-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NIM+RqkRuMWbyM6UGmZceYrSqR0W6y/CmY4uCfok80NinLigMJexB7R5RqoRVud8 7RuAGb1WcjLjYNVuTi9VMg== 0000930661-97-000745.txt : 19970401 0000930661-97-000745.hdr.sgml : 19970401 ACCESSION NUMBER: 0000930661-97-000745 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: HOLLYWOOD CASINO CORP CENTRAL INDEX KEY: 0000888245 STANDARD INDUSTRIAL CLASSIFICATION: HOTELS & MOTELS [7011] IRS NUMBER: 752352412 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-20275 FILM NUMBER: 97568348 BUSINESS ADDRESS: STREET 1: TWO GALLERIA TOWER STREET 2: 13455 NOEL RD LB 48 CITY: DALLAS STATE: TX ZIP: 75240 BUSINESS PHONE: 2143927777 MAIL ADDRESS: STREET 1: 13455 NOEL ROAD LB48 STREET 2: TWO GALLERIA TOWER SUITE 2200 CITY: DALLAS STATE: TX ZIP: 75240 FORMER COMPANY: FORMER CONFORMED NAME: PRT CORP DATE OF NAME CHANGE: 19600201 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HWCC TUNICA INC CENTRAL INDEX KEY: 0000927801 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MISCELLANEOUS AMUSEMENT & RECREATION [7990] IRS NUMBER: 752513808 STATE OF INCORPORATION: TX FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 033-82182 FILM NUMBER: 97568349 BUSINESS ADDRESS: STREET 1: TWO GALLERIA TOWER - STE 2200 STREET 2: 13455 NOEL RD LB 48 CITY: DALLAS STATE: TX ZIP: 75240 BUSINESS PHONE: 2143927777 MAIL ADDRESS: STREET 1: 13455 NOEL ROAD STREET 2: LB 48 CITY: DALLAS STATE: TX ZIP: 75240 10-K 1 FORM 10-K FORM 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended DECEMBER 31, 1996 ----------------- 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) (Registrant's telephone number, including area code): (972) 392-7777 -------------- Securities registered pursuant to Section 12(b) of the Act: NONE NOT APPLICABLE ---- -------------- Title of each class Name of exchange on which registered Securities registered pursuant to Section 12(g) of the Act: NONE 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 the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO ______ ______ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Hollywood Casino Corporation's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the voting stock held by non-affiliates of Hollywood Casino Corporation, based on the closing price of such stock on March 25, 1997, was $45,917,944. For the purposes of this computation, all officers, directors and 5% beneficial owners of Hollywood Casino Corporation are deemed to be affiliates. Such determination should not be deemed an admission that such officer, directors and beneficial owners are in fact, affiliates of Hollywood Casino Corporation. As of March 25, 1997, 24,759,968 shares of Class A Common Stock, $.0001 par value per share, were outstanding. As of March 25, 1997, 1,000 shares of Common Stock of HWCC-Tunica, Inc., $.01 par value per share, were outstanding, all of which were held by an affiliate of HWCC-Tunica, Inc. DOCUMENTS INCORPORATED BY REFERENCE Portions of the following documents are incorporated by reference into the indicated part or parts of this report. (1) Definitive proxy statement filed pursuant to Regulation 14A in connection with the Annual Meeting of Shareholders to be held on May 29, 1997 -- Part III. HWCC-Tunica, Inc. meets the conditions set forth in General Instruction (J)(l)(a) and (b) of Form 10-K and is therefore filing this Form with the reduced disclosure format. 1 PART I ITEM 1. BUSINESS GENERAL 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 40 miles west of downtown Chicago, and a casino and hotel complex in Tunica County, Mississippi (the "Tunica Casino") located approximately 27 miles south of Memphis, Tennessee. Both the Aurora and Tunica facilities feature the Company's unique theme (the "Hollywood Theme"), which incorporates the excitement and glamour of the motion picture industry by utilizing designs inspired by famous movies, displays of motion picture memorabilia and movie themed gaming, entertainment and dining areas. The Company is also actively pursuing potential gaming opportunities in domestic and foreign jurisdictions where gaming is legalized or is being actively considered. Approximately 47% of HCC's outstanding common shares are listed and traded on the Nasdaq National Market tier of the Nasdaq Stock Market under the symbol HWCC. The remaining outstanding HCC common shares are owned by certain general partnerships and trusts controlled by Jack E. Pratt, Edward T. Pratt, Jr. and William D. Pratt and by other family members (collectively, the "Pratt Family"). HCC owns all of the outstanding common stock of both Hollywood Casino - - Aurora, Inc. ("HCA") and HWCC - Tunica, Inc. ("HCT"). HCA is an Illinois corporation organized by the Pratt Family during 1990 which owns and operates the Aurora Casino. HCT is a Texas corporation formed by HCC during 1993 which owns and operates the Tunica Casino. Prior to December 31, 1996, the Company also owned approximately 80% of the common stock of Greate Bay Casino Corporation ("GBCC," formerly known as Pratt Hotel Corporation). On December 31, 1996, HCC distributed the common stock of GBCC owned by HCC to its shareholders. As a result of the dividend, GBCC is no longer a subsidiary of HCC. GBCC's principal assets were the Sands Hotel and Casino (the "Sands") in Atlantic City, New Jersey and management and consulting contracts with the Aurora Casino and Tunica Casino. GBCC's common stock is listed and traded on the American Stock Exchange under the symbol GBY. GBCC's subsidiaries were all indirect subsidiaries of HCC prior to the distribution of GBCC's common stock. PPI Corporation ("PPI"), a wholly owned subsidiary of GBCC, owns various entities related to GBCC's Atlantic City gaming operations. Subsidiaries of PPI include: GB Property Funding Corp., the issuer of $185 million of 10 7/8% First Mortgage Notes, due 2004 (the "10 7/8% First Mortgage Notes"); PRT Funding Corp., the issuer of $85 million of 11 5/8% senior notes, due 2004 ("the PRT Funding Notes"); New Jersey Management, Inc. ("NJMI"), which manages the operations of the Sands; Pratt Management, L.P. ("PML"), which manages the operations of the Aurora Casino; Pratt Casino Corporation ("PCC"), which earns consulting fees from the Tunica Casino; and Greate Bay Hotel and Casino, Inc. ("GBHC"), which owns the Sands. Subject to regulatory approval and effective as of April 1, 1997, HCC will acquire the general partnership interest in PML from PPI. The Company's casinos, as well as the Sands, use casino information technology developed by Advanced Casino Systems Corporation ("ACSC"), a subsidiary of GBCC. Such information technology includes ACSC's table game and slot monitoring systems that provide the casinos with the ability to capture and maintain information necessary to track and rate patron play through the use of a casino players' card. These systems provide management with the key characteristics of patron play as each slot machine and table game pit is connected with its data base monitoring system. When patrons utilize the casino players' card at slot machines and table games, the information is immediately available to management and allows management to implement marketing programs to recognize and reward patrons during their visits to the 2 casino. Such promotions and complimentaries include free food, admissions, retail merchandise and sweepstakes giveaways. Management believes that its ability to reward its higher value patrons on a "same-visit" basis is valuable in implementing its strategy of developing a loyal patron base of premium rated players. In addition, ACSC's systems allow the casinos to monitor, analyze and control the granting of gaming credit, promotional expenses and other marketing costs. The principal executive offices of HCC are located at Two Galleria Tower, Suite 2200, 13455 Noel Road, Dallas, Texas 75240, telephone (972) 392- 7777. THE AURORA CASINO The Aurora Casino commenced operations on June 17, 1993 and is one of only four casinos in Illinois now operating within 50 miles of downtown Chicago. The Aurora Casino currently consists of two multi-level riverboat casinos containing an aggregate of approximately 32,100 square feet of gaming space with approximately 975 slot machines and approximately 56 table games. The Aurora Casino also includes an approximately 64,000 square foot land-based Pavilion through which patrons board the facility's two riverboat casinos via enclosed passenger loading ramps. The highly themed Pavilion features a glass-domed, four-story atrium with two grand staircases, two upscale lounges, two gourmet restaurants, a large buffet and a diner. Patrons of the Aurora Casino are offered valet and self-parking in two multi-level parking garages that accommodate approximately 1,340 cars, as well as other available surface parking. Since a majority of the facility's patrons arrive by car, the Company completed construction during 1996 of a new five-story, approximately 500-space parking garage directly across the street from the Pavilion designed to enhance access to the Aurora Casino. The parking garage is connected to the Pavilion through a climate controlled tunnel. The new structure also contains approximately 1,500 square feet of retail space, the "Hollywood Casino(R) Studio Store," a highly themed store selling logo items licensed from motion picture studios as well as first-run movies on videocassette. See "Properties - The Aurora Casino". In order to enhance the operating performance of the Aurora Casino, the Company completed a major expansion and renovation of the Aurora facility in 1995. The first phase of this project was completed on May 10, 1995 with the opening of a 10,000 square foot expansion of one of the Aurora Casino's riverboats. Management believes that prior to the expansion, the Aurora Casino's gaming facilities were capacity constrained during peak periods, which limited the property's operating performance. The casino expansion increased the Aurora Casino's gaming space by approximately 45% to the current 32,100 square feet, allowed the facility to offer patrons the maximum number of gaming positions permitted by Illinois gaming regulations in a spacious, highly-themed setting. The Company also completed a renovation of the Aurora Casino's second riverboat casino in September 1995 which included the installation of new interior decor more extensively utilizing the Company's Hollywood Theme and the reconfiguration of gaming areas to provide a more spacious and comfortable setting. Business Strategy. The Aurora facility's primary market is the affluent suburbs north and west of Chicago. Based on a sampling of its patrons, the Company believes that the casino drew approximately 40% of its patrons from such suburbs during 1996. Approximately 7.1 million people live within a 40- mile radius and approximately 11.6 million people live within a 100-mile radius of the Aurora Casino. The facility is easily accessible from major highways, can be reached from downtown Chicago in approximately 50 minutes by trains which average 20 trips a day, and is approximately 30 miles from O'Hare International Airport. The four operating Chicago-area casinos, including the Aurora Casino, have approximately 132,000 square feet of combined gaming space. No additional casinos may be licensed in Illinois without the passage of new state legislation. The Aurora Casino's riverboats currently depart from their landings for as many as 18 cruises daily, commencing at various times from 8:30 a.m. until 4:30 a.m. This schedule may be varied, based on 3 experience and seasonal factors. The use of a staggered cruise schedule with two vessels significantly reduces the waiting time until the next gaming session for patrons who miss a cruise departure. Once passengers board, they are permitted to game during the half hour prior to the time the riverboat departs. After the excursion, passengers are permitted to game for another half hour before new passengers board, for a total of two to three hours of gaming per cruise, depending on the cruising schedule. In addition, Illinois regulations permit dockside gaming if the riverboat captain reasonably determines that it is unsafe to cruise due to inclement weather, mechanical or structural problems or river icing. During dockside gaming, the Aurora riverboats operate on their normal schedules and passengers may leave the vessels at any time but may board only during the half hour prior to the regularly scheduled start of the cruise. The Aurora Casino employs a marketing strategy designed to take advantage of its proximity to the affluent northern and western suburbs of Chicago and the large population base of the Chicago metropolitan area. Management uses a patron data base developed through ACSC's systems to focus its marketing efforts on patrons who have been identified through the system as having the characteristics of a higher value patron. Given the limited number of gaming positions available on each daily casino excursion, management believes that its process of identifying the premium patron, encouraging participation in its various casino players' card programs and tailoring promotions and special events to cater to this market segment will enhance profitability. The Aurora Casino also markets to the "mass" casino patron market segment through various forms of advertising media as well as through group and bus tour packages. Once new patrons are introduced to the Company's gaming facility and its casino players' card programs, management uses its data base capabilities to direct market to these patrons in an attempt to convert them into higher value patrons. Management believes that the Aurora Casino's facilities, in particular its highly themed dockside Pavilion and its close proximity to the Paramount Theatre, an 1,800-seat art deco theatre in which the Company features headliner entertainment, are appealing to both the premium and mass casino patron markets. Entertainers who have appeared include Frank Sinatra, Tom Jones, Ann-Margaret, the Temptations, Howie Mandel, Willie Nelson and the Bolshoi Ballet. Casino Credit. Casino operations are conducted on both a credit and a cash basis. Gaming debts arising in Aurora in accordance with applicable regulations are enforceable under Illinois law. For the year ended December 31, 1996, gaming credit extended to customers accounted for approximately 13.9% of overall table game wagering, while table game wagering accounted for approximately 13.8% of overall casino wagering during the period. At December 31, 1996, gaming receivables amounted to $2.1 million before allowances for uncollectible gaming receivables which amounted to $690,000. Management of the Aurora Casino believes that the allowances for uncollectible gaming receivables are adequate. Employees and Labor Relations. In Aurora, all casino employees must be licensed by the Illinois Gaming Board. At December 31, 1996 there were approximately 1,650 employees at the Aurora Casino, none of whom are represented under collective bargaining agreements. Management considers its labor relations to be good. THE TUNICA CASINO The Tunica Casino opened on August 8, 1994 and is part of a four casino cluster located in north Tunica County. The Tunica Casino features a 54,000 square foot casino with approximately 1,370 slot machines and 50 table games. With the completion of its new hotel tower in 1996, the facility currently has 506 hotel rooms; other amenities include an entertainment lounge, themed bar facilities, three restaurants, a large themed buffet, an indoor pool, banquet and meeting facilities, a showroom, parking for 1,850 cars and a 50- space recreational vehicle park. 4 The Company completed construction in the third quarter of 1996 of an eight-story, approximately 350-room hotel tower expansion at the Tunica Casino, including additional banquet and meeting facilities, a themed indoor pool and atrium and a showroom. In addition to satisfying the existing demand for its hotel accommodations (the Tunica Casino's hotel experienced overall occupancy rates in excess of 96% during 1995 with occupancy rates approaching 99% during weekend and other peak periods), management believes that the additional hotel capacity will allow the Tunica Casino to more effectively market to and attract overnight and extended stay patrons. The Tunica hotel expansion cost approximately $31.8 million. In February 1996, the Tunica Casino opened a themed gaming area, the "Adventure Slots" attraction, which consists of an approximately 12,500 square foot, adventure themed gaming and entertainment area featuring interactive special effects, multimedia displays of memorabilia from famous adventure motion pictures and approximately 210 slot machines with custom graphic details. Construction of the Adventure Slots cost approximately $5.1 million. Business Strategy. Tunica County is currently the closest legalized gaming jurisdiction to, and is easily accessible from, Memphis. Approximately 4.1 million residents live within a 150 mile radius of Tunica County (approximately one million of whom live in the greater Memphis metropolitan area). Memphis also hosts approximately 3.5 million tourists each year. Other markets within 250 miles of Tunica County include Little Rock, Jonesboro and Pine Bluff, Arkansas; Nashville and Jackson, Tennessee, and Southeast Missouri. The Tunica Casino is accessible to its primary geographic market via Highway 61 and Interstate 55. The Tunica Casino is located in a cluster with gaming facilities operated by Harrah's Entertainment, Inc. ("Harrah's" and "Mardi Gras") and Boyd Gaming Corporation ("Sam's Town"), which gives potential patrons a variety of gaming options. The four casinos have named their cluster "Casino Strip" in order to establish a marketing identity for the cluster and have entered into a joint billboard campaign promoting the Casino Strip name. These properties also operate a free shuttle bus service between the four casinos. Additional joint marketing activities, including radio advertising and joint special events, are currently being conducted. Management believes that the critical mass of the four property cluster, together with the ability of visitors to move freely among these properties and to access the cluster from the main Tunica highways, generates significant patron traffic to the Tunica Casino. In November 1996, the Casino Strip resorts announced plans for the joint construction and operation of an 18-hole championship golf course scheduled to open in the fall of 1998 on approximately 190 acres of land adjacent to the Casino Strip. Management believes that the golf course will help strengthen the Casino Strip as a gaming and convention resort destination. The Tunica Casino employs a marketing strategy designed to take advantage of its proximity to the large population base of the greater Memphis metropolitan area and other major markets by (i) targeting the local day-trip market and (ii) by utilizing its hotel rooms and recreational vehicle park to expand its patron mix to include overnight visitors. Management also utilizes the ACSC developed casino information technology to identify the premium Memphis area patron; such information is then used to encourage participation in its casino players' card program and tailor promotions and special events to cater to this market segment. Management believes that the Tunica Casino's unique theme (the casino was constructed to resemble a large Hollywood sound stage set with authentic and replica movie props presented in multimedia display cases with larger props suspended from the ceiling) has broad patron appeal and distinguishes the Tunica Casino from its competitors. Additionally, the nature of the theming will allow for periodic and cost effective updating which management believes will stimulate repeat visitors. Casino Credit. Casino operations are conducted on both a credit and a cash basis. Gaming debts arising in Tunica in accordance with applicable regulations are enforceable under Mississippi law. During 1996, gaming credit extended to customers accounted for approximately 16% of overall wagering. At December 31, 1996, gaming receivables amounted to $1.6 million before allowances for uncollectible 5 gaming receivables amounting to $621,000. Management of the Tunica Casino believes that the allowances for uncollectible gaming receivables are adequate. Employees and Labor Relations. At December 31, 1996, there were approximately 1,200 employees at the Tunica Casino, none of whom are represented under collective bargaining agreements. Management considers its labor relations to be good. THE SANDS For a description of the Sands' facilities, please refer to "Item 2. - Properties - The Sands." Business Strategy. The Sands' marketing strategy in the highly competitive Atlantic City market has consisted of seeking higher-value repeat patrons through its ongoing capital improvements program and its use of sophisticated casino information technology to monitor and control certain casino operations and to target marketing efforts toward frequent visitors. Traditionally, the Sands has been successful in its marketing efforts toward the high end, frequent table game and slot patron through its offering of private, limited-access facilities and related amenities to premium patrons. While the Sands has strived to maintain its position in this segment, the completion of the Sands' expansion in 1994 has allowed the Sands to broaden its appeal to the mass drive-in patron for continued growth in this market segment. The Sands markets to the "mass" casino patron market segment through various forms of advertising media as well as through group and bus tour packages. Once new patrons are introduced to the Sands' gaming facilities and the casino player's card program, management uses its data base capabilities to direct market to these patrons in an attempt to convert them into higher value patrons. Industry Developments. A number of significant changes to the regulations governing the casino industry have been approved by New Jersey regulators in recent years. Additional deregulation of the industry occurred in 1995 with the enactment of legislation amending the New Jersey Casino Control Act (the "Casino Act"). The amendments generally lessened regulatory and licensing requirements and allowed for additional gaming space under certain conditions. Partly as a result of such regulatory changes, the Atlantic City gaming industry has continued to grow. Revenues have increased from $3.4 billion in 1994 to $3.7 billion in 1995 (an increase from the previous year of 9.5%) and to $3.8 billion in 1996 (an increase from the previous year of 1.8%). The 1996 increase resulted primarily from an overall expansion of gaming space to approximately one million square feet at the end of 1996 from approximately 950,000 square feet at the end of 1995, to an increase in the number of hotel rooms available in the Atlantic City market and to an intense marketing campaign undertaken by the industry during most of 1996. Casino/hotel operators have also benefited in recent years from a trend toward increased slot play as slot machines have increasingly become more popular than table games with loyal and frequent patrons, as well as with recreational and other casual visitors. Casino operators have been catering increasingly to slot patrons through new forms of promotions and incentives such as slot machines which are linked between the various casinos to pay out a pooled jackpot and more attractive gaming machines. As a result, slot machine revenue growth has significantly outpaced table game revenue growth in recent years to the point where for 1996 slot win accounted for approximately 68.9% of total Atlantic City gaming win. Table games remain important, however, in catering to the higher-end segment of gaming patrons as well as in adding to the gaming ambience and providing a varied gaming experience. Casino Credit. Casino operations are conducted on both a credit and a cash basis. Gaming debts arising in Atlantic City in accordance with applicable regulations are enforceable under New Jersey law. For the year ended December 31, 1996, gaming credit extended to Sands' customers accounted for approximately 26.1% of overall table game wagering, while table game wagering accounted for approximately 22.8% of overall casino wagering during the period. At December 31, 1996, gaming receivables amounted to $24.4 million before allowances for uncollectible gaming receivables amounting 6 to $15.5 million. Management of the Sands believes that the allowances for uncollectible gaming receivables are adequate. License Agreement. GBCC entered into a 99-year license agreement (the "Sands License Agreement") during 1987 to use the trade name "Sands" in Atlantic City, New Jersey . GBHC pays an annual royalty of 3% of gross room charges, as defined in the Sands License Agreement. Such charges amounted to $283,000 during the year ended December 31, 1996 and $288,000 during each of the years ended December 31, 1995 and 1994. Employees and Labor Relations. In Atlantic City, all casino employees, except certain hotel employees, must be licensed under the Casino Act. Due to the seasonality of the operations of the Sands, the number of employees varies during the course of the year. At December 31, 1996, there were approximately 3,200 employees at the Sands. The Sands has collective bargaining agreements with two unions that represent approximately 1,000 hotel employees, substantially all of whom are represented by the Hotel, Restaurant Employees and Bartenders International Union, AFL-CIO, Local 54. The collective bargaining agreements expire in September 1999. Management considers its labor relations to be good. COMPETITION The gaming industry is highly fragmented and characterized by a high degree of competition among a large number of participants, some of which have greater financial and other resources than the Company. Competitive gaming activities include land-based casinos, dockside casinos, riverboat casinos, video lottery terminals, Indian gaming and other forms of legalized gaming in the United States and other jurisdictions. Casino gaming is currently permitted in a number of states, including Colorado, Illinois, Indiana, Iowa, Louisiana, Michigan, Mississippi, Missouri, Montana, Nevada, New Jersey and South Dakota, and in Windsor, Ontario, Canada, as well as on Native American Indian lands in certain states. Other jurisdictions may legalize gaming in the near future through the introduction of proposals to legalize gaming in their state legislatures. In addition, established gaming jurisdictions could award additional gaming licenses or permit the expansion of existing gaming operations. New or expanded operations by other persons can be expected to increase competition for the Company's present and proposed gaming operations and could have a material adverse impact on the Company. THE AURORA CASINO The Illinois Riverboat Gambling Act and the rules promulgated by the Illinois Gaming Board thereunder (the "Riverboat Act") authorizes only ten owner's licenses for riverboat gaming operations in Illinois and permits a maximum of 1,200 gaming positions (as defined by the Illinois Gaming Board) at any time for each of the ten licensed sites. All authorized owner's licenses have been granted and no additional licenses or gaming positions can be permitted without further state legislation. Four riverboat sites, including the Aurora Casino, are currently licensed in Illinois within 50 miles of downtown Chicago. Two of these riverboat sites are in Joliet, approximately 42 miles southwest of downtown Chicago, and a third is in Elgin, Illinois, approximately 20 miles from Aurora, 45 miles from downtown Chicago and amid the affluent northern and western suburbs. The Company has also experienced increased competition from three riverboat operations opened during 1996 in northwestern Indiana within 25 miles of downtown Chicago. An additional riverboat operation with approximately 50,000 square feet of gaming space is anticipated to open in East Chicago, Indiana in May 1997. Increased competition from casinos in Indiana has resulted in greater competition for patrons from the downtown Chicago market and from the suburban Chicago market. The next closest operating casinos are in Milwaukee, Wisconsin, approximately 90 miles from downtown Chicago, and in Peoria, and Rock Island, Illinois, approximately 160 miles from downtown Chicago. The Company understands that legislation may be introduced in the Illinois legislature to authorize one or more land-based and/or riverboat casinos in downtown Chicago and/or the granting of additional casino licenses elsewhere in Illinois including within the Company's principal market. In 7 addition, the authorization for up to three casinos in Detroit, Michigan was approved in late 1996. Several major competitors have expressed an interest in the Detroit market; however, the establishment of a regulatory system and subsequent licensing have yet to be accomplished. Accordingly, it is not anticipated that any casino will be operational until late 1997 or 1998. Native American Indian tribes are seeking to open casino facilities in northwestern Indiana and Michigan under the Indian Gaming Regulatory Act. The opening of additional casinos proximate to Chicago could have a material adverse impact on the Aurora Casino. THE TUNICA CASINO The Tunica Casino faces intense competition from the other casinos operating in north Tunica County. The Mississippi Gaming Control Act does not limit the number of licenses that may be granted. Any significant increase in new capacity in Tunica County could negatively impact the operations of the Tunica Casino. Within the Casino Strip cluster, Sam's Town has 90,000 square feet of gaming space with approximately 1,900 slot machines and 75 table games and approximately 850 hotel rooms; Harrah's currently has 24,000 square feet of gaming space with approximately 930 slot machines and 40 table games; and Harrah's Mardi Gras which opened in the former Southern Belle facility in April 1996, currently has 55,000 square feet of gaming space with approximately 1,150 slot machines and 56 table games. Harrah's recently announced plans to either sell or close its smaller facility during 1997. A three casino cluster consisting of Binion's Horseshoe, ITT Sheraton and Circus Circus ("Casino Center") is located north of the Casino Strip cluster and closer to the Memphis market. Bally's, which previously operated a casino at Mhoon Landing (located approximately 15 miles south of the Tunica Casino), reopened its casino at the Lady Luck Olympia Hotel site adjacent to, but not connected with, the Casino Center as part of a joint venture agreement with Lady Luck. Fitzgeralds is located between Casino Center and the Casino Strip cluster. Due to increased competition in the Tunica gaming market, all four casinos that previously operated at Mhoon Landing have ceased operations and certain other casinos in Tunica County have reduced their work forces. Despite the recent closings and work force reductions, the number of casinos and gaming positions in north Tunica County continues to increase. The increase in competition in the north Tunica County casino market could have a material adverse effect on the Tunica Casino. Immediately north of Casino Center, Grand Gaming Corp. has completed the first phase of a project which, based on plans announced, will include a casino complex with 140,000 square feet of gaming space with approximately 3,175 slot machines and 160 table games (the largest casino in Mississippi), two hotels with an aggregate of 800 rooms, a golf course, convention center and other amenities. The casino opened in July 1996 and was followed by the opening of 188 hotel rooms in September 1996. An additional 600 hotel rooms are scheduled to open in March 1997 and the golf course and other amenities are scheduled for later completion. The opening of this casino space increased casino capacity in Tunica County by 24%. The Company believes that the most significant restrictions to the growth of gaming in the Tunica market are the lack of an effective infrastructure and the shortage of hotel rooms. The Mississippi Department of Transportation ("MDOT") embarked on a road widening development program which expanded the two-lane highway leading to Tunica County from Memphis (Highway 61) during 1996. Additionally, MDOT plans to improve the highway from eastern Mississippi (Highway 304) to four lanes. A number of casino operations completed and opened hotel facilities during 1996. Including the addition of approximately 350 rooms at the Tunica Casino, the total number of hotel rooms in Tunica County increased to 3,176 rooms at the end of 1996 from 2,136 at the end of 1995, an increase of 48.7%. The Tunica Casino may eventually face competition from the opening of gaming casinos closer to Memphis including DeSoto County, Mississippi, which is the only county between Tunica County and the Tennessee border. DeSoto County has defeated gaming proposals on three separate occasions, most 8 recently in November 1996. In addition, gaming has been legalized in Coahoma County (immediately south of Tunica County and more accessible from Little Rock, Arkansas) where Lady Luck has relocated its Mhoon Landing casino to the Mississippi side of the Helena, Arkansas bridge over the Mississippi River. Farther south, in Greenville, Washington County, two casinos are now operating, and in Vicksburg, Warren County, there are four casinos open. Casino gaming is not currently legalized in Tennessee or Arkansas. Although management does not anticipate such legislation in the near term, the legalization of gaming in either Tennessee or Arkansas could have a material adverse impact on the Tunica Casino. THE SANDS The Sands faced intense competition from the 11 other existing Atlantic City casinos. According to reports of the New Jersey Casino Control Commission (the "Casino Commission"), the twelve Atlantic City casinos currently offer over one million square feet of gaming space. With the December 31, 1996 distribution by HCC of its GBCC common stock, HCC has exited the Atlantic City market. CASINO REGULATION ILLINOIS The Riverboat Act authorizes riverboat gaming on navigable streams within or forming a boundary of the State of Illinois except for Lake Michigan and any waterway in Cook County, which includes Chicago. The Riverboat Act strictly regulates the facilities, persons, associations and practices related to gaming operations pursuant to the police powers of the State of Illinois, including comprehensive law enforcement supervision. The Riverboat Act grants the Illinois Gaming Board specific powers and duties, and all other powers necessary and proper to fully and effectively execute the Riverboat Act for the purpose of administering, regulating and enforcing the system of riverboat gaming. The Illinois Gaming Board's jurisdiction extends to every person, association, corporation, partnership and trust involved in riverboat gaming operations in the State of Illinois. Owner's Licenses. The Riverboat Act requires the owner of a riverboat gaming operation to hold an owner's license issued by the Illinois Gaming Board. The Illinois Gaming Board is authorized to issue ten owner's licenses statewide. Each owner's license permits up to two boats as a part of the riverboat gaming operation. No entity may be licensed as the owner of more than one riverboat gaming operation in Illinois, although a licensed owner may hold up to 10% of a second riverboat gaming operation in Illinois. In addition to the ten owner's licenses which may be authorized under the Riverboat Act, the Illinois Gaming Board may issue special event licenses allowing persons who are not otherwise licensed to conduct riverboat gaming to conduct such gaming on a specified date or series of dates. Riverboat gaming under such a license may take place on a riverboat not normally used for riverboat gaming. An owner's license is issued for an initial period of three years and must be renewed annually thereafter. An owner's license is eligible for renewal upon payment of the applicable fee and a determination by the Illinois Gaming Board that the licensee continues to meet all of the requirements of the Riverboat Act. The Illinois Gaming Board also requires that officers, directors and employees of a gaming operation and suppliers of gaming equipment, devices and supplies and certain other suppliers be licensed. Licenses issued by the Illinois Gaming Board may not be transferred to another person or entity. All licensees must maintain their suitability for licensure and have a continuing duty to disclose any material changes in information provided to the Illinois Gaming Board. Applicants for and holders of an owner's license are required to obtain formal approval from the Illinois Gaming Board for changes in the following areas; (i) key persons, (ii) type of entity, (iii) equity and debt capitalization of the entity, (iv) investors and/or debt holders, (v) source of funds, (vi) applicant's 9 economic development plan, (vii) riverboat capacity or significant design change, (viii) gaming positions, (ix) anticipated economic impact, or (x) pro forma budgets and financial statements. A holder of an owner's license is allowed to make distributions to its partners, stockholders or itself only to the extent that such distribution would not impair the financial viability of the gaming operation. Factors to be considered by the licensee include, but are not limited to, the following: (i) working capital requirements, (ii) debt service requirements, (iii) requirements for repairs and maintenance, and (iv) capital expenditure requirements. The Illinois Gaming Board will require a personal disclosure from any person or entity (unless such person or entity qualifies as an institutional investor) who or which, individually or in association with others, acquires, directly or indirectly, beneficial ownership of more than 5% of any class of voting securities or non-voting securities convertible into voting securities of a publicly traded corporation which holds an ownership interest or a beneficial interest in the holder of an owner's license. If the Illinois Gaming Board denies an application for such an acquisition, commencing as of the date the Illinois Gaming Board issues a notice that it denies such application, it will be unlawful for such applicant to receive any dividends or interest on his or its securities, to exercise, directly or indirectly, any right conferred by such securities, or to receive any remuneration in any form from any person or entity holding any license under the Riverboat Act for services rendered or otherwise. If the Illinois Gaming Board denies an application for such a transfer and if no hearing is requested or if the Illinois Gaming Board issues a final order of disqualification, the holder of the affected owner's license shall purchase all of the disqualified person's or entity's securities at the lesser of either the market price or the purchase price of such securities. An ownership interest in a holder of an owner's license may be transferred or pledged as collateral only with the consent of the Illinois Gaming Board. Regulation of Gaming Operations. The Riverboat Act does not limit the maximum bet or per patron loss and licensees may set any maximum or minimum limits on wagering. Vessels must have the capacity to hold a minimum of 500 persons if operating on the Mississippi River or the Illinois River south of Marshall County, and a minimum of 400 persons on any other waterway. The number of gaming positions is limited to a maximum of 1,200 per license. Gaming sessions are limited to a four hour duration; however, special event extended cruises may be authorized by the Illinois Gaming Board. If a riverboat captain reasonably determines for reasons of safety that although seaworthy, the riverboat should not leave the dock or should return immediately thereto, due to inclement weather, river icing, or mechanical or structural difficulties, a gaming excursion may commence or continue while the gangplank or its equivalent is raised and remains raised, in which event the riverboat is not considered docked. Recently, the Illinois Gaming Board amended its rules to clarify the circumstances under which dockside gaming will be permitted and to require the imposition of a fine for violations of the cruising requirements. A $2 per person admission tax is imposed on the owner of a riverboat operation. Such admission tax for the Aurora Casino amounted to $6.4 million, $5.4 million and $4.7 million , respectively, during 1996, 1995 and 1994. Additionally, a wagering tax is imposed on the adjusted gross receipts, as defined in the Riverboat Act, of a riverboat operation at the rate of 20%. The licensee is required to wire transfer all such gaming tax payments to the Illinois Gaming Board. Such wagering tax for the Aurora Casino amounted to $31.3 million, $29.3 million and $27.9 million, respectively, for the years 1996, 1995 and 1994. The Illinois Gaming Board is authorized to conduct investigations into the conduct of gaming and into alleged violations of the Riverboat Act and to take such disciplinary and enforcement action as it may deem necessary and proper. Employees and agents of the Illinois Gaming Board have access to and may inspect any facilities relating to the riverboat gaming operations at all times. 10 A holder of any license is subject to imposition of penalties and fines, suspension or revocation of such license, or other action for any act or failure to act by such holder or his or her agents or employees, that is injurious to the public health, safety, morals, good order and general welfare of the people of the State of Illinois, or that would discredit or tend to discredit the Illinois gaming industry or the State of Illinois. Any riverboat operation not conducted in compliance with the Riverboat Act may constitute an illegal gaming place and consequently may be subject to criminal penalties, which penalties include possible seizure, confiscation and destruction of illegal gaming devices and seizure and sale of riverboats and dock facilities to pay any unsatisfied judgment that may be recovered and any unsatisfied fine that may be levied. The Riverboat Act also provides for civil penalties equal to the amount of gross receipts derived from wagering on the gaming, whether unauthorized or authorized, conducted on the day of any violation. The Illinois Gaming Board may revoke or suspend licenses, as the Board may see fit and in compliance with applicable laws of Illinois regarding administrative procedures, and may suspend an owner's license, without notice or hearing, upon a determination that the safety or health of patrons or employees is jeopardized by continuing a riverboat's operation. The suspension may remain in effect until the Illinois Gaming Board determines that the cause for suspension has been abated and it may revoke the owner's license upon a determination that the owner has not made satisfactory progress toward abating the hazard. The Illinois Gaming Board may waive any licensing requirement or procedure provided by rule if it determines that such waiver is in the best interests of the public and the gaming industry. MISSISSIPPI The ownership and operation of casino gaming facilities in Mississippi are subject to extensive state and local regulation including the Mississippi Gaming Control Act ( the "Mississippi Act"). Gaming in Mississippi can be legally conducted only on vessels of a certain minimum size in navigable waters of counties bordering the Mississippi River or in waters of the State of Mississippi which lie adjacent to the coastline of the three counties bordering the Gulf of Mexico. Mississippi's gaming operations are subject to the licensing and regulatory control of the Mississippi Gaming Commission (the "Mississippi Commission") and various federal, state, and county regulatory agencies. The Mississippi Act does not restrict the amount or percentage of space on a vessel that may be utilized for gaming nor does it limit the number of licenses that the Mississippi Commission can grant for a particular area. Each of HCT's directors, officers and certain key employees who are actively and directly engaged in the administration or supervision of gaming in Mississippi, or who have any other significant involvement with the gaming activities of the Tunica Casino, must be found suitable therefor and may be required to be licensed by the Mississippi Commission. All personnel responsible for the direction and management of the Tunica Casino have been found suitable by the Mississippi Commission. The finding of suitability is comparable to licensing, and both require submission of detailed personal financial information followed by a thorough investigation. An application for licensing may be denied for any cause deemed reasonable by the issuing agency. Changes in licensed positions must be reported to the issuing agency and the Mississippi Commission has jurisdiction to disapprove a change in licensed positions. If the Mississippi Commission were to find a director, officer or key employee unsuitable for licensing or unsuitable to continue having a relationship with HCT, HCT would have to suspend, dismiss and sever all relationships with such person or lose its license. HCT would have similar obligations with regard to any person who refuses to file appropriate applications. Each gaming employee must obtain a work permit. The licenses obtained by HCT are not transferable and will need to be renewed periodically. Presently, the policy of the Mississippi Commission is to award casino licenses for two-year periods, subject to renewal. The Mississippi Commission has the power to deny, limit, condition, revoke and 11 suspend any license, finding of suitability or registration, and to fine any person as it deems reasonable and in the public interest, subject to an opportunity for a hearing. Any individual who is found to have a material relationship to, or material involvement with, HCT may be required to be investigated in order to be found suitable or to be licensed as a business associate of HCT. Key employees, controlling persons or others who exercise significant influence upon the management or affairs of HCT may also be deemed to have such a relationship or involvement. Additionally, certain beneficial owners, lenders and landlords of HCT may be required to be licensed. The landlord under the ground lease for the Tunica Casino has been found suitable by the Mississippi Commission. The statutes and regulations give the Mississippi Commission the discretion to require a suitability finding with respect to anyone who acquires any debt or equity security of HCT regardless of the percentage of ownership. In addition, the Mississippi Commission has discretionary authority to require a holder of any debt to file an application, to be investigated and to be found suitable. While the Mississippi Commission generally does not require the individual holders of obligations to be investigated and found suitable, the Mississippi Commission retains the discretion to do so for any reason, including but not limited to a default or where the holder of a debt instrument exercises a material influence over the gaming operations of the entity in question. The applicant is required to pay all costs of investigation. Any owner of debt or equity securities found unsuitable and who holds, directly or indirectly, any beneficial ownership of debt or equity interests in HCT beyond such period of time as may be prescribed by the Mississippi Commission may be guilty of a misdemeanor. Any person who fails or refuses to apply for a finding of suitability or a license within 30 days after being ordered to do so by the Mississippi Commission may be found unsuitable. HCT is subject to disciplinary action if, after it receives notice that a person is unsuitable to be an owner of its debt or equity securities or to have any other relationship with it, HCT (i) pays the unsuitable person any distributions or interest upon any securities of HCT or any payments or distribution of any kind whatsoever (ii) recognizes the exercise, directly or indirectly, of any voting rights in its securities by the unsuitable person, or (iii) pays the unsuitable person any remuneration in any form for services rendered or otherwise, except in certain limited and specific circumstances. In addition, if the Mississippi Commission finds any owner unsuitable, such owner must immediately offer all of such owner's securities in HCT for purchase, and HCT shall, in turn, purchase the securities so offered, for cash at fair market value, within 10 days of the date of such offer. The Mississippi Commission has the power to impose additional restrictions on the holders of HCT's securities at any time through its power to regulate licensees. Mississippi gaming regulations provide that a change in control of HCT may not occur without the prior approval of the Mississippi Commission. Mississippi law prohibits HCT from making a public offering of its securities without the approval of the Mississippi Commission if any part of the proceeds of the offering is to be used to finance the construction, acquisition or operation of gaming facilities in Mississippi, or to retire or extend obligations incurred for one or more of such purposes. Because HCT is licensed to conduct gaming in Mississippi, neither HCT nor any affiliates may engage in gaming activities outside of Mississippi without the prior approval of the Mississippi Commission. The Mississippi Commission has adopted regulations related to foreign gaming approval, and HCT has been approved by the Mississippi Commission under its regulations to engage in gaming activities in certain jurisdictions outside of Mississippi. License fees and taxes are based upon a percentage of the gross gaming revenues received by a casino operation, or the number of slot machines operated by such casino, or the number of table games operated by such casino. In particular, gaming licensees must pay an annual $5,000 license fee and an 12 additional fee based on the number of table games. A state gross revenues fee of 8% is due on adjusted gross gaming revenues. Several local governments have been authorized to impose additional gross fees on adjusted gross gaming revenues of up to 4% or, alternatively, per person boarding fees, and annual license fees based on the number of gaming devices on board. The City of Tunica and Tunica County impose a combined fee of 4% on adjusted gross gaming revenues. Such gaming taxes for the Tunica Casino amounted to $10.7 million, $10.7 million and $3.7 million during 1996, 1995 and 1994, respectively. Gross gaming taxes paid to the state are allowed as a credit against Mississippi state income tax liability. NEW JERSEY Casino gaming is strictly regulated in Atlantic City under the Casino Act and the rules and regulations of the Casino Commission, which affect virtually all aspects of the operations of the Sands. The laws, rules and regulations affecting Atlantic City gaming operations concern primarily the financial stability, integrity and character of casino operators, their employees, their debt and equity security holders and others financially interested in casino operations; the nature of casino/hotel facilities; the operation methods (including rules of games and credit granting procedures); and financial and accounting practices used in connection with casino operations. Casino Licenses. The Casino Act requires that all casino operations be licensed by the Casino Commission and that all employees (except for certain non-casino job positions), major shareholders and other persons or entities financially interested in the casino operation be either licensed or approved by the Casino Commission. A license is not transferable and may be revoked or suspended under certain circumstances by the Casino Commission. A plenary license authorizes the operation of a casino with the games authorized in an operation certificate issued by the Casino Commission, and the operation certificate may be issued only on a finding that the casino conforms to the requirements of the Casino Act and applicable regulations and that the casino is prepared to entertain the public. Under such determination, GBHC and NJMI were issued plenary casino licenses, and GBCC was approved as a holding company of a casino licensee. The Casino Act provides for a casino license fee of not less than $200,000 based upon the cost of the investigation and consideration of the license application, and a renewal fee of not less than $100,000 or $200,000 for a one year or four year renewal, respectively, based upon the cost of maintaining control and regulatory activities. In addition, a licensee must pay annual taxes of 8% of casino win (as defined in the Casino Act), net of a provision for uncollectible accounts of up to 4% of casino win. During the years ended December 31, 1996, 1995 and 1994, the taxes assessed by, and the license and other fees paid by the Sands to the Casino Commission amounted to $23.5 million, $25 million and $24.5 million, respectively. The Casino Act also requires a casino licensee to make certain approved investments in New Jersey, of at least 1.25% of its gross casino revenues (as defined in the Casino Act) or pay an investment alternative tax of 2.5% of its gross casino revenues. Approved investments include the purchase of bonds issued by the Casino Reinvestment Development Authority ("CRDA"), a governmental agency which administers the statutorily mandated investments made by casino licenses. GBHC has, from time to time, contributed certain amounts held in escrow to the CRDA. In return, the CRDA granted GBHC waivers of certain of its investment obligations in future periods. GBHC made such contributions during the years ended December 31, 1996, 1995 and 1994 totaling $1.5 million, $250,000 and $2.5 million , respectively, resulting in waivers granted by the CRDA during 1995 totaling $128,000. No such waivers were granted during 1996 and 1994; however, the contributions have been designated for projects expected to benefit the community and the Sands facility. 13 NON-GAMING REGULATION The Company is subject to certain federal, state and local safety and health laws, regulations and ordinances that apply to non-gaming businesses generally, such as the Clean Air Act, Clean Water Act, Occupational Safety and Health Act, Resource Conservation Recovery Act and the Comprehensive Environmental Response, Compensation and Liability Act. The Company has not made, and does not anticipate making, material expenditures with respect to such environmental laws and regulations. However, the coverage and attendant compliance costs associated with such laws, regulations and ordinances may result in future additional costs to the Company's operations. For example, in 1990 the U.S. Congress enacted the Oil Pollution Act to consolidate and rationalize mechanisms under various oil spill response laws. The Department of Transportation has proposed regulations requiring owners and operators of certain vessels to establish through the U.S. Coast Guard evidence of financial responsibility in the amount of $5.5 million for clean-up of oil pollution. This requirement would be satisfied by either proof of adequate insurance (including self-insurance) or the posting of a surety bond or guaranty. The riverboats operated by the Company must comply with U.S. Coast Guard requirements as to boat design, on-board facilities, equipment, personnel and safety. Each of them must hold a Certificate of Seaworthiness or must be approved by the American Bureau of Shipping ("ABS") for stabilization and flotation, and may also be subject to local zoning and building codes. The U.S. Coast Guard requirements establish design standards, set limits on the operation of the vessels and require individual licensing of all personnel involved with the operation of the vessels. Loss of a vessel's Certificate of Seaworthiness or ABS approval would preclude its use as a floating casino. All shipboard employees of the Company, even those who have nothing to do with the marine operations of the vessel (such as dealers, waiters and security personnel), may be subject to the Jones Act which, among other things, exempts those employees from state limits on workers' compensation awards. TRADEMARKS The Company uses the service mark "Hollywood Casino" which is registered with the United States Patent and Trademark Office. The Company considers its rights to the "Hollywood Casino" service mark to be well established and to have significant competitive value to the Company's business. The loss of its right to use the "Hollywood Casino" service mark and to prevent others from using the same or a deceptively similar mark could have a material adverse effect on the Company. The Company also uses the service mark "Hollywood" and other "Hollywood-formative" marks to promote its casino and related services. These marks are either registered or are the subject of pending registration applications with the United States Patent and Trademark Office. 14 DEVELOPMENT ACTIVITIES On March 13, 1997, the Louisiana Gaming Control Board voted unanimously to grant the fifteenth and final riverboat license in Louisiana to Hollywood/DeBartolo Entertainment Louisiana, L.L.C. ("Hollywood/DeBartolo"), a company owned 50% by a subsidiary of HCC. Subject to receiving certain remaining approvals, Hollywood/DeBartolo has announced plans to construct a $194 million resort complex in Bossier City, Louisiana, approximately 200 miles east of Dallas, Texas. As presently planned, the complex will include a riverboat gaming facility with 30,000 square feet of gaming space; a 400-room hotel with a 30,000 square foot convention facility; an 80,000 square foot, themed pavilion; an 18-hole golf course and a highly themed, retail entertainment center. A subsidiary of HCC will operate the complex, other than the retail entertainment center, under a long-term management contract. Management believes that a proactive business development strategy is critical to the Company's long-term growth and continued success, and is committed to a development program that will maximize the Company's future opportunities. Accordingly, the Company will continue to actively pursue development of new casino entertainment venues by promoting the expansion of legalized gaming and by exploring opportunities where gaming is already sanctioned. OTHER OPERATIONS During 1996 and early 1997, GBCC disposed of its remaining non-casino hotel operations. GBCC managed and had an ownership interest (but no obligation to fund losses) in the hotel operations of the Sands Hotel and Casino in San Juan, Puerto Rico. GBCC also managed two non-casino hotels and had an ownership interest in one of the hotels. For the year ended December 31, 1996, earnings before interest, taxes, depreciation and amortization attributable to such operations amounted to $1.2 million. As of December 31, 1996, all of GBCC's non-casino hotel related indebtedness was extinguished. ITEM 2. PROPERTIES THE AURORA CASINO The Aurora Casino consists of two, four-level riverboats, City of Lights I and II, which have combined casino space of approximately 32,100 square feet and approximately 1,200 gaming positions. The complex also includes the four-story, approximately 64,000 square foot land based Pavilion and two parking garages. The first parking garage contains approximately 18,000 square feet of office space for administrative offices and approximately 13,000 square feet of office space. HCA leases the parking garage, including the office and retail space, from the City of Aurora under a 30 year lease ending June 2023, with HCA having the right to extend the term to a maximum of 99 years. In September 1996, HCA and the Aurora Metropolitan Exposition, Auditorium and Office Building Authority ("ACCA"), a governmental agency, completed the joint construction of a new five-story, approximately 500-space parking garage directly across the street from, and connected by a climate- controlled tunnel to, the Aurora Casino's Pavilion. The new garage provides additional parking for casino patrons and includes approximately 1,500 square feet of retail space. ACCA financed a portion of the construction costs through an $11.5 million, 7.5% industrial revenue bond issue which yielded proceeds of approximately $10.5 million. HCA funded all remaining construction costs. The facility is owned by ACCA and operated by HCA pursuant to a 30-year lease with the right to extend the lease for up to 20 additional years. Rental payments during the first 15 years equal ACCA's debt service costs related to the industrial revenue bond issue. In addition, HCA pays ACCA base rent equal to $15,000 per month, subject to a credit of $615,000 at the rate of $10,000 per month for improvements made to ACCA's North 15 Island Center banquet and meeting facilities. HCA is also responsible for additional rent, consisting of costs such as any real estate taxes, maintenance costs, insurance premiums and utilities arising out of its operation of the garage. The lease is treated as a capital lease for financial reporting purposes. The Aurora Casino is pledged as collateral to the extent of $39 million, for $210 million face amount of senior secured notes, due November 1, 2003 (the "Senior Secured Notes") issued by HCC on October 17, 1995. The Senior Secured Notes bear interest, payable semiannually, at the rate of 12 3/4% discounted to yield 13 3/4% per annum. The Senior Secured Notes are redeemable at the option of HCC any time on or after November 1, 1999 at 106.375% of the then outstanding principal amount, decreasing to 103.1875% and 100%, respectively, on November 1, 2000 and 2001. Commencing with the November 1, 1997 interest payment date and at each subsequent interest payment date, HCC will be required to make an offer to purchase not more than $2,500,000 in principal amount of the Senior Secured Notes at a price of 106.375% of the principal amount tendered. The indenture to the Senior Secured Notes contains various provisions limiting the ability of HCC and certain defined subsidiaries to, among other things, pay dividends or make other restricted payments; incur additional indebtedness or issue preferred stock; create liens; create dividend or other payment restrictions affecting certain defined subsidiaries; enter into mergers or consolidations or make sales of all or substantially all assets of HCC, HCT or any future guarantor; and enter into transactions with certain affiliates. THE TUNICA CASINO The Tunica Casino currently consists of a one-story, 60,000 square foot casino, including 54,000 square feet of gaming space, 506 hotel rooms and suites and support facilities that includes three restaurants, a buffet, an arcade and a gift shop, banquet space, an enclosed pool and atrium, a showroom and administrative offices. The 1996 construction on an eight-story, approximately 350-room hotel tower was completed with a portion of the proceeds from the Senior Secured Notes discussed above. The Tunica facility also includes a 50-space recreational vehicle park and a 1,850-space surface parking area. The ground lease for the Tunica site has an initial term of five years from the date gaming operations commence, and an option to extend the lease for nine successive five-year terms. Rent during the initial term is equal to the greater of 4% of Gross Revenues (as defined in the lease) or $1.1 million per year. Because the ground lease for the Tunica site covers approximately 70 acres, there is sufficient land for future expansion should circumstances warrant. Substantially all of the assets of the Tunica Casino are pledged as collateral for the Senior Secured Notes discussed above. THE SANDS As of December 31, 1996, the entity which owns the Sands is no longer an indirect subsidiary of HCC. The Sands is located in Atlantic City, New Jersey on approximately 4.8 acres of land one-half block from the boardwalk at Brighton Park between Indiana Avenue and Dr. Martin Luther King, Jr. Boulevard. The Sands facility consists of a casino and simulcasting facility with approximately 76,000 square feet of gaming space containing approximately 2,000 slot machines and 125 table games; a hotel with 532 rooms (including 58 suites); six restaurants; a cocktail lounge; two private lounges for invited guests (the Plaza Club and the Island Club); an 800-seat cabaret theater; retail space; an adjacent nine-story executive office building with 77,000 square feet of office space for its executive, financial and administrative personnel; the "People Mover", an elevated, enclosed, one-way moving sidewalk connecting the Sands to the Boardwalk; and parking for approximately 1,900 vehicles. In addition, a warehouse near Atlantic City and 16 a building located in Atlantic City that houses a print shop and auto shop support the operations of the Sands. DEVELOPMENT SITES The Company holds options to purchase approximately 86 acres of land in Bossier City, Louisiana for its planned development of a resort complex as described under "Item 1. Business - Development Activities" above. The Company acquired two sites in the Houston, Texas area, one on Clear Lake in the City of Seabrook and the other on Lake Houston, as well as one lakeside site in the Dallas, Texas area in the north Dallas suburb of Farmers Branch, for development in the event that Texas passed enabling legislation to legalize gaming. Such legislation failed to pass in 1995, and although it is expected to be reintroduced during the 1997 legislative session, passage is believed to be highly doubtful. During 1996, management concluded that the properties should be offered for sale. An evaluation of net realizable value resulted in the Company recognizing an anticipated loss from the disposition of such properties of approximately $3.4 million. OTHER OPERATIONS Prior to sale of the property in November 1996, GBCC had a 50% partnership interest with an unrelated third party in the Sheraton Plaza, a 496- room hotel located in Orlando, Florida. GBCC agreed to contribute up to $3.9 million as an additional investment in the Sheraton Plaza hotel partnership to refurbish the hotel facility. GBCC contributed $2.5 million toward such commitment through 1996. Such contributions were in recognition of GBCC's partner having agreed to make $5 million in principal reductions on the underlying mortgage note on the facility of which $4 million were made through 1996. GBCC was required to pay approximately $2.9 million to retire its share of the underlying indebtedness on the property in connection with the sale. Prior to sale of the property in September 1996, GBCC operated the Holiday Inn located at the north entrance of the Dallas/Fort Worth Airport ("DFW North") which was owned by Metroplex Hotel Limited ("Metroplex"), a partnership controlled by certain members of the Pratt Family. During 1996 and 1995, GBCC made capital expenditures under the hotel operating agreement totaling approximately $2.6 million toward property improvements. GBCC was also obligated by the hotel operating agreement to make minimum rental payments equal to Metroplex's principal and interest payments on the underlying indebtedness of this hotel. During February 1994, GBCC utilized funds borrowed from HCC to purchase such underlying indebtedness with a principal balance of $13.8 million from third parties at a cost of $6.8 million and subject to third party indebtedness amounting to $2.7 million. The required minimum rental payments (net of debt service receipts since the February 1994 note acquisition date) amounted to $397,000, $530,000 and $678,000, respectively, during the years ended December 31, 1996, 1995 and 1994. GBCC recorded the note receivable from Metroplex, which accrued interest at the rate of 9 1/2% per annum, at acquisition cost. Upon the sale of the hotel by Metroplex, GBCC received proceeds sufficient to repay the third party indebtedness of $1.9 million, recover its $6.8 million acquisition cost of the underlying indebtedness, recover $2.6 million of its total investment in property improvements and receive additional cash of approximately $770,000. GBCC also had a 46% interest in Southmark San Juan, Inc. ("Southmark San Juan"), a subsidiary of Southmark Corporation ("Southmark") which owned the 420-room Sands Hotel and Casino located in San Juan, Puerto Rico (the "Sands San Juan") prior to its sale in February 1997. GBCC operated this facility under a management agreement with Southmark San Juan and earned management fees of $504,000, $513,000 and $488,000 during the years ended December 31, 1996, 1995 and 1994, respectively. GBCC received a termination fee of approximately $1.5 million in connection with the sale 17 and has agreed to continue to provide management services on a month to month basis through October 1997 subject to cancellation by the new owners. GBCC had not recognized losses incurred by Southmark San Juan since 1990 as its investment was eliminated through the recognition of prior years' losses. ITEM 3. LEGAL PROCEEDINGS PLANET HOLLYWOOD LITIGATION Planet Hollywood International, Inc., a Delaware corporation, and Planet Hollywood (Region IV), Inc., a Minnesota corporation (collectively, "PHII"), filed a complaint in the United States District Court for the Northern District of Illinois, Eastern Division on July 29, 1996 against HCC, HCA and a member of the Pratt Family (collectively, the "Original Hollywood Defendants"). The Original Hollywood Defendants filed with the Court on September 18, 1996 an answer to PHII's lawsuit, along with numerous counterclaims against PHII, Robert Earl and Keith Barish (collectively, the "PHII Defendants"). PHII filed with the Court on January 21, 1997, an amendment to their complaint which, among other things, added HCT (together with the Original Hollywood Defendants, the "Hollywood Defendants") and GBCC as defendants. The Original Hollywood Defendants filed with the Court on February 4, 1997, and GBCC and HCT filed with the Court on February 20, 1997, answers and counterclaims to such amended complaint. In its lawsuit, PHII alleges, among other things, that the Hollywood Defendants and GBCC have, in opening and operating the Hollywood Casino concept, infringed on PHII's trademark, service mark and trade dress and have engaged in unfair competition and deceptive trade practices. In their counterclaims, the Hollywood Defendants and GBCC allege, among other things, that the PHII Defendants have, through their planned use of their mark in connection with casino services, infringed on certain of HCC's service marks and trade dress and have engaged in unfair competition. Given the uncertainties inherent in litigation, no assurance can be given that the Hollywood Defendants will prevail in this litigation; however, the Hollywood Defendants believe that PHII's claims are without merit and intend to defend their position and pursue their counterclaims vigorously. The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of the uncertainties described above. OTHER LITIGATION HCC and its subsidiaries are also parties in various other 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. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS During the fourth quarter of 1996, no matter was submitted to a vote of security holders through the solicitation of proxies or otherwise. 18 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS HCC's Class A common stock, 50,000,000 shares at $.0001 par value per share, is HCC's sole voting security. Since May 28, 1993, HCC's common stock has traded on the Nasdaq National Market tier of the Nasdaq Stock Market under the symbol HWCC. The prices set forth in the following table represent actual transactions.
PERIOD High Low - ------------------- ------ ----- 1996 First Quarter $ 4.63 $3.13 Second Quarter 8.50 3.38 Third Quarter 10.75 4.63 Fourth Quarter 6.13 2.88 1995 First Quarter $ 6.75 $4.75 Second Quarter 10.25 5.88 Third Quarter 10.13 6.63 Fourth Quarter 7.00 3.63
As of March 25, 1997, there were approximately 500 holders of record of HCC's voting common stock. No cash dividends have been paid on HCC's common stock in the past and HCC has no plans to pay cash dividends on its common stock in the foreseeable future. See Note 4 of "Notes to Consolidated Financial Statements" for a description of certain agreements that impose specified restrictions on the transfer of funds between certain subsidiaries. HCT's common stock, 1,000 shares with par value of $.01 per share, is its sole voting security; all of the 1,000 shares outstanding are owned by HCC. HCT has not paid dividends in the past and has no plans to pay any dividends in the foreseeable future. 19 ITEM 6. SELECTED FINANCIAL DATA HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES The following tables present selected financial data for HCC and are qualified in their entirety by the consolidated financial statements, including the notes thereto, appearing elsewhere herein. The selected financial data for HCC has been presented as though HCC, which was incorporated during November 1990, owned its subsidiaries for all periods presented. See Note 1 to Notes to the Consolidated Financial Statements of HCC appearing elsewhere herein. The data as of December 31, 1996 and 1995, and for the years ended December 31, 1996, 1995 and 1994, have been derived from the audited consolidated financial statements of HCC contained elsewhere in Item 8.
STATEMENT OF OPERATIONS DATA: YEAR ENDED DECEMBER 31, ----------------------------------------------------- 1996 1995 1994 1993 1992 --------- --------- --------- --------- --------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Net revenues............................................................. $530,580 $539,943 $464,384 $343,340 $275,584 -------- -------- -------- -------- -------- Expenses: Departmental........................................................... 426,769 396,157 338,776 249,139 209,268 General and administrative............................................. 37,169 36,914 33,189 31,989 30,507 Depreciation and amortization.......................................... 40,836 40,955 30,960 25,003 21,064 Amortization of preopening costs....................................... - 11,002 2,120 - Development............................................................ 1,065 6,765 5,154 1,926 - Write down of properties held for sale.................................................................. 3,400 - - - - -------- -------- -------- -------- -------- Total expenses....................................................... 509,239 480,791 419,081 310,177 260,839 -------- -------- -------- -------- -------- Income from operations................................................... 21,341 59,152 45,303 33,163 14,745 -------- -------- -------- -------- -------- Nonoperating income (expenses): Interest income........................................................ 3,101 3,708 4,227 3,437 3,800 Interest expense....................................................... (59,090) (55,558) (46,233) (43,141) (40,924) Write-off deferred pre-acquisition costs............................... - - - - (13,086) Loss on disposition of assets.......................................... (1,841) (514) (26) - - -------- -------- -------- -------- -------- Total nonoperating expenses, net..................................... (57,830) (52,364) (42,032) (39,704) (50,210) -------- -------- -------- -------- -------- (Loss) income before income taxes, nonrecurring and extraordinary items............................................... (36,489) 6,788 3,271 (6,541) (35,465) Valuation provision on affiliate receivables............................. (18,741) - - - - -------- -------- -------- -------- -------- (Loss) income before income taxes and extraordinary item.................................................... (55,230) 6,788 3,271 (6,541) (35,465) Income tax (provision) benefit........................................... (63) (268) (1,527) 7,069 (657) -------- -------- -------- -------- -------- (Loss) income before extraordinary item.................................. (55,293) 6,520 1,744 528 (36,122) Extraordinary item: Early extinguishment of debt, net of related tax benefits (1)...................................... - (23,808) 126 (13,069) - -------- -------- -------- -------- -------- Net (loss) income........................................................ $(55,293) $(17,288) $ 1,870 $(12,541) $(36,122) ======== ======== ======== ======== ======== Per common share: (Loss) income before extraordinary item................................ $ (2.24) $ .26 $ .07 $ .02 $ (1.81) Extraordinary item..................................................... - (.96) .01 (.57) - -------- -------- -------- -------- -------- Net (loss) income.................................................... $ (2.24) $ (.70) $ .08 $ (.55) $ (1.81) ======== ======== ======== ======== ======== BALANCE SHEET DATA: DECEMBER 31, ---------------------------------------------------- 1996 1995 1994 1993 1992 -------- -------- -------- -------- -------- (IN THOUSANDS) Total assets............................................................. $308,085 $514,463 $464,135 $369,255 $279,547 Total debt, including capital lease obligations...................................................... 232,046 496,847 432,117 345,451 328,555 Shareholders' equity (deficit)........................................... 45,144 (57,233) (39,947) (41,818) (97,538)
- -------------------- (1) Includes the following items: (i) for 1995, costs associated with the October 1995 issuance of the Senior Secured Notes by HCC and (ii) for 1993, the accrual of $14 million of costs associated with a 1994 recapitalization of GBCC, net of related tax benefit. 20 HOLLYWOOD CASINO-AURORA, INC. AND HWCC-TUNICA, INC. The following tables set forth selected financial information for HCA and HCT and are qualified in their entirety by, and should be read in conjunction with, HCA and HCT's Financial Statements and notes thereto contained elsewhere herein. HCA and HCT commenced operations on June 17, 1993 and August 8, 1994, respectively. The data as of December 31, 1996 and 1995 and for the years ended December 31, 1996, 1995 and 1994 have been derived from the audited financial statements of HCA and HCT contained elsewhere in Item 8. HOLLYWOOD CASINO-AURORA, INC. STATEMENT OF OPERATIONS DATA:
YEAR ENDED DECEMBER 31, ----------------------------------------------------- 1996 1995 1994 1993(1) 1992 --------- --------- --------- ---------- -------- (IN THOUSANDS) Net revenues....................................... $163,391 $152,508 $148,000 $71,628 $ - -------- -------- -------- ------- ------- Expenses: Departmental.................................... 114,006 102,780 95,495 45,047 - General and administrative...................... 14,645 14,406 11,926 8,200 - Depreciation and amortization................... 8,834 9,172 7,121 3,582 494 Amortization of preopening costs................ - - 5,863 2,120 - -------- -------- -------- ------- ------- Total expenses................................. 137,485 126,358 120,405 58,949 494 -------- -------- -------- ------- ------- Income from operations.......................... 25,906 26,150 27,595 12,679 (494) -------- -------- -------- ------- ------- Non-operating income (expense): Interest income................................. 205 306 458 432 - Interest expense................................ (6,704) (6,493) (6,654) (3,930) - -------- -------- -------- ------- ------- Total non-operating expenses, net.............. (6,499) (6,187) (6,196) (3,498) - -------- -------- -------- ------- ------- Income before income taxes......................... 19,407 19,963 21,399 9,181 (494) Income tax provision............................... (6,883) (7,554) (7,557) (3,567) - -------- -------- -------- ------- ------- Income before extraordinary item................... 12,524 12,409 13,842 5,614 (494) Extraordinary item................................. - (989) - - - -------- -------- -------- ------- ------- Net income......................................... $ 12,524 $ 11,420 $ 13,842 $ 5,614 $ (494) ======== ======== ======== ======= ======= BALANCE SHEET DATA: DECEMBER 31, ---------------------------------------------------- 1996 1995 1994 1993 1992 -------- -------- -------- ------- ------- Total assets....................................... $107,449 $ 93,196 $ 73,356 $77,113 $17,716 Total debt, including capital lease obligations.... 65,430 55,829 50,141 54,624 13,767 Shareholder's equity............................... 28,033 25,549 14,071 10,659 1,507
(1) The Aurora Casino commenced operations on June 17, 1993. 21 HWCC-TUNICA, INC. STATEMENT OF OPERATIONS DATA:
YEAR ENDED DECEMBER 31, -------------------------------- 1996 1995 1994(1) --------- --------- ---------- (IN THOUSANDS) Net revenues.............................................. $ 94,524 $ 94,416 $32,413 -------- -------- ------- Expenses: Departmental............................................. 72,602 63,842 22,623 General and administrative............................... 5,962 5,711 2,425 Depreciation and amortization............................ 10,906 10,356 3,610 Amortization of preopening costs......................... - - 5,939 -------- -------- ------- Total expenses.......................................... 89,470 79,909 34,597 -------- -------- ------- Income (loss) from operations............................ 5,054 14,507 (2,184) -------- -------- ------- Non-operating income (expenses):.......................... Interest income.......................................... 835 637 374 Interest expense......................................... (10,060) (10,792) (4,454) Loss on sale of assets................................... (45) (505) - -------- -------- ------- Total non-operating expenses, net....................... (9,270) (10,660) (4,080) -------- -------- ------- (Loss) income before income taxes and extraordinary item.. (4,216) 3,847 (6,264) Income tax benefit........................................ - 694 - -------- -------- ------- (Loss) income before extraordinary item................... (4,216) 4,541 (6,264) Extraordinary item........................................ - (9,614) 126 -------- -------- ------- Net loss.................................................. $ (4,216) $ (5,073) $(6,138) ======== ======== ======= BALANCE SHEET DATA: DECEMBER 31, ------------------------------ 1996 1995 1994 --------- -------- -------- Total assets.............................................. $116,620 $122,240 $99,889 Total debt, including capital lease obligations........... 86,645 88,340 61,789 Shareholder's equity...................................... 19,210 23,426 28,499
(1) The Tunica Casino commenced operations on August 8, 1994. 22 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Annual Report on Form 10-K contains forward-looking statements about the business, financial condition and prospects of the Company. The actual results could differ materially from those indicated by the forward- looking statements because of various competition, economic conditions, tax regulations, state regulations applicable to the gaming industry in general or the Company in particular, and other risks indicated in the Company's filings with the Securities and Exchange Commission. Such risks and uncertainties are beyond management's ability to control and, in many cases, can not be predicted by management. When used in this Annual Report on Form 10-K, the words "believes", "estimates", "anticipates" and similar expressions as they relate to the Company or its management are intended to identify forward-looking statements. 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. For the years ended December 31, 1996, 1995 and 1994, however, the operations of GBCC are included in the consolidated results of operations of HCC. In future periods, HCC's results of operations will not include the operations of GBCC and its subsidiaries. Because HCC and the HCC subsidiaries that own and operate the Aurora Casino and the Tunica Casino are not obligated for GBCC's indebtedness and because GBCC and its subsidiaries are restricted in their ability to pay or advance funds to HCC and its subsidiaries, management's discussion and analysis of HCC's financial condition and results of operations is divided into separate analyses of: (i) HCC, including all of its subsidiaries other than GBCC and its subsidiaries (the "HCC Group") and (ii) GBCC and its subsidiaries which include the Sands (the "GBCC Group"). The following table sets forth the pro forma results of operations of HCC for the year ended December 31, 1996 as if the distribution of GBCC common stock had occurred at December 31, 1995 and, as a result, the GBCC Group had not been consolidated with HCC. Such pro forma information for years prior to 1996 is not believed to be relevant as the operations of the Tunica Casino and the Aurora Casino would be for less than full years. Net revenues $ 258,487,000 Total expenses (241,545,000) ------------ Income from operations 16,942,000 ------------ Non-operating expenses: Interest expense, net (26,563,000) Loss on disposal of assets (46,000) ------------ Total non-operating expenses (26,609,000) ------------ Loss before income taxes (9,667,000) Income tax provision (695,000) ------------ Net loss $(10,362,000) ============ Net loss per common share $(0.42) ============ 23 RESULTS OF OPERATIONS HCC GROUP Selected financial information of the HCC Group is presented below:
YEAR ENDED DECEMBER 31, ------------------------------------------ 1996 1995 1994 ------------ ------------ ------------ (in thousands) Casino revenues................................................ $ 244,485 $ 234,570 $ 169,877 Other departmental revenues.................................... 36,660 30,915 29,739 Less - promotional allowances.................................. (22,658) (18,226) (19,067) ------------ ------------ ------------ Net revenues................................................. 258,487 247,259 180,549 ------------ ------------ ------------ Casino expenses................................................ 174,032 154,584 109,256 Other departmental expenses.................................... 12,716 11,907 8,670 General and administrative expenses............................ 29,326 26,523 21,654 Depreciation and amortization.................................. 21,006 20,432 11,413 Amortization of preopening costs............................... - - 11,802 Development expenses........................................... 1,065 6,765 5,154 Write down of properties held for sale......................... 3,400 - - ------------ ------------ ------------ Total expenses............................................... 241,545 220,211 167,949 ------------ ------------ ------------ Income from operations....................................... $ 16,942 $ 27,048 $ 12,600 ============ ============ ============
Net revenues of the HCC Group for the year ended December 31, 1996 were $258.5 million, an increase of 4.5% from net revenues of $247.3 million in 1995. The 1995 net revenues reflected an increase of $66.7 million (36.9%) from the $180.5 million earned during 1994. Most of the 1996 increase was realized by improved net revenues at the Aurora Casino; net revenues at the Tunica Casino were virtually unchanged in 1996 compared to 1995. The Tunica Casino, which opened in August 1994, provided incremental net revenues of $62 million during 1995, accounting for substantially all of the HCC Group's increase. The 1995 increased revenues also included an increase in net revenues at the Aurora Casino of $4.5 million compared to 1994. As explained below, an expansion project at the Aurora Casino, which commenced during the first quarter of 1995 and required the removal from service of one of the Aurora Casino's two riverboats for a period of 30 days during the second quarter of 1995, resulted in a decline in revenues during the second quarter of 1995. As explained in greater detail below, the 4.5% increase in 1996 net revenues was offset by a $21.3 million (9.7%) increase in operating expenses, resulting in a decline in income from operations of $10.1 million (37.4%) in 1996 compared to 1995. The increase in operating expenses primarily resulted from higher marketing and promotional expenses in response to increased competition at both the Aurora Casino and the Tunica Casino. The 1995 increase in revenues over the prior year enabled the HCC Group's income from operations to improve $14.4 million to $27 million in 1995 from $12.6 million in 1994. The Tunica Casino contributed an incremental $16.7 million in income from operations after consulting fees; as a result of the aforementioned construction and the advent of additional competition in its market area, income from operations at the Aurora Casino declined by $1.4 million during 1995 compared with 1994. 24 AURORA CASINO GENERAL Income from operations at the Aurora Casino, adjusted to exclude management fees payable to a subsidiary of GBCC, amounted to $35.3 million for the year ended December 31, 1996 compared to $35.6 million and $37.6 million, respectively, during 1995 and 1994. During the second quarter of 1995, the expansion of one of the Aurora Casino's two riverboats was completed, increasing gaming capacity by 10,000 square feet and slot machine capacity by 34%. The increase in space generated significant increases in gross wagering and gaming revenues during the first half of 1996 compared to the first half of 1995. Operating results during the last half of 1996 were negatively impacted by the opening of three gaming facilities in northern Indiana during June and severe local flooding in July. During the period of their operations in 1996, the northern Indiana casinos generated nearly $3 billion of gross wagering and $230 million of casino revenues. While the flooding caused only minor damage to the Aurora Casino, several cruises had to be cancelled and the surrounding area suffered extensive damage which reduced casino volume for the remainder of the third quarter. During the 1995 expansion one riverboat was out of service for 30 days prior to completion of the construction in May; however, through a combination of cruise schedule revisions and special marketing efforts, casino revenues during this period approximated 72% of those earned during the same period in 1994. Such performance was achieved despite a 48% reduction in gaming positions and the additional competition in 1995 from a riverboat operation in nearby Elgin, which opened in October 1994. GAMING OPERATIONS The following table sets forth certain unaudited financial and operating data for the Aurora Casino's operations for the years ended December 31, 1996, 1995 and 1994.
YEAR ENDED DECEMBER 31, ------------------------------------- 1996 1995 1994 ----------- ----------- ----------- (IN THOUSANDS, EXCEPT PERCENTAGES) REVENUES: Table games................. $ 51,230 $ 57,008 $ 64,763 Slot machines............... 105,894 89,273 74,674 ---------- ---------- ---------- Total...................... $ 157,124 $ 146,281 $ 139,437 ========== ========== ========== TABLE GAMES: Gross wagering (drop) (1)... $ 304,851 $ 320,822 $ 356,381 Hold percentages (2): HCA........................ 16.8% 17.8% 18.2% Other Chicago-area (3)..... 18.8% 19.0% 18.4% SLOT MACHINES: Gross wagering (handle) (1). $1,902,642 $1,499,768 $1,182,594 Hold percentages (2): HCA........................ 5.6% 6.0% 6.3% Other Chicago-area (3)..... 5.7% 5.9% 6.3%
_______________________ 25 (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". (3) Comprised of Empress and DPD/Harrah's Casinos located in Joliet, Illinois and Grand Victoria's Casino located in Elgin, Illinois (which opened October 6, 1994). Percentages have been calculated based on information published by the Illinois Gaming Board. Total gross wagering at the Aurora Casino as measured by table drop and slot machine handle increased by $386.9 million during 1996 compared to 1995 primarily due to the expansion of gaming space in 1995 which increased slot machine capacity by 34%. Slot machine handle during 1996 increased $402.9 million (26.9%) while table drop decreased slightly. The increase in slot machine handle during the first four months of 1996 was 76.3% compared to the pre-expansion and construction periods in 1995; however, as a result of flooding and the competition from new boats in Indiana, slot machine handle during the last six months of 1996 was only 2% above the 1995 comparable period. The 26.9% increase in slot machine handle during 1996 compares favorably to the 3.4% increase experienced by other Chicago-area riverboat operators. Other Chicago-area operators also experienced a decrease in table game wagering of 10.8% compared to a 5% decrease at the Aurora Casino. Accordingly, the Aurora Casino increased both its slot machine and table games market share during 1996 as the additional competition from Indiana riverboats had a greater negative impact on Chicago-area operators closer to Indiana than on the Aurora Casino. Total gross wagering increased $281.6 million during 1995 compared to 1994 in spite of the removal of one of the facility's two riverboats from service for 30 days as discussed previously. The overall increase in casino wagering reflects the expanded gaming space, as well as the continuing refinement of the Aurora Casino's marketing strategy, including the growth of its data base of Chicago area patrons and the growth in membership of its patron recognition casino players' card programs which identify higher value patrons. The Aurora Casino's decrease in table drop of 10% during the year ended December 31, 1995 (a decrease of 3.3% during the six month period ended December 31, 1995 subsequent to the expansion of gaming space) compares with an increase in table drop for other Chicago-area riverboat operators of 39.9%. The significant Chicago market increase and the resulting decrease in table games market share for the Aurora Casino is primarily due to increased competition from the Elgin facility, which was able to provide more spacious surroundings for its table game patrons. Exclusive of the Elgin facility, table drop for the other Chicago-area riverboat operators increased by only 2.5%. Slot machine handle at the Aurora Casino increased 26.8% overall during 1995 compared to 1994 and 38.4% during the last six months of 1995 compared to the same period in 1994. The 1995 increase compares unfavorably to the 62.8% increase experienced by other Chicago-area riverboat operators; however, excluding the increase resulting from the Elgin facility's opening in October 1994, the other Chicago- area increase in slot machine handle was only 20.2%. REVENUES Casino revenues increased $10.8 million (7.4%) during the year ended December 31, 1996 compared to 1995. Such increase resulted from a $16.6 million increase in slot machine revenues offset, in part, by a $5.8 million decline in table game revenues. The 26.9% increase in slot machine handle during 1996 was partially offset by a decrease in the slot machine hold percentage to 5.6% from 6%, resulting in a slot machine revenue increase of $16.6 million (18.6%). The slight decline in table game wagering discussed 26 previously was further compounded by a decline in the table game hold percentage to 16.8% in 1996 from 17.8% in 1995. These factors combined to bring about a decrease in table game revenues of $5.8 million (10.1%). Total casino revenues increased $6.8 million (4.9%) during 1995 compared to 1994. Table games revenue decreased $7.8 million (12%) during 1995 compared to 1994. The aforementioned 10% decrease in drop during 1995 compared to 1994 was compounded by the decrease in the table game hold percentage to 17.8% in 1995 from 18% in 1994. The 26.8% increase in slot machine handle during 1995 was partially offset by a decline in the slot hold percentage, resulting in a 1995 slot machine revenue increase of $14.6 million (19.6%) compared to 1994. Food and beverage revenues increased $2.1 million (17.7%) during 1996 compared to 1995 as a result of increased complimentaries resulting from marketing programs. Food and beverage revenues at the Aurora Casino increased by $728,000 (6.6%) during 1995 compared to 1994 due to increases in patron volume and enhancements at the Epic Buffet and other banquet facilities. Other revenues decreased $1 million (21%) during 1996 compared to 1995 due to reductions in parking fees generated in response to competitive pressures. Admission and other revenues decreased by $8.9 million (64.3%) during 1995 compared to 1994 primarily as the result of admission fees being discontinued in response to competitive pressures in the Chicago area together with decreases in retail revenue resulting from changes in certain retail- oriented promotional activities. 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 64.5%, 62.6% and 65.5%, respectively, during the years ended December 31, 1996, 1995 and 1994. The 1996 increase reflects the increase in dining promotional activities partially offset by the elimination of complimentary parking fees. The 1995 decrease from the prior year reflects (i) the discontinuance of admission fees and, consequently, complimentary admissions, and (ii) the elimination of complimentary beverages to conform to a clarification of existing liquor laws. DEPARTMENTAL EXPENSES Casino expenses increased by $10.8 million (11.2%) in 1996 compared to 1995 primarily due to the increases in casino wagering noted above together with increased promotional activity. Casino expenses increased by $8.6 million (9.7%) during 1995 over 1994. Such increase exceeded the corresponding increase in casino revenues and is primarily due to additional costs associated with the opening of the expanded riverboat in May 1995 and to the implementation of new marketing programs and expansion of existing programs. Food and beverage expenses increased slightly during 1996 as increases in payroll and food costs were virtually offset by increased allocations to the casino department as a result of promotional activities. Food and beverage expenses decreased $721,000 (12.9%) during 1995 compared to 1994. Such decrease was a result of an increase in food complimentaries charged to casino expenses and was partially offset by higher food costs primarily due to increased patronage and the Aurora Casino's efforts to upgrade the quality of its Epic Buffet food service. Food and beverage services to casino patrons are, for the most part, ancillary to the casino operation. Accordingly, these departments are not expected to contribute significantly to income from operations. Other expenses increased $324,000 (43.7%) in 1996 compared to 1995 as fewer expenses were allocated to the casino department, primarily as a result of reduced parking costs. Other expenses 27 decreased $577,000 (43.7%) during 1995 as compared to 1994 primarily due to increased allocations to the casino department. TUNICA CASINO GENERAL The Tunica Casino earned income from operations, adjusted to exclude consulting fees payable to a subsidiary of GBCC, of $6.3 million in 1996 compared to $15.7 million in 1995 and a loss of $1.8 million for 1994 (the Tunica Casino opened on August 8, 1994). The 1996 decrease results primarily from increased competition in the Tunica market as evidenced by the opening of new casinos in December 1995 and April and July 1996. The additional competition resulted in increased marketing and promotional expenditures to protect market share. GAMING OPERATIONS The following table sets forth certain unaudited financial and operating data relating to the operations of the Tunica facility for the years ended December 31, 1996 and 1995 and for the period from opening on August 8, 1994 through December 31, 1994. Published local and state-wide industry information is limited in both detail and availability. Accordingly, relevant comparisons between the Tunica Casino and its market competitors can not be presented.
YEAR ENDED DECEMBER 31, PERIOD FROM -------------------------- OPENING THROUGH 1996 1995 DECEMBER 31, 1994 ----------- ------------- ------------------ (in thousands, except percentages) CASINO REVENUES: Table games............................. $ 16,650 $ 17,782 $ 7,384 Slot machines........................... 69,644 69,256 22,521 Poker revenues.......................... 1,067 1,251 535 ---------- ---------- -------- Total.......................... $ 87,361 $ 88,289 $ 30,440 ========== ========== ======== TABLE GAMES: Gross wagering (drop) (1)............... $ 82,350 $ 80,348 $ 38,039 Hold percentage (2)..................... 20.2% 22.1% 19.4% SLOT MACHINES: Gross wagering (handle) (1)............. $1,332,949 $1,345,983 $409,938 Hold percentage (2)..................... 5.2% 5.1% 5.5%
- -------------- (1)(2) See corresponding notes to the table at "Aurora Casino - Gaming Operations" above. Total gross wagering at the Tunica Casino as measured by table game drop and slot machine handle decreased slightly (less than 1%) during 1996 as compared to 1995. Table game wagering increased $2 million (2.5%); however, slot machine handle decreased $13 million (1%), more than offsetting the table game increase. 28 During the first quarter of 1996, the Tunica Casino opened its new "Adventure Slots" attraction, a highly themed area of the casino floor which features interactive memorabilia displays and entertainment. Although a significant portion of the casino's slot machine capacity was removed from the casino floor during the first six weeks of 1996 for construction of this new attraction, increased patron volume subsequent to its mid-February opening resulted in an overall increase in slot machine handle of 6% for the first quarter of 1996 compared to the same period of 1995. Such increase was offset during the remainder of 1996 by the opening in April 1996 of a fourth casino in the Casino Strip cluster and the opening in July 1996 of the largest casino in Tunica County, Grand Casino, which is located north of the Casino Strip and closer to the primary gaming market of Memphis, Tennessee. REVENUES Total casino revenues decreased slightly by $928,000 (1.1%) during 1996 compared to 1995. The increase in table game wagering was offset by a decrease in the table hold percentage to 20.2% from 22.1%, resulting in a decrease in table game revenues of $1.1 million (6.4%). Although slot machine wagering showed a decrease in 1996, the hold percentage improved to 5.2% from 5.1%, resulting in a slight increase in slot machine revenues of $388,000 (less than 1%). Casino revenues increased $57.9 million (190%) during the year ended December 31, 1995 compared to the period of time the Tunica Casino was in operation during 1994. On a more comparable basis, annualization of the reported amounts of revenues during the 1994 period of operations indicates that table revenues declined and slot machine revenues increased during 1995 in comparison to 1994. The Tunica Casino reduced the number of table games by approximately 10% and slightly increased the number of slot machines compared to the initial period of its operations in 1994 reflecting changes in the table game and slot machine components of its customer mix. Such changes resulted, in part, from the opening in February 1995 of an additional casino which heavily promotes its table game business, from the introduction by the Tunica Casino of additional marketing programs geared toward slot patrons and to refinements in the type of slot machines offered to meet customers' preferences. Table game revenues also benefitted from an increase in the hold percentage for table games to 22.1% during 1995 compared to 19.4% during the period from opening to December 31, 1994. Slot machine revenue growth in 1995 was a result of significant increases in slot machine gross wagering, partially offset by a decline in the slot machine hold percentage to 5.1% during 1995 compared to 5.5% during the period from opening to December 31, 1994. Rooms revenues increased $2.1 million (67.2%) during 1996 compared to 1995. This increase results from the opening of the Tunica Casino's new 352- room hotel tower during the third quarter of 1996, increasing the number of guest rooms by almost 130%. Hotel occupancy rates have decreased slightly as a result of the additional rooms, declining to an average of 88% for the period from August through December 1996 from an average of 99.7% from January through July 1996 and an average of 96% in 1995. Hotel room revenues increased $2.3 million (152.5%) in 1995 compared to 1994 primarily as a result of the hotel facility opening approximately one month after the casino opened in the third quarter of 1994 and to improved occupancy rates, which have increased from an average of approximately 86% in 1994 to approximately 96% in 1995. Food and beverage revenues increased $2.3 million (24.1%) during 1996 compared to 1995 as a result of increased overnight patron volume from the newly completed hotel tower, the opening of a new dining outlet and increased promotional activities. The $6.1 million (174.3%) increase in food and beverage revenues during 1995 compared to the partial year in 1994 is comparable to the increases noted in casino revenues and reflects additional patron volume. Promotional allowances represent the estimated value of goods and services provided free of charge to casino customers under various marketing programs. These allowances, as a percentage of rooms, food 29 and beverage and other revenues, increased to 61.1% from 56% during 1995 and 58.9% during the period from opening to December 31, 1994. The 1996 increase results from the increased use of hotel and food and beverage complimentaries as part of the Tunica Casino's promotional programs. The 1995 decrease from the prior period primarily resulted from decreased utilization of complimentaries compared with the initial period of operations, during which more complimentaries were used to attract new casino patrons. DEPARTMENTAL EXPENSES Casino expenses increased $8.6 million (15%) in 1996 compared to 1995 primarily due to increases in advertising and marketing costs and other promotional activities. Such costs increased in 1996 with the advent of additional competition as discussed under "Gaming Operations" above and the opening of the new hotel tower and the "Adventure Slots" attraction. Additional promotional activities also resulted in increased allocations of rooms and food and beverage costs to the casino department. Casino expenses increased $36.7 million (177.8%) in 1995 compared to the partial year of operations in 1994. Such increase is comparable to the increase in casino revenues and reflects increased patron volume. Rooms expenses decreased $314,000 (16.6%) in 1996 compared to 1995 in spite of the addition of the new hotel tower. The decrease is primarily due to increases in promotional activities resulting in increased allocations of room costs to the casino department. Rooms expenses increased $1.4 million (281.2%) in 1995 compared to the partial year of operations in 1994. In addition to the increase resulting from increased patron volume, the near capacity hotel occupancy rate of 96% in 1995 allowed for less hotel room promotional activity, thus reducing the allocation of such costs to the casino department. The increase in other expenses of $72,000 (6.1%) during 1996 compared to 1995 results from increased merchandise costs with respect to retail sales, to increases in entertainment expenses and to increased public area maintenance costs. The $826,000 (228.8%) increase in other expenses in 1995 compared to the period from opening in 1994 reflects the additional casino volume and a decrease in promotional activities after the initial start up period. GBCC GROUP Selected financial information of the GBCC Group is presented below:
YEAR ENDED DECEMBER 31, ------------------------------ 1996 1995 1994 --------- --------- --------- (in thousands) Casino revenues.................................... $242,889 $264,048 $256,207 Other departmental revenues........................ 68,680 67,372 64,653 Less - promotional allowances...................... (27,929) (27,083) (24,943) -------- -------- -------- Net revenues...................................... 283,640 304,337 295,917 -------- -------- -------- Casino expenses.................................... 218,990 209,282 198,270 Other departmental expenses........................ 21,031 20,384 22,482 General and administrative expenses................ 19,363 21,983 22,916 Depreciation and amortization...................... 19,868 20,553 19,547 -------- -------- -------- Total expenses.................................... 279,252 272,202 263,215 -------- -------- -------- Income from operations............................ $ 4,388 $ 32,135 $ 32,702 ======== ======== ========
30 The GBCC Group's primary sources of revenues are the operations of the Sands and management and consulting fees earned from the Aurora Casino and the Tunica Casino. Results of operations for the Aurora Casino, on which such management fees are based, were discussed above as part of the HCC Group. Since January 1994, the GBCC Group has earned a fixed consulting fee from the Tunica Casino of $100,000 per month. The GBCC Group has reduced its losses from noncasino hotels during recent years through the sale of certain owned properties and the termination of management contracts on certain managed properties. The GBCC Group's consolidated net revenues declined to $283.6 million during 1996 from $304.3 million for 1995 which, combined with higher operating costs at the Sands, resulted in a decline in income from operations to $4.4 million in 1996 from $32.1 million in 1995. Operating results have been adversely affected in 1996 by the advent of unprecedented and highly aggressive marketing programs instituted by certain other Atlantic City casinos seeking to increase their market share and to a lesser degree by severe winter snowstorms in January and February. These factors, as well as declines in both the table games and slot machine hold percentages, resulted in a decline in net revenues at the Sands of 6.8% (to $264.8 million in 1996 from $284 million in 1995). In addition, marketing and advertising costs increased by $10.9 million (17.3%) during 1996 compared to 1995 in response to competitive pressures. GAMING OPERATIONS The following table sets forth certain unaudited financial and operating data relating to the Sands' operations:
YEAR ENDED DECEMBER 31, ------------------------------------- 1996 1995 1994 ----------- ----------- ----------- (IN THOUSANDS, EXCEPT PERCENTAGES) REVENUES: Table games........... $ 79,127 $ 95,835 $ 96,485 Slot machines......... 159,972 163,821 155,381 Other (1)............. 3,790 4,392 4,341 ---------- ---------- ---------- Total................ $ 242,889 $ 264,048 $ 256,207 ========== ========== ========== TABLE GAMES: Gross Wagering (Drop) (2)........... $ 576,577 $ 606,283 $ 605,854 ========== ========== ========== Hold Percentages: (3) Sands................ 13.7% 15.8% 15.9% Atlantic City Casino Gaming Industry..... 15.5% 15.9% 15.8% SLOT MACHINES: Gross Wagering (Handle) (2)......... $1,954,612 $1,892,159 $1,760,279 ========== ========== ========== Hold Percentage:(3) Sands (4)............ 8.2% 8.7% 8.8%
____________________________ 31 (1) Consists of revenues from poker and simulcast horse racing wagering. (2) Gross wagering consists of the total value of chips purchased for table games (excluding poker) and keno wagering (collectively, the "drop") and coins wagered in slot machines ("handle"). (3) 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". (4) The Sands' hold percentage with respect to slot machines is reflected on an accrual basis. Comparable data for the Atlantic City gaming industry is not available. The 1994 hold percentage calculations for the Sands have been adjusted to exclude the recognition of approximately $1 million, in slot machine revenues resulting from the reversal of certain progressive jackpot liabilities (see "Revenues" below). Table games drop at the Sands declined $29.7 million (4.9%) during 1996 compared with 1995 and did not change significantly during 1995 compared with 1994. The Sands' 1996 decrease in table drop compares with an increase of 5% in table drop for all other Atlantic City casinos during the same period. As a result, the Sands' 1996 table game market share (expressed as a percentage of the Atlantic City industry aggregate table game drop) declined to 7.7% from 8.5% during 1995. Table game drop throughout 1996 was adversely impacted by the increase in competitive pressures in the rated table market segment, of which a significant portion was in the "high end" and midmarket segments. The second half of 1996 also saw a decline in the unrated table market segment as expansions at competing properties, construction on roadways into the city and other factors all served to reduce unrated table play at the Sands. The Sands' slight decrease in drop during 1995 compares with an increase of 4.7% in table drop for all other Atlantic City casinos during the same period. As a result, the Sands' table game market share decreased to 8.5% during 1995 from 8.8% in 1994. The Sands' table game drop decrease was again largely attributable to competitive pressures in the rated table market segment; however, such decreases were partially offset by increases in the unrated table segment. As a result of the Grand Opening on July 1, 1994, the number of table games, excluding poker, increased significantly and table games were made more accessible to casino patrons boosting table drop during the second half of 1994. However, a number of factors adversely affected the 1994 first six months' table games performance including: (i) the relocation of many blackjack tables to a less accessible temporary gaming space during construction and the periodic closing of selected tables on the main casino floor as construction neared completion; (ii) the severe winter weather during the first quarter, particularly on weekend periods which generally affect the Sands to a greater degree than its competitors since the Sands caters to premium table players who concentrate their visits over weekend periods; (iii) the overall trend in the Atlantic City marketplace towards slot machine play and (iv) competitive pressures, particularly in the high-end table patron segment. Slot machine handle increased $62.5 million (3.3%) and $131.9 million (7.5%) for the years ended December 31, 1996 and 1995, respectively, compared with the previous years. The Sands' slot machine handle increases compare with 4.9% and 15.7% increases, respectively, in slot machine handle for all other Atlantic City casinos during the same periods. As a result, the Sands' market share decreased to 6.1% in 1996 from 6.2% during 1995 and 6.7% during 1994. The increases in slot machine handle are largely attributable to increases in marketing programs, such as coin incentive and direct marketing programs, which resulted in significant increases in the number of bus patrons for 1996 compared to 1995. The Sands' average number of slot machines increased by less than 1% during 1996 compared to an increase of 11.3% for all other Atlantic City casinos. The greater percentage increase in the number of slot machines for other Atlantic City casinos reflects, in part, expansions of certain facilities during 1996 which resulted in an overall increase of approximately 121,000 square feet of casino space and further contributed to the Sands' decline in market share. Although the Sands' increase in the average number of slot machines during 1995 was comparable to the overall Atlantic City industry increase, the Sands' increase in slot machine handle lagged the 15.7% increase in handle for all other Atlantic City casinos. During the 32 second quarter of 1995, the Sands discontinued certain marketing programs and promotions (particularly slot promotions which included cash giveaways) which management deemed to be only marginally profitable. This strategy worked well during the 1995 second quarter; however, entering the peak summer season, many of the Sands' competitors increased such spending programs and the Sands lost market share in the highly profitable mass market segment. REVENUES Casino revenues at the Sands decreased by $21.2 million (8%) during 1996 compared with 1995. Most of the decline in casino revenues is attributable to table games which were impacted by both a decline in gross wagering as discussed previously and by a significant and unusual decrease in table games hold percentage at the Sands to 13.7% during 1996 compared to 15.8% during 1995. The 3.3% increase in slot machine wagering at the Sands during 1996 compared to 1995 was more than offset by a decline in the slot machine hold percentage to 8.2% from 8.7%. During 1995, casino revenues at the Sands increased by $7.8 million (3.1%) compared with 1994. Casino revenues during the second quarter of 1994 included the recognition of approximately $1 million resulting from the reversal of certain progressive jackpot liabilities; the exclusion of such amount from 1994 revenues results in a 1995 increase in casino revenues of 3.5%. Casino revenues were also negatively impacted by decreases in both the table games and slot machine hold percentages at the Sands during 1995 compared to 1994. Rooms revenues decreased $1.3 million (8.5%) during 1996 compared with 1995, but did not change significantly during 1995 compared with 1994. The 1996 decrease reflects the sale in September 1996 of a hotel property operated by the GBCC Group under a joint operating agreement. Room revenues for such property were $1.4 million during the fourth quarter of 1995. Food and beverage revenues increased by $1 million (2.9%) and by $3.3 million (10.6%), respectively, during 1996 and 1995 compared with the prior years. These increases were primarily the result of the opening of the Epic Buffet at the Sands during the third quarter of 1995, partially offset in 1996 by the aforementioned sale of a hotel property. Other revenues increased $1.6 million (8.8%) during 1996 compared to 1995 primarily due to increases in theater entertainment revenue at the Sands. Other revenues decreased $1.1 million (5.8%) during 1995 compared to 1994 primarily due to decreased revenues from GBCC's computer services subsidiary. Promotional allowances represent the estimated value of goods and services provided free of charge to casino customers under various marketing programs. As a percentage of rooms, food and beverage and other revenues at the Sands, these allowances decreased to 56.1% in 1996 from 57.6% in 1995 and 56.9% in 1994. The 1996 decrease is primarily attributable to increases in other types of marketing programs in lieu of promotional allowances. The 1995 increase is primarily attributable to promotional activity associated with the 1995 opening of the Epic Buffet. DEPARTMENTAL EXPENSES Casino expenses at the Sands increased $9.7 million (4.6%) during 1996 and $11 million (5.6%) during 1995 compared with the prior years. The 1996 increase is primarily due to the expansion of various marketing programs in response to competitive pressures. During much of 1996, an unprecedented and highly aggressive industry wide attempt to increase market share resulted in significantly higher costs with respect to coin incentive packages offered to bus patrons. The additional costs of such programs result in greater allocation of rooms, food and beverage and other expenses to casino expense. The 1995 increase results from higher operating costs during the first half of 1995 due to increased casino patronage at the expanded Sands facility. The increased costs were most apparent during the first quarter of 1995, which saw a $7.4 million increase (17.1%) compared to the first quarter of 1994. Higher operating costs were 33 substantially offset during the remainder of 1995 by decreases in marketing programs as previously discussed and by other cost containment measures implemented by management. Rooms expense decreased $529,000 (10.6%) during 1996 compared to 1995, but did not change significantly during 1995 compared with the prior year. The 1996 decrease reflects the sale of a hotel property in September 1996 and is comparable to the decline in associated rooms revenues. Food and beverage expense did not change significantly during 1996 compared with 1995 or during 1995 compared with 1994. Increased costs associated with the 1995 third quarter opening of the Epic Buffet were offset by increases in food and beverage complimentaries allocated to the casino department. Other expenses increased $808,000 (21.6%) during 1996 compared with 1995 as increases in theater entertainment costs at the Sands were partially offset by increased allocations to the casino department. Other expenses decreased $1.5 million (29.3%) during 1995 compared with 1994 primarily due to reductions in entertainment costs associated with headliner entertainment at the Sands. OTHER CONSOLIDATED ITEMS The operating expenses of HCC, exclusive of the Aurora Casino, the Tunica Casino and the Sands, consist primarily of general and administrative expenses and expenses incurred in connection with the pursuit of additional gaming venues. GENERAL AND ADMINISTRATIVE General and administrative expenses did not increase significantly during 1996 compared to 1995 and increased $3.7 million (11.2%) during 1995 compared to 1994. As a result of the Tunica Casino only operating for a partial year in 1994, HCC's incremental general and administrative expenses were $3.3 million during 1995. DEPRECIATION AND AMORTIZATION Depreciation and amortization expense did not change significantly during 1996 compared to 1995 following an increase of $10 million (32.3%) during 1995 compared to 1994. Although the addition of a valet parking garage at the Aurora Casino in August 1996 and a hotel tower at the Tunica Casino in September 1996 resulted in more depreciable assets, the revision of estimated economic lives of existing assets as explained in Note 2 of the Notes to Consolidated Financial Statements offset any increase in depreciation and amortization attributable to property additions. The 1995 increase was primarily due to increased depreciation and amortization resulting from the opening of the Tunica Casino. Such opening resulted in an additional $6.7 million of depreciation and amortization during 1995 compared to 1994. AMORTIZATION OF PREOPENING COSTS Amortization of deferred preopening costs represents the amortization of costs incurred in connection with the openings of the Aurora Casino and the Tunica Casino. Such costs, which include preopening training and general and administrative costs, were fully amortized in 1994. 34 DEVELOPMENT EXPENSES Development expenses represent costs incurred in connection with HCC's pursuit of potential gaming opportunities in jurisdictions where additional gaming licenses may be available as well as those where gaming has not been legalized. Such costs decreased $5.7 million (84.3%) in 1996 compared to 1995 primarily as a result of an overall decrease in prospective venues and projects. Development expenses increased by $1.6 million (31.3%) in 1995 compared to 1994 primarily as a result of the 1995 abandonment and write off of $1.7 million of costs deferred during 1994 for certain development projects which proved infeasible. Additional 1995 project costs written off amounted to approximately $1.1 million. Excluding the effect of such write offs, development expenses decreased by approximately $1.2 million in 1995 as a result of an overall decrease in suitable venues and projects. WRITE DOWN OF PROPERTIES HELD FOR SALE During 1996, management determined that certain properties in Texas acquired as potential sites for future development should be offered for sale. An evaluation of net realizable value for such sites resulted in a write down for the anticipated loss on disposal of the properties of $3.4 million. INTEREST Interest income decreased $607,000 (16.4%) for the year ended December 31, 1996 compared with 1995 and $519,000 (12.3%) for the year ended December 31, 1995 compared with 1994. The 1996 decrease in interest income is primarily due to the expenditure of cash on construction projects from funds reserved for such purposes and the overall decline in cash generated from operations at the Sands, both of which reduced the amount of cash available for temporary cash investments. The 1995 decrease results from comparison to an unusually high level of interest income in 1994. Interest expense increased $3.5 million (6.4%) and $9.3 million (20.2%), respectively, during 1996 and 1995 compared to the prior years. Substantially all of the 1996 interest expense increase was experienced by the HCC Group and is attributable to interest incurred on $210 million of Senior Secured Notes issued during October 1995, partially offset by the elimination of interest from the retirement of previously outstanding debt. Such increases were partially offset by the increased capitalization of interest on construction projects. Substantially all of the 1995 interest expense increase was again experienced by the HCC Group and is attributable to incremental interest incurred on certain debt issued in June 1994 in connection with construction of the Tunica Casino and the Senior Secured Notes, partially offset by reductions of interest from the retirement of previously outstanding debt. The 1995 increase was compounded by the 1994 capitalization of interest expense associated with the construction of the Tunica Casino ($3.3 million). LOSS ON DISPOSAL OF ASSETS During 1996, GBCC experienced a loss on disposal of assets amounting to $1.8 million resulting from the write off of deferred option costs with respect to the planned purchase of a site for future expansion. Loss on disposal of assets during 1995 includes the sale of excess barges by HCT which were acquired in January 1994 together with other assets of the partially completed Tunica project from the project's previous owner. The barges were sold to third parties at a price below management's estimate of net realizable value, resulting in a loss on the sale. WRITE DOWN OF AFFILIATE RECEIVABLES In connection with a refinancing of its indebtedness in 1994, GBCC issued $40.5 million discounted principal amount of deferred interest notes (the "PPI Funding Notes") to HCC in exchange for 35 $38.8 million principal amount of 15 1/2% notes issued by another GBCC subsidiary and held by HCC. It was anticipated that HCC's primary method of collection with respect to the new notes would be through the utilization of existing tax net operating losses of the GBCC Group. As a result of HCC's distribution of GBCC stock, GBCC's tax net operating losses will no longer be available for utilization in HCC's consolidated tax returns; accordingly, HCC evaluated the collectability of the $54.3 million PPI Funding Notes outstanding at December 31, 1996. Based on (i) the planned utilization of $7.6 million of such notes in connection with the acquisition from GBCC of the general partnership interest in the limited partnership which holds the Aurora Management contract (see "Liquidity and Capital Resources - HCC Group -Financing Activities" below); (ii) management's intention, subject to the approval of the independent directors of GBCC, to utilize additional notes to acquire other assets from GBCC; and (iii) an evaluation of the future prospects for repayment based on cash flow projections and other available information, HCC established a valuation allowance in the amount of $18.7 million at December 31, 1996 to adjust the carrying amount of the PPI Funding Notes to their estimated realizable value. INCOME TAX (PROVISION) BENEFIT HCC and its subsidiaries have tax net operating loss carryforwards ("NOL's") totaling approximately $20 million, none of which begin to expire until the year 2007. Additionally, HCC and its subsidiaries have various tax credits available totaling approximately $200,000 which do not begin to expire until the year 2008. Based on the operating results of the Aurora Casino and the Tunica Casino since commencement of their operations, management believes that it is more likely than not that future consolidated taxable income 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 sheets reflect the recording of a net deferred tax asset of $6.5 million as of December 31, 1996. Subject to a "change of control" as discussed below not occurring, the ultimate recognition of this amount of deferred tax assets will be dependent on HCC and its subsidiaries' ability to generate approximately $19 million of taxable income for federal tax purposes prior to the expiration dates of the NOL's and tax credit carryforwards and the reversal of other temporary differences. NET OPERATING LOSS CARRYFORWARDS Sales by HCC or existing stockholders of common stock by a five percent stockholder, as defined in the Internal Revenue Code of 1986, as amended (the "Code"), can cause a "change of control", as defined in Section 382 of the Code, which would limit 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. 36 EXTRAORDINARY ITEM During October 1995, HCC completed the refinancing of $90 million of 14% Senior Notes as well as other debt incurred in connection with the construction of the Tunica Casino. As a result, costs and fees incurred, together with the write off of unamortized transaction costs, resulted in the recording of an extraordinary item in the amount of $23.8 million in 1995. INFLATION Management believes that in the near term, modest inflation, together with increased competition within the gaming industry for qualified and experienced personnel, will continue to cause increases in operating expenses, particularly labor and employee benefits costs. SEASONALITY Historically, the Sands' operations have been highly seasonal in nature, with the peak activity occurring from May to September. 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, the Aurora Casino has also experienced seasonality, but to a lesser degree than the Sands, and management believes that seasonality may also cause fluctuations in reported results at the Tunica Casino. In addition, the operations of the Aurora Casino, the Tunica Casino, and the Sands 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 Since their openings on June 17, 1993 and August 8, 1994, respectively, the Aurora Casino and the Tunica Casino have become the principal sources of liquidity and capital resources for HCC. Prior to the commencement of operations of the Aurora facility, HCC's principal business activities were limited to its approximate 80% ownership of GBCC. GBCC's principal sources of liquidity and capital resources for the last several years have been cash flow from the Sands, proceeds from debt financings and proceeds from asset sales. HCC GROUP OPERATING ACTIVITIES The operations of the Aurora Casino continue to be the HCC Group's primary source of liquidity and capital resources, having contributed approximately $21.8 million of cash flow from operations during 1996 after deducting the payment of $9.4 million of management fees to the GBCC Group. The Tunica Casino provided $6.5 million of cash from operations during 1996 after deducting the payment of $1.2 million of consulting fees to the GBCC Group. The HCC Group's other sources of funds have included the repayment of principal and interest on intercompany loans made to the GBCC Group and interest income earned on temporary investments. In addition to operating expenses at the Aurora Casino and the Tunica Casino, uses of operating cash by the HCC Group included interest payments on the 14% Senior Notes ($27.8 million), costs to pursue development opportunities ($1 million) and corporate overhead costs ($8.7 million). During 1995, cash flow from operations, together with existing cash, $5 million in debt financing and the repayment of $5.5 million of indebtedness from the GBCC Group were used by the HCC Group to fund capital expenditures of approximately $45.2 million, to repay third party indebtedness of approximately $4 million and to make payments under capital lease obligations of $2.4 million. 37 Subsequent to its distribution of GBCC common stock, the HCC Group has tax net operating loss carryforwards totaling approximately $20 million and tax credits available totaling approximately $200,000. Due to the availability of such net operating loss and tax credit carryforwards, management presently does not anticipate HCC and its subsidiaries being required to make significant tax payments in the near future. FINANCING ACTIVITIES During October 1995, the HCC Group completed the refinancing of its 14% Senior Notes and 13 1/2% First Mortgage Notes through a public offering of $210 million of 12 3/4% Senior Secured Notes due November 1, 2003, discounted to yield 13 3/4% per annum (the "HCC Refinancing"). In addition to refinancing existing debt, proceeds from the HCC Refinancing were used to finance construction of a 352-room hotel tower and related amenities and to fund development and construction of the "Adventure Slots" attraction, a themed gaming area, at the Tunica Casino; to fund HCA's required contribution of $4 million for construction of a new 500-space parking garage; and, to the extent available, for working capital purposes. Interest on the Senior Secured Notes is payable semiannually on May 1 and November 1 of each year commencing on May 1, 1996. The Senior Secured Notes are unconditionally guaranteed on a senior secured basis by HCT and by certain future subsidiaries of HCC. Neither HCA nor GBCC and its subsidiaries are guarantors. The Senior Secured Notes and related guarantees are secured by, among other things, (i) substantially all of the assets of HCT and future guarantors, (ii) a first mortgage limited to approximately $39 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 any future management contracts entered into by HCC. The Senior Secured Notes are redeemable at the option of HCC any time on or after November 1, 1999 at 106.375% of the then outstanding principal amount, decreasing to 103.1875% and 100%, respectively, on November 1, 2000 and 2001. Commencing with the November 1, 1997 interest payment date and at each subsequent interest payment date, HCC will be required to make an offer to purchase not more than $2.5 million in principal amount of the Senior Secured Notes at a price of 106.375% of the principal amount tendered. The indenture to the Senior Secured Notes contains various provisions limiting the ability of HCC and certain defined subsidiaries to, among other things, pay dividends or make other restricted payments; incur additional indebtedness or issue preferred stock; create liens; create dividend or other payment restrictions affecting certain defined subsidiaries; enter into mergers or consolidations or make sales of all or substantially all assets of HCC, HCT or any future guarantor; and enter into transactions with certain affiliates. During 1995, HCA obtained a $5 million unsecured bank promissory note with respect to its riverboat expansion project. Principal payments are based on a 30-month amortization with the final payment due in February 1998. At December 31, 1996, HCT had a $1 million bank credit facility available through August 15, 1997. Borrowings on the line of credit accrue interest at the rate of prime plus 1 1/2% per annum. During the first quarter of 1997, HCT borrowed $1 million on this credit facility. Subject to regulatory approval and effective as of April 1, 1997, HCC will acquire from the GBCC Group the general partnership interest in the limited partnership which holds the Aurora Management contract. The acquisition price for the general partnership interest will include a note in the amount of $3.8 million and the assignment of $7.6 million of PPI Funding Notes to the GBCC Group. Annual principal and interest payments by HCC on the $3.8 million note will approximate the general partner's share of annual partnership distributions which will now be made to HCC. 38 In connection with the GBCC Group recapitalization discussed below, HCC loaned $15 million on a junior subordinated basis to the GBCC Group at 14 5/8% interest (the "Junior Subordinated Notes"); payment of principle and interest on this loan is subject to certain members of the GBCC Group meeting certain financial coverage and other payment restriction tests. As of December 31, 1996, HCC had assigned the entire principal amount of the Junior Subordinated Notes together with accrued interest thereon to the GBCC Group in consideration for tax net operating losses of the GBCC Group utilized by the HCC Group in 1994 ($6.3 million principal and $1.9 million interest) and as a capital contribution in connection with the distribution of GBCC stock to HCC's shareholders ($8.7 million principal and $1.8 million interest). As of December 31, 1996, the HCC Group's scheduled maturities of long-term debt and payments under capital leases during 1997 are approximately $6.3 million and $3.7 million, respectively. CAPITAL EXPENDITURES AND OTHER INVESTING ACTIVITIES In September 1996, HCA and the Aurora Metropolitan Exposition, Auditorium and Office Building Authority ("ACCA") completed the joint construction of a new five-story, approximately 500-space parking garage directly across the street from, and connected by a climate-controlled tunnel to, the Aurora Casino's Pavilion. The garage provides additional parking for patrons of the Aurora Casino and contains approximately 1,500 square feet of retail space. ACCA financed a portion of the construction costs through an $11.5 million, 7.5% industrial revenue bond issue which yielded proceeds of approximately $10.5 million. HCA funded all remaining construction costs and escrowed $3,500,000 at the rate of $400,000 per month towards satisfaction of its obligations under the agreement. HCA also agreed to make payments to ACCA equal to the financing costs relating to the ACCA industrial revenue bond issue due in July 1996. Other capital expenditures at the Aurora Casino during 1996 were approximately $5.8 million, including $1.8 million for construction of a pedestrian bridge to improve access from the existing self park garage to the Pavillion, $1.3 million for new slot machines, $300,000 for a new dining outlet and other departmental expenditures. Management anticipates spending $3.1 million during 1997 primarily for its ongoing capital improvements program with no major projects currently scheduled. Capital expenditures at the Tunica Casino for 1996 amounted to $35 million. Of such expenditures, $31.1 million was spent toward the construction of an adjacent eight-story hotel tower, including 352 additional rooms, additional banquet space, an enclosed pool/atrium and a showroom and $2.1 million was spent on construction of the "Adventure Slots" attraction. Additional expenditures included approximately $1 million for new signage and other departmental expenditures. Management anticipates spending $2.5 million in 1997 primarily for its ongoing program of capital improvements. HCT has entered into a partnership agreement providing for the joint construction and ownership of a golf course in conjunction with two other casino operators. Management estimates that its contributions to the partnership will aggregate $2 million. During November 1995, HCC loaned $10 million of the proceeds from the HCC Refinancing to an unaffiliated gaming company in the form of two $5 million notes (Series A and Series B). The loans earn interest at the rate of prime plus one percent per annum and are payable in quarterly installments of principal and interest commencing in November 1997 with the final payment due in August 2000. All principal payments received are to be applied first to the Series A note. In connection with the loans, HCC received warrants to acquire up to a 10% equity interest in the gaming company at any time between November 15, 1998 and November 15, 2000 at an exercise price of $500,000 per 1/2% interest. Under the terms of the loan agreement, the gaming company may require HCC to exercise warrants to acquire a 5% equity interest on November 15, 1998 at a cost not to exceed $5 million, payable through the 39 reduction of the outstanding principal balance and, to the extent applicable, the forgiveness of accrued interest on the Series B note. HCC is pursuing several potential gaming opportunities. HCC intends to finance any future ventures with cash flow from operations, together with private, public or bank financing, which might include non-recourse project financing. SUMMARY As a result of the distribution to its shareholders of GBCC stock, HCC's funding requirements for 1997 will consist of those required for the HCC Group, as previously defined. Management anticipates that the HCC Group's funding requirements for the next twelve months will be satisfied by existing cash and cash generated by the Aurora and Tunica Casinos. THE GBCC GROUP OPERATING ACTIVITIES The GBCC Group receives a base management fee equal to 5% of operating revenues (as defined in the management agreement) subject to a maximum of $5.5 million annually, and an incentive fee equal to 10% of gross operating profit (as defined in the management agreement) from the operation of the Aurora Casino. Management fees received during 1996 amounted to $9.4 million. During 1994, the GBCC Group entered into a consulting agreement with HCT with respect to the Tunica Casino which provides for the payment of $1.2 million annually by the Tunica Casino for consulting services and for reimbursement of direct costs and expenses incurred. Prior to 1996, the Sands' earnings before depreciation, interest, amortization, taxes and intercompany management fees were sufficient to meet its debt service obligations (other than certain maturities of principal that have been refinanced) and to fund a substantial portion of its capital expenditures. Historically, the Sands has also utilized borrowings to fund seasonal cash needs and for certain capital projects. During 1996, the GBCC Group's net cash used in operating activities (after net interest expense and income taxes) amounted to $3 million compared with cash provided by operating activities of $29.2 million during 1995. The change in net cash from operating activities compared to 1995 results primarily from a substantial decline in operating cash flow generated by the Sands. The Sands sustained an operating cash flow deficit of $6.1 million during 1996 compared to net cash generated from operations of $20.7 million during 1995, resulting in an aggregate decline in operating cash flow of $26.8 million and a decline in working capital of $28.2 million compared to December 31, 1995. The GBCC Group utilized existing cash together with proceeds from the repayment of an outstanding note receivable, borrowings on GBHC's short-term credit facility and net borrowings from HCC during 1996 to meet its operating needs, to fund capital additions ($8.1 million), to make obligatory investments at the Sands ($3.1 million) and to retire its share of the underlying indebtedness of an unconsolidated partnership in connection with the sale of a Florida hotel property ($2.9 million). In prior years GBCC's hotel operations required substantial infusions of operating funds; however, the disposition of substantially all of its hotel properties has greatly reduced the cash required to fund hotel operations (see "Capital Expenditures and Other Investments" below). 40 FINANCING ACTIVITIES During February 1994, the GBCC Group completed the refinancing of virtually all of its casino-related outstanding debt. The refinancing was completed through a public offering of $270 million of debt securities consisting of $185 million of 10 7/8% First Mortgage Notes due January 15, 2004 and $85 million of 11 5/8% PRT Funding Notes due April 15, 2004. Proceeds from the debt offerings were used, in part, to refinance outstanding mortgage notes on the Sands and other indebtedness scheduled to mature in 1994, to repay $58.4 million of publicly held PCPI Notes and to provide partial funding for an expansion of gaming space at the Sands. During 1996, the GBCC Group repaid long-term indebtedness of $2.4 million. As of April 30, 1996, GBHC extended $2 million of its bank line of credit until April 30, 1997. As of December 31, 1996, $2 million was outstanding under the line of credit; the outstanding balance was repaid in January 1997 and the line of credit was cancelled. During the third quarter of 1996, the GBCC Group borrowed $6.5 million from HCC which accrues interest at the rate of 13 3/4% per annum payable quarterly commencing October 1, 1996. GBCC loaned such funds to GBHC on similar terms. Also during the third quarter of 1996, the GBCC Group repaid $4.8 million it previously borrowed from HCC with respect to the purchase of the underlying indebtedness of a non-casino hotel property it operated (see below). CAPITAL EXPENDITURES AND OTHER INVESTMENTS Property and equipment additions during 1996 totaled $8.1 million, of which capital expenditures at the Sands amounted to approximately $5.5 million. Additional capital expenditures by the GBCC Group during 1996 included approximately $2.6 million of property improvements at a non-casino hotel property it operated under an agreement with Metroplex Hotel Limited (see Note 8 of Notes to Consolidated Financial Statements). The Sands is required by the New Jersey Casino Control Act to make certain investments with the CRDA, a governmental agency which administers the statutorily mandated investments made by casino licensees. Deposit requirements for 1996 totaled $3.1 million. GBCC agreed to contribute up to $3.9 million (approximately $2.5 million of which was paid) as an additional investment in an unconsolidated hotel partnership to refurbish the hotel facility in Orlando, Florida. No such contributions were required during 1996. Such contributions were in recognition of GBCC's partner having agreed to make $5 million in principal reductions on the underlying mortgage note on the facility of which $4 million was made. During November 1996, the Partnership sold the hotel facility; GBCC was required to pay approximately $2.9 million to retire its share of the underlying indebtedness of the property. Also during the fourth quarter of 1996, another unconsolidated partnership in which a GBCC subsidiary holds a 50% interest entered into a contract for the sale of a casino/hotel in San Juan, Puerto Rico owned by the partnership and managed by a GBCC subsidiary. The sale was completed in February 1997; the GBCC subsidiary received a fee of approximately $1.5 million with respect to the termination of its management agreement and agreed to provide management services on a month to month basis through October 1997 subject to cancellation by the new owners. 41 SUMMARY As discussed previously, the GBCC Group is no longer a consolidated subsidiary of HCC. Accordingly, liquidity and capital resource requirements of the GBCC Group are no longer relevant to management's discussion and analysis of HCC's financial condition. 42 ITEM 8. INDEX TO FINANCIAL STATEMENTS
PAGE ---- HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES: Report of Independent Public Accountants.................... 44 Consolidated Balance Sheets as of December 31, 1996 and 1995................................................... 45 Consolidated Statements of Operations for the Years Ended December 31, 1996, 1995 and 1994..................... 47 Consolidated Statement of Changes in Shareholders' Equity (Deficit) for the Three Years Ended December 31, 1996...... 48 Consolidated Statements of Cash Flows for the Years Ended December 31, 1996, 1995 and 1994..................... 49 Notes to Consolidated Financial Statements.................. 50 HOLLYWOOD CASINO-AURORA, INC. Report of Independent Public Accountants.................... 74 Balance Sheets as of December 31, 1996 and 1995............. 75 Statements of Operations for the Years Ended December 31, 1996, 1995 and 1994........................... 77 Statement of Changes in Shareholder's Equity for the Three Years Ended December 31, 1996........................ 78 Statements of Cash Flows for the Years Ended December 31, 1996, 1995, and 1994.......................... 79 Notes to Financial Statements............................... 80 HWCC-TUNICA, INC. Report of Independent Public Accountants.................... 91 Consolidated Balance Sheets as of December 31, 1996 and 1995.............................................. 92 Consolidated Statements of Operations for the Years Ended December 31, 1996, 1995 and 1994..................... 94 Consolidated Statement of Changes in Shareholder's Equity for the Three Years Ended December 31, 1996......... 95 Consolidated Statements of Cash Flows for the Years Ended December 31, 1996, 1995 and 1994........................... 96 Notes to Consolidated Financial Statements.................. 97
43 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ---------------------------------------- To Hollywood Casino Corporation: We have audited the accompanying consolidated balance sheets of Hollywood Casino Corporation (the Company and a Delaware corporation) and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of operations, changes in shareholders' equity (deficit) and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Hollywood Casino Corporation and subsidiaries as of December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Roseland, New Jersey March 21, 1997 44 HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (NOTE 1) ASSETS
DECEMBER 31, ----------------------------- 1996 1995 ------------- -------------- Current Assets: Cash and cash equivalents....................... $ 21,488,000 $ 56,538,000 Accounts receivable, net of allowances of $1,693,000 and $17,675,000, respectively....... 3,140,000 16,410,000 Inventories..................................... 1,620,000 5,837,000 Prepaid expenses................................ 1,363,000 3,530,000 Deferred income taxes........................... 4,271,000 10,585,000 Refundable deposits and other current assets................................. 328,000 950,000 Due from affiliates............................. 7,641,000 - ------------ ------------- Total current assets........................... 39,851,000 93,850,000 ------------ ------------- Property and Equipment: Land............................................ 20,346,000 61,643,000 Buildings and improvements...................... 119,501,000 255,646,000 Riverboats and barges........................... 69,713,000 39,491,000 Operating equipment............................. 39,494,000 149,051,000 Construction in progress........................ 687,000 7,378,000 ------------ ------------- 249,741,000 513,209,000 Less - accumulated depreciation and amortization............................... (49,740,000) (179,073,000) ------------ ------------- Net property and equipment..................... 200,001,000 334,136,000 ------------ ------------- Cash Restricted for Construction Projects........ - 29,874,000 ------------ ------------- Other Assets: Obligatory investments.......................... - 5,521,000 Deferred financing costs........................ 6,565,000 16,136,000 Notes receivable................................ 10,000,000 19,222,000 Land rights..................................... 7,658,000 7,962,000 Due from affiliate, net of valuation allowance.. 36,597,000 - Other assets.................................... 7,413,000 7,762,000 ------------ ------------- Total other assets............................. 68,233,000 56,603,000 ------------ ------------- $308,085,000 $ 514,463,000 ============ =============
The accompanying notes to consolidated financial statements are an integral part of these consolidated balance sheets. 45 HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (NOTE 1) LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
DECEMBER 31, ------------------------------ 1996 1995 -------------- -------------- Current Liabilities: Current maturities of long-term debt and capital lease obligations........................ $ 8,282,000 $ 9,325,000 Accounts payable...................................... 5,407,000 14,054,000 Accrued liabilities - Salaries and wages................................... 3,531,000 9,593,000 Interest............................................. 4,734,000 16,964,000 Insurance............................................ 2,268,000 4,319,000 Other................................................ 5,368,000 10,767,000 Due to affiliates..................................... 2,534,000 - Other current liabilities............................. 1,550,000 7,331,000 ------------- ------------- Total current liabilities............................ 33,674,000 72,353,000 ------------- ------------- Long-Term Debt......................................... 202,057,000 476,829,000 ------------- ------------- Capital Lease Obligations.............................. 21,707,000 10,693,000 ------------- ------------- Other Noncurrent Liabilities........................... 5,503,000 11,821,000 ------------- ------------- Commitments and Contingencies Shareholders' Equity (Deficit): Common Stock: Class A common stock, $.0001 par value per share; 50,000,000 shares authorized; 24,760,000 and 24,720,000 shares issued and outstanding, respectively........................................ 2,000 2,000 Class B, non-voting, $.01 par value per share; 10,000,000 shares authorized; no shares issued...... - - Additional paid-in capital............................ 235,606,000 77,936,000 Accumulated deficit................................... (190,464,000) (135,171,000) ------------- ------------- Total shareholders' equity (deficit)................. 45,144,000 (57,233,000) ------------- ------------- $ 308,085,000 $ 514,463,000 ============= =============
The accompanying notes to consolidated financial statements are an integral part of these consolidated balance sheets. 46 HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (NOTE 1)
YEAR ENDED DECEMBER 31, ------------------------------------------- 1996 1995 1994 -------------- ------------- ------------- Revenues: Casino........................................................... $487,374,000 $498,618,000 $426,084,000 Rooms............................................................ 18,834,000 17,950,000 15,191,000 Food and beverage................................................ 61,620,000 56,225,000 46,022,000 Other............................................................ 13,339,000 12,459,000 21,097,000 ------------ ------------ ------------ 581,167,000 585,252,000 508,394,000 Less - Promotional allowances.................................... (50,587,000) (45,309,000) (44,010,000) ------------ ------------ ------------ Net revenues.................................................... 530,580,000 539,943,000 464,384,000 ------------ ------------ ------------ Expenses: Casino........................................................... 393,022,000 363,867,000 307,525,000 Rooms............................................................ 6,029,000 6,871,000 5,644,000 Food and beverage................................................ 20,708,000 19,884,000 18,735,000 Other............................................................ 7,010,000 5,535,000 6,872,000 General and administrative....................................... 37,169,000 36,914,000 33,189,000 Depreciation and amortization.................................... 40,836,000 40,955,000 30,960,000 Amortization of preopening costs................................. - - 11,002,000 Development...................................................... 1,065,000 6,765,000 5,154,000 Write down of properties held for sale........................... 3,400,000 - - ------------ ------------ ------------ Total expenses................................................. 509,239,000 480,791,000 419,081,000 ------------ ------------ ------------ Income from operations............................................ 21,341,000 59,152,000 45,303,000 ------------ ------------ ------------ Non-operating income (expenses): Interest income.................................................. 3,101,000 3,708,000 4,227,000 Interest expense, net of capitalized interest of $1,006,000, $354,000 and $4,065,000, respectively............ (59,090,000) (55,558,000) (46,233,000) Loss on disposal of assets....................................... (1,841,000) (514,000) (26,000) ------------ ------------ ------------ Total non-operating expenses, net............................... (57,830,000) (52,364,000) (42,032,000) ------------ ------------ ------------ (Loss) income before income taxes, nonrecurring and extraordinary items.............................................. (36,489,000) 6,788,000 3,271,000 Valuation provision on affiliate receivables...................... (18,741,000) - - ------------ ------------ ------------ (Loss) income before income taxes and extraordinary item.......... (55,230,000) 6,788,000 3,271,000 Income tax provision.............................................. (63,000) (268,000) (1,527,000) ------------ ------------ ------------ (Loss) income before extraordinary item.......................... (55,293,000) 6,520,000 1,744,000 Extraordinary item: (Loss) gain on early extinguishment of debt, net of related tax benefit............................................. - (23,808,000) 126,000 ------------ ------------ ------------ Net (loss) income................................................. $(55,293,000) $(17,288,000) $ 1,870,000 ============ ============ ============ Net (loss) income per common share: (Loss) income before extraordinary item.......................... $(2.24) $.26 $.07 Extraordinary item............................................... - (.96) .01 ------------ ------------ ------------ Net (loss) income................................................ $(2.24) $(.70) $.08 ============ ============ ============
The accompanying notes to consolidated financial statements are an integral part of these consolidated statements. 47 HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT) (NOTE 1) FOR THE THREE YEARS ENDED DECEMBER 31, 1996
CLASS A COMMON STOCK ADDITIONAL ------------------ PAID-IN ACCUMULATED SHARES AMOUNT CAPITAL DEFICIT ---------- ------ ------------ ------------- BALANCE, JANUARY 1, 1994......................... 22,720,000 $2,000 $ 77,933,000 $(119,753,000) Exercise of stock warrants.................... 1,140,000 - 1,000 - Exercise of stock options..................... 532,000 - - - Net income.................................... - - - 1,870,000 ---------- ------ ------------ ------------- BALANCE, DECEMBER 31, 1994....................... 24,392,000 2,000 77,934,000 (117,883,000) Exercise of stock options..................... 328,000 - 2,000 - Net loss...................................... - - - (17,288,000) ---------- ------ ------------ ------------- BALANCE, DECEMBER 31, 1995....................... 24,720,000 2,000 77,936,000 (135,171,000) Distribution of Greate Bay Casino Corporation common stock.................... - - 157,670,000 - Exercise of stock options..................... 40,000 - - - Net loss...................................... - - - (55,293,000) ---------- ------ ------------ ------------- BALANCE, DECEMBER 31, 1996....................... 24,760,000 $2,000 $235,606,000 $(190,464,000) ========== ====== ============ =============
The accompanying notes to consolidated financial statements are an integral part of this consolidated statement. 48 HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (NOTE 1)
YEAR ENDED DECEMBER 31, --------------------------------------------- 1996 1995 1994 ------------- -------------- -------------- OPERATING ACTIVITIES: Net (loss) income.............................................................. $(55,293,000) $ (17,288,000) $ 1,870,000 Adjustments to reconcile net (loss) income to net cash provided by operating activities: Extraordinary item............................................................ - 23,808,000 (126,000) Depreciation and amortization, including accretion of debt discount........... 41,621,000 41,477,000 42,420,000 Valuation provision on affiliate receivables.................................. 18,741,000 - - Write down of properties held for sale........................................ 3,400,000 - - Loss on sale of assets........................................................ 1,841,000 514,000 26,000 Provision for doubtful accounts............................................... 3,031,000 3,774,000 3,830,000 Deferred income tax provision (benefit)....................................... 46,000 (419,000) 1,947,000 Increase in accounts receivable............................................... (769,000) (3,890,000) (4,081,000) Net increase in accounts payable and accrued expenses......................... 649,000 3,008,000 724,000 Net change in other current assets and liabilities............................ (677,000) 2,754,000 (2,111,000) Net change in other noncurrent assets and liabilities......................... (281,000) (211,000) (4,060,000) ------------ ------------- ------------- Net cash provided by operating activities.................................... 12,309,000 53,527,000 40,439,000 ------------ ------------- ------------- INVESTING ACTIVITIES: Net property and equipment additions........................................... (53,078,000) (55,009,000) (101,729,000) Collections on notes receivable................................................ 9,361,000 103,000 7,614,000 Issuance of notes receivable................................................... - (10,000,000) - Proceeds from dispositions of assets........................................... 2,699,000 236,000 73,000 Obligatory investments......................................................... (3,062,000) (2,967,000) (826,000) Purchase of mortgage note...................................................... - - (5,750,000) Short-term investments......................................................... (2,000,000) - - Cost of acquisition, net of cash acquired...................................... - - (8,998,000) Deferred preopening costs...................................................... - - (5,140,000) Investments in unconsolidated affiliates....................................... (2,946,000) (1,675,000) (660,000) Distribution of GBCC cash and cash equivalents................................. (22,991,000) - - (Increase) decrease in cash restricted for construction projects............... 29,874,000 (29,874,000) - ------------ ------------- ------------- Net cash used in investing activities.......................................... (42,143,000) (99,186,000) (115,416,000) ------------ ------------- ------------- FINANCING ACTIVITIES: Repayments of short-term debt.................................................. - - (21,000,000) Proceeds from issuance of long-term debt....................................... 2,203,000 204,939,000 327,500,000 Net borrowings on short-term credit facilities................................. 2,000,000 - - Cost of early retirement of debt............................................... - (16,635,000) - Deferred financing costs....................................................... (126,000) (7,634,000) (14,714,000) Repayments of long-term debt................................................... (6,840,000) (142,554,000) (237,411,000) Payments on capital lease obligations.......................................... (2,453,000) (2,412,000) (1,559,000) Issuance of common stock....................................................... - 2,000 1,000 ------------ ------------- ------------- Net cash (used in) provided by financing activities........................... (5,216,000) 35,706,000 52,817,000 ------------ ------------- ------------- Net decrease in cash and cash equivalents..................................... (35,050,000) (9,953,000) (22,160,000) Cash and cash equivalents at beginning of year............................... 56,538,000 66,491,000 88,651,000 ------------ ------------- ------------- Cash and cash equivalents at end of year..................................... $ 21,488,000 $ 56,538,000 $ 66,491,000 ============ ============= =============
The accompanying notes to consolidated financial statements are an integral part of these consolidated statements. 49 HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) ORGANIZATION AND BUSINESS Hollywood Casino Corporation ("HCC" or the "Company"), is a Delaware corporation which was organized and incorporated on November 5, 1990. On June 4, 1993, HCC completed an initial public offering of 4,800,000 shares of its Class A Common Stock (the "Stock Offering"). As a result of the Stock Offering and the subsequent exercise of warrants to purchase common stock, certain general partnerships and trusts controlled by Jack E. Pratt, Edward T. Pratt, Jr. and William D. Pratt and by other family members (collectively, the "Pratt Family") currently own approximately 53% of the issued and outstanding stock of HCC. HCC owns all of the outstanding common stock of both Hollywood Casino - Aurora, Inc. ("HCA") and HWCC - Tunica, Inc. ("HCT"). HCA is an Illinois corporation organized during 1990 which owns and operates a 32,100 square foot riverboat gaming operation together with docking and other entertainment facilities under the service mark Hollywood Casino(R) located in Aurora, Illinois (the "Aurora Casino"). HCT is a Texas corporation formed by HCC during 1993 which owns and operates a 54,000 square foot gaming facility, adjacent support facilities and a 506-room hotel complex under the service mark Hollywood Casino(R) in northern Tunica County, Mississippi (the "Tunica Casino"). The Aurora Casino and the Tunica Casino commenced operations in June 1993 and August 1994, respectively. Prior to December 31, 1996, HCC also owned approximately 80% of the common stock of Greate Bay Casino Corporation ("GBCC", formerly known as Pratt Hotel Corporation), 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. GBCC's principal assets were the Sands Hotel and Casino in Atlantic City, New Jersey (the "Sands") and management and consulting contracts with the Aurora Casino and the Tunica Casino, respectively. GBCC's other operations in the United States and Puerto Rico, including various ventures in which GBCC had an interest, were managed by GBCC or its subsidiaries. The Company estimates that its gaming operations derive a significant amount of their gaming revenues from patrons living in areas surrounding the sites where the Company's gaming operations are located. Competition within the Company's gaming markets is intense and management believes that this competition will continue in the future. The Board of Directors approved the adoption in May 1993 of a Rights Agreement, which provides that stockholders of HCC receive rights to acquire Series A Junior Participating Preferred Stock of HCC at an initial price of $60 per one one-hundredth of a share, subject to adjustment, for each share of HCC Common Stock owned. The rights become exercisable if a person (other than the Pratt Family) acquires 20% or more, or announces a tender offer for 20% or more, of the Company's Common Stock. If the Company is acquired in a merger or other business combination, each right will enable the holder to exercise such right for Common Stock of the acquiring company at a 50% discount. The rights, which expire on May 7, 2003, may be redeemed by the Company at its option at a price of $.0001 per right at any time prior to the earlier of 10 days following the date after which a person has acquired at least 20% of the Company's outstanding shares or May 7, 2003. Until such time as it becomes likely that the rights will be exercised, they are not included as common stock equivalents in the computation of net (loss) income per common share. 50 HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Contined) (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The significant accounting policies followed in the preparation of the accompanying consolidated financial statements are discussed below. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include the accounts of HCC and its wholly owned subsidiaries and, prior to December 31, 1996, GBCC (which was majority owned) and GBCC's wholly owned subsidiaries. At December 31, 1996, GBCC is no longer a subsidiary of HCC. The accompanying consolidated financial statements include GBCC's operations and cash flows through the date of disposition (December 31, 1996). However, the accompanying consolidated balance sheet at December 31, 1996 no longer reflects GBCC on a consolidated basis and reflects the dividend of GBCC's common stock to HCC's shareholders (adjusted for related transactions) as an adjustment to additional paid-in capital. All significant intercompany balances and transactions have been eliminated. Investments in unconsolidated affiliates including joint ventures, that were 50% or less owned are accounted for by the equity method. To the extent that losses incurred in prior years by GBCC have exceeded the minority shareholders' interest associated with such shares, such losses have been allocated to HCC. CASINO REVENUES, PROMOTIONAL ALLOWANCES AND DEPARTMENTAL EXPENSES - HCC recognizes the net win from gaming activities (the difference between gaming wins and losses) as casino revenues. Casino revenues are net of accruals for anticipated payouts of progressive and certain other slot machine jackpots and certain progressive table game payouts. Such anticipated jackpots and payouts are reflected as other accrued liabilities in the accompanying consolidated balance sheets. During the year ended December 31, 1994, the Sands removed certain progressive jackpots from the gaming floor, in accordance with regulations of the New Jersey Casino Control Commission (the "Casino Commission") resulting in the reduction of $1,035,000 of progressive jackpot liabilities and the corresponding recognition of an equal amount of slot machine revenues. The estimated value of rooms, food and beverage and other items which were provided to customers without charge has been included in revenues and a corresponding amount has been deducted as promotional allowances. The costs of such complimentaries have been included as casino expenses in the accompanying consolidated statements of operations. Costs of complimentaries allocated from the rooms, 51 HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Contined) food and beverage and other operating departments to the casino department during the years ended December 31, 1996, 1995 and 1994 are as follows:
1996 1995 1994 ----------- ----------- ----------- Rooms.............. $ 7,332,000 $ 6,677,000 $ 6,253,000 Food and beverage.. 49,860,000 45,639,000 35,128,000 Other.............. 5,956,000 6,309,000 6,094,000 ----------- ----------- ----------- $63,148,000 $58,625,000 $47,475,000 =========== =========== ===========
CASH AND CASH EQUIVALENTS - Cash and cash equivalents are generally comprised of cash and investments with original maturities of three months or less, such as commercial paper, certificates of deposit and fixed repurchase agreements. ALLOWANCE FOR DOUBTFUL ACCOUNTS - The allowance for doubtful accounts is maintained at a level considered adequate to provide for possible future losses. Provisions for doubtful accounts amounting to $3,031,000, $3,774,000 and $3,830,000 were made during the years ended December 31, 1996, 1995 and 1994, respectively. INVENTORIES - Inventories are stated at the lower of cost (on a first-in, first-out basis) or market. PROPERTY AND EQUIPMENT - Property and equipment have been recorded at cost and are being depreciated utilizing the straight-line method over their estimated useful lives as follows: Buildings and improvements 10-40 years Riverboats and barges 25-40 years Operating equipment 3-15 years On October 1, 1996, HCC revised the estimated useful lives of its buildings, barges and related land rights (see below) from 25 years to 40 years; of certain parking facilities under a capital lease from 25 years to 30 years; and of certain operating equipment from three years to five years. Management believes the changes in estimated lives more appropriately reflect the timing of the economic benefits to be received from these assets. For the year ended December 31, 1996, the effect of these changes reduced depreciation and amortization expense and net loss by approximately $1,893,000 and reduced net loss per share by $.08. Interest costs related to property and equipment acquisitions are capitalized during the acquisition period and amortized over the useful lives of the related assets. 52 HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Contined) DEFERRED FINANCING COSTS - The costs of issuing long-term debt, including all underwriting, licensing, legal and accounting fees, have been capitalized and are being amortized over the term of the related debt issue. Amortization of such costs was $2,044,000, $3,016,000 and $2,578,000 for the years ended December 31, 1996, 1995 and 1994, respectively. Deferred financing costs, net of accumulated amortization, amounting to $5,853,000 and $104,000 were written off during 1995 and 1994, respectively, with respect to the reacquisition of outstanding debt. LONG-LIVED ASSETS - Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets" 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. During 1996, certain real property held as potential gaming development sites in Texas was offered for sale; consequently management conducted a review to determine its estimate of net realizable value with respect to these properties. As a result of its review, HCC has recorded an anticipated loss from the disposition of assets held for sale of $3,400,000 for the year ended December 31, 1996 related to its long- lived assets. ACCRUED INSURANCE - HCC is self insured for a portion of its general liability, certain health care and other liability exposures. Accrued insurance includes estimates of such accrued liabilities based on an evaluation of the merits of individual claims and historical claims experience; accordingly, HCC's ultimate liability may differ from the amounts accrued. INCOME TAXES - HCC complies with the provisions of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"), which utilizes the liability method and results in the determination of deferred taxes based on the estimated future tax effects of differences between the financial statement and tax bases of assets and liabilities. INTEREST EXPENSE - Interest expense includes the accretion of debt discount amounting to $785,000, $522,000 and $458,000 during the years ended December 31, 1996, 1995 and 1994, respectively. LAND RIGHTS - Land rights are being amortized on a straight-line basis over the estimated useful life of the Tunica facility, which is less than the term of the ground lease including renewals (see Note 13); such amortization commenced with the opening of the Tunica Casino. The estimated economic benefit of the land rights was increased from 25 years to 40 years effective on October 1, 1996 consistent with the change in estimated 53 HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Contined) useful life of the Tunica facility as discussed under "Property and Equipment" above. Management presently intends to renew the ground lease at least through its currently estimated 40-year useful life of the facility. Accumulated amortization of such land rights amounted to $787,000 and $483,000, respectively, at December 31, 1996 and 1995. EMPLOYEE STOCK OPTIONS - During 1996, HCC adopted the provisions of statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). SFAS 123 requires that an entity account for employee stock compensation under a fair value based method. However, SFAS 123 also allows an entity to continue to measure compensation cost for employee stock-based compensation plans using the intrinsic value based method of accounting prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("Opinion 25"). Entities electing to remain with the accounting under Opinion 25 are required to make pro forma disclosures of net income and earnings per share as if the fair value based method of accounting under SFAS 123 had been applied. HCC has elected to continue to account for employee stock-based compensation under Opinion 25 with the requisite additional disclosures included in Note 7. NET (LOSS) INCOME PER COMMON SHARE - Net (loss) income per common share for all periods is calculated by dividing the net (loss) income by the weighted average number of shares of common stock and common stock equivalents outstanding. All common stock equivalents are excluded from the calculation of net loss per share for periods during which a loss was incurred as the effect of their inclusion would be antidilutive. Common stock equivalents are included in the calculation of net income per share for periods during which income was realized. The weighted average number of shares of common stock and common stock equivalents outstanding used for earnings per share calculation purposes was 24,721,000 for the year ended December 31, 1996 and 24,850,000 for each of the years ended December 31, 1995 and 1994. The Financial Accounting Standards Board has issued a new standard, "Earnings per Share" ("SFAS 128"). SFAS 128 provides for revisions to the current method of calculating earnings per share and for the disclosure of certain information about the capital structure of the reporting entity. SFAS 128 will become effective on December 15, 1997; early adoption is not permitted. HCC does not believe the new pronouncement will impact its present calculation of earnings per share. RECLASSIFICATIONS - Certain reclassifications have been made to the prior years' consolidated financial statements to conform to the 1996 consolidated financial statement presentation. Such reclassifications include the reallocation of certain costs among the various operating departments and general and administrative expenses resulting from the completion of a comprehensive internal review of departmental allocations. Management believes that such reclassifications better reflect the matching of costs with the associated revenues. 54 HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (3) SHORT-TERM CREDIT FACILITIES During June 1994, a subsidiary of GBCC entered into an agreement for a bank line of credit in the amount of $5,000,000. The agreement, which was renewed in April 1995, provided for interest on borrowings at the bank's prime lending rate plus 3/4% per annum. Borrowings under the line of credit were guaranteed to the extent of $2,000,000 by another subsidiary of GBCC. As of April 30, 1996, the GBCC subsidiary extended $2,000,000 of the line of credit until April 30, 1997. Additionally, the guarantor pledged a certificate of deposit in the face amount of $2,000,000 as collateral for the line of credit. During 1996, $2,000,000 was borrowed under the line of credit; no borrowings were outstanding at December 31, 1995. As of December 31, 1996, HCT had a $1,000,000 bank credit facility available through August 15, 1997 on which no borrowings had been made. Borrowings under the line of credit accrue interest at the rate of the bank's prime lending rate plus 1 1/2% per annum. The line of credit agreement requires the maintenance of certain financial ratios and balances in addition to the provision of certain financial reports. During the first quarter of 1997, HCT borrowed $1,000,000 on this credit facility. (4) LONG-TERM DEBT AND PLEDGE OF ASSETS Substantially all of HCC's assets are pledged in connection with HCC's long-term indebtedness; HCC was not obligated for GBCC's indebtedness. The indenture to HCC's Senior Secured Notes, as defined below, did not contain cross-default provisions with respect to GBCC's indebtedness. Substantially all of GBCC's assets were pledged in connection with GBCC's long-term indebtedness. 55 HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, ---------------------------- 1996 1995 ------------- ------------- Indebtedness of HCC: 12 3/4% Senior Secured Notes, due 2003, net of discount of $9,127,000 and $9,912,000, respectively $200,873,000 $200,088,000 Term note, due 1999 2,150,000 2,300,000 ------------ ------------ 203,023,000 202,388,000 ------------ ------------ Indebtedness of HCA: Promissory note to bank (b) 2,472,000 4,402,000 Equipment loans 1,472,000 2,412,000 ------------ ------------ 3,944,000 6,814,000 ------------ ------------ Indebtedness of HCT for which HCC is not obligated: Equipment loans 1,401,000 1,367,000 ------------ ------------ 1,401,000 1,367,000 ------------ ------------ GBCC indebtedness for which HCC was not obligated: 10 7/8% first mortgage notes, due 2004 (c) - 185,000,000 11 5/8% senior notes, due 2004 (d) - 85,000,000 Other - 3,342,000 ------------ ------------ - 273,342,000 ------------ ------------ Total indebtedness 208,368,000 483,911,000 Less - current maturities (6,311,000) (7,082,000) ------------ ------------ Total long-term debt $202,057,000 $476,829,000 ============ ============
- -------------------------- (a) During October 1995, HCC completed the refinancing of certain outstanding indebtedness through a public offering of $210,000,000 of 12 3/4% Senior Secured Notes (the "Senior Secured Notes") due November 1, 2003, discounted to yield 13 3/4% per annum (the "HCC Refinancing"). In addition to refinancing existing debt, proceeds from the HCC Refinancing were used to finance construction of a 352-room hotel tower and related amenities and to fund development and construction of the "Adventure Slots" attraction, a themed gaming area, at the Tunica Casino; to fund HCA's required contribution of $4,000,000 for construction of a new 500-space parking garage (see Note 5); and, to the extent available, for working capital purposes. The unexpended construction funds are included in cash restricted for construction projects in the accompanying 56 HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) consolidated balance sheet at December 31, 1995. Interest on the Senior Secured Notes is payable semiannually on May 1 and November 1 of each year commencing on May 1, 1996. The Senior Secured Notes are unconditionally guaranteed on a senior secured basis by HCT and may be guaranteed by certain future subsidiaries of HCC. HCA is not and GBCC and its subsidiaries were not 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 first mortgage limited to approximately $39 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 any future management contracts entered into by HCC. The Senior Secured Notes are redeemable at the option of HCC any time on or after November 1, 1999 at 106.375% of the then outstanding principal amount, decreasing to 103.1875% and 100%, respectively, on November 1, 2000 and 2001. Commencing with the November 1, 1997 interest payment date and at each subsequent interest payment date, HCC will be required to make an offer to purchase not more than $2,500,000 in principal amount of the Senior Secured Notes at a price of 106.375% of the principal amount tendered. The indenture to the Senior Secured Notes contains various provisions limiting the ability of HCC and certain defined subsidiaries to, among other things, pay dividends or make other restricted payments; incur additional indebtedness or issue preferred stock; create liens; create dividend or other payment restrictions affecting certain defined subsidiaries; enter into mergers or consolidations or make sales of all or substantially all assets of HCC, HCT or any future guarantor; and enter into transactions with certain affiliates. (b) During February 1995, HCA entered into a $5,000,000 bank promissory note agreement. The note accrues interest at the bank's prime lending rate plus 1% per annum. Interest only was payable during the first six months. Commencing September 1, 1995, principal and interest are payable monthly based on a 30-month amortization schedule with the final payment due on February 1, 1998. (c) On February 17, 1994, a subsidiary of GBCC issued $185,000,000 of non- recourse first mortgage notes due January 15, 2004 (the "10 7/8% First Mortgage Notes") and collateralized by a first mortgage on the Sands. Interest on the notes accrued at the rate of 10 7/8% per annum, payable semiannually commencing July 15, 1994 with the balance due at maturity. Interest only was payable during the first three years. (d) On February 17, 1994, a subsidiary of GBCC issued $85,000,000 of unsecured senior notes due April 15, 2004 (the "PRT Funding Notes"). Interest on the PRT Funding Notes accrued at the rate of 11 5/8% per annum, payable semiannually commencing October 15, 1994. 57 HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Scheduled payments of long-term debt as of December 31, 1996 are set forth below: 1997 $ 6,311,000 1998 6,294,000 1999 7,055,000 2000 5,335,000 2001 5,000,000 Thereafter 187,500,000 ------------ Total $217,495,000 ============ Interest paid, net of capitalized interest and commitment fees, amounted to $59,404,000, $58,401,000 and $36,439,000, respectively, during the years ended December 31, 1996, 1995 and 1994. (5) CAPITAL LEASES HCA leases two parking garages under capital lease agreements. The first such lease has an initial term of 30 years commencing in June 1993 with the right to extend the term to a maximum of 99 years. Rental payments during the first 20 years equal the City of Aurora's financing costs related to its $10,000,000 general obligation bond issue used to finance the construction of the parking garage. The general obligation bond issue includes interest at rates between 7% and 7 5/8% per annum. In September 1996, HCA and the Aurora Metropolitan Exposition, Auditorium and Office Building Authority ("ACCA") completed the joint construction of a new five-story, approximately 500-space parking garage directly across the street from, and connected by a climate- controlled tunnel to, the Aurora Casino's Pavilion. The garage provides additional parking for patrons of the Aurora Casino and contains approximately 1,500 square feet of retail space. ACCA financed a portion of the construction costs through an $11,500,000, 7.5% industrial revenue bond issue which yielded proceeds of approximately $10,500,000. HCA funded all remaining construction costs and escrowed a total of $3,500,000 at the rate of $400,000 per month beginning in September 1995 towards satisfaction of its obligations under the agreement. HCA additionally agreed to make payments to ACCA during construction equal to the financing costs due in July 1996 relating to the ACCA industrial revenue bond issue. Such escrow and financing payments were included in cash restricted for construction projects in the accompanying consolidated balance sheet at December 31, 1995. The facility is owned by ACCA and operated by HCA pursuant to a 30-year lease with the right to extend the lease for up to 20 additional years. Rental payments during the first 15 years equal ACCA's debt service costs related to the industrial revenue bond issue. In addition, HCA pays ACCA base rent equal to $15,000 per month, subject to a credit of $615,000 at the rate of $10,000 per month for improvements made to ACCA's North Island Center banquet and meeting facilities. HCA is also responsible for additional rent, consisting of costs such as real estate taxes, maintenance costs, insurance premiums and utilities, arising out of its operation of both parking garages. HCA also leases certain equipment under capital lease agreements which provide for interest at the rate of 11.2% and expire at various dates through 1998. HCT leases certain gaming and other equipment under capital lease agreements which provide for interest at rates ranging up to 13 1/4% per annum and which expire during 1997. 58 HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The original cost of HCA's parking garages is included in buildings in the accompanying consolidated balance sheets at December 31, 1996 and 1995 in the amounts of $27,476,000 and $10,000,000, respectively. Assets under capital leases with an original cost of $7,143,000 and $7,342,000, are included in operating equipment in the accompanying consolidated balance sheets at December 31, 1996 and 1995, respectively. Amortization expense with respect to assets under capital leases amounted to $2,723,000, $2,725,000 and $1,551,000 during the years ended December 31, 1996, 1995 and 1994, respectively. Future minimum lease payments under capital lease obligations as of December 31, 1996 were as follows: 1997 $ 3,744,000 1998 2,494,000 1999 2,457,000 2000 2,483,000 2001 2,532,000 Thereafter 26,719,000 ------------ Total minimum lease payments 40,429,000 Less amount representing interest (16,751,000) ------------ Present value of future minimum lease payments 23,678,000 Current capital lease obligation (1,971,000) ------------ Long-term capital lease obligation $ 21,707,000 ============ (6) INCOME TAXES Components of HCC's provision for income taxes consisted of the following: YEAR ENDED DECEMBER 31, --------------------------------- 1996 1995 1994 ------ ------ ------ Current: Federal $ (72,000) $ - $ (36,000) State 55,000 (687,000) 456,000 Deferred: Federal - - (450,000) State (46,000) 419,000 (1,497,000) ------------ --------- ----------- $ (63,000) $(268,000) $(1,527,000) ============ ========= =========== Total state and federal income taxes paid by HCC for the years ended December 31, 1996, 1995 and 1994 amounted to $223,000, $522,000 and $1,107,000, respectively. 59 HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) A reconciliation between the calculated tax provision on income before extraordinary item based on the statutory rates in effect and the effective tax rates follows:
YEAR ENDED DECEMBER 31, ---------------------------------------- 1996 1995 1994 ------------ ------------ ------------ Calculated income tax benefit (provision) at 34% $ 18,778,000 $(2,308,000) $(1,112,000) SFAS 109 recognition of net operating loss and tax credit carryforwards - - (450,000) Utilization of operating loss carryforwards - 3,716,000 2,341,000 Tax benefit of operating losses not recognized (17,412,000) - - Amortization of excess purchase price (601,000) (803,000) (803,000) Lobbying costs (306,000) (227,000) (427,000) Disallowance of meals and entertainment (404,000) (410,000) (361,000) State income taxes 6,000 (177,000) (687,000) Other (124,000) (59,000) (28,000) ------------ ----------- ----------- Tax provision as shown on consolidated statements of operations $ (63,000) $ (268,000) $(1,527,000) ============ =========== ===========
At December 31, 1996, HCC and its subsidiaries had tax net operating loss carryforwards ("NOL's") totaling approximately $20,000,000, none of which begin to expire until the year 2007. Additionally, HCC and its subsidiaries have various tax credits available totaling approximately $213,000, which do not begin to expire until the year 2008. The provisions of SFAS 109 require that the tax benefit of such NOL's and credit carryforwards 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. At December 31, 1995, HCC and its subsidiaries (including GBCC and its subsidiaries) had net deferred tax assets arising from NOL's, tax credits and timing differences amounting to $34,263,000. Continuing losses of GBCC resulted in management's determination that it was more likely than not that only a portion of such deferred tax assets would be utilized. Accordingly, management established a valuation allowance which resulted in a net deferred tax asset of $8,050,000 at December 31, 1995. As a result of the distribution by HCC of its 80% ownership of GBCC at December 31, 1996, the NOL's, tax credits and net deferred tax assets attributable to GBCC are no longer available to HCC. Management believes that it is more likely than not that future consolidated taxable income of HCC (primarily from the Aurora Casino and Tunica Casino) will be sufficient to utilize a portion of the remaining net deferred tax assets of $12,885,000. Accordingly, a valuation allowance has been established at December 31, 1996 reducing the net deferred tax asset to $6,513,000. The ultimate recognition of this amount of NOL's and tax credits is dependent on HCC and its subsidiaries' ability to generate approximately $19 million of taxable income for federal tax purposes prior to the expiration dates of the NOL's and tax credit carryforwards. The revaluation of the net deferred tax asset resulting from the 60 HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) distribution of GBCC stock ($1,537,000) has been reflected in the accompanying consolidated financial statements at December 31, 1996 as an adjustment to additional paid-in capital. 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 future utilization of its loss carryforwards. The Internal Revenue Service is currently examining the consolidated Federal income tax returns of HCC for the years 1993 and 1994. Management believes that the results of such examination will not have a material adverse effect on the consolidated financial position of HCC. The components of the net deferred tax asset were as follows: DECEMBER 31, --------------------------- 1996 1995 ------------ ------------- Deferred tax assets: Net operating loss carryforwards $ 6,746,000 $ 25,316,000 Allowance for doubtful accounts 7,316,000 7,251,000 Investment and jobs tax credits 213,000 4,417,000 Equity losses of unconsolidated subsidiaries and joint ventures - 3,166,000 Other liabilities and accruals 3,179,000 3,741,000 Benefits accrual 1,704,000 1,479,000 Write off excess of cost of investment - 1,543,000 Other 750,000 2,276,000 ----------- ------------ Total deferred tax assets 19,908,000 49,189,000 ----------- ------------ Deferred tax liabilities: Depreciation and amortization (4,395,000) (10,227,000) Amortization of note discount (2,628,000) (4,042,000) Other - (657,000) ----------- ------------ Total deferred tax liabilities (7,023,000) (14,926,000) ----------- ------------ Net deferred tax asset 12,885,000 34,263,000 Valuation allowance (6,372,000) (26,213,000) ----------- ------------ $ 6,513,000 $ 8,050,000 =========== ============ 61 HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (7) STOCK OPTIONS AND COMPENSATION PLANS HOLLYWOOD CASINO CORPORATION STOCK OPTION PLANS - HCC currently has two employee stock option plans in effect: the Hollywood Casino Corporation 1996 Long-Term Incentive Plan (the "1996 Plan") and the Hollywood Casino Corporation 1992 Stock Option Plan (the "1992 Plan"). The 1996 Plan and the 1992 Plan provide for the granting of nonqualified stock options and incentive stock options that are intended to qualify for the special tax treatment under the Internal Revenue Code; the 1996 Plan also provides for the granting of restricted stock. The shares to be offered under the 1996 Plan and the 1992 Plan consist of shares of Class A Common Stock. The 1996 Plan and the 1992 Plan provide for the granting of 3,000,000 and 1,197,000 shares, respectively, of Class A Common Stock of which 2,680,000 and 147,006, respectively, remain available for future grant as of December 31, 1996. The 1996 Plan and the 1992 Plan are administered by committees of HCC's Board of Directors. Options granted under the 1996 Plan become vested at the discretion of the Committee of the Board of Directors (however, vesting for certain officers, directors and shareholders may not be less than six months) and may be exercised for a period of not more than ten years (five years in the case of incentive stock options) from the date of grant. No more than 150,000 shares may be awarded to any individual during any fiscal year and incentive stock options are subject to a $100,000 calendar year limitation. Options granted under the 1992 Plan become vested over a three year period, are exercisable for a term ending not more than seven years (five years in the case of incentive stock options) from the date of the grant and incentive stock options are subject to limitations on the quantity exercised in a calendar year. As of December 31, 1996, options to purchase 320,000 shares remain outstanding at exercise prices ranging from $3.125 per share to $5.25 per share under the 1996 Plan. Such options have a weighted average exercise price of $3.26 and a weighted average remaining contractual life of 60 months. None of the options are currently exercisable. As of December 31, 1996, options to purchase 90,008 shares remain outstanding at an exercise price of $.0006 per share under the 1992 Plan, all of which are currently exercisable and have a remaining contractual life of 37 months. The following table lists the combined activity of the 1996 Plan and the 1992 Plan:
YEAR ENDED DECEMBER 31, --------------------------------------------------------- 1996 1995 1994 --------------------- ---------------- ---------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE --------- -------- --------- ------ --------- ------ Outstanding options at beginning of year 150,008 $ .80 478,340 $ .25 989,994 $.0006 Options cancelled (20,000) 6.00 - - - - Options granted 320,000 3.26 - - 20,000 6.00 Options exercised (40,000) .0006 (328,332) .0006 (531,654) .0006 ------- -------- -------- Outstanding options at end of year 410,008 $ 2.54 150,008 $ .80 478,340 $ .25 ======= ======== ========
62 HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) During 1996, HCC also adopted the Hollywood Casino Corporation 1996 Non-Employee Director Stock Plan (the "Directors' Plan") providing for the grant of non-qualified stock options of Class A common stock of HCC. The Directors' Plan provides for the granting of 150,000 shares of Class A common stock of which 130,000 remain available for future grant as of December 31, 1996. An initial option of 10,000 shares per non-employee director was granted upon adoption of the plan with any future outside director to also receive an option of 10,000 shares. In addition, each outside director will receive a grant of 2,500 shares on January 15 of each year. All such grants are at an exercise price equal to the fair market value as of the date of the grant, vest after six months and expire no later than ten years from the date of grant. The Directors' Plan is administered by a Committee of the Board of Directors. As of December 31, 1996, 20,000 shares remain outstanding and are currently exercisable at a price of $6.25 per share. The Company has elected to apply Opinion 25 with respect to accounting for options. Based on such election, no compensation expense has been recognized in the accompanying consolidated financial statements as a result of the granting of stock options. Had compensation expense been determined consistent with SFAS 123, the net loss for the year ended December 31, 1996 would have increased by approximately $41,000 with no effect on reported loss per share. The fair value of each option grant in 1996 was estimated on the date of grant using a method approximating the Black-Scholes option pricing model with the following assumptions: risk free interest rate of 5.54%; no dividend yield; expected life of one year and volatility of 62.1%. The weighted average fair value of options granted in 1996 was $.91. COMPENSATION PLAN - HCC has agreements with certain of its principal shareholders and key executive officers providing for (1) lifetime pension benefits upon the expiration of existing employment contracts and subsequent consulting agreements and (2) death benefits to be paid for a period of ten years. The obligations under these agreements, which are not funded, are being charged to operations over the remaining terms of the employment agreements. Amounts charged to expense under the agreements for the years ended December 31, 1996, 1995 and 1994 were approximately $660,000, $315,000 and $218,000, respectively. Obligations accrued under the agreements at December 31, 1996 and 1995 amounted to $5,011,000 and $4,351,000, respectively, and are included in other noncurrent liabilities in the accompanying consolidated balance sheets. (8) TRANSACTIONS WITH RELATED PARTIES As a result of the distribution by HCC of the GBCC common stock it owned, GBCC is no longer a consolidated subsidiary. Accordingly, intercompany receivables and payables between HCC and GBCC and its subsidiaries which previously eliminated in consolidation are now considered balances outstanding with affiliates. 63 HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) HCC has advanced funds to GBCC totaling $7,750,000 as of December 31, 1996. Of the amounts advanced, $1,000,000, which is not due until April 1, 1998, is classified as noncurrent in the accompanying consolidated balance sheet at December 31, 1996. In addition, $250,000 is due on demand, or if no demand is made, on April 1, 1998. Such borrowings from HCC bear interest at the rate of 14% per annum, payable semiannually. During the third quarter of 1996, GBCC borrowed $6,500,000 from HCC on a demand basis with interest at the rate of 13 3/4% per annum payable quarterly commencing October 1, 1996. Interest receivable amounting to $323,000 is included in due from affiliates in the accompanying consolidated balance sheet at December 31, 1996. The payment of principal and interest to HCC on such borrowings is subject to the approval of the Casino Commission. On February 17, 1994, PPI Funding Corp., a subsidiary of GBCC, issued $40,524,000 discounted principal amount of new deferred interest notes (the "PPI Funding Notes") to HCC in exchange for $38,779,000 principal amount of 15 1/2% unsecured notes (the "PCPI Notes") held by HCC and issued by PCPI Funding Corp., another subsidiary of GBCC. The increased principal amount of the new notes included a call premium on the exchange ($1,745,000) equal to 4 1/2% of the principal amount of PCPI Notes exchanged; such premium was also paid to third party holders of $58,364,000 principal amount of PCPI Notes concurrently redeemed. The PPI Funding Notes were discounted to yield interest at the rate of 14 7/8% per annum and had an original face value of $110,636,000. Subsequent principal payments by PPI Funding Corp. have reduced the maturity value of the notes to $98,353,000. 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. It was anticipated that HCC's primary method of collection with respect to the PPI Funding Notes would be through the utilization of NOL's of GBCC. As GBCC is no longer a consolidated subsidiary for federal income tax purposes, this means of collection is no longer available to HCC. Accordingly, at December 31, 1996, HCC established a valuation allowance in the amount of $18,741,000 to reduce the outstanding principal balance on the PPI Funding Notes to an estimated realizable value. Management anticipates that the remaining balance of $35,597,000, which is included in noncurrent due from affiliates on the accompanying consolidated balance sheet at December 31, 1996 will be realized through a combination of asset acquisitions from GBCC and its subsidiaries (see Note 17) and repayments from GBCC. Pursuant to a management agreement, HCA pays to Pratt Management, L.P. ("PML"), a limited partnership wholly owned through 1996 by GBCC (see Note 17), a base management fee equal to 5% of the Aurora Casino's operating revenues (as defined in the agreement) subject to a maximum of $5,500,000 annually, and an incentive fee equal to 10% of gross operating profit (as defined in the agreement to generally include all revenues, less expenses other than depreciation, interest, amortization and taxes). Unpaid fees amounting to $2,096,000 are included in amounts due to affiliates in the accompanying consolidated balance sheet at December 31, 1996. Pursuant to a ten-year consulting agreement with GBCC, HCT incurs a monthly consulting fee of $100,000. 64 HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Various subsidiaries of GBCC provide services to HCC and its subsidiaries, including certain administrative and marketing services. Unpaid fees amounting to $203,000 are included in due to affiliates in the accompanying consolidated balance sheet at December 31, 1996. HCT and Advanced Casino Systems Corporation ("ACSC"), a subsidiary of GBCC, entered into a Computer Services Agreement dated as of January 1, 1994. The term of the agreement was three years with an automatic renewal for an additional three years becoming effective on January 1, 1997. 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 as well as a fixed license fee of $30,000 a month ($33,600 effective January 1, 1997). HCT also reimburses ACSC for its direct costs and expenses incurred under this agreement. Unpaid charges amounting to $30,000 are included in due to affiliates in the accompanying consolidated balance sheet at December 31, 1996. HCA also receives certain computer-related services from ACSC including hardware, software and operator support. HCA reimburses ACSC for its direct costs and any expenses incurred. Unpaid charges amounting to $51,000 are included in due to affiliates in the accompanying consolidated balance sheet at December 31, 1996. Prior to sale of the property in September 1996, GBCC operated the Holiday Inn located at the north entrance of the Dallas/Fort Worth Airport ("DFW North") which was owned by Metroplex Hotel Limited ("Metroplex"), a partnership controlled by certain members of the Pratt Family. During 1996 and 1995, GBCC made capital expenditures under the hotel operating agreement totaling approximately $2,581,000 toward property improvements. GBCC was also obligated by the hotel operating agreement to make minimum rental payments equal to Metroplex's principal and interest payments on the underlying indebtedness of this hotel. During February 1994, GBCC utilized funds borrowed from HCC to purchase such underlying indebtedness with a principal balance of $13,756,000 from third parties at a cost of $6,750,000 and subject to third party indebtedness amounting to $2,706,000. The required minimum rental payments (net of debt service receipts since the February 1994 note acquisition date) amounted to $397,000, $530,000 and $678,000, respectively, during the years ended December 31, 1996, 1995 and 1994. GBCC recorded the note receivable from Metroplex, which accrued interest at the rate of 9 1/2% per annum, at acquisition cost; such note was included in notes receivable in the accompanying consolidated balance sheet at December 31, 1995. Upon the sale of the hotel by Metroplex, GBCC received proceeds sufficient to repay the third party indebtedness of $1,873,000, recover its $6,750,000 acquisition cost of the underlying indebtedness, recover $2,581,000 of its total investment in property improvements and receive additional cash of approximately $770,000. In September 1994, a subsidiary of HCC entered into an agreement with an entity owned by a member of the Pratt Family to manage the operation and maintenance of a Company-owned aircraft and to make such aircraft available for charters by third parties. Expenses and commissions charged by the management company under the agreement during 1996, 1995 and 1994 totaled $499,000, $462,000 and $138,000, respectively. 65 HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (9) STATE GAMING REGULATIONS Riverboat gaming operations in Illinois are subject to regulatory control by the Illinois Gaming Board. Under the provisions of the Illinois gaming regulations, HCA is required to maintain its ownership license. Such license was renewed in 1996 and expires in December 1997. Gaming operations in Mississippi are subject to regulatory control by the Mississippi Gaming Commission. Under the provisions of the Mississippi gaming regulations, HCT is required to maintain all necessary licenses. The ownership license for the Tunica Casino was renewed on September 25, 1995 until October 17, 1997. Management intends to file for renewal of each of the licenses enumerated above in Illinois and Mississippi and anticipates that such renewals will be approved by the applicable regulatory agencies during 1997. If it were determined that gaming laws were violated by a licensee, the gaming licenses held by each licensee could be limited, conditioned, suspended or revoked. In addition, the licensees and other persons involved could be subject to substantial fines. (10) OBLIGATORY INVESTMENTS The New Jersey Casino Control Act requires casino licensees to make certain approved investments in New Jersey or to pay an investment alternative tax. Casino licensees may obtain investment credits, which amount to 1.25% of casino revenues, by purchasing bonds at below-market interest rates from the Casino Reinvestment Development Authority (the "CRDA") or by making qualified investments approved by the CRDA. This governmental agency administers the statutorily mandated investments made by casino licensees and is required to expend the monies received by it for the eligible projects defined in the statute. The investment alternative tax amounts to 2.5% of casino revenues. Payments of the investment obligations must be made quarterly. The Sands has elected to comply with the requirements by obtaining investment credits or by making qualified investments. As of December 31, 1995, the Sands had purchased bonds totaling $4,630,000. In addition, the Sands had remaining funds on deposit and held in escrow by the CRDA at December 31, 1995 of $4,683,000. The bonds purchased and the amounts on deposit and held in escrow are collectively referred to as "obligatory investments" in the accompanying consolidated financial statements. Obligatory investments at December 31, 1995 are net of an accumulated valuation allowance of $3,792,000 based upon the estimated realizable value of the investments. Provisions for valuation allowances during the years ended December 31, 1996, 1995 and 1994 amounted to $1,344,000, $1,457,000 and $617,000, respectively. The Sands has, from time to time, contributed certain amounts held in escrow to the CRDA. In consideration thereof, the CRDA granted the Sands waivers of certain of its investment obligations in future periods. The Sands made such contributions of obligatory investments during the years ended December 31, 1996, 1995 and 1994 totaling $1,500,000, $250,000 and $2,500,000, respectively, resulting in waivers granted by the CRDA during 1995 totaling $128,000. No such waivers were granted by the CRDA during 1996 and 1994; however, the contributions have been designated for projects expected to 66 HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) benefit the community and the Sands facility. Accordingly, intangible assets of $1,275,000 were included in other assets on the accompanying consolidated balance sheet at December 31, 1995. Amortization of waivers granted in prior years totaled $128,000 and $1,727,000, respectively, during 1995 and 1994. At December 31, 1995, all waivers were fully amortized. (11) SUMMARIZED COMBINED FINANCIAL INFORMATION OF AND TRANSACTIONS WITH UNCONSOLIDATED AFFILIATES Certain summarized combined financial information of GBCC's unconsolidated affiliates, which include joint ventures, is presented below. YEAR ENDED DECEMBER 31, ------------------------------------------- 1996 1995 1994 ------------- ------------- ------------- Net revenues $ 39,314,000 $ 40,005,000 $ 38,897,000 Expenses (41,524,000) (43,144,000) (42,154,000) ------------ ------------ ------------ Net loss $ (2,210,000) $ (3,139,000) $ (3,257,000) ============ ============ ============ DECEMBER 31, 1995 ------------ Current assets $ 5,410,000 ============ Noncurrent assets $ 58,011,000 ============ Current liabilities $ 7,398,000 ============ Noncurrent liabilities $ 77,877,000 ============ Income and losses of GBCC's unconsolidated affiliates have not been reflected in the accompanying consolidated statements of operations for the years ended December 31, 1996, 1995 or 1994 as GBCC's investments in such affiliates were previously eliminated through the recognition of prior years' losses. Prior to sale of the property in November 1996, GBCC had an ongoing commitment to fund its proportionate share of operating cash deficits with respect to its 50% ownership interest in the Sheraton Plaza located in Orlando, Florida; GBCC was not required to make any such payments during 1996, 1995 and 1994. GBCC also agreed to contribute up to $3,900,000 as an additional investment in the Sheraton Plaza hotel partnership to refurbish the hotel facility. No such commitments were required during 1996; GBCC contributed $1,675,000 and $660,000 during 1995 and 1994, respectively, toward such commitment. Such contributions were in recognition of GBCC's partner having agreed to make $5,000,000 in principal reductions on the underlying mortgage note on the facility. GBCC was required to pay approximately $2,946,000 to retire its share of the underlying indebtedness on the property in connection with the sale. 67 HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) GBCC earned management and project fees from unconsolidated affiliates for the management and project supervision of certain hotel facilities. During the years ended December 31, 1996, 1995 and 1994, such fees amounted to $1,167,000, $1,139,000 and $977,000, respectively. (12) LITIGATION PLANET HOLLYWOOD LITIGATION - Planet Hollywood International, Inc., a Delaware corporation, and Planet Hollywood (Region IV), Inc., a Minnesota corporation (collectively, "PHII"), filed a complaint in the United States District Court for the Northern District of Illinois, Eastern Division on July 29, 1996 against HCC, HCA and a member of the Pratt Family (collectively, the "Original Hollywood Defendants"). The Original Hollywood Defendants filed with the Court on September 18, 1996 an answer to PHII's lawsuit, along with numerous counterclaims against PHII, Robert Earl and Keith Barish (collectively, the "PHII Defendants"). PHII filed with the Court on January 31, 1997, an amendment to their complaint which, among other things, added HCT (together with the Original Hollywood Defendants, the "Hollywood Defendants") and GBCC as defendants. The Original Hollywood Defendants filed with the Court on February 4, 1997, and GBCC and HCT filed with the Court on February 20, 1997, answers and counterclaims to such amended complaint. In its lawsuit, PHII alleges, among other things, that the Hollywood Defendants and GBCC have, in opening and operating the Hollywood Casino concept, infringed on PHII's trademark, service mark and trade dress and have engaged in unfair competition and deceptive trade practices. In their counterclaims, the Hollywood Defendants and GBCC allege, among other things, that the PHII Defendants have, through their planned use of their mark in connection with casino services, infringed on certain of HCC's service marks and trade dress and have engaged in unfair competition. Given the uncertainties inherent in litigation, no assurance can be given that the Hollywood Defendants will prevail in this litigation; however, the Hollywood Defendants believe that PHII's claims are without merit and intend to defend their position and pursue their counterclaims vigorously. The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of the uncertainties described above. OTHER LITIGATION - HCC and its subsidiaries are also parties in various other 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. 68 HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (13) COMMITMENTS AND CONTINGENCIES HCT entered into a ground lease covering 70 acres of land on which the Tunica Casino was constructed. The ground lease is for an initial term of five years from the opening date of the facility and, at the option of HCT, may be renewed for nine additional five-year periods. Obligations under the ground lease during the initial term include both minimum monthly fixed payments and percentage rent, which in the aggregate will be the greater of 4% of Gross Revenues, as defined, or $1,100,000 per year. HCT is responsible for all operating and other expenses of the property in accordance with the lease terms. HCT prepaid the first year fixed rental payments; such amount, together with all rental payments made during the construction period, were taken as a credit against rent payments as they became due during the first year of operations. During 1996, 1995 and 1994, HCT expensed $3,486,000, $3,608,000 and $1,210,000, respectively, in connection with the ground lease. (14) THIRD PARTY NOTES RECEIVABLE During November 1995, HCC loaned $10,000,000 of the proceeds from the HCC Refinancing to an unaffiliated gaming company in the form of two $5,000,000 notes (Series A and Series B). The loans earn interest at the rate of prime plus one percent per annum and are payable in quarterly installments of principal and interest commencing in November 1997 with the final payment due in August 2000. All principal payments received are to be applied first to the Series A note. In connection with the loans, HCC received warrants to acquire up to a 10% equity interest in the gaming company at any time between November 15, 1998 and November 15, 2000 at an exercise price of $500,000 per 1/2% interest. Under the terms of the loan agreement, the gaming company may require HCC to exercise warrants to acquire a 5% equity interest on November 15, 1998 at a cost not to exceed $5,000,000 payable through the reduction of the outstanding principal balance and, to the extent applicable, the forgiveness of accrued interest on the Series B note. (15) SUPPLEMENTAL CASH FLOW INFORMATION During 1996, HCA entered into a capital lease obligation in the original amount of $13,195,000 with respect to a second parking garage (see Note 5). Additional escrowed construction and financing costs totaling $4,281,000 were capitalized as part of the cost of the facility. At December 31, 1996, HCC contributed certain receivables from GBCC and its subsidiaries to GBCC. Notes receivable amounting to $8,738,000 together with accrued interest thereon totaling $1,753,000 and other receivables of $4,283,000 with respect to pension obligations assumed during 1995 were contributed to GBCC. 69 HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) At December 31, 1996, HCC distributed the common stock of GBCC it owned to its shareholders. The following net liabilities were distributed to HCC's shareholders in the form of a dividend: Long-term debt............................................... $ 326,024,000 Short-term borrowings........................................ 8,750,000 Other current liabilities.................................... 41,186,000 Other noncurrent liabilities................................. 4,592,000 Net property and equipment................................... (156,887,000) Accounts receivable, net of allowance........................ (10,656,000) Net book value of other assets distributed (excluding cash).. (30,811,000) ------------- Net liabilities distributed................................. $ 182,198,000 ============= During 1995, HCA acquired certain equipment at a cost of $2,985,000 under financing agreements with a third party vendor. During 1994, HCT entered into capital lease obligations totaling $5,013,000 for new equipment (see Note 5). During 1994, HCT acquired certain equipment at a cost of $5,169,000 under financing agreements with certain third party vendors. In connection with the acquisition of the Tunica Casino site by HCT during January 1994, liabilities were assumed as follows: Fair value of assets acquired................................... $10,577,000 Land rights..................................................... 8,445,000 Cash paid for capital stock and limited partnership interest.................................... (7,986,000) Notes issued for capital stock and limited partnership interest.................................... (6,000,000) ----------- Liabilities assumed............................................. $ 5,036,000 =========== During 1994, GBCC acquired the underlying indebtedness of the DFW North Holiday Inn subject to third party indebtedness totaling $2,706,000 (see Note 8). (16) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value: CASH, CASH EQUIVALENTS AND CASH RESTRICTED FOR CONSTRUCTION PROJECTS - The carrying amounts approximate fair value because of the short maturity of these instruments. 70 HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) OBLIGATORY INVESTMENTS - The carrying amount of obligatory investments approximates its fair value as a result of an allowance reflecting the below market interest rate associated with such investments. NOTES RECEIVABLE - The fair value of notes receivable is estimated based on the discounting of net cash flows at current market rates for notes of similar remaining maturities and collateral or on the estimated realizable value. INTEREST PAYABLE - The carrying amount of interest payable approximates fair value because of the short maturity of the obligation. LONG-TERM DEBT - The fair value of HCC's long-term debt is estimated based on either the quoted market prices of the issue or on the discounted cash flow of future payments utilizing current rates available to HCC for debt of similar remaining maturities. Debt obligations with a short remaining maturity are valued at the carrying amount. The estimated carrying amounts and fair values of HCC's financial instruments are as follows:
DECEMBER 31, 1996 DECEMBER 31, 1995 ------------------------- ------------------------------------- CARRYING CARRYING AMOUNT FAIR VALUE AMOUNT FAIR VALUE ------------ ------------ ----------------- ----------------- Financial Assets Cash and cash equivalents...... $ 21,488,000 $ 21,488,000 $ 56,538,000 $ 56,538,000 Restricted cash................ - - 29,874,000 29,874,000 Notes receivable............... 10,000,000 10,000,000 19,222,000 19,222,000 Notes receivable - affiliates.. 7,750,000 7,750,000 - - PPI Funding Notes.............. 35,597,000 35,597,000 - - Obligatory investments......... - - 5,521,000 5,521,000 Financial Liabilities Interest payable............... $ 4,734,000 $ 4,734,000 $ 16,964,000 $ 16,964,000 12 3/4% Senior Secured Notes... 210,000,000 201,600,000 210,000,000 191,100,000 10 7/8% First Mortgage Notes... - - 185,000,000 160,950,000 11 5/8% PRT Funding Notes...... - - 85,000,000 62,900,000 Equipment loans................ 2,873,000 2,879,000 3,779,000 3,785,000 Note payable................... 2,150,000 2,150,000 2,300,000 2,300,000 Other.......................... 2,472,000 2,472,000 7,744,000 7,596,000
71 HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (17) SUBSEQUENT EVENT Subject to regulatory approval and effective as of April 1, 1997, HCC will acquire the general partnership interest in Pratt Management, L.P. ("PML"), the limited partnership owned by subsidiaries of GBCC which holds the management contract on the Aurora Casino. PML earns management fees from the Aurora Casino and incurs operating and other expenses with respect to its management thereof. As general partner, HCC will receive 99% of the first $84,000 of net income earned by the partnership each month and 1% of any income earned above such amount. HCC will issue a five-year note in the original amount of $3,800,000, and assign $7,597,000 principal amount of PPI Funding Notes (see Note 8) to a GBCC subsidiary in exchange for the general partnership interest. HCC further intends to enter into negotiations during 1997 to acquire the capital stock of ACSC, a company engaged in the development, installation and servicing of computer software related to the gaming industry, which is currently wholly-owned by a subsidiary of GBCC. ACSC installed and continues to service certain gaming software applications at the Company's Aurora and Tunica casinos (see Note 8). (18) SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
QUARTER ---------------------------------------------------------- FIRST SECOND THIRD FOURTH ------------- ------------- ------------- ------------- YEAR ENDED DECEMBER 31, 1996: Net revenues, as previously reported.. $132,980,000 $138,109,000 $136,244,000 $122,960,000 Reclassifications..................... 135,000 152,000 - - ------------ ------------ ------------ ------------ Net revenues.......................... $133,115,000 $138,261,000 $136,244,000 $122,960,000 ============ ============ ============ ============ Net loss.............................. $ (6,660,000) $ (8,250,000) $ (8,421,000) $(31,962,000) ============ ============ ============ ============ Net loss per common share (1).................... $ (.27) $ (.33) $ (.34) $ (1.29) ============ ============ ============ ============ YEAR ENDED DECEMBER 31, 1995: Net revenues, as previously reported.. $128,668,000 $131,520,000 $147,304,000 $131,907,000 Reclassifications..................... 150,000 150,000 94,000 150,000 ------------ ------------ ------------ ------------ Net revenues.......................... $128,818,000 $131,670,000 $147,398,000 $132,057,000 ============ ============ ============ ============ Net income (loss)..................... $ 1,243,000 $ 3,126,000 $ 7,144,000 $(28,801,000) ============ ============ ============ ============ Net income (loss) per common share (1).................... $ .05 $ .13 $ .29 $ (1.17) ============ ============ ============ ============
72 HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (1) In accordance with the provisions of APB Opinion No. 15, earnings per share are calculated separately for each quarter and the full year. Accordingly, annual earnings per share will not necessarily equal the total of the interim periods. 73 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Hollywood Casino - Aurora, Inc.: We have audited the accompanying balance sheets of Hollywood Casino - Aurora, Inc. (the Company and an Illinois corporation) as of December 31, 1996 and 1995, and the related statements of operations, changes in shareholder's equity and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Hollywood Casino - Aurora, Inc. as of December 31, 1996 and 1995, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Roseland, New Jersey March 21, 1997 74 HOLLYWOOD CASINO - AURORA, INC. (WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION) BALANCE SHEETS ASSETS DECEMBER 31, --------------------------- 1996 1995 ------------- ------------ Current Assets: Cash and cash equivalents......................... $ 9,034,000 $ 8,996,000 Accounts receivable, net of allowances of $1,071,000 and $866,000, respectively......... 1,895,000 2,613,000 Inventories....................................... 948,000 482,000 Deferred income taxes............................. 1,421,000 765,000 Due from affiliates............................... 1,046,000 322,000 Prepaid expenses and other current assets......... 854,000 719,000 ------------ ------------ Total current assets............................. 15,198,000 13,897,000 ------------ ------------ Property and Equipment: Land improvements................................. 2,786,000 2,756,000 Buildings and improvements........................ 46,247,000 26,615,000 Riverboats........................................ 36,970,000 36,967,000 Operating equipment............................... 30,766,000 27,114,000 Construction in progress.......................... 276,000 294,000 ------------ ------------ 117,045,000 93,746,000 Less - accumulated depreciation and amortization.. (26,814,000) (17,980,000) ------------ ------------ Net property and equipment....................... 90,231,000 75,766,000 ------------ ------------ Cash Restricted for Construction Project........... - 1,955,000 ------------ ------------ Other Assets....................................... 2,020,000 1,578,000 ------------ ------------ $107,449,000 $ 93,196,000 ============ ============ The accompanying notes to financial statements are an integral part of these balance sheets. 75 HOLLYWOOD CASINO - AURORA, INC. (WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION) BALANCE SHEETS LIABILITIES AND SHAREHOLDER'S EQUITY DECEMBER 31, ------------------------- 1996 1995 ------------ ----------- Current Liabilities: Current maturities of long-term debt and capital lease obligations.......... $ 6,456,000 $ 3,376,000 Accounts payable........................ 2,131,000 2,288,000 Accrued liabilities - Salaries and wages..................... 2,117,000 1,868,000 Interest............................... 1,315,000 1,120,000 Gaming and other taxes................. 497,000 920,000 Insurance.............................. 1,393,000 773,000 Other.................................. 1,351,000 881,000 Due to affiliates....................... 2,278,000 2,324,000 Other current liabilities............... 861,000 1,315,000 ------------ ----------- Total current liabilities.............. 18,399,000 14,865,000 ------------ ----------- Long-Term Debt........................... 37,267,000 42,959,000 ------------ ----------- Capital Lease Obligations................ 21,707,000 9,494,000 ------------ ----------- Deferred Income Taxes.................... 2,043,000 329,000 ------------ ----------- Commitments and Contingencies Shareholder's Equity: Common stock, $.01 par value per share; 2,000,000 shares authorized; 1,501,000 shares issued and outstanding.......... 15,000 15,000 Additional paid-in capital.............. 24,541,000 24,541,000 Retained earnings....................... 3,477,000 993,000 ------------ ----------- Total shareholder's equity............. 28,033,000 25,549,000 ------------ ----------- $107,449,000 $93,196,000 ============ =========== The accompanying notes to financial statements are an integral part of these balance sheets. 76 HOLLYWOOD CASINO - AURORA, INC. (WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION) STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, ------------------------------------------- 1996 1995 1994 ------------- ------------- ------------- Revenues: Casino................................... $157,124,000 $146,281,000 $139,437,000 Food and beverage........................ 13,780,000 11,712,000 10,984,000 Admissions............................... - - 7,855,000 Other.................................... 3,895,000 4,933,000 5,964,000 ------------ ------------ ------------ 174,799,000 162,926,000 164,240,000 Less - promotional allowances............ (11,408,000) (10,418,000) (16,240,000) ------------ ------------ ------------ Net revenues............................. 163,391,000 152,508,000 148,000,000 ------------ ------------ ------------ Expenses: Casino................................... 108,014,000 97,173,000 88,590,000 Food and beverage........................ 4,926,000 4,865,000 5,586,000 Other.................................... 1,066,000 742,000 1,319,000 General and administrative............... 14,645,000 14,406,000 11,926,000 Depreciation and amortization............ 8,834,000 9,172,000 7,121,000 Amortization of preopening costs......... - - 5,863,000 ------------ ------------ ------------ Total expenses.......................... 137,485,000 126,358,000 120,405,000 ------------ ------------ ------------ Income from operations.................... 25,906,000 26,150,000 27,595,000 ------------ ------------ ------------ Non-operating income (expense): Interest income.......................... 205,000 306,000 458,000 Interest expense, net of capitalized interest of $354,000 in 1995............ (6,704,000) (6,493,000) (6,654,000) ------------ ------------ ------------ Total non-operating expenses, net....... (6,499,000) (6,187,000) (6,196,000) ------------ ------------ ------------ Income before income taxes and extraordinary item....................... 19,407,000 19,963,000 21,399,000 Income tax provision...................... (6,883,000) (7,554,000) (7,557,000) ------------ ------------ ------------ Income before extraordinary item.......... 12,524,000 12,409,000 13,842,000 Extraordinary item: Loss on early extinguishment of debt, net of related tax benefit................... - (989,000) - ------------ ------------ ------------ Net income................................ $ 12,524,000 $ 11,420,000 $ 13,842,000 ============ ============ ============
The accompanying notes to financial statements are an integral part of these financial statements. 77 HOLLYWOOD CASINO - AURORA, INC. (WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION) STATEMENT OF CHANGES IN SHAREHOLDER'S EQUITY FOR THE THREE YEARS ENDED DECEMBER 31, 1996
(ACCUMULATED COMMON STOCK ADDITIONAL DEFICIT) ---------------------- PAID-IN RETAINED SHARES AMOUNT CAPITAL EARNINGS ------------ -------- ----------- ------------- BALANCE, JANUARY 1, 1994......... 1,501,000 $15,000 $ 9,986,000 $ 658,000 Capital contributions.......... - - 4,555,000 - Net income..................... - - - 13,842,000 Dividends...................... - - - (14,985,000) ------------ ------- ----------- ------------ BALANCE, DECEMBER 31, 1994....... 1,501,000 15,000 14,541,000 (485,000) Capital contributions.......... - - 10,000,000 - Net income..................... - - - 11,420,000 Dividends...................... - - - (9,942,000) ------------ ------- ----------- ------------ BALANCE, DECEMBER 31, 1995....... 1,501,000 15,000 24,541,000 993,000 Net income..................... - - - 12,524,000 Dividends...................... - - - (10,040,000) ------------ ------- ----------- ------------ BALANCE, DECEMBER 31, 1996....... 1,501,000 $15,000 $24,541,000 $ 3,477,000 ============ ======= =========== ============
The accompanying notes to financial statements are an integral part of this financial statement. 78 HOLLYWOOD CASINO - AURORA, INC. (WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION) STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, ------------------------------------------------------ 1996 1995 1994 ------------------------ ------------- ------------- OPERATING ACTIVITIES: Net income........................................................... $ 12,524,000 $ 11,420,000 $ 13,842,000 Adjustments to reconcile net income to net cash provided by operating activities: Extraordinary item.................................................. - 989,000 - Depreciation and amortization....................................... 8,834,000 9,172,000 12,984,000 Provision for doubtful accounts..................................... 325,000 337,000 441,000 Deferred income tax provision (benefit)............................. 1,119,000 1,095,000 (1,444,000) Decrease (increase) in receivables.................................. 393,000 (1,309,000) (402,000) Increase in accounts payable and accrued liabilities................ 954,000 2,537,000 419,000 Decrease in due to affiliates....................................... (770,000) (47,000) (1,979,000) Net change in other current assets and liabilities.................. (1,116,000) 1,426,000 (2,137,000) Net change in other assets and liabilities.......................... (442,000) (784,000) (702,000) ------------ ------------ ------------ Net cash provided by operating activities............................ 21,821,000 24,836,000 21,022,000 ------------ ------------ ------------ INVESTING ACTIVITIES: Net property and equipment additions................................. (10,104,000) (27,633,000) (9,499,000) Decrease (increase) in cash restricted for construction projects..... 1,955,000 (1,955,000) - ------------ ------------ ------------ Net cash used in investing activities................................ (8,149,000) (29,588,000) (9,499,000) ------------ ------------ ------------ FINANCING ACTIVITIES: Proceeds from issuance of debt....................................... - 5,000,000 - Repayments of debt................................................... (2,870,000) (1,287,000) (3,606,000) Payments on capital lease obligations................................ (724,000) (1,010,000) (877,000) Capital contributions................................................ - 10,000,000 4,000,000 Dividends............................................................ (10,040,000) (9,942,000) (14,985,000) ------------ ------------ ------------ Net cash (used in) provided by financing activities.................. (13,634,000) 2,761,000 (15,468,000) ------------ ------------ ------------ Net increase (decrease) in cash and cash equivalents................. 38,000 (1,991,000) (3,945,000) Cash and cash equivalents at beginning of year....................... 8,996,000 10,987,000 14,932,000 ------------ ------------ ------------ Cash and cash equivalents at end of year............................. $ 9,034,000 $ 8,996,000 $ 10,987,000 ============ ============ ============
The accompanying notes to financial statements are an integral part of these financial statements. 79 HOLLYWOOD CASINO - AURORA, INC. (WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION) NOTES TO FINANCIAL STATEMENTS (1) ORGANIZATION AND BUSINESS Hollywood Casino - Aurora, Inc. ("HCA") is an Illinois corporation and a wholly owned subsidiary of Hollywood Casino Corporation ("HCC"), a Delaware corporation. HCA was organized and incorporated during December 1990 by certain relatives of Jack E. Pratt, Edward T. Pratt, Jr. and William D. Pratt (collectively, the "Pratt Family") for the purpose of developing and holding the ownership interest in a riverboat gaming operation located in Aurora, Illinois (the "Aurora Casino"). In May 1992, HCC, which was then wholly owned by members of the Pratt Family or by certain general partnerships and trusts controlled by the Pratt Family, acquired all of the outstanding stock of HCA through the issuance of HCC stock. Prior to December 31, 1996, HCC also owned approximately 80% of Greate Bay Casino Corporation ("GBCC," formerly known as Pratt Hotel Corporation), a Delaware corporation which owns the entity with which HCA has a management services contract. Under the provisions of an agreement between the city of Aurora, Illinois (the "City") and HCA dated June 4, 1991, the City granted HCA the exclusive right to develop the Aurora Casino on the Fox River. The Aurora Casino consists of two, four-level riverboats having a combined casino space of approximately 32,000 square feet and a four-level pavilion and docking facility which houses ticketing, food service, passenger waiting, and various administrative functions. The Aurora Casino also includes two parking structures with approximately 1,350 parking spaces. HCA was responsible for the design and construction of the parking garages; however, it leases the facilities under long-term lease agreements. The leases are treated as capital leases for financial reporting purposes (see Note 5). 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 northern Indiana and management believes that this competition will continue in the future. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The significant accounting policies followed in the preparation of the accompanying financial statements are discussed below. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. CASINO REVENUES, PROMOTIONAL ALLOWANCES AND DEPARTMENTAL EXPENSES - HCA recognizes the net win from gaming activities (the difference between gaming wins and losses) as casino revenues. Casino revenues are net of accruals for anticipated payouts of progressive jackpots. Such anticipated jackpot payouts are reflected as current liabilities in the accompanying balance sheets. The estimated value of food and beverage, admissions and other items which were provided to customers without charge has been included in revenues and a corresponding amount has been deducted as promotional allowances. The costs of such complimentaries have been included as casino expenses in 80 HOLLYWOOD CASINO - AURORA, INC. (WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION) NOTES TO FINANCIAL STATEMENTS (CONTINUED) the accompanying statements of operations. Costs of complimentaries allocated from the food and beverage, admissions and other operating departments to the casino department during the years ended December 31, 1996, 1995 and 1994 are as follows: 1996 1995 1994 ----------- ----------- ---------- Food and beverage................. $ 10,280,000 $ 8,777,000 $ 7,535,000 Admissions........................ - 5,446,000 3,986,000 Other............................. 1,318,000 2,569,000 2,661,000 ----------- ----------- ---------- $ 11,598,000 $ 16,792,000 $ 14,182,000 =========== =========== =========== CASH AND CASH EQUIVALENTS - Cash and cash equivalents are generally comprised of cash and investments with original maturities of three months or less, such as treasury bills and fixed repurchase agreements. ALLOWANCE FOR DOUBTFUL ACCOUNTS - The allowance for doubtful accounts is maintained at a level considered adequate to provide for possible future losses. Provisions for doubtful accounts amounting to $325,000, $337,000 and $441,000, respectively, were made during the years ended December 31, 1996, 1995 and 1994. INVENTORIES - Inventories are stated at the lower of cost (on a first-in, first-out basis) or market. PROPERTY AND EQUIPMENT - Property and equipment have been recorded at cost and are being depreciated over their estimated useful lives utilizing the straight-line method based on the following lives: Land improvements 20 years Buildings, riverboats and improvements 25-40 years Operating equipment 3-7 years On October 1, 1996, HCA revised the estimated useful life of its pavilion from 25 years to 40 years, the estimated life of one of its parking garages under a capital lease from 25 years to 30 years and the estimated life of its slot machines from three years to five years. Management believes the changes in estimated lives more appropriately reflect the timing of the economic benefits to be received from these assets. For the year ended December 31, 1996, the effect of these changes reduced depreciation and amortization expense and increased net income by approximately $274,000. 81 HOLLYWOOD CASINO - AURORA, INC. (WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION) NOTES TO FINANCIAL STATEMENTS (CONTINUED) DEFERRED FINANCING COSTS - The costs of issuing long-term debt, including all underwriting, licensing, legal and accounting fees, are capitalized and are amortized over the term of the related debt issue. Amortization of such costs was $509,000 and $643,000 for the years ended December 31, 1995 and 1994, respectively. LONG-LIVED ASSETS - Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets" 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 material impairment currently exists related to its long- lived assets. ACCRUED INSURANCE - HCA is self insured for a portion of its general liability, certain health care and other liability exposures. Accrued insurance includes estimates of such accrued liabilities based on an evaluation of the merits of individual claims and historical claims experience; accordingly, HCA's ultimate liability may differ from the amounts accrued. INTEREST EXPENSE - Interest costs of $2,247,000 were capitalized during the initial construction period together with capitalized interest of $555,000 contributed by HCC in 1994 (see Note 10). Interest costs totaling $354,000 were capitalized during 1995 with respect to the expansion of one of the Aurora Casino's riverboats. Such capitalized interest costs are amortized over the useful lives of the related assets. INCOME TAXES - HCA is included in HCC's consolidated federal income tax return. Pursuant to agreements between HCC and HCA, HCA's provision for federal income taxes is based on the amount of tax which would be provided if a separate federal income tax return were filed. HCA paid $6,774,000, $5,726,000 and $10,293,000 to HCC in connection with its current federal tax provisions for the years ended December 31, 1996, 1995 and 1994, respectively. For the years ended December 31, 1996, 1995 and 1994, HCA paid state income taxes of $28,000, $100,000 and $641,000, respectively. RECLASSIFICATIONS - Certain reclassifications have been made to the prior years' financial statements to conform such statements to the 1996 presentation. Such reclassifications include the reallocation of certain costs among the various operating departments and general and administrative expenses resulting from the completion of a comprehensive internal review of department allocations. Management believes that such reclassifications better reflect the matching of costs with the associated revenues. 82 HOLLYWOOD CASINO - AURORA, INC. (WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION) NOTES TO FINANCIAL STATEMENTS (CONTINUED) (3) BORROWINGS FROM AFFILIATE During 1994, HCA repaid outstanding borrowings from HCC of $2,000,000. Such borrowings were due on demand and accrued interest at the rate of 14% per annum. Interest incurred on such loans amounted to $82,000 for the year ended December 31, 1994. (4) LONG-TERM DEBT AND PLEDGE OF ASSETS HCA's long-term indebtedness consists of the following: DECEMBER 31, -------------------------- 1996 1995 ------------ ------------ 12 3/4% Promissory Note to HCC, due on November 1, 2003 (a).................. $39,007,000 $39,007,000 Promissory note to bank (b)............. 2,472,000 4,402,000 Equipment loans (c)..................... 1,472,000 2,412,000 ----------- ----------- Total indebtedness...................... 42,951,000 45,821,000 Less - current maturities............... (5,684,000) (2,862,000) ----------- ----------- Total long-term debt.................... $37,267,000 $42,959,000 =========== =========== _____________________ (a) The intercompany note accrues interest at the rate of 12 3/4% per annum payable semiannually on October 15 and April 15 of each year and requires semiannual principal repayments of $2,500,000 commencing October 15, 1997 with the balance of the note due November 1, 2003. The note is pledged as security with respect to HCC's 12 3/4% Senior Secured Notes due in 2003. HCA is not a guarantor of HCC's indebtedness; however, the indebtedness is secured, in part, by a first mortgage limited to approximately $39 million on substantially all of the assets of HCA and by a pledge of the capital stock of HCA. The 12 3/4% intercompany note replaced a previous 14% intercompany note to HCC as a result of HCC's refinancing of its outstanding indebtedness during October 1995. (b) During February 1995, HCA entered into a $5,000,000 bank promissory note agreement. The note accrues interest at the bank's prime lending rate plus 1% per annum. Interest only was payable during the first six months. Principal and interest are payable monthly with the final payment due on February 1, 1998. (c) HCA financed the purchase of certain equipment from vendors through the issuance of promissory notes totaling $2,985,000. The promissory notes are payable in monthly installments, including interest at the approximate rate of 12 1/4% per annum, and mature at various dates in 1998. 83 HOLLYWOOD CASINO - AURORA, INC. (WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION) NOTES TO FINANCIAL STATEMENTS (CONTINUED) As of December 31, 1996, future maturities of long-term debt are as follows: 1997...................................$5,684,000 1998................................... 5,760,000 1999................................... 5,000,000 2000................................... 5,000,000 2001................................... 5,000,000 Thereafter.............................16,507,000 ----------- $42,951,000 =========== Interest paid, net of amounts capitalized, for the years ended December 31, 1996, 1995 and 1994 amounted to $6,509,000, $5,578,000 and $6,666,000, respectively. (5) CAPITAL LEASES HCA leases two parking garages under capital lease agreements. The first such lease has an initial term of 30 years commencing in June 1993 with the right to extend the term to a maximum of 99 years. Rental payments during the first 20 years equal the City of Aurora's financing costs related to its $10,000,000 general obligation bond issue used to finance the construction of the parking garage. The general obligation bond issue includes interest at rates between 7% and 7 5/8% per annum. In September 1996, HCA and the Aurora Metropolitan Exposition, Auditorium and Office Building Authority ("ACCA") completed the joint construction of a new five-story approximately 500-space parking garage directly across the street from, and connected by a climate- controlled tunnel to, the Aurora Casino's Pavilion. The garage provides additional parking for patrons of the Aurora Casino and contains approximately 1,500 square feet of retail space. ACCA financed a portion of the construction costs through an $11,500,000, 7.5% industrial revenue bond issue which yielded proceeds of approximately $10,500,000. HCA funded all remaining construction costs and escrowed $3,500,000 at the rate of $400,000 per month beginning in September 1995 towards satisfaction of its obligations under the agreement. HCA additionally agreed to make payments to ACCA during construction equal to the financing costs due in July 1996 relating to the ACCA industrial revenue bond issue. Such escrow and financing payments were included in cash restricted for construction projects in the accompanying balance sheet at December 31, 1995. The facility is owned by ACCA and operated by HCA pursuant to a 30-year lease with the right to extend the lease for up to 20 additional years. Rental payments during the first 15 years equal ACCA's debt service costs related to the industrial revenue bond issue. In addition, HCA pays ACCA base rent equal to $15,000 per month, subject to a credit of $615,000 at the rate of $10,000 per month for improvements made to ACCA's North Island Center banquet and meeting facilities. HCA is also responsible for additional rent, consisting of costs such as real estate taxes, maintenance costs, insurance premiums and utilities, arising out of its operation of both parking garages. HCA also leases certain equipment under capital lease agreements which provide for interest at the rate of 11.2% and expire at various dates through 1998. The original cost of HCA's parking garages is included in buildings and improvements in the accompanying balance sheets at December 31, 1996 and 1995 in the amounts of $27,476,000 and 84 HOLLYWOOD CASINO - AURORA, INC. (WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION) NOTES TO FINANCIAL STATEMENTS (CONTINUED) $10,000,000, respectively. Assets under capital leases with an original cost of $2,329,000 are included in operating equipment in the accompanying balance sheets at December 31, 1996 and 1995. Amortization expense with respect to assets under capital leases amounted to $1,223,000 during the year ended December 31, 1996 and $1,051,000 during each of the years ended December 31, 1995 and 1994. Future minimum lease payments under capital lease obligations as of December 31, 1996 are as follows: 1997................................................... $ 2,489,000 1998................................................... 2,494,000 1999................................................... 2,457,000 2000................................................... 2,483,000 2001................................................... 2,532,000 Thereafter............................................. 26,719,000 ----------- Total minimum lease payments........................... 39,174,000 Less - amount representing interest.................... (16,695,000) ------------ Present value of future minimum lease payments......... 22,479,000 Current capital lease obligation....................... (772,000) ------------ Long-term capital lease obligation $ 21,707,000 ============ (6) INCOME TAXES Components of HCA's (provision) benefit for income taxes consist of the following: YEAR ENDED DECEMBER 31, ----------------------------------------- 1996 1995 1994 ------------ ------------ ----------- Current: Federal.......................... $ (5,927,000) $ (6,121,000) $(8,957,000) State............................ 163,000 (338,000) (44,000) Deferred: Federal.......................... (1,125,000) (1,034,000) 1,366,000 State............................ 6,000 (61,000) 78,000 ------------ ------------ ----------- $ (6,883,000) $ (7,554,000) $(7,557,000) ============ ============ =========== The tax benefit related to the extraordinary loss on early extinguishment of debt was $564,000 in 1995. 85 HOLLYWOOD CASINO - AURORA, INC. (WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION) NOTES TO FINANCIAL STATEMENTS (CONTINUED) A reconciliation between the calculated tax provision on income before extraordinary item based on the statutory rates in effect and the effective tax rates for the years ended December 31, 1996, 1995 and 1994 follows:
YEAR ENDED DECEMBER 31, --------------------------------------------- 1996 1995 1994 --------------- -------------- ------------ Calculated income tax provision at statutory rate......................... $(6,792,000) $(6,987,000) $(7,490,000) State income taxes......................... 110,000 (259,000) (283,000) Adjustment to prior year income taxes..... (81,000) (214,000) 305,000 Political contributions and lobbying costs. (89,000) (65,000) (70,000) Other...................................... (31,000) (29,000) (19,000) ----------- ------------ ----------- Tax provision as shown on statements of operations............................. $(6,883,000) $(7,554,000) $(7,557,000) =========== =========== ===========
Deferred taxes are computed based on the expected future tax consequences of temporary differences between the carrying amounts and tax bases of assets and liabilities, using enacted tax rates. Deferred income taxes result primarily from the use of the allowance method rather than the direct write-off method for doubtful accounts, the use of accelerated methods of depreciation for federal income tax purposes and differences in the timing of deductions taken between tax and financial reporting purposes for the amortization of preopening costs and other accruals. The components of HCA's net deferred tax (liability) asset at December 31, 1996 and 1995 are as follows: DECEMBER 31, ------------------------ 1996 1995 ------------ ---------- Deferred tax assets: Allowance for doubtful accounts.... $ 375,000 $ 314,000 Other liabilities and reserves..... 1,130,000 451,000 ----------- --------- Total deferred tax assets......... 1,505,000 765,000 ----------- --------- Deferred tax liabilities: Depreciation and amortization...... (2,127,000) (329,000) ----------- --------- Net deferred tax (liability) asset.. $ (622,000) $ 436,000 =========== ========= 86 HOLLYWOOD CASINO - AURORA, INC. (WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION) NOTES TO FINANCIAL STATEMENTS (CONTINUED) Receivables and payables in connection with the aforementioned tax allocation agreements at December 31, 1996 and 1995 are as follows: DECEMBER 31, ------------------------ 1996 1995 ------------ ---------- Deferred tax assets....... $ 1,421,000 $ 739,000 Due from affiliates....... 1,002,000 237,000 Deferred tax liabilities.. (2,043,000) (311,000) (7) TRANSACTIONS WITH RELATED PARTIES Pursuant to a management services contract, HCA pays base management and incentive fees to Pratt Management, L.P. ("PML"), a limited partnership wholly owned by GBCC. The base management fee is equal to 5% of operating revenues (as defined in the management services contract) subject to a maximum of $5,500,000 in any consecutive twelve month period. The incentive fee is equal to 10% of gross operating profit (as defined in the management services agreement to generally include all revenues less expenses other than depreciation, interest, amortization and taxes). HCA incurred such fees totaling $9,360,000, $9,432,000 and $10,009,000, respectively, during the years ended December 31, 1996, 1995 and 1994. Management and incentive fees payable at December 31, 1996 and 1995 were $2,096,000 and $2,177,000, respectively. HCA incurred interest with respect to its promissory note payable to HCC (see Note 4). Such interest amounted to $4,973,000, $5,406,000 and $5,537,000, respectively, for the years ended December 31, 1996, 1995 and 1994. Interest payable to HCC on such notes amounted to $1,050,000 and $1,022,000, respectively, at December 31, 1996 and 1995 and is included in accrued interest payable in the accompanying balance sheets. HCA has acquired computer software and hardware and has been allocated certain expenses, including legal, financing and payroll expenses from HCC and its subsidiaries. During the years ended December 31, 1996, 1995 and 1994, such transactions totaled $720,000, $1,562,000 and $888,000, respectively. At December 31, 1996 and 1995, HCA had payables amounting to $138,000 and $130,000, respectively, in connection with such charges. (8) ILLINOIS REGULATORY MATTERS Riverboat gaming operations in Illinois are subject to regulatory control by the Illinois Gaming Board (the "IGB"). Under the provisions of the Illinois gaming regulations, HCA and PML are required to maintain their respective owner's and supplier's licenses. HCA's owner's license expires in July 1997 and PML's supplier's license expires in December 1997. Management intends to file for renewal of HCA's owner's license and PML's supplier's license and anticipates that such renewals will be approved by the IGB during 1997. If it were determined that gaming laws were violated by a licensee, the gaming licenses held by each licensee could be limited, conditioned, suspended, or revoked. In addition, the licensees and 87 HOLLYWOOD CASINO - AURORA, INC. (WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION) NOTES TO FINANCIAL STATEMENTS (CONTINUED) other persons involved could be subject to substantial fines. Limitation or conditioning or suspension of any gaming license could, and revocation would, have a materially adverse affect on the operations of HCA. (9) COMMITMENTS AND CONTINGENCIES PLANET HOLLYWOOD LITIGATION Planet Hollywood International, Inc., a Delaware corporation, and Planet Hollywood (Region IV), Inc., a Minnesota corporation (collectively, "PHII"), filed a complaint in the United States District Court for the Northern District of Illinois, Eastern Division on July 29, 1996 against HCC, HCA and a member of the Pratt Family (collectively, the "Original Hollywood Defendants"). The Original Hollywood Defendants filed with the Court on September 18, 1996 an answer to PHII's lawsuit, along with numerous counterclaims against PHII, Robert Earl and Keith Barish (collectively, the "PHII Defendants"). PHII filed with the Court on January 21, 1997, an amendment to their complaint which, among other things, added the HCC subsidiary which owns and operates a casino in Tunica, Mississippi, HWCC-Tunica, Inc. ("HCT", together with the Original Hollywood Defendants, the "Hollywood Defendants"), and GBCC as defendants. The Original Hollywood Defendants filed with the Court on February 4, 1997, and GBCC and HCT filed with the Court on February 20, 1997, answers and counterclaims to such amended complaint. In its lawsuit, PHII alleges, among other things, that the Hollywood Defendants and GBCC have, in opening and operating the Hollywood Casino concept, infringed on PHII's trademark, service mark and trade dress and have engaged in unfair competition and deceptive trade practices. In their counterclaims, the Hollywood Defendants allege, among other things, that the PHII Defendants have, through their planned use of their mark in connection with casino services, infringed on certain of HCC's service marks and trade dress and have engaged in unfair competition. Given the uncertainties inherent in litigation, no assurance can be given that the Hollywood Defendants will prevail in this litigation; however, the Hollywood Defendants believe that PHII's claims are without merit and intend to defend their position and pursue their counterclaims vigorously. The accompanying financial statements do not include any adjustments that might result from the outcome of the uncertainties described above. OTHER LITIGATION HCA is a party in various legal proceedings with respect to the conduct of casino operations. Although a possible range of loss can not be estimated, in the opinion of management, based upon the advice of counsel, settlement or resolution of the proceedings should not have a material adverse impact on the financial position or results of operations of HCA. 88 HOLLYWOOD CASINO - AURORA, INC. (WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION) NOTES TO FINANCIAL STATEMENTS (CONTINUED) (10) SUPPLEMENTAL CASH FLOW INFORMATION During 1996, HCA entered into a capital lease obligation in the original amount of $13,195,000 with respect to a second parking garage (see Note 5). Additional escrowed construction and financing costs totaling $4,281,000 were capitalized as part of the cost of the facility. During 1995, HCA acquired certain equipment at a cost of $2,985,000 under financing agreements with a third party vendor (see Note 4). During 1994, HCA incurred interest charges from HCC amounting to $555,000 with respect to funding provided by HCC in connection with construction of the Aurora Casino. The resulting liability was subsequently contributed as additional paid-in capital by HCC. (11) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value: CASH, CASH EQUIVALENTS AND CASH RESTRICTED FOR CONSTRUCTION PROJECTS - The carrying amounts approximate fair value because of the short maturity of these instruments. INTEREST PAYABLE - The carrying amount of interest payable approximates fair value because of the short maturity of the obligation. LONG-TERM DEBT - The fair value of HCA's long-term debt is estimated based on either the quoted market prices of the issue or on the discounted cash flow of future payments utilizing current rates available to HCA for debt of similar remaining maturities. Debt obligations with a short remaining maturity are valued at the carrying amount. 89 HOLLYWOOD CASINO - AURORA, INC. (WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION) NOTES TO FINANCIAL STATEMENTS (CONTINUED) The estimated carrying amounts and fair values of HCA's financial instruments are as follows:
DECEMBER 31, 1996 DECEMBER 31, 1995 ------------------------ ------------------------------------ CARRYING CARRYING AMOUNT FAIR VALUE AMOUNT FAIR VALUE ----------- ----------- ----------------- ----------------- Financial Assets: Cash and cash equivalents............ $ 9,034,000 $ 9,034,000 $ 8,996,000 $ 8,996,000 Cash restricted for construction projects.. - - 1,955,000 1,955,000 Financial Liabilities: Interest payable........ $ 1,315,000 $ 1,315,000 $ 1,120,000 $ 1,120,000 12 3/4% promissory note. 39,007,000 37,447,000 39,007,000 35,496,000 Promissory note to bank. 2,472,000 2,472,000 4,402,000 4,402,000 Equipment loans......... 1,472,000 1,478,000 2,412,000 2,418,000
(12) SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
QUARTER ------------------------------------------------- FIRST SECOND THIRD FOURTH ----------- ----------- ----------- ----------- Year Ended December 31, 1996 Net revenues................. $43,715,000 $43,039,000 $39,332,000 $37,305,000 =========== =========== =========== =========== Net income................... $ 4,436,000 $ 4,138,000 $ 1,908,000 $ 2,042,000 =========== =========== =========== =========== Year Ended December 31, 1995 Net revenues................. $35,111,000 $35,206,000 $41,965,000 $40,226,000 =========== =========== =========== =========== Net income................... $ 3,163,000 $ 2,694,000 $ 3,513,000 $ 2,050,000 =========== =========== =========== ===========
90 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To HWCC - Tunica, Inc.: We have audited the accompanying consolidated balance sheets of HWCC - Tunica, Inc. and subsidiary (the Company and a Texas corporation) as of December 31, 1996 and 1995, and the related consolidated statements of operations, changes in shareholder's equity and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of HWCC - Tunica, Inc. and subsidiary as of December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Roseland, New Jersey March 21, 1997 91 HWCC - TUNICA, INC. AND SUBSIDIARY (WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION) CONSOLIDATED BALANCE SHEETS ASSETS DECEMBER 31, ---------------------------- 1996 1995 ------------- ------------- Current Assets: Cash and cash equivalents........................ $ 9,321,000 $ 11,529,000 Accounts receivable, net of allowances of $622,000 and $313,000, respectively............... 1,363,000 1,428,000 Inventories...................................... 672,000 883,000 Deferred income taxes............................ 953,000 488,000 Prepaid expenses and other current assets........ 854,000 705,000 ------------ ------------ Total current assets.............................. 13,163,000 15,033,000 ------------ ------------ Property and Equipment: Land and improvements............................ 3,060,000 3,037,000 Buildings........................................ 73,348,000 44,048,000 Barges........................................... 2,524,000 2,524,000 Operating equipment.............................. 35,724,000 26,360,000 Construction in progress......................... 412,000 4,504,000 ------------ ------------ 115,068,000 80,473,000 Less - accumulated depreciation and amortization (22,275,000) (12,178,000) ------------ ------------ Net property and equipment....................... 92,793,000 68,295,000 ------------ ------------ Cash Restricted for Construction Project.......... - 27,919,000 ------------ ------------ Other Assets: Land rights...................................... 7,658,000 7,962,000 Other assets..................................... 3,006,000 3,031,000 ------------ ------------ Total other assets................................ 10,664,000 10,993,000 ------------ ------------ $116,620,000 $122,240,000 ============ ============ The accompanying notes to consolidated financial statements are an integral part of these consolidated balance sheets. 92 HWCC - TUNICA, INC. AND SUBSIDIARY (WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION) CONSOLIDATED BALANCE SHEETS LIABILITIES AND SHAREHOLDER'S EQUITY DECEMBER 31, ---------------------------- 1996 1995 ------------- ------------- Current Liabilities: Current maturities of long-term debt and capital lease obligations........... $ 1,511,000 $ 3,096,000 Accounts payable...................... 2,797,000 2,128,000 Accrued liabilities - Salaries and wages...................... 1,254,000 1,630,000 Interest................................ 2,262,000 2,203,000 Gaming and other taxes.................. 813,000 519,000 Insurance............................... 875,000 1,207,000 Other................................... 2,012,000 1,605,000 Other current liabilities............. 752,000 1,094,000 ------------ ------------ Total current liabilities............. 12,276,000 13,482,000 ------------ ------------ Long-Term Debt.......................... 85,134,000 84,045,000 ------------ ------------ Capital Lease Obligations............... - 1,199,000 ------------ ------------ Other Noncurrent Liabilities............ - 88,000 ------------ ------------ Commitments and Contingencies Shareholder's Equity: Common stock, $.01 par value per share; 100,000 shares authorized; 1,000 shares issued and outstanding .... - - Additional paid-in capital............ 34,637,000 34,637,000 Accumulated deficit................... (15,427,000) (11,211,000) ------------ ------------ Total shareholder's equity.............. 19,210,000 23,426,000 ------------ ------------ $116,620,000 $122,240,000 ============ ============ The accompanying notes to consolidated financial statements are an integral part of these consolidated balance sheets. 93 HWCC - TUNICA, INC. AND SUBSIDIARY (WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION) CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, ------------------------------------------- 1996 1995 1994 --------------- ------------- ------------ Revenues: Casino.......................................... $ 87,361,000 $ 88,289,000 $30,440,000 Rooms........................................... 5,329,000 3,187,000 904,000 Food and beverage............................... 11,987,000 9,657,000 3,520,000 Other........................................... 1,097,000 1,091,000 376,000 ------------ ------------ ----------- 105,774,000 102,224,000 35,240,000 Less - promotional allowances................... (11,250,000) (7,808,000) (2,827,000) ------------ ------------ ----------- Net revenues................................ 94,524,000 94,416,000 32,413,000 ------------ ------------ ----------- Expenses: Casino.......................................... 66,018,000 57,411,000 20,666,000 Rooms........................................... 1,573,000 1,887,000 495,000 Food and beverage............................... 3,752,000 3,357,000 1,101,000 Other........................................... 1,259,000 1,187,000 361,000 General and administrative...................... 5,962,000 5,711,000 2,425,000 Depreciation and amortization................... 10,906,000 10,356,000 3,610,000 Amortization of preopening costs................ - - 5,939,000 ------------ ------------ ----------- Total expenses.............................. 89,470,000 79,909,000 34,597,000 ------------ ------------ ----------- Income (loss) from operations.................... 5,054,000 14,507,000 (2,184,000) ------------ ------------ ----------- Non-operating income (expenses): Interest income................................. 835,000 637,000 374,000 Interest expense, net of capitalized interest of $1,006,000 and $1,667,000 in 1996 and 1994, respectively................................... (10,060,000) (10,792,000) (4,454,000) Loss on assets held for sale.................... (45,000) (505,000) - ------------ ------------ ----------- Total non-operating expenses, net.............. (9,270,000) (10,660,000) (4,080,000) ------------ ------------ ----------- (Loss) income before income taxes and extraordinary item.............................. (4,216,000) 3,847,000 (6,264,000) Income tax benefit............................... - 694,000 - ------------ ------------ ----------- (Loss) income before extraordinary item.......... (4,216,000) 4,541,000 (6,264,000) Extraordinary item: (Loss) gain on early extinguishment of debt, net of taxes.......................... - (9,614,000) 126,000 ------------ ------------ ----------- Net loss......................................... $ (4,216,000) $ (5,073,000) $(6,138,000) ============ ============ ===========
The accompanying notes to consolidated financial statements are an integral part of these consolidated statements. 94 HWCC - TUNICA, INC. AND SUBSIDIARY (WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION) CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDER'S EQUITY (NOTE 1) FOR THE THREE YEARS ENDED DECEMBER 31, 1996
COMMON STOCK ADDITIONAL ----------------- PAID-IN ACCUMULATED SHARES AMOUNT CAPITAL DEFICIT ------ ------ --------- ---------- BALANCE, JANUARY 1, 1994.............. 1,000 $ - $ 1,000 $ - Capital contributions................ - - 34,636,000 - Net loss............................. - - - (6,138,000) ------ ------ ---------- ---------- BALANCE, DECEMBER 31, 1994............ 1,000 - 34,637,000 (6,138,000) Net loss............................. - - - (5,073,000) ------ ------ ---------- ---------- BALANCE, DECEMBER 31, 1995............ 1,000 - 34,637,000 (11,211,000) Net loss............................. - - - (4,216,000) ------ ------ ---------- ---------- BALANCE, DECEMBER 31, 1996............ 1,000 $ - $34,637,000 $(15,427,000) ====== ====== ========== ==========
The accompanying notes to consolidated financial statements are an integral part of this consolidated statement. 95 HWCC - TUNICA, INC. AND SUBSIDIARY (WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION) CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, ------------------------------------------------------ 1996 1995 1994 ------------------- ------------- ------------------ OPERATING ACTIVITIES: Net loss............................................... $ (4,216,000) $ (5,073,000) $ (6,138,000) Adjustments to reconcile net loss to net cash provided by operating activities: Extraordinary item .................................. - 9,614,000 (126,000) Depreciation and amortization........................ 10,906,000 10,356,000 9,549,000 Deferred income tax benefit.......................... - (626,000) (68,000) Loss on assets held for sale......................... 45,000 505,000 - Provision for doubtful accounts...................... 539,000 449,000 106,000 Increase in accounts receivable...................... (474,000) (1,159,000) (824,000) Increase in accounts payable and accrued expenses........................................... 721,000 1,469,000 3,116,000 Net change in other current assets and liabilities........................................ (280,000) (127,000) 911,000 Net change in other noncurrent assets and liabilities................................... (740,000) (939,000) (1,167,000) ------------ ------------ ------------ Net cash provided by operating activities....................................... 6,501,000 14,469,000 5,359,000 ------------ ------------ ------------ INVESTING ACTIVITIES: Net property and equipment additions................. (35,038,000) (7,228,000) (52,327,000) Proceeds from sale of assets......................... 105,000 180,000 - Decrease (increase) in cash restricted for construction projects............................... 27,919,000 (27,919,000) - Cost of acquisition, net of cash acquired............ - - (8,998,000) Deferred pre opening costs........................... - - (5,939,000) ------------ ------------ ------------ Net cash used in investing activities............... (7,014,000) (34,967,000) (67,264,000) ------------ ------------ ------------ FINANCING ACTIVITIES: Issuance of long-term debt........................... 1,503,000 84,045,000 55,000,000 Deferred financing costs............................. - - (4,253,000) Repayments of long-term debt......................... (1,469,000) (55,862,000) (8,500,000) Payments on capital lease obligations................ (1,729,000) (1,402,000) (683,000) Costs of early retirement of debt.................... - (7,414,000) - Capital contribution................................. - - 33,000,000 ------------ ------------ ------------ Net cash (used in) provided by financing activities.............................. (1,695,000) 19,367,000 74,564,000 ------------ ------------ ------------ Net (decrease) increase in cash and cash equivalents................................... (2,208,000) (1,131,000) 12,659,000 Cash and cash equivalents at beginning of year................................ 11,529,000 12,660,000 1,000 ------------ ------------ ------------ Cash and cash equivalents at end of year...................................... $ 9,321,000 $ 11,529,000 $ 12,660,000 ============ ============ ============
The accompanying notes to consolidated financial statements are an integral part of these consolidated statements. 96 HWCC - TUNICA, INC. AND SUBSIDIARY (WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) ORGANIZATION, BUSINESS AND BASIS OF PRESENTATION HWCC - Tunica, Inc. ("HCT") is a Texas corporation and a wholly owned subsidiary of Hollywood Casino Corporation ("HCC"), a Delaware corporation. HCT was incorporated in December 1993 for the purpose of acquiring and completing a gaming facility in northern Tunica County, Mississippi approximately 27 miles southwest of Memphis, Tennessee. In January 1994, HCC acquired from unrelated third parties all of the common stock of Summit Riverboat Casinos - Tunica, Inc. ("SRCT") and all of the limited partnership interests of Summit Tunica Partnership ("STP"), a Mississippi limited partnership. STP completed construction of the Tunica Casino at a cost of approximately $92.6 million. Capital contributions from HCC totaling approximately $33 million provided the initial funding for the project. On June 3, 1994, HCT issued $55 million of first mortgage notes, the net proceeds of which (approximately $51.3 million), together with equipment financing, were used to complete construction of the facility. The completed facility (the "Tunica Casino") which currently includes a casino with 54,000 square feet of gaming space, 506 hotel rooms and suites and related amenities commenced operations on August 8, 1994 under the service mark Hollywood Casino(R). On October 17, 1995, in connection with the HCC Refinancing (see Note 3), STP was dissolved and distributed all of its assets and liabilities to SRCT, the general partner, and HCT, the sole limited partner. In addition, SRCT merged with and into HCT, which now owns and operates the Tunica Casino. As the above entities were under common control, the merger was accounted for similar to a pooling of interests; accordingly, the accompanying 1995 and 1994 consolidated financial statements have been presented as if the companies had always been combined. The accompanying consolidated financial statements include the accounts of HCT and its wholly owned subsidiary, HWCC-Golf Course Partners, Inc. ("Golf"). Golf, a Delaware corporation, was formed in 1996 to own an interest in an as yet undeveloped golf course to be used by patrons of the Tunica Casino and other participating casino/hotel properties. All significant intercompany balances have been eliminated in consolidation. 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 competition will continue in the future. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The significant accounting policies followed in the preparation of the accompanying consolidated financial statements are discussed below. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 97 HWCC - TUNICA, INC. AND SUBSIDIARY (WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION) NOTES TO CONSOLIDATED FINANCIAL STATEMEMENTS (CONTINUED) CASINO REVENUES, PROMOTIONAL ALLOWANCES AND DEPARTMENTAL EXPENSES - The Tunica Casino recognizes the net win from gaming activities (the difference between gaming wins and losses) as casino revenues. Casino revenues are net of accruals for anticipated payouts of progressive slot machine jackpots and certain progressive table game payouts. Such anticipated jackpots and payouts are included in other accrued liabilities in the accompanying consolidated balance sheets at December 31, 1996 and 1995. The estimated value of rooms, food and beverage and other items which are provided to customers without charge has been included in revenues and a corresponding amount has been deducted as promotional allowances. The costs of such complimentaries have been included as casino expenses in the accompanying consolidated statements of operations. Costs of complimentaries allocated from the rooms, food and beverage and other operating departments to the casino department during the years ended December 31, 1996 and 1995 and from the commencement of operations through December 31, 1994 were as follows: 1996 1995 1994 ----------- ---------- ---------- Rooms......... ...... $ 1,162,000 $ 654,000 $ 173,000 Food and beverage.... 10,223,000 8,603,000 2,982,000 Other................ 203,000 109,000 40,000 ----------- ---------- ---------- $11,588,000 $9,366,000 $3,195,000 ========== ========== ========== CASH AND CASH EQUIVALENTS - Cash and cash equivalents are generally comprised of cash and investments with original maturities of three months or less, such as commercial paper, certificates of deposit and fixed repurchase agreements. ALLOWANCE FOR DOUBTFUL ACCOUNTS - The allowance for doubtful accounts is maintained at a level considered adequate to provide for possible future losses. Provisions for doubtful accounts amounting to $539,000, $449,000 and $106,000, respectively, were made during the years ended December 31, 1996 and 1995 and during the period from the commencement of operations through December 31, 1994. INVENTORIES - Inventories are stated at the lower of cost (on a first-in, first-out basis) or market. 98 HWCC - TUNICA, INC. AND SUBSIDIARY (WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION) NOTES TO CONSOLIDATED FINANCIAL STATEMEMENTS (CONTINUED) PROPERTY AND EQUIPMENT - Property and equipment have been recorded at cost and are being depreciated utilizing the straight-line method over the estimated useful lives of the assets as follows: Hotel, dockside facilities and improvements......... 25-40 years Barges.............................................. 25-40 years Operating equipment..................................3 - 7 years On October 1, 1996, HCT revised the estimated useful lives of its buildings, barges and related land rights (see below) from 25 years to 40 years and the estimated useful life of its slot machines from three years to five years. Management believes the changes in estimated lives more appropriately reflect the timing of the economic benefits to be received from these assets. For the year ended December 31, 1996, the effect of these changes reduced depreciation and amortization expense and net loss by approximately $858,000. Interest incurred in connection with property and equipment acquisitions totalling $1,006,000 in 1996 and $1,667,000 in 1994 has been capitalized during the acquisition period and, together with $1,636,000 of capitalized interest contributed by HCC during 1994 (see Note 10), is being amortized over the useful lives of the related assets. DEFERRED FINANCING COSTS - Costs associated with issuing long-term debt, including all underwriting, legal and accounting fees, are capitalized and are amortized over the term of the related debt issue. Deferred financing costs, net of accumulated amortization, amounting to $2,954,000 and $104,000, respectively, were written off during 1995 and 1994 with respect to the early extinguishment of debt (see Note 3). LAND RIGHTS - Land rights are being amortized on a straight-line basis over the estimated useful life of the facility, which is less than the term of the ground lease including renewals (see Note 8); such amortization commenced with the opening of the Tunica Casino. The estimated economic benefit of the land rights was increased from 25 years to 40 years effective on October 1, 1996 consistent with the change in estimated useful life of the Tunica facility as discussed under "Property and Equipment" above. Management presently intends to renew the ground lease at least through its currently estimated 40-year useful life of the facility. Accumulated amortization of such land rights amounted to $787,000 and $483,000, respectively, at December 31, 1996 and 1995. LONG-LIVED ASSETS - Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets" requires, among other things, that an entity review its long-lived assets and certain related 99 HWCC - TUNICA, INC. AND SUBSIDIARY (WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION) NOTES TO CONSOLIDATED FINANCIAL STATEMEMENTS (CONTINUED) 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 material impairment currently exists related to its long-lived assets. ACCRUED INSURANCE - HCT is self insured for a portion of its general liability, certain health care and other liability exposures. Accrued insurance includes estimates of such accrued liabilities based on an evaluation of the merits of individual claims and historical claims experience; accordingly, HCT's ultimate liability may differ from the amounts accrued. INCOME TAXES - HCT is included in HCC's consolidated federal income tax return. HCT's provision for federal income taxes is based on the amount of tax which would be provided if a separate federal income tax return were filed. HCT paid no state or federal income taxes during the years ended December 31, 1996, 1995 and 1994. RECLASSIFICATIONS - Certain reclassifications have been made to the prior years' consolidated financial statements to conform to the 1996 consolidated financial statement presentation. Such reclassifications include the reallocation of certain costs among the various operating departments and general and administrative expenses resulting from the completion of a comprehensive internal review of departmental allocations. Management believes that such reclassifications better reflect the matching of costs with the associated revenues. (3) LONG-TERM DEBT AND PLEDGE OF ASSETS Substantially all of HCT's assets are pledged in connection with its long-term indebtedness. Long-term debt consists of the following: DECEMBER 31, ---------------------------- 1996 1995 ------------- -------------- Promissory notes to HCC (a) $ 84,045,000 $ 84,045,000 Equipment loans (b) 1,401,000 1,367,000 ----------- ----------- Total indebtedness 85,446,000 85,412,000 Less - current maturities (312,000) (1,367,000) ----------- ----------- Total long-term debt $ 85,134,000 $ 84,045,000 =========== =========== _____________________ 100 HWCC - TUNICA, INC. AND SUBSIDIARY (WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION) NOTES TO CONSOLIDATED FINANCIAL STATEMEMENTS (CONTINUED) (a) During October 1995, HCC loaned $54,045,000 to HCT to repay its outstanding mortgage indebtedness, together with the associated call premium and certain accrued interest thereon, and loaned an additional $30,000,000 to HCT to be used to finance construction of a 352-room hotel tower and related amenities and to fund development and construction of a themed gaming area. Such intercompany loans were made with a portion of the note proceeds from HCC's issue of $210,000,000 of 12 3/4% Senior Secured Notes (the "Senior Secured Notes") due November 1, 2003, discounted to yield 13 3/4% per annum. The unexpended portion of the construction loan was included in cash restricted for construction projects in the accompanying consolidated balance sheet at December 31, 1995. Interest on the loans from HCC accrues at the rate of 12 3/4% per annum and is payable semiannually on April 15 and October 15 of each year. The Senior Secured Notes are unconditionally guaranteed on a senior secured basis by HCT and by certain future subsidiaries of HCC. The Senior Secured Notes and related guarantees are secured by, among other things, (i) substantially all of the assets of HCT and other future guarantors, (ii) a first mortgage limited to approximately $39 million on substantially all of the assets of another gaming facility operated by a wholly owned subsidiary of HCC, (iii) a pledge of the capital stock of HCT and certain other subsidiaries of HCC and (iv) the collateral assignment of any future management contracts entered into by HCC. The indenture to the Senior Secured Notes contains various provisions limiting the ability of HCC, HCT and certain defined subsidiaries to, among other things, pay dividends or make other restricted payments; incur additional indebtedness or issue preferred stock; create liens; create dividend or other payment restrictions affecting certain defined subsidiaries; enter into mergers or consolidations or make sales of all or substantially all assets of HCC, HCT or any future guarantor; and enter into transactions with certain affiliates. (b) The loans outstanding at December 31, 1996 are payable monthly including interest at rates ranging from 11 1/4% to 12 3/8% per annum and are due in 2000. The loans outstanding at December 31, 1995 accrued interest at rates ranging from 12 1/2% to 12 3/4% and were repaid in 1996. Scheduled payments of long-term debt as of December 31, 1996 are set forth below: 1997............................. $ 312,000 1998............................. 354,000 1999............................. 400,000 2000............................. 335,000 2001............................. - Thereafter....................... 84,045,000 ----------- Total $85,446,000 =========== Interest paid, net of amounts capitalized, amounted to $10,000,000, $11,344,000 and $1,519,000, respectively, during the years ended December 31, 1996, 1995 and 1994. 101 HWCC - TUNICA, INC. AND SUBSIDIARY (WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION) NOTES TO CONSOLIDATED FINANCIAL STATEMEMENTS (CONTINUED) (4) CAPITAL LEASES HCT leases certain gaming and other equipment under capital lease agreements which provide for interest at rates ranging up to 13 1/4% per annum and which expire during 1997. Assets under capital leases with an original cost of $4,814,000 and $5,013,000 are included in operating equipment in the accompanying consolidated balance sheets at December 31, 1996 and 1995. Amortization expense for the years ended December 31, 1996, 1995 and 1994 was $1,500,000, $1,674,000 and $500,000, respectively. Accumulated amortization at December 31, 1996 and 1995 with respect to these assets amounted to $3,571,000 and $2,174,000, respectively. Future minimum lease payments under capital lease obligations as of December 31, 1996 are $1,255,000 in 1997 of which $56,000 represents interest, resulting in a current capital lease obligation of $1,199,000. (5) INCOME TAXES Components of HCT's benefit for income taxes for the years ended December 31, 1996, 1995 and 1994 consist of the following: YEARS ENDED DECEMBER 31, -------------------------------- 1996 1995 1994 -------- -------- ------------ Benefit in lieu of federal income taxes: Current................................. $ - $ 68,000 $(68,000) Deferred................................ - 626,000 68,000 -------- -------- -------- $ - $694,000 $ - ======== ======== ======== The deferred tax benefit related to the extraordinary loss on early extinguishment of debt was $343,000 in 1995. 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. 102 HWCC - TUNICA, INC. AND SUBSIDIARY (WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION) NOTES TO CONSOLIDATED FINANCIAL STATEMEMENTS (CONTINUED) A reconciliation between the calculated tax benefit on (loss) income before extraordinary item based on the statutory rates in effect and the effective tax rates for the years ended December 31, 1996, 1995 and 1994 follows:
YEARS ENDED DECEMBER 31, --------------------------------------- 1996 1995 1994 ----------- ----------- ------------ Calculated income tax benefit at 34%............ $ 1,433,000 $(1,308,000) $ 2,087,000 Utilization of operating loss carryforward...... - 2,028,000 - Tax benefit of operating loss not utilized...... (1,400,000) - (2,028,000) Lobbying costs.................................. (3,000) (6,000) (56,000) Disallowance of meals and entertainment......... (25,000) (20,000) (3,000) Other........................................... (5,000) - - ----------- ----------- ----------- Tax benefit as shown on statement of operations. $ - $ 694,000 $ - =========== =========== ===========
Deferred income taxes result primarily from the use of the allowance method rather than the direct write-off method for doubtful accounts, the use of accelerated methods of depreciation for federal income tax purposes and differences in the timing of deductions taken between tax and financial reporting purposes for the amortization of preopening costs and other accruals. At December 31, 1996, HCT had net operating loss carryforwards ("NOL's") totaling approximately $18,000,000, which do not begin to expire until 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 anticipation of taxable income in the near future, management believes that it is more likely than not that future taxable income will be sufficient to utilize at least a portion of the NOL's and deferred tax assets. Accordingly, a valuation allowance has been established which has resulted in the recording of net deferred tax assets of $1,037,000 at both December 31, 1996 and 1995. The ultimate recognition of this amount of deferred tax assets is dependent on HCT's ability to generate approximately $3 million of taxable income for federal income tax purposes prior to the expiration dates of the NOL's and the reversal of other temporary differences. 103 HWCC - TUNICA, INC. AND SUBSIDIARY (WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION) NOTES TO CONSOLIDATED FINANCIAL STATEMEMENTS (CONTINUED) The components of the deferred tax asset are as follows: DECEMBER 31, -------------------------- 1996 1995 ------------ ------------ Deferred tax assets: Net operating loss carryforwards......... $ 6,138,000 $ 3,884,000 Allowance for doubtful accounts.......... 211,000 106,000 Other liabilities and accruals........... 809,000 758,000 ----------- ----------- Total deferred tax assets.......... 7,158,000 4,748,000 Deferred tax liabilities: Depreciation and amortization............ (1,668,000) (711,000) ----------- ----------- Net deferred tax asset..................... 5,490,000 4,037,000 Valuation allowance........................ (4,453,000) (3,000,000) ----------- ----------- $ 1,037,000 $ 1,037,000 =========== =========== Receivables and payables in connection with HCT's federal income taxes are included in the accompanying consolidated financial statements as follows: DECEMBER 31, ---------------------- 1996 1995 --------- -------- Deferred income taxes...................... $953,000 $488,000 Other noncurrent assets.................... 84,000 549,000 (6) TRANSACTIONS WITH RELATED PARTIES Pursuant to a ten-year consulting agreement with Pratt Casino Corporation, an affiliated company, HCT incurs a monthly consulting fee of $100,000. Such fees amounted to $1,200,000 during each of the years ended December 31, 1996, 1995 and 1994. HCT and Advanced Casino Systems Corporation ("ACSC"), an affiliated company, entered into a Computer Services Agreement dated as of January 1, 1994. The term of the agreement was three years with an automatic renewal for an additional three years becoming effective on January 1, 1997. 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 as well as a fixed license fee of $30,000 a month ($33,600 effective January 1, 1997). HCT also reimburses ACSC for its direct costs and expenses incurred under this agreement. Total charges incurred 104 HWCC - TUNICA, INC. AND SUBSIDIARY (WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) under such agreement amounted to $511,000, $532,000 and $763,000, respectively, for the years ended December 31, 1996, 1995 and 1994. Greate Bay Hotel and Casino, Inc. ("GBHC"), an affiliated company which owns and operates the Sands Hotel and Casino in Atlantic City, New Jersey, performs certain administrative and marketing services on behalf of HCT. During the years ended December 31, 1996, 1995 and 1994, fees charged to HCT by GBHC totaled $653,000, $298,000 and $196,000, respectively. HCT is charged for certain legal, accounting, and other expenses incurred by HCC and its subsidiaries that relate to HCT's business. For the years ended December 31, 1996, 1995 and 1994, such charges amounted to $509,000, $241,000 and $506,000, respectively. (7) MISSISSIPPI REGULATORY MATTERS Gaming operations in Mississippi are subject to regulatory control by the Mississippi Gaming Commission. Under the provisions of the Mississippi gaming regulations, HCT is required to maintain all necessary licenses. The ownership license for the Tunica Casino has been renewed through October 17, 1997. Management intends to file for renewal of HCT's ownership license and anticipates that such renewal will be approved by the Mississippi Gaming Commission during 1997. If it were determined that gaming laws were violated by a licensee, the gaming licenses held by each licensee could be limited, conditioned, suspended or revoked. In addition, the licensees and other persons involved could be subject to substantial fines. (8) COMMITMENTS AND CONTINGENCIES GROUND LEASE - ------------ HCT entered into a ground lease covering 70 acres of land on which the Tunica Casino was constructed. The ground lease is for an initial term of five years from the opening date of the facility and, at HCT's option, may be renewed for nine additional five-year periods. Obligations under the ground lease during the initial term include both minimum monthly fixed payments and percentage rent, which in the aggregate will be the greater of 4% of Gross Revenues, as defined, or $1,100,000 per year. HCT is responsible for all operating and other expenses of the property in accordance with the lease terms. For the years ended December 31, 1996, 1995 and 1994, HCT expensed $3,486,000, $3,608,000 and $1,210,000, respectively, in connection with the ground lease. CREDIT FACILITY - --------------- As of December 31, 1996, HCT had a $1,000,000 bank credit facility available through August 15, 1997 on which no borrowings had been made. Borrowings under the line of credit accrue interest at the rate of the bank's prime lending rate plus 1 1/2% per annum. The line of credit agreement requires the maintenance of certain financial ratios and balances in addition to the provision of certain financial reports. During the first quarter of 1997, HCT borrowed $1,000,000 on the bank credit facility. 105 HWCC - TUNICA, INC. AND SUBSIDIARY (WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) PLANET HOLLYWOOD LITIGATION - --------------------------- Planet Hollywood International, Inc., a Delaware corporation, and Planet Hollywood (Region IV), Inc., a Minnesota corporation (collectively, "PHII"), filed a complaint in the United States District Court for the Northern District of Illinois, Eastern Division on July 29, 1996 against HCC, the wholly owned subsidiary of HCC which owns and operates a casino in Aurora, Illinois and a member of the Pratt Family (collectively, the "Original Hollywood Defendants"). The Original Hollywood Defendants filed with the Court on September 18, 1996 an answer to PHII's lawsuit, along with numerous counterclaims against PHII, Robert Earl and Keith Barish (collectively, the "PHII Defendants"). PHII filed with the Court on January 21, 1997, an amendment to their complaint which, among other things, added HCT (together with the Original Hollywood Defendants, the "Hollywood Defendants") and Greate Bay Casino Corporation ("GBCC"), an affiliated company, as defendants. The Original Hollywood Defendants filed with the Court on February 4, 1997, and GBCC and HCT filed with the Court on February 20, 1997, answers and counterclaims to such amended complaint. In its lawsuit, PHII alleges, among other things, that the Hollywood Defendants and GBCC have, in opening and operating the Hollywood Casino concept, infringed on PHII's trademark, service mark and trade dress and have engaged in unfair competition and deceptive trade practices. In their counterclaims, the Hollywood Defendants and GBCC allege, among other things, that the PHII Defendants have, through their planned use of their mark in connection with casino services, infringed on certain of HCC's service marks and trade dress and have engaged in unfair competition. Given the uncertainties inherent in litigation, no assurance can be given that the Hollywood Defendants will prevail in this litigation; however, the Hollywood Defendants believe that PHII's claims are without merit and intend to defend their position and pursue their counterclaims vigorously. The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of the uncertainties described above. OTHER - ----- HCT is a party in various legal proceedings with respect to the conduct of casino and hotel operations. Although a possible range of loss can not be estimated, in the opinion of management, based upon the advice of counsel, settlement or resolution of the proceedings should not have a material adverse impact on the consolidated financial position or results of operations of HCT. (10) SUPPLEMENTAL CASH FLOW INFORMATION During 1994, HCT acquired certain equipment at a cost of $5,169,000 under financing agreements with third party vendors. During 1994, HCT entered into capital lease obligations totaling $5,013,000 for new equipment (see Note 4). 106 HWCC - TUNICA, INC. AND SUBSIDIARY (WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) During the third quarter of 1994, HCC contributed interest capitalized in connection with the construction of the Tunica Casino to HCT. The contribution, which totaled $1,636,000, has been excluded from the accompanying consolidated statement of cash flows as a noncash transaction. In connection with the acquisition of SRCT and STP by HCT during January 1994, liabilities were assumed as follows: Fair value of assets acquired............................ $10,577,000 Land rights.............................................. 8,445,000 Cash paid for capital stock and limited partnership interest........................... (7,986,000) Notes issued for capital stock and limited partnership interest........................... (6,000,000) ----------- Liabilities assumed.................................. $ 5,036,000 =========== (11) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value: CASH, CASH EQUIVALENTS AND CASH RESTRICTED FOR CONSTRUCTION PROJECTS - The carrying amounts approximate fair value because of the short maturity of these instruments. INTEREST PAYABLE - The carrying amount of interest payable approximates fair value because of the short maturity of the obligation. LONG-TERM DEBT - The fair value of HCT's long-term debt is estimated based on either the quoted market prices of the issue or on the discounted cash flow of future payments utilizing current rates available to HCT for debt of similar remaining maturities. Debt obligations with a short remaining maturity are valued at the carrying amount. 107 HWCC - TUNICA, INC. AND SUBSIDIARY (WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The estimated carrying amounts and fair values of HCT's financial instruments at December 31, 1996 and 1995 are as follows:
DECEMBER 31, 1996 DECEMBER 31, 1995 ------------------------------ ------------------------------- CARRYING CARRYING AMOUNT FAIR VALUE AMOUNT FAIR VALUE ----------- ----------------- ------------ ----------------- Financial Assets Cash and cash equivalents...................... $ 9,321,000 $ 9,321,000 $11,529,0000 $11,529,000 Cash restricted for construction project....... - - 27,919,000 27,919,000 Financial Liabilities Interest payable............................... $ 2,262,000 $ 2,262,000 $ 2,203,000 $ 2,203,000 Promissory notes to HCC........................ 84,045,000 80,683,000 84,045,000 76,481,000 Equipment loans................................ 1,401,000 1,401,000 1,367,000 1,367,000
(12) SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
QUARTER ------------------------------------------------------ FIRST SECOND THIRD FOURTH ------------ ------------ ------------ ------------ YEAR ENDED DECEMBER 31, 1996: Net revenues $24,230,000 $21,907,000 $23,209,000 $25,178,000 =========== =========== =========== =========== Net (loss) income $ (417,000) $(3,158,000) $ (769,000) $ 128,000 =========== =========== =========== =========== YEAR ENDED DECEMBER 31, 1995: Net revenues $23,420,000 $23,207,000 $25,217,000 $22,572,000 =========== =========== =========== =========== Net income (loss) $ 1,620,000 $ 791,000 $ 1,325,000 $(8,809.000) =========== =========== =========== ===========
108 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE HCC and HCT had no disagreements with their independent accountants to report under this item. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information called for by this item is incorporated herein by reference from HCC's definitive proxy statement filed with the Securities and Exchange Commission relating to its Annual Meeting of Shareholders to be held on May 29, 1997 (the "Definitive Proxy Statement") under the caption "Election of Directors" and "Management." ITEM 11. EXECUTIVE COMPENSATION The information called for by this item is incorporated herein by reference from HCC's Definitive Proxy Statement under the caption "Remuneration of Directors and Executive Officers." ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information called for by this item is incorporated herein by reference from the HCC's Definitive Proxy Statement under the caption "Voting Rights and Principal Stockholders". ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information called for by this item is incorporated herein by reference from HCC's Definitive Proxy Statement under the caption "Certain Transactions with Management." PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) The following documents are filed as a part of this report: 1. FINANCIAL STATEMENTS The financial statements filed as part of this report are listed on the Index to Financial Statements on page 43. 2. FINANCIAL STATEMENT SCHEDULES Hollywood Casino Corporation and Subsidiaries -- Report of Independent Public Accountants -- Schedule I; Condensed Financial Information of Registrant, Hollywood Casino Corporation (Parent Company): -- Balance Sheets -- Statements of Operations -- Statements of Cash Flows -- Notes to Parent Company Financial Statements -- Schedule II; Valuation and Qualifying Accounts 109 Hollywood Casino - Aurora, Inc. -- Report of Independent Public Accountants -- Schedule II; Valuation and Qualifying Accounts HWCC-Tunica, Inc. -- Report of Independent Public Accountants -- Schedule II; Valuation and Qualifying Accounts All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and therefore have been omitted. 3. EXHIBITS **2.1 -- Agreement of Merger dated as of May 15, 1992, of Correction of Agreement of Merger dated as of between PBC, Inc. and HCC and Certificate June 16, 1992. (Exhibit 2.1) +3.1 -- Certificate of Incorporation of HCC, as amended. (Exhibit 3.1) +3.2 -- Amended Bylaws of HCC. (Exhibit 3.2) @@3.3 -- Articles of Incorporation of HCT. (Exhibit 3.1). @@3.4 -- Bylaws of HCT. (Exhibit 3.2) ++4.1 -- Indenture among the Company as Issuer, HCT as Guarantor and Shawmut Bank, National Association, as Trustee (including form of Note) dated as of October 17, 1995. (Exhibit 4.1) ++4.2 -- Mortgage, Leasehold Mortgage, Security Agreement, Fixture Filing and Financing Statement made by HCA, as Mortgagor, for the benefit of the Company, as assigned to Shawmut Bank, National Association, as Trustee and Mortgagee. (Exhibit 4.2) ++4.3 -- Leasehold Deed of Trust, Security Agreement, Fixture Filing and Financing Statement made by HCT, as Grantor, to Jim B. Tohill, as Deed Trustee, for the benefit of Shawmut Bank, National Association, as Trustee and Beneficiary (relating to a first- lien Deed of Trust securing the Indenture). (Exhibit 4.3) ++4.4 -- Leasehold Deed of Trust, Security Agreement, by HCT, as Grantor, to Jim B. Tohill, as Deed Trustee, for the benefit of the Company, as assigned to Shawmut Bank, National Association, as Trustee and Beneficiary (relating to a second-lien Leasehold Deed of Trust securing the Intercompany Notes executed by HCT). (Exhibit 4.4) ++4.5 -- First Preferred Fleet Mortgage made and given assigned to Shawmut Bank, National Association, as Trustee and Mortgagee (relating to Vessel Nos. 993836, 993837, and 1029229) dated as of October 17, 1995. (Exhibit 4.5) ++4.6 -- First Preferred Ship Mortgage made and given by HCT, as Mortgagor, to Shawmut Bank, National Association, as Trustee and Mortgagee (relating to Vessel No. 534006) dated as of October 17, 1995. (Exhibit 4.6) ++4.7 -- Second Preferred Ship Mortgage made and given by HCT, as Mortgagor, to the Company, as assigned to Shawmut Bank, National Association, as Trustee and Mortgagee (relating to Vessel No. 534006) dated as of October 17, 1995. (Exhibit 4.7) ++4.8 -- Security Agreement (Stock Pledge) made by the Company, as Pledgor, in favor of Shawmut Bank, National Association, as Trustee and Secured Party dated October 17, 1995. (Exhibit 4.8) ++4.9 -- Security Agreement between the Company, as Debtor, and Shawmut Bank, National Association, as Trustee and Secured Party dated October 17, 1995. (Exhibit 4.9) ++4.10 -- First Amendment and Supplement to Security Agreement between the Company, as debtor, and Shawmut Bank, National Association, as Trustee, dated as of November 15, 1995. (Exhibit 4.10) ++4.11 -- Security Agreement between HCT, as Debtor, and Shawmut Bank, National Association, as Trustee and Secured Party dated October 17, 1995. (Exhibit 4.11) ++4.12 -- Intercompany Security Agreement between HCT, as Debtor, and the Company, as assigned to Shawmut Bank, National Association, as Trustee and Secured Party (relating to a second-lien 110 security agreement for HCT securing the Intercompany Note executed by it) dated October 17, 1995. (Exhibit 4.12) ++4.13 -- Intercompany Security Agreement between HCA, as Debtor, and the Company, as assigned to Shawmut Bank, National Association, as Trustee and Secured Party (relating to a first-lien security agreement for HCA securing the Intercompany Note executed by it) dated October 17, 1995. (Exhibit 4.13) ++4.14 -- Assignment made and given by the Company, as Assignor, of First Preferred Fleet Mortgage made and given by HCA, as Mortgagor, to the Company, in favor of Shawmut Bank, National Association, as Trustee and Mortgagee (relating to Vessel Nos. 993836, 993837, and 1029229), dated October 17, 1995. (Exhibit 4.14). ++4.15 -- Assignment made and given by the Company, as Assignor, of Second Preferred Ship Mortgage made and given by HCT, as Mortgagor, to the Company, in favor of Shawmut Bank, National Association, as Trustee and Mortgagee (relating to Vessel No. 534006), dated October 17, 1995. (Exhibit 4.15) ++4.16 -- Promissory Note in the aggregate principal amount of $54,045,000 issued by HCT to the Company, endorsed by the Company, dated October 17, 1995. (Exhibit 4.16) ++4.17 -- Promissory Note in the aggregate principal amount of $30 million issued by HCT to the Company, endorsed by the Company, dated October 17, 1995. (Exhibit 4.17) ++4.18 -- Amended and Restated Promissory Note in the aggregate principal amount of $39,006,818 issued by HCA to the Company, endorsed by the Company, dated October 17, 1995. (Exhibit 4.18) ++4.19 -- Assignment of Mortgage, Leasehold Mortgage, Security Agreement, Fixture Filing and Financing Statement made and given by the Company, as Assignor, in favor of Shawmut Bank, National Association, as Trustee and Assignee, dated October 17, 1995. (Exhibit 4.19) ++4.20 -- Assignment of Second Leasehold Deed of Trust, Security Agreement, Fixture Filing and Financing Statement made and given by the Company, as Assignor, in favor of Shawmut Bank, National Association, as Trustee and Assignee, dated October 17, 1995. (Exhibit 4.20) 10.1 -- Fifth Amendment to Employment Agreement dated January 1, 1997, between HCC and Jack E. Pratt. 10.2 -- Fifth Amendment to Employment Agreement dated January 1, 1997, between HCC and Edward T. Pratt, Jr. 10.3 -- Fifth Amendment to Employment Agreement dated January 1, 1997, between HCC and William D. Pratt . 10.4 -- Employment Agreement dated May 1, 1996, between HCC and Edward T. Pratt III. ++10.5 -- Employment Agreement dated as of June 1, 1992, between Greate Bay Casino Corporation and Richard D. Knight, as amended by HCC as of May 22, 1995. (Exhibit 10.17) *10.6 -- Development Agreement dated as of June 4, 1991, between the City of Aurora, Illinois and HCA. (Exhibit 10.3) *10.7 -- Management Services Agreement dated as of June 21, 1991, between HCA and Greate Bay Casino Corporation (the "Management Services Agreement"). (Exhibit 10.34) *10.8 -- First Amendment to the Management Services Agreement dated as of May 14, 1992. (Exhibit 10.35) *10.9 -- Tax Sharing Agreement dated May 13, 1992, by and among HCC, HCA and Pratt Hotel Corporation ("PHC", now known as GBCC). (Exhibit 10.36) *10.10 -- Parking lease Agreement June 4, 1991, between the City of Aurora, Illinois and HCA. (Exhibit 10.39) *10.11 -- Purchase and Sale Agreement dated June 4, 1991, between the City of Aurora, Illinois and HCA. (Exhibit 10.40) *10.12 -- Technical Services Agreement dated February 21, 1992, between HCA and PHC (the "Technical Services Agreement"). (Exhibit 10.42) *10.13 -- First Amendment to the Technical Services Agreement dated May 14, 1992. (Exhibit 10.43) @10.14 -- Rights Agreement, dated as of May 7, 1993 between HCC and Continental Stock Transfer & Trust Company, as Rights Agent. (Exhibit 10.45) +10.15 -- Hollywood Casino Corporation Stock Option Plan. @10.16 -- Agreement of Limited Partnership of Pratt Management, L.P. (Exhibit 10.55) @@10.17 -- Ground Lease dated as of October 11, 1993 between R.M. Leatherman and Hugh M. Mageveney, III, as Landlord, and SRCT, as Tenant. (Exhibit 10.4) 111 @@10.18 -- Letter Agreement dated as of October 11, 1993 between R.M. Leatherman and Hugh M. Mageveney, III, as Landlord, and SRCT, as Tenant (relating to Ground Lease). (Exhibit 10.5) @@10.19 -- Blanket Conveyance, Bill of Sale and Assignment and Assumption Agreement dated as of May 31, 1994 between SRCT and STP. (Exhibit 10.6) @@10.20 -- Assignment of Lease and Assumption Agreement dated as of May 31, 1994 between SRCT and STP (relating to Ground Lease). (Exhibit 10.7) @@10.21 -- Consulting Agreement dated as of January 1, 1994 between PCC, as the Consultant, and HCT (Exhibit 10.8) @@10.22 -- Computer Services Agreement dated as of January 1, 1994 between STP and Advanced Casino Systems Corporation. (Exhibit 10.11) ++10.23 -- North Island Center Expansion and Redevelopment Agreement dated June 12, 1995 between HCA, the Aurora Metropolitan Exposition, Auditorium and Office Building Authority and the City of Aurora. (Exhibit 10.36) ++10.24 -- Note and Warrant Purchase Agreement dated November 16, 1995 between Golden Gate Gaming, L.L.C., Edward J. DeBartolo, Jr., Cynthia R. DeBartolo and HCC. (Exhibit 10.37) ++10.25 -- Promissory Notes (Series A and Series B), each in the aggregate amount of $5,000,000, issued by Golden Gate Gaming, LLC to the Company, dated November 16, 1995. (Exhibit 10.38) ++10.26 -- Warrant Certificates (Series A and Series B) by and between Golden Gate Gaming, LLC, Edward J. DeBartolo, Jr., Cynthia R. DeBartolo and the Company, dated November 16, 1995. (Exhibit 10.39) 10.27 -- Joint Venture Agreement dated August 1, 1996 by and between HWCC-Louisiana, Inc. and DeBartolo Entertainment Louisiana Gaming, Inc. 10.28 -- Hollywood Casino Corporation 1996 Long-Term 10.29 -- Hollywood Casino Corporation 1996 Non-Employee Director Stock Plan. 11.1 -- Statement regarding Computation of Per Share Losses. 21.1 -- Subsidiaries of HCC. 23.1 -- Consent of Arthur Andersen LLP 27.1 -- Financial Disclosure Schedule - Hollywood Casino Corporation and Subsidiaries 27.2 -- Financial Disclosure Schedule - HWCC-Tunica, Inc. and Subsidiary - ----------------------- + Incorporated by reference from the exhibit shown in parenthesis to Form S- 1 Registration Statement (Registration No. 33-58732) for Hollywood Casino Corporation as filed with the SEC on May 27, 1993. ++ Incorporated by reference from the exhibit shown in parenthesis filed in HCC's Annual Report on Form 10-K for the fiscal year ended December 31, 1995. * Incorporated by reference from the exhibit shown in parenthesis to that Registration Statement on Form 10 filed with the SEC on May 28, 1992 by PRT Corporation (now know as HCC). ** Incorporated by reference from the exhibit shown in parenthesis to that Registration Statement on Form 10, as amended, filed with the SEC on August 13, 1992 by HCC. @ Incorporated by reference from the exhibit shown in parenthesis to Form S- 1 Registration Statement (Registration No. 33-77502) for Hollywood Casino Corporation as filed with the SEC on April 8, 1994. @@ Incorporated by reference from the exhibit shown in parenthesis to Form S- 1 Registration Statement (Registration No. 33-82182) for HWCC - Tunica, Inc. as filed with the SEC on September 29, 1994. 112 (B) REPORTS ON FORM 8-K. Neither HCC nor HCT filed any reports on Form 8-K during the quarter ended December 31, 1996. On January 15, 1996, HCC filed a Form 8-K with the Securities and Exchange Commission with respect to the distribution of its stock in GBCC to HCC's shareholders. 113 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Dallas, State of Texas on March 27, 1997. HOLLYWOOD CASINO CORPORATION By: /s/ Jack E. Pratt --------------------- Jack E. Pratt Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant in the capacities and on the dates indicated:
Signature Title Date /s/ Jack E. Pratt Chief Executive March 27, 1997 - ---------------------------------- --------------------- Jack E. Pratt Officer and Director /s/ Edward T. Pratt, Jr. Vice President, Treasurer March 27, 1997 - ---------------------------------- --------------------- Edward T. Pratt, Jr. and Director /s/ William D. Pratt Executive Vice President, March 27, 1997 - ---------------------------------- --------------------- William D. Pratt Secretary, General Counsel and Director /s/ Edward T. Pratt III President, Chief Operating March 27, 1997 - ---------------------------------- --------------------- Edward T. Pratt III Officer and Director /s/ Richard D. Knight Executive Vice President - March 27, 1997 - ---------------------------------- --------------------- Richard D. Knight Operations /s/ Charles F. LaFrano III Vice President - Finance March 27, 1997 - ---------------------------------- --------------------- Charles F. LaFrano III /s/ John C. Hull Corporate Controller and March 27, 1997 - ---------------------------------- --------------------- John C. Hull Principal Accounting Officer /s/ James A. Colquitt Director March 27, 1997 - ---------------------------------- --------------------- James A. Colquitt /s/ Theodore H. Strauss Director March 27, 1997 - ---------------------------------- --------------------- Theodore H. Strauss
114 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Dallas, State of Texas on March 27, 1997. HWCC - TUNICA, INC. By: /s/ Jack E. Pratt ------------------------ Jack E. Pratt Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant in the capacities and on the dates indicated:
Signature Title Date --------- ----- ---- /s/ Jack E. Pratt Chief Executive March 27, 1997 - ---------------------------------- --------------------- Jack E. Pratt Officer and Director /s/ Edward T. Pratt, Jr. Director March 27, 1997 - ---------------------------------- --------------------- Edward T. Pratt, Jr. /s/ William D. Pratt Executive Vice President, March 27, 1997 - ---------------------------------- --------------------- William D. Pratt Secretary, General Counsel and Director /s/ Edward T. Pratt III President and Director March 27, 1997 - ---------------------------------- --------------------- Edward T. Pratt III /s/ Richard D. Knight Executive Vice President March 27, 1997 - ---------------------------------- --------------------- Richard D. Knight /s/ John R. Osborne Vice President - Finance March 27, 1997 - ---------------------------------- --------------------- John R. Osborne /s/ John C. Hull Corporate Controller and March 27, 1997 - ---------------------------------- --------------------- John C. Hull Principal Accounting Officer
115 INDEX TO FINANCIAL STATEMENT SCHEDULES HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES -- Report of Independent Public Accountants -- Schedule I; Condensed Financial Information of Registrant: -- Balance Sheets -- Statements of Operations -- Statements of Cash Flows -- Notes to Parent Company Financial Statements -- Schedule II; Valuation and Qualifying Accounts HOLLYWOOD CASINO-AURORA, INC. -- Report of Independent Public Accountants -- Schedule II; Valuation and Qualifying Accounts HWCC-TUNICA, INC. -- Report of Independent Public Accountants -- Schedule II; Valuation and Qualifying Accounts REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Hollywood Casino Corporation: We have audited in accordance with generally accepted auditing standards, the consolidated financial statements of Hollywood Casino Corporation and subsidiaries included in this Form 10-K and have issued our report thereon dated March 21, 1997. Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedules listed in the index to financial statement schedules are the responsibility of the Company's management and are presented for purposes of complying with the Securities and Exchange Commission's rules and are not part of the basic financial statements. These schedules have been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly state in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN LLP Roseland, New Jersey March 21, 1997 SCHEDULE I PAGE 1 HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES CONDENSED FINANCIAL INFORMATION OF REGISTRANT HOLLYWOOD CASINO CORPORATION (PARENT COMPANY) BALANCE SHEETS (NOTE 1) ASSETS
DECEMBER 31, -------------------------- 1996 1995 ------------ ------------ Cash and cash equivalents $ 2,897,000 $ 7,483,000 Accounts receivable 8,000 333,000 Due from affiliates 14,079,000 11,620,000 Deferred federal income taxes 4,271,000 8,443,000 Other current assets 101,000 178,000 ------------ ------------ Total current assets 21,356,000 28,057,000 ------------ ------------ Investment in and advances to affiliates 46,633,000 47,853,000 Property and equipment, net 14,836,000 18,436,000 Due from affiliates 158,984,000 184,116,000 Notes receivable 10,000,000 10,000,000 Other assets 8,836,000 7,451,000 ------------ ------------ $260,645,000 $295,913,000 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current maturities of long-term debt $ 2,815,000 $ 2,300,000 Accounts payable and accrued liabilities 2,361,000 1,759,000 Accrued interest payable 4,469,000 5,509,000 ------------ ------------ Total current liabilities 9,645,000 9,568,000 ------------ ------------ Long-term debt, net of discount 200,208,000 200,088,000 ------------ ------------ Other noncurrent liabilities 5,503,000 4,919,000 ------------ ------------ Shareholders' equity: Class A common stock, $.0001 par value per share, 50,000,000 shares authorized, 24,760,000 and 24,720,000 shares issued and outstanding, respectively 2,000 2,000 Class B common stock, non-voting, $.01 par value per share; 10,000,000 authorized; no shares issued - - Additional paid-in capital 61,625,000 77,936,000 Retained earnings (16,338,000) 3,400,000 ------------ ------------ Total shareholders' equity 45,289,000 81,338,000 ------------ ------------ $260,645,000 $295,913,000 ============ ============
The accompanying notes to consolidated financial statements are an integral part of this schedule. SCHEDULE I PAGE 2 HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES CONDENSED FINANCIAL INFORMATION OF REGISTRANT HOLLYWOOD CASINO CORPORATION (PARENT COMPANY) STATEMENTS OF OPERATIONS (NOTE 1)
YEAR ENDED DECEMBER 31, ----------------------------------------- 1996 1995 1994 ----------- ------------ ----------- REVENUES: Interest income $ 25,725,000 $ 17,015,000 $15,490,000 Other income 60,000 66,000 93,000 ------------ ------------ ----------- 25,785,000 17,081,000 15,583,000 ------------ ------------ ----------- EXPENSES: General and administrative 7,376,000 5,063,000 6,558,000 Interest 27,786,000 15,704,000 10,175,000 Depreciation and amortization 1,106,000 743,000 622,000 Write down of properties held for sale 3,400,000 - - Other - 541,000 - ------------ ------------ ----------- Total expenses 39,668,000 22,051,000 17,355,000 ------------ ------------ ----------- Loss before income taxes, nonrecurring, extraordinary and other items (13,883,000) (4,970,000) (1,772,000) Write down of affiliate receivables (18,741,000) - - ------------ ------------ ----------- Loss before income taxes, extraordinary and other items (32,624,000) - - Income tax provision (72,000) - (486,000) ------------ ------------ ----------- Loss before extraordinary and other items (32,696,000) (4,970,000) (2,258,000) Extraordinary item: (Loss) gain on early extinguishment of debt - (12,298,000) 18,409,000 ------------ ------------ ----------- Loss before other item (32,696,000) (17,268,000) 16,151,000 Equity in income of consolidated subsidiaries 12,958,000 4,353,000 1,273,000 ------------ ------------ ----------- Net (loss) income $(19,738,000) $(12,915,000) $17,424,000 ============ ============ ===========
The accompanying notes to consolidated financial statements are an integral part of this schedule. SCHEDULE I PAGE 3 HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES CONDENSED FINANCIAL INFORMATION OF REGISTRANT HOLLYWOOD CASINO CORPORATION (PARENT COMPANY) STATEMENTS OF CASH FLOWS (NOTE 1)
YEAR ENDED DECEMBER 31, ------------------------------------------ 1996 1995 1994 ------------ ------------- ------------- NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES $ (150,000) $ (4,234,000) $ 8,382,000 ----------- ------------ ------------ INVESTING ACTIVITIES: Net property and equipment additions (91,000) (161,000) (16,047,000) Proceeds from sale of assets 142,000 - - Issuance of notes receivable - (10,000,000) - Investments in consolidated affiliates (2,621,000) (16,974,000) (51,384,000) Net repayments (advances to) from affiliates (1,600,000) (72,647,000) 12,292,000 ----------- ------------ ------------ Net cash provided by (used in) investing activities (4,170,000) (99,782,000) (55,139,000) ----------- ------------ ------------ FINANCING ACTIVITIES: Net proceeds from issuance of long-term debt - 199,939,000 2,500,000 Repayments of long-term debt (150,000) (84,907,000) (50,000) Cost of early retirement of debt - (9,221,000) - Issuance of common stock - 2,000 1,000 Deferred financing costs (116,000) (7,602,000) - ----------- ------------ ------------ Net cash (used in) provided by financing activities (266,000) 98,211,000 2,451,000 ----------- ------------ ------------ Net decrease in cash and cash equivalents (4,586,000) (5,805,000) (44,306,000) Cash and cash equivalents at beginning of year 7,483,000 13,288,000 57,594,000 ----------- ------------ ------------ Cash and cash equivalents at end of year $ 2,897,000 $ 7,483,000 $ 13,288,000 =========== ============ ============
The accompanying notes to consolidated financial statements are an integral part of this schedule. SCHEDULE I PAGE 4 HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES CONDENSED FINANCIAL INFORMATION OF REGISTRANT HOLLYWOOD CASINO CORPORATION (PARENT COMPANY) NOTES TO PARENT COMPANY FINANCIAL STATEMENTS (1) BASIS OF PRESENTATION During October 1995, HWCC - Lake Houston, Inc., HWCC - Clearklake, Inc. and HWCC -Farmer's Branch, Inc., all wholly owned subsidiaries of Hollywood Casino Corporation ("HCC"), merged with and into the parent company. Such transaction was reflected in the accompanying parent company financial statements as a combination of entities under common control, a method of accounting similar to a pooling of interests. Accordingly, the parent company 1995 and 1994 financial statements have been adjusted to reflect the accounts and operations of these entities as if they had always been combined. (2) GUARANTEES OF REGISTRANT As of December 31, 1996, HCC had not guaranteed any obligations of its subsidiaries or unconsolidated affiliates . (3) SCHEDULED PAYMENTS OF LONG-TERM DEBT OF THE REGISTRANT Scheduled payments of long-term debt outstanding at December 31, 1996 are set forth below:
1997 $ 2,815,000 1998 5,180,000 1999 6,655,000 2000 5,000,000 2001 5,000,000 Thereafter 187,500,000 ------------ Total $212,150,000 ============
(4) DIVIDENDS AND DISTRIBUTIONS HCC received dividends from its consolidated subsidiaries amounting to $10,040,000, $9,942,000 and $14,985,000, respectively, during the years ended December 31, 1996, 1995 and 1994. On December 31, 1996, HCC distributed to its shareholders the common stock of Greate Bay Casino Corporation ("GBCC", formerly known as Pratt Hotel Corporation) owned by HCC. Prior to the distribution, HCC owned approximately 80% of GBCC's outstanding common stock. SCHEDULE I PAGE 5 HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES CONDENSED FINANCIAL INFORMATION OF REGISTRANT HOLLYWOOD CASINO CORPORATION (PARENT COMPANY) NOTES TO PARENT COMPANY FINANCIAL STATEMENTS (CONTINUED) (5) SUPPLEMENTAL CASH FLOW INFORMATION At December 31, 1996, HCC contributed certain receivables from GBCC and its subsidiaries to GBCC. Notes receivable amounting to $8,738,000 together with accrued interest thereon totaling $1,753,000 and other receivables of $4,283,000 with respect to pension obligations assumed during 1995 were contributed to GBCC. (6) RECLASSIFICATIONS Certain reclassifications have been made to the prior years' parent company financial statements to conform to the 1996 financial statement presentation. The accompanying notes to consolidated financial statements are an integral part of this schedule. SCHEDULE II HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS
AMOUNTS BALANCE AT CHARGED TO BALANCE AT BEGINNING COSTS AND OTHER AT END OF PERIOD EXPENSES DEDUCTIONS CHARGES OF PERIOD ----------- ---------- ------------ ---------- ------------ YEAR ENDED DECEMBER 31, 1996: Allowance for doubtful accounts receivable $17,675,000 $3,031,000 $(3,489,000)(1) $(15,524,000)(3) $ 1,693,000 Allowance for obligatory investments 3,792,000 1,344,000 (735,000)(2) (4,401,000)(3) - ----------- ---------- ----------- ------------ ----------- $21,467,000 $4,375,000 $(4,224,000) $(19,925,000) $ 1,693,000 =========== ========== =========== ============ =========== YEAR ENDED DECEMBER 31, 1995: Allowance for doubtful accounts receivable $16,119,000 $3,774,000 $(2,218,000)(1) $ - $17,675,000 Allowance for obligatory investments 2,458,000 1,457,000 (123,000)(2) - 3,792,000 ----------- ---------- ----------- ------------ ----------- $18,577,000 $5,231,000 $(2,341,000) $ - $21,467,000 =========== ========== =========== ============ =========== YEAR ENDED DECEMBER 31, 1994: Allowance for doubtful accounts receivable $15,089,000 $3,830,000 $(2,800,000)(1) $ - $16,119,000 Allowance for obligatory investments 3,065,000 617,000 (1,224,000)(2) - 2,458,000 ----------- ---------- ----------- ------------ ----------- $18,154,000 $4,447,000 $(4,024,000) $ - $18,577,000 =========== ========== =========== ============ ===========
________________________ (1) Represents net write-offs of uncollectible accounts. (2) Represents write-offs of obligatory investments in connection with the contribution of certain obligatory investments to the Casino Reinvestment Development Authority. (3) Related asset, net of valuation allowance set forth above, was distributed to shareholders in connection with Hollywood Casino Corporation's distribution of its ownership of the common stock of Greate Bay Casino Corporation on December 31, 1996. The accompanying notes to consolidated financial statements are an integral part of this schedule. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ---------------------------------------- To Hollywood Casino-Aurora, Inc.: We have audited in accordance with generally accepted auditing standards, the financial statements of Hollywood Casino-Aurora, Inc. included in this Form 10-K and have issued our report thereon dated March 21, 1997. Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed in the index to financial statement schedules is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN LLP Roseland, New Jersey March 21, 1997 SCHEDULE II HOLLYWOOD CASINO-AURORA, INC. (WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION) VALUATION AND QUALIFYING ACCOUNTS
AMOUNTS BALANCE AT CHARGED TO BALANCE BEGINNING COSTS AND AT END OF PERIOD EXPENSES DEDUCTIONS OF PERIOD ---------- ---------- -------------- ---------- YEAR ENDED DECEMBER 31, 1996: Allowance for doubtful accounts receivable $866,000 $325,000 $(120,000)(1) $1,071,000 ======== ======== ========== ========== YEAR ENDED DECEMBER 31, 1995: Allowance for doubtful accounts receivable $715,000 $337,000 $(186,000)(1) $ 866,000 ======== ======== ========== ========== YEAR ENDED DECEMBER 31, 1994: Allowance for doubtful accounts receivable $274,000 $441,000 $ - $ 715,000 ======== ======== ========== ==========
________________________ (1) Represents net write-offs of uncollectible accounts. The accompanying notes to consolidated financial statements are an integral part of this schedule. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ---------------------------------------- To HWCC-Tunica, Inc.: We have audited in accordance with generally accepted auditing standards, the consolidated financial statements of HWCC-Tunica, Inc. and subsidiary included in this Form 10-K and have issued our report thereon dated March 21, 1997. Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed in the index to financial statement schedules is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN LLP Roseland, New Jersey March 21, 1997 SCHEDULE II HWCC-TUNICA, INC. AND SUBSIDIARY (WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION) VALUATION AND QUALIFYING ACCOUNTS
AMOUNTS BALANCE AT CHARGED TO BALANCE BEGINNING COSTS AND AT END OF PERIOD EXPENSES DEDUCTIONS OF PERIOD ---------- ---------- -------------- --------- YEAR ENDED DECEMBER 31, 1996: Allowance for doubtful accounts receivable $313,000 $539,000 $(230,000)(1) $622,000 ======== ======== ========== ======== YEAR ENDED DECEMBER 31, 1995: Allowance for doubtful accounts receivable $106,000 $449,000 $(242,000)(1) $313,000 ======== ======== ========== ======== YEAR ENDED DECEMBER 31, 1994: Allowance for doubtful accounts receivable $ - $106,000 $ - $106,000 ======== ======== ========== ========
________________________________ (1) Represents net write-offs of uncollectible accounts. The accompanying notes to consolidated financial statements are an integral part of this schedule. EX-10.1 2 EXHIBIT 10.1 EXHIBIT 10.1 FIFTH AMENDMENT TO EMPLOYMENT AGREEMENT THIS FIFTH AMENDMENT TO EMPLOYMENT AGREEMENT (the "Fifth Amendment") is made and entered into to be effective as of the 1st day of January, 1997, among HOLLYWOOD CASINO CORPORATION, a Delaware corporation (the "Employer"), and JACK E. PRATT (the "Employee") with reference to the foregoing. RECITALS A. Pratt Hotel Corporation (nka Greate Bay Casino Corporation), a Delaware corporation ("PHC") which was a direct approximately 80% owned subsidiary of Employer prior to December 31, 1996, and Employee entered into that certain Employment Agreement dated as of September 21, 1989; B. PHC and Employee subsequently entered into that certain First Amendment to Employment Agreement dated as of January 1, 1991; C. PHC and Employee subsequently entered into that certain Second Amendment to Employment Agreement dated as of September 30, 1992; D. PHC and Employee subsequently entered into that certain Third Amendment to Employment Agreement dated as of January 1, 1994; E. PHC assigned to Employer the right, title and interest of PHC in, to and under, and Employer assumed the obligations of PHC under, the Employment Agreement, as amended by the First Amendment to Employment Agreement, the Second Amendment to Employment Agreement and the Third Amendment to Employment Agreement, pursuant to that certain Assignment of Pratt Brother Employment Contracts and Assumption Agreement dated as of October 16, 1995; F. Employer and Employee subsequently entered into that certain Fourth Amendment to Employment Agreement dated as of January 1, 1996; G. The Employment Agreement, as amended by the First Amendment to Employment Agreement, the Second Amendment to Employment Agreement, the Third Amendment to Employment Agreement and the Fourth Amendment to Employment Agreement, are hereinafter collectively called the "Existing Employment Agreement"; and H. Employer and Employee now desire to further amend the Existing Employment Agreement as provided below. AGREEMENTS ---------- NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. Paragraph 2 of the Existing Employment Agreement is hereby amended in its entirety to read as follows: "2. Term of Employment. The term of employment of the Executive under this Agreement shall expire on December 31, 2000; subject, however, to the provisions of Section 5 of this Agreement." 2. This Fifth Amendment may be executed in multiple counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. 3. If any provision of this Fifth Amendment or the application hereof to any person or circumstances shall to any extent be held void, unenforceable or invalid, then the remainder of this Fifth Amendment or the application of such provision to persons or circumstances other than those as to which it is held void, unenforceable or invalid shall not be affected thereby, and each provision of this Fifth Amendment shall be valid and enforced to the fullest extent permitted by law. 4. THIS FIFTH AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE GOVERNED BY THE LAWS OF THE STATE OF TEXAS, WITHOUT REGARD TO ANY OF SUCH STATE'S DOCTRINES REGARD CONFLICTS OF LAWS. 5. Except as amended hereby, the Existing Employment Agreement shall continue in full force and effect without any further action by the parties thereto. On or after the effective date of this Fifth Amendment, references to the "Employment Agreement" in the Existing Employment Agreement, as amended hereby, shall be deemed to mean, for purposes of determining the rights, remedies, obligations and liabilities of the parties thereto and all other purposes, the Existing Employment Agreement, as amended by this Fifth Amendment. * * * 2 IN WITNESS WHEREOF, the parties to this Fifth Amendment have executed such Fifth Amendment effective as of the date first set forth above. /S/ JACK E. PRATT ---------------------- JACK E. PRATT HOLLYWOOD CASINO CORPORATION By: /s/ Charles F. LaFrano III ----------------------------- Name: Charles F. LaFrano III Title: Vice President of Finance 3 EX-10.2 3 EXHIBIT 10.2 EXHIBIT 10.2 FIFTH AMENDMENT TO EMPLOYMENT AGREEMENT --------------------------------------- THIS FIFTH AMENDMENT TO EMPLOYMENT AGREEMENT (the "Fifth Amendment") is made and entered into to be effective as of the 1st day of January, 1997, among HOLLYWOOD CASINO CORPORATION, a Delaware corporation (the "Employer"), and EDWARD T. PRATT, JR. (the "Employee") with reference to the foregoing. RECITALS -------- A. Pratt Hotel Corporation (nka Greate Bay Casino Corporation), a Delaware corporation ("PHC") which was a direct approximately 80% owned subsidiary of Employer prior to December 31, 1996, and Employee entered into that certain Employment Agreement dated as of September 21, 1989; B. PHC and Employee subsequently entered into that certain First Amendment to Employment Agreement dated as of January 1, 1991; C. PHC and Employee subsequently entered into that certain Second Amendment to Employment Agreement dated as of September 30, 1992; D. PHC and Employee subsequently entered into that certain Third Amendment to Employment Agreement dated as of February 23, 1995; E. PHC assigned to Employer the right, title and interest of PHC in, to and under, and Employer assumed the obligations of PHC under, the Employment Agreement, as amended by the First Amendment to Employment Agreement, the Second Amendment to Employment Agreement and the Third Amendment to Employment Agreement, pursuant to that certain Assignment of Pratt Brother Employment Contracts and Assumption Agreement dated as of October 16, 1995; and F. Employer and Employee subsequently entered into that certain Fourth Amendment to Employment Agreement dated as of January 1, 1996; G. The Employment Agreement, as amended by the First Amendment to Employment Agreement, the Second Amendment to Employment Agreement, the Third Amendment to Employment Agreement and the Fourth Amendment to Employment Agreement, are hereinafter collectively called the "Existing Employment Agreement"; and H. Employer and Employee now desire to further amend the Existing Employment Agreement as provided below. AGREEMENTS ---------- NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. Paragraph 2 of the Existing Employment Agreement is hereby amended in its entirety to read as follows: "2. Term of Employment. The term of employment of the Executive under this Agreement shall expire on December 31, 1999; subject, however, to the provisions of Section 5 of this Agreement." 2. This Fifth Amendment may be executed in multiple counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. 3. If any provision of this Fifth Amendment or the application hereof to any person or circumstances shall to any extent be held void, unenforceable or invalid, then the remainder of this Fifth Amendment or the application of such provision to persons or circumstances other than those as to which it is held void, unenforceable or invalid shall not be affected thereby, and each provision of this Fifth Amendment shall be valid and enforced to the fullest extent permitted by law. 4. THIS FIFTH AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE GOVERNED BY THE LAWS OF THE STATE OF TEXAS, WITHOUT REGARD TO ANY OF SUCH STATE'S DOCTRINES REGARD CONFLICTS OF LAWS. 5. Except as amended hereby, the Existing Employment Agreement shall continue in full force and effect without any further action by the parties thereto. On or after the effective date of this Fifth Amendment, references to the "Employment Agreement" in the Existing Employment Agreement, as amended hereby, shall be deemed to mean, for purposes of determining the rights, remedies, obligations and liabilities of the parties thereto and all other purposes, the Existing Employment Agreement, as amended by this Fifth Amendment. * * * 2 IN WITNESS WHEREOF, the parties to this Fifth Amendment have executed such Fifth Amendment effective as of the date first set forth above. /S/ EDWARD T. PRATT, JR. ------------------------------------- EDWARD T. PRATT, JR. HOLLYWOOD CASINO CORPORATION By: /s/ Charles F. LaFrano III ----------------------------------- Name: Charles F. LaFrano III Title: Vice President of Finance 3 EX-10.3 4 EXHIBIT 10.3 EXHIBIT 10.3 FIFTH AMENDMENT TO EMPLOYMENT AGREEMENT --------------------------------------- THIS FIFTH AMENDMENT TO EMPLOYMENT AGREEMENT (the "Fifth Amendment") is made and entered into to be effective as of the 1st day of January, 1997, among HOLLYWOOD CASINO CORPORATION, a Delaware corporation (the "Employer"), and WILLIAM D. PRATT (the "Employee") with reference to the foregoing. RECITALS -------- A. Pratt Hotel Corporation (nka Greate Bay Casino Corporation), a Delaware corporation ("PHC") which was a direct approximately 80% owned subsidiary of Employer prior to December 31, 1996, and Employee entered into that certain Employment Agreement dated as of September 21, 1989; B. PHC and Employee subsequently entered into that certain First Amendment to Employment Agreement dated as of January 1, 1991; C. PHC and Employee subsequently entered into that certain Second Amendment to Employment Agreement dated as of September 30, 1992; D. PHC and Employee subsequently entered into that certain Third Amendment to Employment Agreement dated as of February 23, 1995; E. PHC assigned to Employer the right, title and interest of PHC in, to and under, and Employer assumed the obligations of PHC under, the Employment Agreement, as amended by the First Amendment to Employment Agreement, the Second Amendment to Employment Agreement and the Third Amendment to Employment Agreement, pursuant to that certain Assignment of Pratt Brother Employment Contracts and Assumption Agreement dated as of October 16, 1995; and F. Employer and Employee subsequently entered into that certain Fourth Amendment to Employment Agreement dated as of January 1, 1996; G. The Employment Agreement, as amended by the First Amendment to Employment Agreement, the Second Amendment to Employment Agreement, the Third Amendment to Employment Agreement and the Fourth Amendment to Employment Agreement, are hereinafter collectively called the "Existing Employment Agreement"; and H. Employer and Employee now desire to further amend the Existing Employment Agreement as provided below. AGREEMENTS ---------- NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. Paragraph 2 of the Existing Employment Agreement is hereby amended in its entirety to read as follows: "2. Term of Employment. The term of employment of the Executive under this Agreement shall expire on December 31, 1999; subject, however, to the provisions of Section 5 of this Agreement." 2. This Fifth Amendment may be executed in multiple counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. 3. If any provision of this Fifth Amendment or the application hereof to any person or circumstances shall to any extent be held void, unenforceable or invalid, then the remainder of this Fifth Amendment or the application of such provision to persons or circumstances other than those as to which it is held void, unenforceable or invalid shall not be affected thereby, and each provision of this Fifth Amendment shall be valid and enforced to the fullest extent permitted by law. 4. THIS FIFTH AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE GOVERNED BY THE LAWS OF THE STATE OF TEXAS, WITHOUT REGARD TO ANY OF SUCH STATE'S DOCTRINES REGARD CONFLICTS OF LAWS. 5. Except as amended hereby, the Existing Employment Agreement shall continue in full force and effect without any further action by the parties thereto. On or after the effective date of this Fifth Amendment, references to the "Employment Agreement" in the Existing Employment Agreement, as amended hereby, shall be deemed to mean, for purposes of determining the rights, remedies, obligations and liabilities of the parties thereto and all other purposes, the Existing Employment Agreement, as amended by this Fifth Amendment. * * * 2 IN WITNESS WHEREOF, the parties to this Fifth Amendment have executed such Fifth Amendment effective as of the date first set forth above. /S/ WILLIAM D. PRATT ------------------------------------- WILLIAM D. PRATT HOLLYWOOD CASINO CORPORATION By: /s/ Charles F. LaFrano III ----------------------------------- Name: Charles F. LaFrano III Title: Vice President of Finance 3 EX-10.4 5 EXHIBIT 10.4 EXHIBIT 10.4 - -------------------------------------------------------------------------------- Dated: May 1, 1996 - -------------------------------------------------------------------------------- EMPLOYMENT AGREEMENT - by and between - HOLLYWOOD CASINO CORPORATION - and - EDWARD T. PRATT III - -------------------------------------------------------------------------------- TABLE OF CONTENTS Page ---- RECITALS 1 1. DEFINITIONS 2 2. PRIOR EMPLOYMENT 4 3. BASIC EMPLOYMENT AGREEMENT 4 4. DUTIES OF EMPLOYEE 4 5. ACCEPTANCE OF EMPLOYMENT 5 6. TERM 5 7. SPECIAL TERMINATION PROVISIONS 5 8. COMPENSATION TO EMPLOYEE 7 (a) Base Salary 7 (b) Base Salary Adjustment 7 (c) Incentive Bonus 8 (d) Employee Benefit Plans 8 (e) Expense Reimbursement 9 (f) Licensing Expenses 9 (g) Vacations and Holidays 9 9. LICENSING REQUIREMENTS 10 10. CONFIDENTIALITY 11 11. RESTRICTIVE COVENANT 12 12. BEST EVIDENCE 13 13. SUCCESSION 13 14. ASSIGNMENT 13 15. AMENDMENT OR MODIFICATION 14 16. GOVERNING LAW 14 17. NOTICES 14 18. INTERPRETATION 15 i 19. SEVERABILITY 15 20. DISPUTE RESOLUTION 15 21. WAIVER 15 22. PAROL 16 EXECUTION PAGE 17 ii ----------------------------------- EMPLOYMENT AGREEMENT ----------------------------------- THIS EMPLOYMENT AGREEMENT (the "Agreement") is made and entered into as of the 1st day of May, 1996, by and between HOLLYWOOD CASINO CORPORATION, a Delaware corporation ("Employer"), and EDWARD T. PRATT III ("Employee"). W I T N E S S E T H: ------------------- WHEREAS, Employer is a corporation, duly organized and existing under the laws of the State of Delaware, which develops and/or operates land-based, riverboat and dockside casinos and related support facilities in emerging and established gaming jurisdictions and which has a need for qualified, experienced personnel; WHEREAS, Employee is an adult individual currently residing at 17423 Woods Edge Drive, Dallas, Texas 75287; WHEREAS, Employee has represented and warranted to Employer that Employee possesses sufficient qualifications and expertise in order to fulfill the terms of the employment stated in this Agreement; and WHEREAS, Employer is willing to employ Employee, and Employee is desirous of accepting employment from Employer, under the terms and pursuant to the conditions set forth herein. NOW, THEREFORE, for and in consideration of the foregoing recitals, and in consideration of the mutual covenants, agreements, understandings, undertakings, representations, 1 warranties and promises hereinafter set forth, and intending to be legally bound thereby, Employer and Employee do hereby covenant and agree as follows: 1. DEFINITIONS. As used in this Agreement, the words and terms hereinafter defined have the respective meanings ascribed to them herein, unless a different meaning clearly appears from the context: (a) "Cause" - means (i) the conviction of Employee of a felony by a court of competent jurisdiction; (ii) the indictment of Employee by a state or federal grand jury of competent jurisdiction for embezzlement or misappropriation of Employer's funds or for any act of dishonesty or lack of fidelity towards Employer; (iii) a decree of a court of competent jurisdiction that Employee is not mentally competent or is unable to handle his own affairs; (iv) the written confession by Employee of any act of dishonesty towards Employer or any embezzlement or misappropriation of Employer's funds; (v) the payment (or, by the operation solely of the effect of a deductible, the failure of payment) by a surety or insurer of a claim under a fidelity bond issued to the benefit of Employer reimbursing Employer for a loss due to the wrongful act or wrongful omission to act of Employee (the occurrence of which shall cause Employee to be indebted to Employer for the greater of either (A) the loss incurred by Employer or (B) the sums paid by Employer to Employee pursuant to this Agreement); (vi) Employee's breach of the restrictive covenant set forth in Paragraph 11 of this Agreement, or (vii) Employee's failure to maintain in force and in good standing any and all licenses, permits and/or approvals required of Employee by the relevant governmental authorities for the discharge of the obligations of Employee under this Agreement, provided that should Employee's required licenses, permits and/or approvals be suspended pending a final license, permit or approval revocation determination, this Agreement shall not terminate but any compensation which would otherwise be paid by Employer to Employee under Paragraph 8 of this Agreement shall be suspended and accrued pending the final resolution of such final license, permit and/or approval revocation determination, and, in the event such final resolution of such final license, permit and/or approval revocation determination does not revoke Employee's licenses, permits and/or approvals, any compensation which has been so suspended and accrued shall be paid by Employer to Employee, provided, however, that Employee's disability due to illness or accident or any other mental or physical incapacity shall not constitute "Cause" as defined herein. 2 (b) "Complete Disability" - means the inability of Employee, due to illness or accident or other mental or physical incapacity, to perform his obligations under this Agreement for a period of three hundred sixty (360) calendar days in the aggregate over a period of five hundred (500) consecutive calendar days, such "Complete Disability" to become effective upon the expiration of such three hundred sixtieth (360th) day. (c) "Confidential Information" - means any information in any form, regardless of the medium or media by which such information is recorded or communicated, that is in the possession of Employer being neither in the public domain nor routinely available to third parties, and if directly or indirectly disclosed to Employer's competitors (i) would assist such competitors in competing against Employer, (ii) would diminish or eliminate any competitive advantage now enjoyed by Employer,(iii) would cause financial injury or loss to Employer, or (iv) would reveal proprietary information or trade secrets of Employer. (d) "Effective Date" - means May 1, 1996. (e) "Employee" - means Edward T. Pratt III. (f) "Employer" - means Hollywood Casino Corporation, a Delaware corporation. 3 (g) "Employer's Affiliates" - means any parent, subsidiary, affiliate or other legal entity of Employer. (h) "Prior Employment" - means any prior employment Employee has had with either Employer or Employer's Affiliates. 2. PRIOR EMPLOYMENT. This Agreement supersedes and replaces any and all prior employment agreements, whether written or oral, by and between Employee, on the one side, and Employer or Employer's Affiliates, on the other side. From and after the Effective Date, Employee shall be the employee of Employer under the terms and pursuant to the conditions set forth in this Agreement. 3. BASIC EMPLOYMENT AGREEMENT. Subject to the terms and pursuant to the conditions hereinafter set forth, Employer hereby employs Employee during the Term hereinafter specified to serve in a managerial or executive capacity, under a title and with such duties not inconsistent with those set forth in Paragraph 4 of this Agreement, as the same may be modified and/or assigned to Employee by Employer from time to time. Notwithstanding the foregoing, Employer and Employee hereby covenant and agree that, in the absence of mutual consent of both Employer and Employee, Employee shall not be assigned duties by Employer which would require that Employee maintain his principal place of residence or primary place of employment outside of the greater metropolitan area of Dallas, Texas. 4. DUTIES OF EMPLOYEE. Employee shall perform such duties assigned to Employee by Employer as are generally associated with the duties of President and Chief Operating Officer of Employer, or 4 such similar duties as may be assigned to Employee by the Chairman of the Board of Directors of Employer, including but not limited to (i) the efficient and continuous operation of Employer and Employer's Affiliates; (ii) the preparation of relevant budgets and allocation of relevant funds; (iii) the selection and delegation of duties and responsibilities of subordinates; (iv) the direction, review and oversight of all operations and programs under Employee's supervision; and (v) such other and further duties specifically related to such duties as assigned by Employer to Employee. In the performance of his duties hereunder, Employee shall report directly to the Chairman of the Board/Chief Executive Officer and the Board of Directors of Employer. Notwithstanding the foregoing, Employee shall devote such time to Employer's Affiliates as required by Employer, provided such duties are not inconsistent with Employee's primary duties to Employer hereunder. 5. ACCEPTANCE OF EMPLOYMENT. Employee hereby unconditionally accepts the employment set forth hereunder, under the terms and pursuant to the conditions set forth in this Agreement. Employee hereby covenants and agrees that, during the Term of this Agreement, Employee will devote the whole of his normal and customary working time and best efforts solely to the performance of Employee's duties under this Agreement. 6. TERM. The term of this Agreement shall commence on May 1, 1996 and expire on 12:00 p.m. on April 30, 2000 (the "Term"), unless sooner terminated as provided herein. 7. SPECIAL TERMINATION PROVISIONS. Notwithstanding the provisions of Paragraph 6 above, this Agreement and all parties' 5 rights and obligations hereunder shall terminate upon the occurrence of any of the following events: (a) the death of Employee; provided, however, that any and all employee benefits due and owing to Employee shall be paid to the spouse of Employee in the event of such death; (b) the giving of written notice from Employer to Employee of the termination of this Agreement upon the Complete Disability of Employee; provided, however, that a termination pursuant to this Paragraph 7(b) shall not affect Employee's vesting or continued rights in any stock option plan set forth in Paragraph 8(c) of this Agreement; (c) the giving of written notice by Employer to Employee of the termination of this Agreement upon the discharge of Employee for Cause; (d) the giving of written notice by Employer to Employee of the termination of this Agreement without Cause; provided, however, that, if Employer gives Employee written notice of termination of this Agreement without Cause, such notice must be accompanied by Employer's written tender to Employee of Employer's commitment to continue to pay to Employee the compensation set forth in Paragraph 8(a) of this Agreement; and/or (e) a Change of Control (as defined in that certain Indenture dated as of October 17, 1995, among Employer, HWCC-Tunica, Inc. and Shawmut Bank, National Association (now Fleet National Bank) as Trustee); provided, however, that, in the event of such Change of Control, Employer shall be obligated to pay to Employee an amount (the "Severance Amount") equal to the aggregate compensation which would have been paid by Employer to Employee under Paragraph 8(a) of this Agreement during the period (the "Severance Period") from the date of termination to the later to occur of the expiration date of this Agreement or thirty-six (36) months from the date of termination assuming that such termination had not occurred. Employee shall have the right, exercisable by written notice to Employer, to elect to have the Severance Amount paid by 6 Employer to Employee in (i) a lump sum payment not later than the date of occurrence of the Change of Control or (ii) equal monthly installments during the Severance Period. 8. COMPENSATION TO EMPLOYEE. For and in complete consideration for Employee's full and faithful performance of his duties under this Agreement, Employer hereby covenants and agrees to pay to Employee, and Employee hereby covenants and agrees to accept from Employer, the following items of compensation: (a) Base Salary. Employer hereby covenants and agrees to pay to Employee, and Employee hereby covenants and agrees to accept from Employer, an annual base salary of Four Hundred Twenty-Five Thousand and No/100 Dollars ($425,000.00), effective January 1, 1996, payable in such equal regular installments as is Employer's custom and usage. Such base salary shall be exclusive of and in addition to any other benefits which Employer, in its sole discretion, may make available to Employee, including, but not limited to, any pension plans, bonus plans, retirement plans, company life insurance plan, medical and/or hospitalization plans, or any and all other benefit plans which may from time to time be in available to executive officers of Employer generally during the Term of this Agreement. (b) Base Salary Adjustment. The base salary prescribed in Paragraph 8(a) above may be adjusted at such time and in such manner as the Compensation Committee of the Board of Directors of Employer may determine in accordance with the executive 7 compensation policy of Employer then in effect; provided, however, that such base salary shall never be less than $425,000 per annum. (c) Incentive Bonus. Employee shall be eligible to receive one or more incentive compensation bonuses based upon such performance and other criteria as Employer shall determine in its sole discretion. After the Effective Date of this Agreement, Employer will implement an incentive bonus program in which Employee will participate and which will be used to determine Employee's incentive bonus. The incentive bonus shall be payable by Employer to Employee no later than the first day of March of the year following the calendar year for which the incentive bonus is accrued (or in accordance with the terms of any applicable incentive bonus program), and, where applicable, shall be prorated based upon the number of days Employee was employed by Employer during such calendar year. Any incentive bonus shall be in addition to Employee's participation in any and all profit sharing plans, bonus participation plans, stock options or other incentive compensation to which Employee is entitled to participate or receive. (d) Employee Benefit Plans. Employer hereby covenants and agrees that it shall include Employee, if otherwise eligible, in any pension plans, retirement plans, company life insurance plans, medical and/or hospitalization plans, and/or any and all other benefit plans which may be placed in effect by Employer during the Term of this Agreement. (e) Expense Reimbursement. During the Term of this Agreement, Employer shall either pay directly or reimburse Employee 8 for Employee's reasonable expenses incurred for the benefit of Employer in accordance with Employer's general policy regarding reimbursement, as the same may be amended, modified or changed from time to time. Such reimbursable expenses shall include, but are not limited to, reasonable entertainment and promotional expenses, gift and travel expenses, dues and expenses of membership in clubs, professional societies and fraternal organizations, and the like. Prior to reimbursement, Employee shall provide Employer with sufficient detailed invoices of such expenses in accordance with the then applicable guidelines of the Internal Revenue Service so as to permit Employer to claim a deduction of such expenses. (f) Licensing Expenses. Employer hereby covenants and agrees that Employer shall pay all licensing fees and expenses incurred by Employee in securing and maintaining such licenses and permits required of Employee in order to perform his duties under this Agreement. (g) Vacations and Holidays. Commencing as of the Effective Date of this Agreement, Employee shall be entitled to (i) annual paid vacation leave in accordance with Employer's standard policy therefor, to be taken at such times as selected by Employee and approved by Employer, and (ii) the following paid holidays (or, at Employer's option, an equivalent number of paid days off): New Year's Day, Dr. Martin Luther King, Jr.'s Birthday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day. 9. LICENSING REQUIREMENTS. (a) Employer and Employee hereby covenant and agree that this Agreement may be subject to the approval of (i) the New Jersey Casino Control 9 Commission (the "CCC") pursuant to the provisions of the New Jersey Casino Control Act, as amended (the "New Jersey Gaming Act"), and the regulations promulgated thereunder, (ii) the Illinois Gaming Board (the "IGB") pursuant to the provisions of the Illinois Riverboat Gambling Act, as amended (the "Illinois Gaming Act"), and the regulations promulgated thereunder and/or (iii) the Mississippi Gaming Commission (the "MGC") pursuant to the provisions of the Mississippi Gaming Control Act, as amended (the "Mississippi Gaming Act"), and the regulations promulgated thereunder. If this Agreement is required by the New Jersey Gaming Act, the Illinois Gaming Act and/or the Mississippi Gaming Act and the regulations promulgated thereunder to be approved by the CCC, the IGB and/or the MGC, as applicable, but is not so approved by any such gaming regulatory authority, this Agreement shall immediately terminate and shall be null and void and of no further force or effect; provided, however, should this Agreement be required to be approved but is not so approved by the CCC, the IGB and/or the MGC, Employer and Employee hereby covenant and agree that, with the exception of the provisions of Paragraph 8 of this Agreement, this Agreement shall be modified and amended so as to receive the appropriate approval from the CCC, the IGB and/or the MGC. (b) Employer and Employee hereby covenant and agree that, in order for Employee to discharge the duties required under this Agreement, Employee shall hold any necessary and appropriate casino key employee license (the "License") in gaming jurisdictions in which Employer or Employer's Affiliates may now or hereafter maintain casino operations. In the event that any applicable 10 gaming regulatory authority (the "Authority") objects to the renewal of Employee's License or refuses to renew Employee's License, Employer, at Employer's sole cost and expense, shall promptly defend such action and shall take such reasonable steps as may be required to either remove the Authority's objections or secure the Authority's approval. Notwithstanding the foregoing, if the source of the Authority's objections or the Authority's refusal to renew Employee's License arise as a result of any of the events described in Paragraph 1(a) of this Agreement, Employer's obligations under this Paragraph 9 shall not be operative and Employee shall promptly reimburse Employer upon demand for any expenses incurred by Employer pursuant to this Paragraph 9. 10. CONFIDENTIALITY. Employee hereby warrants, covenants and agrees that, without the prior express written approval of Employer, Employee shall hold in the strictest confidence and shall not disclose to any person, firm, corporation or other entity, any and all of Employer's Confidential Information, including, but not limited to, (i) information, letters, photographs, graphs, samples, or computer software of a confidential nature; (ii) information or other documents concerning Employer's business, customers or suppliers; (iii) Employer's marketing methods, files and credit and collection techniques and files; or (iv) Employer's trade secrets, technical information, design, process, procedure, improvement and other "know-how" or information not of a public nature, regardless of how such information came into the custody of Employee. The warranty, covenant and agreement set forth in this 11 Paragraph 10 shall not expire, shall survive this Agreement and shall be binding upon Employee without regard to the passage of time or other events. 11. RESTRICTIVE COVENANT. Employee hereby covenants and agrees that, during the Term of this Agreement or until April 30, 2000, if Employer terminates Employee pursuant to Paragraph 7(d) above and is continuing to make payments to Employee as provided therein, Employee shall not directly or indirectly, either as a principal, agent, employee, employer, consultant, partner, shareholder of a closely held corporation or shareholder in excess of five percent (5%) of a publicly traded corporation, corporate officer or director, or in any other individual or representative capacity, engage or otherwise participate in any manner or fashion in any business that is in competition in any manner whatsoever with the principal business activity of Employer or Employer's Affiliates, in or about any state in which Employer or Employer's Affiliates are licensed to conduct casino operations (the "Operating States"), including without limitation any waterways which are wholly within the Operating States, which are partly within the Operating States and partly without the Operating States, or which form a boundary between the Operating States and any other state or body public. Employee hereby further acknowledges and agrees that the restrictive covenant contained in this Paragraph 11 is reasonable as to duration, terms and geographical area and that the same protects the legitimate interests of Employer and Employer's Affiliates, imposes no undue hardship on Employee and is not injurious to the public. Notwithstanding anything express or implied herein to the contrary, 12 the restrictive covenant contained in this Paragraph 11 shall not apply in the event of the termination of this Agreement due to a Change of Control. 12. BEST EVIDENCE. This Agreement shall be executed in original and "Xerox" or photostatic copies and each copy bearing original signatures in ink shall be deemed an original. 13. SUCCESSION. This Agreement shall be binding upon and inure to the benefit of Employer and Employee and their respective successors and assigns. 14. ASSIGNMENT. Employee shall not assign this Agreement or delegate his duties hereunder without the express written prior consent of Employer thereto. Any purported assignment by Employee in violation of this Paragraph 14 shall be null and void and of no force or effect. Employer shall have the right to assign this Agreement freely; provided, however, that in the event of such an assignment by Employer and the assignee subsequently defaults under the terms of this Agreement, Employer shall remain liable for compliance with the terms of Paragraph 8 of this Agreement. 15. AMENDMENT OR MODIFICATION. This Agreement may not be amended, modified, changed or altered except by a writing signed by both Employer and Employee. 16. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of Texas in effect on the Effective Date of this Agreement. 13 17. NOTICES. Any and all notices required under this Agreement shall be in writing and shall either hand-delivered; mailed by certified mail, return receipt requested; or sent via telecopier addressed to: TO EMPLOYER: Chairman of the Board Hollywood Casino Corporation Two Galleria Tower, Suite 2200 13455 Noel Road, LB 48 Dallas, Texas 75240 WITH COPY TO: General Counsel Hollywood Casino Corporation Two Galleria Tower, Suite 2200 13455 Noel Road, LB 48 Dallas, Texas 75240 TO EMPLOYEE: Edward T. Pratt III 17423 Woods Edge Drive Dallas, Texas 75287 All notices hand-delivered shall be deemed delivered as of the date actually delivered. All notices mailed shall be deemed delivered as of three (3) business days after the date postmarked. All notices sent via telecopier shall be deemed delivered as of the next business day following the date of the confirmation of delivery. Any changes in any of the addresses listed herein shall be made by notice as provided in this Paragraph 17. 18. INTERPRETATION. The preamble recitals to this Agreement are incorporated into and made a part of this Agreement. Titles of paragraphs are for convenience only and are not to be considered a part of this Agreement. 19. SEVERABILITY. In the event any one or more provisions of this Agreement is declared judicially void or otherwise unenforceable, the remainder of this Agreement shall survive and such provision(s) shall be deemed modified or amended so as to fulfill the intent of the parties hereto. 14 20. DISPUTE RESOLUTION. Except for equitable actions seeking to enforce the provisions of Paragraphs 10 and 11 of this Agreement, jurisdiction and venue for which is hereby granted to Dallas County, Texas, any and all claims, disputes or controversies arising between the parties hereto regarding any of the terms of this Agreement or the breach thereof, on the written demand of either of the parties hereto, shall be submitted to and be determined by final and binding arbitration held in Dallas, Texas, in accordance with the Employment Dispute Resolution Rules of the American Arbitration Association. This Agreement to arbitrate shall be specifically enforceable in any court of competent jurisdiction. 21. WAIVER. None of the terms of this Agreement, including this Paragraph 21, or any term, right or remedy hereunder shall be deemed waived unless such waiver is in writing and signed by the party to be charged therewith and in no event by reason of any failure to assert or delay in asserting any such term, right or remedy or similar term, right or remedy hereunder. 22. PAROL. This Agreement constitutes the entire agreement between Employer and Employee with respect to the subject matter hereto and this Agreement supersedes any prior understandings, agreements or undertakings by and between Employer and Employee with respect to the subject matter hereof. 15 IN WITNESS WHERE AND INTENDING TO BE LEGALLY BOUND THEREBY, the parties hereto have executed and delivered this Agreement as of the year and date first above written. EMPLOYER: ATTEST: HOLLYWOOD CASINO CORPORATION, a Delaware corporation /s/ William D. Pratt By:/s/ Jack E. Pratt ----------------------- ------------------------------ Name: William D. Pratt Name: Jack E. Pratt Title: Secretary Title: Chairman of the Board & Chief Executive Officer EMPLOYEE: /s/ Edward T. Pratt III --------------------------------- EDWARD T. PRATT III 16 EX-10.27 6 EXHIBIT 10.27 EXHIBIT 10.27 AGREEMENT This Agreement (this "AGREEMENT") is entered into this 1st day of August, 1996, by and between HWCC-LOUISIANA, INC., a Louisiana corporation ("HWCC-LOUISIANA"), and DEBARTOLO ENTERTAINMENT LOUISIANA GAMING, INC., a Louisiana corporation ("DEBARTOLO"). RECITALS -------- 1. Pursuant to the terms of that certain (a) Option Agreement dated June 16, 1995, between H&H Contracting Co., Inc. ("H&H") and Jones Environmental, Inc. (whose interest in such Option Agreement has been assigned to HWCC-Louisiana), as amended by that certain First Amendment to Option Agreement dated March 29, 1996 (as amended, "OPTION AGREEMENT #1"), and (b) Option Agreement No. 2 dated October 3, 1995, between H&H and HWCC-Louisiana, as amended by that certain First Amendment to Option Agreement No. 2 dated March 29, 1996 (as amended, "OPTION AGREEMENT #2") (Option Agreement #1 and Option Agreement #2 are collectively referred to herein as the "OPTION AGREEMENTS"), HWCC-Louisiana possesses the right to acquire certain real property described in the Option Agreements (the "HWCC PROPERTY") upon terms and conditions described in the Option Agreements. 2. On August 28, 1995, HWCC-Louisiana filed (a) an Amended and Restated Level I Riverboat License Application Part A (the "DIVISION APPLICATION") with the Riverboat Gaming Enforcement Division of the Gaming Enforcement Section of the Office of the Louisiana State Police, Department of Public Safety and Corrections (the "DIVISION") and (b) an Amended and Restated Application for Certificate of Preliminary Approval (the "COMMISSION APPLICATION") (the Division Application and the Commission Application are collectively referred to as the "APPLICATIONS") with the Gaming Division of the Louisiana Department of Justice (the "DEPARTMENT OF JUSTICE") for review by the Louisiana Riverboat Gaming Commission. 3. The Department of Justice has issued formal notice that all previous applicants for the remaining riverboat license in Louisiana must submit amendments to any application for such license by no later than August 2, 1996 (the "APPLICATION DEADLINE"). 4. HWCC-Louisiana and DeBartolo (collectively the "PARTIES" and individually a "PARTY") desire to enter into this Agreement in order to jointly develop, own and operate a world-class casino and entertainment project on the Property (as defined in Section 1.03(b)), subject to the terms and conditions contained in this Agreement. NOW THEREFORE, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, and in consideration of the covenants and agreements set forth below, HWCC-Louisiana and DeBartolo agree as follows: AGREEMENT --------- ARTICLE I PREDEVELOPMENT ACTIVITY AND FORMATION OF LLC 1.01 PRE-DEVELOPMENT ACTIVITY. Commencing immediately upon the execution of this Agreement, the Parties will act in good faith and use all commercially reasonable efforts to promote the granting of the Licenses (as defined in Section 1.03(b)). In connection therewith, the Parties agree to work together to file by no later than the Application Deadline any amendments to the Applications (the "APPLICATION AMENDMENTS") or any other documentation or materials necessitated by the Parties entering into this Agreement or otherwise mandated by the Division, the State of Louisiana Gaming Control Board, the Department of Justice or any other applicable authority (the "APPLICABLE AUTHORITIES"). Except as otherwise set forth in Sections 9.02 and 10.04, all other expenses incurred by either of the Parties or the LLC (as defined in Section 1.02) in connection with such pre-development activity (including all such expenses incurred by HWCC-Louisiana prior to the date of this Agreement) (the "SHARED EXPENSES") shall be borne (a) prior to the Closing (as defined in Section 4.01) equally by the Parties and (b) after the Closing, by the LLC. Simultaneous with the execution of this Agreement, DeBartolo shall remit to HWCC-Louisiana cash in an amount equal to one-half of the Shared Expenses incurred by HWCC-Louisiana prior to the date of this Agreement and that have been capitalized by HWCC-Louisiana. That portion of the Shared Expenses incurred by HWCC-Louisiana prior to the date of this Agreement and not capitalized by HWCC-Louisiana shall constitute a portion of HWCC-Louisiana's capital contribution to the LLC. 1.02 FORMATION OF LLC. Commencing immediately upon execution of this Agreement, the Parties shall take any and all action necessary to form a Louisiana limited liability company to be owned on a 50-50 basis by each of HWCC-Louisiana and DeBartolo (the "LLC"). In the event that any Applicable Authority or any law, rule or regulation prevents, or fails to consent to, formation of the LLC and/or the granting of the Licenses to the LLC, the Parties hereby agree to work in good faith and to use their best efforts to develop a structure or organizational form that will lawfully achieve the terms and conditions of this Agreement. 1.03 CAPITAL CONTRIBUTIONS TO THE LLC; PROJECT FINANCING. (a) The LLC will be initially capitalized with the minimum capital required to capitalize the LLC. Each of the Parties will contribute its fifty percent (50%) share of such minimum required capital. In addition, HWCC- Louisiana will contribute any and all of its rights to, and the LLC will expressly assume, indemnify and release HWCC-Louisiana from any of its obligations under, the Option Agreements. (b) Commencing immediately upon the issuance of all licenses and permits required for the LLC to legally conduct casino gaming on the Property ("LICENSES"), each of the Parties and their affiliates will use their contacts in the capital markets and their respective experience in raising capital to enable the LLC to obtain a long-term credit facility (the "PROJECT FINANCING") on the most favorable terms available to the LLC in an amount adequate to provide the LLC with sufficient funds for the development of a world-class casino entertainment project (the "PROJECT") consisting of (i) a riverboat, (ii) a pavilion situated on the HWCC Property at which the riverboat will be docked, (iii) an 18-hole golf course, a portion of which shall be on the HWCC Property and the remainder of which shall be on property owned by the City of Bossier City (the "BOSSIER CITY PROPERTY") (the HWCC Property and the Bossier City Property are collectively referred to herein as the "PROPERTY"), (iv) a retail mall built, and operated by the Simon/DeBartolo REIT on a portion of the HWCC Property leased to it by the LLC, and (v) related surface and structured parking, hotel, dining, 2 retail and entertainment facilities also located on the Property. The Parties estimate that the total development cost of the Project will be in the range of $200 million. The ultimate nature, scope and size of the Project will be determined in good faith by mutual agreement of the Parties based upon the then-prevailing physical, financial, economic, zoning and competitive constraints and considerations. (c) Notwithstanding anything to the contrary in this Agreement providing for a different capital structure, to the extent that the lenders under the Project Financing require HWCC-Louisiana and DeBartolo to contribute additional equity into the LLC in order to obtain the Project Financing, each of HWCC-Louisiana and DeBartolo agrees to contribute such equity on a 50-50 basis. ARTICLE II MANAGEMENT 2.01 EXECUTIVE COMMITTEE. The LLC will be managed by an Executive Committee (the "EXECUTIVE COMMITTEE") comprised of four (4) managers. The authority of the Executive Committee will be specified in the organizational documentation for the LLC (the "LLC DOCUMENTATION"). No member of the LLC will have the right to bind the LLC or to incur any obligation on behalf of the LLC unless approved by the Executive Committee. HWCC-Louisiana will appoint two (2) members to the Executive Committee who will represent HWCC- Louisiana, and DeBartolo will appoint two (2) members to the Executive Committee who will represent DeBartolo. The LLC Documentation will contain mandatory (but nonbinding) mediation procedures to resolve management stalemates in a manner acceptable to both Parties, with mutually acceptable buy/sell procedures in the event a stalemate cannot be resolved through mediation. 2.02 CASINO AND HOTEL MANAGEMENT. All facilities and amenities owned by the LLC with respect to the Project will be operated and managed by one or more affiliates of HWCC-Louisiana (the "MANAGER"), pursuant to a management contract with a term coterminous with the Licenses (including any renewals thereof); provided, however, the HWCC-Louisiana-affiliate may retain a third-party to conduct such services with respect to the proposed golf course. The management contract will provide for (a) an initial term of 20 years, with 3 successive 10-year renewal periods, (b) the LLC's payment to the managing entity of a management fee (the "MANAGEMENT FEE") equal to 4% of the sum of (i) the net gaming revenues from the casino operations (i.e., gross casino revenues less promotional allowances) and (ii) the gross revenues of the hotel operations and all other facilities and amenities managed by the Manager, each calculated in accordance with custom in their respective industry, and (c) such other terms and conditions substantially similar to those set forth in Exhibit "A" attached to this Agreement. As part of the management service package to be provided by HWCC-Louisiana or its affiliates, the LLC will benefit from the use of certain accounting and proprietary marketing software systems provided by Advanced Casino Systems Corporation ("ACSC") and trademarks and other intellectual property rights necessary to operate under the "Hollywood Casino" name. The applicable royalties for use of the ACSC software or related to the intellectual property rights will be deemed to be included in the Management Fee; provided, however, the direct costs incurred by ACSC in providing such software to the LLC will be an additional responsibility of the LLC. 2.03 INDEMNIFICATION. The LLC will indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the LLC) by reason of the fact that such person is or was an Executive Committee member or officer of the LLC, against expenses (including attorney's fee), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit and/or proceeding. The termination of any action, 3 suit or proceeding by judgment, order, settlement or conviction will not, of itself, create a presumption that the person did not act in good faith and in a manner which such person reasonably believed to be in or not opposed to the best interests of the LLC, and, with respect to any criminal action or proceeding, that such person had reasonable cause to believe that his or her conduct was unlawful. Expenses incurred by a director or officer in defending a civil or criminal action, suit or proceeding may be paid by the LLC in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of such director or officer to repay such amount if it is ultimately determined that such person is not entitled to be indemnified by the LLC. Such expenses incurred by other officers, employees and agents may be so paid upon such terms and conditions, if any, as the Executive Committee deems appropriate. ARTICLE III DISTRIBUTIONS AND FINANCIAL MATTERS 3.01 Distribution Policy. The distribution policy of the LLC will be established by the Executive Committee taking into account (a) the requirements of applicable law, (b) the terms and conditions of the Project Financing, and (c) the capital and operating needs of the LLC. 3.02 Additional Capital. To the extent that capital in addition to the Project Financing is needed to operate the LLC or fund certain maintenance or expansion of the Project, the LLC will raise such funds according to the following priorities; first, the LLC will seek to borrow such funds; second, the Parties may loan such funds to the LLC, with appropriate dilution of the non-lending Parties' membership interest in the LLC should the funds not be repaid within an appropriate period of time; and third, equity contributions will be made by each of the Parties on a pro rata basis in accordance with such Parties' membership interest in the LLC. 3.03 Financial and Accounting Matters. The Parties will cause the LLC to perform the following. (a) Keep true and accurate books of account and records in accordance with usual accounting practices and procedures and cause the books and records of the LLC to be audited as soon as possible after the end of each fiscal year by a recognized accounting firm acceptable to the Parties. (b) Allow the members of the LLC and their authorized representatives to inspect, during normal business hours, the books and accounting records of the LLC to make extracts and copies therefrom at their own expense, and to have full access to all the property and assets of the LLC. (c) Supply to the members of the LLC any financial information they may from time to time reasonably require. ARTICLE IV CLOSING AND CONDITIONS TO CLOSING 4.01 THE CLOSING. The transactions prescribed in Section 1.02 shall be consummated at the earliest practicable date after the satisfaction of all conditions to the Parties' respective obligations, or at such other time as the Parties mutually agree (the "CLOSING"). The Closing will occur at the executive offices of HWCC-Louisiana, or at such other location as the Parties mutually agree. 4 4.02 CONDITIONS OF DEBARTOLO'S OBLIGATIONS TO CLOSE. The obligation of DeBartolo to consummate the transactions prescribed in Section 1.02 shall be subject to the satisfaction of the following conditions: (a) The representations and warranties of HWCC-Louisiana set forth in Article VII shall be true and correct in all material respects at and as of the Closing, as though made as of such date. (b) HWCC-Louisiana shall have performed and complied with all of its covenants hereunder in all material respects through the Closing. (c) There shall not be any injunction, judgment, order, decree, ruling or charge issued by any court or governmental entity with jurisdiction over any of the Parties in effect preventing consummation of any of the transactions contemplated by this Agreement. 4.03 CONDITIONS TO HWCC-LOUISIANA'S OBLIGATIONS TO CLOSE. The obligation of HWCC-Louisiana to consummate the transactions prescribed in Section 1.02 shall be subject to the satisfaction of the following conditions: (a) The representations and warranties of DeBartolo set forth in Article VII shall be true and correct in all material respects at and as of the Closing, as though made as of such date. (b) DeBartolo shall have performed and complied with all of its covenants hereunder in all material respects through the Closing. (c) There shall not be any injunction, judgment, order, decree, ruling or charge issued by any court or governmental entity with jurisdiction over any of the Parties in effect preventing consummation of any of the transactions contemplated by this Agreement. ARTICLE V SALE OF MEMBERSHIP INTERESTS 5.01 PRIOR WRITTEN CONSENT REQUIRED FOR THE SALE OF MEMBERSHIP INTERESTS (a) Commencing immediately upon consummation of the Closing, no LLC member may sell, transfer or otherwise dispose of all or any its membership interest in the LLC without either (i) obtaining the prior written consent of the other LLC members, which consent will not be unreasonably withheld, or (ii) in the case of a proposed sale, transfer or disposition by DeBartolo, complying with the provisions of Section 5.01(b), and in the case of a proposed sale, transfer or disposition by HWCC-Louisiana, complying with the provisions of Section 5.01(c). Notwithstanding the foregoing, no written consent of the other LLC members or compliance with Section 5.01(b) or Section 5.01(c) will be required in the event of (x) an assignment or transfer of any membership interest in the LLC from an LLC member to its parent corporation or to another directly or indirectly wholly-owned subsidiary or holding company of the LLC member or its parent company or to an affiliate or subsidiary of such holding company or (y) a collateral pledge of or grant of a security interest in a membership interest in the LLC in order to secure indebtedness. Any sale, transfer or other disposal of any membership interest in the LLC (whether or not requiring the prior written consent of the other LLC members) will not be or become effective until the assignee or transferee has executed appropriate documentation in favor of the other LLC members and to the LLC whereby such assignee or transferee agrees to be bound by the terms and conditions of this Agreement and any other third party contracts entered into by the Parties. 5 (b) As a condition to DeBartolo's right to sell, transfer or otherwise dispose of all or a portion of its membership interest in the LLC (other than as permitted in Section 5.01(a)), DeBartolo will first comply with the following conditions: (i) DeBartolo will first inform HWCC-Louisiana in writing (the "DEBARTOLO NOTICE OF SALE") of the prices, terms and conditions upon which it proposes to sell, transfer or otherwise dispose of all or any of its membership interest in the LLC, will identify the prospective purchaser or transferee of such membership interest, and will offer HWCC-Louisiana the opportunity to irrevocably elect to either (x) in the event that HWCC- Louisiana's membership interest in the LLC constitutes less than 50%, participate in such sale, transfer, or other disposition to the extent of HWCC-Louisiana's membership interest in the LLC (the "HWCC TAG-A-LONG RIGHTS") or (y) acquire DeBartolo's membership interest in the LLC (the "HWCC ROFR RIGHTS"). HWCC-Louisiana will have the preferential right to exercise either its HWCC Tag-a-Long Rights or its HWCC ROFR Rights as of the date of the DeBartolo Notice of Sale. (ii) In the event that HWCC-Louisiana exercises its HWCC Tag-a-Long Rights, DeBartolo will use its best efforts to cause the prospective purchaser or transferee to purchase both its and HWCC-Louisiana's membership interest in the LLC according to the terms set forth in the DeBartolo Notice of Sale so that HWCC-Louisiana would be entitled to receive the same value and nature of consideration for its proportionate membership interest in the LLC as is received by DeBartolo with respect to its membership interest in the LLC . If after giving effect to the proposed sale, the proposed purchaser intends to terminate, or replace the manager under, the management agreement referred to in Section 2.02 with someone other than an affiliate of HCC, then (I) HWCC- Louisiana will first be entitled to that portion of the proceeds of such sale that equals the fair market value of the management fee paid or to be paid under the management agreement and (II) DeBartolo and HWCC-Louisiana each would then be entitled to for their respective membership interests in the LLC an amount equal to the product of (A) the remainder of (1) the price in such DeBartolo Notice of Sale divided by DeBartolo's membership interest in the LLC minus (2) the fair market value of the management fee paid or to be paid under such management agreement, multiplied by (B) the respective Party's membership interest in the LLC. If an affiliate of HCC would continue as manager according to terms substantially similar to those set forth in Exhibit "A", then DeBartolo and HWCC-Louisiana would be entitled to for their respective membership interests in the LLC an amount equal to the product of (aa) the price in such DeBartolo Notice of Sale divided by DeBartolo's membership interest in the LLC, multiplied by (bb) the respective Party's membership interest in the LLC. In the event that such prospective purchaser or transferee will not agree to purchase all such membership interests in the LLC in accordance with the foregoing, DeBartolo may not proceed with such sale without the prior written consent of HWCC-Louisiana, which consent may be withheld by HWCC-Louisiana in its sole discretion. (iii) It will be deemed that the HWCC Tag-a-Long Rights and the HWCC ROFR Rights have been waived if such rights have not been exercised in writing within thirty (30) calendar days after receipt of the DeBartolo Notice of Sale. (iv) DeBartolo may, within a period of sixty (60) calendar days after the HWCC Tag-a-Long Rights and the HWCC ROFR Rights have been refused or waived by HWCC-Louisiana, sell, transfer or otherwise dispose of such membership interest to the prospective purchaser or transferee previously identified in the DeBartolo Notice of Sale, but not at a price less than nor upon terms and conditions more favorable to the purchaser or transferee than the price, terms and conditions first offered to HWCC-Louisiana. (v) If no such transaction of DeBartolo's membership interest in the LLC is consummated by DeBartolo within the same period of sixty (60) calendar days, DeBartolo will 6 not thereafter make any sale, transfer or other disposal without again offering the same to HWCC-Louisiana in accordance with the provisions of this Section 5.01(b). (c) As a condition to HWCC-Louisiana's right to sell, transfer or otherwise dispose of all or a portion of its membership interest in the LLC (other than as permitted in Section 5.01(a)), HWCC-Louisiana will first comply with the following conditions: (i) HWCC-Louisiana will first inform DeBartolo in writing (the "HWCC NOTICE OF SALE") of the prices, terms and conditions upon which it proposes to sell, transfer or otherwise dispose of all or any of its membership interest in the LLC, will identify the prospective purchaser or transferee of such membership interest, and will offer DeBartolo the opportunity to irrevocably elect to either (x) participate in such sale, transfer, or other disposition to the extent of DeBartolo's membership interest in the LLC (the "DEBARTOLO TAG-A-LONG RIGHTS") or (y) acquire HWCC-Louisiana's membership interest in the LLC (the "DEBARTOLO ROFR RIGHTS"). DeBartolo will have the preferential right to exercise either its DeBartolo Tag-a-Long Rights or its DeBartolo ROFR Rights as of the date of the HWCC Notice of Sale. (ii) In the event that DeBartolo exercises its DeBartolo Tag-a-Long Rights, HWCC-Louisiana will use its best efforts to cause the prospective purchaser or transferee to purchase both its and DeBartolo's membership interest in the LLC according to the terms set forth in the HWCC Notice of Sale so that DeBartolo would be entitled to receive the same value and nature of consideration for its proportionate membership interest in the LLC as is received by HWCC-Louisiana with respect to its membership interest in the LLC. If after giving effect to the proposed sale the proposed purchaser intends to terminate, or replace the manager under, the management agreement referred to in Section 2.02 with someone other than an affiliate of HCC, then such amount that DeBartolo would be entitled to would be equal to the product of (x) the remainder of (I) the price in such HWCC Notice of Sale divided by HWCC- Louisiana's membership interest in the LLC minus (II) the fair market value of the management fee paid or to be paid under such management agreement, multiplied by (y) DeBartolo's membership interest in the LLC. If an affiliate of HCC would continue as manager according to terms substantially similar to those set forth in Exhibit "A", then such amount that DeBartolo would be entitled to would be equal to the product of (aa) the price in such HWCC Notice of Sale divided by HWCC-Louisiana's membership interest in the LLC, multiplied by (bb) DeBartolo's membership interest in the LLC. In the event that such prospective purchaser or transferee will not agree to purchase all such membership interests in the LLC in accordance with the foregoing, HWCC- Louisiana may not proceed with such sale without the prior written consent of DeBartolo, which consent may be withheld by DeBartolo in its sole discretion. (iii) It will be deemed that the DeBartolo Tag-a-Long Rights and the DeBartolo ROFR Rights have been waived if such rights have not been exercised in writing within thirty (30) calendar days after receipt of the HWCC Notice of Sale. (iv) HWCC-Louisiana may, within a period of sixty (60) calendar days after the DeBartolo Tag-a-Long Rights and the DeBartolo ROFR Rights have been refused or waived by DeBartolo, sell, transfer or otherwise dispose of such membership interest to the prospective purchaser or transferee previously identified in the HWCC Notice of Sale, but not at a price less than nor upon terms and conditions more favorable to the purchaser or transferee than the price, terms and conditions first offered to DeBartolo. (v) If no such transaction of HWCC-Louisiana's membership interest in the LLC is consummated by HWCC-Louisiana within the same period of sixty (60) calendar days, HWCC-Louisiana will not thereafter make any sale, transfer or other disposal without again offering the same to DeBartolo in accordance with the provisions of this Section 5.01(c). 7 (d) Notwithstanding any of the provisions of this Article V, no LLC member may sell, transfer or otherwise dispose of all or any of its membership interest in the LLC, and no non-offering LLC member will be required to purchase such membership interest pursuant to Section 5.01(b) and Section 5.01(c), until the person, entity, group or other recipient which will purchase, receive or otherwise obtain such membership interest (i) satisfies the applicable provisions of Section 5.01 and (ii) complies with and satisfies any and all regulatory requirements provided under Section 9.02 of this Agreement. 5.02 CHANGE OF CONTROL. In the event of a change in control (as defined below) of HWCC-Louisiana or Hollywood Casino Corporation ("HCC"), then DeBartolo shall have the right to require that HWCC-Louisiana purchase from DeBartolo all of the right, title and interest held by DeBartolo in the LLC in accordance with the terms set forth herein. A change in control with respect to HWCC-Louisiana shall be deemed to occur upon any loss of voting control of HWCC-Louisiana by HCC (or a wholly-owned subsidiary of HCC), including without limitation, the failure of HCC (or a wholly-owned subsidiary of HCC) to hold a majority of the outstanding stock of HWCC-Louisiana. A change in control with respect to HCC shall be deemed to occur in the event that HCC becomes aware of (by way of a report or any other filing pursuant to Section 13(d) of the Securities Exchange Act of 1934 (as amended, the "EXCHANGE ACT"), proxy vote, written notice or otherwise) the acquisition by any person or related group (within the meaning of Section 13(d)(3) or Section 14(d)(2) of the Exchange Act, or any successor provision to either of the foregoing, including any "group" acting for the purpose of acquiring, holding or disposing of securities within the meaning of Rule 13d-5(b)(1) under the Exchange Act), other than the Pratt Holders (as defined below), in a single transaction or in a related series of transactions, by way of merger, consolidation or other business combination or purchase of beneficial ownership (within the meaning of Rule 13d-3 under the Exchange Act, or any successor provision) of 30% or more of the total voting power entitled to vote in the election of the Board of Directors of HCC or such other person surviving the transaction and, at such time, the Pratt Holders collectively shall fail to beneficially own, directly or indirectly, securities representing greater than the combined voting power of HCC's or such other person's voting stock as is beneficially owned by such person or group. "PRATT HOLDERS" means (a) Jack E. Pratt, Edward T. Pratt, Jr., William D. Pratt, Crystal A. Pratt, Maria A. Pratt and Edward T. Pratt III, their respective estates and members of the immediate family (including adopted children) of any such individuals who acquire voting stock of HCC from any such estates, (b) J.E. Pratt Co. No. 1, E.T. Pratt Co. No. 1, W.D. Pratt Co. No. 1, each a Texas general partnership, (c) C.A. Pratt Partners, Ltd., a Texas limited partnership, and (d) J.E. Pratt Family Trust, E. Pratt Family Trust and W.D. Pratt Family Trust. HWCC-Louisiana shall promptly give written notice to DeBartolo of the occurrence of any change in control described in this Section 5.02. DeBartolo will have a period of sixty (60) days following the date on which such notice is deemed given, within which to exercise the rights given to it hereunder by written notice ("PUT NOTICE") given to HWCC-Louisiana. Payment of the entire purchase price for DeBartolo's interest in the LLC shall be made within one hundred fifty (150) days after the date on which the Put Notice is deemed given by wire transfer to an account designated by DeBartolo. The purchase price for the interest in the LLC purchased hereunder shall be equal to the fair market value of the LLC (including the management agreement referred to in Section 2.02 but deducting therefrom the fair market value of the management fees paid or to be paid thereunder) multiplied by DeBartolo's membership interest in the LLC. The fair market value of the LLC shall be determined by an independent United States investment banking firm of national standing as selected by the mutual agreement of HWCC-Louisiana and DeBartolo or, if they cannot agree, then each of DeBartolo and HWCC-Louisiana shall select an independent United States investment banking firm to establish a good faith valuation of the LLC hereunder and the value of the LLC for purposes of this Section 5.02 shall equal the average of the two values. All costs attributable to obtaining any valuation under this Section 5.02 shall be borne equally by HWCC-Louisiana and DeBartolo. 8 ARTICLE VI TERMINATION 6.01 GENERAL. This Agreement will continue in effect until terminated pursuant to this Article VI. The Parties agree that the LLC Documentation will contain provisions similar to the provisions in this Article VI. 6.02 TERMINATION BY NOTICE. Either Party may give written notice of termination of this Agreement to the other Party upon the happening of any of the following: (a) If the Parties, for whatever reason, lose the Licenses and the LLC is no longer able to commercially operate the Project as a gaming and casino establishment; or (b) If either Party in good faith determines that by entering into this Agreement and consummating the transactions described herein the review and analysis of the Applications has been or will be delayed or the chances of HWCC-Louisiana or the LLC being granted the Licenses has been or will be impaired; or (c) If the Licenses have not been granted to the LLC by December 31, 1997. 6.03 Responsibility for Expenses. In the event either Party terminates this Agreement pursuant to Section 6.02 prior to the Closing, each of the Parties shall remain responsible for one-half of the Shared Expenses. ARTICLE VII REPRESENTATIONS AND WARRANTIES Each Party (and its respective permitted successors and assignees) hereunder represents and warrants the matters set forth below to the other Party as of the date hereof. 7.01 AUTHORITY. It is validly existing and duly organized under the laws of the jurisdiction of its formation, and it (and the persons acting in its behalf) have all the requisite power and authority to execute, deliver and comply with the terms and provisions hereof and consummate the transactions contemplated herein. 7.02 APPROVALS AND ENFORCEABILITY. Its execution, delivery and performance of this Agreement do not require the consent or approval of any governmental body or regulatory authority or other entity; is not in material contravention of or in material conflict with any applicable law or regulation; and, this Agreement is the valid, binding and legally enforceable obligation of such Party in accordance with its terms, except as the enforceability thereof may be limited by the effect of any bankruptcy or similar laws affecting creditors' rights generally. 7.03 COMPLIANCE WITH LAWS. It is not in violation or default under any agreement with any person, or under any law, judgement, order, decree, license, permit, approval, rule or regulation of any court, arbitrator, administrator, administrative agency or other governmental authority to which it may be subject which might have a material adverse impact on its ability to perform its obligations hereunder, or on the other Party. 7.04 EXCLUSIVITY. It is not now pursuing any activity that would violate the provisions of Section 8.01, except as otherwise described in Section 8.01. Neither Party has any existing or prospective business relationship in the State of Louisiana in connection with the subject matter of this Agreement. 9 7.05 SUITABILITY. Neither it nor any of its affiliates is likely to be determined by any applicable regulatory authority to be unsuitable to conduct the operation of a casino gaming enterprise, has had any application for any gaming license or permit rejected, or has had any gaming license or permit, once having been issued, rescinded, suspended, revoked or not renewed or reinstated, and such Party has no knowledge that its affiliation with any person or entity will threaten or adversely affect the plans of the Parties' to obtain any requisite license or that could otherwise threaten or cause a possible revocation of such license. 7.06 ACCURACY OF INFORMATION. All of the factual information regarding such Party contained herein (including all information set forth in the Recitals to this Agreement) or provided during the course of the Parties' negotiation is true, complete and accurate in all materials respects, and such Party has not omitted to disclose any material fact or detail pertinent to itself or the transactions contemplated hereunder which, in light of all of the facts and circumstances involved in the negotiation hereof, should have been disclosed to prevent any other information from being untrue, incomplete or inaccurate. ARTICLE VIII SPECIAL COVENANTS 8.01 EXCLUSIVE AGREEMENT. The Parties hereby agree that this Agreement will encompass their exclusive arrangements for pursuing and conducting riverboat casino gaming activities (exclusive of any existing arrangements between affiliates of DeBartolo and Casino America which are exempted from this Section 8.01) in either Bossier Parish or Caddo Parish, Louisiana (the "VENTURE AREA"). In this regard, each of the Parties covenants on behalf of itself and its owners, officers, members, partners, agents, family members (excluding, with respect to DeBartolo, Denise York) and affiliates that, regardless of whether or not the Parties form or own the LLC, and notwithstanding any termination of this Agreement, for a period of twelve (12) months from the date of termination of this Agreement no Party or any owner, officer, member, partner, agent, family member or affiliate thereof will pursue or possess (either directly or indirectly through affiliates, associates or family members) any pecuniary, proprietary, operational or financial interest in any business or entity engaged in riverboat casino gaming in the Venture Area other than with the other Party hereto on terms substantially similar to those set forth in this Agreement. 8.02 CONFIDENTIALITY. All information designated in writing by any Party as confidential and proprietary at the time it is disclosed to the other Party (or such other Party's representatives and agents) during the term of this Agreement will be deemed to be confidential and proprietary (provided that for purposes hereof, any information provided by any Party pursuant to this Agreement which is generally available or was available to such other Party on a non-confidential basis prior to its disclosure in connection with this Agreement will not be deemed to be "confidential and proprietary") and will be treated as such. The Parties agree not to disclose any of the confidential and proprietary information (except as required by law) to any third party or use or permit the use of any such information in a manner detrimental to the other. Upon termination of this Agreement, each Party will promptly return to the other such materials (including all documents, memoranda, notes, any other writings whatsoever and electronic data prepared by the Parties or their advisors based on such materials) furnished to the other without retaining any copies thereof (except as otherwise required by law). This obligation will survive the termination of this Agreement for two (2) years from the date of termination. Notwithstanding the foregoing, such Party will be permitted to make use of or disclose confidential and proprietary information (a) which is in or comes into the public domain otherwise than through the default of either of the Parties, (b) which was already in the possession of such Party prior to the negotiations between the Parties leading to the execution of this Agreement as evidence by documentation in such Parties' possession at the date hereof, (c) as is required by law, (d) that is required to be disclosed by a court or governmental agency, (e) as may be authorized by both Parties in 10 writing, and (f) to its financial advisors, attorneys and accountants to the extent necessary to effect the purpose and intent of this Agreement. Each Party will cause its subsidiaries and affiliates to observe the restrictions contained in the foregoing provisions. ARTICLE IX REGULATORY MATTERS 9.01 REGULATORY INFORMATION. Each Party shall provide all information pertaining to its organization, business, ownership, assets, management, financial sources and associations as shall be required by any federal or state regulatory authority with jurisdiction over the LLC or one or more of the Parties, including without limitation regulatory authorities in the States of Louisiana, Illinois, New Jersey and Mississippi. 9.02 REGULATORY COMPLIANCE. The Parties must each independently comply with all regulations promulgated by any regulatory authority with jurisdiction over the LLC or one or more of the Parties. Without limiting the generality of the foregoing, the Parties shall submit to and cooperate in any attendant background investigations required by any of the foregoing jurisdictions by virtue of the Party's participation in the LLC. The Parties will each bear all of their own costs which they incur in connection with such compliance. 9.03 EFFECT OF UNSUITABILITY DETERMINATION. If the applicable casino regulatory organization in any jurisdiction in which either Party to this Agreement (or any of its affiliates) holds a license to own or operate a casino compels such Party (the "AFFECTED PARTY") to discontinue its relationship with such other Party (the "UNSUITABLE PARTY") hereto for any reason whatsoever relating to the unsuitability of the Unsuitable Party or its affiliates, then the Parties agree to negotiate with such casino regulatory organization in an attempt to rescind or stay such order or otherwise afford the Unsuitable Party relief from such order. If the Parties are unsuccessful in obtaining the rescission, stay or other relief within ninety (90) days of such occurrence (or other shorter period mandated by the casino regulatory organization), then the Unsuitable Party's rights in the LLC shall immediately cease, and the Affected Party shall have the right to acquire all of the Unsuitable Party's right, title and interest in and to the Unsuitable Party's interest in the LLC and any projects developed by the LLC for the one-time termination payment set forth below: (a) The amount of the termination payment shall be the lesser of (i) 75 percent of the Appraised Value (as defined below), and (ii) that amount approved by the applicable casino regulatory organization. (b) Payment of the termination payment shall be made by wire transfer to an account designated by the Unsuitable Party within 120 days after the cessation of the Unsuitable Party's rights in the LLC. 11 (c) The "APPRAISED VALUE" shall be the net present value of all future distributions attributable to the Unsuitable Party's interest in the LLC, as determined by an independent United States investment banking firm of national standing chosen by the Affected Party. All costs (including investment banking fees) attributable to obtaining the foregoing investment banking valuation shall reduce the termination payment. If either Party disputes the Appraised Value as determined above, such Party may retain a second independent investment banking firm of national standing to perform a second valuation of the Unsuitable Party's interest. The average of the initial valuation and any such subsequent valuation shall be the Appraised Value and shall be binding on all Parties. All costs (including investment banking fees) attributable to obtaining any subsequent investment banking valuation shall be paid solely by the Party disputing the initial valuation. 9.04 INCLUSION IN ARTICLES AND BYLAWS. The Parties hereby agree to cause the LLC Documentation to include provisions that are equivalent to the provisions set forth in Sections 9.01, 9.02 and 9.03 of this Agreement. ARTICLE X MISCELLANEOUS PROVISIONS 10.01 BOARD APPROVAL. Each of the Parties represents and warrants that it is duly authorized and empowered to enter into and perform its obligations under this Agreement. 10.02 FURTHER ACTIONS. The Parties to this Agreement will take any and all further actions and execute and deliver any and all documents that may be necessary to give full effect to the terms and intent of this Agreement. 10.03 COOPERATION. Each of the Parties acknowledges that this Agreement is entered into between them and will be performed in a spirit of mutual cooperation, trust and confidence and that its intention is that the business, profitability and reputation of the LLC will be maximized by all reasonable and proper means. Each of the Parties undertakes to use all reasonable commercial efforts to promote the business undertaken in this joint venture. 10.04 FEES AND EXPENSES. Each Party to this Agreement will pay its own fees and expenses incurred in connection with the negotiation and execution of this Agreement and the LLC Documentation, including, without limitation, attorneys' fees. 10.05 NOTICES. Unless otherwise provided in this Agreement, all notices, approvals, consents, or other communications purporting to affect the rights of the Parties hereunder will be in writing and will be given personally or by facsimile or express overnight courier to the other Party entitled thereto at the proper address as set forth below or at such other address as such Party will notify to the other Party to this Agreement. If to HWCC-Louisiana: HWCC-Louisiana, Inc. Two Galleria Tower, Suite 2200 13455 Noel Road Dallas, Texas 75240 Attention: Jack E. Pratt Copy to: General Counsel Telecopy Number: 214-386-7411 12 If to DeBartolo: DeBartolo Entertainment Louisiana Gaming, Inc. 999 Baker Way, Suite 420 San Mateo, California 94404 Attention: Edward J. DeBartolo, Jr. Telecopy Number: 415-286-9636 Any such notice or communication (a) sent by express overnight courier or facsimile will be considered given on the first business day following the date of dispatch and (b) delivered personally will be considered given on the date of such delivery. Nothing contained in this Section 10.05 will excuse failure to give prompt or immediate oral notice for purposes of informing the other Party of an event that requires such notice, but such oral notice will not satisfy the requirements of written notice set forth in this Section 10.05. 10.06 WAIVER. No failure or delay by any Party in exercising any right, power or remedy under this Agreement will operate as a waiver thereof, nor will any single or partial exercise of the same preclude any further exercise thereof or the exercise of any other right, power or remedy. No waiver by any Party of any breach of any provision hereof will be deemed to be a waiver of any subsequent breach of that or any other provision thereof. If at any time any provision of this Agreement is or becomes illegal, invalid or unenforceable in any respect, the legality, validity and enforceability of the remaining provisions of this Agreement will not be affected or impaired thereby. 10.07 AMENDMENTS. No amendment, addition to, or deletion of any of the provisions of this Agreement will be effective unless made in writing and signed by an authorized representative of each of the Parties. 10.08 ASSIGNMENT. No Party will assign this Agreement or its rights or obligations hereunder except as expressly provided herein. 10.09 GOVERNING LAW. This Agreement will be governed by and construed in accordance with the laws of the State of Louisiana (except for its conflict of law provisions). 10.10 JURISDICTION. Any legal action or proceeding with respect to this Agreement must be brought in the state courts of Bossier Parish, State of Louisiana, or in the federal courts of the United States of America for the Western District of Louisiana. Each of the Parties accepts and submits to, for themselves and in respect of their property, generally and unconditionally, the jurisdiction of the aforesaid courts, and irrevocable waives, in connection with any such action or proceeding any objection based upon the laying of venue or forum non conveniens, which they may now or hereafter have to the bringing of any such action or proceeding in such respective jurisdictions. 10.11 HEADINGS; SECTION REFERENCES. The headings in this Agreement are for convenience and reference only and are not part of the substance of this Agreement. References in this Agreement to Sections and Articles are references to the Sections and Articles of this Agreement unless otherwise specified. 13 10.12 ATTORNEYS' FEES, ETC. If any action at law or equity is brought to interpret or enforce this Agreement, the prevailing party or parties will be entitled to recover reasonable attorneys' fees, costs and necessary disbursements from the other party or parties in addition to any other relief to which he or they may be entitled. 10.13 COUNTERPARTS. This Agreement may be executed in any number of counterparts. Each counterpart shall be deemed to be an original, and all counterparts together shall constitute one document. * * * * 14 IN WITNESS whereof this Agreement has been executed on the day and year first above written. HWCC-LOUISIANA, INC. By: /s/ Jack E. Pratt ---------------------------- Jack E. Pratt President DEBARTOLO ENTERTAINMENT LOUISIANA GAMING, INC. By: /s/ Edward J. DeBartolo, Jr. ----------------------------- Name: Edward J. DeBartolo, Jr. Title: President 15 EXHIBIT "A" FORM OF MANAGEMENT AGREEMENT [See attached] Exhibit "A" - Page 1 _______________________________________ MANAGEMENT SERVICES AGREEMENT _______________________________________ THIS MANAGEMENT SERVICES AGREEMENT ("AGREEMENT") is made and entered into as of the _____ day of __________, 199__, by and between [INSERT NAME OF HWCC-LOUISIANA/DEBARTOLO JOINT VENTURE], a Louisiana limited liability company ("OWNER") and [INSERT HWCC-LOUISIANA AFFILIATE WHO IS OPERATOR], a _____________ Corporation ("OPERATOR"). W I T N E S S E T H: ------------------- WHEREAS, Owner is or will become the owner in fee of those certain premises located on or adjacent to the Red River commonly known as Cane's Landing in the City of Bossier City, Parish of Bossier and State of Louisiana more particularly described on Exhibit "A" which is attached hereto and made a part hereby by reference (the "PROPERTY"), and that certain riverboat to be located in a basin on the Property which shall be licensed to conduct gaming activity thereon (collectively referred to as the "COMPLEX"); and WHEREAS, Operator has extensive experience in casino operations and management and has the knowledge and expertise to manage and operate the Complex on behalf of Owner; and, WHEREAS, Owner desires to benefit from the Operator's expertise in the management and operation of the Complex and Operator is willing to manage and operate the Complex on behalf of Owner, all in accordance with the terms and pursuant to the conditions set forth in this Agreement; NOW, THEREFORE, in consideration of the foregoing recitals and of the mutual promises, representations, warranties, understandings, undertakings and covenants herein contained, and intending to be legally bound thereby, Owner and Operator hereby covenant and agree as follows: ARTICLE ONE ----------- APPOINTMENT OF OPERATOR ----------------------- 1.01 APPOINTMENT AND TERM. Owner hereby appoints and employs Operator to act as its sole and exclusive agent for the supervision, direction and control of the management of the Complex (or any additions or expansions thereto) on the Owner's behalf, upon the terms and conditions hereinafter set forth for a term of twenty (20) years, commencing as of ___________, 199__ (the "COMMENCEMENT DATE") which date shall be the Commencement Date of the initial term (the "INITIAL TERM") and unless this Agreement is terminated by either party on not less than [SIX (6) MONTHS] prior written notice to the other prior to the expiration of the Initial Term of this Agreement, this Agreement shall be automatically renewed for three (3) consecutive additional terms of ten (10) years each (the "RENEWAL TERMS"). The Initial Term and the Renewal Terms are hereinafter referred to as the "TERM". Upon termination of the Term or any early termination as provided herein, Owner shall forthwith pay to Operator any and all amounts due to Operator as of such termination date. 1.02 RELATION OF THE PARTIES. In taking any action pursuant to this Agreement, Operator will be acting only as the appointed agent or representative of Owner, and nothing in this Agreement shall be construed as creating a tenancy, partnership, joint venture or any other relationship between the parties hereto, except that of principal and agent. All debts and liabilities properly incurred by Operator in the course of its management and operation of the Complex hereunder shall be the debts and obligations of the Owner only, and Operator shall not be liable therefor, except as specifically stated to the contrary herein. 2 ARTICLE TWO ----------- PRE-OPENING PROGRAM ------------------- 2.01 REFURBISHING OF THE COMPLEX. Owner hereby warrants and represents that it is presently preparing for the construction of the Complex, in accordance with those certain plans and specifications tendered by Owner to Operator. During such construction, and prior to the Commencement Date of this Agreement, Operator shall perform the following project development services for Owner, provided Owner separately provides Operator reimbursement of (i) all expenses incurred by Operator under the provisions of this Section 2.01, and (ii) the compensation (including any and all salaries, expenses, benefits, and the like) paid to Operator's employees or those employees of Operator's affiliates assigned to the Complex on a full-time basis for the purpose of providing the following project development services until the Commencement Date of this Agreement: (a) Pre-opening sales office set-up, together with a pre-opening marketing plan to be approved in advance by Owner, which approval shall not be unreasonably withheld or unduly delayed; and, (b) Hiring of personnel in accordance with the provisions of this Agreement; and, (c) Coordination of initial inventories purchases; and, (d) Establishment of operating policies and procedures for the entire Complex; and, (e) Establishment of Complex security systems for assets, personnel and patrons; and, (f) Establishment of accounting and internal control systems and procedures; and, (g) Establishment of a preventative maintenance program; and, (h) Establishment of risk management policies and procedures; and, (i) Training of all staff. Notwithstanding the foregoing, Operator shall not provide project development services for Owner at a cost in the aggregate to Owner in excess of the Pre- Opening Budget described in Section 4.10(a)(i). 3 2.02 CONSTRUCTION, FURNISHINGS AND EQUIPMENT OF THE COMPLEX. Owner warrants and represents: (a) That the Complex will be constructed of and will consist of those items specifically set forth in Exhibit "B", which is attached hereto and made a part hereof by reference; (b) That the Complex will be professionally designed, fully-furnished and provided with all necessary accessories, including but not limited to casino equipment and supplies, and will meet all fire, security and alarm requirements of all applicable building codes; and, (c) That Owner will provide, initially and throughout the Term, and at Owner's sole cost and expense, full and adequate initial inventories of food and beverage and of consumable items utilized in operating the Complex, such as soap, cleaning materials, matches, stationery and all other similar items; and, (d) That Owner will provide, initially and throughout the Term, and at Owner's sole cost and expense, sufficient working capital, as contemplated in Section 4.09 for the operation of the Complex. 2.03 TITLE TO COMPLEX. Owner covenants and agrees that it has and throughout the Term of this Agreement it will maintain: (a) Full fee simple absolute possessory interest in the Property and full ownership of and title to the improvements of the Complex, except for such mortgages or other encumbrances related to Owner's financing of the purchase and refurbishment of the Complex and the retail mall to be constructed on the Property; and, (b) Full ownership of the furnishings, fixtures and equipment located on the Property ("FF&E"), free and clear of any liens, encumbrances, covenants, charges, burdens or claims, except: (i) such as do not materially and adversely affect the use thereof by Operator; (ii) mortgages or other encumbrances related to the financing of the Complex; (iii) leases of personal property and equipment; and (iv) purchase money mortgages. This Agreement shall not be subject to forfeiture or termination under any financing documents relating to the Complex, except in accordance with the provisions of this Agreement, notwithstanding that there shall be a default under such financing documents. Owner further covenants and agrees to pay and 4 discharge any ground rents, any other rental payments, concession charges or any other charges payable by Owner in respect of the Complex, and, at its own expense, to undertake and prosecute all appropriate actions, judicial or otherwise, required to assure the quiet and peaceable operation of the Complex by Operator. Owner also agrees to pay, prior to delinquency, all taxes and assessments of whatever type which may become a lien on the Complex and which may be due and payable during the Term, unless (i) payment thereof is in good faith being contested by Owner, (ii) enforcement of any purported lien is stayed, and (iii) Owner maintains adequate reserves in a separate account with a reputable financial institution in order to discharge any such lien upon five (5) days notice of the existence of such lien. 5 ARTICLE THREE ------------- NOTICES ------- Any and all written notices required by this Agreement shall be either hand-delivered or mailed, certified mail, return receipt requested, telexed, telecopied, or sent via commercial courier, addressed to: TO OPERATOR: --------------------------- --------------------------- --------------------------- --------------------------- --------------------------- Telecopier No. ------------ WITH COPY TO: --------------------------- --------------------------- --------------------------- --------------------------- --------------------------- Telecopier No. ------------ TO OWNER: --------------------------- --------------------------- --------------------------- --------------------------- --------------------------- Telecopier No. ------------ WITH COPY TO: --------------------------- --------------------------- --------------------------- --------------------------- --------------------------- Telecopier No. ------------ All notices hand-delivered shall be deemed delivered as of the date actually delivered. All notices mailed shall be deemed delivered as of five (5) business days after the date postmarked. All notices telecopied shall be deemed delivered as of the business day immediately following the date receipt of the telecopy is confirmed. All notices sent via commercial courier shall be deemed delivered as of the business day immediately following the date the notice is entrusted to the commercial courier service with directions for service within one (1) day. Any changes in any of the addresses listed herein shall be made by notice as provided in this Article Three. 6 ARTICLE FOUR ------------ OPERATION --------- 4.01 STANDARDS. (a) With respect to the operation of the Complex pursuant to this and every other applicable Section of this Agreement, Operator shall manage the Complex in a manner consistent with both a first class entertainment complex and the standards and procedures exercised by Operator, its subsidiaries and affiliates, in the management of other casinos owned and operated by affiliates of Operator in the United States of America of the same or similar type, class and quality as the Complex, as such standards and procedures may be reasonably modified or revised by Operator from time to time, all in a professional manner and in the exercise of good faith. (b) In order for Operator to meet or exceed the aforementioned standards and procedures in a professional manner, and to comply with any legal requirements, Owner hereby agrees that (i) Operator shall have uninterrupted control and operation of the Complex during the Term of this Agreement, (ii) Owner will not interfere or involve itself with the day-to-day operation of the Complex, and (iii) Operator may operate the Complex free of molestation, eviction or disturbance by Owner or any third party claiming by, through or under Owner. Examples of the matters which Operator in its sole and exclusive discretion shall determine from time to time hereunder include, but shall not be limited to: rates; prices; charges to guests for other services performed by Operator at the Complex; the issuance of credit or other like decisions; the granting of complementaries or other like decisions; the terms of admittance to the Complex for purposes of entertainment; the labor policies of the Complex; and the type and character of publicity and promotion. 4.02 PERMITS. Owner, with the assistance of Operator, shall obtain and maintain in full force and effect all necessary licenses and permits as may be required for the operation of the Complex by Operator including, without limitation, casino, liquor, bar, restaurant, sign and hotel licenses. All licenses and permits are to be in effect as of the Commencement Date of this Agreement. Operator undertakes to comply fully with any and all reasonably imposed conditions set out in any such licenses and permits. 7 4.03 PERSONNEL. (a) All personnel of the Complex, except those mentioned in Section 4.03(b), shall be personnel of Owner. As agent for Owner, Operator shall have the sole and absolute discretion to hire, supervise, direct the work of, discharge and determine the compensation and other benefits of all personnel working in the Complex. Owner shall not interfere with or give orders or instructions to personnel employed at the Complex. Operator, in its sole and absolution discretion, shall determine the fitness and qualification of such personnel. Operator shall in no way be liable to said personnel or to Owner for any and all claims for wages, compensation or other benefits (including, without limitation, severance, pension, superannuation, retirement and termination pay) asserted by or on behalf of such personnel. The salaries, other compensation and benefits of such personnel shall be either paid by Owner or paid by Operator's check and reimbursed to Operator by Owner, depending upon which procedure Operator and Owner agree is most feasible. (b) Operator shall employ, in Operator's name but as agent of Owner and at Owner's sole expense, all key personnel as deemed reasonably necessary to be employed by Operator for the successful operation of the Complex. Operator shall pay the salaries, other compensation and benefits of such key personnel described above, for which Operator shall be reimbursed by Owner each month as a charge against Complex operations. Upon any termination of this Agreement, Operator shall have the right, but not the obligation, to remove or terminate said personnel from their duties at the Complex simultaneously with the termination hereof; Owner hereby covenants and agrees that it shall not hire or otherwise retain any such key personnel either prior to or after removal by Operator, without Operator's prior written consent thereto, which consent may be unreasonably withheld. As an expense of Complex operations, Operator shall have the right to grant such key personnel (i) such complimentary privileges usual and customary in the industry to similar positions, (ii) housing and meal allowances, including complimentary housing and meals at or near the Complex as is usual and customary in the hospitality industry for similar positions, or (iii) both (i) and (ii). 8 (c) Operator shall employ and pay, and Owner shall reimburse Operator for, such reasonable pro rata wages and other reasonable compensation of Operator's own employees and those of subsidiaries and affiliates of Operator not employed on the premises of the Complex on a permanent basis who are engaged in the performance of duties imposed under this Agreement. Owner shall pay monthly to Operator all reasonable travel, lodging and meal costs and expenses incurred by Operator's employees, and those of subsidiaries and affiliates of Operator, prior to and after the Complex is opened to the public as the same are incurred in the performance of duties imposed under this Agreement. Operator shall have the right, which right shall not be unreasonably exercised, to determine the advisability of such travel. Operator's employees shall be furnished and provided with rooms and food, as an expense of Complex operations, whenever such employees are located at the Complex in the performance of this Agreement. (d) Operator shall, as agent for Owner and at Owner's sole expense, employ specialists to perform services for the Complex related to the operation, maintenance and/or protection of the Complex, such as engineers, designers, attorneys, independent accountants and the like. 4.04 SALES AND PROMOTIONS. (a) Operator shall cause the Complex to participate in sales and promotional campaigns and, as appropriate, activities involving complimentary items to hotels, casinos, travel agents, tourist officials and airline representatives and other hospitality industry representatives. Operator shall have the sole right to entitle the key personnel and the personnel employed by Owner and Operator to grant complimentary items when the same is customary in the travel, hospitality or gaming industry or in Operator's standard practice or policy. (b) Owner agrees that no influence will be brought on Operator or the General Manager of the Complex relating to the granting or extension of credit. Credit facilities shall be granted by Operator in its sole reasonable discretion and in accordance with Operator's standard procedures. (c) Operator, on behalf of Owner, shall institute and supervise a sales and marketing program and shall coordinate and cooperate with the local and international sales and marketing programs of Operator and shall also coordinate with tour programs marketed by airlines, travel 9 agents and government tourist departments when Operator determines such programs are in the best interest of Owner. 4.05 MAINTENANCE AND CAPITAL REPLACEMENT. (a) Owner recognizes the necessity of a program of replacement of FF&E and the need to cause the Complex to continue to be furnished, equipped and landscaped in accordance with the standards described herein. Both parties recognize that the particular properties or particular articles of FF&E may not require expenditure for maintenance and repairs in any given year, but average costs thereof shall be reflected in the Budgets (as defined in Section 4.10(a)). During the first year of operations hereunder, a reserve of not less than one and one-half percent (1.5%) of the gross revenues of the Complex shall be established for replacements, substitutions and additions to FF&E, such reserve to be established by setting aside each month from operating profits an amount equal to one and one-half percent (1.5%) of the gross revenues of the Complex for such month; for the second operating year (and for each operating year thereafter), the respective percentages shall be increased to two percent (2%), respectively. In determining the Annual Budget (as defined in Section 4.10(a)(iii)) of the second operating year (and for each operating year thereafter), Owner and Operator shall mutually agree as to whether such reserve should be increased, it being understood that the account of such reserve must always be sufficient to meet the standards established hereunder. (b) Operator, as agent of Owner, is authorized to make and enter into such agreements as are in Operator's reasonable opinion necessary for the operation, supply and maintenance of the Complex as required by this Agreement. Notwithstanding the foregoing, Operator may not enter into agreements for the provision of goods and/or services to the Complex from Operator's affiliated entities, unless such agreements are at or below the fair market value of the goods and/or services provided or rendered; for purposes of this Agreement, the term "Operator's affiliated entities" shall mean any entity in which Operator, either directly or indirectly, has the power to control or vote a significant part of the outstanding securities or equity interest of such entity. 10 (c) Operator shall have the right to make such alterations, additions or improvements in or to the Complex as are consistent with the standards established hereunder. The cost of such alternations, additions or improvements shall be charged directly to current expenses of the Complex or shall be capitalized and amortized on the books of account of the Complex in accordance with Operator's standard accounting practices consistently applied. (d) In the event that, at any time during the Term of this Agreement, repairs or additions to or changes in the Complex shall be required by reason of any laws, ordinances, rules or regulations now or hereafter in force, or by proper and lawful order of any governmental or municipal power, department, agency, authority, or officer, such repairs or changes shall be made at the discretion of Operator, without the prior approval of Owner; provided that Operator shall use its best efforts to consult, in advance, with Owner with respect to such changes, additions or repairs. 4.06 ACCOUNTING SERVICES. (a) Operator, at Owner's sole cost and expense, shall maintain a complete accounting system in connection with the management of the Complex. The books and records shall be kept in accordance with generally accepted accounting principles consistently applied, as applied by Operator or its subsidiaries or affiliates in other gaming operations similar to the Complex. Books and accounts shall be maintained at the Complex. Title to such books and accounts shall vest jointly in Owner and Operator, while possession of such books and records shall vest solely in Operator; provided, however, that upon proper termination of this Agreement and proper and timely payment to Operator of all sums due to or accrued for the benefit of Operator under this Agreement, title to and possession of such books and accounts shall vest in Owner. Owner shall have the right and privilege of examining and copying said books and records at any reasonable time during regular business hours. (b) Operator, at Owner's sole cost and expense, shall cause a certified audit of the Complex to be performed annually by such reputable accounting firm mutually acceptable to Owner and Operator, and at least three (3) copies thereof shall be furnished to each party not later than ninety (90) days from the end of Owner's fiscal year. Nothing herein contained shall 11 prevent Owner, at its sole expense, from designating a reputable accounting firm to, upon reasonable prior written notice, examine the books and records of the Complex during regular business hours. (c) On or before the twenty-fifth (25th) day of each month, Operator shall furnish Owner with an unaudited operating statement for the prior calendar month detailing (i) Statistical Data, (ii) Gaming Revenue Data (broken down by departmental or revenue source), (iii) Gaming Operating Expense Data (broken down by departmental or expense source) (iv) Food & Beverage Department Data, (v) Other Income Data, (vi) Overhead Departments Data, (vii) Fixed Charges, (viii) Gross Operating Profit, and (ix) Net Income or Loss, including management fees and other amounts paid to Operator. Any adjustment required to make up an underpayment or to refund an overpayment of the monthly payments to Owner or to Operator, as revealed in any monthly operating statement, shall be made by way of an adjustment in the payment during the month following the furnishing of said monthly operating statement. Likewise, any adjustments predicated on the annual audited statements for the Complex, will be made during the first month following completion of the annual audit. 12 4.07 BANK ACCOUNTS. (a) Operator shall establish at reputable financial institution(s) reasonably approved by Owner such Complex bank accounts as Operator deems necessary for the operation of the Complex. The accounts shall be styled "name of Complex-type of account (e.g., operations, payroll)", and all bank accounts shall provide that Operator's designees shall be the only parties authorized to draw upon said accounts. At least thirty (30) days prior to the Commencement Date, Owner shall deposit the amount of _____________ ($___________) into the operating bank account, as designated by Operator, to serve as a minimum bank account to use as the Complex's initial operating capital in accordance with the approved Budgets. After the Commencement Date, Operator shall deposit, not less frequently than monthly, any cash on hand in excess of its reasonably anticipated operating capital needs for the next thirty (30) days and of any reserves required hereunder in such bank accounts or other depositories as may be designated by Owner. It is understood that Operator shall maintain funds at the Complex and shall make payments therefrom as the same are usually and customarily made in the hospitality and gaming industry. (b) During the Term hereof, Owner shall furnish to Operator true and correct copies of all property tax statements and insurance policies and all financing documents (including notes and mortgages) relating to the Complex. Without in any way diminishing Owner's responsibility hereunder, Operator shall be authorized, if Owner so requests in writing, to pay from the Complex bank accounts the amounts indicated by said statements and/or documents, provided sufficient funds are in such Complex accounts. 4.08 CONCESSIONS. Operator shall have the exclusive right to consummate, in the name of and for the benefit of Owner, arrangements and leases with concessioners, licensees, tenants and other users of any commercial space in the Complex, at then-prevailing commercially reasonable rates. 4.09 EXPENSES. (a) All costs, expenses, funding of operating deficits and working capital, and other obligations and liabilities hereunder ("OWNER'S FINANCIAL OBLIGATIONS") shall be the sole and 13 exclusive responsibility and obligation of Owner, except for those instances herein where it is expressly and specifically stated that such item shall be for the accounts of Operator. It is understood that statements herein indicating that Operator shall "furnish", "provide" or otherwise supply, present or contribute items or services hereunder shall not be interpreted or construed to mean that Operator is liable or responsible to fund or pay for such items or services, except in those specific instances mentioned above. (b) With respect to Owner's Financial Obligations, the same shall be funded and/or paid for as follows: (i) First, from monies which may be available in the Complex accounts maintained by Operator hereunder; and (ii) Second, if such Complex accounts maintained by Operator hereunder do not contain monies sufficient to fund and/or pay Owner's Financial Obligations, from monies which shall be deposited by Owner in such Complex accounts within fifteen (15) days after request therefor by Operator in writing. If such monies are not so deposited by Owner in the amounts requested by Operator within such fifteen (15) day period, Operator shall have the right, but not the obligation, to terminate this Agreement upon ten (10) days prior written notice to Owner and, in the event of two (2) consecutive such defaults in any calendar year, regardless of Owner's cure thereof. (c) It is understood and agreed that Operator shall have no obligation or duty to fund and/or pay for any of Owner's Financial Obligations. 4.10 BUDGETS. (a) Operator shall be obligated to furnish Owner with the following budgets (collectively "BUDGETS") during the Term hereof: (i) A pre-opening budget ("PRE-OPENING BUDGET") on or prior to the Commencement Date, which Pre-Opening Budget shall detail all costs and expenses reasonably anticipated by Operator for the actions described in Section 2.01. (ii) A commencement budget ("COMMENCEMENT BUDGET") within sixty (60) days prior to the Commencement Date to be updated within thirty (30) days after the Commencement Date, which Commencement Budget shall detail all costs, expenses and reserves reasonably anticipated by Operator, or contemplated in this Agreement, during the remainder of the first calendar year of the Term of this Agreement, including but not limited to, working capital, initial operating equipment and supplies, expenditures for 14 recruiting, training, advertising and promotion and other similar costs and expenses. (iii) An annual budget ("ANNUAL BUDGET") at least sixty (60) days prior to the end of the first calendar year after the Commencement Date and each succeeding calendar year of the Term hereunder. Each Annual Budget shall detail all costs, expenses and reserves reasonably anticipated by Operator, or contemplated in this Agreement, for the next succeeding year. Annual Budgets may be amended from time to time, after submission by Operator to Owner of such amendments. (b) Operator makes no guarantee, warranty or representation whatsoever in regard to Budgets, same being intended as reasonable estimates only. (c) With respect to any deficits which may arise as a result of operations hereunder, Owner shall be obligated to fund and pay such deficits which are not covered by Complex income within fifteen (15) days after written request therefor by Operator. If Owner fails or delays in furnishing funds to cover deficits as aforesaid (by failure to approve or delay in approving Budgets in a timely manner or otherwise), Operator shall have no responsibility or liability therefor, and Owner shall indemnify and hold harmless Operator with respect to any liability, however arising, which may arise out of or relate to, directly or indirectly, such failure or delay in funding such obligations. (d) All Budgets submitted by Operator to Owner under this Section 4.10 shall (i) be prepared generally in accordance with generally accepted accounting principles, (ii) be presented substantially in the format of the operating statements required of Operator pursuant to Section 4.06(c) of this Agreement, (iii) include detailed business and market plans, and (iv) be subject to Owner's prior express approval, which approval shall not be unreasonably withheld or unduly delayed. In the event Owner and Operator are unable to agree on any given Budget within two (2) months from the end of a fiscal year, Owner and Operator, hereby appoint Arthur Andersen & Co. as an independent arbiter which shall determine a Budget no later than four (4) weeks after its receipt of written notice of such a dispute. The arbiter's Budget shall be binding upon Owner and Operator. All expenses incurred as a result of the invocation of such independent arbiter provision shall be borne solely by the Complex, subordinated to the payment of all fees and expenses due to or accrued for the benefit of Operator pursuant to this Agreement. The provisions of this Section 4.10(d) are 15 to be carried out in tandem with, and not as an alternative for, the arbitration provisions of Section 13.07 of this Agreement. (e) The foregoing notwithstanding, Operator may incur expenses in excess of the amounts set forth in the Budgets provided: (i) the actual total expenditures for the operating department within which any given expense is allocable will not exceed one hundred ten (110%) percent of the total budgeted expenditures for such operating department approved in the then-applicable Budget; or 16 (ii) such expenditure is expressly authorized in this Agreement; or, (iii) Operator obtains Owner's prior approval of such expenditure, which approval shall not be unreasonably withheld or unduly delayed; or, (iv) such expenditure is warranted by increased levels of business; or, (v) such expenditure is required to meet emergency conditions and Owner is promptly advised thereof; or, (vi) additional expenditures are incurred by reason of the occurrence of an event or events not reasonably foreseeable by Operator; or, (vii) such expenditure is caused by the occurrence of an event or events outside Operator's reasonable control. 4.11 APPROVALS. In approving or consenting to any matter hereunder, Owner shall act in a reasonable manner; however, Owner shall take into account Operator's advises stemming from its experience as a manager of complex gaming properties, and taking into account conditions prevailing generally in the hospitality and gaming industry. 17 ARTICLE FIVE ------------ COMPENSATION OF OPERATOR ------------------------ 5.01 FORMS OF COMPENSATION. For and in consideration of the services rendered by Operator pursuant to this Agreement, Owner agrees to pay to Operator the Management Fee (defined below) and all reimbursables set forth elsewhere in this Agreement. 5.02 MANAGEMENT FEE DEFINED. For purposes of this Article Five, the term "MANAGEMENT FEE" shall mean a fee equal to four percent (4%) of all gross revenues of the Complex, including without limitation, all revenues and proceeds from business interruption or other loss of income insurance. In computing the Management Fee, there shall first be deducted the following: (a) Any gratuities, or service charges added to a customer's bill or statement in lieu of gratuities, which are payable to Complex employees; (b) An amount equal to all credits or refunds made to customers, guests or patrons; (c) All sums and credits received in settlement of claims for loss or damage of FF&E or to the physical plant of the Complex; (d) All gaming taxes, sales taxes, excise taxes, gross receipt taxes, admission taxes, entertainment taxes, tourist taxes or charges; (e) Any and all income from the sale of FF&E; (f) Any compensation payments for claims against third parties arising out of or during the course of the operation of the Complex. The Management Fee shall (i) be computed monthly before the payment of any and all income, franchise, federal, state or municipal taxes (other than gaming taxes), and (ii) shall be paid monthly in arrears on the tenth (10th) day of each month. The Management Fee shall be included in all operating statements which Operator furnishes to Owner hereunder, and adjusted annually in accordance with the audited Financial Statements for the Complex. 5.03 LOSSES. Except to the extent set forth in Section 5.03, losses in any year shall be borne 18 exclusively by Owner and shall not reduce the amount of any compensation which Operator may be entitled to receive hereunder for any prior, present, or subsequent years. No part of such losses shall be charged against, recaptured out of or otherwise serve to diminish or affect the Gross Operating Profit of the Complex for prior, present, or subsequent years. ARTICLE SIX ----------- INSURANCE AND INDEMNITY ----------------------- 6.01 PROPERTY INSURANCE. Operator shall procure and maintain, and Owner shall pay for, from the Commencement Date and thereafter at all times during the Term hereof property insurance, equal to at least one hundred percent (100%) of the insurable value thereof on a replacement cost basis, or such lesser amount to which Operator, in its sole and exclusive discretion, may determine, against loss or damage to the Complex and its contents from fire, boiler explosion and such other extended coverage risks and casualties as Operator shall deem necessary. Operator shall also procure and maintain, and Owner shall pay for, business interruption insurance against loss or damage by fire and other hazards customarily included in an extended coverage endorsement, including riot, civil commotion and insurrection, all of said business interruption insurance to be effective from the Commencement Date of this Agreement and during the Term hereof. Such liability and property insurance coverage shall list Operator as an additional insured, with a right to thirty (30) days prior written notice in the event of cancellation or modification of coverage. 6.02 LIABILITY INSURANCE/MISCELLANEOUS COVERAGES. Operator shall procure and maintain, and Owner shall pay for, during the Term hereof, the following insurance, which insurance shall list Operator and Operator's subsidiaries, affiliates, officers, directors, agents, servants, workmen, and employees (all collectively referred to herein as "OPERATOR") as additional insures, with a right to thirty (30) days prior written notice in the event of cancellation or modification of coverage: (a) Comprehensive General Liability Insurance at a limit of at least $1 million per occurrence/$2 million aggregate, including, but not limited to, liquor liability and innkeepers liability coverage to protect against theft of or damage to guests' property; (b) Automobile Liability and Physical Damage Insurance for at least $1 million combined single limit to include broad form drive other car coverage; 19 (c) Comprehensive Crime Insurance including, but not limited to, Employee Dishonesty and Depositor's Forgery Coverages; (d) Such Workman's Compensation, Employer's Liability or similar insurance as may be required by law; (e) Group Benefits Insurance including major medical and hospitalization for Complex employees; (f) Any insurance which Owner or Operator may be required to obtain pursuant to any franchise covering the Complex; (g) Umbrella (Excess Liability) Insurance in an amount of not less than $100 million; and (h) Insurance against such other operating risks which it is now or may hereafter be customary to insure in the operation of gaming complexes. 6.03 INSURANCE STANDARDS AND REQUIREMENTS. (a) It is agreed that all insurance hereunder shall fully and adequately protect Owner and Operator, and shall meet or exceed any requirements of applicable laws, rules or regulations, insurance underwriters, or other third parties having the right to determine insurance requirements for the Complex. Owner and Operator shall each approve all insurance required for the Complex with respect to amount and types of coverage, and the terms and conditions thereof; provided that, in making determinations hereunder with respect to insurance, Owner and Operator shall take into account Operator's advice derived from its experience as a casino and hotel manager. Insurance procured hereunder shall be placed with reputable, financially sound insurance companies acceptable to Owner and Operator, and shall be obtained in the name of Owner or Operator (as agent for Owner), as the parties may mutually agree. All insurance hereunder shall name Operator and Owner as co-insureds and/or additional insureds. If Owner should refuse or delay in approving the procuring or maintaining of insurance which Operator reasonably deems to be advisable to obtain for the Complex, Operator shall have (i) the right, upon five (5) days prior written notice to Owner, to procure such insurance in Operator's own name but at Owner's sole cost and expense, and (ii) the right to terminate this Agreement upon sixty (60) days prior written notice to Owner, unless such insurance is procured by Owner within such notice period. (b) Operator and Owner shall submit to each other each year a summary of the insurance 20 coverage maintained by each with respect to the Complex, and each party shall have thirty (30) days thereafter to give its comments thereon to the other. If a submitting party receives no written comments from the other party within said period, the insurance program shall be deemed approved for that year. 6.04 INDEMNITY. Owner agrees: (a) To indemnify and hold Operator free and harmless from any liability for injury or death to persons or damage or destruction of property due to any cause whatsoever, either in or about the Complex or elsewhere, as a result of the performance of this Agreement by Operator, its agents, workmen, servants, officers, directors or employees, irrespective of whether caused, wholly or partially, by the negligence of Operator, its agents, officers, directors or employees; and, (b) To reimburse Operator upon demand for any money or other property which Operator is required to pay out for any reason whatsoever in performing its duties hereunder or as a consequence thereof, whether the payment is required by law to settle labor claims, for operating expenses or any other charges or debts incurred or assumed by Operator or any other party, or judgments, settlements, or expenses in defense of any claim, civil or criminal action, proceeding, charge, or prosecution made, instituted or maintained against Operator or Owner, jointly or severally, because of the condition or use of the Complex, or acts of failures to act of Operator, its employees, officers, directors or agents, Owner, its employees, officer or agents, or arising out of or based upon any law, regulation, requirement, contract or award; and, (c) To defend any claim, action, suit or proceeding brought against Operator or Owner, jointly or severally, arising out of or connected with any of the foregoing, and to hold harmless and fully indemnify Operator from any judgment, loss or settlement on account thereof, regardless of the jurisdiction in which any such claims, actions, suits or proceedings may be brought. (d) Notwithstanding the foregoing, Owner shall not be liable to indemnify and hold Operator harmless from any liability described above which results from the gross negligence or willful misconduct of Operator, its agents, employees, officers or directors. 21 ARTICLE SEVEN ------------- GROUP SERVICES BY OPERATOR -------------------------- 7.01 GROUP SERVICES. Operator shall provide to the Complex, from other offices or casinos managed by Operator or its affiliates or subsidiaries, the following services: (a) General Administrative Service, in connection with: (i) Operation: Quality Control and Inspection; General Supervision; Supervision of Employee Hiring and Training; Sales Coordination; Coordination of a System-wide Preventive Maintenance Program; Coordination of Advertising and Promotional Program; Renovating and Redecoration of Complex; Purchasing of Furnishings and Equipment. (ii) Accounting: Coordination of the Accounting System, and the procuring of a Computer Program (Software) for the same; General Supervision of Accounting Reports; Internal Audits. (b) Specific services, whereby personnel might be loaned to the Complex as may be deemed reasonable by Operator from other hotel and/or casinos from time to time for the Complex's benefit. 7.02 COSTS OF SERVICES. The cost of the services referred to in Section 7.01 shall be reimbursed to Operator as a Complex operating expenses on a direct cost bases. Such costs for services include: (a) Actual out-of-pocket telecommunication and travel expenses for the personnel necessary to coordinate the above services directly attributable to the Complex operation; and 22 (b) The direct cost to Operator in preparing payrolls, computer time and financial statements for the Complex; and (c) The proportional cost attributable to the Complex of the overall advertising and promotion budget undertaken by Operator or its affiliates or subsidiaries; and (d) In the case of specific services described in Section 7.01(b), the actual pro rata compensation cost and out-of-pocket reimbursable travel expenses of personnel while loaned to the Complex for its benefit. 7.03 SOFTWARE. (a) Software. Operator and Owner acknowledge that, through the experience of Operator's affiliates, Operator has developed or directed the development of data processing computer software for hotel operations (the "SOFTWARE"). As part of the services furnished by Operator under this Agreement, Operator shall procure for the Complex, at Owner's sole cost and expense, Operator's data processing computer software for the operation of the Complex from Operator's affiliates. Owner agrees that Operator shall purchase, at Owner's sole cost and expense, the necessary data processing hardware equipment to use the computer software in the operation of the Complex. Owner further agrees that, as an operating expense of the Complex and at Owner's sole cost and expense, Operator shall procure such installation, training, retraining and maintenance assistance from Operator's affiliates as Operator, in its sole discretion, deems advisable. For purposes of this Section 7.03(a), the term "Owner's cost and expense" is defined as a cost which is cost competitive in the marketplace with other comparable available date processing software and hardware. (b) Title to the Software. Owner hereby acknowledges that the exclusive right of ownership in the Software, as well as any subsequent improvements, modifications or updates to the Software, vests solely in Operator. Owner hereby disclaims any right to ownership, possession or use of the Software and related materials. Owner hereby acknowledges the unique proprietary nature of the Software and does hereby covenant that Owner shall maintain the strict confidential nature of the Software and related materials provided for use pursuant to this Agreement and Owner shall not disseminate such Software or related materials to any other person or entity without the express written consent of Operator thereto. Owner hereby further covenants that it shall not, and it shall not suffer any other person or entity to, violate the provisions of this Section 7.03(b), which Owner 23 hereby consents shall be enforceable in equity, in a summary fashion, by Operator or its assignees without proof of harm other than an unauthorized disclosure. (c) Return of the Software. Upon termination of this Agreement, for whatever reason, Owner shall immediately discontinue the use of the Software and/or related materials and shall, within sixty (60) days of such termination, certify to Owner that (i) the use of the Software and related materials has been discontinued, (ii) all originals and copies of the Software have been returned to Operator, and (iii) no person or entity has retained any portion, in original or duplicate, of the Software or related material. The provisions of Sections 7.03(b) and 7.03(c) of this Agreement shall survive any termination of this Agreement. 7.04 INTELLECTUAL PROPERTY. Operator shall procure for the Complex the use of the "Hollywood Casino" name and related trademarks, including those marks which may from time to time be developed and implemented in operating Hollywood Casino establishments in the United States (the "INTELLECTUAL PROPERTY") to the extent that the use of such additional marks are appropriate (as determined by the Operator) for use at the Complex. The cost and expense of such Intellectual Property shall be deemed to be included within the Management Fee. 24 ARTICLE EIGHT ------------- DAMAGE TO AND DESTRUCTION OF THE COMPLEX ---------------------------------------- 8.01 OWNER TO RESTORE. Owner agrees, subject to the provisions of this Article Eight, to repair, restore, rebuild or replace any insured damage to, or impairment or destruction of the Complex from fire or other casualty. If Owner fails to undertake such work within ninety (90) days after the fire or other casualty, or shall fail to complete the same diligently, Operator may, but shall not be obligated to, undertake or complete such work for the account of Owner and shall be entitled to be repaid therefor, and proceeds of insurance shall be made available to Operator. 8.02 LIMITATION ON RESTORATION. If the Complex shall be totally destroyed or substantially destroyed during the Term of this Agreement by fire or other casualty and (a) adequate insurance as required by Article Six of this Agreement shall have been maintained, and (b) the cost of repairing, restoring, rebuilding and replacing the same shall exceed one hundred percent (100%) of the proceeds of the insurance collectible by Owner for and on account thereof, Owner shall have the right and option, upon notice served upon Operator within sixty (60) days after such fire or other casualty, to terminate this Agreement. If the cost of repairing, restoring, rebuilding or replacing the damage, impairment or destruction resulting from such fire or other casualty shall be less than one hundred percent (100%) of the proceeds of the insurance collectible by Owner, or, if greater, is the result of Owner not having maintained adequate insurance as required by Article Six of this Agreement, Owner shall repair, restore, rebuild or replace such damage, impairment or destruction, unless and to the extent that Owner and Operator shall otherwise agree. If Owner fails to undertake such work within ninety (90) days after a fire or other casualty, or shall fail to complete the same diligently, Operator, without prejudice to its rights to repair, restore, rebuild or replace such damage, impairment or destruction for and on behalf of Owner and its rights and remedies upon undertaking any such work provided for in this Article, may at its election, terminate this Agreement upon notice to Owner. 25 ARTICLE NINE ------------ CONDEMNATION ------------ 9.01 TOTAL CONDEMNATION. If the whole of the Complex shall be taken or condemned in any eminent domain, condemnation, compulsory acquisition or like proceeding by any competent authority for any public or quasi-public use or purpose, or if such a portion hereof shall be taken or condemned so as to make it imprudent or unfeasible, in Operator's reasonable opinion, to use the remaining portion as a Complex of type and class immediately preceding such taking or condemnation, then, in either of such events, Operator, in its sole discretion, may determine that the Term of this Agreement shall cease and terminate as of the date of such taking or condemnation, and, in any such event, Operator shall be paid from such award an amount equal to four percent (4%) of such award or Operator's Management Fee earned during the year preceding the date of termination of this Agreement, whichever is greater. 9.02 PARTIAL CONDEMNATION. If only a part of the Complex shall be taken or condemned and the taking or condemnation of such part does not make it unfeasible or imprudent, in Operator's reasonable opinion, to operate the remainder as a Complex of the type and class immediately preceding such taking or condemnation, this Agreement shall not terminate, but out of the award to Owner, so much thereof as shall be reasonable necessary to repair any damage to the Complex, or any part thereof, or to alter or modify the Complex, or any part thereof, so as to render the Complex a complete and satisfactory architectural unit as a Complex of the same type and class as it was immediately preceding the taking or condemnation shall be used by Owner for that purpose. The balance of the award, after deduction of the sum necessary for restoration, shall be fairly and equitably apportioned between Owner and Operator so as to compensate Operator for any loss of income resulting from or as the result of the taking or condemnation. ARTICLE TEN ----------- RELATIONSHIP AND AUTHORITY -------------------------- The provisions of this Agreement relating to the Management Fee payable hereunder is included solely for the purpose of providing a method whereby the said fees can be measured and ascertained. Operator and Owner shall not be construed as joint venturers or partners of each other 26 and neither shall have the power to bind or obligate the other except as set forth in this Agreement. Operator is, however, clothed with such additional authority and powers as agent of Owner as may be necessary to carry out the spirit and intent of this Agreement. ARTICLE ELEVEN -------------- TERMINATION ----------- 11.01 RECIPROCAL TERMINATION. Notwithstanding any other provision of this Agreement to the contrary, each party shall have the right to terminate this Agreement on forty-five (45) days prior written notice to the other in the event such other party shall cause, commit or suffer to exist with respect to: (a) A material breach of this Agreement which is not cured within the period of written notice thereof; or (b) The institution of any statute, regulation, rule or ruling rendering the conduct of gaming in the United States or at the Complex illegal. 11.02 OPERATOR'S RIGHT TO FUND NECESSARY FUNDS OR TERMINATE. Upon the failure of Owner to furnish the funds required for Operator to properly manage the Complex as contemplated herein or the failure of Owner to either compensate or reimburse Operator as stipulated in this Agreement, Operator shall have the right, but not the obligation, to either (a) advance the necessary funds to the Owner as a loan, which loan will bear interest at a market rate of interest, or (b) terminate this Agreement, said termination to become effective upon the expiration of the notice period otherwise provided in this Agreement, unless cured by Owner within such period. In the event Operator elects to exercise its rights under clause (a) of the preceding sentence, Owner will, if requested by Operator, execute and deliver a negotiable promissory note in form and substance satisfactory to Operator evidencing such obligation. ARTICLE TWELVE -------------- SUCCESSORS AND ASSIGNS ---------------------- 12.01 Assignments by Operator. Owner's consent shall not be required for Operator to assign this Agreement or its rights and interest in the operation of the Complex to any entity in which Hollywood Casino Corporation, a Delaware corporation, either directly or indirectly maintains a controlling interest and such assignment shall serve to fully relieve and discharge Operator from 27 any further duties or obligations pursuant to this Agreement. In addition, Owner's consent shall not be required for Operator to collaterally assign this Agreement or its rights and interest in the operation of the Complex to any entity as security for indebtedness. Except as hereinabove provided, neither Operator nor Owner shall assign this Agreement or in any manner sell, assign or transfer its rights and interests in the Complex without the prior written consent of the non-assigning party. It is understood and agreed that any consent granted by the non-assigning party to any such assignment shall not be deemed a waiver of the covenant herein contained against assignment in any subsequent case. 12.02 TRANSFERS BY OWNER. If at any time during the term of this Agreement (a) Owner shall be desirous of selling or assigning the whole or a majority part of its interest in the Complex or (b) by virtue of the exercise of rights by the holder of a mortgage or such similar encumbrance Owner shall be required to part with the whole or a majority part of its interest in the Complex, Owner shall so notify Operator in writing. The assignee, purchaser or recipient in any such assignment or transfer by Owner of a whole or a majority of its interest in this Agreement or the Complex shall be free to either attorn to, and be bound by, this Agreement or terminate this Agreement; provided, however, such assignee, purchaser or transferee shall be deemed to have attorned to, and be bound by, this Agreement if it shall not have provided Operator with written notice of termination within three (3) business days after the effective date of such assignment or transfer. Operator shall have the absolute right to require that any new owner or holder of less than a majority interest shall be bound by the terms of this Agreement. Any assignment or transfer by Owner of less than a majority interest in this Agreement or the Complex, whether voluntary or involuntary, shall require that the assignee, purchaser or recipient thereunder shall attorn to and be bound by this Agreement. 12.03 ASSIGNS BOUND. Subject to the provisions of this Agreement regarding and/or restricting sale or assignments as set forth elsewhere in this Agreement, the terms, provisions, covenants, undertakings, agreements, obligations and conditions of this Agreement shall be binding upon and shall inure to the benefit of the successors in interest and the assigns of the parties hereto with the same effect as if mentioned in each instance where the party hereto is named or referred to, 28 except that no assignment, transfer pledge, mortgage, lease or sublease by or through Operator or by or through Owner, as the case may be, in violation of the provision of this Agreement shall vest any rights in the assignee, transferee, mortgagee, pledge, lessee, sublessee or occupant. ARTICLE THIRTEEN ---------------- GENERAL PROVISIONS ------------------ 13.01 BEST EVIDENCE. This Agreement shall be executed in original and "Xerox" or photostatic copies and each copy bearing original signatures of the parties hereto in ink shall be deemed an original. 13.02 AMENDMENT OR MODIFICATION. This Agreement may not be amended or modified except by a writing signed by all parties hereto. 13.03 GOVERNING LAW. This Agreement shall be governed by and construed under the laws of the State of _________ in effect on the date of the execution of this Agreement. Notwithstanding the foregoing, this Agreement shall, as required, be governed by and construed in accordance with the Louisiana Gaming Control Act and the rules and regulations of the Louisiana Gaming Control Board promulgated thereunder. 13.04 INTERPRETATION. The preamble recitals of this Agreement are incorporated into and made a part of this Agreement; titles of Sections and Articles are for convenience only and are not to be considered a part of this Agreement. All references to years shall mean a year commencing as of the first day of January of each year. All references to the singular shall include the plural and all references to gender shall, as appropriate, include other genders. 13.05 SEVERABILITY. In the event any one or more provisions of this Agreement is judicially declared null and void or otherwise unenforceable, the remainder of this Agreement shall survive, unless such survival vitiates the intent of the parties hereto. 13.06 PROHIBITION ON RECORDATION/COVENANT OF DISCLOSURE. (a) Operator hereby covenants and agrees that it shall take no action, nor authorize or suffer any one to take any action, the result of which would be to cause this Agreement, or a memorandum thereof, to be filed of record against the realty of the Complex. This covenant prohibiting recordation shall not apply to the filing of a judgment lien by reason of an action or cause 29 of action arising from this Agreement or the breach thereof. (b) Owner hereby covenants and agrees that it shall disclose the existence, terms, provisions and conditions of this Agreement to any and all prospective purchasers and mortgagees of the realty of the Complex. 13.07 ARBITRATION. Any dispute, controversy or claim arising out of or related to this Agreement, shall be resolved in the following manner; provided, however, that any dispute, controversy or claim arising out of or related to the intellectual property rights of Operator (or Operator's parent, subsidiary or affiliates) will not be subject to arbitration. The parties hereto shall refer the matter to their chief executive officers for the negotiation of a mutually satisfactory resolution. If no such resolution is reached, then at any time after fifteen (15) days following the date the matter was referred to the chief executive officers of the parties, either party hereto may notify the other of its intention to have the claim finally settled by confidential arbitration in Dallas, Texas, in accordance with the Commercial Arbitration Rules of the American Arbitration Association and in accordance with the Federal Rules of Civil Procedure and Evidence applicable thereto. This agreement to arbitrate shall be specifically enforceable in any court of competent jurisdiction. 13.08 FORCE MAJEURE. With the exception of payment obligations imposed under this Agreement (which obligations are not subject to suspension, extinguishment or cancellation as a consequence of this Section 13.08 or otherwise), the parties to this Agreement shall be excused from the performance of any obligation under this Agreement in the event such performance is hindered or prevented by strike, boycott, lockout or other labor trouble; and storm, fire, earthquake or Act of God; any riot, civil disturbance, or any act of war or of the public enemy; the shortage, unavailability or disruption in the supply of labor, materials, fuels or the disruption of postal, electrical, telephone or other utility service; any present or future governmental law, ordinance, order rule or regulation; or any other cause or contingency beyond the respective parties' control, but only during such time as such party is unable due to a specified reason herein to perform its obligations hereunder. 13.09 WAIVER. None of the terms of this Agreement, including this Section 13.09, or any term, right or remedy hereunder shall be deemed waived unless such waiver is in writing and signed 30 by the party to be charged therewith and in no event by reason of any failure to assert or delay in asserting any such term, right or remedy or similar term, right or remedy hereunder. 13.10 GENERAL WARRANTIES. Each party hereto warrants and represents to the other as follows: (a) Each party is the holder of good standing of all necessary governmental licenses and permits required to satisfy its obligations under this Agreement; and, (b) Each party has the right, power, title and authority to enter into this Agreement. 13.11 PAROL. This Agreement constitutes the entire agreement and understanding of the parties hereto with respect to the subject matter hereof, and this Agreement supersedes any prior understandings, agreements, or undertakings. 31 IN WITNESS WHEREOF, the parties hereto have duly executed and delivered this Agreement as of the day and year first above written. ATTEST: --------------------------------- By: - --------------------------------- ------------------------------ Name: ---------------------------- Title: --------------------------- ATTEST: --------------------------------- By: - --------------------------------- ------------------------------ Name: ---------------------------- Title: --------------------------- Exhibits: - -------- A - Description of Complex B - Furnishings and Equipment of the Complex 32 EX-10.28 7 EXHIBIT 10.28 EXHIBIT 10.28 HOLLYWOOD CASINO CORPORATION 1996 LONG-TERM INCENTIVE PLAN ----------------------------- The Hollywood Casino Corporation 1996 Long-Term Incentive Plan (hereinafter called the "Plan") was adopted by the Board of Directors of Hollywood Casino Corporation, a Delaware corporation (hereinafter called the "Company"), effective as of June 12, 1996, and was approved by the Company's stockholders on July 30, 1996. ARTICLE 1 PURPOSE ------- The purpose of the Plan is to attract and retain key management employees of the Company and its Subsidiaries and to provide such persons with a proprietary interest in the Company through the granting of incentive stock options, non-qualified stock options or restricted stock, whether granted singly or in combination, that will (a) increase the interest of such persons in the Company's welfare; (b) furnish an incentive to such persons to continue their services for the Company; and (c) provide a means through which the Company may attract able persons as employees. ARTICLE 2 DEFINITIONS ----------- For the purpose of the Plan, unless the context requires otherwise, the following terms shall have the meanings indicated: 2.1 "Act" means the Illinois Act, the Mississippi Act, the New Jersey Act, and any other gaming laws to which the Company is or may be subject. 2.2 "Award" means the grant of any Incentive Stock Option, Non-qualified Stock Option or Restricted Stock, whether granted singly or in combination (each individually referred to herein as an "Incentive"). 2.3 "Award Agreement" means a written agreement between a Participant and the Company which sets out the terms of the grant of an Award. 2.4 "Award Period" means the period during which one or more Incentives granted under an Award may be exercised. 2.5 "Board" means the board of directors of the Company. 2.6 "Change of Control" means any of the following: (i) any consolidation, merger or share exchange of the Company in which the Company is not the continuing or surviving corporation or pursuant to which shares of the Company's Common Stock would be converted into cash, securities or other property, other than a consolidation, merger or share exchange of the Company in which the holders of the Company's Common Stock immediately prior to such transaction have the same proportionate ownership of Common Stock of the surviving corporation immediately after such transaction or in which a Pratt Family Member owns a majority of the combined total voting power of each class of capital stock of the surviving or resulting corporation; 1 (ii) any sale, lease, exchange or other transfer (excluding transfer by way of pledge or hypothecation) in one transaction or a series of related transactions, of all or substantially all of the assets of the Company other than a sale, lease, exchange or transfer to a Pratt Family Member; (iii) the stockholders of the Company approve any plan or proposal for the liquidation or dissolution of the Company unless such liquidation or dissolution is approved by all of the Pratt Family Members who then own or hold beneficially or of record any shares of capital stock of the Company; (iv) the cessation of control (by virtue of their not constituting a majority of directors) of the Board by the individuals (the "Continuing Directors") who (x) at the date of this Plan were directors or (y) become directors after the date of this Plan and whose election or nomination for election by the Company's stockholders, was approved by a vote of at least two-thirds of the directors then in office who were directors at the date of this Plan or whose election or nomination for election was previously so approved; (v) the acquisition of beneficial ownership (within the meaning of Rule 13d-3 under the Securities Exchange Act of 1934, as amended (the "1934 Act")) of an aggregate of 20% of the voting power of the Company's outstanding voting securities by any person or group (as such term is used in Rule 13d-5 under the 1934 Act) who beneficially owned less than 10% of the voting power of the Company's outstanding voting securities on the date of this Plan, or the acquisition of beneficial ownership of an additional 5% of the voting power of the Company's outstanding voting securities by any person or group who beneficially owned at least 10% of the voting power of the Company's outstanding voting securities on the date of this Plan, provided, however, that notwithstanding the foregoing, an acquisition shall not constitute a Change of Control hereunder if the acquiror is (w) a Pratt Family Member, (x) a trustee or other fiduciary holding securities under an employee benefit plan of the Company and acting in such capacity, (y) a Subsidiary of the Company or a corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of voting securities of the Company or (z) any other person whose acquisition of shares of voting securities is approved in advance by a majority of the Continuing Directors; or (vi) in a Title 11 bankruptcy proceeding, the appointment of a trustee or the conversion of a case involving the Company to a case under Chapter 7. 2.7 "Code" means the Internal Revenue Code of 1986, as amended. 2.8 "Commission" means the Illinois Commission, the Mississippi Commission, the New Jersey Commission, and any other similar gaming entity to which the Company is or may be subject in the future. 2.9 "Committee" means the committee appointed or designated by the Board to administer the Plan in accordance with ARTICLE 3 of this Plan. 2.10 "Common Stock" means the Class A Common Stock which the Company is currently authorized to issue or may in the future be authorized to issue. 2.11 "Company" means Hollywood Casino Corporation, a Delaware corporation, and any successor entity. 2.12 "Date of Grant" means the effective date on which an Award is made to a Participant as set forth in the applicable Award Agreement; provided, however, that solely for purposes of Section 16 of the 1934 Act and the rules and regulations promulgated thereunder, the Date of Grant of an Award shall be the date of stockholder approval of the Plan if such date is later than the effective date of such Award as set forth in the Award Agreement. 2.13 "Employee" means common law employee (as defined in accordance with the Regulations and Revenue Rulings then applicable under Section 3401(c) of the Code) of the Company or any Subsidiary of the Company. 2.14 "Fair Market Value" of a share of Common Stock means (i) the closing price per share on any stock exchange on which the Common Stock is traded, (ii) the mean between the 2 closing or average (as the case may be) bid and asked prices per share of Common Stock on the over-the-counter market or (iii) as determined by the Committee if the Common Stock is not traded on an exchange or quoted on an over-the-counter market, whichever is applicable. 2.15 "Illinois Act" means the Illinois Riverboat Gambling Act, Ill. Rev. Stat. ch. 120, Paragraph 2401 et seq., as amended, and the regulations promulgated and rulings issued thereunder, and any other Illinois statute regulating gaming activity. 2.16 "Illinois Commission" means the Illinois Gaming Board established pursuant to Section 5 of the Illinois Act. 2.17 "Incentive Stock Option" or "ISO" means an incentive stock option within the meaning of Section 422 of the Code, granted pursuant to this Plan. 2.18 "Mississippi Act" means the Mississippi Gaming Control Act, as amended and the regulations promulgated and rulings issued thereunder, and any other Mississippi statute regulating gaming activity. 2.19 "Mississippi Commission" means the Mississippi Gaming Commission established pursuant to the Mississippi Act. 2.20 "New Jersey Act" means the New Jersey Casino Control Act, N.J. Stat. Ann. 5:12 1, et seq., as amended, and the regulations promulgated and rulings issued thereunder, and any other New Jersey statute regulating gaming activity. 2.21 "New Jersey Commission" means the New Jersey Casino Control Commission. 2.22 "Non-qualified Stock Option" or "NQSO" means a non-qualified stock option, granted pursuant to this Plan. 2.23 "Option Price" means the price which must be paid by a Participant upon exercise of a Stock Option to purchase a share of Common Stock. 2.24 "Participant" shall mean an Employee of the Company or a Subsidiary to whom an Award is granted under this Plan. 2.25 "Plan" means this Hollywood Casino Corporation 1996 Long-Term Incentive Plan, as amended from time to time. 2.26 "Pratt Family Member" means Jack E. Pratt, Edward T. Pratt, Jr., William D. Pratt, or any affiliate or associate (as such terms are defined in Rule 12b-2 promulgated under the 1934 Act) of any of those persons. 2.27 "Restricted Stock" means shares of Common Stock issued or transferred to a Participant pursuant to this Plan which are subject to restrictions or limitations set forth in this Plan and in the related Award Agreement. 2.28 "Retirement" means any Termination of Service pursuant to the terms of any pension plan or policy of the Company which is applicable to such Participant at the time of his or her Termination of Service, or if no such plan or policy exists, the attainment of either (i) age 65, or (ii) age 55 and the completion of 10 full years of service with the Company. 2.29 "Stock Option" means a Non-qualified Stock Option or an Incentive Stock Option. 2.30 "Subsidiary" means (i) any corporation in an unbroken chain of corporations 3 beginning with the Company, if each of the corporations other than the last corporation in the unbroken chain owns stock possessing a majority of the total combined voting power of all classes of stock in one of the other corporations in the chain, (ii) any limited partnership, if the Company or any corporation described in item (i) above owns a majority of the general partnership interest and a majority of the limited partnership interests entitled to vote on the removal and replacement of the general partner, and (iii) any partnership, if the partners thereof are composed only of the Company, any corporation listed in item (i) above or any limited partnership listed in item (ii) above. "Subsidiaries" means more than one of any such corporations, limited partnerships or partnerships. 2.31 "Termination of Service" occurs when a Participant who is an Employee of the Company or any Subsidiary shall cease to serve as an Employee of the Company and its Subsidiaries, for any reason. 2.32 "Total and Permanent Disability" means a Participant is qualified for long-term disability benefits under the Company's disability plan or insurance policy; or, if no such plan or policy is then in existence, that the Participant, because of ill health, physical or mental disability or any other reason beyond his or her control, is unable to perform his or her duties of employment for a period of six (6) continuous months, as determined in good faith by the Committee. ARTICLE 3 ADMINISTRATION -------------- The Plan shall be administered by a committee appointed by the Board (the "Committee"). The Committee shall consist of not fewer than two persons. Any member of the Committee may be removed at any time, with or without cause, by resolution of the Board. Any vacancy occurring in the membership of the Committee may be filled by appointment by the Board. Membership on the Committee shall be limited to those members of the Board who are disinterested persons under Rule 16b-3(c) promulgated pursuant to the 1934 Act. The Committee shall select one of its members to act as its Chairman. A majority of the Committee shall constitute a quorum, and the act of a majority of the members of the Committee present at a meeting at which a quorum is present shall be the act of the Committee. The Committee shall determine and designate from time to time the eligible persons to whom Awards will be granted and shall set forth in each related Award Agreement the Award Period, the Date of Grant, and such other terms, provisions, limitations, and performance requirements, as are approved by the Committee, but not inconsistent with the Plan. The Committee shall determine whether an Award shall include one type of Incentive or two or more Incentives granted in combination. The Committee, in its discretion, shall (i) interpret the Plan, (ii) prescribe, amend, and rescind any rules and regulations necessary or appropriate for the administration of the Plan, and (iii) make such other determinations and take such other action as it deems necessary or advisable in the administration of the Plan. Any interpretation, determination, or other action made or taken by the Committee shall be final, binding, and conclusive on all interested parties. ARTICLE 4 ELIGIBILITY ----------- Any Employee (including an Employee who is also a director or an officer) whose judgment, initiative, and efforts contributed or may be expected to contribute to the successful performance of the Company is eligible to participate in the Plan. Non-employee directors shall not be eligible to participate in the Plan. The Committee, upon its own action, may grant, but shall not be required to grant, an Award to any Employee of the Company or any Subsidiary. Awards may be granted by the Committee at any time and from time to time to new Participants, or to then Participants, or to 4 a greater or lesser number of Participants, and may include or exclude previous Participants, as the Committee shall determine. Except as required by this Plan, Awards granted at different times need not contain similar provisions. The Committee's determinations under the Plan (including without limitation determinations of which Employees, if any, are to receive Awards, the form, amount and timing of such Awards, the terms and provisions of such Awards and the agreements evidencing same) need not be uniform and may be made by it selectively among Employees who receive, or are eligible to receive, Awards under the Plan. ARTICLE 5 SHARES SUBJECT TO PLAN ---------------------- The maximum number of shares of Common Stock that may be issued pursuant to Awards granted under the Plan is three million (3,000,000) (as may be adjusted in accordance with ARTICLES 13 and 14 hereof). Shares to be issued may be made available from either authorized but unissued Common Stock or Common Stock held by the Company in its treasury. Shares of Common Stock previously subject to Awards which are forfeited, terminated, settled in cash in lieu of Common Stock, or exchanged for Awards that do not involve Common Stock, or expired unexercised, shall immediately become available for Awards under the Plan. During the term of this Plan, the Company will at all times reserve and keep available the number of shares of Common Stock that shall be sufficient to satisfy the requirements of this Plan. ARTICLE 6 GRANT OF AWARDS --------------- 6.1 IN GENERAL. The grant of an Award shall be authorized by the Committee and shall be evidenced by an Award Agreement setting forth the Incentive or Incentives being granted, the total number of shares of Common Stock subject to the Incentive(s), the Option Price (if applicable), the Award Period, the Date of Grant, and such other terms, provisions, limitations, and performance objectives, as are approved by the Committee, but not inconsistent with the Plan. The Company shall execute an Award Agreement with a Participant after the Committee approves the issuance of an Award. Any Award granted pursuant to this Plan must be granted within ten (10) years of the date of adoption of this Plan. The Plan shall be submitted to the Company's stockholders for approval; however, the Committee may grant Awards under the Plan prior to the time of stockholder approval. Any such options granted prior to such stockholder approval shall be made subject to such stockholder approval. The grant of an Award to a Participant shall not be deemed either to entitle the Participant to, or to disqualify the Participant from, receipt of any other Award under the Plan. If the Committee establishes a purchase price for an Award, the Participant must accept such Award within a period of 30 days (or such shorter period as the Committee may specify) after the Date of Grant by executing the applicable Award Agreement and paying such purchase price. 6.2 MAXIMUM ISO GRANTS. The Committee may not grant Incentive Stock Options under the Plan to any Employee which would permit the aggregate Fair Market Value (determined on the Date of Grant) of the Common Stock with respect to which Incentive Stock Options (under this and any other plan of the Company and its Subsidiaries) are exercisable for the first time by such Employee during any calendar year to exceed $100,000. To the extent any Stock Option granted under this Plan which is designated as an Incentive Stock Option exceeds this limit, such Stock Option shall be a Non-qualified Stock Option. 6.3 MAXIMUM INDIVIDUAL GRANTS. No Participant may receive during any fiscal year of the Company Awards covering an aggregate of more than one hundred fifty thousand (150,000) shares of Common Stock. 5 6.4 RESTRICTED STOCK. If Restricted Stock is granted to a Participant under an Award, the Committee shall set forth in the related Award Agreement: (i) the number of shares of Common Stock awarded, (ii) the price, if any, to be paid by the Participant for such Restricted Stock, (iii) the time or times within which such Award may be subject to forfeiture, (iv) specified performance goals, or other criteria, which the Committee determines must be met in order to remove any restrictions (including vesting) on such Award, and (v) all other terms, limitations, restrictions, and conditions of the Restricted Stock, which shall be consistent with this Plan. The provisions of Restricted Stock need not be the same with respect to each Participant. (A) LEGEND ON SHARES. Each Participant who is awarded Restricted Stock shall be issued a stock certificate or certificates in respect of such shares of Common Stock. Such certificate(s) shall be registered in the name of the Participant, and shall bear an appropriate legend referring to the terms, conditions, and restrictions applicable to such Restricted Stock, substantially as provided in SECTION 17.9 of the Plan. The Committee may require that the stock certificates evidencing shares of Restricted Stock be held in custody by the Company until the restrictions thereon shall have lapsed, and that the Participant deliver to the Committee a stock power or stock powers, endorsed in blank, relating to the shares of Restricted Stock. (B) RESTRICTIONS AND CONDITIONS. Shares of Restricted Stock shall be subject to the following restrictions and conditions: (i) Subject to the other provisions of this Plan and the terms of the particular Award Agreements, during such period as may be determined by the Committee commencing on the Date of Grant (the "Restriction Period"), the Participant shall not be permitted to sell, transfer, pledge or assign shares of Restricted Stock. Except for these limitations, the Committee may in its sole discretion, remove any or all of the restrictions on such Restricted Stock whenever it may determine that, by reason of changes in applicable laws or other changes in circumstances arising after the date of the Award, such action is appropriate. If the Restricted Stock is held by an insider (as defined in SECTION 8.2 of the Plan), the Restriction Period shall be at least six months from the Date of Grant. (ii) Except as provided in sub-paragraph (i) above, the Participant shall have, with respect to his or her Restricted Stock, all of the rights of a stockholder of the Company, including the right to vote the shares, and the right to receive any dividends thereon. Certificates for shares of Common Stock free of restriction under this Plan shall be delivered to the Participant promptly after, and only after, the Restriction Period shall expire without forfeiture in respect of such shares of Common Stock. Certificates for the shares of Common Stock forfeited under the provisions of the Plan and the applicable Award Agreement shall be promptly returned to the Company by the forfeiting Participant. Each Award Agreement shall require that (x) each Participant, by his or her acceptance of Restricted Stock, shall irrevocably grant to the Company a power of attorney to transfer any shares so forfeited to the Company and agrees to execute any documents requested by the Company in connection with such forfeiture and transfer, and (y) such provisions regarding returns and transfers of stock certificates with respect to forfeited shares of Common Stock shall be specifically performable by the Company in a court of equity or law. (iii) The Restriction Period of Restricted Stock shall commence on the Date of Grant and, subject to paragraph (d) of ARTICLE 14 of the Plan, unless otherwise established by the Committee in the Award Agreement setting forth the terms of the Restricted Stock, shall expire upon satisfaction of the conditions set forth in the Award Agreement; such conditions may provide for vesting based on (i) length of continuous service, (ii) achievement of specific business objectives, (iii) increases in specified indices, (iv) attainment of specified growth rates, or (v) other comparable measurements of Company performance, as may be determined by the Committee in its sole discretion. 6 (iv) Subject to the provisions of the particular Award Agreement, upon Termination of Service for any reason during the Restriction Period, the nonvested shares of Restricted Stock shall be forfeited by the Participant. In the event a Participant has paid any consideration to the Company for such forfeited Restricted Stock, the Company shall, as soon as practicable after the event causing forfeiture (but in any event within 5 business days), pay to the Participant, in cash, an amount equal to the total consideration paid by the Participant for such forfeited shares. Upon any forfeiture, all rights of a Participant with respect to the forfeited shares of the Restricted Stock shall cease and terminate, without any further obligation on the part of the Company. ARTICLE 7 OPTION PRICE ------------ The Option Price for any share of Common Stock which may be purchased under a Stock Option shall be at least One Hundred Percent (100%) of the Fair Market Value of the share on the Date of Grant. If an Incentive Stock Option is granted to an Employee who owns or is deemed to own (by reason of the attribution rules of Section 424(d) of the Code) more than 10% of the combined voting power of all classes of stock of the Company (or any parent or Subsidiary), the Option Price shall be at least 110% of the Fair Market Value of the Common Stock on the Date of Grant. ARTICLE 8 AWARD PERIOD; VESTING --------------------- 8.1 AWARD PERIOD. Subject to the other provisions of this Plan, the Committee may, in its discretion, provide that an Incentive may not be exercised in whole or in part for any period or periods of time or beyond any date specified in the Award Agreement. Except as provided in the Award Agreement, an Incentive may be exercised in whole or in part at any time during its term. The Award Period for an Incentive shall be reduced or terminated upon Termination of Service in accordance with this ARTICLE 8 and ARTICLE 9. No Incentive granted under the Plan may be exercised at any time after the end of its Award Period. No portion of any Incentive may be exercised after the expiration of ten (10) years from its Date of Grant. However, if an Employee owns or is deemed to own (by reason of the attribution rules of Section 424(d) of the Code) more than 10% of the combined voting power of all classes of stock of the Company (or any parent or Subsidiary) and an Incentive Stock Option is granted to such Employee, the term of such Incentive Stock Option (to the extent required by the Code at the time of grant) shall be no more than five (5) years from the Date of Grant. 8.2 VESTING. The Committee, in its sole discretion, may determine that an Incentive will be immediately exercisable, in whole or in part, or that all or any portion may not be exercised until a date, or dates, subsequent to its Date of Grant, or until the occurrence of one or more specified events, subject in any case to the terms of the Plan. If the Committee imposes conditions upon exercise, then subsequent to the Date of Grant, the Committee may, in its sole discretion, accelerate the date on which all or any portion of the Incentive may be exercised. Notwithstanding anything in the Plan to the contrary, a participant who is a director, executive officer or 10% or greater stockholder of the Company under Section 16 of the 1934 Act and the rules promulgated thereunder (an "insider") cannot exercise a Stock Option until at least six months have expired from the Date of Grant. ARTICLE 9 TERMINATION OF SERVICE ---------------------- In the event of Termination of Service of a Participant, a Stock Option may only be exercised as determined by the Committee and provided in the Award Agreement. 7 ARTICLE 10 EXERCISE OF INCENTIVE --------------------- 10.1 IN GENERAL. A vested Incentive may be exercised during its Award Period, subject to limitations and restrictions set forth therein and in ARTICLE 9. A vested Incentive may be exercised at such times and in such amounts as provided in this Plan and the applicable Award Agreement, subject to the terms, conditions, and restrictions of the Plan. In no event may an Incentive be exercised or shares of Common Stock be issued pursuant to an Award if a necessary listing of the shares of Common Stock on a stock exchange or any registration under state or federal securities laws required under the circumstances has not been accomplished. No Incentive may be exercised for a fractional share of Common Stock. The granting of an Incentive shall impose no obligation upon the Participant to exercise that Incentive. Subject to such administrative regulations as the Committee may from time to time adopt, a Stock Option may be exercised by the delivery of written notice to the Committee setting forth the number of shares of Common Stock with respect to which the Stock Option is to be exercised and the date of exercise thereof (the "Exercise Date") which shall be at least three (3) days after giving such notice unless an earlier time shall have been mutually agreed upon. On the Exercise Date, the Participant shall deliver to the Company consideration with a value equal to the total Option Price of the shares to be purchased, payable as follows: (a) cash, certified check, bank draft, or money order payable to the order of the Company, (b) Common Stock (including Restricted Stock), valued at its Fair Market Value on the Exercise Date, and/or (c) any other form of payment which is acceptable to the Committee. In the event that shares of Restricted Stock are tendered as consideration for the exercise of a Stock Option, a number of shares of Common Stock issued upon the exercise of the Stock Option equal to the number of shares of Restricted Stock used as consideration therefor, shall be subject to the same restrictions as the Restricted Stock so submitted. Common Stock which is acquired by the Participant pursuant to the exercise of a Stock Option may not be used to exercise a subsequent Stock Option until and unless such shares have been held for a period of six months. Upon payment of all amounts due from the Participant, the Company shall cause certificates for the Common Stock then being purchased to be delivered to the Participant (or the person exercising the Participant's Stock Option in the event of his death) at its principal business office promptly after the Exercise Date; provided that the Participant has exercised an Incentive Stock Option, the Company may at its option retain physical possession of the certificate evidencing the shares acquired upon exercise until the expiration of the holding periods described in Section 422(a)(1) of the Code. The obligation of the Company to deliver shares of Common Stock shall, however, be subject to the condition that if at any time the Committee shall determine in its discretion that the listing, registration, or qualification of the Stock Option or the Common Stock upon any securities exchange or under any state or federal law, or the consent or approval of any governmental regulatory body, is necessary or desirable as a condition of, or in connection with, the Stock Option or the issuance or purchase of shares of Common Stock thereunder, the Stock Option may not be exercised in whole or in part unless such listing, registration, qualification, consent, or approval shall have been effected or obtained free of any conditions not acceptable to the Committee. If the Participant fails to pay for any of the Common Stock specified in such notice or fails to accept delivery thereof, the Participant's right to purchase such Common Stock may be terminated by the Company. 10.2 DISQUALIFYING DISPOSITION OF ISO. If shares of Common Stock acquired upon exercise of an Incentive Stock Option are disposed of by a Participant prior to the expiration of either two (2) years from the Date of Grant of such Stock Option or one (1) year from the transfer of shares of Common Stock to the Participant pursuant to the exercise of such Stock Option, or in any other disqualifying disposition within the meaning of Section 422 of the Code, such Participant shall 8 notify the Company in writing of the date and terms of such disposition. A disqualifying disposition by a Participant shall not affect the status of any other Stock Option granted under the Plan as an Incentive Stock Option within the meaning of Section 422 of the Code. ARTICLE 11 AMENDMENT OR DISCONTINUANCE --------------------------- Subject to the limitations set forth in this ARTICLE 11, the Board may at any time and from time to time, without the consent of the Participants, alter, amend, revise, suspend, or discontinue the Plan in whole or in part; provided, however, that no amendment which requires stockholder approval in order for the Plan to continue to comply with Rule 16b-3 under the 1934 Act and Section 162(m) of the Code, including any successors to such Rule and Section, shall be effective unless such amendment shall be approved by the requisite vote of the stockholders of the Company entitled to vote thereon. Subject to the forgoing, the Board shall have the power and authority to amend the Plan in any manner advisable in order for Stock Options granted under the Plan to qualify for the exemption provided by Rule 16b-3 (or any successor rule relating to exemption from Section 16(b) of the 1934 Act) or to qualify as "performance-based" compensation under Section 162(m) of the Code (including amendments as a result of changes to Rule 16b-3 or Section 162(m) or the regulations thereunder to permit greater flexibility with respect to Stock Options granted under the Plan), and any such amendment shall, to the extent deemed necessary or advisable by the Committee, be applicable to any outstanding Stock Options theretofore granted under the Plan, notwithstanding any contrary provisions contained in any stock option agreement. In the event of any such amendment to the Plan, the holder of any Stock Option outstanding under the Plan shall, upon request of the Committee and as a condition to the exercisability thereof, execute a conforming amendment in the form prescribed by the Committee to any stock option agreement relating thereto within such reasonable time as the Committee shall specify in such request. Notwithstanding anything contained in this Plan to the contrary, unless required by law, no action contemplated or permitted by this ARTICLE 11 shall adversely affect any rights of Participants or obligations of the Company to Participants with respect to any Stock Options theretofore granted under the Plan without the consent of the affected Participant. ARTICLE 12 TERM ---- The Plan shall be effective from the date that this Plan is approved by the Board. Unless sooner terminated by action of the Board, the Plan will terminate on June 12, 2006, but Incentives granted before that date will continue to be effective in accordance with their terms and conditions. ARTICLE 13 CAPITAL ADJUSTMENTS ------------------- If at any time while the Plan is in effect, or unexercised Stock Options are outstanding, there shall be any increase or decrease in the number of issued and outstanding shares of Common Stock resulting from (1) the declaration or payment of a stock dividend, (2) any recapitalization resulting in a stock split-up, combination, or exchange of shares of Common Stock, or (3) other increase or decrease in such shares of Common Stock effected without receipt of consideration by the Company, then and in such event: (i) An appropriate adjustment shall be made in the maximum number of shares of Common Stock then subject to being awarded under the Plan and in the maximum number of shares of Common Stock then subject to being awarded to a Participant, to the end that the same proportion of the Company's issued and outstanding shares of Common Stock shall continue to be subject to being so awarded; and 9 (ii) Appropriate adjustments shall be made in the number of shares of Common Stock and the Option Price thereof then subject to purchase pursuant to each such Stock Option previously granted and unexercised, to the end that the same proportion of the Company's issued and outstanding shares of Common Stock in each such instance shall remain subject to purchase at the same aggregate Option Price. Except as otherwise expressly provided herein, the issuance by the Company of shares of its capital stock of any class, or securities convertible into shares of capital stock of any class, either in connection with direct sale or upon the exercise of rights or warrants to subscribe therefor, or upon conversion of shares or obligations of the Company convertible into such shares or other securities, shall not affect, and no adjustment by reason thereof shall be made with respect to, the number of or Option Price of shares of Common Stock then subject to outstanding Stock Options granted under the Plan. Upon the occurrence of each event requiring an adjustment with respect to any Stock Option, the Company shall mail to each affected Participant its computation of such adjustment which shall be conclusive and shall be binding upon each such Participant. ARTICLE 14 RECAPITALIZATION, MERGER AND CONSOLIDATION; CHANGE IN CONTROL -------------------------------- (a) The existence of this Plan and Incentives granted hereunder shall not affect in any way the right or power of the Company or its stockholders to make or authorize any or all adjustments, recapitalizations, reorganizations, or other changes in the Company's capital structure and its business, or any merger or consolidation of the Company, or any issue of bonds, debentures, preferred or preference stocks ranking prior to or otherwise affecting the Common Stock or the rights thereof (or any rights, options, or warrants to purchase same), or the dissolution or liquidation of the Company, or any sale or transfer of all or any part of its assets or business, or any other corporate act or proceeding, whether of a similar character or otherwise. (b) Subject to any required action by the stockholders, if the Company shall be the surviving or resulting corporation in any merger, consolidation or share exchange, any Incentive granted hereunder shall pertain to and apply to the securities or rights (including cash, property, or assets) to which a holder of the number of shares of Common Stock subject to the Incentive would have been entitled. (c) In the event of any merger, consolidation or share exchange pursuant to which the Company is not the surviving or resulting corporation, there shall be substituted for each share of Common Stock subject to the unexercised portions of such outstanding Incentives, that number of shares of each class of stock or other securities or that amount of cash, property, or assets of the surviving, resulting or consolidated company which were distributed or distributable to the stockholders of the Company in respect to each share of Common Stock held by them, such outstanding Incentives to be thereafter exercisable for such stock, securities, cash, or property in accordance with their terms. Notwithstanding the foregoing, however, all such Incentives may be cancelled by the Company as of the effective date of any such reorganization, merger, consolidation, share exchange or any dissolution or liquidation of the Company by giving notice to each holder thereof or his personal representative of its intention to do so and by permitting the purchase during the thirty (30) day period next preceding such effective date of all of the shares of Common Stock subject to such outstanding Incentives. (d) In the event of a Change of Control, then, notwithstanding any other provision in this Plan to the contrary, all unmatured installments of Incentives outstanding shall thereupon automatically be accelerated and exercisable in full and all Restriction Periods applicable to Awards 10 of Restricted Stock shall automatically expire. The determination of the Committee that any of the foregoing conditions has been met shall be binding and conclusive on all parties. ARTICLE 15 LIQUIDATION OR DISSOLUTION -------------------------- In case the Company shall, at any time while any Incentive under this Plan shall be in force and remain unexpired, (i) sell all or substantially all of its property, or (ii) dissolve, liquidate, or wind up its affairs, then each Participant may thereafter receive upon exercise of a Stock Option (in lieu of each share of Common Stock of the Company which such Participant would have been entitled to receive) the same kind and amount of any securities or assets as may be issuable, distributable, or payable upon any such sale, dissolution, liquidation, or winding up with respect to each share of Common Stock of the Company. If the Company shall, at any time prior to the expiration of any Stock Option, make any partial distribution of its assets, in the nature of a partial liquidation, whether payable in cash or in kind (but excluding the distribution of a cash dividend payable out of earned surplus and designated as such) then in such event the Option Prices then in effect with respect to each Stock Option shall be reduced, on the payment date of such distribution, in proportion to the percentage reduction in the tangible book value of the shares of the Company's Common Stock (determined in accordance with generally accepted accounting principles) resulting by reason of such distribution. ARTICLE 16 INCENTIVES IN SUBSTITUTION FOR INCENTIVES GRANTED BY OTHER CORPORATIONS ---------------------------------------- Incentives may be granted under the Plan from time to time in substitution for similar instruments held by employees of a corporation who become or are about to become management Employees of the Company or any Subsidiary as a result of a merger or consolidation of the employing corporation with the Company or the acquisition by the Company of stock of the employing corporation. The terms and conditions of the substitute Incentives so granted may vary from the terms and conditions set forth in this Plan to such extent as the Board at the time of grant may deem appropriate to conform, in whole or in part, to the provisions of the Incentives stock appreciation right in substitution for which they are granted. ARTICLE 17 MISCELLANEOUS PROVISIONS ------------------------ 17.1 INVESTMENT INTENT. The Company may require that there be presented to and filed with it by any Participant under the Plan, such evidence as it may deem necessary to establish that the Incentives granted or the shares of Common Stock to be purchased or transferred are being acquired for investment and not with a view to their distribution. 17.2 NO RIGHT TO CONTINUED EMPLOYMENT. Neither the Plan nor any Incentive granted under the Plan shall confer upon any Participant any right with respect to continuance of employment by the Company or any Subsidiary. 17.3 INDEMNIFICATION OF BOARD AND COMMITTEE. No member of the Board or the Committee, nor any officer or Employee of the Company acting on behalf of the Board or the Committee, shall be personally liable for any action, determination, or interpretation taken or made in good faith with respect to the Plan, and all members of the Board or the Committee and each and any officer or employee of the Company acting on their behalf shall, to the extent permitted by law, be fully indemnified and protected by the Company in respect of any such action, determination, or interpretation. 11 17.4 EFFECT OF THE PLAN. Neither the adoption of this Plan nor any action of the Board or the Committee shall be deemed to give any person any right to be granted an Award or any other rights except as may be evidenced by an Award Agreement, or any amendment thereto, duly authorized by the Committee and executed on behalf of the Company, and then only to the extent and upon the terms and conditions expressly set forth therein. 17.5 COMPLIANCE WITH OTHER LAWS AND REGULATIONS. Notwithstanding anything contained herein to the contrary, the Company shall not be required to sell or issue shares of Common Stock under any Incentive if the issuance thereof would constitute a violation by the Participant or the Company of any provisions of any law or regulation of any governmental authority or any national securities exchange or other forum in which shares of Common Stock are traded (including without limitation any gaming laws or SECTION 16 of the 1934 Act); and, as a condition of any sale or issuance of shares of Common Stock under an Incentive, the Committee may require such agreements or undertakings, if any, as the Committee may deem necessary or advisable to assure compliance with any such law or regulation. The Plan, the grant and exercise of Incentives hereunder, and the obligation of the Company to sell and deliver shares of Common Stock, shall be subject to all applicable federal and state laws, rules and regulations and to such approvals by any government or regulatory agency as may be required. 17.6 TAX REQUIREMENTS. The Company shall have the right to deduct from all amounts hereunder paid in cash or other form, any Federal, state, or local taxes required by law to be withheld with respect to such payments. The Participant receiving shares of Common Stock issued under the Plan shall be required to pay the Company the amount of any taxes which the Company is required to withhold with respect to such shares of Common Stock. Such payments shall be required to be made prior to the delivery of any certificate representing such shares of Common Stock. Such payment may be made in cash, by check, or through the delivery of shares of Common Stock owned by the Participant (which may be effected by the actual delivery of shares of Common Stock by the Participant or, if the Participant is not an insider (as defined in SECTION 8.2 of the Plan), by the Company's withholding a number of shares to be issued upon the exercise of a Stock Option, if applicable), which shares have an aggregate Fair Market Value equal to the required minimum withholding payment, or any combination thereof. 17.7 NON-ASSIGNABILITY. An Incentive granted to a Participant may not be transferred or assigned other than by will or by the laws of descent and distribution, and in the case of a Non-qualified Stock Option, may also be assigned pursuant to a qualified domestic relations order as defined in the Code or Title I of the Employee Retirement Income Security Act of 1974, as amended. If the Participant attempts to alienate, assign, pledge, hypothecate, or otherwise dispose of his Incentive or any right thereunder, except as provided for in this Plan or the Award Agreement, or in the event of any levy, attachment, execution, or similar process upon the right or interest conferred by this Plan or the Award Agreement, the Committee may terminate the Participant's Incentive by notice to him, and it shall thereupon become null and void. In the case of a Restricted Stock Award or a cash Award, such Award, or any portion thereof, shall no longer be deemed to be an Incentive under this Section when such Award or portion of such Award becomes vested and all restrictions and conditions applicable to such Award or portion thereof have lapsed or been satisfied, as the case may be. 17.8 USE OF PROCEEDS. Proceeds from the sale of shares of Common Stock pursuant to Incentives granted under this Plan shall constitute general funds of the Company. 17.9 LEGEND. Each certificate representing shares of Restricted Stock issued to a Participant shall bear the following legend, or a similar legend deemed by the Company to constitute an appropriate notice of the provisions hereof (any such certificate not having such legend shall be surrendered upon demand by the Company and so endorsed): 12 On the face of the certificate: "Transfer of this stock is restricted in accordance with conditions printed on the reverse of this certificate." On the reverse: "The shares of stock evidenced by this certificate are subject to and transferrable only in accordance with that certain Hollywood Casino Corporation 1996 Long-Term Incentive Plan, a copy of which is on file at the principal office of the Company in Dallas, Texas. No transfer or pledge of the shares evidenced hereby may be made except in accordance with and subject to the provisions of said Plan. By acceptance of this certificate, any holder, transferee or pledgee hereof agrees to be bound by all of the provisions of said Plan." The following legend shall be inserted on a certificate evidencing Common Stock issued under the Plan if the shares were not issued in a transaction registered under the applicable federal and state securities laws: "Shares of stock represented by this certificate have been acquired by the holder for investment and not for resale, transfer or distribution, have been issued pursuant to exemptions from the registration requirements of applicable state and federal securities laws, and may not be offered for sale, sold or transferred other than pursuant to effective registration under such laws, or in transactions otherwise in compliance with such laws, and upon evidence satisfactory to the Company of compliance with such laws, as to which the Company may rely upon an opinion of counsel satisfactory to the Company." A copy of this Plan shall be kept on file in the principal office of the Company in Dallas, Texas. 17.10 COMMISSION. To the extent required by law, stock ownership under the Plan will be subject to review by each Commission pursuant to the provisions of the applicable Act. If, after exercise of any Stock Options or issuance of any Restricted Stock under the Plan, a Participant is found to be disqualified by a Commission, such person shall dispose of his shares of Common Stock and the Company shall have the absolute right to repurchase such shares at the then Fair Market Value, the Option Price or the purchase price (if applicable), whichever is the least. 13 IN WITNESS WHEREOF, the Company has caused this instrument to be executed as of July 30, 1996, by its President and Secretary pursuant to prior action taken by the Board. HOLLYWOOD CASINO CORPORATION By: /s/ Edward T. Pratt III ----------------------- President Attest: /s/ William D. Pratt ----------------------------------------- Secretary 14 AMENDMENT TO HOLLYWOOD CASINO CORPORATION 1996 LONG-TERM INCENTIVE PLAN ----------------------------- WHEREAS, Hollywood Casino Corporation, a Delaware corporation (the "Company"), established the Hollywood Casino Corporation 1996 Long-Term Incentive Plan (the "Plan") effective June 12, 1996; and WHEREAS, Article 11 of the Plan authorizes the Board of Directors of the Company to amend the Plan without the approval of the stockholders of the Company unless stockholder approval is necessary to comply with Section 162(m) of the Internal Revenue Code of 1986 or Rule 16b-3 (the "Rule") promulgated under Section 16(b) of the Securities Exchange Act of 1934; and WHEREAS, the Board of Directors (the "Board") has authorized the amendment of the Plan and all awards granted under the Plan to bring them into conformity with recently adopted amendments to the Rule; and WHEREAS, all capitalized terms used but not defined herein shall have the respective meanings assigned to them in the Plan; NOW, THEREFORE, effective as of March 18, 1997, the Corporation hereby amends the Plan and all outstanding awards granted under the Plan as follows: I. The last sentence of Section 8.2 of the Plan is amended to read in its entirety as follows: "Notwithstanding anything in the Plan to the contrary, a participant who is a director, executive officer or 10% or greater stockholder of the Company under Section 16 of the 1934 Act and the rules promulgated thereunder (an "insider") cannot dispose of any Common Stock such insider acquires pursuant to an Award until six months have expired from the Date of Grant of such Award, unless the Committee determines that such disposition by the insider would not result in a violation of Section 16(b) of the 1934 Act." II. The foregoing amendments to the Plan shall be deemed to apply to all outstanding Awards granted under the Plan, and such Awards are hereby deemed amended to the extent necessary to bring them into conformity with the foregoing amendments to the Plan. ***** IN WITNESS WHEREOF, the Company has executed this Amendment this 18th day of March, 1997. HOLLYWOOD CASINO CORPORATION By: /s/ Jack E. Pratt ----------------- Name: Jack E. Pratt Title: Chairman of the Board and Chief Executive Officer Attest: /s/ William D. Pratt -------------------- William D. Pratt, Secretary 2 EX-10.29 8 EXHIBIT 10.29 EXHIBIT 10.29 HOLLYWOOD CASINO CORPORATION 1996 NON-EMPLOYEE DIRECTOR STOCK PLAN ------------------------------------- The Hollywood Casino Corporation 1996 Non-Employee Director Stock Plan (hereinafter called the "Plan") was adopted by the Board of Directors of Hollywood Casino Corporation, a Delaware corporation (hereinafter called the "Company"), effective as of June 12, 1996, and was approved by the Company's stockholders on July 30, 1996. ARTICLE 1 PURPOSE ------- The purpose of the Plan is to attract and retain key Outside Directors of Hollywood Casino Corporation and to provide such persons with a proprietary interest in the Company through the issuance of Common Stock that will (a) increase the interest of such persons in the Company's welfare; (b) furnish an incentive to such persons to continue their services for the Company; and (c) provide a means through which the Company may attract able persons as directors. ARTICLE 2 DEFINITIONS ----------- For the purpose of the Plan, unless the context requires otherwise, the following terms shall have the meanings indicated: 2.1 "Act" means the Illinois Act, the Mississippi Act, the New Jersey Act, and any other gaming laws to which the Company is or may be subject. 2.2 "Board" means the board of directors of the Company. 2.3 "Code" means the Internal Revenue Code of 1986, as amended. 2.4 "Commission" means the Illinois Commission, the Mississippi Commission, the New Jersey Commission, and any other similar gaming entity to which the Company is or may be subject in the future. 2.5 "Committee" means the committee appointed or designated by the Board to administer the Plan in accordance with ARTICLE 3 of this Plan. 2.6 "Common Stock" means the Common Stock which the Company is currently authorized to issue or may in the future be authorized to issue. 2.7 "Company" means Hollywood Casino Corporation, a Delaware corporation, and any successor entity. 2.8 "Date of Grant" means the effective date on which a Stock Option is awarded 1 to an Outside Director (as defined in ARTICLE 4 of this Plan) as set forth in the applicable Stock Option Agreement. 2.9 "Employee" means common law employee (as defined in accordance with the Regulations and Revenue Rulings then applicable under Section 3401(c) of the Code) of the Company or any Subsidiary of the Company. 2.10 "Fair Market Value" of a share of Common Stock means (i) the closing price per share on any stock exchange on which the Common Stock is traded, (ii) the mean between the closing or average (as the case may be) bid and asked prices per share of Common Stock on the over-the-counter market, whichever is applicable, or (iii) as determined by the Committee if the Common Stock is not traded on an exchange or quoted on an over-the-counter market, whichever is applicable. 2.11 "Illinois Act" means the Illinois Riverboat Gambling Act, Ill. Rev. Stat. ch. 120, Paragraph 2401 et seq., as amended, and the regulations promulgated and rulings issued thereunder, and any other Illinois statute regulating gaming activity. 2.12 "Illinois Commission" means the Illinois Gaming Board established pursuant to Section 5 of the Illinois Act. 2.13 "Mississippi Act" means the Mississippi Gaming Control Act, as amended, and the regulations promulgated and rulings issued thereunder, and any other Mississippi statute regulating gaming activity. 2.14 "Mississippi Commission" means the Mississippi Gaming Commission established pursuant to the Mississippi Act. 2.15 "New Jersey Act" means the New Jersey Casino Control Act, N.J. Stat. Ann. 5:12 1, et seq., as amended, and the regulations promulgated and rulings issued thereunder, and any other New Jersey statute regulating gaming activity. 2.16 "New Jersey Commission" means the New Jersey Casino Control Commission. 2 2.17 "Option Period" means the period during which a Stock Option may be exercised. 2.18 "Option Price" means the price which must be paid by a Participant upon exercise of a Stock Option to purchase a share of Common Stock. 2.19 "Outside Director" means a director of the Company who is not an Employee. 2.20 "Participant" shall mean an Outside Director of the Company who is entitled to participate in the Plan. 2.21 "Plan" means this Hollywood Casino Corporation 1996 Non-Employee Director Stock Plan, as amended from time to time. 2.22 "Retirement" means Termination of Service at or after attaining age 65. 2.23 "Stock Option" means a non-qualified option to purchase Common Stock of the Company granted under this Plan. 2.24 "Stock Option Agreement" means a written agreement between a Participant and the Company which sets out the terms of the grant of a Stock Option. 2.25 "Subsidiary" means (i) any corporation in an unbroken chain of corporations beginning with the Company, if each of the corporations other than the last corporation in the unbroken chain owns stock possessing a majority of the total combined voting power of all classes of stock in one of the other corporations in the chain, (ii) any limited partnership, if the Company or any corporation described in item (i) above owns a majority of the general partnership interest and a majority of the limited partnership interests entitled to vote on the removal and replacement of the general partner, and (iii) any partnership, if the partners thereof are composed only of the Company, any corporation listed in item (i) above or any limited partnership listed in item (ii) above. "Subsidiaries" means more than one of any such corporations, limited partnerships or partnerships. 2.26 "Termination of Service as a Director" occurs when a Participant who is an Outside Director of the Company shall cease to serve as a director of the Company for any reason. 2.27 "Total and Permanent Disability" means total and permanent disability as defined in Section 22(e) of the Code. 3 ARTICLE 3 ADMINISTRATION -------------- The Plan shall be administered by a committee appointed by the Board (the "Committee"). The Committee shall consist of not fewer than two persons. Any member of the Committee may be removed at any time, with or without cause, by resolution of the Board. Any vacancy occurring in the membership of the Committee may be filled by appointment by the Board. The Committee shall select one of its members to act as its Chairman and shall make such rules and regulations for its operation as it deems appropriate. A majority of the Committee shall constitute a quorum, and the act of a majority of the members of the Committee present at a meeting at which a quorum is present shall be the act of the Committee. The Committee, in its discretion, shall (i) interpret the Plan, (ii) prescribe, amend, and rescind any rules and regulations necessary or appropriate for the administration of the Plan, and (iii) make such other determinations and take such other action as it deems necessary or advisable in the administration of the Plan. Any interpretation, determination, or other action made or taken by the Committee shall be final, binding, and conclusive on all interested parties. ARTICLE 4 ELIGIBILITY; GRANT OF OPTIONS ----------------------------- The Committee shall grant Stock Options as follows: (i) each Outside Director serving as such on the effective date of the Plan shall receive a Stock Option for 10,000 shares of Common Stock; (ii) each person who shall subsequently be elected or appointed after the effective date of the Plan to serve as an Outside Director and who shall not have previously served as an Outside Director of the Company shall receive a Stock Option for 10,000 shares of Common Stock; and (iii) each person serving as an Outside Director on January 15th of each calendar year shall receive a Stock Option for 2,500 shares of Common Stock. The Committee shall not grant Stock Options under any other circumstances. The grant of a Stock Option shall be evidenced by a Stock Option Agreement setting forth the total number of shares of Common Stock subject to the Stock Option, the Option Price, the maximum term of the Stock Option, the Date of Grant, and such other terms and provisions as are approved by the Committee, but not inconsistent with the Plan. The Company shall execute a Stock Option Agreement with a Participant after the issuance of a Stock Option. Any Stock Option granted pursuant to this Plan must be granted within ten (10) years of the date of adoption of this Plan. The Plan shall be submitted to the Company's stockholders for approval; however, the Committee may grant Stock Options under the Plan prior to the time of stockholder approval. Any such options granted prior to such stockholder approval shall be subject to such stockholder approval. ARTICLE 5 SHARES SUBJECT TO PLAN ---------------------- The maximum number of shares of Common Stock that may be issued under the Plan is one hundred and fifty thousand (150,000) (as may be adjusted in accordance with ARTICLES 12 and 13 hereof). All Stock Options granted under the Plan shall be designated as non-qualified stock options. Shares of Common Stock to be issued under the Plan may be made available from either authorized but unissued Common Stock or Common Stock held by the Company in its treasury. Shares of Common Stock previously subject to Stock Options which are forfeited, terminated, or settled in cash in lieu of Common Stock, or expired unexercised, shall immediately become available for 4 grants of Stock Options under the Plan. During the term of this Plan, the Company will at all times reserve and keep available the number of shares of Common Stock that shall be sufficient to satisfy the requirements of this Plan. ARTICLE 6 OPTION PRICE ------------ The Option Price for any share of Common Stock which may be purchased under a Stock Option shall be One Hundred Percent (100%) of the Fair Market Value of the share on the Date of Grant. ARTICLE 7 OPTION PERIOD; FORFEITURE ------------------------- A Stock Option may be exercised in whole or in part at any time during its Option Period after the expiration of six (6) months from its Date of Grant. No Stock Option granted under the Plan may be exercised at any time after the end of its Option Period. The Option Period for each Stock Option will terminate at the first of the following to occur: (a) 5 p.m. on the tenth anniversary of the Date of Grant; (b) 5 p.m. on the date which is twelve (12) months following the Participant's Termination of Service as a Director due to death or Total and Permanent Disability; (c) 5 p.m. on the date which is three (3) months following the Participant's Termination of Service as a Director due to Retirement; or (d) 5 p.m. on the 30th day after the day of any other Termination of Service as a Director; provided, however, that if such termination occurs after the date this Plan is adopted but before this Plan is approved by the stockholders of the Company, such 30-day period shall begin to run on the effective date of such stockholder approval rather than on the date of termination. ARTICLE 8 EXERCISE OF OPTION ------------------ Stock Options may be exercised during the Option Period. Options may be exercised at such times and in such amounts as provided in this Plan and the applicable Stock Option Agreements, subject to the terms, conditions, and restrictions of the Plan. In no event may a Stock Option be exercised or shares of Common Stock be issued pursuant to a Stock Option if a necessary listing of the shares on a stock exchange or any registration under state or federal securities laws required under the circumstances has not been accomplished. No Stock Option may be exercised for a fractional share of Stock. The granting of a Stock Option shall impose no obligation upon the Participant to exercise that Stock Option. Subject to such administrative regulations as the Committee may from time to time adopt, a Stock Option may be exercised by the delivery of written notice to the Committee setting forth the 5 number of shares of Common Stock with respect to which the Stock Option is to be exercised and the date of exercise thereof (the "Exercise Date") which shall be at least three (3) days after giving such notice unless an earlier time shall have been mutually agreed upon. On the Exercise Date, the Participant shall deliver to the Company consideration with a value equal to the total Option Price of the shares of Common Stock to be purchased, payable as follows: (a) cash, certified check, bank draft, or money order payable to the order of the Company, (b) Common Stock, valued at its Fair Market Value on the Exercise Date, and/or (c) any other form of payment which is acceptable to the Committee. Common Stock which is acquired by the Participant pursuant to the exercise of a Stock Option may not be used to exercise a subsequent Stock Option until and unless such shares have been held for a period of six months. Upon payment of all amounts due from the Participant, the Company shall cause certificates for the Common Stock then being purchased to be delivered to the Participant (or the person exercising the Participant's Stock Option in the event of his death) at its principal business office promptly after the Exercise Date. The obligation of the Company to deliver shares of Common Stock shall, however, be subject to the condition that if at any time the Committee shall determine in its discretion that the listing, registration, or qualification of the Stock Option or the Common Stock upon any securities exchange or under any state or federal law, or the consent or approval of any governmental regulatory body, is necessary or desirable as a condition of, or in connection with, the Stock Option or the issuance or purchase of shares of Common Stock thereunder, the Stock Option may not be exercised in whole or in part unless such listing, registration, qualification, consent, or approval shall have been effected or obtained free of any conditions not acceptable to the Committee. If the Participant fails to pay for any of the Common Stock specified in such notice or fails to accept delivery thereof, the Participant's right to purchase such Common Stock may be terminated by the Company. ARTICLE 9 AMENDMENT OR DISCONTINUANCE --------------------------- Subject to the limitations set forth in this ARTICLE 9, the Board may at any time and from time to time, without the consent of the Participants, alter, amend, revise, suspend, or discontinue the Plan in whole or in part; provided, however, that no amendment which requires stockholder approval in order for the Plan to continue to comply with Rule 16b-3 under the Securities Exchange Act of 1934 Act, as in effect from time to time (the "1934 Act"), including any successor to such Rule, shall be effective unless such amendment shall be approved by the requisite vote of the stockholders of the Company entitled to vote thereon. Subject to the forgoing, the Board shall have the power and authority to amend the Plan in any manner advisable in order for Stock Options granted under the Plan to qualify for the exemption provided by Rule 16b-3 (or any successor rule relating to exemption from Section 16(b) of the 1934 Act) (including amendments as a result of changes to Rule 16b-3 or the regulations thereunder to permit greater flexibility with respect to Stock Options granted under the Plan), and any such amendment shall, to the extent deemed necessary or advisable by the Committee, be applicable to any outstanding Stock Options theretofore granted under the Plan, notwithstanding any contrary provisions contained in any stock option agreement. To the extent required by the rules and regulations promulgated under Section 16 of the 1934 Act, ARTICLES 4, 6 and 7 of the Plan shall not be amended more than once every six months, except that the foregoing shall not preclude any amendment to comport with changes in the Code, the Employee Retirement Income Security Act of 1974 or the rules thereunder in effect from time to time. In the event of any such amendments to the Plan, the holder of any Stock Option outstanding under the Plan shall, upon request of the 6 Committee and as a condition to the exercisability thereof, execute a conforming amendment in the form prescribed by the Committee to any stock option agreement relating thereto within such reasonable time as the Committee shall specify in such request. Notwithstanding anything contained in this Plan to the contrary, unless required by law, no action contemplated or permitted by this ARTICLE 9 shall adversely affect any rights of Participants or obligations of the Company to Participants with respect to any Stock Options theretofore granted under the Plan without the consent of the affected Participant. ARTICLE 10 ELECTION TO RECEIVE COMMON STOCK IN LIEU OF RETAINER ------------------- A Participant may elect to reduce all or part of the cash compensation otherwise payable for services to be rendered by him or her as a director (including the annual retainer fee and any fees payable for services on the Board or any committee thereon) and to receive in lieu thereof shares of Common Stock. Any such election (a) shall be in writing, (b) shall specify an amount of such compensation to be received in the form of Common Stock (expressed as a percentage of the compensation otherwise payable in cash, as an amount in dollars of compensation otherwise payable in cash or as a type of fee (e.g., retainer fee) otherwise payable in cash), (c) shall be made at least six months prior to the end of the first calendar quarter with respect to which such election is to apply and (d) may not be revoked or changed thereafter except as to compensation for services rendered at least six months after any such election to revoke or change is made in writing. Any such election shall continue in effect until six months after an election to revoke or change such election is made in writing. If a Participant elects pursuant to this ARTICLE 10 to receive Common Stock, there shall be issued to such Participant promptly after the end of each calendar quarter with respect to which such election applies a number of shares of Common Stock equal to the amount of such compensation divided by the Fair Market Value of a share of Common Stock on the last business day of the calendar quarter for which the compensation would have been paid in cash in the absence of such election. To the extent that the application of the foregoing formula would result in fractional shares of Common Stock being issuable, cash will be paid to the Participant in lieu of such fractional shares based upon the value established pursuant to such formula. ARTICLE 11 TERM ---- The Plan shall be effective from the date that this Plan is approved by the Board. Unless sooner terminated by action of the Board, the Plan will terminate on June 12, 2006, but Stock Options granted before the date will continue to be effective in accordance with their terms and conditions. ARTICLE 12 CAPITAL ADJUSTMENTS ------------------- If at any time while the Plan is in effect or unexercised Stock Options are outstanding there shall be any increase or decrease in the number of issued and outstanding shares of Common Stock resulting from (1) the declaration or payment of a stock dividend, (2) any recapitalization resulting 7 in a stock split-up, combination, or exchange of shares of Common Stock, or (3) other increase or decrease in such shares of Common Stock effected without receipt of consideration by the Company, then and in such event: (i) An appropriate adjustment shall be made in the maximum number of shares of Common Stock then subject to being issued under the Plan, to the end that the same proportion of the Company's issued and outstanding shares of Common Stock shall continue to be subject to being so issued; (ii) Appropriate adjustments shall be made in the number of shares to be granted under ARTICLE 4 of the Plan, to the end that the same proportion of the Company's issued and outstanding shares of Common Stock shall be granted under ARTICLE 4. (iii) Appropriate adjustments shall be made in the number of shares of Common Stock and the Option Price thereof then subject to purchase pursuant to each such Stock Option previously granted and unexercised, to the end that the same proportion of the Company's issued and outstanding shares of Common Stock in each such instance shall remain subject to purchase at the same aggregate Option Price. Except as otherwise expressly provided herein, the issuance by the Company of shares of its capital stock of any class, or securities convertible into shares of capital stock of any class, either in connection with direct sale or upon the exercise of rights or warrants to subscribe therefor, or upon conversion of shares or obligations of the Company convertible into such shares or other securities, shall not affect, and no adjustment by reason thereof shall be made with respect to, the number of or Option Price of shares of Common Stock then subject to outstanding Stock Options granted under the Plan. Upon the occurrence of each event requiring an adjustment with respect to any Stock Option, the Company shall mail to each Participant its computation of such adjustment which shall be conclusive and shall be binding upon each such Participant. ARTICLE 13 RECAPITALIZATION, MERGER AND CONSOLIDATION ------------------------------------------ (a) The existence of this Plan and Stock Options granted hereunder shall not affect in any way the right or power of the Company or its stockholders to make or authorize any or all adjustments, recapitalizations, reorganizations, or other changes in the Company's capital structure and its business, or any merger or consolidation of the Company, or any issue of bonds, debentures, preferred or preference stocks ranking prior to or otherwise affecting the Common stock or the rights thereof (or any rights, options, or warrants to purchase same), or the dissolution or liquidation of the Company, or any sale or transfer of all or any part of its assets or business, or any other corporate act or proceeding, whether of a similar character or otherwise. (b) Subject to any required action by the stockholders, if the Company shall be the surviving or resulting corporation in any merger or consolidation, any Stock Option granted hereunder shall pertain to and apply to the securities or rights (including cash, property, or assets) to which a holder of the number of shares of Common Stock subject to the Stock Option would have been entitled. (c) In the event of any merger or consolidation pursuant to which the Company is not the surviving or resulting corporation, there shall be substituted for each share of Common Stock subject 8 to the unexercised portions of such outstanding Stock Options, that number of shares of each class of stock or other securities or that amount of cash, property, or assets of the surviving or consolidated company which were distributed or distributable to the stockholders of the Company in respect to each share of Common Stock held by them, such outstanding Stock Options to be thereafter exercisable for such stock, securities, cash, or property in accordance with their terms. Notwithstanding the foregoing, however, all such Stock Options may be cancelled by the Company as of the effective date of any such reorganization, merger, consolidation, or any dissolution or liquidation of the Company by giving notice to each holder thereof or his personal representative of its intention to do so and by permitting the purchase during the thirty (30) day period next preceding such effective date of all of the shares of Common Stock subject to such outstanding Stock Options. (d) Upon the occurrence of each event requiring an adjustment of the Option Price or the number of shares of Common Stock purchasable pursuant to Stock Options granted pursuant to the terms of this Plan, the Company shall mail to each Participant its computation of such adjustment which shall be conclusive and shall be binding upon each such Participant. ARTICLE 14 LIQUIDATION OR DISSOLUTION -------------------------- In case the Company shall, at any time while any Stock Option under this Plan shall be in force and remain unexpired, (i) sell all or substantially all of its property, or (ii) dissolve, liquidate, or wind up its affairs, then each Participant may thereafter receive upon exercise hereof (in lieu of each share of Common Stock of the Company which such Participant would have been entitled to receive) the same kind and amount of any securities or assets as may be issuable, distributable, or payable upon any such sale, dissolution, liquidation, or winding up with respect to each share of Common Stock of the Company. If the Company shall, at any time prior to the expiration of any Stock Option, make any partial distribution of its assets, in the nature of a partial liquidation, whether payable in cash or in kind (but excluding the distribution of a cash dividend payable out of earned surplus and designated as such) then in such event the prices then in effect with respect to each Stock Option shall be reduced, on the payment date of such distribution, in proportion to the percentage reduction in the tangible book value of the shares of the Company's Common Stock (determined in accordance with generally accepted accounting principles) resulting by reason of such distribution. ARTICLE 15 OPTIONS IN SUBSTITUTION FOR STOCK OPTIONS GRANTED BY OTHER CORPORATIONS ------------------------------------------- Stock Options may be granted under the Plan from time to time in substitution for such options held by directors of a corporation who become or are about to become Outside Directors in connection with a merger or consolidation of the employing corporation with the Company or the acquisition by the Company of stock of the employing corporation. The terms and conditions of the substitute options so granted may vary from the terms and conditions set forth in this Plan to such extent as the Committee at the time of grant may deem appropriate to conform, in whole or in part, to the provisions of the options in substitution for which they are granted. 9 ARTICLE 16 MISCELLANEOUS PROVISIONS ------------------------ 16.1 INVESTMENT INTENT. The Company may require that there be presented to and filed with it by any Participant under the Plan, such evidence as it may deem necessary to establish that the options granted or the shares of Common Stock to be purchased or transferred are being acquired for investment and not with a view to their distribution. 16.2 NO EMPLOYMENT RELATIONSHIP. The Participant is not an Employee of the Company or any Subsidiary. Nothing herein shall be construed to create an employer-employee relationship between the Company and the Participant. 16.3 INDEMNIFICATION OF BOARD AND COMMITTEE. No member of the Board or the Committee, nor any officer or employee of the Company acting on behalf of the Board or the Committee, shall be personally liable for any action, determination, or interpretation taken or made in good faith with respect to the Plan, and all members of the Board or the Committee and each and any officer or employee of the Company acting on their behalf shall, to the extent permitted by law, be fully indemnified and protected by the Company in respect of any such action, determination, or interpretation. 16.4 EFFECT OF THE PLAN. Neither the adoption of this Plan nor any action of the Board or the Committee shall be deemed to give any person any right to be granted a Stock Option to purchase Common Stock of the Company or any other rights except as may be evidenced by a Stock Option Agreement, or any amendment thereto, duly authorized by the Committee and executed on behalf of the Company, and then only to the extent and upon the terms and conditions expressly set forth therein. 16.5 COMPLIANCE WITH OTHER LAWS AND REGULATIONS. Notwithstanding anything contained herein to the contrary, the Company shall not be required to sell or issue shares of Common Stock under any Stock Option if the issuance thereof would constitute a violation by the Participant or the Company of any provisions of any law or regulation of any governmental authority or any national securities exchange or other forum in which shares of Common Stock are traded (including without limitation any gaming laws or Section 16 of the Securities Exchange Act of 1934); and, as a condition of any sale or issuance of shares of Common Stock under a Stock Option, the Committee may require such agreements or undertakings, if any, as the Committee may deem necessary or advisable to assure compliance with any such law or regulation. The Plan, the grant and exercise of Stock Options hereunder, and the obligation of the Company to sell and deliver shares of Common Stock, shall be subject to all applicable federal and state laws, rules and regulations and to such approvals by any government or regulatory agency as may be required. 16.6 TAX REQUIREMENTS. The Company shall have the right to deduct from all amounts hereunder paid in cash or other form, any Federal, state, or local taxes required by law to be withheld with respect to such payments. The Participant receiving shares of Common Stock issued under the Plan shall be required to pay the Company the amount of any taxes which the Company is required to withhold with respect to such shares of Common Stock. Such payments shall be required to be made prior to the delivery of any certificate representing such shares of Common Stock. Such payment may be made in cash or by check. 16.7 NON-ASSIGNABILITY. A Stock Option granted to a Participant may not be transferred or assigned other than by will or the laws of descent and distribution or pursuant to a qualified domestic relations order as defined in the Code or Title I of the Employee Retirement Income 10 Security Act of 1974, as amended. If the Participant attempts to alienate, assign, pledge, hypothecate, or otherwise dispose of his Stock Option or any right thereunder, except as provided for in this Plan or the Stock Option Agreement, or in the event of any levy, attachment, execution, or similar process upon the right or interest conferred by this Plan or the Stock Option Agreement, the Committee may terminate the Participant's Stock Option by notice to him, and it shall thereupon become null and void. 16.8 USE OF PROCEEDS. Proceeds from the sale of shares of Common Stock pursuant to Stock Options granted under this Plan shall constitute general funds of the Company. 16.9 LEGEND. If shares of Common Stock are issued upon exercise of a Stock Option, and such transaction is not registered under the applicable federal and state securities laws, the certificate(s) representing such shares shall bear the following legend, or a similar legend deemed by the Company to constitute an appropriate notice of the provisions of the applicable securities laws (any such certificate not having such legend shall be surrendered upon demand by the Company and so endorsed): "Shares of stock represented by this certificate have been acquired by the holder for investment and not for resale, transfer or distribution, have been issued pursuant to exemptions from the registration requirements of applicable state and federal securities laws, and may not be offered for sale, sold or transferred other than pursuant to effective registration under such laws, or in transactions otherwise in compliance with such laws, and upon evidence satisfactory to the Company of compliance with such laws, as to which the Company may rely upon an opinion of counsel satisfactory to the Company." 16.10 COMMISSION. To the extent required by law, stock ownership under the Plan will be subject to review by each Commission pursuant to the provisions of the applicable Act. If, after the exercise of any Stock Options or the issuance of any Common Stock under the Plan, a Participant is found to be disqualified by a Commission, such person shall dispose of his shares of Common Stock and the Company shall have the absolute right to repurchase such shares at the then market price, the Option Price or the Fair Market Value, if any, whichever is the least. IN WITNESS WHEREOF, the Company has caused this instrument to be executed as of July 30, 1996, by its President and Secretary pursuant to prior action taken by the Board. HOLLYWOOD CASINO CORPORATION By: /s/ Edward T. Pratt III ----------------------- President Attest: /s/ William D. Pratt ------------------------------------------ Secretary 11 EX-11.1 9 EXHIBIT 11.1 EXHIBIT 11.1 HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES STATEMENT RE COMPUTATION OF PER SHARE (LOSSES) INCOME
YEAR ENDED DECEMBER 31, ----------------------------------------------------------------------- 1996 1995 1994 1993 1992 ------------- ------------- ----------- ------------- ------------- Calculation of losses: Net (loss) income before extraordinary items.............. $(55,293,000) $ (6,520,000) $ 1,744,000 $ 528,000 $(36,122,000) Preferred stock dividend requirements..................... - - - (79,000) (113,000) ------------ ------------ ----------- ------------ ------------ Net (loss) income to common stockholders before extraordinary items.............. (55,293,000) 6,520,000 1,744,000 449,000 (36,235,000) Extraordinary items................ - (23,808,000) 126,000 (13,069,000) - ------------ ------------ ----------- ------------ ------------ Net (loss) income to common stockholders........................ $(55,293,000) $(17,288,000) $ 1,870,000 $(12,620,000) $(36,235,000) ============ ============ =========== ============ ============ Calculation of number of shares: Class A common stock............... 24,721,000 24,720,000 24,392,000 16,968,000 13,300,000 Exercise of options................ - 130,000 458,000 1,047,000 1,050,000 Exercise of warrants............... - - - 4,791,000 5,700,000 ------------ ------------ ----------- ------------ ------------ Weighted average shares outstanding......................... 24,721,000 24,850,000 24,850,000 22,806,000 20,050,000 ============ ============ =========== ============ ============ Per share data: Net (loss) income to common stockholders before extraordinary items.............. $ (2.24) $ 0.26 $ 0.07 $ 0.02 $ (1.81) Extraordinary items................ - (0.96) 0.01 (0.57) - ------------ ------------ ----------- ------------ ------------ Net (loss) income to common stockholders........................ $ (2.24) $ (0.70) $ 0.08 $ (0.55) $ (1.81) ============ ============ =========== ============ ============
EX-21.1 10 EXHIBIT 21.1 EXHIBIT 21.1 SUBSIDIARIES OF HOLLYWOOD CASINO CORPORATION
STATE NAME ADDRESS ORGANIZED Hollywood Casino - Aurora, Inc. 13455 Noel Road Illinois Suite 2200, LB48 Dallas, TX 75240 HWCC-Aurora Management, Inc. 13455 Noel Road Illinois Suite 2200, LB48 Dallas, TX 75240 HWCC - Tunica, Inc. 13455 Noel Road Texas Suite 2200, LB48 Dallas, TX 75240 HWCC Development Corp. 13455 Noel Road Texas Suite 2200, LB48 Dallas, TX 75240 HWCC - Louisiana, Inc. 13455 Noel Road Louisiana Suite 2200, LB48 Dallas, TX 75240 HWCC - Argentina, Inc. 13455 Noel Road Texas Suite 2200, LB48 Dallas, TX 75240 Hollywood Management, Inc. 13455 Noel Road Texas Suite 2200, LB48 Dallas, TX 75240 HWCC - Golf Course Partners, Inc. 13455 Noel Road Delaware Suite 2200, LB48 Dallas, TX 75240 HWCC - Aviation, Inc. 13455 Noel Road Texas Suite 2200, LB48 Dallas, TX 75240
EX-23.1 11 EXHIBIT 23.1 EXHIBIT 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS ----------------------------------------- To Hollywood Casino Corporation: As independent public accountants, we hereby consent to the incorporation of our report included in this Form 10-K, into the Company's previously filed Registration Statement File No. 333-11163. ARTHUR ANDERSEN LLP Roseland, New Jersey March 28, 1997 EX-27.1 12 EXHIBIT 27.1
5 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. 0000888245 HOLLYWOOD CASINO CORPORATION 1,000 YEAR YEAR DEC-31-1996 DEC-31-1995 JAN-01-1996 JAN-01-1995 DEC-31-1996 DEC-31-1995 21,488 56,538 0 0 4,833 34,085 1,693 17,675 1,620 5,837 39,851 93,850 249,741 513,209 49,740 179,073 308,085 514,463 33,674 72,353 223,764 487,522 0 0 0 0 2 2 45,142 (57,235) 308,085 514,463 0 0 530,580 539,943 0 0 423,738 392,383 84,311 85,148 21,772 3,774 55,989 51,850 (55,230) 6,788 63 268 (55,293) 6,520 0 0 0 (23,808) 0 0 (55,293) (17,288) (2.24) (.70) 0 0
EX-27.2 13 EXHIBIT 27.2
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF HWCC - TUNICA, INC. AND SUBSIDIARY AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000927801 HWCC-TUNICA, INC. 1,000 YEAR YEAR DEC-31-1996 DEC-31-1995 JAN-01-1996 JAN-01-1995 DEC-31-1996 DEC-31-1995 9,321 11,529 0 0 1,985 1,741 622 313 672 883 13,163 15,033 115,068 80,473 22,275 12,178 116,620 122,240 12,276 13,482 85,134 85,244 0 0 0 0 0 0 19,210 23,426 116,620 122,240 0 0 94,524 94,416 0 0 72,063 63,393 16,913 16,572 539 449 9,225 10,155 (4,216) 3,847 0 (694) (4,216) 4,541 0 0 0 (9,614) 0 0 (4,216) (5,073) 0 0 0 0
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