<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM-10Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1999
------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
---------------------- --------------------
Commission file number 33-48887
--------------------
HOLLYWOOD CASINO CORPORATION
HWCC-TUNICA, INC.
- ------------------------------------------------------------------------------
(Exact name of each Registrant as specified in its charter)
Delaware 75-2352412
Texas 75-2513808
- -------------------------------------------- -----------------------
(States or other jurisdictions of (I.R.S. Employer
incorporation or organization) Identification No.'s)
Two Galleria Tower, Suite 2200
13455 Noel Road, LB 48
Dallas, Texas 75240
- -------------------------------------------- ----------------------
(Address of principal executive offices) (Zip Code)
(Registrants' telephone number, including area code) (972) 392-7777
-------------------------
(Not Applicable)
- -------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether each of the Registrants (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that each
of the Registrants was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes X No
------ ------
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
<TABLE>
<S> <C> <C>
Registrant Class Outstanding at November 11, 1999
- ---------------------------- ------------------------------ --------------------------------
Hollywood Casino Corporation Common Stock, $.0001 par value 24,949,976 Shares
HWCC-Tunica, Inc. Common Stock, $.01 par value 1,000 Shares
</TABLE>
1
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
Part I: Financial Information
- ------------------------------
Introductory Notes to Consolidated Financial Statements
- -------------------------------------------------------
Hollywood Casino Corporation ("HCC" or the "Company") develops, owns and
operates distinctively themed casino entertainment facilities under the service
mark Hollywood Casino(R). Through its subsidiaries, HCC currently owns and
operates a riverboat gaming facility located in Aurora, Illinois (the "Aurora
Casino") approximately 35 miles west of Chicago and a casino and hotel complex
in Tunica County, Mississippi (the "Tunica Casino") approximately 30 miles south
of Memphis, Tennessee. In addition, the Company recently received approval and
has a license to develop, own and operate a destination gaming resort to be
located in Shreveport, Louisiana (the "Shreveport Casino") approximately 180
miles east of Dallas, Texas. HCC's outstanding common shares are listed and
traded on the American Stock Exchange under the symbol HWD. Approximately 54%
of the outstanding HCC common shares are owned by Jack E. Pratt, Edward T.
Pratt, Jr. and William D. Pratt and by certain general partnerships and trusts
controlled by the Pratts and by other family members (collectively, the "Pratt
Family").
HCC owns all of the outstanding common stock of Hollywood Casino - Aurora,
Inc. ("HCA"), HWCC - Tunica, Inc. ("HCT"), HWCC-Louisiana, Inc. ("HCL") and
HWCC-Shreveport, Inc. ("HCS"). HCA is an Illinois corporation organized by the
Pratt Family during 1990 for the purpose of developing and owning the Aurora
Casino. HCT is a Texas corporation formed by HCC during 1993 to acquire and
complete the Tunica Casino. HCL is a Louisiana corporation formed by HCC in
1993 to pursue gaming opportunities in Louisiana which will develop and own the
Shreveport Casino. HCS is a Louisiana corporation formed by HCC in 1997 which
will hold the management contract for the Shreveport Casino.
As further discussed in the Notes to Consolidated Financial Statements, HCC
issued $310,000,000 of 11.25% Senior Secured Notes due May 1, 2007 and
$50,000,000 of floating rate Senior Secured Notes due May 1, 2006 (collectively,
the "Senior Secured Notes"). The Senior Secured Notes are unconditionally
guaranteed on a senior secured basis by HCT, HCS and by certain future
subsidiaries of HCC. The Senior Secured Notes are secured by, among other
things, (i) substantially all of the assets of HCT, (ii) a limited lien on
substantially all of the assets of HCA and (iii) a pledge of the capital stock
of certain subsidiaries of HCC including HCA, HCT and HCL. Accordingly, the
financial statements of HCA and HCT are also included herein. HCS currently has
no operations or significant assets; accordingly, separate financial statements
are not included herein. HCL has been designated an "Unrestricted Subsidiary"
of HCC and the operations of the Shreveport Casino, other than management fees
paid to HCS, will not provide credit support for the Senior Secured Notes.
Proceeds of the debt offering were used to purchase and discharge the
$204,712,000 balance of previously outstanding senior secured notes, to fund a
portion of HCC's equity investment in the Shreveport Casino and, during October
1999, to purchase and terminate the management and consulting agreements on the
Aurora and Tunica casinos. The remaining proceeds are planned to be used for,
among other things, a proposed expansion of the Aurora Casino's operating
facilities.
During August 1999, the partnership formed to develop the Shreveport Casino
issued $150,000,000 of 13% First Mortgage Notes, with contingent interest, which
are non-recourse to HCC. Because the partnership is effectively owned and
controlled by HCL, the financial statements of the partnership, including its
debt obligations, are included in the accompanying consolidated financial
statements of HCC.
The consolidated financial statements and financial statements as of
September 30, 1999 and for the three and nine month periods ended September 30,
1999 and 1998 have been prepared by HCC, HCA and HCT without audit, pursuant to
the rules and regulations of the Securities and Exchange Commission. In the
opinion of management, these consolidated financial statements and financial
statements contain all adjustments (consisting of only normal recurring
adjustments) necessary to present fairly the consolidated financial positions of
HCC and HCT and the financial position of HCA as of September 30, 1999, the
2
<PAGE>
results of their operations for the three and nine month periods ended September
30, 1999 and 1998 and their cash flows for the nine month periods ended
September 30, 1999 and 1998.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. These financial statements should be read in
conjunction with the financial statements and notes thereto included in HCC and
HCT's 1998 Annual Report on Form 10-K.
Historically, the Aurora Casino and Tunica Casino have experienced
some degree of seasonality. Consequently, the results of operations for the nine
month period ended September 30, 1999 are not necessarily indicative of the
operating results to be reported for the full year.
3
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
September 30,
1999 December 31,
(Unaudited) 1998
------------ ------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $141,634,000 $ 42,118,000
Short-term investments - 3,905,000
Restricted cash 41,467,000 -
Accounts receivable, net of allowances of
$1,926,000 and $1,468,000, respectively 3,584,000 2,300,000
Inventories 1,403,000 1,385,000
Deferred income taxes 849,000 890,000
Refundable deposits and other
current assets 3,387,000 1,976,000
Due from affiliates, net of valuation allowances 8,700,000 8,893,000
------------ ------------
Total current assets 201,024,000 61,467,000
------------ ------------
Investment in unconsolidated affiliates 2,037,000 4,581,000
------------ ------------
Property and Equipment:
Land 7,812,000 7,812,000
Buildings and improvements 121,373,000 120,060,000
Riverboats and barges 40,394,000 40,166,000
Operating equipment 83,461,000 77,192,000
Construction in progress 23,916,000 3,380,000
------------ ------------
276,956,000 248,610,000
Less - accumulated depreciation
and amortization (90,301,000) (80,642,000)
------------ ------------
Net property and equipment 186,655,000 167,968,000
------------ ------------
Cash restricted for construction projects 145,762,000 -
------------ ------------
Other Assets:
Deferred financing costs 15,964,000 4,792,000
Land rights 7,097,000 7,250,000
Due from affiliates, net of valuation allowances 12,359,000 12,359,000
Land held for sale, net of valuation allowances 2,216,000 6,232,000
Other assets 7,380,000 6,091,000
------------ ------------
Total other assets 45,016,000 36,724,000
------------ ------------
$580,494,000 $270,740,000
============ ============
</TABLE>
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated balance sheets.
4
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' (DEFICIT) EQUITY
<TABLE>
<CAPTION>
September 30,
1999 December 31,
(Unaudited) 1998
------------- -------------
<S> <C> <C>
Current Liabilities:
Current maturities of long-term debt
and capital lease obligations $ 4,096,000 $ 7,914,000
Accounts payable 9,783,000 4,578,000
Accrued liabilities -
Salaries and wages 4,862,000 5,023,000
Interest 18,018,000 4,872,000
Gaming and other taxes 5,249,000 1,613,000
Insurance 3,365,000 2,940,000
Other 4,444,000 4,503,000
Other current liabilities 3,190,000 3,311,000
------------- -------------
Total current liabilities 53,007,000 34,754,000
------------- -------------
Long-Term Debt 515,979,000 199,667,000
------------- -------------
Capital Lease Obligations 19,495,000 19,948,000
------------- -------------
Other Noncurrent Liabilities 5,831,000 5,755,000
------------- -------------
Commitments and Contingencies
Minority Interest 5,369,000 3,104,000
------------- -------------
Shareholders' (Deficit) Equity:
Common Stock -
Class A common stock, $.0001 par value per share;
50,000,000 shares authorized; 24,950,000 shares
issued and outstanding 2,000 2,000
Class B, non-voting, $.01 par value per share;
10,000,000 shares authorized; no shares issued - -
Additional paid-in capital 216,926,000 216,926,000
Accumulated deficit (236,115,000) (209,416,000)
------------- -------------
Total shareholders' (deficit) equity (19,187,000) 7,512,000
------------- -------------
$ 580,494,000 $ 270,740,000
============= =============
</TABLE>
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated balance sheets.
5
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
---------------------------
1999 1998
------------ ------------
<S> <C> <C>
Revenues:
Casino $ 79,252,000 $66,767,000
Rooms 2,864,000 2,550,000
Food and beverage 7,946,000 7,763,000
Other 1,394,000 1,199,000
------------ -----------
91,456,000 78,279,000
Less - promotional allowances (8,508,000) (7,431,000)
------------ -----------
Net revenues 82,948,000 70,848,000
------------ -----------
Expenses:
Casino 55,813,000 48,941,000
Rooms 347,000 459,000
Food and beverage 2,028,000 2,119,000
Other 731,000 742,000
General and administrative 5,113,000 4,608,000
Consulting fees 300,000 300,000
Depreciation and amortization 4,017,000 4,011,000
Development 204,000 282,000
Preopening costs 285,000 -
------------ -----------
Total expenses 68,838,000 61,462,000
------------ -----------
Income from operations 14,110,000 9,386,000
------------ -----------
Non-operating income (expense):
Interest income 3,094,000 786,000
Interest expense, net of capitalized interest of
$256,000 in 1999 (13,149,000) (7,790,000)
Gain on disposal of assets 1,000 37,000
------------ -----------
Total non-operating expense, net (10,054,000) (6,967,000)
------------ -----------
Income before income taxes and other item 4,056,000 2,419,000
Income tax provision (574,000) (349,000)
------------ -----------
Income before other item 3,482,000 2,070,000
Minority interest in earnings of Limited Partnership (Note 1) (2,380,000) (1,866,000)
------------ -----------
Net income $ 1,102,000 $ 204,000
============ ===========
Basic net income per common share $ .05 $ .01
============ ===========
Diluted net income per common share $ .04 $ .01
============ ===========
</TABLE>
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated statements.
6
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
---------------------------
1999 1998
------------ ------------
<S> <C> <C>
Revenues:
Casino $218,011,000 $189,009,000
Rooms 7,889,000 7,058,000
Food and beverage 22,264,000 21,722,000
Other 3,537,000 3,098,000
------------ ------------
251,701,000 220,887,000
Less - promotional allowances (22,829,000) (19,879,000)
------------ ------------
Net revenues 228,872,000 201,008,000
------------ ------------
Expenses:
Casino 156,089,000 137,163,000
Rooms 959,000 1,357,000
Food and beverage 6,381,000 6,465,000
Other 1,809,000 2,084,000
General and administrative 14,513,000 13,446,000
Consulting fees 900,000 900,000
Depreciation and amortization 11,875,000 12,435,000
Development 688,000 706,000
Preopening costs 285,000 -
------------ ------------
Total expenses 193,499,000 174,556,000
------------ ------------
Income from operations 35,373,000 26,452,000
------------ ------------
Non-operating income (expense):
Interest income 4,550,000 2,203,000
Interest expense, net of capitalized interest of $256,000
in 1999 (29,616,000) (22,697,000)
Loss on disposal of assets (55,000) (28,000)
------------ ------------
Total non-operating expense, net (25,121,000) (20,522,000)
------------ ------------
Income before income taxes, extraordinary and other items 10,252,000 5,930,000
Income tax provision (1,128,000) (1,014,000)
------------ ------------
Income before extraordinary and other items 9,124,000 4,916,000
Minority interest in earnings of Limited Partnership (Note 1) (5,470,000) (4,498,000)
------------ ------------
Income before extraordinary item 3,654,000 418,000
Extraordinary item - early extinguishment of debt (30,353,000) -
------------ ------------
Net (loss) income $(26,699,000) $ 418,000
============ ============
Basic (loss) income per common share:
Before extraordinary item $ 0.15 $ .02
Extraordinary item (1.22) -
------------ ------------
Net (loss) income $ (1.07) $ .02
============ ============
Diluted (loss) income per common share:
Before extraordinary item $ 0.15 $ .02
Extraordinary item (1.21) -
------------ ------------
Net (loss) income $ (1.06) $ .02
============ ============
</TABLE>
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated statements.
7
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------------------
1999 1998
------------- ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net (loss) income $ (26,699,000) $ 418,000
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Extraordinary item 30,353,000 -
Depreciation and amortization, including accretion
of debt discount 12,313,000 13,197,000
Loss on disposal of assets 55,000 28,000
Minority interest in earnings of Limited Partnership 5,470,000 4,498,000
Provision for doubtful accounts 657,000 593,000
Deferred income tax (benefit) provision (3,000) 532,000
(Increase) decrease in accounts receivable (1,941,000) 5,000
Increase in accounts payable and accrued expenses 21,690,000 5,681,000
Net change in other current assets and liabilities (1,357,000) (1,350,000)
Net change in other noncurrent assets and liabilities (165,000) (610,000)
------------- -----------
Net cash provided by operating activities 40,373,000 22,992,000
------------- -----------
INVESTING ACTIVITIES:
Purchases of property and equipment (25,166,000) (9,423,000)
Short-term investments 3,905,000 1,664,000
Restricted cash (41,467,000) -
Increase in cash restricted for construction projects (145,762,000) -
Increase in cash from acquisition 1,525,000 -
Collections on notes receivable - 6,000,000
Proceeds from disposal of assets 3,944,000 92,000
Loan to joint venture partner (1,000,000) -
Investments in unconsolidated affiliates (45,000) (2,500,000)
------------- -----------
Net cash used in investing activities (204,066,000) (4,167,000)
------------- -----------
FINANCING ACTIVITIES:
Borrowings on credit facilities - 541,000
Proceeds from issuance of long-term debt 493,395,000 -
Deferred financing costs (16,316,000) -
Repayments of long-term debt (209,244,000) (1,934,000)
Payments on capital lease obligations (421,000) (425,000)
Investment by joint venture partner 1,000,000 -
Limited partnership distributions (5,205,000) (3,801,000)
------------- -----------
Net cash provided by (used in) financing activities 263,209,000 (5,619,000)
------------- -----------
Net increase in cash and cash equivalents 99,516,000 13,206,000
Cash and cash equivalents at beginning of period 42,118,000 38,156,000
------------- -----------
Cash and cash equivalents at end of period $ 141,634,000 $51,362,000
============= ===========
</TABLE>
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated statements.
8
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) Organization and Business
Hollywood Casino Corporation ("HCC" or the "Company"), is a Delaware
corporation which was organized and incorporated on November 5, 1990.
Approximately 54% of the issued and outstanding stock of HCC is owned by Jack E.
Pratt, Edward T. Pratt, Jr. and William D. Pratt (the "Pratt Brothers"), by
certain general partnerships and trusts controlled by the Pratt Brothers and by
other family members (collectively, the "Pratt Family").
HCC owns all of the outstanding common stock of Hollywood Casino - Aurora,
Inc. ("HCA"), HWCC - Tunica, Inc. ("HCT"), HWCC-Louisiana, Inc. ("HCL") and
HWCC-Shreveport, Inc. ("HCS"). HCA is an Illinois corporation organized during
1990 which owns and operates a riverboat gaming operation with approximately
30,000 square feet of gaming space together with docking and other entertainment
facilities under the service mark Hollywood Casino(R) in Aurora, Illinois (the
"Aurora Casino") approximately 35 miles west of Chicago. HCT is a Texas
corporation formed by HCC during 1993 which owns and operates a 54,000 square
foot gaming facility, adjacent support facilities and a 506-room hotel complex
under the service mark Hollywood Casino(R) in northern Tunica County,
Mississippi (the "Tunica Casino") approximately 30 miles south of Memphis,
Tennessee. The Aurora Casino and the Tunica Casino commenced operations in June
1993 and August 1994, respectively. HCL is a Louisiana corporation formed by
HCC in 1993 to pursue gaming opportunities in Louisiana which will develop and
own a destination gaming resort including a dockside casino, all suite hotel and
other entertainment facilities located in Shreveport, Louisiana (the "Shreveport
Casino") approximately 180 miles east of Dallas, Texas. HCS is a Louisiana
corporation formed by HCC in 1997 which will hold the management contract for
the Shreveport Casino.
The Company believes that its two currently operating gaming facilities
derive a significant amount of their gaming revenues from patrons living in the
surrounding areas. Competition within the Company's gaming markets is intense
and management believes that this competition will continue or intensify in the
future.
Prior to December 31, 1996, HCC also owned approximately 80% of the common
stock of Greate Bay Casino Corporation ("GBCC"), also a Delaware corporation.
On December 31, 1996, HCC distributed to its shareholders the common stock of
GBCC owned by HCC. As a result of the dividend, GBCC is no longer a subsidiary
of HCC. While owned by HCC, GBCC's principal asset was the Sands Hotel and
Casino in Atlantic City, New Jersey (the "Sands").
Prior to October 14, 1999, HCC was the general partner in Pratt Management
L.P. ("PML"), having acquired such interest in April 1997 from PPI Corporation,
a wholly owned subsidiary of GBCC. PML held the management contract on and
earned management fees from the Aurora Casino and incurred operating and other
expenses with respect to its management thereof. As general partner, HCC
received 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 was held by Pratt Casino Corporation ("PCC"), which until
its acquisition by HCC in October 1999, was a wholly owned subsidiary of GBCC.
For those periods that PCC was owned by GBCC, the limited partnership interest
was reflected on the accompanying consolidated financial statements as a
minority interest. PCC also had a consulting contract with the Tunica Casino
(see Note 6).
9
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
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 which
were in default. The PRT Funding Notes were guaranteed by PCC. Under the terms
of the agreement, HCC was to purchase the stock of PCC from GBCC for nominal
consideration and fund the payment of PCC's obligations as part of a debt
restructuring of PRT Funding, PCC and other subsidiaries of PCC. When acquired
by HCC, PCC's assets were to consist of its limited partnership interest in PML
and its consulting contract for the Tunica Casino and its liabilities were to
consist of a new $40,329,000 obligation payable in satisfaction of the PRT
Funding Notes.
In order to complete the restructuring, PCC and PRT Funding filed for
protection under Chapter 11 of the United States Bankruptcy Code on May 25, 1999
with the above transactions included as part of a pre-negotiated plan of
reorganization. Such plan was confirmed by the bankruptcy court in October
1999. At such time, HCC completed its acquisition of PCC and settled PCC's
obligations. The acquisition and subsequent termination of the management
contract and consulting agreement will result in a fourth quarter charge to
expense by the Company in the amount of approximately $40,000,000 as no asset
value will be attributed to such contracts when acquired.
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, a joint venture in which HCL is a partner (the
"Shreveport Partnership") received approval to develop, own and operate the
Shreveport Casino. HCL originally planned to develop the Shreveport Casino with
two partners in a joint venture in which it would have had an interest of
approximately 50%. HCL's 50% investment in the joint venture ($2,500,000) was
reflected on the accompanying consolidated balance sheet at December 31, 1998 as
an investment in unconsolidated affiliate.
On March 31, 1999, HCL entered into a definitive agreement with one of the
joint venture partners to acquire its interest in the Shreveport Partnership.
The acquisition price was $2,500,000 (the amount the joint venture partner
contributed to the project), $1,000 of which was paid at closing with the
remainder to be paid six months after the opening of the Shreveport Casino. The
revised structure of the joint venture received approval by the Louisiana Gaming
Control Board (the "LGCB") on April 20, 1999. As a result, HCL now has an
effective 100% ownership interest in the Shreveport Casino with the remaining
joint venture partner holding a 10% residual interest in the event the project
is ever sold. The joint venture partners' interest is included in minority
interest on the accompanying consolidated balance sheet at September 30, 1999 in
the amount of $2,000,000. The acquisition was accounted for under the purchase
method of accounting. Accordingly, effective with the April 23, 1999 closing of
HCL's acquisition of the additional joint venture interest, the Shreveport
Partnership is included in the consolidated financial statements of HCC. The
acquired company had no significant operating activities prior to the
acquisition date.
10
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The $150,000,000 Shreveport First Mortgage Notes (see Note 3), together with
a total of $49,000,000 of capital contributions from HCL, a $1,000,000 capital
contribution from HCL's joint venture partner made with funds loaned by HCL and
$30,000,000 in furniture, fixture and equipment financing for which a commitment
letter has been obtained (see Note 7) are expected to provide the estimated
$230,000,000 needed to construct and open the Shreveport Casino. In addition,
HCC has agreed to contribute up to an additional $5,000,000 in equity to the
Shreveport Casino under certain circumstances which include cost overruns or
delays. As currently planned, the Shreveport Casino will consist of a three-
level riverboat casino with approximately 1,370 slot machines and 75 table
games; a 405-room, all suite, art deco style hotel; and approximately 42,000
square feet of restaurant and entertainment facilities. Construction began in
August 1999 with a planned opening date approximately 14 months later.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
HCC is self insured for a portion of its general liability, certain health
care and other liability exposures. Accrued insurance includes estimates of
such accrued liabilities based on an evaluation of the merits of individual
claims and historical claims experience; accordingly, HCC's ultimate liability
may differ from the amounts accrued.
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"
requires, among other things, that an entity review its long-lived assets and
certain related intangibles for impairment whenever changes in circumstances
indicate that the carrying amount of an asset may not be fully recoverable.
Land held for sale is shown net of valuation allowances of $3,084,000 and
$3,432,000, respectively, on the accompanying consolidated balance sheets at
September 30, 1999 and December 31, 1998.
In June 1998, the FASB issued a new statement, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"), which has been amended to be
effective for fiscal years beginning after June 15, 2000. SFAS 133 requires,
among other things, that derivatives be recorded on the balance sheet at fair
value. Changes in the fair value of derivatives may, depending on
circumstances, be recognized in earnings or deferred as a component of
shareholders' equity until a hedged transaction occurs. The Company does not
believe the adoption of SFAS 133 will have a significant impact on its financial
position or results of operations.
The consolidated financial statements as of September 30, 1999 and for the
three and nine month periods ended September 30, 1999 and 1998 have been
prepared by HCC without audit. In the opinion of management these consolidated
financial statements contain all adjustments (consisting of only normal
recurring adjustments) necessary to present fairly the consolidated financial
position of HCC as of September 30, 1999, the results of its operations for the
three and nine month periods ended September 30, 1999 and 1998 and its cash
flows for the nine month periods ended September 30, 1999 and 1998.
11
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(2) (Loss) Earnings per common share -
Basic (loss) earnings per common share is calculated by dividing the net
(loss) income by the weighted average number of shares of common stock
outstanding. Diluted (loss) earnings per common share is calculated for periods
in which income from continuing operations was earned by dividing the components
of net income by the weighted average number of shares of common stock and
potential common shares outstanding.
The weighted average number of shares of common stock and potential common
shares outstanding used for the calculation of (loss) earnings per share is as
follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -----------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Shares used in the calculation of:
- ----------------------------------
Basic net (loss) income per share 24,949,976 24,949,976 24,949,976 24,945,140
Diluted net (loss) income per share 25,489,395 24,949,998 25,231,700 24,950,020
</TABLE>
The number of shares used in the calculation of diluted earnings per share
for the three and nine month periods ended September 30, 1999 and 1998 has been
adjusted to include potential common shares arising from stock options held by
certain employees and directors. The calculation of diluted earnings per share
excludes certain options to purchase common stock. These options have been
excluded as they would be antidilutive to the diluted earnings per share
calculation. The weighted average number of options excluded was 620,000 and
1,175,000, respectively, for the three month periods ended September 30, 1999
and 1998 and 1,125,000 and 904,121, respectively, for the nine months periods
ended September 30, 1999 and 1998.
12
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(3) Long-Term Debt and Pledge of Assets
Substantially all of HCC's assets are pledged in connection with its long-
term indebtedness. The obligations of HCL and its subsidiaries are non-recourse
to HCC.
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
-------------- -------------
<S> <C> <C>
Indebtedness of HCC:
11.25% Senior Secured Notes, due 2007 (a) $310,000,000 $ -
Floating rate Senior Secured Notes, due 2006 (a) 50,000,000 -
12.75% Senior Secured Notes, due 2003, net of discount
of $7,013,000 at December 31, 1998 (b) - 200,199,000
Promissory note due to affiliate (Note 6) 2,310,000 2,836,000
------------ ------------
362,310,000 203,035,000
------------ ------------
Indebtedness of HCA:
Promissory note to bank (c) 2,145,000 1,900,000
------------ ------------
Indebtedness of HCT :
Equipment loans (d) 2,656,000 1,291,000
Bank credit facility (e) 323,000 462,000
------------ ------------
2,979,000 1,753,000
------------ ------------
Indebtedness of HCL for which HCC is not obligated:
13% Shreveport First Mortgage Notes, with contingent
interest, due 2006 (f) 150,000,000 -
Other, net of discount of $284,000 at September 30, 1999(g) 1,716,000 -
------------ ------------
151,716,000 -
------------ ------------
Total indebtedness 519,150,000 206,688,000
Less - current maturities (3,171,000) (7,021,000)
------------ ------------
Total long-term debt $515,979,000 $199,667,000
============ ============
</TABLE>
- -------------------------
(a) During May 1999, HCC completed the refinancing of its outstanding 12.75%
senior secured notes (see (b) below) through a debt offering of
$310,000,000 of 11.25% Senior Secured Notes due May 1, 2007 and $50,000,000
of floating rate Senior Secured Notes due May 1, 2006 (collectively, the
"Senior Secured Notes"). Interest on the floating rate notes is equal to
the six-month LIBOR rate plus 6.28% and is reset semiannually. Interest on
the floating rate notes was adjusted from an initial rate of 11.36% to
12.41% per annum effective November 1, 1999. In addition to refinancing
existing debt, the Company has used proceeds from the debt offering to fund
a portion of its equity investment in the Shreveport Casino (see Note 1)
and, during October 1999, to acquire the management and consulting
contracts on the Aurora and Tunica casinos (see Notes 1 and 10). The
Company also plans to use proceeds from the debt offering to finance
construction of a new, dockside gaming facility at the Aurora Casino and,
to the extent available, for working capital purposes. The funds needed to
acquire the management and consulting contracts were placed in escrow and
are reflected as restricted cash on the accompanying
13
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
consolidated balance sheet at September 30, 1999. Interest on the Senior
Secured Notes is payable semiannually on May 1 and November 1 commencing on
November 1, 1999. The Senior Secured Notes are unconditionally guaranteed
on a senior secured basis by HCT and HCS and may be guaranteed by certain
future subsidiaries of HCC. Neither HCA nor HCL are guarantors. The Senior
Secured Notes and related guarantees are secured by, among other things,
(i) substantially all of the assets of HCT and future guarantors, (ii) a
lien not to exceed approximately $108,000,000 on substantially all of the
assets of HCA, (iii) a pledge of the capital stock of certain subsidiaries
of HCC and (iv) the collateral assignment of the management contract for
the Shreveport Casino.
The fixed rate Senior Secured notes are redeemable at the option of HCC any
time on or after May 1, 2003 at 107% of the then outstanding principal
amount, decreasing to 104.666%, 102.333% and 100%, respectively, on May 1,
2004, 2005 and 2006. The Company may also redeem up to 35% of the fixed
rate Senior Secured Notes at a redemption price of 111.25% plus accrued
interest at any time prior to May 1, 2002 with the proceeds from an
offering of HCC's common stock if net proceeds to the Company from any such
offering are at least $20 million.
The floating rate Senior Secured Notes may be redeemed at the option of HCC
at any time at an initial redemption price of 105% plus accrued interest
with the redemption premium decreasing by 1% on May 1 of each year
beginning May 1, 2000.
The indenture to the Senior Secured Notes contains various provisions
limiting the ability of HCC and certain defined subsidiaries to, among
other things, pay dividends or make other restricted payments; incur
additional indebtedness or issue preferred stock, create liens, create
dividend or other payment restrictions affecting certain defined
subsidiaries; enter into mergers or consolidations or make sales of all or
substantially all assets of HCC, HCT, HCS or any future guarantor; or enter
into certain transactions with affiliates. The indenture also requires
certain financial reporting information (see Note 9).
(b) During October 1995, HCC issued $210,000,000 of 12 .75% Senior Secured
Notes (the "12.75% Senior Secured Notes") due November 1, 2003, discounted
to yield 13.75% per annum. Interest on the 12.75% Senior Secured Notes was
payable semiannually on May 1 and November 1 of each year.
Commencing with the November 1, 1997 interest payment date and at each
subsequent interest payment date, HCC was required to make an offer to
purchase not more than $2,500,000 in principal amount of the 12.75% Senior
Secured Notes at a price of 106.375% of the principal amount tendered. A
total of $5,288,000 of 12.75% Senior Notes were purchased by the Company.
The remaining 12.75% Senior Secured Notes were repaid in May 1999 with a
portion of the proceeds of the Senior Secured Notes (see (a) above).
(c) During September 1998, HCA entered into a bank loan agreement to borrow up
to $2,000,000 on an unsecured basis. Borrowings under the agreement are
payable in 36 monthly installments including interest at the rate of 7.5%
per annum. HCA borrowed $2,000,000 under the agreement during October
1998.
14
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
On May 19, 1999, HCA borrowed an additional $750,000 from the bank on an
unsecured basis. The loan is payable in monthly installments of $15,000
including interest at the rate of 7.5% per annum.
(d) The equipment loans are payable monthly including interest at effective
rates ranging from 8.5% to 12.9% per annum and mature at various dates
between 1999 and 2002. One such loan with a balance of $58,000 at
September 30, 1999 and which matures in 2000 does not accrue interest.
(e) HCT had a bank credit facility in the amount of $1,300,000 available to
borrow against through September 30, 1998. HCT borrowed $541,000 under the
credit facility during 1998 at the rate of 8.875% per annum. Borrowings
under the credit facility are to be repaid in monthly installments over a
period of 36 months and are collateralized by equipment purchased with the
loan proceeds. The credit facility was not renewed by HCT.
(f) During August 1999, the partnership formed to develop the Shreveport Casino
issued $150,000,000 of 13% First Mortgage Notes, with contingent interest
(the "Shreveport First Mortgage Notes"), which are non-recourse to HCC.
Interest on the Shreveport First Mortgage Notes is payable semiannually on
February 1 and August 1 of each year commencing in February 2000. In
addition, contingent interest will be payable on each interest payment date
after the opening of the Shreveport Casino. The amount of the contingent
interest will be equal to 5% of the Shreveport Casino's cash flow, as
defined, for the prior two fiscal quarters up to a maximum of $5,000,000
for any four consecutive fiscal quarters. The notes are collateralized by
a first priority secured interest in substantially all of the partnership's
existing and future assets other than furniture, fixtures and equipment for
which up to $35,000,000 of financing has been or will be obtained as well
as by a pledge of the common stock of the HCC subsidiaries which hold the
partnership interests.
The Shreveport First Mortgage Notes are redeemable at the option of the
partnership at any time on or after August 1, 2003 at 106.5% of the then
outstanding principal amount, decreasing to 103.25% on August 1, 2004 and
100% on or after August 1, 2005. Up to 35% of the original aggregate
amount of the Shreveport First Mortgage Notes may also be redeemed at any
time prior to August 1, 2002 with proceeds of contributions to the
partnership made by HCC from certain offerings of equity securities by HCC.
The indenture to the Shreveport First Mortgage Notes contains various
provisions limiting the ability of the partnership to borrow money, pay
dividends, make investments, pledge or sell its assets or enter into
mergers or consolidations. The indenture also limits the ability of
certain HCC subsidiaries which guarantee the debt to acquire additional
assets, become liable for additional obligations or engage in any business
activities other than holding the partnership interests or acting as
managing general partner of the partnership.
(g) The former partners of the Shreveport Partnership's predecessor conducted
riverboat gaming operations in New Orleans. In connection with the change
in site to Shreveport, the former partners entered into a Compromise
Agreement with the City of New Orleans under which the city would be paid a
fee of $10,000,000. One of the former partners paid $5,000,000 of the
amount
15
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
to the City of New Orleans. The current partners agreed that the Shreveport
Casino would pay the remaining $5,000,000 upon securing financing for its
construction; such payment was made in August 1999. In addition, the
current partners agreed that the Shreveport Casino would reimburse the
former partner $2,000,000 of the amount it paid to the city; such repayment
is to be paid upon the earlier of the termination of construction of the
Shreveport Casino or in monthly installments of $200,000, without interest,
commencing with the opening of the Shreveport Casino. The $2,000,000
liability, net of a discount in the original amount of $308,000, and the
associated project costs were recorded upon the issuance of the Shreveport
First Mortgage Notes in August 1999.
Scheduled payments of long-term debt as of September 30, 1999 are set forth
below:
<TABLE>
<CAPTION>
<S> <C>
1999 (three months) $ 760,000
2000 3,530,000
2001 4,334,000
2002 568,000
2003 168,000
Thereafter 510,074,000
------------
Total $519,434,000
============
</TABLE>
Interest paid amounted to $16,278,000 and $14,830,000, respectively, during
the nine month periods ended September 30, 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 7.625% per annum. The second lease has an initial term ending in September
2026 with the right to extend the lease for up to 20 additional years. Rental
payments during the first 15 years equal the lessor's debt service costs related
to the industrial revenue bond issue used to finance a portion of the
construction costs of the parking garage. The remaining construction costs were
funded by HCA. In addition, HCA pays base rent equal to $15,000 per month,
subject to a credit of $615,000 at the rate of $10,000 per month, for
improvements made to the lessor's North Island Center banquet and meeting
facilities. HCA is also responsible for additional rent, consisting of costs
such as maintenance costs, insurance premiums and utilities arising out of its
operation of both parking garages.
HCA also leased certain equipment under capital lease agreements which
provided for interest at the rate of 11.2% per annum and expired in 1998. HCT
previously leased certain gaming equipment under capital lease agreements.
The original cost of HCA's parking garages is included in buildings on the
accompanying consolidated balance sheets at both September 30, 1999 and December
31, 1998 in the amount of
16
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
$27,358,000. Assets under capital leases with an original cost of $7,091,000 and
$7,260,000, respectively, are included in operating equipment on the
accompanying consolidated balance sheets at September 30, 1999 and December 31,
1998. Amortization expense with respect to these assets amounted to $246,000 and
$333,000 during the three month periods ended September 30, 1999 and 1998,
respectively, and $737,000 and $998,000 during the nine month periods ended
September 30, 1999 and 1998, respectively. Accumulated amortization at September
30, 1999 and December 31, 1998 with respect to these assets amounted to
$11,373,000 and $10,805,000, respectively.
Future minimum lease payments under capital lease obligations as of
September 30, 1999 are as follows:
<TABLE>
<CAPTION>
<S> <C>
1999 (three months) $ 1,021,000
2000 2,483,000
2001 2,532,000
2002 2,643,000
2003 2,660,000
Thereafter 21,417,000
------------
Total minimum lease payments 32,756,000
Less amount representing interest (12,336,000)
------------
Present value of future
minimum lease payments 20,420,000
Current capital lease obligation (925,000)
------------
Long-term capital lease obligation $ 19,495,000
============
</TABLE>
(5) Income Taxes
HCC's provision for income taxes consists of the following:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ -------------------------
1999 1998 1999 1998
--------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Current:
Federal $ - $ - $ - $ -
State (579,000) (160,000) (1,131,000) (482,000)
Deferred:
Federal (259,000) 821,000 9,233,000 534,000
State 5,000 (29,000) 3,000 (71,000)
Change in valuation allowance 259,000 (981,000) (9,233,000) (995,000)
--------- ----------- ----------- -----------
$(574,000) $ (349,000) $(1,128,000) $(1,014,000)
========= ========== =========== ===========
</TABLE>
Federal tax payments of $169,000 and $4,678,000, respectively, were made
during the nine month periods ended September 30, 1999 and 1998. State tax
payments of $877,000 and $553,000, respectively, were made during the nine month
periods ended September 30, 1999 and 1998.
17
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Federal and state income tax provisions or benefits are based upon
estimates of the results of operations for the current period and reflect the
nondeductibility for income tax purposes of certain items, including certain
lobbying, meals and entertainment and other expenses. Deferred taxes are
computed based on the expected future tax effects of differences between the
financial statement and tax bases of assets and liabilities, using enacted tax
rates. Deferred income taxes result primarily from the use of the allowance
method rather than the direct write-off method for doubtful accounts, the use of
accelerated methods of depreciation for federal income tax purposes and
differences in the timing of deductions taken between tax and financial
reporting purposes for the amortization of preopening costs and other accruals.
At September 30, 1999, HCC and its subsidiaries have tax net operating loss
carryforwards ("NOL's") totaling approximately $25,700,000, 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
$600,000, 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 $1,846,000 and $1,843,000 at September 30, 1999 and
December 31, 1998, respectively.
18
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The components of the net deferred tax asset and classification on the
accompanying consolidated balance sheets are as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- ------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 8,734,000 $ 1,305,000
Valuation and other allowances 9,996,000 8,241,000
Alternative minimum tax credit 4,913,000 4,913,000
Investment and jobs tax credits 600,000 415,000
Basis in limited partnership 2,890,000 2,890,000
Other liabilities and accruals 4,387,000 4,145,000
Benefits accrual 1,717,000 1,711,000
Other 1,205,000 724,000
------------ ------------
Total deferred tax assets 34,442,000 24,344,000
------------ ------------
Deferred tax liabilities:
Depreciation and amortization (9,349,000) (8,610,000)
Basis in debt obligations (850,000) (727,000)
------------ ------------
Total deferred tax liabilities (10,199,000) (9,337,000)
------------ ------------
Net deferred tax asset 24,243,000 15,007,000
Valuation allowance (22,397,000) (13,164,000)
------------ ------------
$ 1,846,000 $ 1,843,000
============ ============
Classified as:
Current deferred income tax asset $ 849,000 $ 890,000
Other assets 1,602,000 1,524,000
Other noncurrent liabilities (605,000) (571,000)
</TABLE>
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. Such
examination for 1993 and 1994 has been completed for HCC, except with respect to
HCT. Based on the findings to date and preliminary discussions regarding HCT,
HCC's net operating loss carryforwards could be significantly reduced, which
might result in additional alternative minimum tax or regular tax obligations.
Due to the inclusion of GBCC and its subsidiaries in such consolidated returns,
an as yet undetermined portion of any resulting tax liability may be recoverable
from GBCC. As a result, management is presently unable to estimate the ultimate
impact of the examination on the consolidated financial position or results of
operations of HCC and is continuing to review the preliminary findings with the
assistance of its tax advisors. The Internal Revenue Service is continuing its
examination of the consolidated Federal income tax returns of HCC for 1995 and
1996.
19
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(6) Transactions with Related Parties
GBCC and its Subsidiaries -
HCC had loans outstanding to GBCC amounting to $6,750,000 as of both
September 30, 1999 and December 31, 1998. The loans consist of a $6,500,000
demand note issued in the third quarter of 1996 with interest at the rate of
13.75% per annum payable quarterly commencing October 1, 1996 and an additional
$250,000 note which became due on April 1, 1998 for which payment has not been
received. The $250,000 note 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 for the same
reasons as discussed below with respect to the PPI Funding Notes. Interest
receivable amounting to $1,781,000, net of a valuation allowance of $704,000 at
September 30, 1999, is included in due from affiliates on the accompanying
consolidated balance sheets. Interest income earned on loans and advances to
GBCC amounted to $232,000 and $696,000, respectively, during the three and nine
month periods ended September 30, 1998.
In connection with its acquisition of the general partnership interest in
PML (see Note 1), HCC issued a five-year note in the original amount of
$3,800,000 and assigned $13,750,000 undiscounted principal amount of PPI Funding
Notes (see below) and $350,000 accrued interest due from GBCC to PPI
Corporation. The $3,800,000 note was 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. The note payable to PPI was amended as of the October 12,
1999 acquisition of PCC (Notes 1 and 10) to provide for monthly installments of
$83,000 including interest and additional quarterly principal payments of
$21,000 beginning January 1, 2000. The revised terms have been reflected in the
current and long-term portion of the note payable included on the accompanying
consolidated balance sheet at September 30, 1999 and in the disclosures in Note
3. HCC incurred interest expense with respect to the note amounting to $84,000
and $107,000, respectively, during the three month periods ended September 30,
1999 and 1998 and $267,000 and $336,000, respectively, during the nine month
periods ended September 30, 1999 and 1998. Accrued interest of $27,000 and
$34,000 with respect to the note is included in interest payable on the
accompanying consolidated balance sheets at September 30, 1999 and December 31,
1998, respectively.
On February 17, 1994, PPI Funding Corp., a subsidiary of GBCC, issued
$40,524,000 discounted principal amount of new deferred interest notes (the "PPI
Funding Notes") to HCC in exchange for $38,779,000 principal amount of 15.5%
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 14.875% 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
20
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
was anticipated that GBCC's equity ownership of GBHC would be significantly
reduced in the reorganization under Chapter 11 and, as a consequence, HCC
forgave $37,000,000 undiscounted principal amount of the PPI Funding Notes at
December 31, 1997, further reducing the maturity value to $47,603,000. Payment
of interest is deferred through February 17, 2001 at which time interest will
become payable semiannually, with the unpaid principal balance due on February
17, 2006. The PPI Funding Notes are collateralized by a pledge of all of the
common stock of a subsidiary of GBCC.
Prior to December 31, 1996, when GBCC and its subsidiaries were members of
the HCC consolidated group, it was anticipated that one of HCC's primary methods
of realizing the carrying value of the PPI Funding Notes would be through the
utilization of NOL's of GBCC. As a result of HCC's distribution of GBCC stock
at December 31, 1996, GBCC's NOL's are no longer available for utilization in
HCC's consolidated federal income tax returns. Accordingly, HCC provided a
valuation allowance in the amount of $18,741,000 at December 31, 1996 which
reduced the carrying amount of the PPI Funding Notes to their estimated
realizable value of $35,597,000 at that date. As a result of the 1997
forgiveness of debt discussed above, the carrying amount of the PPI Funding
Notes was reduced to an estimated realizable value of $12,322,000 at September
30, 1999 and December 31, 1998. 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 incurred a monthly consulting fee of $100,000 pursuant to a consulting
agreement with PCC prior to its termination on October 14, 1999. Such fees
amounted to $300,000 and $900,000, respectively, during each of the three and
nine month periods ended September 30, 1999 and 1998.
Advanced Casino Systems Corporation ("ACSC"), a subsidiary of GBCC,
provides computer, marketing and other administrative services to HCC and its
subsidiaries. Computer services provided include hardware, software, and
operator support and, for the most part, such services are billed by ACSC at its
direct costs plus expenses incurred. ACSC and HCT entered into a Computer
Services Agreement dated as of January 1, 1994 and renewed through December 31,
1999 to provide such services and to license or sublicense to HCT computer
software necessary to operate HCT's casino, hotel and related facilities and
business operations. HCT pays ACSC for such equipment and licenses such software
at amounts and on terms and conditions that ACSC provides to unrelated third
parties. HCT also pays ACSC a fixed license fee of $33,600 per month. ACSC's
billings to HCC and its subsidiaries for such products and services during the
three month periods ended September 30, 1999 and 1998 amounted to $214,000 and
$253,000, respectively; such billings amounted to $794,000 and $915,000,
respectively, during the nine month periods ended September 30, 1999 and 1998.
At September 30, 1999 and December 31, 1998, unpaid charges of $195,000 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 $249,000, respectively, for the three month periods
ended September 30, 1999 and 1998; such costs and fees amounted to $466,000 and
$795,000, respectively, during the nine month periods ended September 30, 1999
and 1998. Receivables from GBCC and its subsidiaries in the amount of $2,000 and
$172,000 are included in due from affiliates on the accompanying consolidated
balance sheets at September 30, 1999 and December 31, 1998, respectively.
21
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
During 1998, the Company determined that it should revise its tax treatment
of the spin-off of the stock of GBCC which occurred on December 31, 1996. As a
result of the revised tax treatment for the spin-off of GBCC stock to HCC's
shareholders, shareholders of the Company on the distribution date would also
have been required to revise their method of reporting the distribution received
on their separate federal income tax returns. The Company committed to assume
the obligation for additional federal income taxes owed by its shareholders
arising from the revised tax treatment. Consequently, the Company reached an
agreement with the Internal Revenue Service to settle such obligations on behalf
of its shareholders, exclusive of the Pratt Family, for $100,000 and to issue
new tax reporting forms to the Pratt Family. Such forms required the Pratt
Family members to amend their federal income tax returns for 1996 resulting in
substantial additional tax obligations totaling approximately $790,000. The
shareholder obligations assumed by the Company are included in other accrued
liabilities on the accompanying consolidated balance sheet at December 31, 1998;
all of these obligations were settled during 1999.
Shreveport Casino Partnership -
In accordance with the amended and restated partnership agreement, HCL
agreed that upon the closing of the Shreveport First Mortgage Notes, it would
loan $1,000,000 to its joint venture partner which they will use to make a
$1,000,000 capital contribution to the partnership. The loan accrues interest at
the rate of prime commencing with the opening of the Shreveport Casino and will
be payable monthly. Principle on the loan is payable on the tenth anniversary of
the opening of the Shreveport Casino. The loan, net of a discount of $83,000 at
September 30, 1999, is included in other noncurrent assets on the accompanying
consolidated balance sheet. The joint venture partner was also given credit for
an additional $1,000,000 capital contribution upon the closing of the Shreveport
First Mortgage Notes and payment of the $5,000,000 obligation to the Shreveport
Partnership's former partner as discussed in Note 3. The credit was in
recognition of guarantees provided by an affiliate of the partner which were
necessary for the Shreveport Partnership to obtain approval of its development
plans. The $2,000,000 equity interest of the partner is included in minority
interest in the consolidated financial statements of HCC at September 30, 1999.
HCL's joint venture partner will receive for so long as it remains a joint
venture partner, among other things, an amount equal to 1% of "complex net
revenues" of the Shreveport Casino, as defined, which approximates net revenues.
Such payment is in exchange for the assignment by the partner of its interest in
the partnership to HCL.
The Shreveport Partnership has also entered into an agreement with HCL's
joint venture partner to provide certain marine services for so long as it
remains a joint venture partner. The Marine Services Agreement became effective
on September 22, 1998 and, in addition to the reimbursement of the partner for
its direct expenses incurred, the Shreveport Casino will pay a monthly fee of
$30,000 effective with its opening. No payments have been made under the
agreement as of September 30, 1999.
22
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(7) Commitments and Contingencies
Ground Leases -
HCT entered into a ground lease covering 70 acres of land on which the
Tunica Casino was constructed. The ground lease was 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. The lease is currently in its first five-
year renewal term. Obligations under the ground lease include both minimum
monthly fixed payments and percentage rent, which in the aggregate will be the
greater of 4% of Gross Revenues, as defined, or $1,100,000 per year. HCT is
responsible for all operating and other expenses of the property in accordance
with the lease terms. HCT expensed $1,101,000 and $1,080,000, respectively,
during the three month periods ended September 30, 1999 and 1998 and $3,157,000
and $2,966,000, respectively, during the nine month periods ended September 30,
1999 and 1998 in connection with the ground lease.
In May 1999, the Shreveport Partnership entered into a ground lease with
the City of Shreveport for the land on which the Shreveport Casino will be
built. The term of the lease begins when construction commences and ends on the
tenth anniversary of the date the Shreveport Casino opens. The Shreveport
Partnership has options to renew the lease on the same terms for up to an
additional forty years. The lease may be further renewed after that time at
prevailing rates and terms for similar leases. The City of Shreveport may
terminate the lease as a result of, among other things, a default by the
Shreveport Partnership under the lease or the failure to substantially complete
construction within the time period established by the LGCB. The Shreveport
Partnership may terminate the lease at any time if the operation of the
Shreveport Casino becomes uneconomic. Base rental payments under the lease are
$10,000 per month during the construction period increasing to $450,000 per year
upon opening and continuing at that amount for the remainder of the initial ten-
year lease term. During the first five-year renewal term, the annual base rental
will be $402,500. Subsequent renewal period base rental payments will increase
by 15% during each of the next four five-year renewal terms with no further
increases. In addition to the base rent, the Shreveport Partnership will pay
monthly percentage rent of not less than $500,000 per year equal to 1% of
monthly adjusted gross revenues and the amount, if any, by which monthly parking
facilities net income exceeds the parking income credit, as all such terms are
defined in the lease agreement. The Shreveport Casino made payments totaling
$26,000 during the three month period ended September 30, 1999 in connection
with the ground lease. Such payments have been capitalized as part of the
construction costs of the Shreveport Casino.
Shreveport Casino Lease Commitment -
The Shreveport Partnership has entered into a lease commitment agreement
with a third party lessor for up to $30,000,000 to be used to acquire furniture,
fixtures and equipment for the Shreveport Casino. Borrowings under the lease
commitment may be made monthly during the construction period in amounts of at
least $5,000,000 and will accrue interest at the rate of LIBOR plus 4%. During
the construction period, the Shreveport Partnership will only pay interest on
outstanding borrowings as well as a fee of .5% per annum on the undrawn portion
of the commitment. Upon opening of the Shreveport Casino, the outstanding
borrowings will become payable quarterly including interest over a three year
period to fully amortize the loan. The lease will be treated as a capital lease
for financial reporting purposes. Borrowings under the lease commitment will be
collateralized by the furniture, fixtures and equipment purchased. The
23
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
lease agreement contains certain covenants limited to those included in the
indenture for the Shreveport First Mortgage Notes (see Note 3).
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 19, 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 3, 1997, and GBCC and HCT filed with
the Court on February 20, 1997, answers and counterclaims to such amended
complaint.
In its lawsuit, PHII seeks a declaratory judgment that it is entitled to
use the name "Planet Hollywood" for a casino. In addition, PHII seeks damages
alleging, 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 seek a declaratory judgement that PHII is not entitled to use the name
"Planet Hollywood" for a casino. In addition, the Hollywood Defendants and GBCC
seek damages alleging, 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.
On June 7, 1999, the magistrate judge severed the litigation as to
liability and damages. A trial on the liability issues commenced on July 19,
1999 and concluded on July 26, 1999. In oral argument on July 26, 1999, the
Hollywood Defendants and GBCC waived their declaratory judgment claims based, in
part, on PHII's reported deteriorating financial condition and perceived
inability to enter into the casino business. On August 25, 1999, the Hollywood
Defendants and GBCC filed a motion to dismiss the declaratory judgment claims of
all parties asserting, among other things, that as a result of PHII's reported
deteriorating financial condition and perceived inability to enter into the
casino business, there is no longer any actual case or controversy. On October
12, 1999, Planet Hollywood (Region IV), Inc. filed a petition for reorganization
under Chapter 11 of the United States Bankruptcy Code. The judge has not yet
issued a ruling on either the liability issues or the motion to dismiss and has
provided no definitive date by which either such ruling will be issued.
Given the uncertainties inherent in litigation, no assurance can be given
that the Hollywood Defendants will prevail in this litigation; however, the
Hollywood Defendants believe that PHII's claims are without merit and have
defended their position vigorously. The accompanying consolidated financial
statements do not include any adjustments that might result from the outcome of
the uncertainties described above.
24
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Other Litigation -
On October 8, 1998, HCC filed a complaint in the District Court of Dallas
County, Texas against Arthur Andersen LLP, HCC's former independent accountants,
and selected partners alleging negligent advice and breach of contract with
respect to the tax consequences resulting from the spin-off of GBCC's stock to
HCC's shareholders on December 31, 1996. The lawsuit is currently in the
discovery stage.
Third parties could assert obligations against the partnership developing
the Shreveport Casino for liabilities that have arisen or that might arise
against its predecessors or the partners of its predecessors with respect to any
period prior to September 22, 1998, the date on which the partnership was
reconstituted in its current form. Management believes that in the event such a
claim arises, it would be adequately covered under either existing
indemnification agreements with the former partners or insurance policies
maintained by the partnership's predecessors or their partners.
HCC and its subsidiaries are parties in various legal proceedings with
respect to the conduct of casino and hotel operations. Although a possible
range of loss cannot be estimated, in the opinion of management, based upon the
advice of counsel, settlement or resolution of these proceedings should not have
a material adverse impact on the consolidated financial position or results of
operations of HCC and its subsidiaries.
(8) Supplemental Cash Flow Information
In connection with the acquisition of one of its joint venture partner's
interest in the Shreveport Casino project during April 1999, the joint venture
became a consolidated subsidiary of HCC. The acquisition of the joint venture
interest and consolidation of the joint venture resulted in the assumption of
liabilities as follows:
<TABLE>
<CAPTION>
<S> <C>
Fair value of non-cash assets acquired $ 1,523,000
Cash acquired 1,525,000
Contingent liability for purchase (2,499,000)
Preacquisition earnings attributable to joint venture
partner (46,000)
Cash paid for capital stock (1,000)
-----------
Liabilities assumed $ 502,000
===========
</TABLE>
The issuance of a note to a former partner of the predecessor to the
partnership developing the Shreveport Casino at a discounted face amount of
$1,692,000 (see Note 3(g)) and the associated project costs have been excluded
from the accompanying consolidated statement of cash flows for the nine month
period ended September 30, 1999 as a non-cash transaction.
The additional $1,000,000 credit given to HCL's joint venture partner as an
additional contribution to the Shreveport Partnership (see Note 6) and the
corresponding addition to construction in progress have been excluded from the
accompanying consolidated statement of cash flows for the nine month period
ended September 30, 1999 as a non-cash transaction.
25
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(9) Unrestricted Subsidiaries
Under the terms of the indenture to the Senior Secured Notes (see Note 3),
certain subsidiaries and investees of HCC have been designated as "Unrestricted
Subsidiaries." Unrestricted Subsidiaries generally do not provide credit
support for the Senior Secured Notes and obligations of Unrestricted
Subsidiaries are non-recourse to HCC. Unrestricted Subsidiaries of HCC
presently consist of HCL and its subsidiaries; HWCC-Holdings, Inc.; HWCC-Golf
Course Partners, Inc.; and PML. The following presentation summarizes the
financial position and results of operations of the Company reflecting its
Unrestricted Subsidiaries under the equity method of accounting. Such
information is not intended to be a presentation in conformity with generally
accepted accounting principles and is included for purposes of complying with
certain reporting requirements as contained in the indenture to the Senior
Secured Notes.
Condensed Balance Sheet
September 30, 1999
(amounts in thousands)
<TABLE>
<CAPTION>
<S> <C>
Current Assets:
Cash and cash items $ 103,866
Restricted cash 41,467
Accounts receivable, net of allowance of $1,926 2,591
Inventories 1,403
Prepaid expenses and other current assets 4,150
Due from affiliates 8,700
----------
162,177
----------
Investment in and advances to Unrestricted
Subsidiaries 54,316
----------
Property and equipment, net of accumulated
depreciation and amortization of $90,301 165,396
----------
Other Assets:
Deferred finance costs 10,923
Due from affiliates, net of valuation
allowances 12,359
Other assets 15,782
----------
39,064
----------
$ 420,953
==========
Current Liabilities:
Current maturities of long-term debt and
capital leases $ 4,096
Accounts payable and accrued liabilities 39,896
Other current liabilities 3,190
----------
47,182
----------
Long-term debt 364,263
----------
Capital lease obligations 19,495
----------
Other noncurrent liabilities 5,831
----------
Minority interest in limited partnership 3,369
----------
Shareholders' deficit:
Common stock 2
Additional paid-in capital 216,926
Accumulated deficit (236,115)
----------
(19,187)
----------
$ 420,953
==========
</TABLE>
26
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Condensed Statements of Operations
(amounts in thousands)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
September 30, 1999 September 30, 1999
------------------ ------------------
<S> <C> <C>
Net revenues $ 82,948 $ 228,872
--------- ----------
Expenses:
Departmental expenses 58,858 165,177
General and administrative 4,703 13,473
Management and consulting fees 3,361 8,173
Depreciation and amortization 3,916 11,774
Development 148 522
--------- ----------
Total expenses 70,986 199,119
--------- ----------
Income from operations 11,962 29,753
Non-operating expense, net (8,863) (24,007)
--------- ----------
Income before taxes, extraordinary and other items 3,099 5,746
Provision for taxes (574) (1,127)
--------- ----------
Income before extraordinary and other items 2,525 4,619
Equity in losses of unrestricted subsidiaries (1,423) (965)
--------- ----------
1,102 3,654
Income before extraordinary item
Extraordinary item - loss from early
extinguishment of debt - (30,353)
--------- ----------
Net income (loss) $ 1,102 $ (26,699)
========= ==========
</TABLE>
(10) Subsequent Event
As discussed in Note 1, HCC acquired the restructured PCC from GBCC in
October 1999 following the confirmation of PCC's plan of reorganization under
Chapter 11 of the United States Bankruptcy Code. When acquired by HCC for
$1,000, PCC's assets consisted of its limited partnership interest in PML and
its consulting agreement with the Tunica Casino and its liabilities consisted of
an obligation to pay $40,329,000 in satisfaction of the PRT Funding Notes. HCC
used a portion of the proceeds from the Senior Secured Notes to pay PCC's
obligation. As a result of subsequent mergers, liquidations and dissolutions by
and among its wholly owned subsidiaries, HCC terminated the management agreement
between the Aurora Casino and PML and the consulting agreement between the
Tunica Casino and PCC on October 14, 1999. Accordingly, effective October 13,
1999, HCC will no longer reflect a minority
27
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
interest in PML nor pay a consulting fee to PCC. The minority interest and
consulting fee expense totaled $6,370,000 for the nine month periods ended
September 30, 1999 and $7,694,000 for the year ended December 31, 1998. The
acquisition by HCC of the management and consulting agreements will result in a
charge to operations of approximately $40,000,000 during the fourth quarter of
1999.
(11) Reclassifications
Certain reclassifications have been made to the prior year's consolidated
financial statements to conform to the 1999 consolidated financial statement
presentation.
28
<PAGE>
HOLLYWOOD CASINO - AURORA, INC.
(wholly owned by Hollywood Casino Corporation)
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
September 30,
1999 December 31,
(Unaudited) 1998
------------- ------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 28,884,000 $ 9,718,000
Accounts receivable, net of allowances
of $875,000 and $655,000, respectively 1,103,000 1,128,000
Inventories 620,000 606,000
Deferred income taxes 1,931,000 1,540,000
Due from affiliates 36,000 428,000
Prepaid expenses and other current assets 736,000 1,010,000
------------ ------------
Total current assets 33,310,000 14,430,000
------------ ------------
Property and Equipment:
Land improvements 3,167,000 3,167,000
Buildings and improvements 46,205,000 46,205,000
Riverboats 37,870,000 37,642,000
Operating equipment 39,164,000 37,192,000
Construction in progress 1,353,000 615,000
------------ ------------
127,759,000 124,821,000
Less - accumulated depreciation and amortization (46,431,000) (41,114,000)
------------ ------------
Net property and equipment 81,328,000 83,707,000
------------ ------------
Other Assets 2,178,000 2,173,000
------------ ------------
$116,816,000 $100,310,000
============ ============
</TABLE>
The accompanying introductory notes and notes to financial statements are an
integral part of these balance sheets.
29
<PAGE>
HOLLYWOOD CASINO - AURORA, INC.
(wholly owned by Hollywood Casino Corporation)
BALANCE SHEETS
LIABILITIES AND SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
September 30,
1999 December 31,
(Unaudited) 1998
------------- ------------
<S> <C> <C>
Current Liabilities:
Current maturities of long-term debt
and capital lease obligations $ 1,717,000 $ 6,517,000
Accounts payable 2,531,000 2,199,000
Accrued liabilities -
Salaries and wages 1,650,000 2,300,000
Interest 1,565,000 1,058,000
Gaming and other taxes 3,619,000 981,000
Insurance 1,162,000 965,000
Other 1,862,000 1,374,000
Due to affiliates 9,669,000 2,109,000
Other current liabilities 993,000 993,000
------------ ------------
Total current liabilities 24,768,000 18,496,000
------------ ------------
Long-Term Debt 30,360,000 27,783,000
------------ ------------
Capital Lease Obligations 19,495,000 19,948,000
------------ ------------
Deferred Income Taxes 5,686,000 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 10,951,000 3,164,000
------------ ------------
Total shareholder's equity 36,507,000 28,720,000
------------ ------------
$116,816,000 $100,310,000
============ ============
</TABLE>
The accompanying introductory notes and notes to financial statements are an
integral part of these balance sheets.
30
<PAGE>
HOLLYWOOD CASINO - AURORA, INC.
(wholly owned by Hollywood Casino Corporation)
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
---------------------------
1999 1998
------------ ------------
<S> <C> <C>
Revenues:
Casino $ 51,714,000 $ 40,083,000
Food and beverage 3,806,000 3,568,000
Other 1,025,000 811,000
------------ ------------
56,545,000 44,462,000
Less - promotional allowances (3,101,000) (2,750,000)
------------ ------------
Net revenues 53,444,000 41,712,000
------------ ------------
Expenses:
Casino 34,452,000 28,614,000
Food and beverage 1,105,000 1,139,000
Other 376,000 384,000
General and administrative 4,308,000 3,926,000
Depreciation and amortization 1,763,000 1,714,000
------------ ------------
Total expenses 42,004,000 35,777,000
------------ ------------
Income from operations 11,440,000 5,935,000
------------ ------------
Non-operating income (expense):
Interest income 184,000 32,000
Interest expense (1,251,000) (1,493,000)
Gain on disposal of assets 1,000 6,000
------------ ------------
Total non-operating expense, net (1,066,000) (1,455,000)
------------ ------------
Income before income taxes 10,374,000 4,480,000
Income tax provision (4,613,000) (1,698,000)
------------ ------------
Net income $ 5,761,000 $ 2,782,000
============ ============
</TABLE>
The accompanying introductory notes and notes to financial statements
are an integral part of these financial statements.
31
<PAGE>
HOLLYWOOD CASINO - AURORA, INC.
(wholly owned by Hollywood Casino Corporation)
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------------------
1999 1998
-------------- -------------
<S> <C> <C>
Revenues:
Casino $ 139,716,000 $ 115,734,000
Food and beverage 10,756,000 10,174,000
Other 2,511,000 2,065,000
-------------- -------------
152,983,000 127,973,000
Less - promotional allowances (8,282,000) (7,448,000)
-------------- -------------
Net revenues 144,701,000 120,525,000
-------------- -------------
Expenses:
Casino 96,742,000 82,330,000
Food and beverage 3,585,000 3,462,000
Other 900,000 1,007,000
General and administrative 10,992,000 10,278,000
Depreciation and amortization 5,318,000 5,537,000
-------------- -------------
Total expenses 117,537,000 102,614,000
-------------- -------------
Income from operations 27,164,000 17,911,000
-------------- -------------
Non-operating income (expense):
Interest income 337,000 94,000
Interest expense (4,004,000) (4,594,000)
Gain on disposal of assets 2,000 3,000
-------------- -------------
Total non-operating expense, net (3,665,000) (4,497,000)
-------------- -------------
Income before income taxes 23,499,000 13,414,000
Income tax provision (9,592,000) (5,113,000)
-------------- -------------
Net income $ 13,907,000 $ 8,301,000
============== =============
</TABLE>
The accompanying introductory notes and notes to financial statements
are an integral part of these financial statements.
32
<PAGE>
HOLLYWOOD CASINO - AURORA, INC.
(wholly owned by Hollywood Casino Corporation)
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------------------
1999 1998
------------ -------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 13,907,000 $ 8,301,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 5,318,000 5,537,000
Provision for doubtful accounts 225,000 147,000
Gain on disposal of assets (2,000) (3,000)
Deferred income tax (benefit) provision (68,000) 691,000
(Increase) decrease in receivables (200,000) 259,000
Increase in accounts payable and accrued liabilities 3,512,000 3,099,000
Net change in affiliate accounts 7,952,000 (1,000)
Net change in other current assets and liabilities 260,000 (377,000)
Net change in other assets and liabilities (5,000) 15,000
------------ ------------
Net cash provided by operating activities 30,899,000 17,668,000
------------ ------------
INVESTING ACTIVITIES:
Purchases of property and equipment (2,939,000) (4,655,000)
Proceeds from sale of assets 2,000 46,000
Short term investments - 1,689,000
------------ ------------
Net cash used in investing activities (2,937,000) (2,920,000)
------------ ------------
FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt 29,757,000 -
Repayments of debt (32,012,000) (3,263,000)
Payments on capital lease obligations (421,000) (425,000)
Dividends (6,120,000) (11,741,000)
------------ ------------
Net cash used in financing activities (8,796,000) (15,429,000)
------------ ------------
Net increase (decrease) in cash and cash equivalents 19,166,000 (681,000)
Cash and cash equivalents at beginning of period 9,718,000 9,491,000
------------ ------------
Cash and cash equivalents at end of period $ 28,884,000 $ 8,810,000
============ ============
</TABLE>
The accompanying introductory notes and notes to financial statements
are an integral part of these financial statements.
33
<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 had a limited
partnership interest in the entity which held the management services contract
for the Aurora Casino prior to the acquisition of such interest by HCC in
October 1999 (see Notes 5 and 7).
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.
34
<PAGE>
HOLLYWOOD CASINO - AURORA, INC.
(wholly owned by Hollywood Casino Corporation)
NOTES TO FINANCIAL STATEMENTS (Continued)
(Unaudited)
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of"
requires, among other things, that an entity review its long-lived assets and
certain related intangibles for impairment whenever changes in circumstances
indicate that the carrying amount of an asset may not be fully recoverable. As
a result of its review, HCA does not believe that any such changes have
occurred.
In June 1998, the FASB issued a new statement, "Accounting for Derivative
Instruments and Hedging Activities," ("SFAS 133"), which has been amended to be
effective for fiscal years beginning after June 15, 2000. SFAS 133 requires,
among other things, that derivatives be recorded on the balance sheet at fair
value. Changes in the fair value of derivatives may, depending on
circumstances, be recognized in earnings or deferred as a component of
shareholders' equity until a hedged transaction occurs. HCA does not believe
the adoption of SFAS 133 will have a significant impact on its financial
position or results of operations.
The financial statements as of September 30, 1999 and for the three and
nine month periods ended September 30, 1999 and 1998 have been prepared by HCA
without audit. In the opinion of management, these financial statements contain
all adjustments (consisting of only normal recurring adjustments) necessary to
present fairly the financial position of HCA as of September 30, 1999, the
results of its operations for the three and nine month periods ended September
30, 1999 and 1998 and its cash flows for the nine month periods ended September
30, 1999 and 1998.
(2) Long-Term Debt and Pledge of Assets
HCA's long-term indebtedness consists of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------ -----------
<S> <C> <C>
11.25% Promissory note to HCC, due on
May 1, 2007 (a) $29,007,000 $ -
12.75% Promissory note to HCC (b) - 31,507,000
Promissory notes to bank (c) 2,145,000 1,900,000
----------- -----------
Total indebtedness 31,152,000 33,407,000
Less - current maturities (792,000) (5,624,000)
----------- -----------
Total long-term debt $30,360,000 $27,783,000
=========== ===========
</TABLE>
- -------------------
(a) The intercompany note was issued as of May 19, 1999 and accrues interest at
the rate of 11.25% per annum. The initial borrowing on the note replaced
the previous intercompany note with HCC described in (b) below. During
October 1999, HCA borrowed an additional $37,000,000 from HCC
35
<PAGE>
HOLLYWOOD CASINO - AURORA, INC.
(wholly owned by Hollywood Casino Corporation)
NOTES TO FINANCIAL STATEMENTS (Continued)
(Unaudited)
under the note agreement to acquire and terminate its management contract
(see Notes 5 and 7). HCA may borrow up to a total of $108,000,000 under the
intercompany note agreement. Interest on advances is payable semiannually on
October 15 and April 15 of each year. The intercompany note is pledged as
security with respect to HCC's $360,000,000 Senior Secured Notes due in 2006
and 2007. HCA is not a guarantor of HCC's indebtedness; however, the
indebtedness is secured, in part, by a lien limited to the outstanding
principal amount on the intercompany note to HCC on substantially all of the
assets of HCA and by a pledge of the capital stock of HCA.
(b) The intercompany note accrued interest at the rate of 12 .75% per annum
payable semiannually on October 15 and April 15 of each year and required
semiannual principal repayments of $2,500,000 commencing October 15, 1997
with the balance of the note due November 1, 2003. The note was refinanced
on May 19, 1999 (see (a) above).
(c) During September 1998, HCA entered into a bank loan agreement to borrow up
to $2,000,000 on an unsecured basis. Borrowings under the agreement are
payable in 36 monthly installments including interest at the rate of 7.5%
per annum. HCA borrowed $2,000,000 under the agreement during October 1998.
On May 18, 1999, HCA borrowed an additional $750,000 from the bank on an
unsecured basis. The loan is payable in 60 monthly installments of $15,000
including interest at the rate of 7.5% per annum.
As of September 30, 1999, future maturities of long-term debt are as
follows:
<TABLE>
<CAPTION>
<S> <C>
1999 (three months) $ 192,000
2000 808,000
2001 747,000
2002 156,000
2003 168,000
Thereafter 29,081,000
-----------
$31,152,000
===========
</TABLE>
Interest paid for the nine month periods ended September 30, 1999 and 1998
amounted to $3,497,000 and $3,411,000, respectively.
(3) Capital Leases
HCA leases two parking garages under capital lease agreements. The first
lease has an initial 30-year term ending in June 2023 with the right to extend
the term under renewal options for an additional 67 years. Rental payments
through June 2012 equal the City of Aurora's financing costs related to its
general obligation bond issue used to finance the construction of the parking
garage. The general obligation bond
36
<PAGE>
HOLLYWOOD CASINO - AURORA, INC.
(wholly owned by Hollywood Casino Corporation)
NOTES TO FINANCIAL STATEMENTS (Continued)
(Unaudited)
issue includes interest at rates between 7% and 7.625% per annum. The second
lease has an initial term ending in September 2026 with the right to extend the
lease for up to 20 additional years. Rental payments during the first 15 years
equal the lessor's debt service costs related to the industrial revenue bond
issue used to finance a portion of the construction costs of the parking garage.
The remaining construction costs were funded by HCA. In addition, HCA pays base
rent equal to $15,000 per month, subject to a credit of $615,000 at the rate of
$10,000 per month for improvements made to the lessor's North Island Center
banquet and meeting facilities. HCA is also responsible for additional rent,
consisting of costs such as maintenance costs, insurance premiums and utilities
arising out of its operation of both parking garages.
HCA also leased certain equipment under capital lease agreements which
provided for interest at the rate of 11.2% and expired in 1998.
The original cost of HCA's parking garages is included in buildings and
improvements on the accompanying balance sheets at both September 30, 1999 and
December 31, 1998 in the amount of $27,358,000. Assets under capital leases
with an original cost of $2,446,000 are included in operating equipment on the
accompanying balance sheets at both September 30, 1999 and December 31, 1998.
Amortization expense with respect to these assets amounted to $246,000 during
each of the three month periods ended September 30, 1999 and 1998 and $737,000
during each of the nine month periods ended September 30, 1999 and 1998.
Accumulated amortization at September 30, 1999 and December 31, 1998 with
respect to these assets amounted to $6,728,000 and $5,991,000, respectively.
Future minimum lease payments under capital lease obligations as of
September 30, 1999 are as follows:
<TABLE>
<CAPTION>
<S> <C>
1999 (three months) $ 1,021,000
2000 2,483,000
2001 2,532,000
2002 2,643,000
2003 2,660,000
Thereafter 21,417,000
-------------
Total minimum lease payments 32,756,000
Less - amount representing interest (12,336,000)
-------------
Present value of future minimum lease payments 20,420,000
Current capital lease obligation (925,000)
-------------
Long-term capital lease obligation $ 19,495,000
=============
</TABLE>
37
<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 Nine Months Ended
September 30, September 30,
--------------------------- -----------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Current:
Federal $ (4,154,000) $ (1,258,000) $ (8,559,000) $ (3,949,000)
State (567,000) (152,000) (1,101,000) (473,000)
Deferred:
Federal 103,000 (259,000) 65,000 (620,000)
State 5,000 (29,000) 3,000 (71,000)
------------ ------------ ------------ ------------
$ (4,613,000) $ (1,698,000) $ (9,592,000) $ (5,113,000)
============ ============ ============ ============
</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 made payments in lieu of federal taxes
to HCC amounting to $956,000 and $4,133,000, respectively, and state income
taxes amounting to $864,000 and $540,000, respectively, during the nine month
periods ended September 30, 1999 and 1998.
Deferred taxes are computed based on the expected future tax effects of
differences between the financial statement and tax bases of assets and
liabilities, using enacted tax rates. Deferred income taxes result primarily
from the use of the allowance method rather than the direct write-off method for
doubtful accounts, the use of accelerated methods of depreciation for federal
income tax purposes and differences in the timing of deductions taken between
tax and financial reporting purposes for other accruals.
38
<PAGE>
HOLLYWOOD CASINO - AURORA, INC.
(wholly owned by Hollywood Casino Corporation)
NOTES TO FINANCIAL STATEMENTS (Continued)
(Unaudited)
The components of HCA's net deferred tax liability are as follows:
September 30, December 31,
1999 1998
-------------- -------------
Deferred tax assets:
Allowance for doubtful accounts $ 329,000 $ 246,000
Other liabilities and reserves 1,730,000 1,420,000
------------- -------------
Total deferred tax assets 2,059,000 1,666,000
------------- -------------
Deferred tax liabilities:
Depreciation and amortization (5,814,000) (5,489,000)
------------- -------------
Net deferred tax liability $ (3,755,000) $ (3,823,000)
============= =============
Receivables and payables to HCC in connection with the aforementioned tax
allocation agreements at September 30, 1999 and December 31, 1998 are as
follows:
September 30, December 31,
1999 1998
----------- -----------
Deferred tax assets $ 1,726,000 $ 1,373,000
Due (to) from affiliates (7,256,000) 347,000
Deferred tax liabilities (5,081,000) (4,793,000)
The Internal Revenue Service recently completed its examination of the
consolidated Federal income tax returns of HCC for the years 1993 and 1994 as
they pertain to HCA. The additional tax liability under the tax allocation
agreements which is anticipated to result from such examination ($558,000) has
been included in the current federal tax provision for the three and nine month
periods ended September 30, 1999. The Internal Revenue Service is continuing
its examination of the consolidated Federal income tax returns of HCC for 1995
and 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 which was terminated in October
1999 (see Note 7), HCA paid base management and incentive fees to Pratt
Management, L.P. ("PML"), a limited partnership. HCC was the general partner and
a subsidiary of GBCC was the limited partner in PML. The base management fee
was 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
was equal to 10% of
39
<PAGE>
HOLLYWOOD CASINO - AURORA, INC.
(wholly owned by Hollywood Casino Corporation)
NOTES TO FINANCIAL STATEMENTS (Continued)
(Unaudited)
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 $3,061,000 and $2,444,000,
respectively, during the three month periods ended September 30, 1999 and 1998
and $7,273,000 and $6,269,000, respectively, during the nine month periods ended
September 30, 1999 and 1998. Management and incentive fees payable at September
30, 1999 and December 31, 1998 amounting to $2,046,000 and $2,067,000,
respectively, are included in due to affiliates on the accompanying balance
sheets.
HCA incurred interest with respect to its promissory notes payable to HCC
(see Note 2) amounting to $815,000 and $1,084,000, respectively, for the three
month periods ended September 30, 1999 and 1998 and $2,706,000 and $3,344,000,
respectively, for the nine month periods ended September 30, 1999 and 1998.
Interest payable to HCC on such notes amounted to $1,197,000 and $848,000,
respectively, at September 30, 1999 and December 31, 1998 and is included in
accrued interest payable on the accompanying balance sheets.
HCA has acquired computer software and hardware from GBCC and has been
allocated certain other expenses from HCC and GBCC. In addition, HCA is
reimbursed by HCC and GBCC for certain administrative and other services it
performs on their behalf. Such transactions resulted in net charges to HCA
during the three month periods ended September 30, 1999 and 1998 totaling
$21,000 and $53,000, respectively, and during the nine month periods ended
September 30, 1999 and 1998 totaling $117,000 and $243,000, respectively. At
September 30, 1999 and December 31, 1998, HCA had net payables of $68,000 and
net receivables of $37,000, respectively, in connection with such charges.
(6) Commitments and Contingencies
Planet Hollywood Litigation -
Planet Hollywood International, Inc., a Delaware corporation, and Planet
Hollywood (Region IV), Inc., a Minnesota corporation (collectively, "PHII"),
filed a complaint in the United States District Court for the Northern District
of Illinois, Eastern Division on July 29, 1996 against HCC, HCA and a member of
the Pratt Family (collectively, the "Original Hollywood Defendants"). The
Original Hollywood Defendants filed with the Court on September 19, 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 3, 1997, and GBCC
and HCT filed with the Court on February 20, 1997, answers and counterclaims to
such amended complaint.
40
<PAGE>
HOLLYWOOD CASINO - AURORA, INC.
(wholly owned by Hollywood Casino Corporation)
NOTES TO FINANCIAL STATEMENTS (Continued)
(Unaudited)
In its lawsuit, PHII seeks a declaratory judgment that it is entitled to
use the name "Planet Hollywood" for a casino. In addition, PHII seeks damages
alleging, 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 seek a declaratory judgement that PHII is not entitled to use the name
"Planet Hollywood" for a casino. In addition, the Hollywood Defendants and GBCC
seek damages alleging, 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.
On June 7, 1999, the magistrate judge severed the litigation as to
liability and damages. A trial on the liability issues commenced on July 19,
1999 and concluded on July 26, 1999. In oral argument on July 26, 1999, the
Hollywood Defendants and GBCC waived their declaratory judgment claims based, in
part, on PHII's reported deteriorating financial condition and perceived
inability to enter into the casino business. On August 25, 1999, the Hollywood
Defendants and GBCC filed a motion to dismiss the declaratory judgment claims of
all parties asserting, among other things, that as a result of PHII's reported
deteriorating financial condition and perceived inability to enter into the
casino business, there is no longer any actual case or controversy. On October
12, 1999, Planet Hollywood (Region IV), Inc. filed a petition for reorganization
under Chapter 11 of the United States Bankruptcy Code. The judge has not yet
issued a ruling on either the liability issues or the motion to dismiss and has
provided no definitive date by which either such ruling will be issued.
Given the uncertainties inherent in litigation, no assurance can be given
that the Hollywood Defendants will prevail in this litigation; however, the
Hollywood Defendants believe that PHII's claims are without merit and have
defended their position 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.
(7) Subsequent Event
During October 1999, HCC acquired the GBCC subsidiary which held the
limited partnership interest in PML (see Note 5) following the confirmation of
the GBCC subsidiary's plan of reorganization under Chapter 11 of the United
States Bankruptcy Code. When acquired by HCC, the subsidiary's assets consisted
of its limited partnership interest in PML and a consulting agreement with
another casino facility owned by HCC and its liabilities consisted of an
obligation to pay $40,329,000 in satisfaction of the subsidiary's guarantee of
an affiliate's debt issue. HCA borrowed an additional $37,000,000 under its
41
<PAGE>
HOLLYWOOD CASINO - AURORA, INC.
(wholly owned by Hollywood Casino Corporation)
NOTES TO FINANCIAL STATEMENTS (Continued)
(Unaudited)
intercompany note with HCC (see Note 2) to acquire and terminate the management
contract. Accordingly, effective October 13, 1999, HCA will no longer pay a
management fee. The $37,000,000 payment by HCA, which was used by HCC to
partially repay PCC's $40,329,000 obligation, will be recorded by HCA as the
cost of terminating the management contract and will be reflected as an expense
during the fourth quarter of 1999.
42
<PAGE>
HWCC - TUNICA, INC. AND SUBSIDIARY
(wholly owned by Hollywood Casino Corporation)
CONSOLIDATED BALANCE SHEETS
ASSETS
September 30,
1999 December 31,
(Unaudited) 1998
-------------- -------------
Current Assets:
Cash and cash equivalents $ 16,520,000 $ 16,325,000
Short-term investments - 3,905,000
Accounts receivable, net of allowances of
$1,051,000 and $813,000, respectively 2,365,000 1,167,000
Inventories 783,000 779,000
Deferred income taxes 1,294,000 1,451,000
Prepaid expenses and other current assets 1,171,000 770,000
------------ ------------
Total current assets 22,133,000 24,397,000
------------ ------------
Property and Equipment:
Land and improvements 4,645,000 4,645,000
Buildings 75,261,000 73,948,000
Barges 2,524,000 2,524,000
Operating equipment 43,324,000 39,169,000
Construction in progress 1,449,000 2,612,000
------------ ------------
127,203,000 122,898,000
Less - accumulated depreciation and amortization (43,214,000) (38,910,000)
------------ ------------
Net property and equipment 83,989,000 83,988,000
------------ ------------
Other Assets:
Land rights 7,097,000 7,250,000
Other assets 4,934,000 4,826,000
------------ ------------
Total other assets 12,031,000 12,076,000
------------ ------------
$118,153,000 $120,461,000
============ ============
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated balance sheets.
43
<PAGE>
HWCC - TUNICA, INC. AND SUBSIDIARY
(wholly owned by Hollywood Casino Corporation)
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDER'S EQUITY
September 30,
1999 December 31,
(Unaudited) 1998
------------- ------------
Current Liabilities:
Current maturities of long-term debt $ 1,475,000 $ 775,000
Accounts payable 1,594,000 1,638,000
Accrued liabilities -
Salaries and wages 2,111,000 1,685,000
Interest 422,000 476,000
Gaming and other taxes 1,530,000 453,000
Insurance 2,196,000 1,975,000
Other 2,472,000 1,866,000
Other current liabilities 1,606,000 1,283,000
------------ ------------
Total current liabilities 13,406,000 10,151,000
------------ ------------
Long-Term Debt 85,549,000 85,023,000
------------ ------------
Commitments and Contingencies
Shareholder's Equity:
Common stock, $.01 par value
per share; 100,000 shares authorized;
1,000 shares issued and outstanding - -
Additional paid-in capital 26,637,000 34,637,000
Accumulated deficit (7,439,000) (9,350,000)
------------ ------------
Total shareholder's equity 19,198,000 25,287,000
------------ ------------
$118,153,000 $120,461,000
============ ============
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated balance sheets.
44
<PAGE>
HWCC - TUNICA, INC. AND SUBSIDIARY
(wholly owned by Hollywood Casino Corporation)
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
September 30,
-------------------------
1999 1998
----------- -----------
Revenues:
Casino $27,538,000 $26,684,000
Rooms 2,864,000 2,550,000
Food and beverage 4,140,000 4,195,000
Other 370,000 378,000
----------- -----------
34,912,000 33,807,000
Less - promotional allowances (5,407,000) (4,681,000)
----------- -----------
Net revenues 29,505,000 29,126,000
----------- -----------
Expenses:
Casino 21,361,000 20,327,000
Rooms 347,000 459,000
Food and beverage 923,000 980,000
Other 294,000 358,000
General and administrative 1,510,000 1,366,000
Depreciation and amortization 1,800,000 2,020,000
----------- -----------
Total expenses 26,235,000 25,510,000
----------- -----------
Income from operations 3,270,000 3,616,000
----------- -----------
Non-operating income (expenses):
Interest income 90,000 166,000
Interest expense (2,450,000) (2,730,000)
Equity in losses of unconsolidated affiliate (61,000) -
Gain on disposal of assets - 30,000
----------- -----------
Total non-operating expenses, net (2,421,000) (2,534,000)
----------- -----------
Income before income taxes 849,000 1,082,000
Income tax provision (563,000) (443,000)
----------- -----------
Net income $ 286,000 $ 639,000
=========== ===========
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated statements.
45
<PAGE>
HWCC - TUNICA, INC. AND SUBSIDIARY
(wholly owned by Hollywood Casino Corporation)
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Nine Months Ended
September 30,
----------------------------
1999 1998
------------ ------------
Revenues:
Casino $ 78,295,000 $ 73,275,000
Rooms 7,889,000 7,058,000
Food and beverage 11,508,000 11,548,000
Other 1,022,000 993,000
------------ ------------
98,714,000 92,874,000
Less - promotional allowances (14,547,000) (12,431,000)
------------ ------------
Net revenues 84,167,000 80,443,000
------------ ------------
Expenses:
Casino 59,347,000 54,833,000
Rooms 959,000 1,357,000
Food and beverage 2,796,000 3,003,000
Other 848,000 1,028,000
General and administrative 4,561,000 4,373,000
Depreciation and amortization 5,558,000 6,080,000
------------ ------------
Total expenses 74,069,000 70,674,000
------------ ------------
Income from operations 10,098,000 9,769,000
------------ ------------
Non-operating income (expenses):
Interest income 297,000 434,000
Interest expense (7,803,000) (8,205,000)
Equity in losses of unconsolidated affiliate (61,000) -
Loss on disposal of assets (57,000) (31,000)
------------ ------------
Total non-operating expenses, net (7,624,000) (7,802,000)
------------ ------------
Income before income taxes 2,474,000 1,967,000
Income tax provision (563,000) (443,000)
------------ ------------
Net income $ 1,911,000 $ 1,524,000
============ ============
The accompanying introductory notes and notes to consolidated financial
statements
are an integral part of these consolidated statements.
46
<PAGE>
HWCC - TUNICA, INC. AND SUBSIDIARY
(wholly owned by Hollywood Casino Corporation)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
September 30,
--------------------------
1999 1998
------------ -----------
OPERATING ACTIVITIES:
Net income $ 1,911,000 $ 1,524,000
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 5,558,000 6,080,000
Provision for doubtful accounts 432,000 446,000
Equity in losses of unconsolidated affiliate 61,000 -
Deferred tax provision (151,000) -
Loss on disposal of assets 57,000 31,000
(Increase) decrease in accounts receivable (1,630,000) 48,000
Increase in accounts payable
and accrued expenses 2,232,000 1,464,000
Net change in other current assets
and liabilities (82,000) (275,000)
Net change in other noncurrent assets
and liabilities 25,000 (223,000)
------------ -----------
Net cash provided by operating activities 8,413,000 9,095,000
------------ -----------
INVESTING ACTIVITIES:
Purchases of property and equipment (5,359,000) (4,662,000)
Short-term investments 3,905,000 (25,000)
Investment in unconsolidated affiliate (45,000) -
Proceeds from sale of assets 55,000 46,000
------------ -----------
Net cash used in investing activities (1,444,000) (4,641,000)
------------ -----------
FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt 86,271,000 541,000
Repayments of long-term debt (85,045,000) (438,000)
Dividends (8,000,000) -
------------ -----------
Net cash (used in) provided by financing
activities (6,774,000) 103,000
------------ -----------
Net increase in cash and cash equivalents 195,000 4,557,000
Cash and cash equivalents at beginning
of period 16,325,000 11,851,000
------------ -----------
Cash and cash equivalents at end of period $ 16,520,000 $16,408,000
============ ===========
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated statements.
47
<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, 2001.
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 September 30, 1999 and
December 31, 1998.
HCT estimates that a significant amount of the Tunica Casino's revenues are
derived from patrons living in the Memphis, Tennessee area, northern Mississippi
and Arkansas. The Tunica Casino faces intense competition from other casinos
operating in northern Tunica County and management believes that this
competition will continue in the future.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
HCT is self insured for a portion of its general liability, certain health
care and other liability exposures. Accrued insurance includes estimates of
such accrued liabilities based on an evaluation of the merits of individual
claims and historical claims experience; accordingly, HCT's ultimate liability
may differ from the amounts accrued.
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of"
requires, among other things, that an entity review its long-lived assets and
certain related intangibles for impairment whenever changes in circumstances
indicate that the carrying amount of an asset may not be fully recoverable. As
a result of its review, HCT does not believe that any such changes have
occurred.
In June 1998, the FASB issued a new statement, "Accounting for Derivative
Instruments and Hedging Activities," ("SFAS 133"), which has been amended to be
effective for fiscal years beginning after June 15, 2000. SFAS 133 requires,
among other things, that derivatives be recorded on the balance sheet at fair
value. Changes in the fair value of derivatives may, depending on
circumstances, be recognized in earnings or deferred as a component of
shareholders' equity until a hedged transaction occurs. HCT does not believe
the adoption of SFAS 133 will have a significant impact on its financial
position or results of operations.
48
<PAGE>
HWCC - TUNICA, INC. AND SUBSIDIARY
(wholly owned by Hollywood Casino Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The consolidated financial statements as of September 30, 1999 and for the
three and nine month periods ended September 30, 1999 and 1998 have been
prepared by HCT without audit. In the opinion of management, these consolidated
financial statements contain all adjustments (consisting of only normal
recurring adjustments) necessary to present fairly the consolidated financial
position of HCT as of September 30, 1999, the results of its operations for the
three and nine month periods ended September 30, 1999 and 1998 and its cash
flows for the nine month periods ended September 30, 1999 and 1998.
(2) Long-Term Debt and Pledge of Assets
Substantially all of HCT's assets are pledged in connection with its long-
term indebtedness. Long-term debt consists of the following:
September 30, December 31,
1999 1998
----------- -----------
Promissory note to HCC due May 1, 2007 (a) $84,045,000 $ -
Promissory notes to HCC (b) - 84,045,000
Equipment loans (c) 2,656,000 1,291,000
Bank credit facility (d) 323,000 462,000
----------- -----------
Total indebtedness 87,024,000 85,798,000
Less - current maturities (1,475,000) (775,000)
----------- -----------
Total long-term debt $85,549,000 $85,023,000
=========== ===========
__________________
(a) The intercompany note was issued as of May 19, 1999 and accrues interest at
the rate of 11.25% per annum. The initial borrowing on the note replaced
the previous intercompany notes with HCC (see (b) below). HCT may borrow
up to $87,045,000 under the intercompany note agreement. During October
1999, HCT borrowed the additional $3,000,000 available under the
intercompany note with HCC as well as an additional $329,000 under a new
note agreement with HCC to acquire and terminate a consulting agreement
(see Notes 5 and 7). Interest on advances is payable semiannually on April
15 and October 15 of each year. The intercompany note is pledged as
security with respect to HCC's $360,000,000 Senior Secured Notes due in
2006 and 2007 which are unconditionally guaranteed on a senior secured
basis by HCT and by certain other current and future subsidiaries of HCC.
HCC's Senior Secured Notes and related guarantees are secured by, among
other things, (i) substantially all of the assets of HCT and other future
guarantors, (ii) a limited lien on substantially all of the assets of
another gaming facility operated by a wholly owned subsidiary of HCC, (iii)
a pledge of the capital stock of HCT and certain other subsidiaries of HCC
49
<PAGE>
HWCC - TUNICA, INC. AND SUBSIDIARY
(wholly owned by Hollywood Casino Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
and (iv) the collateral assignment of any future management contracts
entered into by HCC. The limitation on the lien described in (ii) above
was increased to $76,007,000 in October 1999; however, such lien may be
further increased as a result of additional borrowings up to a maximum of
$108,000,000.
The indenture to HCC's Senior Secured Notes contains various provisions
limiting the ability of HCC, HCT and certain defined subsidiaries to, among
other things, pay dividends or make other restricted payments; incur
additional indebtedness or issue preferred stock; create liens; create
dividend or other payment restrictions affecting certain defined
subsidiaries; enter into mergers or consolidations or make sales of all or
substantially all assets of HCC, HCT or any future guarantor; or enter into
certain transactions with affiliates. Dividend payments by HCT to HCC are
not restricted under the terms of the indenture.
(b) The intercompany note accrued interest at the rate of 12.75% per annum
payable semiannually on October 15 and April 15 of each year. The note was
refinanced on May 19, 1999 (see (a) above).
(c) The equipment loans are payable monthly including interest at effective
rates ranging from 8.5% to 12.9% per annum and mature at various dates
between 1999 and 2002. One such loan with a balance of $58,000 at
September 30, 1999 and which matures in 2000 does not accrue interest.
(d) HCT had a bank credit facility in the amount of $1,300,000 available to
borrow against until September 30, 1998. HCT borrowed $541,000 under the
credit facility during 1998 at the rate of 8.875% per annum. Borrowings
under the credit facility are to be repaid in monthly installments over a
period of 36 months and are collateralized by equipment purchased with the
loan proceeds. The credit facility was not renewed by HCT.
Scheduled payments of long-term debt as of September 30, 1999 are set forth
below:
1999 (three months) $ 291,000
2000 1,468,000
2001 1,006,000
2002 214,000
2003 -
Thereafter 84,045,000
-----------
Total $87,024,000
===========
Interest paid amounted to $7,857,000 and $8,205,000, respectively, during
the nine month periods ended September 30, 1999 and 1998.
50
<PAGE>
HWCC - TUNICA, INC. AND SUBSIDIARY
(wholly owned by Hollywood Casino Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(3) Capital Leases
HCT leased certain gaming and other equipment under capital lease
agreements which provided for interest at rates ranging up to 13 .25% per annum
and which expired during 1997. Assets under capital leases with an original
cost of $4,645,000 and $4,814,000, respectively, are included in operating
equipment in the accompanying consolidated balance sheets at September 30, 1999
and at December 31, 1998 and are fully amortized. Amortization expense for the
three and nine month periods ended September 30, 1998 was $87,000 and $261,000,
respectively. 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 Nine Months Ended
September 30, September 30,
---------------------------- ----------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Provision for current federal
income taxes $ (562,000) $ (443,000) $ (714,000) $ (443,000)
(Provision) benefit for deferred
federal income taxes (114,000) (70,000) (304,000) (259,000)
Change in valuation allowance 113,000 (70,000) 455,000 259,000
------------ ------------ ------------ ------------
$ (563,000) $ (443,000) $ (563,000) $ (443,000)
============ ============ ============ ============
</TABLE>
HCT is included in HCC's consolidated federal income tax return. HCT's
provision for federal income taxes is based on the amount of tax which would be
provided if a separate federal income tax return were filed. HCT paid federal
income taxes to HCC in the amount of $288,000 and $175,000, respectively, during
the nine month periods ended September 30, 1999 and 1998; no state income taxes
were paid during either of the nine month periods ended September 30, 1999 or
1998. 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.
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.
51
<PAGE>
HWCC - TUNICA, INC. AND SUBSIDIARY
(wholly owned by Hollywood Casino Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
At September 30, 1999, HCT had net operating loss carryforwards ("NOL's")
totaling approximately $13,650,000, which do not begin to expire until the year
2010. Additionally, HCT has alternative minimum tax and other tax credits
available totalling $1,078,000 and $251,000, respectively. Alternative minimum
tax credits do not expire and none of the other tax credits expire before the
year 2009. Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes", requires that the tax benefit of such NOL's, together with the
tax benefit of deferred tax assets resulting from temporary differences, be
recorded as an asset and, to the extent that management can not assess that the
utilization of all or a portion of such deferred tax assets is more likely than
not, a valuation allowance should be recorded. Based on the taxable income
currently being earned by HCT and the expectation of future taxable income,
management believes that it is more likely than not that a portion of the NOL's
and deferred tax assets will be utilized. Accordingly, a valuation allowance
has been established which has resulted in the recording of net deferred tax
assets of $2,143,000 and $1,992,000, respectively, at September 30, 1999 and
December 31, 1998.
The components of HCT's net deferred tax asset are as follows:
September 30, December 31,
1999 1998
-------------- -------------
Deferred tax assets:
Net operating loss carryforwards $ 4,642,000 $ 5,221,000
Alternative minimum tax credit carryforward 1,078,000 800,000
Allowance for doubtful accounts 358,000 277,000
Other liabilities and accruals 1,399,000 1,286,000
Other 251,000 -
----------- -----------
Total deferred tax assets 7,728,000 7,584,000
Deferred tax liabilities:
Depreciation and amortization (3,540,000) (3,092,000)
----------- -----------
Net deferred tax asset 4,188,000 4,492,000
Valuation allowance (2,045,000) (2,500,000)
----------- -----------
$ 2,143,000 $ 1,992,000
=========== ===========
52
<PAGE>
HWCC - TUNICA, INC. AND SUBSIDIARY
(wholly owned by Hollywood Casino Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Receivables from and (payables to) HCC in connection with HCT's federal
income taxes are included in the accompanying consolidated financial statements
as follows:
September 30, December 31,
1999 1998
-------------- ------------
Deferred income taxes $1,294,000 $1,451,000
Other noncurrent assets 849,000 541,000
Due to affiliates (428,000) -
The Internal Revenue Service is currently examining the consolidated
Federal income tax returns of HCC for the years 1993 through 1996. The results
of such examination for 1993 and 1994 with respect to HCT have not been
finalized; however, preliminary findings indicate that if certain issues are not
resolved in HCT's favor, HCT's net operating loss carryforwards could be
significantly reduced, which would result in additional alternative minimum tax
or regular tax liability under an existing tax allocation agreement with HCC.
Management is continuing to review the preliminary findings with the assistance
of its tax advisors, but is presently unable to estimate the ultimate impact on
the financial position or results of operations of HCT. The Internal Revenue
Service is continuing its examination of the consolidated Federal income tax
returns of HCC for 1995 and 1996.
(5) Transactions with Related Parties
Pursuant to a consulting agreement which was terminated during October 1999
(see Note 7), HCT incurred a monthly consulting fee of $100,000. The consulting
agreement was with Pratt Casino Corporation ("PCC"), an affiliated company.
Such fees amounted to $300,000 and $900,000, respectively, during each of the
three and nine month periods ended September 30, 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 $154,000 and $140,000, respectively, for the three month periods
ended September 30, 1999 and 1998 and $553,000 and $522,000, respectively, for
the nine month periods ended September 30, 1999 and 1998. At September 30, 1999
and December 31, 1998, HCT had payables of $143,000 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
53
<PAGE>
HWCC - TUNICA, INC. AND SUBSIDIARY
(wholly owned by Hollywood Casino Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
to those companies. For the three month periods ended September 30, 1999 and
1998 net charges incurred by HCT amounted to $39,000 and $46,000, respectively.
For the nine month periods ended September 30, 1999 and 1998, such charges
amounted to $128,000 and $131,000, respectively. The accompanying consolidated
balance sheets at September 30, 1999 and December 31, 1998 include net payables
to affiliates of $57,000 and net receivables from affiliates of $97,000,
respectively, for such charges.
(6) Commitments and Contingencies
Ground Lease -
HCT entered into a ground lease covering 70 acres of land on which the
Tunica Casino was constructed. The ground lease was 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. The lease is currently in its first five-
year renewal term. Obligations under the ground lease include both minimum
monthly fixed payments and percentage rent, which in the aggregate will be the
greater of 4% of Gross Revenues, as defined, or $1,100,000 per year. HCT is
responsible for all operating and other expenses of the property in accordance
with the lease terms. HCT expensed $1,101,000 and $1,080,000, respectively,
during the three month periods ended September 30, 1999 and 1998, and $3,157,000
and $2,966,000, respectively, during the nine month periods ended September 30,
1999 and 1998 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 19, 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 3, 1997, and GBCC and HCT filed with the Court on February
20, 1997, answers and counterclaims to such amended complaint.
In its lawsuit, PHII seeks a declaratory judgment that it is entitled to
use the name "Planet Hollywood" for a casino. In addition, PHII seeks damages
alleging, 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 seek a declaratory judgement that PHII is not entitled to use the name
"Planet Hollywood" for a casino. In addition, the Hollywood Defendants and GBCC
seek damages alleging, among other things, that the PHII Defendants
54
<PAGE>
HWCC - TUNICA, INC. AND SUBSIDIARY
(wholly owned by Hollywood Casino Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
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.
On June 7, 1999, the magistrate judge severed the litigation as to
liability and damages. A trial on the liability issues commenced on July 19,
1999 and concluded on July 26, 1999. In oral argument on July 26, 1999, the
Hollywood Defendants and GBCC waived their declaratory judgment claims based, in
part, on PHII's reported deteriorating financial condition and perceived
inability to enter into the casino business. On August 25, 1999, the Hollywood
Defendants and GBCC filed a motion to dismiss the declaratory judgment claims of
all parties asserting, among other things, that as a result of PHII's reported
deteriorating financial condition and perceived inability to enter into the
casino business, there is no longer any actual case or controversy. On October
12, 1999, Planet Hollywood (Region IV), Inc. filed a petition for reorganization
under Chapter 11 of the United States Bankruptcy Code. The judge has not yet
issued a ruling on either the liability issues or the motion to dismiss and has
provided no definitive date by which either such ruling will be issued.
Given the uncertainties inherent in litigation, no assurance can be given
that the Hollywood Defendants will prevail in this litigation; however, the
Hollywood Defendants believe that PHII's claims are without merit and have
defended their position vigorously. The accompanying consolidated financial
statements do not include any adjustments that might result from the outcome of
the uncertainties described above.
Other -
HCT is a party in various legal proceedings with respect to the conduct of
casino and hotel operations. Although a possible range of loss can not be
estimated, in the opinion of management, based upon the advice of counsel,
settlement or resolution of the proceedings should not have a material adverse
impact on the consolidated financial position or results of operations of HCT.
(7) Subsequent Event
During October 1999, HCC acquired PCC following the confirmation of PCC's
plan of reorganization under Chapter 11 of the United States Bankruptcy Code.
When acquired by HCC, PCC's assets consisted of the consulting agreement with
the Tunica Casino (see Note 5) and a limited partnership interest in the entity
which held the management contract on another casino facility owned by HCC and
its liabilities consisted of an obligation to pay $40,329,000 in satisfaction of
PCC's guarantee of an affiliate's debt issue. HCT borrowed an additional
$3,329,000 from HCC (see Note 2) to acquire and terminate the consulting
agreement. Accordingly, effective October 13, 1999, HCT will no longer pay a
consulting fee. The $3,329,000 payment by HCT, which was used by HCC to
partially repay PCC's $40,329,000 obligation, will be recorded by HCT as the
cost of terminating the consulting agreement and will be reflected as an expense
during the fourth quarter of 1999.
55
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This Quarterly Report on Form 10-Q contains forward-looking statements about
the business, results of operations, cash flows, financial condition and
prospects of the Company. The actual results could differ materially from those
indicated by the forward-looking statements because of various competition,
economic conditions, tax regulations, state regulations applicable to the gaming
industry in general or the Company in particular and other risks indicated in
the Company's filings with the Securities and Exchange Commission. Such risks
and uncertainties are beyond management's ability to control and, in many cases,
can not be predicted by management. When used in this Quarterly Report on Form
10-Q, the words "believes", "estimates", "anticipates" and similar expressions
as they relate to the Company or its management are intended to identify
forward-looking statements.
RESULTS OF OPERATIONS
HCC had net revenues for the three and nine month periods ended September 30,
1999 of $82.9 million and $228.9 million, respectively, representing increases
of 17.1% and 13.9%, respectively, from the corresponding periods of 1998. The
increases are attributable to improved net revenues at the Aurora Casino of
$11.7 million (28.1%) and $24.2 million (20.1%), respectively, and at the Tunica
Casino of $379,000 (1.3%) and $3.7 million (4.6%), respectively. HCC's
operating expenses increased by $7.4 million and $18.9 million to $68.8 million
and $193.5 million, respectively, during the three and nine month periods ended
September 30, 1999 from $61.5 million and $174.6 million, respectively, during
the same periods of 1998.
Consequently, HCC's income from operations increased by $4.7 million (50.3%)
and $8.9 million (33.7%), respectively, during the third quarter and first nine
of 1999 compared to the same periods of 1998. Income from operations at the
Aurora Casino increased by $5.5 million to $11.4 million and by $9.3 million to
$27.2 million during the three and nine month periods ended September 30, 1999,
respectively, compared with the same periods of 1998 due to significant
increases in patron volume and improved hold percentages. Income from
operations at the Tunica Casino decreased by $346,000 to $3.3 million during the
1999 three month period compared to the same period in 1998 resulting in an
overall 1999 nine month increase of $329,000 to $10.1 million. The three month
period decline resulted primarily from a decrease in the table game hold
percentage.
Aurora Casino
General
Income from operations at the Aurora Casino, adjusted to exclude management
fees, amounted to $14.5 million and $34.4 million, respectively, for the three
and nine month periods ended September 30, 1999 compared to $8.4 million and
$24.2 million, respectively, during the same periods in 1998. The 1999
increases result primarily from improvement in casino revenues attributable to
dockside gaming. Third quarter 1999 net revenues were the highest quarterly net
revenues earned by the Aurora Casino since its opening. As a result of
regulatory changes, dockside gaming began at the Aurora Casino on June 26, 1999,
eliminating the existing cruising requirements and enabling patrons to enter and
exit the boats without restrictions. Management anticipates that the
significantly higher gaming revenues will continue in future periods and has
announced plans to construct a new dockside facility to capitalize on this
regulatory change (see "Liquidity and Capital Resources - Capital Expenditures
and Other Investing Activities").
56
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Gaming Operations
The following table sets forth certain unaudited financial and operating data
for the Aurora Casino's operations for the three and nine month periods ended
September 30, 1999 and 1998.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- -----------------------------------
1999 1998 1999 1998
------------- ------------- --------------- ------------------
<S> <C> <C> <C> <C>
Revenues:
Table games $ 11,480,000 $ 10,015,000 $ 33,034,000 $ 32,181,000
Slot machines 39,504,000 29,534,000 104,781,000 81,811,000
Poker revenues 730,000 534,000 1,901,000 1,742,000
------------ ------------ -------------- --------------
Total $ 51,714,000 $ 40,083,000 $ 139,716,000 $ 115,734,000
============ ============ ============== ==============
Table games:
Gross wagering (drop) (1) $ 67,423,000 $ 62,316,000 $ 187,060,000 $ 185,364,000
Hold percentage (2) 17.0% 16.1% 17.7% 17.4%
Slot machines:
Gross wagering (handle) (1) $677,631,000 $521,835,000 $1,810,876,000 $1,458,944,000
Hold percentage (2) 5.8% 5.7% 5.8% 5.6%
- -----------------------
</TABLE>
(1) Gross wagering consists of the total value of chips purchased for table
games ("drop") and coins wagered in slot machines ("handle").
(2) Casino revenues consist of the portion of gross wagering that a casino
retains and, as a percentage of gross wagering, is referred to as the "hold
percentage".
Total gross wagering at the Aurora Casino as measured by table drop and slot
machine handle increased $160.9 million (27.5%) and $353.6 million (21.5%),
respectively, during the third quarter and first nine months of 1999 compared to
the like periods during 1998. The increases reflects increased patron volume
primarily as a result of dockside gaming.
Revenues
Casino revenues increased $11.6 million (29%) and $24 million (20.7%),
respectively, during the three and nine month periods ended September 30, 1999
compared to the same periods of 1998 due primarily to the increases in gross
wagering previously discussed. Table game revenues increased
57
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
$1.5 million (14.6%) during the third quarter of 1999 compared to the same
period in 1998, more than offsetting the decline through June 30, 1999 in table
game revenues compared to the prior year. As a result, table game revenues
increased $853,000 (2.7%) during the first nine months of 1999 compared to the
like period in 1998. The third quarter increase resulted from the increase in
drop coupled with an improvement in the table game hold percentage to 17.0% in
1999 from 16.1% in 1998. The nine month increase reflects the slight increase in
drop together with the table game hold percentage increase to 17.7% from 17.4%.
The 29.9% and 24.1% increases in slot machine handle together with increases in
the slot machine hold percentages during 1999 resulted in three and nine month
slot machine revenue increases of $10 million (33.8%) and $23 million (28.1%),
respectively, compared to the corresponding periods in 1998. Poker revenues
increased $196,000 (36.7%) during the third quarter and $159,000 (9.1%) for the
nine month period. Poker revenues were negatively impacted in the fourth quarter
of 1998 and early in 1999 as a result of the opening of a competitor's poker
room. The impact has decreased with the passage of time.
Food and beverage revenues at the Aurora Casino increased $238,000 (6.7%) and
$582,000 (5.7%), respectively, during the third quarter and first nine months of
1999 compared to the prior year periods reflecting increased patron volume
during 1999. Other revenues increased $214,000 (26.4%) and $446,000 (21.6%)
during the three and nine month periods ended September 30, 1999 compared to the
same periods of 1998 reflecting increases in parking fees and commission
revenues.
Promotional allowances represent the estimated value of goods and services
provided free of charge to casino customers under various marketing programs.
These allowances, as a percentage of food and beverage and other revenues at the
Aurora Casino, were 64.2% and 62.4%, respectively, during the three and nine
month periods ended September 30, 1999 compared to 62.8% and 60.9%,
respectively, during the like periods in 1998. The increases from the prior
year periods reflect increases in promotional activities as part of the Aurora
Casino's marketing efforts.
Departmental Expenses
Casino expenses increased $5.8 million (20.4%) and $14.4 million (17.5%),
respectively, during the third quarter and first nine months of 1999 compared to
the 1998 periods. Such increases results from additional gaming taxes
associated with the increase in casino revenues as well as to the higher
marketing expenses previously discussed.
Food and beverage expenses did not change significantly during the three and
nine month periods ended September 30, 1999 compared to the same periods in 1998
as higher costs associated with the increased patron volume and slightly higher
food and beverage costs were offset by increased allocations to casino expenses
as part of the Aurora Casino's promotional activities. Other expenses were
virtually unchanged during the third quarter resulting in an overall nine month
decrease of $107,000 (10.6%) due to reductions in personnel and other non-
departmental operating expenses.
58
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Tunica Casino
General
Income from operations at the Tunica Casino amounted to $3.3 million and
$10.1 million, respectively, for the three and nine month periods ended
September 30, 1999 compared to $3.6 million and $9.8 million, respectively,
during the same periods of 1998. The three month period decrease is primarily
attributable to a significant decline in table games hold percentage which more
than offset the increase in gross wagering. The nine month increase is
primarily attributable to the increase in gross wagering and to improvement in
the slot machine hold percentage.
Gaming Operations
The following table sets forth certain unaudited financial and operating data
relating to the operations of the Tunica facility for the three and nine month
periods ended September 30, 1999 and 1998.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- -------------------------------
1999 1998 1999 1998
------------- ------------- -------------- ---------------
<S> <C> <C> <C> <C>
Casino Revenues:
Table games $ 3,255,000 $ 4,239,000 $ 10,816,000 $ 10,628,000
Slot machines 24,033,000 22,180,000 66,767,000 61,882,000
Poker revenues 250,000 265,000 712,000 765,000
------------ ------------ -------------- --------------
Total $ 27,538,000 $ 26,684,000 $ 78,295,000 $ 73,275,000
============ ============ ============== ==============
Table games:
Gross wagering (drop) (1) $ 22,247,000 $ 20,605,000 $ 62,173,000 $ 58,301,000
Hold percentage (2) 14.6% 20.6% 17.4% 18.2%
Slot machines:
Gross wagering (handle) (1) $442,125,000 $428,374,000 $1,252,147,000 $1,190,522,000
Hold percentage (2) 5.4% 5.2% 5.3% 5.2%
</TABLE>
- ---------------------------
(1)(2) See corresponding notes to the table at "Aurora Casino - Gaming
Operations" above.
59
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Total gross wagering at the Tunica Casino as measured by table game drop
and slot machine handle increased $15.4 million (3.4%) and $65.5 million (5.2%),
respectively, during the three and nine month periods ended September 30, 1999
compared to the same periods of 1998. Slot machine handle increased by $13.8
million (3.2%) and $61.6 million (5.2%), respectively, during the third quarter
and first nine months of 1999 compared to the prior year periods. Table game
drop increased by $1.6 million (8%) and $3.9 million (6.6%), respectively,
during the 1999 periods compared to the 1998 periods. Management believes such
increases are attributable to the implementation of a new, more aggressive
marketing campaign designed to reposition the Tunica Casino within the Tunica
gaming market. Such marketing efforts have been supplemented with increased use
of the Tunica Casino's jointly operated golf course and the addition of
headliner entertainment to attract higher value patrons. Improvement in slot
machine handle has also resulted from a significant increase in the number of
slot machines available and to management's program of updating machines to
enhance the patrons' gaming experience. Patron volume declined slightly during
the 1999 periods compared to the same periods in 1998 indicating that the Tunica
Casino has been successful in attracting higher value patrons.
Revenues
Casino revenues increased $854,000 (3.2%) and $5 million (6.9%),
respectively, during the three and nine month periods ended September 30, 1999
compared to the 1998 periods. Table game revenues decreased 23.2% during the
third quarter of 1999 bringing the nine month period increase to only 1.8%. The
increases in table drop discussed above were negated by declines in the table
game hold percentage to 14.6% and 17.4%, respectively, during the 1999 three and
nine month periods from 20.6% and 18.2%, respectively, during the 1998 periods.
The 14.6% table games hold percentage during the third quarter of 1999 was
significantly below historical levels and a full six percentage points below the
prior year's third quarter. Slot machine revenue increased $1.9 million (8.4%)
and $4.9 million (7.9%), respectively, during the third quarter and first nine
months of 1999 compared to the 1998 periods reflecting the increases in gross
wagering discussed above coupled with increases in the slot machine hold
percentages to 5.4% and 5.3%, respectively, in the three and nine month periods
of 1999 from 5.2% in each of the three and nine month periods of 1998. Poker
revenues decreased by 5.7% and 6.9%, respectively, during the three and nine
month periods ended September 30, 1999 compared to the 1998 periods.
Rooms revenue increased $314,000 (12.3%) and $831,000 (11.8%),
respectively, during the three and nine month periods ended September 30, 1999
compared to the same periods in 1998. Hotel occupancy rates declined to 87.9%
in the first nine months of 1999 compared to 91.2% in 1998. Renovations to hotel
rooms and suites together with inclement weather in January 1999 negatively
impacted occupancy rates during the first quarter of 1999. Second and third
quarter occupancy rates declined to an average of 91.5% in 1999 from 95.9% in
1998 due to increased competition for overnight patrons resulting from the
completion and opening of an additional 600 guest rooms early in the second
quarter of 1999. Accordingly, the improvement in room revenues resulted from an
increase in the average daily room rate to $63 during the first nine months of
1999 from $53 during the 1998 period. Food and beverage and other revenues did
not change significantly during either of the 1999 periods compared to the same
periods in 1998.
Promotional allowances represent the estimated value of goods and services
provided free of charge to casino customers under various marketing programs.
Such allowances, as a percentage of rooms, food and beverage and other revenues,
increased to 73.3% and 71.2%, respectively, during the three and nine
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HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
month periods ended September 30, 1999 from 65.7% and 63.4%, respectively,
during 1998. The increases and are the result of higher complimentary room and
food and beverage costs due to increased marketing efforts and increased
competition for overnight guests.
Departmental Expenses
Casino expenses increased $1 million (5.1%) and $4.5 million (8.2%),
respectively, during the three and nine month periods ended September 30, 1999
compared to the 1998 periods reflecting the implementation of marketing
programs. Rooms expense decreased $112,000 (24.4%) and $398,000 (29.3%),
respectively, during the third quarter and first nine months of 1999 compared to
the prior year periods reflecting the increased allocation to the casino
department of hotel costs associated with marketing programs. Food and beverage
expenses also decreased by $57,000 (5.8%) and $207,000 (6.9%), respectively, for
the periods ended September 30, 1999 compared to the 1998 periods and other
departmental expenses decreased by 17.9% and 17.5%, respectively, during the
three and nine month periods in 1999 all due to increased allocations to the
casino department.
Other Consolidated Items
- ------------------------
General and Administrative
General and administrative expenses increased by $505,000 (11%) and $1
million (7.9%), respectively, during the third quarter and first nine months of
1999 compared to the same periods in 1998. Such expenses at the Aurora Casino
(net of management fees) decreased by 15.9% and 7.2%, respectively, for the 1999
three and nine month periods primarily as a result of a reduction in legal and
professional fees. The Tunica Casino experienced increases in general and
administrative expenses (net of consulting fees) of 13.5% and 5.4%,
respectively, for the three and nine month periods ended September 30, 1999
compared to the prior year periods primarily as a result of increases in
personnel costs and professional fees. The remaining corporate general and
administrative expense increases of $596,000 (28.9%) and $1.2 million (19.6%),
respectively, for the 1999 three and nine month periods result from increases in
corporate overhead costs, primarily in legal fees and personnel costs.
Depreciation and Amortization
Depreciation and amortization expense was virtually unchanged during the
third quarter of 1999 compared to the like period in 1998, but reflected a nine
month decrease of $560,000 (4.5%) compared to the 1998 period primarily due to
certain operating equipment at the Aurora and Tunica casinos becoming fully
depreciated. Property additions at the Aurora and Tunica Casinos during the
third quarter of 1999 reversed this trend.
Development Expenses
Development expenses represent costs incurred in connection with HCC's
pursuit of potential gaming opportunities in jurisdictions where gaming has not
been legalized. Such costs decreased by $78,000 (27.7%) during the three month
period ended September 30, 1999 compared to the 1998 period bringing the current
year nine month total in line with the previous year period.
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HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Preopening Costs
Preopening costs are the start up costs associated with the development of
the Shreveport Casino which, in accordance with existing accounting
pronouncements, are required to be expensed as incurred. Such costs include,
among other things, organizational costs, marketing and promotional costs,
hiring and training of new employees and other operating costs incurred prior to
the opening of the project.
Interest
Interest income increased $2.3 million (293.6%) and $2.3 million (106.5%),
respectively, for the three and nine month periods ended September 30, 1999
compared to the same periods of 1998. Both the third quarter and nine month
period increases reflect interest on the unexpended cash proceeds of HCC's debt
issue on May 19, 1999 and Hollywood Casino Shreveport's debt issue on August 10,
1999 (see "Liquidity and Capital Resources - Financing Activities").
Interest expense increased by $5.4 million (68.8%) and $6.9 million
(30.5%), respectively, during the three and nine month periods ended September
30, 1999 compared to the prior year periods due to the increase in HCC's long-
term indebtedness from the May 1999 issuance of the Senior Secured Notes and the
August 1999 issuance of $150 million of 13% First Mortgage Notes with respect to
the Shreveport Casino. Although the issuance of the Senior Secured Notes
increased HCC's indebtedness from a face value of $204.7 million to $360
million, the effective interest rate fell from 13.75% to 11.27%. As indicated
on the accompanying consolidated financial statements, a portion of the interest
associated with the Shreveport Casino borrowing is being capitalized during the
construction period ($256,000 during the three and nine month periods ended
September 30, 1999). The interest rate on $50 million of the Senior Secured
Notes is equal to the six-month LIBOR rate plus 6.28% and is reset semiannually.
On November 1, 1999, the interest rate on such notes increased to 12.41% from
11.36%, effectively increasing the Company's annual interest expense by
$525,000.
Income Taxes
Management believes that it is more likely than not that future
consolidated taxable income of HCC (primarily from the Aurora Casino and the
Tunica Casino) will be sufficient to utilize at least a portion of the NOL's,
tax credits and other deferred tax assets resulting from temporary differences.
Accordingly, under the provisions of Statement of Financial Accounting Standards
No. 109, "Accounting for Income Taxes", the consolidated balance sheet reflects
a net deferred tax asset of $1.8 million as of September 30, 1999 (see also
"Liquidity and Capital Resources - Operating Activities").
Sales by HCC or existing stockholders of common stock, or securities
convertible into common stock, can cause a "change of control", as defined in
Section 382 of the Internal Revenue Code of 1986, as amended, which would limit
the ability of HCC or its subsidiaries to utilize these loss carryforwards in
later tax periods. Should such a change of control occur, the amount of loss
carryforwards available for use in any one year would most likely be
substantially reduced. Future treasury regulations, administrative rulings or
court decisions may also effect HCC's future utilization of its loss
carryforwards.
Minority Interest in Earnings of Limited Partnership
The minority interest in the earnings of the limited partnership which held
the management contract for the Aurora Casino increased by $514,000 (27.5%) and
$972,000 (21.6%), respectively, during the three and nine month periods ended
September 30, 1999 compared to the same periods in 1998. The
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HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
increases result primarily from increases in the management fees paid by the
Aurora Casino to the limited partnership as a result of improved operating
revenues and profits on which such fees are based, coupled with a slight decline
in the limited partnership's operating expenses during the 1999 periods. As a
result of the acquisition and termination of the management contract during
October 1999, such minority interest will no longer be incurred (see "Liquidity
and Capital Resources - Pratt Casino Corporation Acquisition" below).
Extraordinary Item
During May 1999, HCC completed the refinancing of its 12.75% Senior Secured
Notes. The extraordinary loss from early retirement of debt includes the
premium paid and redemption fees associated with the debt retired together with
the write off of related unamortized financing costs.
Year 2000 Compliance
In the year 2000, computer programs that have date sensitive software may
recognize a date using "00" as the year 1900 rather than 2000. Such an error
could result in a system failure or miscalculations causing disruptions of
operations including, among other things, a temporary inability to process
transactions or engage in similar normal business activities.
Management has initiated a program to prepare the Company's computer
systems and applications as well as its non-information technology (embedded
microchip) systems for the Year 2000. The initial stage of the program
consisted of identifying those systems which might be at risk. All identified
systems were categorized as (1) those necessary for regulatory compliance
purposes, (2) essential systems and (3) non-essential systems. Within the
essential systems group, an additional rating factor of one to five was assigned
to each system with a factor of one indicating the greatest significance.
Readiness of information technology and non-information technology systems for
the Year 2000 has been investigated or has been determined by means of vendor
certification or internal testing. System readiness for the Year 2000 is
substantially complete with the essential and regulatory systems having been
completed during the second quarter of 1999. The two major information
technology systems identified as not Year 2000-compliant have been replaced.
Management expects the total costs of acquiring, testing and converting such
systems will be less than $1 million. The majority of these costs have been
included in capital expenditures during 1999 (see "Liquidity and Capital
Resources - Capital Expenditures and Other Investing Activities" below).
The Company has also initiated formal communication with its significant
suppliers to determine the extent to which its operating and information systems
are vulnerable to those third parties' failure to resolve their Year 2000
compliance issues. Determination of the Company's exposure with respect to
third-party supplied systems has been completed and additional procedures have
been taken to remediate potential vulnerabilities.
Contingency plans are also being developed by management with respect to
internally developed systems not fully tested prior to the Year 2000.
Accordingly, the Company does not anticipate any internal systems failures will
have a material impact on its operations or financial condition. The Company
will continue its efforts to ensure that major third party vendors as well as
public and private providers of infrastructure services such as utilities and
communication services will be Year 2000 compliant. The failure of such
infrastructure services could result in a "worst case" scenario in which
operations relying on such services such as mechanical gaming devices would be
temporarily disrupted. The Company can not presently estimate either the
likelihood or the potential cost of such failures.
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HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
While there can be no assurance that the Company and its suppliers and
customers will fully resolve their Year 2000 compliance issues, neither the
estimated costs nor the outcome of the Year 2000 problem is expected to have a
material impact on the Company's operations, liquidity or financial position.
Inflation
Management believes that in the near term, modest inflation, together with
increased competition within the gaming industry for qualified and experienced
personnel, will continue to cause increases in operating expenses, particularly
labor and employee benefits costs.
Seasonality and Other Fluctuations
Historically, the Aurora Casino's operations have experienced some
seasonality due to severe winter weather. Consequently, the results of HCC's
operations for the first and fourth quarters have traditionally been less
profitable than the other quarters of the fiscal year. Furthermore, management
believes that seasonality may also cause fluctuations in reported results at the
Tunica Casino. In addition, the operations of the Aurora Casino and the Tunica
Casino may fluctuate significantly due to a number of factors, including chance.
Such seasonality and fluctuations may materially affect HCC's casino revenues
and overall profitability.
LIQUIDITY AND CAPITAL RESOURCES
Operating Activities
The operations of the Aurora Casino and Tunica Casino continue to be HCC's
primary sources of liquidity and capital resources. The Aurora Casino
contributed approximately $30.9 million of cash flow from operations during the
first nine months of 1999 after deducting the payment of $7.3 million of
management fees. The Tunica Casino provided $8.4 million of cash from
operations during the first nine months of 1999 after deducting the payment of
$900,000 of consulting fees to GBCC. HCC's other sources of funds include
interest income earned on temporary investments ($2.5 million). In addition to
operating expenses at the Aurora Casino and the Tunica Casino, uses of operating
cash by HCC during the first nine months of 1999 included preopening costs with
respect to the Shreveport Casino ($285,000), costs to pursue development
opportunities ($688,000) and corporate overhead costs ($1.2 million).
During the first nine months of 1999, consolidated cash flow provided by
operations ($40.4 million), from the sale of assets ($3.9 million) and from
equipment financing ($2 million) were used, in part, by HCC to fund capital
expenditures, exclusive of Shreveport Casino project costs, of $8.5 million, to
repay third party indebtedness (other than HCC's 12.75% Senior Secured Notes) of
$2 million, to make payments under capital lease obligations of $421,000 and to
pay distributions amounting to $5.2 million to PCC as limited partner in PML.
As a result of the acquisition of Pratt Casino Corporation discussed below,
distributions to PCC were discontinued during October 1999. Shreveport Casino
project costs have, for the most part, been funded with proceeds from borrowings
(see "Liquidity and Capital Resources - Capital Expenditures and Other Investing
Activities").
The Internal Revenue Service is currently examining the consolidated
Federal income tax returns of HCC for the years 1993 through 1996. Such
examination for 1993 and 1994 has been completed for HCC, except with respect to
HCT. Based on the findings to date and preliminary discussions regarding HCT,
HCC's net operating loss carryforwards could be significantly reduced, which
might result in
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HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
additional alternative minimum tax or regular tax obligations. Due to the
inclusion of GBCC and its subsidiaries in such consolidated returns, an as yet
undetermined portion of any resulting tax liability may be recoverable from
GBCC. As a result, management is presently unable to estimate the ultimate
impact of the examination on the consolidated financial position or results of
operations of HCC and is continuing to review the preliminary findings with the
assistance of its tax advisors. The Internal Revenue Service is continuing its
examination of the consolidated Federal income tax returns of HCC for 1995 and
1996. Management believes that it will have adequate capital resources to meet
the additional tax payments, if any, resulting from such examinations.
Pratt Casino Corporation Acquisition
On April 28, 1999, the Company entered into a voting agreement with GBCC
and certain of its wholly owned subsidiaries, including PRT Funding and PCC, and
the holders of substantially all of the $85 million of senior notes issued by
PRT Funding which were in default. The PRT Funding Notes were guaranteed by
PCC. Under the terms of the agreement, the Company was to purchase the stock of
PCC from GBCC for nominal consideration and fund the payment of PCC's
obligations as part of a debt restructuring of PRT Funding, PCC and other
subsidiaries of PCC. When acquired by HCC, PCC's assets were to consist of its
limited partnership interest in PML and its consulting agreement with the Tunica
Casino and its liabilities were to consist of a new $40.3 million obligation
payable in satisfaction of the PRT Funding Notes. The funds necessary to
satisfy such obligation were obtained as part of the May 1999 refinancing and
were placed in escrow for such purpose.
In order to complete the Restructuring, PCC and PRT Funding filed for
protection under Chapter 11 of the United States Bankruptcy Code on May 25, 1999
with the above transactions included as part of a pre-negotiated plan of
reorganization. The plan of reorganization was confirmed by the bankruptcy
court in October 1999. At such time, HCC completed its acquisition of PCC and
settled PCC's obligations. The acquisition and subsequent termination of the
management contract and consulting agreement will result in a fourth quarter
charge to expense by HCC of approximately $40 million as no asset value will be
attributed to such contracts when acquired.
The acquisition of PCC and subsequent termination of the contracts
effective October 13, 1999 will eliminate both the minority interest in PML and
the Tunica consulting fee paid to a GBCC subsidiary. The minority interest and
consulting fee expense totaled $6.4 million for the nine month period ended
September 30, 1999 and $7.7 million for the year ended December 31, 1998.
Financing Activities
During May 1999, HCC completed the refinancing of its outstanding 12.75%
Senior Secured Notes through a private debt offering of $310 million of 11.25%
Senior Secured Notes due May 1, 2007 and $50 million of floating rate Senior
Secured Notes due May 1, 2006 (collectively, the "Senior Secured Notes").
Interest on the floating rate notes is equal to the six-month LIBOR rate plus
6.28% and is reset semiannually. Effective November 1, 1999, the interest rate
increased to 12.41% from an initial rate of 11.36% per annum. In addition to
refinancing existing debt, the Company used proceeds from the debt offering to
fund a portion of the Company's equity investment in the Shreveport Casino and,
during October 1999, to acquire the management and consulting contracts on the
Aurora and Tunica casinos. The Company also plans to use proceeds from the
debt offering to finance construction of a new, dockside gaming facility at the
Aurora Casino (see "Liquidity and Capital Resources - Capital Expenditures and
Other Investing Activities"), and, to the extent available, for working capital
purposes. Interest on the Senior Secured Notes is payable semiannually on May 1
and November 1 commencing on November 1,
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HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
1999. The Senior Secured Notes are unconditionally guaranteed on a senior
secured basis by HCT and HCS and may be guaranteed by certain future
subsidiaries of HCC. Neither HCA nor HCL are guarantors. The Senior Secured
Notes and related guarantees are secured by, among other things, (i)
substantially all of the assets of HCT and future guarantors, (ii) a lien not to
exceed approximately $108 million on substantially all of the assets of HCA,
(iii) a pledge of the capital stock of certain subsidiaries of HCC and (iv) the
collateral assignment of the management contract for the Shreveport Casino.
The fixed rate Senior Secured notes are redeemable at the option of HCC any
time on or after May 1, 2003 at 107% of the then outstanding principal amount,
decreasing to 104.666%, 102.333% and 100%, respectively, on May 1, 2004, 2005
and 2006. The Company may also redeem up to 35% of the fixed rate Senior
Secured Notes at a redemption price of 111.25% plus accrued interest at any time
prior to May 1, 2002 with the proceeds from an offering of the HCC's common
stock if net proceeds to the Company from any such offering are at least $20
million.
The floating rate Senior Secured Notes may be redeemed at the option of HCC
at any time at an initial redemption price of 105% plus accrued interest with
the redemption premium decreasing by 1% on May 1 of each year beginning May 1,
2000.
The indenture to the Senior Secured Notes contains various provisions
limiting the ability of HCC and certain defined subsidiaries to, among other
things, pay dividends or make other restricted payments; incur additional
indebtedness or issue preferred stock, create liens, create dividend or other
payment restrictions affecting certain defined subsidiaries; enter into mergers
or consolidations or make sales of all or substantially all assets of HCC, HCT,
HCS or any future guarantor; or enter into certain transactions with affiliates.
On August 10, 1999 the Shreveport Partnership issued $150 million of 13%
First Mortgage Notes due 2006 with contingent interest, the net proceeds of
which, together with capital contributions from HCL and $30 million of
furniture, fixture and equipment financing for which a commitment has been
obtained, will provide the approximately $230 million of funds necessary to
build, equip and open the Shreveport Casino (see "Liquidity and Capital
Resources - Capital Expenditures and Other Investing Activities"). The
Shreveport First Mortgage Notes are non-recourse to HCC. Fixed interest on the
Shreveport First Mortgage Notes is payable semiannually on February 1 and August
1 of each year commencing on February 1, 2000. In addition, contingent interest
will be payable on each interest payment date after the opening of the
Shreveport Casino. The amount of the contingent interest will be equal to 5% of
the Shreveport Casino's cash flow, as defined, for the prior two fiscal quarters
up to a maximum of $5 million for any four consecutive fiscal quarters. The
notes are collateralized by a first priority security interest in substantially
all of the Shreveport Partnership's existing and future assets other than
furniture, fixtures and equipment for which up to $35 million of financing has
been or will be obtained as well as by a pledge of the common stock of the HCC
subsidiaries which hold the partnership interests.
The Shreveport First Mortgage Notes are redeemable at the option of the
Shreveport Partnership any time on or after August 1, 2003 at 106.5% of the then
outstanding principal amount, decreasing to 103.25% on August 1, 2004 and 100%
on or after August 1, 2005. Up to 35% of the original aggregate amount of the
Shreveport First Mortgage Notes may also be redeemed at any time or prior to
August 1, 2002 with proceeds of contributions to the Shreveport Partnership made
by HCC from certain offerings of equity securities by HCC.
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HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
The indenture to the Shreveport First Mortgage Notes contains various
provisions limiting the ability of the Shreveport Partnership to borrow money,
pay dividends, make investments, pledge or sell its assets or enter into mergers
or consolidations. The indenture also limits the ability of certain HCC
subsidiaries which guarantee the debt to acquire additional assets, become
liable for additional obligations or engage in any business activities other
than holding the partnership interests or acting as managing general partner of
the Shreveport Partnership.
During September 1998, HCA entered into a bank loan agreement to borrow up
to $2 million on an unsecured basis. Borrowings under the agreement are payable
in 36 monthly installments including interest at the rate of 7.5% per annum.
HCA borrowed $2 million under the agreement during October 1998. During May
1999, HCA borrowed an additional $750,000 from the bank on an unsecured basis to
be repaid over 60 months. Interest on such loan is at 7.5% per annum.
HCT had a $1.3 million bank credit facility available to borrow against
through September 30, 1998. Outstanding borrowings on the line of credit
($323,000 at September 30, 1999) are being repaid in monthly installments over
36 months and accrue interest at the rate of 8.875% per annum.
Prior to October 14, 1999, HCC was the general partner in the limited
partnership which held the Aurora management agreement, having acquired such
interest in April 1997. HCC's original acquisition price for the general
partnership interest included a note in the amount of $3.8 million and the
assignment of $13.8 million undiscounted principal amount of PPI Funding Notes
and $350,000 accrued interest due from GBCC to PPI Corporation. Annual
principal and interest payments by HCC on the $3.8 million note approximated the
general partner's share of partnership distributions which were made to HCC
prior to the liquidation of the general partnership in October 1999. Effective
November 1, 1999, HCC will continue to make monthly payments of principal and
interest totalling $83,000 with additional quarterly principal payments of
$21,000 beginning in January 2000 which together will approximate HCC's payment
obligations while the management contract was in effect.
As of September 30, 1999, HCC's scheduled maturities of long-term debt and
payments under capital leases during the remainder of 1999 are approximately
$760,000 and $1 million, respectively.
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HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Capital Expenditures and Other Investing Activities
Aurora Casino -
Capital expenditures at the Aurora Casino during the first nine months of
1999 were $2.9 million; management anticipates spending $1.7 million during the
remainder of 1999 toward its ongoing capital improvements program. Significant
projects planned for 1999 include new slot machines and casino equipment new
telephone and point-of-sale systems and the renovation of a restaurant facility.
In addition, the Company is currently finalizing plans to replace the Aurora
Casino's two riverboats with a newly constructed, permanently moored dockside
casino. As currently planned, the new facility will significantly increase
passenger capacity and provide a premier gaming and entertainment facility for
the Aurora Casino's patrons. The new facility is projected to cost
approximately $50 million and will require a construction period of 14 months.
Final design plans are subject to the approval of various regulatory authorities
and construction is currently scheduled to commence in the first quarter of
2000. Upon the finalization of plans and the receipt of all required approvals,
the Aurora Casino will write down the net book value of its existing riverboats
(approximately $31.4 million at September 30, 1999) to an amount representing
their fair market value based on the estimated remaining 14-month economic life.
The resulting value will then be amortized over the construction period prior to
the boats being removed from service. Management currently anticipates, that
such write down to fair market value could exceed $26 million. Approximately
$40 million of the estimated $50 million in project costs for the proposed
dockside facility were obtained from HCC's debt offering completed in May 1999
with the remainder to come from operating cash flow.
A complaint was recently filed in an Illinois state court concerning the
constitutionality of a portion of the legislation that enabled dockside gaming
in Illinois. Although the constitutional challenge centers on the relocation of
one of the existing gaming licenses, a finding that such portion of the
legislation is unconstitutional could result in a finding that all or a portion
of such legislation, including the legality of dockside gaming, is invalid.
Pending the resolution of this litigation, the Company's planned expansion of
the Aurora Casino could be delayed. If the state court rules that all or a
portion of the legislation is invalid, management believes that it may be able
to continue to operate its existing riverboats on a dockside basis pending a
final resolution of the litigation. If the provisions in question are found to
be unconstitutional after all appeals, and the entire legislation is invalidated
and it appears that the Illinois legislature will not pass new legislation
enabling dockside gaming, then the Company will likely modify its expansion
plans for the Aurora Casino. Under this scenario, the Company would proceed
with the development of a new, large riverboat to replace the smaller of its two
existing riverboats rather than build a permanently moored dockside casino to
replace its riverboats.
Tunica Casino -
Capital expenditures at the Tunica Casino during the first nine months of
1999 amounted to $5.4 million; management anticipates spending $1.6 million
during the remainder of 1999. Such expenditures are part of a two-year capital
improvement plan which include the upgrading of hotel accommodations and public
areas, the replacement of certain slot machines and the development of a new VIP
check-in and private entertainment lounge to enhance the level of service
provided to premium gaming patrons. Projects completed in 1998 as part of the
two year plan included upgrades to hotel rooms, the completion of an 18-hole
championship golf course and the expansion of the recreational vehicle parking
area.
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HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
HCT entered into an agreement with two other casino operators during 1996
providing for the joint construction and ownership of a golf course.
Contributions by HCT to the limited liability corporation formed to develop and
operate the golf course have totalled approximately $2.1 million.
Shreveport Casino -
In September 1998, the Shreveport Partnership received approval to develop,
own and operate a Hollywood-themed hotel and casino complex on the Red River in
Shreveport, Louisiana. HCL originally planned to develop the Shreveport Casino
with two partners in a joint venture in which HCA would have had an interest of
approximately 50%. On March 31, 1999, HCL entered into a definitive agreement
with one of the joint venture partners to acquire their interest in the
Shreveport Partnership for $2.5 million (the amount the joint venture partner
contributed to the project), $1,000 of which was paid at closing with the
remainder to be paid six months after the opening of the Shreveport Casino. The
revised structure of the joint venture received approval by the Louisiana Gaming
Control Board on April 20, 1999. As a result, effective as of April 23, 1999,
HCL now has an effective 100% operating interest in the Shreveport Casino with
the remaining joint venture partner holding a 10% residual interest in the event
the project is sold.
The total estimated cost of the Shreveport Casino is approximately $230
million of which approximately $19.8 million has been spent as of September 30,
1999. HCL has contributed approximately $49 million as an equity investment in
the project with the other joint venture partner having contributed $1 million
to the project with the proceeds of a loan from HCL. The loan accrues interest
at the rate of prime commencing with the opening of the Shreveport Casino and
will be payable monthly. Principle on the loan is payable on the tenth
anniversary of the opening of the Shreveport Casino. The joint venture partner
was also given credit for an additional $1 million capital contribution upon the
closing of the Shreveport First Mortgage Notes and payment of the $5 million
obligation to the Shreveport Partnership's former partner as discussed below.
The credit was in recognition of guarantees provided by an affiliate of the
partner which were necessary for the Shreveport Partnership to obtain approval
of its license. The $2 million equity interest of the partner is reflected as
minority interest in the consolidated financial statements of HCC.
The remaining construction and preopening costs, estimated at $180 million,
have been provided from $150 million of project specific financing issued on
August 10, 1999 which is non-recourse to HCC (see "Liquidity and Capital
Resources - Financing Activities") with the remainder to be provided by a $30
million furniture, fixture and equipment financing for which a commitment letter
has been obtained. In addition, HCC has agreed to contribute up to an additional
$5 million in equity to the Shreveport Casino under certain circumstances which
include cost overruns or delays. Construction of the Shreveport Casino began in
August 1999 with a planned opening date approximately 14 months later.
The former partners of the Shreveport Partnership's predecessor conducted
riverboat gaming operations in New Orleans. In connection with the change in
site to Shreveport, the former partners entered into a Compromise Agreement with
the City of New Orleans under which the city would be paid a fee of $10
million. One of the former partners paid $5 million of the amount to the City
of New Orleans. The current partners agreed that the Shreveport Casino would
pay the remaining $5 million upon securing financing for its construction; such
payment was made in August 1999. In addition, the current partners agreed that
the Shreveport Casino would reimburse the former partner $2 million of the
amount it paid to the city; such repayment is to be paid upon the earlier of the
termination of construction of the Shreveport Casino or in monthly installments
of $200,000 commencing with the opening of the Shreveport Casino.
69
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HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Other -
HCC continues to pursue several additional potential gaming opportunities.
HCC intends to finance any future ventures with cash flow from operations,
together with third party financing, including non-recourse project financing.
Conclusion
Management anticipates that HCC's funding requirements for its operating
activities for the next twelve months will be satisfied by existing cash and
cash generated by the Aurora and Tunica casinos. Proceeds from the debt offering
completed by HCC in May 1999 have been used to fund a portion of HCC's equity
investment in the Shreveport Casino and for the acquisition of the management
and consulting agreements for the Aurora and Tunica casinos. The remaining
proceeds are expected to be used for the planned expansion of the Aurora Casino.
Construction financing for the planned Shreveport Casino has been provided from
the August 1999 issuance of project specific, non-recourse financing together
with capital contributions and equipment financing.
70
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PART II: OTHER INFORMATION
- ---------------------------
Item 6.(a) - Exhibits
*3.1 - Third Amended and Restated Joint Venture Agreement of Hollywood Casino
Shreveport by and among Shreveport Paddlewheels, L.L.C., HCS I, Inc.
and HCS II, Inc., dated as of July 21, 1999. (Exhibit 3.1)
*3.2 - August 1999 Amendment to Third Amended and Restated Joint Venture
Agreement between Shreveport Paddlewheels, L.L.C., HCS I, Inc. and HCS
II, Inc. (Exhibit 3.2)
*4.1 - Indenture among HCC as Issuer, and HWCC-Shreveport, Inc. and HCT as
Guarantors, and State Street Bank and Trust Company, as Trustee, dated
as of May 19, 1999. (Exhibit 4.1)
*4.2 - Security Agreement made by HCC, as Debtor, to State Street Bank and
Trust Company, as Trustee and Secured Party, dated as of May 19, 1999.
(Exhibit 4.2)
*4.3 - Stock Pledge Agreement made by HCC, as Pledgor, in favor of State
Street Bank and Trust Company, as Trustee and Secured Party, dated as
of May 19, 1999. (Exhibit 4.3)
*4.4 - Trademark Security Agreement made by HCC, as Grantor, to State Street
Bank and Trust Company, as Trustee and Secured Party, dated as of May
19, 1999. (Exhibit 4.4)
*4.5 - Escrow and Control Agreement by and among HCC and State Street Bank and
Trust Company, as Trustee and Escrow Agent, dated as of May 19, 1999.
(Exhibit 4.5)
*4.6 - Control Agreement dated as of May 19, 1999 by and among HCC and State
Street Bank and Trust Company, as Trustee. (Exhibit 4.6)
*4.7 - Security Agreement made by HCT, as Debtor, to State Street Bank and
Trust Company, as Trustee and Secured Party, dated as of May 19, 1999.
(Exhibit 4.7)
*4.8 - First Leasehold Deed of Trust, Security Agreement, Assignment of Leases
and Rents, Fixture Filing, and Financing Statement made by HCT in favor
of Phillip A. Poitevin, as Trustee for the benefit of State Street Bank
and Trust Company, as Indenture Trustee, dated as of May 19, 1999.
(Exhibit 4.8)
*4.9 - First Preferred Ship Mortgage made and given by HCT, as Mortgagor, in
favor of State Street Bank and Trust Company, as Trustee and Mortgagee
(relating to Vessel No. 534006), dated as of May 19, 1999. (Exhibit
4.9)
*4.10 - Intercompany Security Agreement made by HCT, as Debtor, to HCC, as
Secured Party, and collaterally assigned to State Street Bank and Trust
Company, as Trustee, dated as of May 19, 1999. (Exhibit 4.11)
*4.11 - Second Leasehold Deed of Trust, Security Agreement, Fixture Filing, and
Financing Statement from HCT, as Grantor, in favor of Jim B. Tobhill,
Trustee, for the benefit of HCC, dated as of May 19, 1999. (Exhibit
4.12)
*4.12 - Collateral Assignment of Second Leasehold Deed of Trust, Security
Agreement, Assignment of Leases and Rents, Fixture Filing and Financing
Statement made by HCC, as Mortgagee and Assignor, in favor of State
Street Bank and Trust Company, as Trustee and Assignee, dated as of May
19, 1999. (Exhibit 4.13)
71
<PAGE>
*4.13 - Assignment of Second Preferred Fleet Mortgage by HCC, as Mortgagee and
Assignor (relating to Vessel No. 534006) in favor of State Street Bank
and Trust Company, as Trustee and Assignee, dated as of May 19, 1999.
(Exhibit 4.15)
*4.14 - Intercompany Security Agreement dated as of May 19, 1999 made by HCA,
as Debtor, to HCC, as Secured Party, and collaterally assigned to State
Street Bank and Trust Company, as Trustee. (Exhibit 4.17)
*4.15 - Collateral Assignment of Mortgage, Leasehold Mortgage, Security
Agreement, Assignment of Leases and Rents, Fixture Filing and Financing
Statement made by HCC, as Mortgagee and Assignor, in favor of State
Street Bank and Trust Company, as Trustee and Assignee, dated as of May
19, 1999. (Exhibit 4.19)
*4.16 - Assignment of First Preferred Fleet Mortgage by HCC, as Mortgagee and
Assignor (relating to Vessel Nos. 993836, 993837 and 1029229) in favor
of State Street Bank and Trust Company, as Trustee and Assignee, dated
as of May 19, 1999. (Exhibit 4.21)
*4.17 - Security Agreement made by HWCC-Shreveport, Inc. as Debtor, to State
Street Bank and Trust Company, as Trustee and Secured Party, dated as
of May 19, 1999. (Exhibit 4.22)
+4.18 - Indenture among Hollywood Casino Shreveport and Shreveport Capital
Corporation ("SCC") as Co-Issuers, and HWCC-Louisiana, Inc. ("HCL"),
HCS I, Inc. and HCS II, Inc., as Guarantors, and State Street Bank and
Trust Company, as Trustee, dated as of August 10, 1999. (Exhibit 4.1)
+4.19 - Registration Rights Agreement, dated as of August 10, 1999, by and
among Hollywood Casino Shreveport, SCC, the Guarantors named therein
and the Initial Purchasers. (Exhibit 4.2)
+4.20 - Collateral Assignment of Contracts and Documents dated August 10, 1999
between Hollywood Casino Shreveport and State Street Bank and Trust
Company, as Trustee. (Exhibit 4.3)
+4.21 - Security Agreement dated August 10, 1999 between Hollywood Casino
Shreveport and State Street Bank and Trust Company, as Trustee.
(Exhibit 4.4)
+4.22 - Partnership Interest Pledge Agreement dated August 10, 1999 made by HCS
I, Inc. in favor of State Street Bank and Trust Company, as Trustee and
Secured Party. (Exhibit 4.5)
+4.23 - Cash Collateral and Disbursement Agreement dated August 10, 1999
between Hollywood Casino Shreveport, SCC, First American Title
Insurance Company, as Disbursement Agent and State Street Bank and
Trust Company, as Trustee. (Exhibit 4.6)
+4.24 - Stock Pledge Agreement dated August 10, 1999 made by HCL in favor of
State Street Bank and Trust Company, as Trustee. (Exhibit 4.7)
+4.25 - Security Agreement dated August 10, 1999 made by SCC, HCL, HCS I, Inc.
and HCS II, Inc. to State Street Bank and Trust Company, as Trustee and
Secured Party. (Exhibit 4.8)
+4.26 - Security Agreement - Vessel Construction dated August 10, 1999 between
Hollywood Casino Shreveport and State Street Bank and Trust Company, as
Trustee. (Exhibit 4.9)
+4.27 - Mortgage, Leasehold Mortgage and Assignment of Leases and Rents made by
Hollywood Casino Shreveport in favor of State Street Bank and Trust
Company, as Mortgagee, dated August 10, 1999. (Exhibit 4.10)
+4.28 - Partnership Interest Pledge Agreement dated August 10, 1999 made by HCS
II, Inc. in favor of
72
<PAGE>
State Street Bank and Trust Company, as Trustee and Secured Party.
(Exhibit 4.11)
+4.29 - First Amendment to Security Agreement dated August 10, 1999 between
HWCC-Shreveport, Inc. and State Street Bank and Trust Company, as
Trustee. (Exhibit 4.12)
+10.1 - Amended and Restated Federal Income Tax Sharing Agreement dated August
10, 1999 by and among HCC, HWCC Development Corporation, Hollywood
Management, Inc., HCT, Golf, HCA, HWCC-Shreveport, Inc., HWCC-
Argentina, Inc., HCL, HWCC Holdings, Inc., HWCC-Aurora Management,
Inc., HWCC-Transportation, Inc., HCS I, Inc. and HCS II, Inc. (Exhibit
10.16)
++10.2 - Completion Capital Agreement, dated as of August 10, 1999, by and among
Hollywood Casino Shreveport, HCL, HCS I, Inc., HCS II, Inc. and HCC.
(Exhibit 10.2)
++10.3 - Manager Subordination Agreement, dated as of August 10, 1999, by and
among State Street Bank and Trust Company, as Trustee, HWCC-Shreveport,
Inc. and Hollywood Casino Shreveport. (Exhibit 10.3)
+10.4 - Technical Services Agreement, dated as of September 22, 1998, by and
between QNOV and HWCC-Shreveport, Inc. (Exhibit 10.4)
+10.5 - Vessel Construction Contract, dated July 16, 1999, by and between
Leevac Shipyards, Inc. and Hollywood Casino Shreveport. (Exhibit 10.5)
+10.6 - Employment Agreement, dated August 4, 1999, by and between HWCC
Development Corporation and Juris Basens. (Exhibit 10.6)
+10.7 - Compromise Agreement, dated September 15, 1998, by and among Hilton New
Orleans Corporation, New Orleans Paddlewheels, Inc., Queen of New
Orleans at the Hilton Joint Venture and the City of New Orleans.
(Exhibit 10.7)
+10.8 - Loan and Settlement Agreement, dated January 16, 1998, by and among New
Orleans Paddlewheels, Inc., Shreveport Paddlewheels, L.L.C., HCL, Sodak
Louisiana L.L.C. and Hilton New Orleans Corporation. (Exhibit 10.11)
+10.9 - Retail Space Lease, executed as of June 3, 1999 by and between QNOV and
Red River Entertainment Company, L.L.C. (Exhibit 10.12)
+10.10 - Ground Lease, dated May 19, 1999, by and between the City of
Shreveport, Louisiana and QNOV. (Exhibit 10.13)
+10.11 - Marine Services Agreement dated September 22, 1998 between QNOV and
Shreveport Paddlewheels, L.L.C. (Exhibit 10.17)
+10.12 - Side Agreement dated January 16, 1998 between Queen of New Orleans at
the Hilton Joint Venture, HCL, and Sodak, L.L.C. (Exhibit 10.18)
+10.13 - Loan Agreement dated August 10, 1999 between Shreveport Paddlewheels,
L.L.C. and HCL. (Exhibit 10.19)
+10.14 - Promissory note dated August 10, 1999 in the original principal amount
of $1,000,000 made by Shreveport Paddlewheels, L.L.C., as Borrower to
HCL, as Lender. (Exhibit 10.20)
+10.15 - Security Agreement dated August 10, 1999 made by Shreveport
Paddlehwheels, L.L.C., as Debtor, in favor of HCL, as Secured Party.
(Exhibit 10.21)
73
<PAGE>
+10.16 - Guaranty Agreement dated August 10, 1999 made by New Orleans
Paddlewheels, L.L.C. in favor of HCL. (Exhibit 10.22)
+10.17 - Contribution and Assumption Agreement dated July 21, 1999 among HCL,
HCS I, Inc., HCS II, Inc. and Shreveport Paddlewheels, L.L.C. (Exhibit
10.24)
- ---------------------------------
* Incorporated by reference to the exhibit shown in parenthesis included
in Form S-4 Registration Statement of Hollywood Casino Corporation as
filed with the SEC on July 16, 1999.
+ Incorporated by reference to the exhibit shown in parenthesis included
in Form S-4 Registration Statement of Hollywood Casino Shreveport and
Shreveport Capital Corporation as filed with the SEC on October 8, 1999.
++ Incorporated by reference to the exhibit shown in parenthesis included
in Form S-4 Registration Statement of Hollywood Casino Corporation as
filed with the SEC on August 13, 1999.
Item 6.(b) - Reports on Form 8-K
The Registrants filed a report on Form 8-K on October 22, 1999 to announce
the acquisition of management and consulting contracts.
74
<PAGE>
SIGNATURES
- ----------
Pursuant to the requirements of the Securities Exchange Act of 1934, each of
the Registrants has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HOLLYWOOD CASINO CORPORATION
Date: November 12, 1999 By: /s/ Charles F. LaFrano III
------------------- ----------------------------
Charles F. LaFrano III
Vice President of Finance and
Principal Accounting Officer
HWCC - TUNICA, INC.
Date: November 12, 1999 By: /s/ Charles F. LaFranco III
------------------- -----------------------------
Charles F. LaFrano III
Principal Accounting Officer
75
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF HOLLYWOOD CASINO CORPORATION AND
SUBSIDIARIES AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<CIK> 0000888245
<NAME> HOLLYWOOD CASINO CORPORATION
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1999
<PERIOD-START> JUL-01-1999 JAN-01-1999
<PERIOD-END> SEP-30-1999 SEP-30-1999
<CASH> 141,634 141,634
<SECURITIES> 0 0
<RECEIVABLES> 5,510 5,510
<ALLOWANCES> 1,926 1,926
<INVENTORY> 1,403 1,403
<CURRENT-ASSETS> 201,024 201,024
<PP&E> 276,956 276,956
<DEPRECIATION> 90,301 90,301
<TOTAL-ASSETS> 580,494 580,494
<CURRENT-LIABILITIES> 53,007 53,007
<BONDS> 535,474 535,474
0 0
0 0
<COMMON> 2 2
<OTHER-SE> (19,189) (19,189)
<TOTAL-LIABILITY-AND-EQUITY> 535,474 535,474
<SALES> 0 0
<TOTAL-REVENUES> 82,948 228,872
<CGS> 0 0
<TOTAL-COSTS> 58,586 164,581
<OTHER-EXPENSES> 12,298 33,786
<LOSS-PROVISION> 333 657
<INTEREST-EXPENSE> 10,055 25,066
<INCOME-PRETAX> 1,676 4,782
<INCOME-TAX> 574 1,128
<INCOME-CONTINUING> 1,102 3,654
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 (30,353)
<CHANGES> 0 0
<NET-INCOME> 1,102 (26,699)
<EPS-BASIC> .05 (1.07)
<EPS-DILUTED> .04 (1.06)
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<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF HWCC-TUNICA, INC. AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000927801
<NAME> HWCC-TUNICA INC.
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1999
<PERIOD-START> JUL-01-1999 JAN-01-1999
<PERIOD-END> SEP-30-1999 SEP-30-1999
<CASH> 16,520 16,520
<SECURITIES> 0 0
<RECEIVABLES> 3,416 3,416
<ALLOWANCES> 1,051 1,051
<INVENTORY> 783 783
<CURRENT-ASSETS> 22,133 22,133
<PP&E> 127,203 127,203
<DEPRECIATION> 43,214 43,214
<TOTAL-ASSETS> 118,153 118,153
<CURRENT-LIABILITIES> 13,406 13,406
<BONDS> 85,549 85,549
0 0
0 0
<COMMON> 0 0
<OTHER-SE> 19,198 19,198
<TOTAL-LIABILITY-AND-EQUITY> 118,153 118,153
<SALES> 0 0
<TOTAL-REVENUES> 29,505 84,167
<CGS> 0 0
<TOTAL-COSTS> 22,667 63,518
<OTHER-EXPENSES> 3,371 10,237
<LOSS-PROVISION> 258 432
<INTEREST-EXPENSE> 2,360 7,506
<INCOME-PRETAX> 849 2,474
<INCOME-TAX> 563 563
<INCOME-CONTINUING> 286 1,911
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 286 1,911
<EPS-BASIC> 0 0
<EPS-DILUTED> 0 0
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