,000 56,538,000
----------- ------------ ------------
Cash and cash equivalents at
end of year................... $42,118,000 $ 40,259,000 $ 21,488,000
=========== ============ ============
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these consolidated statements.
F-8
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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 32,100 square foot
riverboat gaming operation together with docking and other entertainment
facilities under the service mark Hollywood Casino(R) in Aurora, Illinois (the
"Aurora Casino"). HCT is a Texas corporation formed by HCC during 1993 which
owns and operates a 54,000 square foot gaming facility, adjacent support
facilities and a 506-room hotel complex under the service mark Hollywood
Casino(R) in northern Tunica County, Mississippi (the "Tunica Casino"). The
Aurora Casino and the Tunica Casino commenced operations in June 1993 and
August 1994, respectively.
The Company 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 in the future.
Prior to December 31, 1996, HCC also owned approximately 80% of the common
stock of Greate Bay Casino Corporation ("GBCC"), also a Delaware corporation.
On December 31, 1996, HCC distributed to its shareholders the common stock of
GBCC owned by HCC. As a result of the dividend, GBCC is no longer a subsidiary
of HCC. While owned by HCC, GBCC's principal asset was the Sands Hotel and
Casino in Atlantic City, New Jersey (the "Sands"). GBCC also has a limited
partnership interest in Pratt Management L.P. ("PML"), the limited partnership
which holds the management contract on the Aurora Casino, and has a consulting
contract with the Tunica Casino.
Effective as of April 1, 1997, HCC acquired the general partnership interest
in PML from PPI Corporation, a wholly owned subsidiary of GBCC (see Note 8).
For all periods subsequent to the acquisition date (April 1, 1997), PML is
reflected as a consolidated subsidiary of HCC. The assets and liabilities of
PML were recorded at historical cost at the date of acquisition with the
difference between acquisition cost and the historical net book value
($12,747,000) recorded as a charge to paid-in capital (see Note 13). PML earns
management fees from the Aurora Casino and incurs operating and other expenses
with respect to its management thereof. As general partner, HCC receives 99%
of the first $84,000 of net income earned by PML each month together with 1%
of any income earned above such amount. The remaining limited partnership
interest continues to be held by Pratt Casino Corporation ("PCC"), a wholly
owned subsidiary of GBCC, and is reflected on the accompanying consolidated
financial statements as a minority interest (see Note 15).
The accompanying consolidated financial statements also reflect HCT's
initial one-third investment ($2,000,000) in Tunica Golf Course LLC under the
equity method of accounting. This limited liability company was organized in
1996 to develop and operate a golf course to be used by patrons of the Tunica
Casino and other participating casino/hotel properties. The golf course was
completed in November 1998.
HCC also has an approximate 50% interest in a joint venture which holds a
gaming license for a site in Shreveport, Louisiana. Construction of a casino
and hotel project is scheduled to begin in mid-1999. HCC's investment in the
joint venture ($2,500,000) is reflected on the accompanying consolidated
financial statements under the equity method of accounting (see Note 15).
F-9
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Board of Directors approved the adoption in May 1993 of a Rights
Agreement providing that stockholders of HCC receive rights to acquire Series
A Junior Participating Preferred Stock of HCC at an initial price of $60 per
one one-hundredth of a share, subject to adjustment, for each share of HCC
Common Stock owned. The rights become exercisable if a person (other than the
Pratt Family) acquires 20% or more, or announces a tender offer for 20% or
more, of the Company's Common Stock. If the Company is acquired in a merger or
other business combination, each right will enable the holder to exercise such
right for Common Stock of the acquiring company at a 50% discount. The rights,
which expire on May 7, 2003, may be redeemed by the Company at its option at a
price of $.0001 per right at any time prior to the earlier of 10 days
following the date after which a person has acquired at least 20% of the
Company's outstanding shares or May 7, 2003. Until such time as it becomes
likely that the rights will be exercised, the calculation of basic and diluted
earnings per share does not reflect the retroactive adjustment for the bonus
element of the Rights Agreement.
(2) Summary of Significant Accounting Policies
The significant accounting policies followed in the preparation of the
accompanying consolidated financial statements are discussed below. 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.
Principles of consolidation--
The consolidated financial statements include the accounts of HCC and its
wholly owned subsidiaries and, prior to December 31, 1996, the accounts of
GBCC (which was majority owned) and GBCC's wholly owned subsidiaries. The
accompanying consolidated financial statements include GBCC's operations and
cash flows through the date of disposition (December 31, 1996). The dividend
of GBCC's common stock to HCC's shareholders (adjusted for related
transactions) has been reflected in the accompanying consolidated financial
statements as an adjustment to additional paid-in capital at December 31,
1996. All significant intercompany balances and transactions have been
eliminated. Investments in unconsolidated affiliates including joint ventures
that were 50% or less owned are accounted for by the equity method.
Casino revenues, promotional allowances and departmental expenses--
HCC recognizes the net win from gaming activities (the difference between
gaming wins and losses) as casino revenues. Casino revenues are net of
accruals for anticipated payouts of progressive and certain other slot machine
jackpots and certain progressive table game payouts. Such anticipated jackpots
and payouts are reflected as other accrued liabilities on the accompanying
consolidated balance sheets.
The estimated value of rooms, food and beverage and other items which were
provided to customers without charge has been included in revenues and a
corresponding amount has been deducted as promotional allowances. The costs of
such complimentaries have been included as casino expenses on the accompanying
consolidated statements of operations. Costs of complimentaries allocated from
the rooms, food and beverage and other operating departments to the casino
department during the years ended December 31, 1998, 1997 and 1996 are as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Rooms.................................... $ 1,940,000 $ 1,870,000 $ 7,332,000
Food and beverage........................ 20,887,000 19,894,000 49,860,000
Other.................................... 1,431,000 1,061,000 5,956,000
----------- ----------- -----------
$24,258,000 $22,825,000 $63,148,000
=========== =========== ===========
</TABLE>
F-10
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Cash and cash equivalents--
Cash and cash equivalents are generally comprised of cash and investments
with original maturities of three months or less, such as commercial paper,
certificates of deposit and fixed repurchase agreements.
Allowance for doubtful accounts--
The allowance for doubtful accounts is maintained at a level considered
adequate to provide for possible future losses. Provisions for doubtful
accounts amounting to $756,000, $698,000 and $3,031,000 were made during the
years ended December 31, 1998, 1997 and 1996, respectively.
Inventories--
Inventories are stated at the lower of cost (on a first-in, first-out basis)
or market.
Property and equipment--
Property and equipment have been recorded at cost and are being depreciated
utilizing the straight-line method over the estimated useful lives of the
assets as follows:
<TABLE>
<S> <C>
Buildings and improvements....................................... 10-40 years
Riverboats and barges............................................ 25-40 years
Operating equipment.............................................. 3-15 years
</TABLE>
On October 1, 1996, HCC revised the estimated useful lives of its buildings,
barges and related land rights (see below) from 25 years to 40 years; of
certain parking facilities under a capital lease from 25 years to 30 years;
and of certain operating equipment from three years to five years. Management
believes the changes in estimated lives more appropriately reflect the timing
of the economic benefits to be received from these assets. For the year ended
December 31, 1996, the effect of these changes reduced depreciation and
amortization expense by $886,000 and net loss by approximately $578,000. Both
basic and diluted net loss per share were reduced by $.02 for 1996.
Interest costs related to property and equipment acquisitions were
capitalized during the development period and are being amortized over the
useful lives of the related assets.
Deferred financing costs--
The costs of issuing long-term debt, including all underwriting, licensing,
legal and accounting fees, have been capitalized and are being amortized over
the term of the related debt issue using the straight-line method which
approximates the effective interest method. Amortization of such costs was
$952,000, $963,000 and $2,044,000 for the years ended December 31, 1998, 1997
and 1996, respectively, and is included in depreciation and amortization
expense on the accompanying consolidated statements of operations. Deferred
financing costs, net of accumulated amortization, amounting to $62,000 and
$68,000, respectively were written off during 1998 and 1997, with respect to
the reacquisition of outstanding debt.
Long-lived assets--
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 events or changes in
circumstances indicate that the carrying amount of an asset may not be fully
recoverable. Long-lived assets held for sale are carried at the lower of
carrying amount or fair value less cost to sell.
F-11
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
During 1996, certain real property held as potential gaming development
sites in Texas was offered for sale; consequently management conducted a
review to determine the estimated fair value of these properties less costs to
sell. As a result of the review, HCC recorded an anticipated loss from the
disposition of assets held for sale of $3,400,000 during 1996. The loss is
included in write down of assets on the accompanying consolidated statement of
operations for the year ended December 31, 1996. During 1997, a parcel of the
real property was sold at a price approximating its net book value;
accordingly, no gain or loss was recognized on the sale. Land held for sale is
shown net of valuation allowances of approximately $3,400,000 on the
accompanying consolidated balance sheets at both December 31, 1998 and 1997.
Accrued insurance--
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.
Income taxes--
HCC complies with the provisions of Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"), which utilizes
the liability method and results in the determination of deferred taxes based
on the estimated future tax effects of differences between the financial
statement and tax bases of assets and liabilities.
Interest expense--
Interest expense includes the accretion of debt discount amounting to
$1,019,000, $900,000 and $785,000 during the years ended December 31, 1998,
1997 and 1996, respectively.
Land rights--
Land rights are being amortized on a straight-line basis over the estimated
useful life of the Tunica facility, which is less than the term of the ground
lease including renewals (see Note 12); such amortization commenced with the
opening of the Tunica Casino. The estimated economic benefit of the land
rights was revised from 25 years to 40 years effective on October 1, 1996
consistent with the change in estimated useful life of the Tunica facility as
discussed under "Property and Equipment" above. Management presently intends
to renew the ground lease at least through the estimated 40-year useful life
of the facility. Accumulated amortization of such land rights amounted to
$1,195,000 and $991,000, respectively, at December 31, 1998 and 1997.
Employee Stock Options--
During 1996, HCC adopted the provisions of statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123").
SFAS 123 requires that an entity account for employee stock compensation under
a fair value based method. However, SFAS 123 also allows an entity to continue
to measure compensation cost for employee stock-based compensation plans using
the intrinsic value based method of accounting prescribed by Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("Opinion 25"). Entities electing to remain with the accounting under Opinion
25 are required to make pro forma disclosures of net income and earnings per
share as if the fair value based method of accounting under SFAS 123 had been
applied. HCC has elected to continue to account for employee stock-based
compensation under Opinion 25 with the requisite additional disclosures
included in Note 7.
F-12
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Net (loss) income per common share--
During 1997, HCC adopted the provisions of Financial Accounting Standards
No. 128, "Earnings per Share" ("SFAS 128"). SFAS 128 requires the calculation
and disclosure of earnings per common share assuming no dilution (basic
earnings per share) and earnings per common share assuming full dilution
(diluted earnings per share). SFAS 128 requires the restatement of earnings
per share for all prior years presented.
Under SFAS 128, basic earnings per common share is calculated by dividing
the net (loss) 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.
The weighted average number of shares of common stock outstanding used for
the calculation of both basic and diluted loss per share before extraordinary
item and basic and diluted net loss per share was 24,946,359, 24,833,393 and
24,721,279 for the years ended December 31, 1998, 1997 and 1996, respectively.
No potential common shares were included in the calculation of diluted
earnings per share for the years ended December 31, 1998, 1997 and 1996 as the
inclusion of such shares would have been antidilutive due to the net losses
incurred in those years. The weighted average number of shares excluded was
962,260, 535,296 and 161,319, respectively, for the years ended December 31,
1998, 1997 and 1996.
Recent Accounting Pronouncements--
The Financial Accounting Standards Board (the "FASB") recently issued a new
standard, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 requires the
presentation and disclosure of comprehensive income, which is defined as the
change in a company's equity resulting from non-owner transactions and events.
SFAS 130 became effective for fiscal years beginning after December 15, 1997
and requires the reclassification of all prior periods presented. The Company
has adopted the provisions of SFAS 130; however, the statement provides that
an enterprise that has no items of other comprehensive income for any period
presented need only report net income. The Company has no such other
comprehensive income items for any period presented; accordingly, the
presentation and disclosure requirements of SFAS 130 are not applicable.
The FASB has also issued Statement 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"). SFAS 131, which became
effective for fiscal years beginning after December 15, 1997, requires
publicly-held companies to report financial and descriptive information
concerning its reportable operating segments. An operating segment is defined
as a component of a business which (i) earns revenues and incurs expenses,
(ii) has its operating results reviewed on a regular basis by the company's
chief operating decision maker to determine how the company's resources should
be allocated and to assess its performance and (iii) has separate financial
information available. Substantially all of HCC's operations consist of its
two casino facilities. Because of the similarity of these operations with
respect to the services provided, the class of customers served and the
regulatory environments in which they operate, the Company believes that these
operations have similar economic characteristics and will exhibit similar
long-term financial performance. Accordingly, these operations are considered
a single operating segment and additional segment information is not presented
herein.
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
F-13
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
Reclassifications--
Certain reclassifications have been made to the prior years' consolidated
financial statements to conform to the 1998 consolidated financial statement
presentation.
(3) Restatement of Consolidated Financial Statements
As previously disclosed in HCC's quarterly report on Form 10-Q for the
period ended September 30, 1998, and subsequent to the issuance of the
Company's 1997 consolidated financial statements, the Company has determined
that it should revise its tax treatment of the spin-off of the stock of GBCC
which occurred on December 31, 1996. The 1997 and 1996 consolidated financial
statements have been restated from amounts previously reported to record the
appropriate amounts for income taxes, accrued income taxes, deferred taxes,
interest and penalties due to the recognition of additional taxable income
resulting from the revised tax treatment of the spin-off.
For the year ended December 31, 1996, HCC utilized approximately $9,000,000
of its available net operating loss carryforwards ("NOL's") as a result of the
additional taxable income the Company recognized from the spin-off. For
alternative minimum tax ("AMT") purposes, the revised tax treatment resulted
in the Company utilizing all of its remaining AMT loss carryforwards and being
liable for the payment of approximately $2,200,000 in additional AMT taxes.
HCC paid its $2,200,000 AMT obligation for 1996 plus accrued interest thereon
during the fourth quarter of 1998. As a result of the obligation for AMT
payments and the impact on net deferred tax assets, the Company has restated
its December 31, 1996 consolidated statement of changes in shareholders'
equity (deficit) from amounts previously reported to provide an additional
$6,308,000 charge to paid-in capital consistent with the treatment of the
other effects of the spin-off transaction.
For the year ended December 31, 1997, the revised tax treatment resulted in
HCC's recognition of additional income tax expense of $2,070,000 and the
accrual of interest on the underpayment of its federal tax obligations. HCC
paid $4,678,000 during September 1998 with respect to its revised estimated
1997 federal income tax obligation.
The effect of the restatement on HCC's consolidated financial statements as
of and for the year ended December 31, 1997 is as follows:
<TABLE>
<CAPTION>
As Previously Reported As Restated
---------------------- ------------
<S> <C> <C>
Loss before income taxes,
extraordinary and other items....... $ (6,629,000) $ (6,761,000)
Income tax provision................. (3,289,000) (5,359,000)
Loss before extraordinary and other
items............................... (9,918,000) (12,120,000)
Net loss............................. (15,145,000) (17,347,000)
Basic and diluted net loss per common
share:
Loss before extraordinary item..... $ (.60) $ (.69)
Extraordinary item................. (.01) (.01)
------------ ------------
Net loss............................. $ (.61) $ (.70)
============ ============
</TABLE>
The effects of the restatement on the consolidated balance sheet at December
31, 1997 were to decrease additional paid-in capital by $6,308,000, to
increase taxes payable by $6,878,000, to decrease net deferred tax assets by
$1,500,000, to increase interest payable with respect to the underpayment of
taxes by $132,000 and to increase accumulated deficit by $2,202,000.
F-14
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In connection with the revised tax treatment, HCC has commenced litigation
against its former independent accountants and tax advisors alleging negligent
advice and breach of contract (see Note 10). Tax settlement costs of
$1,087,000 included on the accompanying consolidated statement of operations
for the year ended December 31, 1998 represent both costs incurred to date as
well as management's estimate of probable costs to be incurred arising from
and directly related to the modification of HCC's tax treatment of the spin-
off of GBCC stock.
(4) Long-Term Debt and Pledge of Assets
Substantially all of HCC's assets are pledged in connection with its long-
term indebtedness.
<TABLE>
<CAPTION>
December 31,
--------------------------
1998 1997
------------ ------------
<S> <C> <C>
Indebtedness of HCC:
12 3/4% Senior Secured Notes, due 2003, net of
discount of $7,013,000 and $8,128,000,
respectively(a)..................................... $200,199,000 $199,372,000
Promissory note due to affiliate (Note 8)............ 2,836,000 3,447,000
------------ ------------
203,035,000 202,819,000
------------ ------------
Indebtedness of HCA:
Promissory note to bank(b)........................... 1,900,000 350,000
Equipment loans...................................... -- 413,000
------------ ------------
1,900,000 763,000
------------ ------------
Indebtedness of HCT :
Equipment loans...................................... 1,291,000 1,638,000
Bank credit facility(c).............................. 462,000 --
------------ ------------
1,753,000 1,638,000
------------ ------------
Total indebtedness................................... 206,688,000 205,220,000
Less--current maturities........................... (7,021,000) (6,800,000)
------------ ------------
Total long-term debt............................. $199,667,000 $198,420,000
============ ============
</TABLE>
- --------
(a) During October 1995, HCC completed the refinancing of certain outstanding
indebtedness through a public offering of $210,000,000 of 12 3/4% Senior
Secured Notes (the "Senior Secured Notes") due November 1, 2003,
discounted to yield 13 3/4% per annum. Interest on the Senior Secured
Notes is payable semiannually on May 1 and November 1 of each year.
The Senior Secured Notes are unconditionally guaranteed on a senior
secured basis by HCT and may be guaranteed by certain future subsidiaries
of HCC. HCA is not a guarantor. The Senior Secured Notes and related
guarantees are secured by, among other things, (i) substantially all of the
assets of HCT and future guarantors, (ii) a limited first mortgage on
substantially all of the assets of HCA, (iii) a pledge of the capital stock
of certain subsidiaries of HCC and (iv) the collateral assignment of any
future management contracts entered into by HCC. The limitation on the
first mortgage in (ii) above was originally $39,007,000 and is subject to
reduction for principal payments on an intercompany note between HCC and
HCA. The outstanding balance of the intercompany note was $31,507,000 and
$36,507,000 at December 31, 1998 and 1997, respectively. The note requires
semiannual principal payments of $2,500,000 commencing October 15, 1997
with the balance due November 1, 2003.
The Senior Secured Notes are redeemable at the option of HCC any time on
or after November 1, 1999 at 106.375% of the then outstanding principal
amount, decreasing to 103.1875% and 100%, respectively,
F-15
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 1998, HCC made two such
offers resulting in the redemption of $2,788,000 in principal amount of the
Senior Secured Notes of which $2,500,000 was paid in January 1999. The 1998
redemptions of the Senior Secured Notes resulted in an extraordinary loss
of $336,000 consisting of the premium paid ($178,000) together with the
write off of associated deferred finance costs ($62,000) and discount on
the notes ($96,000). During 1997, HCC redeemed $2,500,000 principal amount
of the Senior Secured Notes resulting in an extraordinary loss of $215,000,
net of a related income tax benefit of $111,000, and consisting of the
premium paid ($159,000) together with the write off of associated deferred
finance costs ($68,000) and discount on the notes ($99,000).
The indenture to the Senior Secured Notes contains various provisions
limiting the ability of HCC and certain defined subsidiaries to, among
other things, pay dividends or make other restricted payments; incur
additional indebtedness or issue preferred stock; create liens; create
dividend or other payment restrictions affecting certain defined
subsidiaries; enter into mergers or consolidations or make sales of all or
substantially all assets of HCC, HCT or any future guarantor; and enter
into transactions with certain affiliates.
(b) During September 1998, HCA entered into a bank loan agreement to borrow up
to $2,000,000 on an unsecured basis. Borrowings under the agreement are
payable in 36 monthly installments including interest at the rate of 7.5%
per annum. HCA borrowed $2,000,000 under the agreement during October
1998.
The promissory note outstanding at December 31, 1997 accrued interest at
the bank's prime lending rate plus 1% per annum and was repaid in 1998.
(c) HCT had a bank credit facility in the amount of $1,300,000 available to
borrow against through September 30, 1998. HCT borrowed $541,000 under the
credit facility during 1998 at the rate of 8.875% per annum; no borrowings
were outstanding under the credit facility at December 31, 1997.
Borrowings under the credit facility are to be repaid in monthly
installments over a period 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 December 31, 1998 are set forth
below:
<TABLE>
<S> <C>
1999.......................................................... $ 7,021,000
2000.......................................................... 7,138,000
2001.......................................................... 6,697,000
2002.......................................................... 5,633,000
2003.......................................................... 187,212,000
------------
Total....................................................... $213,701,000
============
</TABLE>
Interest paid, net of capitalized interest in 1996, amounted to $29,161,000,
$29,479,000 and $59,404,000, respectively, during the years ended December 31,
1998, 1997 and 1996.
(5) 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
F-16
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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. HCT
leased certain gaming and other equipment under capital lease agreements which
provided for interest at rates ranging up to 13 1/4% per annum and expired
during 1997.
The original cost of HCA's parking garages is included in buildings in the
accompanying consolidated balance sheets at both December 31, 1998 and 1997 in
the amount of $27,358,000. Assets under capital leases with an original cost
of $7,260,000, are included in operating equipment on the accompanying
consolidated balance sheets at both December 31, 1998 and 1997. Amortization
expense with respect to these assets amounted to $1,281,000, $2,042,000 and
$2,723,000 during the years ended December 31, 1998, 1997 and 1996,
respectively. Accumulated amortization at December 31, 1998 and 1997 with
respect to these assets amounted to $10,805,000 and $9,524,000, respectively.
Future minimum lease payments under capital lease obligations as of December
31, 1998 are as follows:
<TABLE>
<S> <C>
1999........................................................... $ 2,457,000
2000........................................................... 2,483,000
2001........................................................... 2,532,000
2002........................................................... 2,643,000
2003........................................................... 2,660,000
Thereafter..................................................... 21,417,000
------------
Total minimum lease payments................................... 34,192,000
Less amount representing interest.............................. (13,351,000)
------------
Present value of future minimum lease payments................. 20,841,000
Current capital lease obligation............................... (893,000)
------------
Long-term capital lease obligation............................. $ 19,948,000
============
</TABLE>
F-17
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(6) Income Taxes
As discussed in Note 3, the Company modified its tax treatment of the spin-
off of the stock of GBCC. The tax presentation and other disclosures for the
year ended December 31, 1997 as set forth in this footnote have been restated
accordingly.
Components of HCC's provision for income taxes consist of the following:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------
1997
As Restated
1998 (Note 3) 1996
--------- ----------- ------------
<S> <C> <C> <C>
Current income tax benefit
(provision):
Federal............................ $ -- $(4,678,000) $ (2,272,000)
State.............................. (735,000) (200,000) 55,000
Deferred income tax (provision)
benefit:
Federal............................ 731,000 9,289,000 17,778,000
State.............................. (103,000) (205,000) (46,000)
Change in valuation allowance........ (709,000) (9,565,000) (15,578,000)
--------- ----------- ------------
$(816,000) $(5,359,000) $ (63,000)
========= =========== ============
</TABLE>
Total federal income tax payments of $6,878,000 and $72,000, respectively,
were made during the years ended December 31, 1998 and 1996; no such payments
were made during the year ended December 31, 1997. State tax payments of
$797,000, $683,000 and $151,000, respectively, were made during the years
ended December 31, 1998, 1997 and 1996.
A reconciliation between the calculated tax benefit on income based on the
statutory rates in effect and the effective tax rates follows:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------
1997
As Restated
1998 (Note 3) 1996
--------- ----------- ------------
<S> <C> <C> <C>
Calculated income tax benefit........ $ 268,000 $ 4,003,000 $ 18,778,000
Valuation allowance change........... (709,000) (9,565,000) (15,578,000)
Amortization of excess purchase
price............................... -- -- (601,000)
Lobbying costs....................... (98,000) (168,000) (306,000)
Disallowance of meals and
entertainment....................... (64,000) (76,000) (404,000)
State income taxes, net of federal
benefit............................. (553,000) (267,000) 6,000
Other................................ 340,000 714,000 (1,958,000)
--------- ----------- ------------
Tax provision as shown on
consolidated statements of
operations.......................... $(816,000) $(5,359,000) $ (63,000)
========= =========== ============
</TABLE>
At December 31, 1998, HCC and its subsidiaries have NOL's for federal income
tax purposes totaling approximately $3,800,000, 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. 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
F-18
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 $1,843,000 and $1,924,000 at December 31, 1998 and
1997, respectively.
The components of the net deferred tax asset and classification on the
accompanying consolidated balance sheets are as follows:
<TABLE>
<CAPTION>
December 31,
--------------------------
1997
As Restated
1998 (Note 3)
------------ ------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards................... $ 1,305,000 $ --
Valuation and other allowances..................... 8,241,000 9,093,000
Alternative minimum tax credit..................... 4,913,000 4,791,000
Investment and jobs tax credits.................... 415,000 311,000
Basis in limited partnership....................... 2,890,000 2,890,000
Other liabilities and accruals..................... 4,145,000 2,749,000
Benefits accrual................................... 1,711,000 1,710,000
Other.............................................. 724,000 733,000
------------ ------------
Total deferred tax assets......................... 24,344,000 22,277,000
------------ ------------
Deferred tax liabilities:
Depreciation and amortization...................... (8,610,000) (6,422,000)
Amortization of note discount...................... -- (621,000)
Basis in debt obligations.......................... (727,000) (855,000)
------------ ------------
Total deferred tax liabilities.................... (9,337,000) (7,898,000)
------------ ------------
Net deferred tax asset.............................. 15,007,000 14,379,000
Valuation allowance................................. (13,164,000) (12,455,000)
------------ ------------
$ 1,843,000 $ 1,924,000
============ ============
Classified as:
Current deferred income tax asset.................. $ 890,000 $ 2,481,000
Other assets....................................... 1,524,000 --
Other noncurrent liabilities....................... (571,000) (557,000)
</TABLE>
No deferred tax benefit was attributed to the extraordinary item in 1998.
The deferred tax benefit attributed to the extraordinary loss on early
extinguishment of debt in 1997 was $111,000.
Sales by HCC or existing shareholders of common stock can cause a "change of
control", as defined in Section 382 of the Internal Revenue Code of 1986, as
amended (the "Code"), which would limit the ability of HCC or its subsidiaries
to utilize these loss carryforwards in later tax periods. Should such a change
of control occur, the amount of loss carryforwards available for use in any
one year would most likely be substantially reduced. Future treasury
regulations, administrative rulings or court decisions may also effect HCC's
utilization of its loss carryforwards.
The Internal Revenue Service is currently examining the consolidated Federal
income tax returns of HCC for the years 1993 through 1996. Management believes
that the results of such examination will not have a material adverse effect
on the consolidated financial position or results of operations of HCC.
F-19
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(7) Stock Options and Compensation Plans
Hollywood Casino Corporation Stock Option Plans--
HCC currently has two employee stock option plans in effect: the Hollywood
Casino Corporation 1996 Long-Term Incentive Plan (the "1996 Plan") and the
Hollywood Casino Corporation 1992 Stock Option Plan (the "1992 Plan"). The
1996 Plan and the 1992 Plan provide for the granting of nonqualified stock
options and incentive stock options that are intended to qualify for the
special tax treatment under the Internal Revenue Code; the 1996 Plan also
provides for the granting of restricted stock. The shares to be offered under
the 1996 Plan and the 1992 Plan consist of shares of Class A Common Stock. The
1996 Plan and the 1992 Plan provide for the granting of 3,000,000 and
1,197,000 shares, respectively, of Class A Common Stock of which 1,910,000 and
147,006, respectively, remain available for future grant as of December 31,
1998.
The 1996 Plan and the 1992 Plan are administered by committees of HCC's
Board of Directors. Options granted under the 1996 Plan become vested at the
discretion of the Committee of the Board of Directors (however, vesting for
certain officers, directors and shareholders may not be less than six months)
and may be exercised for a period of not more than ten years (five years in
the case of incentive stock options) from the date of grant. No more than
150,000 shares may be awarded to any individual during any fiscal year and
incentive stock options are subject to a $100,000 calendar year limitation.
Options granted under the 1992 Plan become vested over a three year period,
are exercisable for a term ending not more than seven years (five years in the
case of incentive stock options) from the date of the grant and incentive
stock options are subject to limitations on the quantity exercised in a
calendar year. All options granted through December 31, 1998 under both the
1996 Plan and the 1992 Plan have been granted at an exercise price equal to
the fair market value as of the date of the grant. As of December 31, 1998,
options to purchase 1,090,000 shares remain outstanding under the 1996 Plan,
of which over 98% are at exercise prices ranging from $1.75 per share to $3.13
per share. The remaining options have an exercise price of $5.25 per share.
Options outstanding under the 1996 plan have a weighted average exercise price
of $2.51 and a weighted average remaining contractual life of 56 months. As of
December 31, 1998, no options are outstanding under the 1992 Plan.
The following table lists the combined activity of the 1996 Plan and the
1992 Plan:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------
1998 1997 1996
------------------- ----------------- -----------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
--------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding options at
beginning of year...... 660,008 $ 2.86 410,008 $ 2.54 150,008 $ .80
Options cancelled...... (50,000) 2.06 -- -- (20,000) 6.00
Options granted........ 520,000 1.83 300,000 2.81 320,000 3.26
Options exercised...... (40,008) .0006 (50,000) .0006 (40,000) .0006
--------- ------- -------
Outstanding options at
end of year............ 1,090,000 $ 2.51 660,008 $ 2.86 410,008 $ 2.54
========= ======= =======
Exercisable options at
end of year............ 920,000 $ 2.62 360,008 $ 2.90 110,008 $ .95
</TABLE>
During 1996, HCC also adopted the Hollywood Casino Corporation 1996 Non-
Employee Director Stock Plan (the "Directors' Plan") providing for the grant
of non-qualified stock options of Class A common stock of HCC. The Directors'
Plan provides for the granting of 150,000 shares of Class A common stock of
which 107,500 remain available for future grant as of December 31, 1998. An
initial option grant of 10,000 shares was made to the two non-employee
directors upon adoption of the plan; future outside directors receive an
option
F-20
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
grant of 10,000 shares upon election to the Board of Directors. In addition,
each outside director receives a grant of 2,500 shares on January 15 of each
year. All such grants are at an exercise price equal to the fair market value
as of the date of the grant, vest after six months and expire no later than
ten years from the date of grant. The Directors' Plan is administered by a
Committee of the Board of Directors. As of December 31, 1998, 42,500 shares
remain outstanding at a weighted average exercise price of $1.72 per share.
The following table lists the activity of the Directors' Plan:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------
1998 1997 1996
------------------- ---------------- ----------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding options at
beginning of year...... 35,000(1) $4.93 20,000 $6.25 -- $ --
Options granted........ 7,500 1.56 15,000 3.17 20,000 6.25
Options exercised...... -- -- -- -- -- --
------ ------ ------
Outstanding options at
end of year............ 42,500 $1.72 35,000 $4.93 20,000 $6.25
====== ====== ======
Exercisable options at
end of year............ 42,500 $1.72 25,000 $5.78 -- $ --
</TABLE>
- --------
(1) During June 1998, the Board of Directors authorized the repricing of
options to purchase 35,000 shares of common stock granted during 1996 and
1997 to non-employee directors of the Company. The exercise price was
adjusted to $1.75 per share, the fair market value as of the date of the
repricing; all of the repriced options are fully vested. No shareholder
owning 1% or more of the Company's common stock participated in the
repricing.
The Company has elected to apply Opinion 25 with respect to accounting for
options. Based on such election, no compensation expense has been recognized
in the accompanying consolidated financial statements as a result of the
granting of stock options. Had compensation expense been determined consistent
with SFAS 123, the net loss (net of income taxes) for the years ended December
31, 1998 and 1997 would have increased by approximately $138,000 and $251,000,
respectively, increasing both basic and diluted net loss per common share for
each year by $.01. For the year ended December 31, 1996, the net loss would
have increased by approximately $41,000, with no effect on either basic or
diluted net loss per common share.
The fair value of each option grant was estimated on the date of grant using
a method approximating the Black-Scholes option pricing model. The assumptions
applied are set forth below:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------
1998 1997 1996
--------- ------ ------
<S> <C> <C> <C>
Risk free interest rate........................... 5.4% 5.3% 5.5%
Dividend Yield.................................... -- -- --
Expected Life..................................... 1-4 years 1 year 1 year
Volatility........................................ 45.5% 57.6% 62.1%
Weighted Average Fair Value....................... $ .42 $ .70 $ .91
</TABLE>
Compensation Plan--
HCC has agreements with certain of its principal shareholders and key
executive officers providing for (1) lifetime pension benefits upon the
expiration of existing employment contracts and subsequent consulting
F-21
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
agreements and (2) death benefits to be paid for a period of ten years. The
obligations under these agreements, which are not funded, are being charged to
operations over the remaining terms of the employment agreements. Amounts
charged to expense under the agreements for the years ended December 31, 1998,
1997 and 1996 were $4,000, $18,000 and $660,000, respectively. Obligations
accrued under the agreements at December 31, 1998 and 1997 amounted to
$5,033,000 and $5,029,000, respectively, and are included in other noncurrent
liabilities on the accompanying consolidated balance sheets.
Employee Retirement Savings Plan--
The Company has a retirement savings plan under Section 401(k) of the
Internal Revenue Code covering all of its employees who meet certain
eligibility requirements as to age and period of employment. The plan allows
employees to contribute up to 15% of their salary on a pre-tax basis (subject
to statutory limitations) and invest such monies in a choice of mutual funds
on a tax-deferred basis. The Company matches a portion of the participating
employees' contributions to the plan and may, from time to time, make
additional discretionary contributions. For the years ended December 31, 1998,
1997 and 1996, HCC made company contributions to the plan totaling $778,000,
$559,000 and $1,670,000, respectively.
(8) Transactions with Related Parties
As a result of the distribution by HCC of the GBCC common stock it owned,
GBCC is no longer a consolidated subsidiary. Accordingly, intercompany
transactions between HCC and GBCC and its subsidiaries which eliminated in
consolidation during 1996 are considered transactions with affiliates during
1998 and 1997.
HCC has advanced funds to GBCC totaling $6,750,000 as of both December 31,
1998 and 1997. During the third quarter of 1996, GBCC borrowed $6,500,000 from
HCC on a demand basis with interest at the rate of 13 3/4% per annum payable
quarterly commencing October 1, 1996. An additional $250,000 note became due
on April 1, 1998 for which payment has not been received. This advance
continues to bear interest at the rate of 14% per annum, payable semiannually.
Interest receivable amounting to $1,781,000 and $839,000 is included in due
from affiliates on the accompanying consolidated balance sheets at December
31, 1998 and 1997, respectively. Interest income accrued on loans and advances
to GBCC amounted to $942,000 and $977,000, respectively, during the years
ended December 31, 1998 and 1997.
In connection with its acquisition of the general partnership interest in
PML (see Note 1), HCC issued a five-year note in the original amount of
$3,800,000 and assigned $13,750,000 undiscounted principal amount of PPI
Funding Notes (see below) and $350,000 accrued interest due from GBCC to PPI
Corporation. The $3,800,000 note is payable in monthly installments of
$83,000, including interest at the rate of 14% per annum, commencing on May 1,
1997, with additional quarterly variable principal payments commencing on July
1, 1997 in an amount equal to the general partner's share of quarterly cash
distributions, as defined, from PML. HCC incurred interest expense with
respect to the note amounting to $439,000 and $383,000, respectively, during
the years ended December 31, 1998 and 1997. Accrued interest of $34,000 and
$41,000 is included in interest payable on the accompanying consolidated
balance sheets at December 31, 1998 and 1997, 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
F-22
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
the maturity value of the notes to $84,603,000. On January 5, 1998, GBCC's
most significant subsidiary, Greate Bay Hotel and Casino, Inc. ("GBHC"), filed
for protection under Chapter 11 of the United States Bankruptcy Code. It was
anticipated that GBCC's equity ownership of GBHC would be significantly
reduced in the reorganization under Chapter 11 and, as a consequence, HCC
forgave $37,000,000 undiscounted principal amount of the PPI Funding Notes at
December 31, 1997, further reducing the maturity value to $47,603,000. Payment
of interest is deferred through February 17, 2001 at which time interest will
become payable semiannually, with the unpaid principal balance due on February
17, 2006. The PPI Funding Notes are collateralized by a pledge of all of the
common stock of a subsidiary of GBCC.
Prior to December 31, 1996, when GBCC and its subsidiaries were members of
the HCC consolidated group, it was anticipated that one of HCC's primary
methods of realizing the carrying value of the PPI Funding Notes would be
through the utilization of NOL's of GBCC. As a result of HCC's distribution of
GBCC stock at December 31, 1996, GBCC's NOL's are no longer available for
utilization in HCC's consolidated federal income tax returns. Accordingly, HCC
provided a valuation allowance in the amount of $18,741,000 at December 31,
1996 which reduced the carrying amount of the PPI Funding Notes to their
estimated realizable value of $35,597,000 at that date. As a result of GBHC's
January 1998 Chapter 11 filing discussed above, HCC took an additional write
down of $23,275,000 undiscounted principal amount during 1997, further
reducing the carrying amount of the PPI Funding Notes at both December 31,
1998 and 1997 to an estimated realizable value of $12,322,000. The discounted
amount of the 1997 write down ($15,678,000) and the 1996 valuation allowance
($18,741,000) are included in write down of assets on the accompanying
consolidated statements of operations for the years ended December 31, 1997
and 1996, respectively. Management presently anticipates that the remaining
balance will be realized through a combination of repayments from GBCC and
additional asset acquisitions from GBCC and its subsidiaries.
Pursuant to a management services agreement, HCA pays PML a base management
fee equal to 5% of the Aurora Casino's operating revenues (as defined in the
agreement) subject to a maximum of $5,500,000 annually, and an incentive fee
equal to 10% of gross operating profit (as defined in the agreement to
generally include all revenues, less expenses other than depreciation,
interest, amortization and taxes). HCA incurred such fees totaling $2,727,000
during the three month period ended March 31, 1997 while PML was wholly-owned
by subsidiaries of GBCC. Subsequent to March 31, 1997, PML is included in the
consolidated financial statements of HCC; accordingly, HCA's management fee
expense to PML is eliminated in consolidation (see Note 1).
HCT incurs a monthly consulting fee of $100,000 pursuant to a ten-year
consulting agreement with PCC (see Note 15). Such fees amounted to $1,200,000
for the years ended December 31, 1998 and 1997.
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 year ended December 31, 1998 and 1997 amounted to
$1,147,000 and $809,000, respectively. At December 31, 1998 and 1997, unpaid
charges of $109,000 and $78,000, respectively, are included in due to
affiliates on the accompanying consolidated balance sheets.
Many of the marketing and administrative services now provided by ACSC were
previously provided to HCC and its subsidiaries by GBHC. Charges for such
services amounted to $704,000 during the year ended December 31, 1997.
F-23
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
HCC allocates certain general and administrative costs to GBCC and its
subsidiaries pursuant to services agreements. Such allocated costs and fees
amounted to $1,026,000 and $1,843,000 for the years ended December 31, 1998
and 1997, respectively. In connection with such charges, receivables in the
amount of $179,000 and $156,000 are included in due from affiliates on the
accompanying consolidated balance sheets at December 31, 1998 and 1997,
respectively.
As a result of the revised tax treatment for the spin-off of GBCC stock to
HCC's shareholders at December 31, 1996 (see Note 3), 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 will require the Pratt Family members to
amend their federal income tax returns for 1996 resulting in substantial
additional tax obligations which total approximately $790,000. The shareholder
obligations assumed by the Company are included in tax settlement costs
totalling $1,087,000 on the accompanying consolidated statement of operations
for the year ended December 31, 1998 and are included in other accrued
liabilities on the accompanying consolidated balance sheet at December 31,
1998.
In September 1994, a subsidiary of HCC entered into an agreement with an
entity owned by a member of the Pratt Family to manage the operation and
maintenance of a Company-owned aircraft and to make such aircraft available
for charter by third parties. The aircraft was sold during the first quarter
of 1997. Subsequent to the sale, HCC has occasionally chartered aircraft from
the maintenance company. Such charter fees amounted to $20,000 during the year
ended December 31, 1998; charter fees, expenses and commissions amounted to
$268,000 and $499,000, respectively, during the years ended December 31, 1997
and 1996.
(9) State Gaming Regulations
Riverboat gaming operations in Illinois are subject to regulatory control by
the Illinois Gaming Board. Under the provisions of the Illinois gaming
regulations, HCA is required to maintain its ownership license. Such license
was renewed in July 1998 for a period of one year and subsequently extended by
the IGB to December 1999. Gaming operations in Mississippi are subject to
regulatory control by the Mississippi Gaming Commission. Under the provisions
of the Mississippi gaming regulations, HCT is required to maintain all
necessary licenses. The ownership license for the Tunica Casino has been
renewed until October 18, 1999.
If it were determined that gaming laws were violated by a licensee, the
gaming licenses held by each licensee could be limited, conditioned, suspended
or revoked. In addition, the licensees and other persons involved could be
subject to substantial fines.
While a subsidiary of HCC, the Sands was required under the New Jersey
Casino Control Act to either make certain approved investments in New Jersey
or pay an investment alternative tax. The Sands elected to satisfy the
investment requirement by purchasing bonds at below-market interest rates from
a governmental agency established to administer such monies. During the year
ended December 31, 1996, the Sands paid $3,062,000 to purchase these
obligatory investments and provided a valuation allowance amounting to
$1,344,000 on such investments.
F-24
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(10) Litigation
Planet Hollywood Litigation--
Planet Hollywood International, Inc., a Delaware corporation, and Planet
Hollywood (Region IV), Inc., a Minnesota corporation (collectively, "PHII"),
filed a complaint in the United States District Court for the Northern
District of Illinois, Eastern Division on July 29, 1996 against HCC, HCA and a
member of the Pratt Family (collectively, the "Original Hollywood
Defendants"). The Original Hollywood Defendants filed with the Court on
September 18, 1996 an answer to PHII's lawsuit, along with numerous
counterclaims against PHII, Robert Earl and Keith Barish (collectively, the
"PHII Defendants"). PHII filed with the Court on January 21, 1997, an
amendment to their complaint which, among other things, added HCT (together
with the Original Hollywood Defendants, the "Hollywood Defendants") and GBCC
as defendants. The Original Hollywood Defendants filed with the Court on
February 4, 1997, and GBCC and HCT filed with the Court on February 20, 1997,
answers and counterclaims to such amended complaint.
In its lawsuit, PHII alleges, among other things, that the Hollywood
Defendants and GBCC have, in opening and operating the Hollywood Casino
concept, infringed on PHII's trademark, service mark and trade dress and have
engaged in unfair competition and deceptive trade practices. In their
counterclaims, the Hollywood Defendants and GBCC allege, among other things,
that the PHII Defendants have, through their planned use of their mark in
connection with casino services, infringed on certain of HCC's service marks
and trade dress and have engaged in unfair competition.
Given the uncertainties inherent in litigation, no assurance can be given
that the Hollywood Defendants will prevail in this litigation; however, the
Hollywood Defendants believe that PHII's claims are without merit and intend
to defend their position and pursue their counterclaims vigorously. The
accompanying 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.
(11) Commitments and Contingencies
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 1998, 1997 and 1996, HCT expensed $3,899,000, $3,935,000 and
$3,486,000, respectively, in connection with the ground lease.
F-25
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(12) Third Party Notes Receivable
During November 1995, HCC loaned $10,000,000 of the proceeds from the Senior
Secured Notes to an unaffiliated gaming company in the form of two $5,000,000
notes. On February 27, 1998, both parties agreed to settle the outstanding
obligations with the payment of $4,400,000 and the issuance of two new, short-
term obligations totaling $1,600,000, which were paid in April 1998. The
$4,000,000 difference between the $10,000,000 carrying amount of the notes
receivable and the agreed upon settlement was reflected as a write down of the
notes receivable at December 31, 1997 and is included in write down of assets
on the accompanying consolidated statement of operations.
(13) Supplemental Cash Flow Information
During the second quarter of 1997, HCC issued 100,000 shares of its common
stock in exchange for a $10,000,000 loan commitment from unrelated third
parties. The commitment fee was valued at $375,000, the fair market value of
the stock on the date of its issuance, and was expensed during 1997.
Also during the second quarter of 1997, HCC acquired the general partnership
interest in PML (see Notes 1 and 8). The purchase price included the
assignment of certain receivables from GBCC and the issuance of a note to
GBCC. In connection with the acquisition, certain liabilities were assumed as
follows:
<TABLE>
<S> <C>
Assignment of PPI Funding Notes................................ $(7,597,000)
Assignment of interest receivable.............................. (350,000)
Note issued.................................................... (3,800,000)
Charge to paid-in capital (Note 1)............................. 12,747,000
-----------
Net liabilities assumed........................................ $ 1,000,000
===========
</TABLE>
During 1996, HCA entered into a capital lease obligation in the original
amount of $13,195,000 with respect to a new parking garage (see Note 5).
Additional escrowed construction and financing costs totaling $4,163,000 were
capitalized in 1996 as part of the cost of the facility.
At December 31, 1996, HCC contributed certain receivables from GBCC and its
subsidiaries to GBCC. Notes receivable amounting to $8,738,000 together with
accrued interest thereon totaling $1,753,000 and other receivables of
$4,283,000 with respect to pension obligations assumed during 1995 were
contributed to GBCC.
At December 31, 1996, HCC distributed the common stock of GBCC it owned to
its shareholders. The following net liabilities were distributed to HCC's
shareholders in the form of a dividend:
<TABLE>
<S> <C>
Long-term
debt........ $ 326,024,000
Short-term
borrowings.. 8,750,000
Other current
liabilities.. 41,186,000
Other
noncurrent
liabilities.. 4,592,000
Net property
and
equipment... (156,887,000)
Accounts
receivable,
net of
allowance... (10,656,000)
Net book
value of
other assets
distributed
(excluding
cash)....... (30,811,000)
-------------
Net
liabilities
distributed.. $ 182,198,000
=============
</TABLE>
(14) Disclosures about Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value:
F-26
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Cash and cash equivalents--The carrying amounts approximate fair value
because of the short maturity of these instruments.
Short-term investments--The carrying amounts approximate fair value because
of the short maturity of these investments.
Notes receivable--The fair value of notes receivable is calculated based on
the estimated realizable value.
Interest payable--The carrying amount of interest payable approximates fair
value because of the short maturity of the obligation.
Long-term debt--The fair value of HCC's long-term debt is estimated based on
either the quoted market price of the underlying debt issue or on the
discounted cash flow of future payments utilizing current rates available to
HCC for debt of similar remaining maturities. Debt obligations with a short
remaining maturity are valued at the carrying amount.
The estimated carrying amounts and fair values of HCC's financial
instruments are as follows:
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
------------------------- -------------------------
Carrying Carrying
Amount Fair Value Amount Fair Value
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Financial Assets
Cash and cash
equivalents............. $ 42,118,000 $ 42,118,000 $ 40,259,000 $ 40,259,000
Short-term investments... 3,905,000 3,905,000 3,876,000 3,876,000
Notes receivable......... -- -- 6,000,000 6,000,000
Notes receivable--
affiliates.............. 6,750,000 6,750,000 6,750,000 6,750,000
PPI Funding Notes........ 12,322,000 12,322,000 12,322,000 12,322,000
Financial Liabilities
Interest payable......... $ 4,872,000 $ 4,872,000 $ 4,792,000 $ 4,792,000
12 3/4% Senior Secured
Notes................... 207,212,000 220,681,000 207,500,000 223,063,000
Equipment loans.......... 1,291,000 1,335,000 2,051,000 2,063,000
Bank debt................ 1,900,000 1,900,000 350,000 350,000
Bank credit facility..... 462,000 462,000 -- --
Note payable--affiliate.. 2,836,000 2,972,000 3,447,000 3,597,000
</TABLE>
(15) Subsequent Events (Unaudited)
In March 1999, HCC reached an agreement in principle with GBCC, PCC and the
holders of $85,000,000 of senior notes currently in default which were issued
by PRT Funding Corp. ("PRT Funding"), a wholly owned subsidiary of PCC. Under
the terms of the agreement, HCC would purchase the stock of PCC from GBCC for
nominal consideration as part of a debt restructuring (the "Restructuring") of
PRT Funding, PCC and other subsidiaries of PCC. Upon completion of the
Restructuring, PCC's assets will consist of its limited partnership interest
in PML and a consulting contract for the Tunica Casino (see Notes 1 and 8).
These assets will serve as collateral for approximately $39,250,000 of new
notes to be issued by PCC to the holders of the senior notes as part of the
Restructuring. The acquisition of PCC will also result in a charge to expense
by the Company of approximately $39,250,000 during 1999 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, 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 $7,694,000 for the year ended
December 31, 1998.
F-27
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The successful completion of the Restructuring is subject to the execution
of definitive documents and 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 the various gaming regulatory organizations
having jurisdiction over PCC and PRT Funding.
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 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%. 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. Subject to obtaining final approval by
the Louisiana Gaming Control Board, HCC will have 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 $230,000,000. The Company
anticipates contributing approximately $50,000,000 as an equity investment in
the project with the remaining construction and preopening costs, estimated at
$180,000,000, to come from non-recourse project financing. The Company
anticipates securing financing for a portion of the equity investment and all
of the project financing and commencing construction in the summer of 1999
with a planned opening date approximately 14 months later.
(16) Selected Quarterly Financial Data (Unaudited)
<TABLE>
<CAPTION>
Quarter
--------------------------------------------------
First Second Third Fourth
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Year ended December 31,
1998:
Net revenues............... $63,807,000 $66,353,000 $70,848,000 $ 67,752,000
=========== =========== =========== ============
Net income (loss).......... $ 69,000 $ 145,000 $ 204,000 $ (2,023,000)
=========== =========== =========== ============
Basic and diluted net
income (loss) per common
share(1).................. $ .00 $ .01 $ .01 $ (.08)
=========== =========== =========== ============
Year ended December 31,
1997:
Net revenues............... $67,470,000 $66,301,000 $69,839,000 $ 64,147,000
=========== =========== =========== ============
Net income (loss) as
previously reported....... $ 1,491,000 $ 1,193,000 $ 1,701,000 $(19,530,000)
Restatement--Note 3........ -- (44,000) (1,918,000) (240,000)
----------- ----------- ----------- ------------
Net income (loss).......... $ 1,491,000 $ 1,149,000 $ (217,000) $(19,770,000)
=========== =========== =========== ============
Basic and diluted net
income (loss) per common
share as previously
reported.................. $ .06 $ .05 $ .07 $ (.79)
Restatement--Note 3........ -- -- (.08) (.01)
----------- ----------- ----------- ------------
Basic and diluted net
income (loss) per common
share(1).................. $ .06 $ .05 $ (.01) $ (.80)
=========== =========== =========== ============
</TABLE>
- --------
(1) In accordance with the provisions of SFAS 128, earnings per share are
calculated separately for each quarter and the full year. Accordingly,
annual earnings per share will not necessarily equal the total of the
interim periods.
F-28
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To Hollywood Casino-Aurora, Inc.:
We have audited the accompanying balance sheets of Hollywood Casino-Aurora,
Inc. (the Company and an Illinois corporation) as of December 31, 1998 and
1997, and the related statements of operations, changes in shareholder's
equity and cash flows for each of the three years in the period ended December
31, 1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Hollywood Casino-Aurora,
Inc. as of December 31, 1998 and 1997, and the results of its operations and
its cash flows for each of the three years in the period ended December 31,
1998 in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Dallas, Texas
February 23, 1999
F-29
<PAGE>
HOLLYWOOD CASINO--AURORA, INC.
(wholly owned by Hollywood Casino Corporation)
BALANCE SHEET
<TABLE>
<CAPTION>
December 31,
--------------------------
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents........................... $ 9,718,000 $ 11,594,000
Accounts receivable, net of allowances
of $655,000 and $483,000, respectively............. 1,128,000 1,603,000
Inventories......................................... 606,000 794,000
Deferred income taxes............................... 1,540,000 1,336,000
Due from affiliates................................. 428,000 558,000
Prepaid expenses and other current assets........... 1,010,000 932,000
------------ ------------
Total current assets.............................. 14,430,000 16,817,000
------------ ------------
Property and Equipment:
Land improvements................................... 3,167,000 3,165,000
Buildings and improvements.......................... 46,205,000 46,205,000
Riverboats.......................................... 37,642,000 36,970,000
Operating equipment................................. 37,192,000 32,159,000
Construction in progress............................ 615,000 534,000
------------ ------------
124,821,000 119,033,000
Less--accumulated depreciation and amortization..... (41,114,000) (33,919,000)
------------ ------------
Net property and equipment.......................... 83,707,000 85,114,000
------------ ------------
Other Assets......................................... 2,173,000 2,140,000
------------ ------------
$100,310,000 $104,071,000
============ ============
LIABILITIES AND SHAREHOLDER'S EQUITY
Current Liabilities:
Current maturities of long-term debt and capital
lease obligations.................................. $ 6,517,000 $ 6,624,000
Accounts payable.................................... 2,199,000 2,023,000
Accrued liabilities--
Salaries and wages.................................. 2,300,000 2,228,000
Interest............................................ 1,058,000 1,192,000
Gaming and other taxes.............................. 981,000 938,000
Insurance........................................... 965,000 1,115,000
Other............................................... 1,374,000 1,120,000
Due to affiliates................................... 2,109,000 2,185,000
Other current liabilities........................... 993,000 1,209,000
------------ ------------
Total current liabilities......................... 18,496,000 18,634,000
------------ ------------
Long-Term Debt....................................... 27,783,000 31,507,000
------------ ------------
Capital Lease Obligations............................ 19,948,000 20,841,000
------------ ------------
Deferred Income Taxes................................ 5,363,000 4,141,000
------------ ------------
Commitments and Contingencies
Shareholder's Equity:
Common stock, $.01 par value per share; 2,000,000
shares authorized;
1,501,000 shares issued and outstanding............ 15,000 15,000
Additional paid-in capital.......................... 25,541,000 24,541,000
Retained earnings................................... 3,164,000 4,392,000
------------ ------------
Total shareholder's equity........................ 28,720,000 28,948,000
------------ ------------
$100,310,000 $104,071,000
============ ============
</TABLE>
The accompanying notes to financial statements are an
integral part of these balance sheets.
F-30
<PAGE>
HOLLYWOOD CASINO--AURORA, INC.
(wholly owned by Hollywood Casino Corporation)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
Casino.................... $156,404,000 $153,965,000 $157,124,000
Food and beverage......... 13,771,000 14,213,000 13,780,000
Other..................... 2,816,000 1,919,000 3,895,000
------------ ------------ ------------
172,991,000 170,097,000 174,799,000
Less--promotional
allowances............... (10,044,000) (9,790,000) (11,408,000)
------------ ------------ ------------
Net revenues.............. 162,947,000 160,307,000 163,391,000
------------ ------------ ------------
Expenses:
Casino.................... 112,272,000 102,127,000 108,014,000
Food and beverage......... 4,855,000 4,885,000 4,926,000
Other..................... 1,332,000 1,641,000 1,066,000
General and
administrative........... 14,136,000 14,673,000 14,645,000
Depreciation and
amortization............. 7,350,000 7,491,000 8,834,000
------------ ------------ ------------
Total expenses.......... 139,945,000 130,817,000 137,485,000
------------ ------------ ------------
Income from operations...... 23,002,000 29,490,000 25,906,000
------------ ------------ ------------
Non-operating income
(expense):
Interest income........... 112,000 156,000 205,000
Interest expense.......... (6,046,000) (6,847,000) (6,704,000)
Gain on disposal of
assets................... 4,000 134,000 --
------------ ------------ ------------
Total non-operating
expense, net........... (5,930,000) (6,557,000) (6,499,000)
------------ ------------ ------------
Income before income taxes.. 17,072,000 22,933,000 19,407,000
Income tax provision........ (6,559,000) (8,419,000) (6,883,000)
------------ ------------ ------------
Net income.................. $ 10,513,000 $ 14,514,000 $ 12,524,000
============ ============ ============
</TABLE>
The accompanying notes to financial statements are an integral part of these
financial statements.
F-31
<PAGE>
HOLLYWOOD CASINO--AURORA, INC.
(wholly owned by Hollywood Casino Corporation)
STATEMENT OF CHANGES IN SHAREHOLDER'S EQUITY
For the Three Years Ended December 31, 1998
<TABLE>
<CAPTION>
Common Stock Additional
----------------- Paid-in Retained
Shares Amount Capital Earnings
--------- ------- ----------- ------------
<S> <C> <C> <C> <C>
BALANCE, January 1, 1996............ 1,501,000 $15,000 $24,541,000 $ 993,000
Net income........................ -- -- -- 12,524,000
Dividends......................... -- -- -- (10,040,000)
--------- ------- ----------- ------------
BALANCE, December 31, 1996.......... 1,501,000 15,000 24,541,000 3,477,000
Net income........................ -- -- -- 14,514,000
Dividends......................... -- -- -- (13,599,000)
--------- ------- ----------- ------------
BALANCE, December 31, 1997.......... 1,501,000 15,000 24,541,000 4,392,000
Capital contributions............. -- -- 1,000,000 --
Net income........................ -- -- -- 10,513,000
Dividends......................... -- -- -- (11,741,000)
--------- ------- ----------- ------------
BALANCE, December 31, 1998.......... 1,501,000 $15,000 $25,541,000 $ 3,164,000
========= ======= =========== ============
</TABLE>
The accompanying notes to financial statements are an integral part of this
financial statement.
F-32
<PAGE>
HOLLYWOOD CASINO--AURORA, INC.
(wholly owned by Hollywood Casino Corporation)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income......................... $ 10,513,000 $ 14,514,000 $ 12,524,000
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization.... 7,350,000 7,491,000 8,834,000
Provision for doubtful accounts.. 273,000 200,000 325,000
Gain on disposal of assets....... (4,000) (134,000) --
Deferred income tax provision.... 1,018,000 2,183,000 1,119,000
Decrease in accounts receivable.. 202,000 92,000 393,000
Increase in accounts payable and
accrued liabilities............. 261,000 151,000 954,000
Increase in due to affiliates.... 54,000 395,000 (770,000)
Net change in other current
assets and liabilities.......... (106,000) 85,000 (1,116,000)
Net change in other noncurrent
assets and liabilities.......... (33,000) (120,000) (442,000)
------------ ------------ ------------
Net cash provided by operating
activities...................... 19,528,000 24,857,000 21,821,000
------------ ------------ ------------
INVESTING ACTIVITIES:
Purchases of property and
equipment......................... (5,986,000) (2,413,000) (10,104,000)
Proceeds from sale of assets....... 47,000 173,000 --
Decrease in cash restricted for
construction projects............. -- -- 1,955,000
------------ ------------ ------------
Net cash used in investing
activities........................ (5,939,000) (2,240,000) (8,149,000)
------------ ------------ ------------
FINANCING ACTIVITIES:
Proceeds from issuance of long-term
debt.............................. 2,000,000 -- --
Capital contributions.............. 1,000,000 -- --
Repayments of long-term debt....... (5,863,000) (5,681,000) (2,870,000)
Payments on capital lease
obligations....................... (861,000) (777,000) (724,000)
Dividends.......................... (11,741,000) (13,599,000) (10,040,000)
------------ ------------ ------------
Net cash used in financing
activities........................ (15,465,000) (20,057,000) (13,634,000)
------------ ------------ ------------
Net (decrease) increase in cash and
cash equivalents.................. (1,876,000) 2,560,000 38,000
Cash and cash equivalents at
beginning of year................. 11,594,000 9,034,000 8,996,000
------------ ------------ ------------
Cash and cash equivalents at end of
year.............................. $ 9,718,000 $ 11,594,000 $ 9,034,000
============ ============ ============
</TABLE>
The accompanying notes to financial statements are an integral part of these
financial statements.
F-33
<PAGE>
HOLLYWOOD CASINO--AURORA, INC.
(wholly owned by Hollywood Casino Corporation)
NOTES TO FINANCIAL STATEMENTS
(1) Organization and Business
Hollywood Casino-Aurora, Inc. ("HCA") is an Illinois corporation and a
wholly owned subsidiary of Hollywood Casino Corporation ("HCC"), a Delaware
corporation. HCA was organized and incorporated during December 1990 by
certain relatives of Jack E. Pratt, Edward T. Pratt, Jr. and William D. Pratt
(collectively, the "Pratt Family") for the purpose of developing and holding
the ownership interest in a riverboat gaming operation located in Aurora,
Illinois (the "Aurora Casino"). In May 1992, HCC, which was then wholly owned
by members of the Pratt Family or by certain general partnerships and trusts
controlled by the Pratt Family, acquired all of the outstanding stock of HCA
through the issuance of HCC stock. Prior to December 31, 1996, HCC also owned
approximately 80% of Greate Bay Casino Corporation ("GBCC"), a Delaware
corporation. Prior to April 1, 1997, subsidiaries of GBCC held the management
services contract for the Aurora Casino (see Note 6). A GBCC subsidiary
continues to have a limited partnership interest in the entity which holds
such management contract.
The Aurora Casino consists of two, four-level riverboats having a combined
casino space of approximately 32,000 square feet and a four-level pavilion and
docking facility which houses ticketing, food service, passenger waiting, and
various administrative functions. The Aurora Casino also includes two parking
structures with approximately 1,350 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 4).
On June 17, 1993, the Illinois Gaming Board (the "IGB") issued HCA a
temporary operating permit and the Aurora Casino commenced operations. The IGB
issued HCA an owner's license on July 20, 1993 pursuant to the Illinois
Riverboat Gambling Act. HCA's current owner's license was renewed in July 1998
for a period of one year and subsequently extended by the IGB to December
1999. Gaming taxes imposed by the state of Illinois are determined using a
graduated tax rate applied to the licensee's gaming revenues. HCA expenses
such gaming taxes based on its anticipated annual effective tax rate.
HCA estimates that a significant amount of the Aurora Casino's revenues are
derived from patrons living in the Chicago area and surrounding northern and
western suburbs. The Aurora Casino faces intense competition from other
riverboat gaming operations in Illinois and Indiana which serve the Chicago
area and management believes that this competition will continue in the
future.
(2) Summary of Significant Accounting Policies
The significant accounting policies followed in the preparation of the
accompanying financial statements are discussed below. 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.
Casino revenues, promotional allowances and departmental expenses--
HCA recognizes the net win from gaming activities (the difference between
gaming wins and losses) as casino revenues. Casino revenues are net of
accruals for anticipated payouts of progressive jackpots. Such anticipated
jackpot payouts are reflected as current liabilities on the accompanying
balance sheets.
F-34
<PAGE>
HOLLYWOOD CASINO--AURORA, INC.
(wholly owned by Hollywood Casino Corporation)
NOTES TO FINANCIAL STATEMENTS--(Continued)
The estimated value of food and beverage, admissions and other items which
were provided to customers without charge has been included in revenues and a
corresponding amount has been deducted as promotional allowances. The costs of
such complimentaries have been included as casino expenses on the accompanying
statements of operations. Costs of complimentaries allocated from the food and
beverage and other operating departments to the casino department during the
years ended December 31, 1998, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- -----------
<S> <C> <C> <C>
Food and beverage.......................... $8,721,000 $9,057,000 $10,280,000
Other...................................... 1,131,000 921,000 1,318,000
---------- ---------- -----------
$9,852,000 $9,978,000 $11,598,000
========== ========== ===========
</TABLE>
Cash and cash equivalents--
Cash and cash equivalents are generally comprised of cash and investments
with original maturities of three months or less, such as treasury bills and
fixed repurchase agreements.
Allowance for doubtful accounts--
The allowance for doubtful accounts is maintained at a level considered
adequate to provide for possible future losses. Provisions for doubtful
accounts amounting to $273,000, $200,000 and $325,000, respectively, were made
during the years ended December 31, 1998, 1997 and 1996.
Inventories--
Inventories are stated at the lower of cost (on a first-in, first-out basis)
or market.
Property and equipment--
Property and equipment have been recorded at cost and are being depreciated
utilizing the straight-line method over the estimated useful lives of the
assets as follows:
<TABLE>
<S> <C>
Land improvements................................................ 20 years
Buildings, riverboats and improvements........................... 25-40 years
Operating equipment.............................................. 3-7 years
</TABLE>
On October 1, 1996, HCA revised the estimated useful life of its pavilion
from 25 years to 40 years, the estimated life of one of its parking garages
under a capital lease from 25 years to 30 years and the estimated life of its
slot machines from three years to five years. Management believes the changes
in estimated lives more appropriately reflect the timing of the economic
benefits to be received from these assets. For the year ended December 31,
1996, the effect of these changes reduced depreciation and amortization
expense by $274,000 and increased net income by approximately $171,000.
Long-lived assets--
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 events or changes in
circumstances indicate that the carrying amount of an asset may not be fully
recoverable. HCA does not believe that any such events or changes have
occurred.
F-35
<PAGE>
HOLLYWOOD CASINO--AURORA, INC.
(wholly owned by Hollywood Casino Corporation)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Accrued insurance--
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.
Income taxes--
HCA is included in HCC's consolidated federal income tax return. Pursuant to
agreements between HCC and HCA, HCA'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. HCA paid $4,691,000, $5,394,000 and $6,774,000
to HCC in connection with its current federal tax provisions for the years
ended December 31, 1998, 1997 and 1996, respectively. For the years ended
December 31, 1998, 1997 and 1996, HCA paid state income taxes of $781,000,
$682,000 and $28,000, respectively.
Recent Accounting Pronouncements--
The Financial Accounting Standards Board has issued a new standard,
"Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 requires the
presentation and disclosure of comprehensive income, which is defined as the
change in a company's equity resulting from non-owner transactions and events.
SFAS 130 became effective December 15, 1997 and requires the reclassification
of all prior periods presented. HCA has adopted the provisions of SFAS 130;
however, the statement provides that an enterprise that has no items of other
comprehensive income for any period presented need only report net income. HCA
has no such other comprehensive income items for any period presented;
accordingly, the presentation and disclosure requirements of SFAS 130 are not
applicable.
The FASB has also issued Statement 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"). SFAS 131, which became
effective for fiscal years beginning after December 15, 1997, requires
publicly-held companies to report financial and descriptive information
concerning its reportable operating segments. An operating segment is defined
as a component of a business which (i) earns revenues and incurs expenses,
(ii) has its operating results reviewed on a regular basis by the company's
chief operating decision maker to determine how the company's resources should
be allocated and to assess its performance and (iii) has separate financial
information available. HCA's operations consist of its casino and related
facilities. The Aurora Casino is considered a single operating unit due to the
dependence of the food and beverage and other operations on casino patrons.
Such non-casino activities are considered ancillary to the gaming business,
are reviewed as such by management and can not reasonably be presented as
separate operating segments. Accordingly, additional segment information is
not presented herein.
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.
F-36
<PAGE>
HOLLYWOOD CASINO--AURORA, INC.
(wholly owned by Hollywood Casino Corporation)
NOTES TO FINANCIAL STATEMENTS--(Continued)
(3) Long-Term Debt and Pledge of Assets
HCA's long-term indebtedness consists of the following:
<TABLE>
<CAPTION>
December 31,
------------------------
1998 1997
----------- -----------
<S> <C> <C>
12 3/4% Promissory Note to HCC, due on November
1, 2003(a)..................................... $31,507,000 $36,507,000
Promissory note to bank(b)...................... 1,900,000 350,000
Equipment loans(c).............................. -- 413,000
----------- -----------
Total indebtedness.............................. 33,407,000 37,270,000
Less--current maturities........................ (5,624,000) (5,763,000)
----------- -----------
Total long-term debt............................ $27,783,000 $31,507,000
=========== ===========
</TABLE>
- --------
(a) The intercompany note accrues interest at the rate of 12 3/4% per annum
payable semiannually on October 15 and April 15 of each year and requires
semiannual principal repayments of $2,500,000 commencing October 15, 1997
with the balance of the note due November 1, 2003. The note is pledged as
security with respect to HCC's 12 3/4% Senior Secured Notes due in 2003.
HCA is not a guarantor of HCC's indebtedness; however, the indebtedness is
secured, in part, by a first mortgage (limited to the outstanding
principal amount of the intercompany note to HCC) on substantially all of
the assets of HCA and by a pledge of the capital stock of HCA.
(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.
The promissory note outstanding at December 31, 1997 accrued interest at
the bank's prime lending rate plus 1% per annum and was repaid in 1998.
(c) HCA financed the purchase of certain equipment from vendors through the
issuance of note obligations totaling $2,985,000. The promissory notes
were repaid in 1998.
As of December 31, 1998, future maturities of long-term debt are as follows:
<TABLE>
<S> <C>
1999............................................................. $ 5,624,000
2000............................................................. 5,674,000
2001............................................................. 5,602,000
2002............................................................. 5,000,000
2003............................................................. 11,507,000
-----------
$33,407,000
===========
</TABLE>
Interest paid for the years ended December 31, 1998, 1997 and 1996 amounted
to $6,180,000, $6,970,000 and $6,509,000, respectively.
(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
F-37
<PAGE>
HOLLYWOOD CASINO--AURORA, INC.
(wholly owned by Hollywood Casino Corporation)
NOTES TO FINANCIAL STATEMENTS--(Continued)
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 December 31, 1998 and 1997 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 December 31, 1998 and 1997. Amortization expense with respect
to these assets amounted to $983,000, $1,097,000 and $1,223,000, respectively,
during each of the years ended December 31, 1998, 1997 and 1996. Accumulated
amortization at December 31, 1998 and 1997 with respect to these assets
amounted to $5,991,000 and $5,008,000, respectively.
Future minimum lease payments under capital lease obligations as of December
31, 1998 are as follows:
<TABLE>
<S> <C>
1999........................................................... $ 2,457,000
2000........................................................... 2,483,000
2001........................................................... 2,532,000
2002........................................................... 2,643,000
2003........................................................... 2,660,000
Thereafter..................................................... 21,417,000
------------
Total minimum lease payments................................... 34,192,000
Less--amount representing interest............................. (13,351,000)
------------
Present value of future minimum lease payments................. 20,841,000
Current capital lease obligation............................... (893,000)
------------
Long-term capital lease obligation............................. $ 19,948,000
============
</TABLE>
(5) Income Taxes
HCA's provision for income taxes consists of the following:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Current (provision) benefit:
Federal............................ $(4,856,000) $(5,859,000) $(5,927,000)
State.............................. (685,000) (377,000) 163,000
Deferred (provision) benefit:
Federal............................ (915,000) (1,978,000) (1,125,000)
State.............................. (103,000) (205,000) 6,000
----------- ----------- -----------
$(6,559,000) $(8,419,000) $(6,883,000)
=========== =========== ===========
</TABLE>
F-38
<PAGE>
HOLLYWOOD CASINO--AURORA, INC.
(wholly owned by Hollywood Casino Corporation)
NOTES TO FINANCIAL STATEMENTS--(Continued)
A reconciliation between the calculated tax provision on income based on the
statutory rates in effect and the effective tax rates for the years ended
December 31, 1998, 1997 and 1996 follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Calculated income tax provision at
statutory rate..................... $(5,975,000) $(8,027,000) $(6,792,000)
State income taxes, net of federal
benefit............................ (512,000) (378,000) (110,000)
Political contributions and lobbying
costs.............................. (43,000) (67,000) (89,000)
Other............................... (29,000) 53,000 (112,000)
----------- ----------- -----------
Tax provision as shown on statements
of operations...................... $(6,559,000) $(8,419,000) $(6,883,000)
=========== =========== ===========
</TABLE>
Deferred taxes are computed based on the expected future tax consequences of
temporary differences between the carrying amounts and tax bases of assets and
liabilities, using enacted tax rates. Deferred income taxes result primarily
from the use of the allowance method rather than the direct write-off method
for doubtful accounts, the use of accelerated methods of depreciation for
federal income tax purposes and differences in the timing of deductions taken
between tax and financial reporting purposes for the amortization of
preopening costs and other accruals.
The components of HCA's net deferred tax liability are as follows:
<TABLE>
<CAPTION>
December 31,
------------------------
1998 1997
----------- -----------
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts................. $ 246,000 $ 182,000
Other liabilities and reserves.................. 1,420,000 1,271,000
----------- -----------
Total deferred tax assets..................... 1,666,000 1,453,000
----------- -----------
Deferred tax liabilities:
Depreciation and amortization................... (5,489,000) (4,258,000)
----------- -----------
Net deferred tax liability........................ $(3,823,000) $(2,805,000)
=========== ===========
</TABLE>
Receivables and payables to HCC in connection with the aforementioned tax
allocation agreements at December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
December 31,
------------------------
1998 1997
----------- -----------
<S> <C> <C>
Deferred tax assets................................ $ 1,373,000 $ 1,194,000
Due from affiliates................................ 347,000 538,000
Deferred tax liabilities........................... (4,793,000) (3,700,000)
</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.
(6) Transactions with Related Parties
Pursuant to a management services agreement, HCA pays base management and
incentive fees to Pratt Management, L.P. ("PML"), a limited partnership which,
prior to April 1, 1997, was wholly owned by GBCC.
F-39
<PAGE>
HOLLYWOOD CASINO--AURORA, INC.
(wholly owned by Hollywood Casino Corporation)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Effective as of April 1, 1997, HCC acquired the general partnership interest
in PML. The base management fee is equal to 5% of operating revenues (as
defined in the agreement) subject to a maximum of $5,500,000 in any
consecutive twelve month period. The incentive fee is equal to 10% of gross
operating profit (as defined in the agreement to generally include all
revenues less expenses other than depreciation, interest, amortization and
income taxes). HCA incurred such fees totaling $8,872,000, $9,609,000 and
$9,360,000, respectively, during the years ended December 31, 1998, 1997 and
1996. Management and incentive fees payable at December 31, 1998 and 1997
amounting to $2,067,000 and $2,130,000, 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 3) amounting to $4,361,000, $4,906,000 and $4,973,000, respectively,
for the years ended December 31, 1998, 1997 and 1996. Interest payable to HCC
on such note amounted to $848,000 and $983,000, respectively, at December 31,
1998 and 1997 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 years ended December 31, 1998, 1997 and 1996 totaling $249,000,
$427,000 and $720,000, respectively. At December 31, 1998 and 1997, HCA had
net receivables of $37,000 and net payables of $36,000, respectively, in
connection with such charges.
(7) Illinois Regulatory Matters
Riverboat gaming operations in Illinois are subject to regulatory control by
the Illinois Gaming Board (the "IGB"). Under the provisions of the Illinois
gaming regulations, HCA is required to maintain its ownership license. HCA's
owner's license was renewed in July 1998 for a period of one year and was
subsequently extended by the IGB to December 1999. Management intends to file
for renewal of HCA's owner's license and anticipates that such renewal will be
approved by the IGB during 1999. If it were determined that gaming laws were
violated by a licensee, the gaming licenses held by each licensee could be
limited, conditioned, suspended, or revoked. In addition, the licensees and
other persons involved could be subject to substantial fines. Limitation or
conditioning or suspension of any gaming license could, and revocation would,
have a materially adverse affect on the operations of HCA.
(8) 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.
F-40
<PAGE>
HOLLYWOOD CASINO--AURORA, INC.
(wholly owned by Hollywood Casino Corporation)
NOTES TO FINANCIAL STATEMENTS--(Continued)
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.
(9) Employee Retirement Savings Plan
HCA participates in a retirement savings plan under Section 401(k) of the
Internal Revenue Code sponsored by HCC which covers all of its employees who
meet certain eligibility requirements as to age and period of employment. The
plan allows employees to contribute up to 15% of their salary on a pre-tax
basis (subject to statutory limitations) and invest such monies in a choice of
mutual funds on a tax-deferred basis. HCA matches a portion of the
participating employees' contributions to the plan and may, from time to time,
make additional discretionary contributions. For the years ended December 31,
1998, 1997 and 1996, HCA made company contributions to the plan totaling
$473,000, $289,000 and $440,000, respectively.
(10) Supplemental Cash Flow Information
During 1996, HCA entered into a capital lease obligation in the original
amount of $13,195,000 with respect to a new parking garage (see Note 4).
Additional escrowed construction and financing costs totaling $4,163,000 were
capitalized in 1996 as part of the cost of the facility.
(11) Disclosures About Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value:
Cash and cash equivalents--The carrying amounts approximate fair value
because of the short maturity of these instruments.
Interest payable--The carrying amount of interest payable approximates fair
value because of the short maturity of the obligation.
Long-term debt--The fair value of HCA's long-term debt is estimated based on
the quoted market price of the underlying debt issue. Debt obligations with a
short remaining maturity are valued at the carrying amount.
F-41
<PAGE>
HOLLYWOOD CASINO--AURORA, INC.
(wholly owned by Hollywood Casino Corporation)
NOTES TO FINANCIAL STATEMENTS--(Continued)
The estimated carrying amounts and fair values of HCA's financial instruments
are as follows:
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
--------------------- -----------------------
Carrying Carrying
Amount Fair Value Amount Fair Value
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Financial Assets:
Cash and cash equivalents....... $9,718,000 $9,718,000 $11,594,000 $11,594,000
Financial Liabilities:
Interest payable................ $1,058,000 $1,058,000 $ 1,192,000 $ 1,192,000
12 3/4% promissory note......... 31,507,000 33,555,000 36,507,000 39,245,000
Promissory note to bank......... 1,900,000 1,900,000 350,000 350,000
Equipment loans................. -- -- 413,000 413,000
</TABLE>
(12) Selected Quarterly Financial Data (Unaudited)
<TABLE>
<CAPTION>
Quarter
-------------------------------------------------
First Second Third Fourth
------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
Year Ended December 31, 1998
Net revenues............... $ 38,720,000 $ 40,093,000 $41,712,000 $42,422,000
============ ============ =========== ===========
Net income................. $2,458,000 $ $ 3,061,000 $ 2,782,000 $ 2,212,000
============ ============ =========== ===========
Year Ended December 31, 1997
Net revenues............... $ 40,350,000 $ 38,931,000 $41,741,000 $39,285,000
============ ============ =========== ===========
Net income................. $3,431,000 $ $ 3,852,000 $ 3,894,000 $ 3,337,000
============ ============ =========== ===========
</TABLE>
F-42
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To HWCC-Tunica, Inc.:
We have audited the accompanying consolidated balance sheets of HWCC-Tunica,
Inc. (the Company and a Texas Corporation) and subsidiary as of December 31,
1998 and 1997, and the related consolidated statements of operations, changes
in shareholder's equity and cash flows for each of the three years in the
period ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of HWCC-Tunica,
Inc. and subsidiary as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1998 in conformity with generally accepted accounting
principles.
Deloitte & Touche LLP
Dallas, Texas
February 23, 1999
F-43
<PAGE>
HWCC--TUNICA, INC. AND SUBSIDIARY
(wholly owned by Hollywood Casino Corporation)
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
December 31,
--------------------------
1998 1997
------------ ------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents........................ $ 16,325,000 $ 11,851,000
Short-term investments........................... 3,905,000 3,876,000
Accounts receivable, net of allowances of
$813,000 and $705,000, respectively............. 1,167,000 1,510,000
Inventories...................................... 779,000 660,000
Deferred income taxes............................ 1,451,000 1,632,000
Prepaid expenses and other current assets........ 770,000 1,129,000
------------ ------------
Total current assets........................... 24,397,000 20,658,000
------------ ------------
Property and Equipment:
Land and improvements............................ 4,645,000 3,456,000
Buildings........................................ 73,948,000 73,422,000
Barges........................................... 2,524,000 2,524,000
Operating equipment.............................. 39,169,000 37,588,000
Construction in progress......................... 2,612,000 688,000
------------ ------------
122,898,000 117,678,000
Less--accumulated depreciation and
amortization.................................. (38,910,000) (31,760,000)
------------ ------------
Net property and equipment....................... 83,988,000 85,918,000
------------ ------------
Other Assets:
Land rights...................................... 7,250,000 7,454,000
Other assets..................................... 4,826,000 4,697,000
------------ ------------
Total other assets............................. 12,076,000 12,151,000
------------ ------------
$120,461,000 $118,727,000
============ ============
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these consolidated balance sheets.
F-44
<PAGE>
HWCC--TUNICA, INC. AND SUBSIDIARY
(wholly owned by Hollywood Casino Corporation)
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
December 31,
--------------------------
1998 1997
------------ ------------
<S> <C> <C>
Current Liabilities:
Current maturities of long-term debt
and capital lease obligations..................... $ 775,000 $ 485,000
Accounts payable................................... 1,638,000 1,372,000
Accrued liabilities--
Salaries and wages............................... 1,685,000 1,579,000
Interest......................................... 476,000 476,000
Gaming and other taxes........................... 453,000 1,230,000
Insurance........................................ 1,975,000 1,553,000
Other............................................ 1,866,000 1,627,000
Other current liabilities.......................... 1,283,000 1,325,000
------------ ------------
Total current liabilities.......................... 10,151,000 9,647,000
------------ ------------
Long-Term Debt....................................... 85,023,000 85,198,000
------------ ------------
Commitments and Contingencies
Shareholder's Equity:
Common stock, $.01 par value
per share; 100,000 shares authorized;
1,000 shares issued and outstanding............... -- --
Additional paid-in capital......................... 34,637,000 34,637,000
Accumulated deficit................................ (9,350,000) (10,755,000)
------------ ------------
Total shareholder's equity....................... 25,287,000 23,882,000
------------ ------------
$120,461,000 $118,727,000
============ ============
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these consolidated balance sheets.
F-45
<PAGE>
HWCC--TUNICA, INC. AND SUBSIDIARY
(wholly owned by Hollywood Casino Corporation)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
Casino.............................. $ 96,459,000 $ 97,506,000 $ 87,361,000
Rooms............................... 9,386,000 9,651,000 5,329,000
Food and beverage................... 15,039,000 14,320,000 11,987,000
Other............................... 1,373,000 1,164,000 1,097,000
------------ ------------ ------------
122,257,000 122,641,000 105,774,000
Less--promotional allowances........ (16,484,000) (15,378,000) (11,250,000)
------------ ------------ ------------
Net revenues........................ 105,773,000 107,263,000 94,524,000
------------ ------------ ------------
Expenses:
Casino.............................. 72,317,000 69,496,000 66,018,000
Rooms............................... 1,752,000 1,835,000 1,573,000
Food and beverage................... 3,923,000 4,325,000 3,752,000
Other............................... 1,336,000 1,402,000 1,259,000
General and administrative.......... 5,813,000 5,769,000 5,962,000
Depreciation and amortization....... 8,123,000 9,916,000 10,906,000
------------ ------------ ------------
Total expenses.................... 93,264,000 92,743,000 89,470,000
------------ ------------ ------------
Income from operations................ 12,509,000 14,520,000 5,054,000
------------ ------------ ------------
Non-operating income (expenses):
Interest income..................... 587,000 281,000 835,000
Interest expense, net of capitalized
interest of $1,006,000 in 1996..... (10,937,000) (10,980,000) (10,060,000)
(Loss) gain on disposal of assets... (65,000) 6,000 (45,000)
------------ ------------ ------------
Total non-operating expenses,
net.............................. (10,415,000) (10,693,000) (9,270,000)
------------ ------------ ------------
Income (loss) before income taxes..... 2,094,000 3,827,000 (4,216,000)
Income tax (provision) benefit........ (689,000) 845,000 --
------------ ------------ ------------
Net income (loss)..................... $ 1,405,000 $ 4,672,000 $ (4,216,000)
============ ============ ============
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these consolidated statements.
F-46
<PAGE>
HWCC--TUNICA, INC. AND SUBSIDIARY
(wholly owned by Hollywood Casino Corporation)
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDER'S EQUITY
For the Three Years Ended December 31, 1998
<TABLE>
<CAPTION>
Common Stock Additional
------------- Paid-in Accumulated
Shares Amount Capital Deficit
------ ------ ----------- ------------
<S> <C> <C> <C> <C>
BALANCE, January 1, 1996............... 1,000 $-- $34,637,000 $(11,211,000)
Net loss............................. -- -- -- (4,216,000)
----- ---- ----------- ------------
BALANCE, December 31, 1996............. 1,000 -- 34,637,000 (15,427,000)
Net income........................... -- -- -- 4,672,000
----- ---- ----------- ------------
BALANCE, December 31, 1997............. 1,000 -- 34,637,000 (10,755,000)
Net income........................... -- -- -- 1,405,000
----- ---- ----------- ------------
BALANCE, December 31, 1998............. 1,000 $-- $34,637,000 $ (9,350,000)
===== ==== =========== ============
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of this consolidated statement.
F-47
<PAGE>
HWCC--TUNICA, INC. AND SUBSIDIARY
(wholly owned by Hollywood Casino Corporation)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------
1998 1997 1996
----------- ----------- ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss).................... $ 1,405,000 $ 4,672,000 $ (4,216,000)
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation and amortization...... 8,123,000 9,916,000 10,906,000
Loss (gain) on disposal of assets.. 65,000 (6,000) 45,000
Provision for doubtful accounts.... 483,000 498,000 539,000
Deferred income tax provision
(benefit)......................... 115,000 (1,071,000) --
Increase in accounts receivable.... (140,000) (645,000) (474,000)
Increase (decrease) in accounts
payable and accrued expenses...... 256,000 (2,097,000) 721,000
Net change in other current assets
and liabilities................... 199,000 232,000 (280,000)
Net change in other noncurrent
assets and liabilities............ (223,000) 488,000 (740,000)
----------- ----------- ------------
Net cash provided by operating
activities...................... 10,283,000 11,987,000 6,501,000
----------- ----------- ------------
INVESTING ACTIVITIES:
Purchases of property and equipment.. (5,924,000) (2,635,000) (35,038,000)
Short-term investments............... (29,000) (3,876,000) --
Investment in unconsolidated
affiliate........................... (53,000) (2,000,000) --
Proceeds from sale of assets......... 82,000 16,000 105,000
Decrease in cash restricted for
construction projects............... -- -- 27,919,000
----------- ----------- ------------
Net cash used in investing
activities........................ (5,924,000) (8,495,000) (7,014,000)
----------- ----------- ------------
FINANCING ACTIVITIES:
Proceeds from issuance of long-term
debt................................ 687,000 601,000 1,503,000
Repayments of long-term debt......... (572,000) (364,000) (1,469,000)
Payments on capital lease
obligations......................... -- (1,199,000) (1,729,000)
----------- ----------- ------------
Net cash provided by (used in)
financing activities.............. 115,000 (962,000) (1,695,000)
----------- ----------- ------------
Net increase (decrease) in cash and
cash equivalents.................. 4,474,000 2,530,000 (2,208,000)
Cash and cash equivalents at
beginning of year............... 11,851,000 9,321,000 11,529,000
----------- ----------- ------------
Cash and cash equivalents at end
of year......................... $16,325,000 $11,851,000 $ 9,321,000
=========== =========== ============
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these consolidated statements.
F-48
<PAGE>
HWCC--TUNICA, INC. AND SUBSIDIARY
(wholly owned by Hollywood Casino Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Organization, Business and Basis of Presentation
HWCC-Tunica, Inc. ("HCT") is a Texas corporation and a wholly owned
subsidiary of Hollywood Casino Corporation ("HCC"), a Delaware corporation.
HCT was incorporated in December 1993 for the purpose of acquiring and
completing a gaming facility in northern Tunica County, Mississippi
approximately 27 miles southwest of Memphis, Tennessee. The 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 December
31, 1998 and 1997.
HCT estimates that a significant amount of the Tunica Casino's revenues are
derived from patrons living in the Memphis, Tennessee area, northern
Mississippi and Arkansas. The Tunica Casino faces intense competition from
other casinos operating in northern Tunica County and management believes that
this competition will continue in the future.
(2) Summary of Significant Accounting Policies
The significant accounting policies followed in the preparation of the
accompanying consolidated financial statements are discussed below. 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.
Casino revenues, promotional allowances and departmental expenses--
The Tunica Casino recognizes the net win from gaming activities (the
difference between gaming wins and losses) as casino revenues. Casino revenues
are net of accruals for anticipated payouts of progressive slot machine
jackpots and certain progressive table game payouts. Such anticipated jackpots
and payouts are reflected as current liabilities on the accompanying
consolidated balance sheets. The estimated value of rooms, food and beverage
and other items which are provided to customers without charge has been
included in revenues and a corresponding amount has been deducted as
promotional allowances. The costs of such complimentaries have been included
as casino expenses on the accompanying consolidated statements of operations.
Costs of complimentaries allocated from the rooms, food and beverage and other
operating departments to the casino department during the years ended December
31, 1998, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Rooms.................................... $ 1,940,000 $ 1,870,000 $ 1,162,000
Food and beverage........................ 12,166,000 10,837,000 10,223,000
Other.................................... 300,000 140,000 203,000
----------- ----------- -----------
$14,406,000 $12,847,000 $11,588,000
=========== =========== ===========
</TABLE>
F-49
<PAGE>
HWCC--TUNICA, INC. AND SUBSIDIARY
(wholly owned by Hollywood Casino Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Cash and cash equivalents--
Cash and cash equivalents are generally comprised of cash and investments
with original maturities of three months or less, such as commercial paper,
certificates of deposit and fixed repurchase agreements.
Allowance for doubtful accounts--
The allowance for doubtful accounts is maintained at a level considered
adequate to provide for possible future losses. Provisions for doubtful
accounts amounting to $483,000, $498,000 and $539,000, respectively, were made
during the years ended December 31, 1998, 1997 and 1996.
Inventories--
Inventories are stated at the lower of cost (on a first-in, first-out basis)
or market.
Property and equipment--
Property and equipment have been recorded at cost and are being depreciated
utilizing the straight-line method over the estimated useful lives of the
assets as follows:
<TABLE>
<S> <C>
Hotel, dockside facilities and improvements...................... 25-40 years
Barges........................................................... 25-40 years
Operating equipment.............................................. 3-7 years
</TABLE>
On October 1, 1996, HCT revised the estimated useful lives of its buildings,
barges and related land rights (see below) from 25 years to 40 years and the
estimated useful life of its slot machines from three years to five years.
Management believes the changes in estimated lives more appropriately reflect
the timing of the economic benefits to be received from these assets. For the
year ended December 31, 1996, such changes reduced depreciation and
amortization expense and net loss by approximately $612,000.
Interest incurred in connection with property and equipment acquisitions
totalling $1,006,000 in 1996 has been capitalized during the development
period and is being amortized over the useful lives of the related assets.
Land rights--
Land rights are being amortized on a straight-line basis over the estimated
useful life of the facility, which is less than the term of the ground lease
including renewals (see Note 8); such amortization commenced with the opening
of the Tunica Casino. The estimated economic benefit of the land rights was
revised from 25 years to 40 years effective on October 1, 1996 consistent with
the change in estimated useful life of the Tunica facility as discussed under
"Property and Equipment" above. Management presently intends to renew the
ground lease at least through the estimated 40-year useful life of the
facility. Accumulated amortization of such land rights amounted to $1,195,000
and $991,000, respectively, at December 31, 1998 and 1997.
Long-lived assets--
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 events or changes in
circumstances indicate that the carrying amount of an asset may not be fully
recoverable. HCT does not believe that any such events or changes have
occurred.
F-50
<PAGE>
HWCC--TUNICA, INC. AND SUBSIDIARY
(wholly owned by Hollywood Casino Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Accrued insurance--
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.
Income taxes--
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 made
payments to HCC in lieu of federal income taxes amounting to $307,000 and
$494,000 during the years ended December 31, 1998 and 1997, respectively; no
such payments were made during the year ended December 31, 1996. HCT paid no
state income taxes during 1998, 1997 or 1996.
Recent Accounting Pronouncements--
The Financial Accounting Standards Board has issued a new standard,
"Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 requires the
presentation and disclosure of comprehensive income, which is defined as the
change in a company's equity resulting from non-owner transactions and events.
SFAS 130 became effective December 15, 1997 and requires the reclassification
of all prior periods presented. HCT has adopted the provisions of SFAS 130;
however, the statement provides that an enterprise that has no items of other
comprehensive income for any period presented need only report net income. HCT
has no such other comprehensive income items for any period presented;
accordingly, the presentation and disclosure requirements of SFAS 130 are not
applicable.
The FASB has also issued Statement 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"). SFAS 131, which became
effective for fiscal years beginning after December 15, 1997, requires
publicly-held companies to report financial and descriptive information
concerning its reportable operating segments. An operating segment is defined
as a component of a business which (i) earns revenues and incurs expenses,
(ii) has its operating results reviewed on a regular basis by the company's
chief operating decision maker to determine how the company's resources should
be allocated and to assess its performance and (iii) has separate financial
information available. HCT's operations consist of its casino, hotel and
related facilities. The Tunica Casino is considered a single operating unit
due to the dependence of the hotel, food and beverage and other operations on
casino patrons. Such non-casino activities are considered ancillary to the
gaming business, are reviewed as such by management and can not reasonably be
presented as separate operating segments. Accordingly, additional segment
information is not presented herein.
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.
F-51
<PAGE>
HWCC--TUNICA, INC. AND SUBSIDIARY
(wholly owned by Hollywood Casino Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(3) 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>
December 31,
------------------------
1998 1997
----------- -----------
<S> <C> <C>
Promissory notes to HCC due November 1, 2003(a)....... $84,045,000 $84,045,000
Equipment loans(b).................................... 1,291,000 1,638,000
Bank credit facility(c)............................... 462,000 --
----------- -----------
Total indebtedness................................ 85,798,000 85,683,000
Less--current maturities............................ (775,000) (485,000)
----------- -----------
Total long-term debt.............................. $85,023,000 $85,198,000
=========== ===========
</TABLE>
- --------
(a) During October 1995, HCC loaned $54,045,000 to HCT to repay its
outstanding mortgage indebtedness, together with the associated call
premium and certain accrued interest thereon, and loaned an additional
$30,000,000 to HCT to finance construction of a 352-room hotel tower and
related amenities and to fund development and construction of a themed
gaming area. Such intercompany loans were made with a portion of the note
proceeds from HCC's issue of $210,000,000 of 12 3/4% Senior Secured Notes
(the "Senior Secured Notes") due November 1, 2003, discounted to yield 13
3/4% per annum. Interest on the loans from HCC accrues at the rate of 12
3/4% per annum and is payable semiannually on April 15 and October 15 of
each year. The 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 first mortgage on substantially all of the
assets of another gaming facility operated by a wholly owned subsidiary of
HCC, (iii) a pledge of the capital stock of HCT and certain other
subsidiaries of HCC and (iv) the collateral assignment of any future
management contracts entered into by HCC. The limitation on the first
mortgage described in (ii) above is currently $31,507,000 subject to
semiannual reductions of $2,500,000.
The indenture to the Senior Secured Notes contains various provisions
limiting the ability of HCC, HCT and certain defined subsidiaries to, among
other things, pay dividends or make other restricted payments; incur
additional indebtedness or issue preferred stock; create liens; create
dividend or other payment restrictions affecting certain defined
subsidiaries; enter into mergers or consolidations or make sales of all or
substantially all assets of HCC, HCT or any future guarantor; and enter
into transactions with certain affiliates.
(b) The loans outstanding at December 31, 1998 are payable monthly including
interest at effective rates ranging from 7.8% to 12.9% per annum and
mature at various dates between 1999 and 2001.
(c) HCT had a bank credit facility in the amount of $1,300,000 available to
borrow against until September 30, 1998. HCT borrowed $541,000 under the
credit facility during 1998 at the rate of 8.875% per annum; no borrowings
were outstanding under the credit facility at December 31, 1997.
Borrowings under the credit facility are to be repaid in monthly
installments over a period of 36 months and are collateralized by
equipment purchased with the loan proceeds. The credit facility was not
renewed by HCT.
Scheduled payments of long-term debt as of December 31, 1998 are set forth
below:
<TABLE>
<S> <C>
1999........................................................... $ 775,000
2000........................................................... 729,000
2001........................................................... 249,000
2002........................................................... --
2003........................................................... 84,045,000
-----------
Total........................................................ $85,798,000
===========
</TABLE>
F-52
<PAGE>
HWCC--TUNICA, INC. AND SUBSIDIARY
(wholly owned by Hollywood Casino Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Interest paid, net of amounts capitalized, amounted to $10,937,000,
$12,766,000 and $10,001,000, respectively, during the years ended December 31,
1998, 1997 and 1996.
(4) 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 December 31, 1998 and 1997. Amortization
expense for the years ended December 31, 1998, 1997 and 1996 was $298,000,
$945,000 and $1,500,000, respectively. Accumulated amortization at December
31, 1998 and 1997 with respect to these assets amounted to $4,814,000 and
$4,516,000, respectively. No future payment obligations exist with respect to
such capital leases.
(5) Income Taxes
HCT's (provision) benefit for income taxes consists of the following:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1998 1997 1996
--------- ---------- -----------
<S> <C> <C> <C>
Federal income tax (provision) benefit:
Current................................... $(574,000) $ (226,000) $ --
Deferred.................................. (185,000) (812,000) 1,453,000
Change in valuation allowance............... 70,000 1,883,000 (1,453,000)
--------- ---------- -----------
$(689,000) $ 845,000 $ --
========= ========== ===========
</TABLE>
State income taxes have not been provided for since a credit for state
gaming taxes based on gross revenues is allowed to offset income taxes
incurred. The credit is the lesser of total gaming taxes paid or the state
income tax, with no credit carryforward permitted.
A reconciliation between the calculated tax (provision) benefit on income
(loss) based on the statutory rates in effect and the effective tax rates for
the years ended December 31, 1998, 1997 and 1996 follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------
1998 1997 1996
--------- ----------- -----------
<S> <C> <C> <C>
Calculated income tax (provision)
benefit................................. $(712,000) $(1,301,000) $ 1,433,000
Valuation allowance change............... 70,000 1,883,000 --
Tax benefit of operating loss not
utilized................................ -- -- (1,400,000)
Disallowance of meals and entertainment.. (32,000) (43,000) (25,000)
Other.................................... (15,000) 306,000 (8,000)
--------- ----------- -----------
Tax (provision) benefit as shown on
statement of operations................. $(689,000) $ 845,000 $ --
========= =========== ===========
</TABLE>
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 December 31, 1998, HCT had net operating loss carryforwards ("NOL's")
totaling approximately $15,350,000, which do not begin to expire until the
year 2010. Statement of Financial Accounting Standards No.
F-53
<PAGE>
HWCC--TUNICA, INC. AND SUBSIDIARY
(wholly owned by Hollywood Casino Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
109, "Accounting for Income Taxes", requires that the tax benefit of such
NOL's, together with the tax benefit of deferred tax assets resulting from
temporary differences, be recorded as an asset and, to the extent that
management can not assess that the utilization of all or a portion of such
deferred tax assets is more likely than not, a valuation allowance should be
recorded. Based on the taxable income earned by HCT during 1998 and 1997 and
the expectation of future taxable income, management believes that it is more
likely than not that a portion of the NOL's and deferred tax assets will be
utilized. Accordingly, a valuation allowance has been established which has
resulted in the recording of net deferred tax assets of $1,993,000 and
$2,107,000, respectively, at December 31, 1998 and 1997.
The components of HCT's net deferred tax asset are as follows:
<TABLE>
<CAPTION>
December 31,
------------------------
1998 1997
----------- -----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards................. $ 5,221,000 $ 5,200,000
Alternative minimum tax credit carryforward...... 800,000 226,000
Allowance for doubtful accounts.................. 277,000 240,000
Other liabilities and accruals................... 1,286,000 1,108,000
----------- -----------
Total deferred tax assets...................... 7,584,000 6,774,000
Deferred tax liabilities:
Depreciation and amortization.................... (3,092,000) (2,097,000)
----------- -----------
Net deferred tax asset............................. 4,492,000 4,677,000
Valuation allowance................................ (2,500,000) (2,570,000)
----------- -----------
$ 1,992,000 $ 2,107,000
=========== ===========
Receivables from HCC in connection with HCT's federal income taxes are
included in the accompanying consolidated financial statements as follows:
<CAPTION>
December 31,
------------------------
1998 1997
----------- -----------
<S> <C> <C>
Accounts receivable................................ $ -- $ 268,000
Deferred income taxes.............................. 1,451,000 1,632,000
Other noncurrent assets............................ 541,000 475,000
</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.
(6) Transactions with Related Parties
Pursuant to a ten-year consulting agreement with Pratt Casino Corporation,
an affiliated company, HCT incurs a monthly consulting fee of $100,000. Such
fees amounted to $1,200,000 during each of the years ended December 31, 1998,
1997 and 1996.
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
F-54
<PAGE>
HWCC--TUNICA, INC. AND SUBSIDIARY
(wholly owned by Hollywood Casino Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
equipment and will license or sublicense to HCT computer software necessary to
operate HCT's casino, hotel and related facilities and business operations.
HCT pays ACSC for such equipment and licenses such software at amounts and on
terms and conditions that ACSC provides to unrelated third parties. HCT also
pays ACSC a fixed license fee of $33,600 per month ($30,000 prior to January
1, 1997) and reimburses ACSC for its direct costs and expenses incurred under
the agreement. Since the latter part of 1997, ACSC also performs and bills HCT
for certain administrative and marketing services. Total charges incurred by
HCT amounted to $656,000, $635,000 and $477,000, respectively, for the years
ended December 31, 1998, 1997 and 1996. At both December 31, 1998 and 1997,
HCT had payables of $44,000 included in accounts payable with respect to such
charges.
Prior to 1998, Greate Bay Hotel and Casino, Inc. ("GBHC"), an affiliated
company which owns and operates the Sands Hotel and Casino in Atlantic City,
New Jersey, performed certain administrative and marketing services on behalf
of HCT. During the years ended December 31, 1997 and 1996, fees charged to HCT
by GBHC totaled $428,000 and $653,000, respectively.
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 years ended
December 31, 1998, 1997 and 1996, such charges amounted to $167,000, $362,000
and $439,000, respectively. At December 31, 1998 and 1997, HCT had net
receivables of $97,000 and $31,000, respectively, with respect to such
charges.
(7) Mississippi Regulatory Matters
Gaming operations in Mississippi are subject to regulatory control by the
Mississippi Gaming Commission. Under the provisions of the Mississippi gaming
regulations, HCT is required to maintain all necessary licenses. The ownership
license for the Tunica Casino has been renewed through October 18, 1999. If it
were determined that gaming laws were violated by a licensee, the gaming
licenses held by each licensee could be limited, conditioned, suspended or
revoked. In addition, the licensees and other persons involved could be
subject to substantial fines.
(8) Commitments and Contingencies
Ground Lease--
HCT entered into a ground lease covering 70 acres of land on which the
Tunica Casino was constructed. The ground lease is for an initial term of five
years from the opening date of the facility and, at HCT's option, may be
renewed for nine additional five-year periods. Obligations under the ground
lease during the initial term include both minimum monthly fixed payments and
percentage rent, which in the aggregate will be the greater of 4% of Gross
Revenues, as defined, or $1,100,000 per year. HCT is responsible for all
operating and other expenses of the property in accordance with the lease
terms. During 1998, 1997 and 1996, HCT expensed $3,899,000, $3,935,000 and
$3,486,000, 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
F-55
<PAGE>
HWCC--TUNICA, INC. AND SUBSIDIARY
(wholly owned by Hollywood Casino Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Barish (collectively, the "PHII Defendants"). PHII filed with the Court on
January 21, 1997, an amendment to their complaint which, among other things,
added HCT (together with the Original Hollywood Defendants, the "Hollywood
Defendants") and Greate Bay Casino Corporation ("GBCC"), an affiliated
company, as defendants. The Original Hollywood Defendants filed with the Court
on February 4, 1997, and GBCC and HCT filed with the Court on February 20,
1997, answers and counterclaims to such amended complaint.
In its lawsuit, PHII alleges, among other things, that the Hollywood
Defendants and GBCC have, in opening and operating the Hollywood Casino
concept, infringed on PHII's trademark, service mark and trade dress and have
engaged in unfair competition and deceptive trade practices. In their
counterclaims, the Hollywood Defendants and GBCC allege, among other things,
that the PHII Defendants have, through their planned use of their mark in
connection with casino services, infringed on certain of HCC's service marks
and trade dress and have engaged in unfair competition.
Given the uncertainties inherent in litigation, no assurance can be given
that the Hollywood Defendants will prevail in this litigation; however, the
Hollywood Defendants believe that PHII's claims are without merit and intend
to defend their position and pursue their counterclaims vigorously. The
accompanying consolidated financial statements do not include any adjustments
that might result from the outcome of the uncertainties described above.
Other--
HCT is a party in various legal proceedings with respect to the conduct of
casino and hotel operations. Although a possible range of loss can not be
estimated, in the opinion of management, based upon the advice of counsel,
settlement or resolution of the proceedings should not have a material adverse
impact on the consolidated financial position or results of operations of HCT.
(9) Employee Retirement Savings Plan--
HCT participates in a retirement savings plan under Section 401(k) of the
Internal Revenue Code sponsored by HCC which covers all of its employees who
meet certain eligibility requirements as to age and period of employment. The
plan allows employees to contribute up to 15% of their salary on a pre-tax
basis (subject to statutory limitations) and invest such monies in a choice of
mutual funds on a tax-deferred basis. HCT matches a portion of the
participating employees' contributions to the plan and may, from time to time,
make additional discretionary contributions. For the years ended December 31,
1998, 1997 and 1996, HCT made company contributions to the plan totaling
$203,000, $198,000 and $97,000, respectively.
(10) Disclosures about Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value:
Cash and cash equivalents--The carrying amounts approximate fair value
because of the short maturity of these instruments.
Short-term investments--The carrying amounts approximate fair value because
of the short maturity of these investments.
Interest payable--The carrying amount of interest payable approximates fair
value because of the short maturity of the obligation.
F-56
<PAGE>
HWCC--TUNICA, INC. AND SUBSIDIARY
(wholly owned by Hollywood Casino Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Long-term debt--The fair value of HCT's long-term debt is estimated based on
either the quoted market price of the underlying debt issue or on the
discounted cash flow of future payments utilizing current rates available to
HCT for debt of similar remaining maturities. Debt obligations with a short
remaining maturity are valued at the carrying amount.
The estimated carrying amounts and fair values of HCT's financial instruments
are as follows:
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
----------------------- -----------------------
Carrying Carrying
Amount Fair Value Amount Fair Value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Financial Assets
Cash and cash
equivalents............ $16,325,000 $16,325,000 $11,851,000 $11,851,000
Short-term investments.. 3,905,000 3,905,000 3,876,000 3,876,000
Financial Liabilities
Interest payable........ $ 476,000 $ 476,000 $ 476,000 $ 476,000
Promissory notes to
HCC.................... 84,045,000 89,508,000 84,045,000 90,348,000
Equipment loans......... 1,291,000 1,335,000 1,638,000 1,649,000
Bank credit facility.... 462,000 462,000 -- --
(11) Selected Quarterly Financial Data (Unaudited)
<CAPTION>
Quarter
-----------------------------------------------
First Second Third Fourth
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Year Ended December 31,
1998:
Net revenues............ $25,072,000 $26,245,000 $29,126,000 $25,330,000
=========== =========== =========== ===========
Net income (loss)....... $ 732,000 $ 153,000 $ 639,000 $ (119,000)
=========== =========== =========== ===========
Year Ended December 31,
1997:
Net revenues............ $26,979,000 $27,354,000 $28,084,000 $24,846,000
=========== =========== =========== ===========
Net income.............. $ 1,431,000 $ 1,781,000 $ 1,442,000 $ 18,000
=========== =========== =========== ===========
</TABLE>
F-57
<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 notes to consolidated financial statements are an integral
part of these consolidated balance sheets.
F-58
<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 notes to consolidated financial statements
are an integral part of these consolidated balance sheets.
F-59
<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 notes to consolidated financial statements
are an integral part of these consolidated statements.
F-60
<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 notes to consolidated financial statements
are an integral part of these consolidated statements.
F-61
<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 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).
F-62
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
HCC is self insured for a portion of its general liability, certain health
care and other liability exposures. Accrued insurance includes estimates of
such accrued liabilities based on an evaluation of the merits of individual
claims and historical claims experience; accordingly, HCC's ultimate liability
may differ from the amounts accrued.
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"
requires, among other things, that an entity review its long-lived assets and
certain related intangibles for impairment whenever changes in circumstances
indicate that the carrying amount of an asset may not be fully recoverable.
Land held for sale is shown net of a valuation allowance in the amount of
$3,464,000 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.
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>
F-63
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
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.
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
F-64
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
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.
Scheduled payments of long-term debt as of March 31, 1999 are set forth
below:
<TABLE>
<S> <C>
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
============
</TABLE>
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.
F-65
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
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.
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>
(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
F-66
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
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, 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>
F-67
<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 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.
F-68
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
Prior to December 31, 1996, when GBCC and its subsidiaries were members of
the HCC consolidated group, it was anticipated that one of HCC's primary
methods of realizing the carrying value of the PPI Funding Notes would be
through the utilization of NOL's of GBCC. As a result of HCC's distribution of
GBCC stock at December 31, 1996, GBCC's NOL's are no longer available for
utilization in HCC's consolidated federal income tax returns. Accordingly, HCC
provided a valuation allowance in the amount of $18,741,000 at December 31,
1996 which reduced the carrying amount of the PPI Funding Notes to their
estimated realizable value of $35,597,000 at that date. As a result of 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.
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.
F-69
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
(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 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.
F-70
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
(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 $230,000,000. The Company anticipates contributing approximately
$50,000,000 as an equity investment in the project with the remaining
construction and preopening costs, estimated at $180,000,000, 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. Net proceeds of a
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 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.
F-71
<PAGE>
HOLLYWOOD CASINO--AURORA, INC.
(wholly owned by Hollywood Casino Corporation)
BALANCE SHEETS
<TABLE>
<CAPTION>
March 31,
1999 December 31,
(Unaudited) 1998
------------ ------------
<S> <C> <C>
ASSETS
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
============ ============
LIABILITIES AND SHAREHOLDER'S EQUITY
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 notes to financial statements are an
integral part of these balance sheets.
F-72
<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 notes to financial statements are an integral part of these
financial statements.
F-73
<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 notes to financial statements are an integral part of these
financial statements.
F-74
<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.
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.
F-75
<PAGE>
HOLLYWOOD CASINO--AURORA, INC.
(wholly owned by Hollywood Casino Corporation)
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Unaudited)
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.
(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:
<TABLE>
<S> <C>
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
===========
</TABLE>
Interest paid for the three month periods ended March 31, 1999 and 1998
amounted to $268,000 and $257,000, respectively.
F-76
<PAGE>
HOLLYWOOD CASINO--AURORA, INC.
(wholly owned by Hollywood Casino Corporation)
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Unaudited)
(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 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>
F-77
<PAGE>
HOLLYWOOD CASINO--AURORA, INC.
(wholly owned by Hollywood Casino Corporation)
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Unaudited)
(4) Income Taxes
HCA's provision for income taxes consists of the following:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------------
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.
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>
F-78
<PAGE>
HOLLYWOOD CASINO--AURORA, INC.
(wholly owned by Hollywood Casino Corporation)
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Unaudited)
The Internal Revenue Service is currently examining the consolidated Federal
income tax returns of HCC for the years 1993 through 1996. Management believes
that the results of such examination will not have a material adverse effect
on the financial position or results of operations of HCA.
(5) Transactions with Related Parties
Pursuant to a management services agreement, HCA pays base management and
incentive fees to Pratt Management, L.P. ("PML"), a limited partnership of
which HCC is the general partner and a subsidiary of GBCC is the limited
partner. The base management fee is equal to 5% of operating revenues (as
defined in the agreement) subject to a maximum of $5,500,000 in any
consecutive twelve month period. The incentive fee is equal to 10% of gross
operating profit (as defined in the agreement to generally include all
revenues less expenses other than depreciation, interest, amortization and
income taxes). HCA incurred such fees totaling $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.
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
F-79
<PAGE>
HOLLYWOOD CASINO--AURORA, INC.
(wholly owned by Hollywood Casino Corporation)
NOTES TO FINANCIAL STATEMENTS--(Continued)
(Unaudited)
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.
F-80
<PAGE>
HWCC--TUNICA, INC. AND SUBSIDIARY
(wholly owned by Hollywood Casino Corporation)
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
------------ ------------
(Unaudited)
<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 notes to consolidated financial statements
are an integral part of these consolidated balance sheets.
F-81
<PAGE>
HWCC--TUNICA, INC. AND SUBSIDIARY
(wholly owned by Hollywood Casino Corporation)
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
------------ ------------
(Unaudited)
<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 notes to consolidated financial statements
are an integral part of these consolidated balance sheets.
F-82
<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 notes to consolidated financial statements
are an integral part of these consolidated statements.
F-83
<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 notes to consolidated financial statements
are an integral part of these consolidated statements.
F-84
<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
F-85
<PAGE>
HWCC--TUNICA, INC. AND SUBSIDIARY
(wholly owned by Hollywood Casino Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
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.
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.
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.
F-86
<PAGE>
HWCC--TUNICA, INC. AND SUBSIDIARY
(wholly owned by Hollywood Casino Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
(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:
<TABLE>
<S> <C>
1999 (nine months)............................................. $ 958,000
2000........................................................... 1,343,000
2001........................................................... 915,000
2002........................................................... 153,000
2003........................................................... 84,045,000
-----------
Total........................................................ $87,414,000
===========
</TABLE>
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.
(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.
F-87
<PAGE>
HWCC--TUNICA, INC. AND SUBSIDIARY
(wholly owned by Hollywood Casino Corporation)
NOTES TO CONSOLIDATED 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 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.
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
=========== ===========
Receivables from HCC in connection with HCT's federal income taxes are
included in the accompanying consolidated financial statements as follows:
<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.
F-88
<PAGE>
HWCC--TUNICA, INC. AND SUBSIDIARY
(wholly owned by Hollywood Casino Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
(5) Transactions with Related Parties
Pursuant to a consulting agreement expiring December 31, 2003 with Pratt
Casino Corporation, an affiliated company, HCT incurs a monthly consulting fee
of $100,000. Such fees amounted to $300,000 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 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.
F-89
<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.
F-90
<PAGE>
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We have not authorized any dealer, salesperson or other person to give any
information or represent anything not contained in this prospectus. You must
not rely on any unauthorized information. This prospectus does not constitute
an offer to sell or buy any securities in any jurisdiction where it is unlaw-
ful. The information in this prospectus is current as of the date hereof.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 1
Risk Factors............................................................. 12
Use of Proceeds.......................................................... 23
Capitalization........................................................... 24
Selected Consolidated Financial Information.............................. 25
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 34
Business................................................................. 49
Management............................................................... 66
Security Ownership of Certain Beneficial Owners and Management........... 73
Certain Relationships and Related Transactions........................... 74
Description of the Exchange Offer........................................ 76
Description of the Registered Notes...................................... 83
United States Federal Income Tax Considerations.......................... 126
Plan of Distribution..................................................... 126
Legal Matters............................................................ 127
Experts.................................................................. 127
Changes in Accountants................................................... 127
Where You Can Find More Information...................................... 127
Index to Financial Statements............................................ F-1
</TABLE>
Until November 10, 1999, all dealers effecting transactions in the registered
notes, whether or not participating in this distributing may be required to
deliver a prospectus. This is in addition to the obligation of dealers to de-
liver a prospectus when acting as underwriters and with respect to their un-
sold allotments or subscriptions.
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[HOLLYWOOD LOGO APPEARS HERE]
Offer to Exchange all Outstanding
Original 11 1/4% Senior Secured Notes due 2007
for
Registered 11 1/4% Senior Secured Notes due 2007
and
Original Floating Rate Senior Secured Notes due 2006
for
Registered Floating Rate Senior Secured Notes due 2006
---------------
PROSPECTUS
---------------
August 13, 1999
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