-----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, FEw7mAAbtgnPxP+Gkf2FT1dWptXJZ8wEC8om1YGhtPP4Tip0hQQ4ldAtdlc5YevV re8KVEpsDli+uIDT8GlYmw== 0000930661-99-000825.txt : 19990416 0000930661-99-000825.hdr.sgml : 19990416 ACCESSION NUMBER: 0000930661-99-000825 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990415 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: SEC FILE NUMBER: 000-20275 FILM NUMBER: 99594078 BUSINESS ADDRESS: STREET 1: TWO GALLERIA TOWER STREET 2: 13455 NOEL RD LB 48 CITY: DALLAS STATE: TX ZIP: 75240 BUSINESS PHONE: 9723927777 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: SEC FILE NUMBER: 033-82182 FILM NUMBER: 99594079 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, 1998 ------------------------------------------------------ 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 Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, $.0001 PAR VALUE PREFERRED STOCK PURCHASE RIGHTS ------------------------------- Title of each class 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 April 12, 1999, was $16,048,046. 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 April 12, 1999, 24,949,976 shares of Class A Common Stock, $.0001 par value per share, were outstanding. As of April 12, 1999, 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 26, 1999 - Part III. HWCC-Tunica, Inc. meets the conditions set forth in General Instruction (I)(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 casino and entertainment facility in Aurora, Illinois approximately 35 miles west of downtown Chicago (the "Aurora Casino"), and a casino, hotel and entertainment complex in Tunica County, Mississippi located approximately 30 miles south of Memphis, Tennessee (the "Tunica Casino"). Both the Aurora and Tunica facilities feature the Company's unique Hollywood theme, which incorporates the excitement and glamour of the motion picture industry by utilizing designs inspired by famous movies, displays of motion picture memorabilia and movie themed gaming, entertainment and dining areas. In addition, the Company recently received approval and has a license to develop, own and operate a destination gaming resort to be located in Shreveport, Louisiana, approximately 175 miles east of Dallas, Texas (the "Shreveport Casino"). Approximately 46% of HCC's outstanding common shares are listed and traded on the Nasdaq National Market tier of the Nasdaq Stock Market under the symbol HWCC. The remaining outstanding HCC common shares are owned by Jack E. Pratt, Edward T. Pratt, Jr. and William D. Pratt and by certain general partnerships and trusts controlled by the Pratts and by other family members. 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") whose principal assets consisted of the Sands Hotel and Casino in Atlantic City, New Jersey and management and consulting contracts with HCA and HCT. On December 31, 1996, HCC distributed the common stock of GBCC owned by HCC to its shareholders; consequently, GBCC is no longer a subsidiary of HCC. Effective April 1, 1997, HCC acquired the general partnership interest in Pratt Management, L.P. ("PML"), the limited partnership which holds the management contract on the Aurora Casino (see "Pratt Management, L.P." below), from a subsidiary of GBCC. Accordingly, PML is reflected as a consolidated subsidiary of HCC for all periods subsequent to April 1, 1997. The remaining limited partnership interest continues to be held by a subsidiary of GBCC and is reflected in the accompanying consolidated financial statements as a minority interest. The Company's casinos use casino information technology developed by Advanced Casino Systems Corporation ("ACSC"), a subsidiary of GBCC. The technology includes table game and slot machine monitoring systems that enable the casinos 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 slot machines and table games are connected with its data base monitoring system. When patrons use the casino player's card at slot machines or table games, the information is immediately available to management and allows management to implement marketing programs to recognize and reward patrons during their visits to the casino. Such promotions and complimentaries include free food, hotel accommodations, retail merchandise, sweepstake giveaways and "cash-back" programs based on slot machine patrons' gross wagering. Management believes that its ability to reward customers on a same-visit basis is valuable in developing a loyal base of higher value patrons. The casino system also enables the Company's properties to capture and maintain patron information necessary in implementing its casino player's card and other 2 database marketing programs. In addition, ACSC's systems allow management to monitor, analyze and control the granting of gaming credit, promotional expenses and other marketing costs. Management uses the databases to focus marketing efforts on patrons who have been identified as higher value patrons. This focus is particularly important at the Aurora Casino, where the number of gaming positions available on each daily casino excursion is limited. Management believes that the process of identifying higher value patrons, encouraging participation in its casino player's card program and tailoring promotions and special events to cater to this market segment enhances the profitability of the Company's casinos. The Company 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 HCC's gaming facilities and the casino player's card program, the database capabilities are used to direct market to these patrons in an attempt to convert them into higher value patrons. During 1998, the Company began implementing a strategic plan that consists of: (1) maintaining strong market positions in Aurora and Tunica, (2) expanding the Aurora Casino, (3) developing the Shreveport Casino and (4) acquiring the management and consulting contracts with respect to the Aurora and Tunica casinos in order to terminate our existing obligations to pay fees to GBCC. Management believes that the successful execution of this plan will enable HCC to enhance its operating performance and simplify its organizational structure. The Company's plans with respect to the first three points of the strategic plan are discussed below under the captions "Aurora Casino", "Tunica Casino" and "Shreveport Casino." The acquisition of the management and consulting contracts is to be accomplished through the planned acquisition of Pratt Casino Corporation, a wholly owned subsidiary of GBCC (see "Pratt Management, L.P." below). 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 in June 1993. The Aurora facility's primary market is the affluent suburbs north and west of Chicago. Approximately 5.7 million adults live within a 50-mile radius and approximately 8 million adults live within a 100-mile radius of Chicago. The facility is easily accessible from major highways, can be reached by train from downtown Chicago in approximately 50 minutes and is approximately 30 miles from both the O'Hare International and Midway airports. The Aurora Casino's two riverboat casinos contain an aggregate of approximately 29,600 square feet of gaming space with approximately 975 slot machines and approximately 55 table games. The Aurora Casino also includes an approximately 64,000 square foot, land-based pavilion featuring a glass-domed, four-story atrium with two upscale lounges, the award- winning Fairbanks(R) gourmet steakhouse, The Hollywood Epic Buffet(R), a 1950s- style diner, a high-end customer lounge and a new, private, intimate dinning room, called the "Gold Room," for premium players. The Aurora Casino's two parking garages provide convenient access for approximately 1,340 cars. The Aurora Casino also offers retail items at the Hollywood Casino Studio Store, a highly-themed shopping facility that offers movies on video, soundtrack CDs and logo merchandise from major Hollywood studios. The Aurora Casino was the first of HCC's properties to feature the distinctive Hollywood theme. Management believes that the use of the Hollywood theme throughout the Aurora Casino's gaming, dining and entertainment facilities provides a uniquely entertaining atmosphere for patrons and encourages both initial and repeat visits. The Aurora Casino also includes themed gaming areas and the use of movie star 3 look-alikes to entertain guests. The Aurora Casino is also located near the Paramount Arts Center. This 1,900-seat, art deco-style theater was completely renovated by the City of Aurora in 1992. The Aurora Casino uses the Paramount Theater to provide headliner entertainment for customers. Entertainers booked at the Paramount have included: Frank Sinatra, Tom Jones, Ann Margaret, The Temptations, Howie Mandel, Willie Nelson, Engelbert Humperedink, Paul Anka, Bill Cosby, Smokey Robinson, The Beach Boys, Aretha Franklin, Kenny Rogers, Frankie Valli, Liza Minelli and Steve Lawrence & Eydie Gorme. The Chicago gaming market is the fourth largest gaming market in the United States after Las Vegas, Atlantic City and the Connecticut Native American casinos. Based on published reports, the Aurora Casino generated 10.4% of total gaming revenues in the Chicago gaming market with only 9.1% of the market's gaming positions, resulting in the Aurora Casino capturing 114% of its "fair share" of the market's gaming revenues in 1998. The casinos that operate in the Chicago gaming market include four Illinois casinos, including the Aurora Casino, and five Northern Indiana casinos located within 50 miles of downtown Chicago. The Chicago gaming market experienced a significant increase in gaming revenues due to the substantial increase in capacity from the opening of the five Northern Indiana riverboats in 1996 and 1997. In 1998, the Chicago gaming market generated approximately $1.5 billion in gaming revenues, an increase of approximately 100% from 1995. The Aurora Casino's riverboats currently depart from their landings for 16 daily cruises Sunday through Thursday and 17 daily cruises on Friday and Saturday, commencing at various times from 9:00 a.m. until 4:30 a.m. This schedule may be varied, based on experience and seasonal factors. Once passengers board, they are permitted to game during the half hour prior to the time the riverboat departs. After the cruise, passengers are permitted to game for an additional half hour before new passengers board, for a total of up to two and one-half hours of gaming per cruise. 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 vessel at any time but may board only prior to the regularly scheduled start of the cruise. Aurora Casino Expansion. As part of the Company's overall strategic plan to ----------------------- maximize the operating performance of the Aurora Casino, management has developed plans to expand and improve its gaming product by replacing the smaller and less spacious of the two current riverboats with a larger, newly constructed riverboat. The new riverboat would include approximately 22,000 square feet of gaming space on one and one-half levels, as compared to the approximately 9,950 square feet of gaming space on four levels of the existing riverboat. The new riverboat would effectively increase overall passenger capacity for both riverboats from approximately 1,840 to 2,200, representing a 20% increase. The Aurora Casino would also be able to provide a more spacious and comfortable gaming environment for its customers in the larger of its currently existing riverboats by moving a significant number of its slot machines and table games to the new riverboat. Management believes that the expansion would provide a competitive advantage by enabling the Aurora Casino to offer a staggered cruising schedule with two premier gaming facilities. The new riverboat is projected to cost approximately $40 million and would require a construction period of approximately 14 months. The Company intends to seek financing for this expansion; however, no financing has been arranged and there can be no assurance that such financing will be available to the Company. Management understands there is a possibility that legislation could be introduced in the Illinois legislature in the near future that, if enacted, would authorize dockside gaming for the existing casino 4 licensees. Given this possibility, alternative plans have been prepared for the development of a dockside casino in Aurora. The Company believes the $40 million anticipated cost for a new riverboat casino would be sufficient for the development of a dockside casino, should such legislation be enacted. 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, 1998, gaming credit extended to customers accounted for less than 2% of overall wagering. At December 31, 1998, gaming receivables amounted to $1.6 million before allowances for uncollectible gaming receivables which amounted to $655,000. 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, 1998 there were approximately 1,615 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 commenced operations in August 1994. Tunica County is the closest legalized gaming jurisdiction to, and is easily accessible from, the Memphis metropolitan area. Approximately 4.9 million adults live within a 200- mile radius of Tunica County, approximately 867,000 of whom reside within 50 miles of Memphis. In addition, Memphis hosted approximately 8 million visitors in 1998. The Tunica market has become a regional destination resort, attracting customers from markets such as Nashville, Atlanta, St. Louis, Little Rock and Tulsa. The Tunica Casino is accessible to its customers via Highway 61 and Interstate 55. The Tunica Casino features a 54,000 square foot, single level casino with approximately 1,400 slot machines and approximately 50 table games. The facility's 506-room hotel and 123-space recreational vehicle park provide overnight accommodations for the Tunica Casino's patrons. The casino includes the highly-themed Adventure Slots(R) gaming area, featuring special effects, multimedia displays of memorabilia from famous adventure motion pictures and over 200 slot machines. Additional entertainment amenities provided by the Tunica Casino include its award-winning Fairbanks gourmet steakhouse, The Hollywood Epic Buffet, a 1950s-style diner, an entertainment lounge, a themed bar facility, an indoor pool and showroom, banquet and meeting facilities. Also, in November 1998, the Tunica Casino opened an 18-hole championship golf course adjacent to the facility through a joint venture with Harrah's Entertainment, Inc. and Boyd Gaming Corporation. The Tunica Casino also offers parking for 1,850 cars. The Company's Hollywood theme is utilized throughout the Tunica Casino, which is designed to resemble a large motion picture sound stage complete with catwalks and movie-set style lighting. In addition, numerous movie props and pieces of motion picture memorabilia are displayed throughout the facility. In 1998, the Tunica Casino installed one of its largest and most dramatic memorabilia pieces--a 28-foot long model ship used in the filming of the Academy Award(R) winning movie Titanic which is depicted sinking into the Atlantic Ocean. The Tunica Casino also provides headliner entertainment for its customers. Entertainers who have performed at the Tunica Casino include the Commodores and Collin Raye. The Tunica Casino continues to be one of the leading operators in the Tunica gaming market. Based on published market information, the Tunica Casino generated 9.1% of the total gaming revenues in the Tunica gaming market with only 8.8% of the market's gaming positions, resulting in the Tunica Casino capturing approximately 104% of its "fair share" of the market's gaming revenues in 1998. There are currently ten casinos operating in the Tunica market, including the Tunica Casino. The market has rapidly 5 become the fifth largest gaming market in the United States after Las Vegas, Atlantic City, the Connecticut Native American casinos and Chicago, generating approximately $1.1 billion in gaming revenues in 1998. The Tunica Casino is located in a cluster with gaming facilities operated by Harrah's Entertainment, Inc. and Boyd Gaming Corporation. The three operating casinos have named the cluster "Casino Strip" in order to establish a marketing identity for the cluster. The three properties operate a free shuttle bus service between the casinos and have also conducted joint marketing activities including a billboard campaign and radio advertising. Furthermore, the three properties conduct joint special events to attract customers to the cluster. In 1998, management launched a $13 million upgrade which it believes will enhance the Tunica Casino's position as one of the highest quality facilities in the Tunica gaming market. As of March 31, 1999, the casino has added 255 new state of the art slot machines, upgraded all of its hotel rooms, expanded the number of recreational vehicle spaces and opened the 18-hole championship golf course. By the end of the second quarter of 1999, the casino intends to substantially complete the upgrade of all of its hotel suites, replace an additional 136 slot machines, develop a new VIP check-in and a private entertainment lounge to enhance the level of service provided to its premium gaming patrons, enhance all public areas, including the installation of a new marble floor in the hotel lobby, and enhance the facility's exterior through landscaping and lighting improvements. 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 premium patrons; 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 has broad patron appeal and distinguishes the Tunica Casino from its competitors. Additionally, the nature of the theming permits for periodic and cost effective updating which management believes stimulates repeat visits. 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 1998, gaming credit extended to customers accounted for less than 1% of overall wagering. At December 31, 1998, gaming receivables amounted to $1.6 million before allowances for uncollectible gaming receivables amounting to $813,000. Management of the Tunica Casino believes that the allowances for uncollectible gaming receivables are adequate. Employees and Labor Relations. At December 31, 1998, 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. PRATT MANAGEMENT, L.P. - ---------------------- PML manages the Aurora Casino pursuant to a management contract which was executed in June 1991 and has an initial term of 99 years. PML acts as the sole and exclusive agent in the supervision, direction and control of the management of the Aurora Casino and any additions or expansions thereof. PML receives a quarterly base management fee equal to 5% of operating revenues (as defined in the agreement). However, for so long as HCC's 12 3/4% Senior Secured Notes due 2003 (the "Senior Secured Notes") remain outstanding (see "Item 2. Properties - The Aurora Casino" below), payment of the base services fee is (i) subject to a maximum of $5.5 million in any consecutive 12 month period; (ii) 6 subordinate to payment of interest on the Senior Secured Notes; and (iii) conditioned upon compliance with the indenture for the Senior Secured Notes. PML also receives an incentive fee equal to 10% of gross operating profit (as defined in the agreement). Pursuant to the Agreement of Limited Partnership, an HCC subsidiary earns as general partner an amount equal to 99% of the first $84,000 of net income earned by PML each month and 1% of any net income earned above such amount, all of which comes from management fees received from the management of the Aurora Casino pursuant to the management contract. PML makes distributions of all remaining income to a GBCC subsidiary which is the limited partner in PML. Because PML is included in the consolidated results of operations of HCC, the limited partner earnings are reflected as minority interest. The Aurora Casino management contract can be terminated by either party upon 45 days prior written notice in the event of the other party's material breach of the agreement, inability to pay debts generally as they become due, bankruptcy or other similar proceedings, action to suspend normal business operations, or imposition of any materially adverse levy or judgment. Furthermore, PML has the right to terminate if HCA fails to furnish funds required for PML to manage the Aurora Casino or fails to compensate or reimburse PML. In such case, PML is entitled to liquidated damages in an amount equal to 10 times the aggregate base services fee and incentive fee earned by PML in the preceding fiscal year. RECENT DEVELOPMENTS - ------------------- Pratt Casino Corporation Acquisition. In March 1999, the Company entered ------------------------------------ into an agreement in principle with GBCC and certain of its wholly owned subsidiaries, including PRT Funding Corp. ("PRT Funding") and Pratt Casino Corporation ("PCC"), and the holders of $85 million of senior notes currently in default which were issued by PRT Funding. Under the terms of the agreement, the Company would purchase the stock of PCC from GBCC for nominal consideration as part of a debt restructuring (the "Restructuring") of PRT Funding, PCC and other subsidiaries of PCC. Upon completion of the Restructuring, PCC's assets will consist of its limited partnership interest in PML and a consulting agreement for the Tunica Casino. These assets will serve as collateral for $39.3 million of new notes to be issued by PCC to the holders of the senior notes as part of the Restructuring. The acquisition of PCC will also result in a charge to expense by the Company of approximately $39.3 million during 1999 as no asset value will be attributed to the management contract and consulting agreement when acquired. After the acquisition of PCC, the Company will have incurred additional debt and associated interest, but will no longer report a minority interest in PML nor pay the Tunica consulting fee to a GBCC subsidiary. The minority interest and consulting fee expense totaled $7.7 million for the year ended December 31, 1998. The successful completion of the Restructuring is subject to the execution of definitive documents and will require that PCC and PRT Funding file for protection under Chapter 11 of the United States Bankruptcy Code with the above transactions included as part of a pre-negotiated plan of reorganization. Such plan will require approval of the bankruptcy court as well as by the various gaming regulatory organizations having jurisdiction over PCC and PRT Funding. The Shreveport Casino. In September 1998, the Company and its two joint --------------------- venture partners, New Orleans Paddlewheels, Inc. ("Paddlewheels") and Sodak Gaming, Inc. ("Sodak"), received preliminary approval to develop, own and operate a casino and hotel resort in Shreveport, Louisiana. Under the terms of the joint venture agreement, all of the equity capital for the project was to be provided by HCC and Sodak, resulting in each owning 50% of the joint venture, with Paddlewheels holding a 10% residual interest in the event that the project was sold in the future. On March 31, 1999, the Company entered into a definitive agreement to purchase Sodak's interest in the joint venture. HCC is obligated to pay Sodak 7 $2.5 million (the amount Sodak contributed to the project) for its interest, $1,000 of which is to be paid at closing and the remainder to be paid six months after the opening of the Shreveport Casino. Paddlewheels will retain its 10% residual interest. Completion of the project and its initial operation are subject to final approvals by the Louisiana Gaming Control Board as well as obtaining financing for the project. In addition to its 100% ownership interest, which will be held by a non-recourse subsidiary of the Company under the terms of the Senior Secured Notes, another HCC subsidiary will operate the Shreveport Casino under a management agreement. This management agreement provides that the Shreveport Casino must pay a management fee of 2% of net revenues plus an increasing percentage (5 - 10%) of the Shreveport Casino's annual earnings before interest, taxes, depreciation and amortization above $25 million. This destination resort is currently designed to include a 400-room, art deco-style hotel, and a three-level, 66,000 square foot riverboat casino, which would be the largest riverboat casino in the market. The resort is also designed to include a 170,000 square foot pavilion housing numerous restaurants and entertainment amenities, a 100-foot wide seamless entrance to the riverboat from the land-based pavilion on all three levels and over 40,000 square feet of retail space. As planned, the Shreveport Casino will feature the Company's unique Hollywood theme, which will be utilized throughout the resort. The Shreveport resort is planned to be located next to Harrahs' existing riverboat facility which would position it as the first casino property that customers will reach when driving to the Shreveport/Bossier City market from the primary feeder markets of Dallas/Ft. Worth and East Texas. Once completed, the Shreveport Casino will be the fifth casino operating in the Shreveport/Bossier City gaming market. The existing four operators generated approximately $600 million in gaming revenues in 1998. Upon its completion, the Shreveport Casino will compete directly with Binion's Horseshoe, Harrah's, the Isle of Capri and Casino Magic in the Shreveport/Bossier City market. The Louisiana Gaming Control Board has granted approval to applicants for 14 of the 15 legislatively approved licenses, five of which are located in the Shreveport/Bossier City market. If the remaining fifteenth license is granted, it may be located in the Shreveport/Bossier City market which could have a material adverse impact on the Shreveport Casino. It is currently anticipated that the cost to develop and open the Shreveport Casino will be approximately $200 million and that construction of the project will take approximately 14 months to complete. The Company intends to raise approximately $150 million in non-recourse project debt, including equipment financing, to fund the construction of the Shreveport Casino. The remaining $50 million will be provided in the form of equity contributions, a portion of which will come from HCC's existing cash and the remainder being subject to additional financing. Financing for the Shreveport Casino project has not been arranged and there can be no assurance that such financing will be available to the Company. 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, Native American reservation gaming and other forms of legalized gaming in the United States and other jurisdictions. Legalized gambling is currently permitted in various forms throughout the United States, in several Canadian provinces, as well as on Native American reservations in certain states including Louisiana and Mississippi. Other jurisdictions may legalize gaming in the near future through the introduction of proposals to legalize gaming in their state legislatures. In addition, 8 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 (the "Riverboat Act") and the rules promulgated by the Illinois Gaming Board thereunder authorize only ten owner's licenses for riverboat gaming operations in Illinois and permit a maximum of 1,200 gaming positions at any time for each of the ten licensed sites. All authorized owner's licenses have been granted and no additional licenses or gaming positions can be permitted without further state legislation. One licensed site ceased gaming operations in July 1997. Management believes that this license will likely be relocated and will commence operations in the future at a new site which could be within the Aurora Casino's principal market. Four riverboat sites, including the Aurora Casino, are currently licensed in Illinois within 50 miles of downtown Chicago. Two of these riverboat sites are in Joliet, approximately 40 miles southwest of downtown Chicago, and a third is in Elgin, Illinois, approximately 20 miles from Aurora, 40 miles from downtown Chicago and amid the affluent northern and western suburbs. In addition, the Aurora Casino competes directly with five riverboat operations opened since 1996 in northwestern Indiana within 50 miles of downtown Chicago. Increased competition from casinos in Indiana has resulted in greater competition for patrons from the downtown Chicago market and from the suburban Chicago market. The next closest operating casinos are in Milwaukee, Wisconsin, approximately 90 miles from downtown Chicago, and in Peoria, and Rock Island, Illinois, approximately 160 miles from downtown Chicago. Legislation could also 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 Aurora Casino's principal market. In addition, legislation authorizing three casinos in the Detroit, Michigan area has been approved. Native American tribes are seeking to open casino facilities in northwestern Indiana, Michigan and Wisconsin under the Indian Gaming Regulatory Act. The opening of additional casinos proximate to Chicago could have a material adverse impact on the Aurora Casino. THE TUNICA CASINO The Tunica Casino faces intense competition from the other nine casinos operating in north Tunica County and Coahoma County. Within the Casino Strip cluster, the Tunica Casino competes with Sam's Town and Harrah's Mardi Gras. A second casino owned by Harrah's in the Casino Strip closed during 1997, but is expected to be reopened by Isle of Capri Casinos, Inc. in the summer of 1999. A three casino cluster called "Casino Center" consists of Binion's Horseshoe, Sheraton Casino and Goldstrike Casino and is located north of the Casino Strip cluster and closer to the Memphis market. Bally's operates a casino and hotel adjacent to, but not connected with, the Casino Center. Fitzgeralds is located between Casino Center and the Casino Strip cluster. In addition, Lady Luck operates a casino in Coahoma County which is located approximately 40 miles south of the Casino Strip cluster. During July 1996, Grand Casinos opened a casino complex immediately north of Casino Center with 140,000 square feet of gaming space including approximately 3,270 slot machines and 120 table games. Three hotels with an aggregate of 1,366 rooms, a conference center and a golf course are currently available and other amenities are scheduled for later completion. The opening of this casino space, now the largest in Mississippi, increased casino capacity in Tunica County by 24%. Management believes the shortage of hotel rooms was a restriction to growth in prior years. However, a number of casino operations have completed and opened hotel facilities from 1996 through 9 the present. During 1997 and early 1998, the Goldstrike Casino completed a 31- story, 1,200-room hotel tower and Binion's opened a 300-room hotel tower. Sheraton Casino also completed construction of 150 hotel rooms. The total current number of hotel rooms in Tunica County has increased to approximately 5,700 rooms from 1,250 at the end of 1995, a greater than three-fold increase. The additional hotel capacity has made the Casino Center increasingly competitive in attracting overnight visitors. The Mississippi Gaming Control Act does not limit the number of licenses that may be granted. Any significant increase in new capacity in Tunica County could negatively impact the operations of the Tunica Casino. Although management does not believe that the Tunica Casino faces significant competition from casinos outside of Tunica County, legalized gaming operations are established in and around Mississippi, including 12 casinos on the Gulf Coast. In addition, the Tunica Casino may eventually face competition from the opening of gaming casinos closer to Memphis, including DeSoto County, Mississippi, which is the only county between Tunica County and the Tennessee border. DeSoto County has defeated gaming proposals on three separate occasions, most recently in November 1996, and by statute cannot vote on such issue again until 2004. Casino gaming is not currently legalized in Tennessee or Arkansas. Although management does not anticipate such legislation in the near term, the legislation of gaming in either Tennessee or Arkansas could have a material adverse impact on the Tunica Casino. CASINO REGULATION - ----------------- ILLINOIS The Riverboat Act currently authorizes riverboat gaming on navigable streams within or forming a boundary of the State of Illinois except for Lake Michigan. Riverboat gaming is not permitted 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 Aurora Casino's owner's license was renewed in 1998 and expires in December 1999. The Illinois Gaming Board is authorized to issue ten owner's licenses statewide. Each owner's license permits up to two boats as a part of the riverboat gaming operation. 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. 10 All licensees must maintain their suitability for licensure and have a continuing duty to disclose any material changes in information provided to the Illinois Gaming Board. Applicants for and holders of an owner's license are required to obtain formal prior approval from the Illinois Gaming Board for changes proposed in the following areas; (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) economic development plans or proposals, (vii) riverboat capacity or significant design change, (viii) gaming positions, (ix) anticipated economic impact, or (x) agreements, oral or written, relating to the acquisition or disposition of property (real or personal) of a value greater than $1 million. A holder of an owner's license is allowed to make distributions to its partners, stockholders or itself only to the extent that such distribution would not impair the financial viability of the gaming operation. Factors to be considered by the licensee include, but are not limited to, the following: (i) cash flow, casino cash and working capital requirements, (ii) debt service requirements and covenants associated with financial instruments, (iii) requirements for repairs, maintenance and capital improvements, (iv) employment or economic development requirements of the Riverboat Act and (v) a licensee's financial projections. The Illinois Gaming Board will require a personal disclosure form and approval as a key person for any business entity or individual with an ownership interest or voting rights of more than 5% in a licensee, the trustee of any trust holding such ownership interest or voting rights, the directors of the licensee and its chief executive officer, president and chief operating officer, as well as any other individual or entities deemed by the board to hold a position or a level of ownership, control or influence that is material to the regulatory concerns and obligations of the board. Each key person must file, on an annual basis, a disclosure affidavit, updated personal and background information, and updated tax and financial information. Key persons are required to promptly disclose to the board any material changes in status or information previously provided to the board and to maintain their suitability as key persons. In order for the board to identify potential key persons, each applicant for or holder of an owner's license is required to file a table of organization, ownership and control to identify the individuals or entities that through direct or indirect means manage, own or control the interests and assets of the licensee. Based upon findings from an investigation into the character, reputation, experience, associations, business probity and financial integrity of a key person, the Illinois Gaming Board may enter an order upon the licensee to require economic disassociation of a key person. Each licensee is required to provide a means for the economic disassociation of a key person in the event such disassociation is required by an order of the board. 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 bets or other 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 unforeseeable mechanical 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 11 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 $6.6 million, $7.2 million and $6.4 million , respectively, during 1998, 1997 and 1996. Additionally, a wagering tax is imposed on the adjusted gross receipts, as defined in the Riverboat Act. This gaming tax increased significantly in 1998. The tax rate changed from a flat 20% to graduated rates ranging from 15%to 35%. The licensee is required to wire transfer all such gaming tax payments to the Illinois Gaming Board. The wagering tax for the Aurora Casino amounted to $42.4 million, $30.7 million and $31.3 million, respectively, for the years 1998, 1997 and 1996. The Illinois Gaming Board is authorized to conduct investigations into the conduct of gaming employees and into alleged violations of the 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. 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 regulations 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 and counties in which gaming has been approved by the voters. Mississippi's gaming operations are subject to the licensing and regulatory control of the Mississippi Gaming Commission (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. 12 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 need to be renewed periodically. The ownership license for the Tunica Casino has been renewed through October 18, 1999. Presently, the policy of the Mississippi 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 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. 13 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, the number of slot machines operated by such casino and the number of table games operated by such casino. In particular, gaming licensees must pay an annual $5,000 license fee and an additional fee based on the number of gaming devices. A state gross revenues fee of 8% is due on adjusted gross gaming revenues. Several local governments have been authorized to impose additional gross fees on adjusted gross gaming revenues of up to 4% 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 $11.7 million, $11.9 million and $10.7 million during 1998, 1997 and 1996, respectively. Gross gaming taxes paid to the state are allowed as a credit against Mississippi state income tax liability. 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. 14 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. DEVELOPMENT ACTIVITIES - ---------------------- Management believes that a proactive business development strategy is important 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 pursue development of new casino entertainment venues by promoting the expansion of legalized gaming and by exploring opportunities where gaming is already sanctioned. ITEM 2. PROPERTIES THE AURORA CASINO - ----------------- The Aurora Casino consists of two, four-level riverboats, City of Lights I and City of Lights II, which have combined casino space of approximately 29,600 square feet and approximately 1,200 gaming positions. The complex also includes a four-story, approximately 64,000 square foot land based pavilion and two parking garages under capital lease agreements. The first parking garage contains approximately 31,000 square feet of office space of which approximately 22,600 square feet are currently being used for administrative offices. HCA leases the parking garage, including the office space, from the City of Aurora under a 30-year lease ending June 2023, with HCA having the right to extend the term under renewal options for an additional 67 years. The second garage, completed in 1996, has approximately 500 parking spaces and includes approximately 1,500 square feet of retail space. The facility is owned by a governmental agency and operated by HCA pursuant to a lease with an initial term expiring in 2026 with the right to extend the lease for up to 20 additional years. The Aurora Casino is currently pledged as collateral to the extent of approximately $31.5 million (subject to future reductions for principal payments on HCA's intercompany note to HCC) with respect to the Senior Secured Notes in the original face amount of $210 million 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 and currently have a face amount of $204.7 million. 15 THE TUNICA CASINO - ----------------- The Tunica Casino consists of a 60,000 square foot, single level casino with 54,000 square feet of gaming space, 506 hotel rooms and suites and support facilities that include two restaurants, a buffet, an arcade and a gift shop, banquet space, an enclosed pool and atrium, a showroom and administrative offices. An eight-story, 350-room hotel tower was completed in 1996 with a portion of the proceeds from the Senior Secured Notes discussed above. The Tunica facility also includes a 123-space recreational vehicle park (a 51-space expansion was completed in September 1998) and a 1,850-space surface parking area. The ground lease for the Tunica site has an initial term of five years from the date gaming operations commenced, and an option to extend the lease for nine successive five-year terms. 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 an expansion. Substantially all of the assets of the Tunica Casino are pledged as collateral for the Senior Secured Notes discussed above. DEVELOPMENT SITES - ----------------- The Company holds an option to purchase approximately 159 acres of land in Palmer, Massachusetts for possible development of a gaming resort complex in the event that gaming is approved by the state legislature. The Company also holds two sites for resale in the Houston, Texas area. 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. 16 OTHER LITIGATION - ---------------- On October 8, 1998, HCC filed a complaint in the District Court of Dallas County, Texas against Arthur Andersen LLP, HCC's former independent accountants, and selected partners alleging negligent advice and breach of contract with respect to the tax consequences resulting from the spin-off of GBCC's stock to HCC's shareholders on December 31, 1996. The lawsuit is currently in the initial stages of discovery. 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 1998, the Company did not submit any matters to a vote of security holders through the solicitation of proxies or otherwise. 17 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. HCC's common stock trades 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 ------ ----- ----- 1998 First Quarter $2.31 $1.41 Second Quarter 2.13 1.66 Third Quarter 1.94 1.16 Fourth Quarter 1.56 0.97 1997 First Quarter $5.13 $2.69 Second Quarter 4.13 2.81 Third Quarter 3.50 2.38 Fourth Quarter 3.56 1.75
As of April 12, 1999, there were approximately 500 holders of record of HCC's voting common stock. HCC has not paid cash dividends on its common stock in the past and 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. During June 1998, the Board of Directors authorized the repricing of options to purchase 35,000 shares of common stock granted during 1996 and 1997 to non-employee directors of the Company. The exercise price was adjusted to $1.75 per share, the fair market value as of the date of the repricing; all of the repriced options are fully vested. No shareholder owning 1% or more of the Company's common stock participated in the repricing. 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; any such dividends would be payable to HCC. 18 ITEM 6. SELECTED FINANCIAL DATA HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES - --------------------------------------------- The following tables present selected financial data for HCC and its subsidiaries and are qualified in their entirety by the consolidated financial statements and accompanying footnotes appearing elsewhere in this Form 10-K. The data as of December 31, 1998 and 1997, and for the years ended December 31, 1998, 1997 and 1996, have been derived from the audited consolidated financial statements of HCC presented in Item 8. STATEMENT OF OPERATIONS DATA:
YEAR ENDED DECEMBER 31, -------------------------------------------------------------- 1998 1997(1) 1996 1995 1994 ------------ ------------- ----------- --------- --------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Net revenues...................................... $268,760 $267,757 $530,580 $539,943 $464,384 -------- -------- -------- -------- -------- Expenses: Departmental.................................... 197,836 185,753 426,769 396,157 338,776 General and administrative...................... 17,778 16,790 37,169 36,914 33,189 Management and consulting fees.................. 1,200 3,927 - - - Depreciation and amortization................... 16,562 18,901 40,836 40,955 30,960 Amortization of preopening costs................ - - - - 11,002 Development..................................... 779 1,480 1,065 6,765 5,154 -------- -------- -------- -------- -------- Total expenses................................ 234,155 226,851 505,839 480,791 419,081 -------- -------- -------- -------- -------- Income from operations before write down of assets....................................... 34,605 40,906 24,741 59,152 45,303 Write down of assets.............................. - (19,678) (22,141) - - -------- -------- -------- -------- -------- Income from operations............................ 34,605 21,228 2,600 59,152 45,303 -------- -------- -------- -------- -------- Non-operating income (expenses): Interest income................................. 2,844 1,896 3,101 3,708 4,227 Interest expense................................ (30,260) (30,437) (59,090) (55,558) (46,233) Tax settlement costs............................ (1,087) - - - - (Loss) gain on disposal of assets................ (61) 552 (1,841) (514) (26) -------- -------- -------- -------- -------- Total non-operating expenses, net............ (28,564) (27,989) (57,830) (52,364) (42,032) -------- -------- -------- -------- -------- Income (loss) before income taxes, extraordinary and other items................................. 6,041 (6,761) (55,230) 6,788 3,271 Income tax provision.............................. (816) (5,359) (63) (268) (1,527) -------- -------- -------- -------- -------- Income (loss) before extraordinary and other items........................................... 5,225 (12,120) (55,293) 6,520 1,744 Minority interest in earnings of Limited Partnership..................................... (6,494) (5,012) - - - -------- -------- -------- -------- -------- (Loss) income before extraordinary item........... (1,269) (17,132) (55,293) 6,520 1,744 Extraordinary item: Early extinguishment of debt, net of related tax benefits (2)................ (336) (215) - (23,808) 126 -------- -------- -------- -------- -------- Net (loss) income................................. $ (1,605) $(17,347) $(55,293) $(17,288) $ 1,870 ======== ======== ======== ======== ======== Basic (loss) income per common share (3): (Loss) income before extraordinary item......... $ (.05) $ (.69) $ (2.24) $ .27 $ .07 Extraordinary item.............................. (.01) (.01) - (.97) .01 -------- -------- -------- -------- -------- Net (loss) income........................... $ (.06) $ (.70) $ (2.24) $ (.70) $ .08 ======== ======== ======== ======== ======== Diluted (loss) income per common share (3): (Loss) income before extraordinary item......... $ (.05) $ (.69) $ (2.24) $ .26 $ .07 Extraordinary item.............................. (.01) (.01) - (.96) .01 -------- -------- -------- -------- -------- Net (loss) income............................. $ (.06) $ (.70) $ (2.24) $ (.70) $ .08 ======== ======== ======== ======== ========
BALANCE SHEET DATA:
DECEMBER 31, ---------------------------------------------------------- 1998 1997(1) 1996(1) 1995 1994 ----------- -------- -------- -------- -------- (IN THOUSANDS) Total assets...................................... $270,740 $276,218 $308,158 $514,463 $464,135 Total debt, including capital lease obligations............................... 227,529 226,922 232,046 496,847 432,117 Shareholders' equity (deficit).................... 7,512 9,117 38,836 (57,233) (39,947)
_________________________ (1) Restated to reflect the modification of the treatment of income taxes resulting from the distribution of the common stock of Greate Bay Casino Corporation - see Note 3 of Notes to Consolidated Financial Statements of HCC. (2) Includes the following items: (i) for 1998 and 1997, costs associated with HCC's mandatory redemption of Senior Secured Notes, net of related tax benefit, and (ii) for 1995, costs associated with the October 1995 issuance of the Senior Secured Notes by HCC. 19 (3) During 1997, HCC adopted the provisions of Financial Accounting Standards No. 128, "Earnings per Share." The earnings per share calculation has been restated for all prior periods presented. 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 accompanying footnotes appearing elsewhere in this Form 10-K. HCA and HCT commenced operations on June 17, 1993 and August 8, 1994, respectively. The data as of December 31, 1998 and 1997 and for the years ended December 31, 1998, 1997 and 1996 have been derived from the audited financial statements of HCA and HCT presented in Item 8. HOLLYWOOD CASINO-AURORA, INC. STATEMENT OF OPERATIONS DATA:
YEAR ENDED DECEMBER 31, ----------------------------------------------------- 1998 1997 1996 1995 1994 --------- --------- --------- --------- --------- (IN THOUSANDS) Net revenues........................... $162,947 $160,307 $163,391 $152,508 $148,000 -------- -------- -------- -------- -------- Expenses: Departmental........................ 118,459 108,653 114,006 102,780 95,495 General and administrative.......... 14,136 14,673 14,645 14,406 11,926 Depreciation and amortization....... 7,350 7,491 8,834 9,172 7,121 Amortization of preopening costs.... - - - - 5,863 -------- -------- -------- -------- -------- Total expenses.................... 139,945 130,817 137,485 126,358 120,405 -------- -------- -------- -------- -------- Income from operations................. 23,002 29,490 25,906 26,150 27,595 -------- -------- -------- -------- -------- Non-operating income (expense): Interest income..................... 112 156 205 306 458 Interest expense.................... (6,046) (6,847) (6,704) (6,493) (6,654) Gain on disposal of assets.......... 4 134 - - - -------- -------- -------- -------- -------- Total non-operating expense, net.. (5,930) (6,557) (6,499) (6,187) (6,196) -------- -------- -------- -------- -------- Income before income taxes and extraordinary item................... 17,072 22,933 19,407 19,963 21,399 Income tax provision................... (6,559) (8,419) (6,883) (7,554) (7,557) -------- -------- -------- -------- -------- Income before extraordinary item....... 10,513 14,514 12,524 12,409 13,842 Extraordinary item..................... - - - (989) - -------- -------- -------- -------- -------- Net income............................. $ 10,513 $ 14,514 $ 12,524 $ 11,420 $ 13,842 ======== ======== ======== ======== ========
BALANCE SHEET DATA:
DECEMBER 31, ---------------------------------------------------- 1998 1997 1996 1995 1994 -------- -------- -------- -------- -------- (IN THOUSANDS) Total assets........................... $100,310 $104,071 $107,449 $ 93,196 $ 73,356 Total debt, including capital lease obligations.......................... 54,248 58,972 65,430 55,829 50,141 Shareholder's equity................... 28,720 28,948 28,033 25,549 14,071
20 HWCC-TUNICA, INC. STATEMENT OF OPERATIONS DATA:
YEAR ENDED DECEMBER 31, --------------------------------------------------------- 1998 1997 1996 1995 1994 (1) -------- -------- -------- -------- -------- (IN THOUSANDS) Net revenues........................... $105,773 $107,263 $ 94,524 $ 94,416 $ 32,413 -------- -------- -------- -------- -------- Expenses: Departmental.......................... 79,328 77,058 72,602 63,842 22,623 General and administrative............ 5,813 5,769 5,962 5,711 2,425 Depreciation and amortization......... 8,123 9,916 10,906 10,356 3,610 Amortization of preopening costs...... - - - - 5,939 -------- -------- -------- -------- -------- Total expenses...................... 93,264 92,743 89,470 79,909 34,597 -------- -------- -------- -------- -------- Income (loss) from operations.......... 12,509 14,520 5,054 14,507 (2,184) -------- -------- -------- -------- -------- Non-operating income (expenses):....... Interest income....................... 587 281 835 637 374 Interest expense...................... (10,937) (10,980) (10,060) (10,792) (4,454) (Loss) gain on disposal of assets..... (65) 6 (45) (505) - -------- -------- -------- -------- -------- Total non-operating expenses, net................................ (10,415) (10,693) (9,270) (10,660) (4,080) -------- -------- -------- -------- -------- Income (loss) before income taxes and extraordinary items................... 2,094 3,827 (4,216) 3,847 (6,264) Income tax (provision) benefit......... (689) 845 - 694 - -------- -------- -------- -------- -------- Income (loss) before extraordinary items................................ 1,405 4,672 (4,216) 4,541 (6,264) Extraordinary items, net of tax benefit............................... - - - (9,614) 126 -------- -------- -------- -------- -------- Net income (loss)...................... $ 1,405 $ 4,672 $ (4,216) $ (5,073) $ (6,138) ======== ======== ======== ======== ======== BALANCE SHEET DATA: DECEMBER 31, --------------------------------------------------------- 1998 1997 1996 1995 1994 (1) -------- -------- -------- -------- -------- (IN THOUSANDS) Total assets........................... $120,461 $118,727 $116,620 $122,240 $ 99,889 Total debt, including capital lease obligations.......................... 85,798 85,683 86,645 88,340 61,789 Shareholder's equity................... 25,287 23,882 19,210 23,426 28,499
_________________ (1) The Tunica Casino commenced operations on August 8, 1994. 21 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, results of operations, cash flows, financial condition and prospects of the Company. The actual results could differ materially from those indicated by the forward-looking statements because of various competition, economic conditions, tax regulations, state regulations applicable to the gaming industry in general or the Company in particular, and other risks indicated in the Company's filings with the Securities and Exchange Commission. Such risks and uncertainties are beyond management's ability to control and, in many cases, can not be predicted by management. When used in this 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. RESULTS OF OPERATIONS 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 year ended December 31, 1996, however, the operations of GBCC are included in the consolidated results of operations of HCC. The following table sets forth the pro forma losses before income taxes of HCC and its subsidiaries, exclusive of GBCC and its subsidiaries (the "HCC Group"), 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, GBCC had not been consolidated with HCC. Effective on April 1, 1997, HCC acquired the general partnership interest in the limited partnership that manages the Aurora Casino. Prior to that date, the limited partnership was wholly owned by subsidiaries of GBCC. As a result of the purchase, the limited partnership is now consolidated with HCC, and earnings attributable to the limited partnership interest not owned by HCC are deducted from HCC's operating income as minority interest. The 1997 financial information set forth below is adjusted from the consolidated financial statements presented elsewhere to include only the earnings attributable to HCC as general partner in income before taxes, nonrecurring, extraordinary and other items. The 1997 results of operations have been restated from the prior year's presentation as a result of revisions to the tax treatment of the distribution of GBCC stock to HCC's shareholders (see Note 3 of Notes to Consolidated Financial Statements of HCC). As a result of these proforma adjustments, the following presentation reflects all periods on a comparable basis. Except for this presentation, the impact of GBCC's exclusion from the 1998 and 1997 results of operations will not be addressed in the discussion which follows. 22
YEAR ENDED DECEMBER 31, ------------------------------------- 1998(1) 1997(2) 1996(2) ----------- ----------- ----------- (in thousands) Casino revenues $252,863 $251,471 $244,485 Other departmental revenues 42,425 41,454 36,660 Less - promotional allowances (26,528) (25,168) (22,658) -------- -------- -------- Net revenues 268,760 267,757 258,487 -------- -------- -------- Casino expenses 184,589 171,623 174,032 Other departmental expenses 13,247 14,130 12,716 General and administrative expenses 16,497 15,631 18,766 Management and consulting fees 10,072 10,809 10,560 Depreciation and amortization 16,562 18,901 21,006 Development expenses 779 1,480 1,065 -------- -------- -------- Total expenses 241,746 232,574 238,145 -------- -------- -------- Operating income before write down of assets 27,014 35,183 20,342 Write down of assets - (19,678) (22,141) -------- -------- -------- Income (loss) from operations 27,014 15,505 (1,799) Interest expense, net (27,385) (28,453) (26,563) Tax settlement costs (1,087) - - (Loss) gain on disposal of assets (61) 552 (46) Equity in earnings of general partnership 1,066 800 - -------- -------- -------- Loss before income taxes, extraordinary and other items $ (453) $(11,596) $(28,408) ======== ======== ========
________________ (1) As presented in consolidated financial statements except for the general partnership interest. (2) Pro forma HCC Group. The proforma financial information for 1997 has been restated to reflect changes resulting from HCC's modification of the tax treatment for the distribution of GBCC common stock (see Note 3 of Notes to Consolidated Financial Statements of HCC). Net revenues of the HCC Group for 1998 reflect an increase of $1 million (less than 1%) from the $267.8 million earned during 1997. The 1998 increase was realized by improved net revenues at the Aurora Casino which more than offset the decline in net revenues at the Tunica Casino. Net revenues for the year ended December 31, 1997 were $267.8 million, an increase of 3.6% from net revenues of $258.5 million in 1996. The 1997 increase is directly attributable to the $12.7 million (13.5%) increase in net revenues at the Tunica Casino, offset by a $3.1 million (1.9%) decline in net revenues at the Aurora Casino. The 1998 decline in income from ongoing operations of $8.2 million (23.2%) compared to 1997 reflects the slight increase in net revenues offset by a $9.2 million (3.9%) increase in operating expenses other than asset write downs. The increase in ongoing operating expenses primarily resulted from increased gaming taxes at the Aurora Casino as well as higher marketing and promotional expenses in response to increased competition at both the Aurora Casino and the Tunica Casino. The 1997 increase in net revenues over the prior year, coupled with a 2.3% decline in operating expenses, exclusive of asset write downs, results in the HCC Group's ongoing income from operations improving by $14.8 million (73%) to $35.2 million in 1997 from $20.3 million in 1996. 23 AURORA CASINO GENERAL Income from operations at the Aurora Casino, adjusted to exclude management fees, amounted to $31.9 million for the year ended December 31, 1998 compared to $39.1 million and $35.3 million, respectively, during 1997 and 1996. The 1998 decrease from the prior year is primarily due to an increase in the Illinois wagering tax rate which took effect on January 1, 1998. The new tax structure consists of a graduated tax rate system with rates ranging from 15% to 35% based on total adjusted gross receipts. For the years ended December 31, 1998 and 1997, the Aurora Casino paid or accrued wagering taxes of $42.4 million and $30.7 million, respectively. Had the new rates been in effect during 1997, the wagering tax for the Aurora Casino would have been $41.3 million. Management has pursued an operating strategy of implementing changes to its cruising schedule and curtailing marginally profitable operations in response to the increased taxes. The 1998 increase in wagering taxes also reflects the 1.6% increase in gaming revenues compared to the prior year. The operating income decrease is also attributable to increased competition from the opening in northern Indiana of two riverboat gaming operations during April and August 1997. These two operations added approximately 3,700 new gaming positions to the Chicago market area, an increase of nearly 35%. Income from operations increased 10.9% during 1997 as compared to 1996 despite increased competition from the opening in northern Indiana of three riverboat gaming operations during June 1996 and two additional operations in April and August 1997 which more than doubled gaming capacity in the Chicago area. The new facilities added approximately 9,100 gaming positions to the Chicago area; the four existing Illinois riverboats in the Chicago area have less than 5,300 gaming positions. The Chicago area riverboats in general, and the Aurora Casino in particular, continued to adjust and respond to this increased competition as demonstrated by the Aurora Casino's increase in net revenue during both the third and fourth quarters of 1997 compared to the same periods in 1996. The second half 1996 period was also negatively impacted by severe local flooding in July 1996 which caused the cancellation of several cruises. Local economic conditions were also negatively impacted for a period of time as a result of the extensive flood damage in the surrounding area. 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, 1998, 1997 and 1996.
YEAR ENDED DECEMBER 31, ------------------------------------- 1998 1997 1996 ----------- ----------- ----------- (IN THOUSANDS, EXCEPT PERCENTAGES) REVENUES: Table games $ 42,942 $ 47,206 $ 51,230 Slot machines 111,192 105,413 105,894 Poker revenues 2,270 1,346 - ---------- ---------- ---------- Total $ 156,404 $ 153,965 $ 157,124 ========== ========== ========== TABLE GAMES: Gross wagering (drop) (1) $ 247,911 $ 273,689 $ 304,851 Hold percentages (2) 17.3% 17.3% 16.8% SLOT MACHINES: Gross wagering (handle) (1) $1,983,873 $1,866,687 $1,902,642 Hold percentages (2) 5.6% 5.7% 5.6%
________________________ 24 (1) Gross wagering consists of the total value of chips purchased for table games ("drop") and coins wagered in slot machines ("handle"). (2) Casino revenues consist of the portion of gross wagering that a casino retains and, as a percentage of gross wagering, is referred to as the "hold percentage". Total gross wagering at the Aurora Casino as measured by table drop and slot machine handle increased by $91.4 million (4.3%) during 1998 compared to 1997. The increase results from the continuation of aggressive marketing and promotional programs introduced in the second quarter of 1998 to recapture market share in the Chicago area. Declines in gross wagering during the 1998 first quarter resulted from reductions in patron volume due to changes in the Aurora Casino's cruising schedule. In an effort to reduce unprofitable operations in response to the increased wagering tax discussed above, the smaller of the Aurora casino's two riverboats ceased operating daytime cruises on weekdays during January and February; however, all cruises resumed in March. Increased competition in the Chicago market due to the opening of two new casinos in northern Indiana in April and August 1997 has also limited growth in casino wagering. Total gross wagering decreased by $67.1 million (3%) during 1997 compared to 1996. The decrease is directly attributable to the competition from the five new casinos mentioned above. The 1997 decline in total gross wagering reflects a slot handle decline of $36 million (1.9%) and a table drop decrease of $31.1 million (10.2%). For the second half of 1997, total gross wagering was $34.1 million (3.3%) greater than the comparable period in 1996. The second half 1997 increase reflects the Aurora Casino's adjustment to the increased competition (the comparable 1996 period includes operations subsequent to the opening of three of the five new Indiana riverboat operations) as well as the impact of local flooding in 1996. The 1997 annual period decrease in casino wagering continues to reflect the significance of the additional gaming competition in the Chicago market area from the Indiana gaming operations. However, the Illinois-based riverboat operators located closer to the new Indiana facilities and which drew a greater percentage of their customers from areas now more conveniently served by the Indiana facilities suffered a greater loss of patronage than the Aurora Casino. The Aurora Casino's 1997 decrease in gross wagering compares favorably with the decrease in gross wagering for the two Joliet, Illinois riverboat operators which, based on information published by the Illinois Gaming Board, suffered a combined decrease in gross wagering of 15% during the year ended December 31, 1997 compared to 1996. Accordingly, the Aurora Casino's location and resulting customer base west of Chicago together with the success of its facility improvements program, including the completion of a new 500-space parking garage facility during September 1996, have helped maintain patron volume. REVENUES Casino revenues increased slightly (1.6%) during 1998 compared to 1997. Table game revenues decreased $4.3 million (9%) during 1998 compared to 1997 reflecting the 9.4% decrease in drop. Slot machine revenues during 1998 increased $5.8 million (5.5%) compared to 1997 reflecting the 6.3% increase in slot wagering partially offset by the decline in the slot machine hold percentage to 5.6% from 5.7%. Casino revenues were also favorably impacted by the introduction of poker during the second quarter of 1997, which generated casino revenues of $2.3 million during 1998 compared to $1.3 million during 1997. Casino revenues decreased $3.2 million (2%) during the year ended December 31, 1997 compared to 1996. The 1997 decrease reflects a decline in table game revenues of $4 million (7.9%) resulting from the decrease in table drop mentioned above, lessened somewhat by an increase in the hold percentage to 17.3% in 1997 from 16.8% in 1996. Slot machine revenue declined only slightly (less than 1%) in 1997 compared to 1996 despite the $36 million decline in slot machine handle as the slot machine hold percentage increased slightly to 5.7% in 1997 from 5.6% in 1996. Food and beverage revenues did not change significantly during 1998 compared to 1997 or during 1997 compared to 1996. 25 Other revenues increased $897,000 (46.7%) during 1998 compared to 1997 after declining by $2 million (50.7%) during 1997 compared to 1996 primarily due to management's decision to reinstate valet and parking garage fees in 1998 which had been eliminated during 1997 due to competitive pressures. Promotional allowances represent the estimated value of goods and services provided free of charge to casino customers under various marketing programs. These allowances, as a percentage of food and beverage and other revenues at the Aurora Casino, were 60.6%, 60.7% and 64.5%, respectively, during the years ended December 31, 1998, 1997 and 1996. The 1998 change is not significant; the 1997 decrease represents the reduction of promotional activity with respect to parking as mentioned above. DEPARTMENTAL EXPENSES Casino expenses increased $10.1 million (9.9%) during 1998 compared to 1997 primarily due to the wagering tax increase previously discussed. Higher marketing costs, partially offset by reductions in payroll costs, also contributed to the increase. Gaming taxes imposed by the state of Illinois are determined using a graduated tax rate applied to the licensee's gaming revenues. The Aurora Casino expenses such gaming taxes based on its anticipated annual effective tax rate. Casino expenses in 1997 decreased $5.9 million (5.5%) from the prior year reflecting management's success at controlling personnel costs and improving overall profitability. Food and beverage expenses did not change significantly during 1998 compared to 1997 or during 1997 compared to 1996. Other expenses decreased $309,000 (18.8%) during 1998 compared to 1997 reflecting reductions in personnel and other operating expenses. Other expenses increased $575,000 (53.9%) in 1997 compared to 1996 as fewer expenses were allocated to the casino department, primarily as a result of reduced parking costs. TUNICA CASINO GENERAL The Tunica Casino earned income from operations, adjusted to exclude consulting fees payable to a subsidiary of GBCC, of $13.7 million in 1998 compared to $15.7 million in 1997 and $6.3 million in 1996. The 1998 decrease is attributable to a lower than expected table games hold percentages and to increased competition in the Tunica market which has resulted in increased marketing costs. The competitive pressure has resulted from the opening of approximately 1,700 new hotel rooms by other casino operators during the fourth quarter of 1997 and early 1998. The increase in 1997 was primarily due to the opening of the Tunica Casino's new 352-room hotel tower in September 1996, which increased room capacity by over 225% and added luxury suites, meeting spaces, and other amenities. 26 GAMING OPERATIONS The following table sets forth certain unaudited financial and operating data relating to the operations of the Tunica facility for the years ended December 31, 1998, 1997 and 1996.
YEAR ENDED DECEMBER 31, ------------------------------------- 1998 1997 1996 ----------- ----------- ----------- (IN THOUSANDS, EXCEPT PERCENTAGES) CASINO REVENUES: Table games $ 13,658 $ 15,083 $ 16,650 Slot machines 81,801 81,404 69,644 Poker revenues 1,000 1,019 1,067 ---------- ---------- ---------- Total $ 96,459 $ 97,506 $ 87,361 ========== ========== ========== TABLE GAMES: Gross wagering (drop) (1) $ 76,366 $ 78,115 $ 82,350 Hold percentage (2) 17.9% 19.3% 20.2% SLOT MACHINES: Gross wagering (handle) (1) $1,555,316 $1,595,645 $1,332,949 Hold percentage (2) 5.3% 5.1% 5.2%
____________ (1)(2) See corresponding notes to the table at "Aurora Casino - Gaming Operations" above. Total gross wagering at the Tunica Casino as measured by table game drop and slot machine handle decreased by $42.1 million (2.5%) during 1998 compared to 1997. The decreased patron volume is directly attributable to increased competition in the Tunica market. Slot machine handle decreased by $40.3 million (2.5%) and table game drop decreased by $1.8 million (2.2%) during 1998 compared to 1997. Total gross wagering increased $258.5 million (18.3%) during 1997 compared to 1996. The additional patron volume is directly attributable to the hotel expansion mentioned above. This increase reflects an increase in slot machine handle of $262.7 million (19.7%) offset by a decline in table game drop of $4.2 million (5.1%). REVENUES Casino revenues decreased $1 million (1.1%) during 1998 compared to 1997. Table game revenues decreased 9.4% during 1998 due to the previously discussed decline in table drop coupled with an overall decline in the hold percentage to 17.9% in 1998 from 19.3% in 1997. Slot machine revenues did not change significantly during 1998 compared to the prior year as the change in gross wagering was virtually offset by the impact of the change in the slot machine hold percentage. Poker revenues decreased 1.9% during 1998 compared to the prior year primarily from a reduction in the number of poker tables during the period from ten to six. Total casino revenues in 1997 increased $10.1 million (11.6%) compared to 1996. Slot machine revenues increased $11.8 million (16.9%) as a result of the increase in slot handle described above. This increase in revenue was partially offset by a 9.4% decrease in table game revenues, to $15.1 million in 1997 from $16.7 million in 1996. The decrease in table game revenues is attributable to a decline in table drop of $4.2 million, as discussed above, coupled with a drop in the hold percentage to 19.3% in 1997 from 20.2% in 1996. 27 Rooms revenue decreased $265,000 (2.7%) during 1998 compared to 1997 due to increased competition for overnight patrons. Hotel occupancy rates decreased as a result of the additional competition to approximately 82% in the first quarter of 1998 from approximately 88% during the same period of 1997. Occupancy rates at the Tunica Casino for the second, third and fourth quarters of 1998 rebounded to approximately 92% (compared to 93% during the corresponding period of 1997) as the market began to absorb the additional hotel room capacity. Occupancy rates during the period from September through December 1998 were also negatively impacted by rooms being taken out of service for maintenance and upgrading. Room revenues increased in 1997 by $4.3 million (81.1%) compared to 1996 as a result of the opening of the Tunica Casino's new 352-room hotel tower during the third quarter of 1996, increasing the number of guest rooms by over 225%. Hotel occupancy rates decreased slightly as a result of the additional room capacity, declining to an average of 92% for 1997 and 88% for the period from August through December 1996, from an average of 99.7% from January through July 1996. The addition of recreational vehicle parking spaces has also contributed to the increases in rooms revenue. Additions of 51 and 22 parking spaces, respectively, were made to the RV Park at the Tunica Casino in 1998 and 1997 bringing the total current number of parking spaces to 123. Food and beverage revenues increased $719,000 (5%) during 1998 compared to 1997 as a result of increases in both food prices and in the number of dining patrons resulting from increased promotional activities. Food and beverage revenues in 1997 increased $2.3 million (19.5%) principally due to additional patron volume, increased marketing efforts and the opening of a new casual dining outlet. Other revenues increased $209,000 (18%) during 1998 compared to the prior year due to increased patron volume using such services. Other revenues increased by 6.1% during 1997 compared to 1996 due to increased patron volume with respect to such ancillary services as telephones, cable television and vending machines. Promotional allowances represent the estimated value of goods and services provided free of charge to casino customers under various marketing programs. These allowances, as a percentage of rooms, food and beverage and other revenues, increased to 63.9% in 1998 from 61.2% during 1997 and 61.1% in 1996. The 1998 increase results from increased complimentary food and beverage and other services due to increased marketing efforts. Although the dollar amount of promotional allowances increased by $4.1 million (36.7%), the stability of the percentage of promotional allowances in 1997 compared to 1996 indicates that management's efforts to increase revenues while controlling the cost of promotional activities were successful. DEPARTMENTAL EXPENSES Casino expenses increased by $2.8 million (4.1%) during 1998 compared to 1997 as a result of additional promotional activities instituted during the third quarter of 1998 in response to competitive pressures. Casino expenses in 1997 increased $3.5 million (5.3%) due to additional patron volume as evidenced by the 11.6% increase in casino revenues. Rooms expense did not change significantly during 1998 compared to 1997. Rooms expenses in 1997 increased $262,000 (16.7%) compared to the prior year primarily due to the additional patron volume associated with the opening of the new hotel tower. Despite the increases in food and beverage revenues discussed above, food and beverage expenses decreased by $402,000 (9.3%) during 1998 compared to 1997. Such decrease results from the previously noted increase in marketing activities with respect to food and beverage programs, the costs of which are allocated to casino expenses. Food and beverage expense increased $573,000 (15.3%) during 1997 compared to the prior year primarily due to increased patron volume associated with the opening of the new hotel tower and additional dining outlets. Such increase was partially offset by increased promotional activity, the cost of which is allocated to the casino department. The decrease in other expenses during 1998 compared to 1997 was not significant from a monetary amount. The increase in other expenses of $143,000 (11.4%) during 1997 compared to the prior year reflects increased costs associated with merchandise sales and lounge entertainment. 28 OTHER HCC GROUP ITEMS - --------------------- The operating expenses of HCC, exclusive of the Aurora Casino and the Tunica Casino consist primarily of general and administrative expenses and expenses incurred in connection with the pursuit of additional gaming venues. GENERAL AND ADMINISTRATIVE General and administrative expenses for the HCC Group increased $866,000 (5.5%) during 1998 compared to 1997. Increases in such costs at the Aurora Casino of 3.9% and at the Tunica Casino of 1% were not significant; the remaining increase of $622,000 in corporate overhead costs resulted primarily from increases in professional fees. General and administrative expenses decreased $3.1 million (16.7%) in 1997 compared to the prior year. Such expenses decreased 4.2% at the Aurora Casino and 4.1% at the Tunica Casino due to management's cost containment efforts. The remaining corporate decline in general and administrative expense of $2.7 million is due to reductions in corporate overhead costs, primarily in travel costs and professional fees. DEPRECIATION AND AMORTIZATION Depreciation and amortization decreased by $2.3 million (12.4%) in 1998 compared to 1997 and by $2.1 million (10%) in 1997 compared to 1996. The 1998 decrease results primarily from certain operating equipment at the Tunica Casino becoming fully depreciated during the third quarter of 1998. Although completion of a parking garage at the Aurora Casino and a new hotel tower at the Tunica Casino during the third quarter of 1996 significantly increased the amount of depreciable assets, the revision in estimated useful lives of buildings, barges and certain operating equipment effective October 1, 1996 resulted in an overall decrease in depreciation and amortization during 1997 compared to 1996. DEVELOPMENT EXPENSES Development expenses represent costs incurred in connection with 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. The $701,000 (47.4%) decrease in 1998 development costs compared to 1997 reflects an unusually high level of spending in 1997 not repeated in the current year. Such costs in 1997 increased $415,000 (39%) compared to 1996 primarily as a result of HCC's efforts in obtaining a gaming site in Louisiana. A gaming project in Shreveport, Louisiana was approved by the Louisiana Gaming Control Board during the third quarter of 1998 (see "Liquidity and Capital Resources-Capital Expenditures and Other Investing Activities" below). WRITE DOWN OF ASSETS In connection with a refinancing of its indebtedness in 1994, GBCC issued $40.5 million discounted principal amount (face amount of $110.6 million) of deferred interest notes (the "PPI Funding Notes") to HCC in exchange for $38.8 million principal amount of 15 1/2% notes issued by another GBCC subsidiary and held by HCC. It was anticipated that one of HCC's primary methods of realizing the carrying value of 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 at December 31, 1996 to its shareholders, GBCC's tax net operating losses are no longer available for utilization in HCC's consolidated tax returns. Accordingly, at December 31, 1996, HCC provided a valuation allowance in the amount of $18.7 million which reduced the carrying amount of the PPI Funding Notes to their estimated realizable value of $35.6 million at that date. As a result of the filing for protection under Chapter 11 of the United States Bankruptcy Code by GBCC's most significant operating subsidiary on January 5, 1998, HCC took an additional write down during 1997 further reducing the carrying amount of the PPI Funding Notes at both December 31, 1998 and 1997 to an estimated realizable value of $12.3 million. Management presently anticipates that the remaining balance will be realized through a combination of repayments from GBCC and asset acquisitions from GBCC and its subsidiaries. 29 During November 1995, HCC loaned $10 million of the proceeds from the offering of its Senior Secured Notes in October 1995 (see "Liquidity and Capital Resources - Financing Activities" below) to an unaffiliated gaming company in the form of two $5 million notes. On February 27, 1998, both parties agreed to settle the outstanding obligations with the payment of $4.4 million and the issuance of two new, short-term obligations totaling $1.6 million, which were paid in April 1998. The $4 million difference between the $10 million carrying amount of the notes receivable and the agreed upon settlement was reflected as a write down of the notes receivable as of December 31, 1997. During 1996, management determined that certain properties in Texas acquired as potential sites for future development should be offered for sale. An evaluation of the net realizable value for such sites resulted in a write down for the anticipated loss on disposal of the properties of $3.4 million for the year ended December 31, 1996. No additional write downs were recorded in 1998 or 1997. NET INTEREST EXPENSE Net interest expense did not change significantly during 1998 compared to 1997. Net interest expense of the HCC Group increased $1.9 million (7.1%) during 1997 compared to the prior year. The 1997 increase is primarily attributable to additional interest incurred with respect to the new parking garage at the Aurora Casino which is treated as a capital lease for financial reporting purposes and to the capitalization of interest at the Tunica Casino with respect to construction of its new hotel tower during 1996. (LOSS) GAIN ON DISPOSAL OF ASSETS The 1998 loss results primarily from the sale of certain slot machines at the Tunica Casino as part of its program to update such equipment; the 1997 gain resulted primarily from the sale of a company-owned aircraft. HCC CONSOLIDATED ITEMS - ---------------------- INCOME TAXES As previously disclosed in HCC's quarterly report on Form 10-Q for the period ended September 30, 1998, and subsequent to the issuance of the Company's 1997 consolidated financial statements, the Company has determined that it should revise its tax treatment of the spin-off of the stock of GBCC which occurred on December 31, 1996. As a result, the 1997 and 1996 consolidated financial statements have been restated from amounts previously reported to record the appropriate amounts for income taxes, accrued income taxes, deferred taxes, interest and penalties due to the recognition of additional taxable income resulting from the revised tax treatment of the spin-off. For the year ended December 31, 1996, HCC utilized approximately $9 million of its available net operating loss carryforwards ("NOL's") as a result of the additional taxable income the Company recognized from the spin-off. For alternative minimum tax ("AMT") purposes, the revised tax treatment resulted in the Company utilizing all of its remaining AMT loss carryforwards and being liable for the payment of approximately $2.2 million in additional AMT taxes. HCC paid its $2.2 million AMT obligation for 1996 plus accrued interest thereon during the fourth quarter of 1998. As a result of the obligation for AMT payments and the impact on net deferred tax assets, the Company has restated its consolidated statement of changes in shareholders' equity (deficit) from amounts previously reported to provide an additional $6.3 million charge to paid-in- capital consistent with the treatment of other effects of the spin-off transaction. For the year ended December 31, 1997, the revised tax treatment resulted in HCC's recognition of additional income tax expense of $2.1 million and the accrual of interest on the underpayment of its federal tax obligations. HCC paid $4.7 million during September 1998 with respect to its revised estimated 1997 federal income tax obligation. 30 In connection with the revised tax treatment, HCC has commenced litigation against its former independent accountants and tax advisors alleging negligent advice and breach of contract. Management believes that it is more likely than not that future consolidated taxable income of HCC (primarily from the Aurora Casino and the Tunica Casino) will be sufficient to utilize a portion of the NOL's, tax credits and other deferred tax assets resulting from temporary differences. Accordingly, under the provisions of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes", the consolidated balance sheet reflects net deferred tax assets of $1.8 million as of December 31, 1998. 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. TAX SETTLEMENT COSTS Tax settlement costs of $1.1 million represent both costs incurred to date as well as management's estimate of probable costs to be incurred arising from and directly related to the modification of HCC's tax treatment of the spin-off of GBCC stock previously discussed. EXTRAORDINARY ITEM HCC is required to make an offer to purchase not more than $2.5 million in principal amount of its Senior Secured Notes at each semiannual interest payment date. During 1998, HCC made two redemption offers and redeemed $2.8 million of the Senior Secured Notes resulting in an extraordinary loss of $336,000. During 1997, HCC made one such offer and redeemed $2.5 million of the Senior Secured Notes. The 1997 redemption resulted in an extraordinary loss of $326,000, reduced by an estimated income tax benefit of $111,000. YEAR 2000 COMPLIANCE In the year 2000, computer programs that have date sensitive software may recognize a date using "00" as the year 1900 rather than 2000. Such an error could result in a system failure or miscalculations causing disruptions of operations including, among other things, a temporary inability to process transactions or engage in similar normal business activities. Management has initiated a program to prepare the Company's computer systems and applications as well as its non-information technology (embedded microchip) systems for the Year 2000. The initial stage of the program consisted of identifying those systems which might be at risk. All identified systems were categorized as (1) those necessary for regulatory compliance purposes, (2) essential systems and (3) non-essential systems. Within the essential systems group, an additional rating factor of one to five was assigned to each system with a factor of one indicating the greatest significance. Readiness for information technology and non-information technology systems for the Year 2000 is currently being investigated or has been determined by means of vendor certification or internal testing. System readiness for the Year 2000 is anticipated to be completed by September 1999 with the essential and regulatory systems anticipated to be completed by June 1999. The two major information technology systems identified as not Year 2000-compliant are being updated, modified or replaced. Management expects the costs of acquiring, testing and converting such systems will be less than $1 million. The majority of these costs will be incurred during 1999 and have been included in management's forecast of capital expenditures (see "Liquidity and Capital Resources - Capital Expenditures and Other Investing Activities" below). 31 The Company has also initiated formal communication with its significant suppliers to determine the extent to which its operating and information systems are vulnerable to those third parties' failure to resolve their Year 2000 compliance issues. An initial determination of the Company's exposure with respect to third-party supplied systems has recently been completed. Additional procedures, if necessary, are now being taken to remediate potential vulnerabilities. Contingency plans are also being developed by management with respect to internally developed systems not fully tested prior to the Year 2000. Accordingly, the Company does not anticipate any internal systems failures will have a material impact on its operations or financial condition. The Company will continue its efforts to ensure that major third party vendors as well as public and private providers of infrastructure services such as utilities and communication services will be Year 2000 compliant. The failure of such infrastructure services could result in a "worst case" scenario in which operations relying on such services (e.g. mechanical gaming devices) would be temporarily disrupted. The Company can not presently estimate either the likelihood or the potential cost of such failures. While there can be no assurance that the Company and its suppliers and customers will fully resolve their Year 2000 compliance issues, neither the estimated costs nor the outcome of the Year 2000 problem is expected to have a material impact on the Company's operations, liquidity or financial position. INFLATION Management believes that in the near term, modest inflation, together with increased competition within the gaming industry for qualified and experienced personnel, will continue to cause increases in operating expenses, particularly labor and employee benefits costs. SEASONALITY AND OTHER FLUCTUATIONS Historically, the Aurora Casino's operations have experienced some seasonality due to severe winter weather. Consequently, the results of HCC's operations for the first and fourth quarters have traditionally been less profitable than the other quarters of the fiscal year. Furthermore, management believes that seasonality may also cause fluctuations in reported results at the Tunica Casino. In addition, the operations of the Aurora Casino and the Tunica Casino may fluctuate significantly due to a number of factors, including chance. Such seasonality and fluctuations may materially affect HCC's casino revenues and overall profitability. LIQUIDITY AND CAPITAL RESOURCES OPERATING ACTIVITIES The operations of the Aurora Casino and Tunica Casino constitute HCC's primary sources of liquidity and capital resources. The Aurora Casino contributed approximately $19.5 million of cash flow from operations during 1998 after deducting the payment of $8.9 million of management fees. The Tunica Casino provided $10.3 million of cash from operations during 1998 after deducting the payment of $1.2 million of consulting fees to GBCC. HCC's other sources of funds include interest income earned on temporary investments. In addition to operating expenses at the Aurora Casino and the Tunica Casino, uses of operating cash by HCC during 1998 included costs to pursue development opportunities ($779,000) and corporate overhead costs ($7.9 million). HCC also made federal income tax payments amounting to $6.9 million with respect to its 1997 and 1996 income tax obligations resulting from the revised tax treatment with respect to the spin-off of GBCC stock (see "Results of Operations - Income Taxes" above). The Internal Revenue Service is currently examining the consolidated Federal income tax returns of HCC for the years 1993 through 1996. Management believes that the results of such examination will not have a material adverse effect on the consolidated financial position or results of operations of HCC. 32 During 1998, consolidated cash flow from operations ($16.8 million), collections on notes receivable ($6 million) and borrowings under financing agreements ($2.7 million) were used, in part, by HCC to fund capital expenditures of $12 million, to repay third party indebtedness and make payments under capital lease obligations of $2.3 million and $861,000, respectively, to fund its initial $2.5 million investment in a joint venture formed to construct a gaming and hotel facility in Shreveport, Louisiana and to pay distributions amounting to $5.6 million to GBCC as limited partner in PML. PRATT CASINO CORPORATION ACQUISITION In March 1999, the Company entered into an agreement in principle with GBCC and certain of its wholly owned subsidiaries, including PRT Funding Corp. ("PRT Funding") and Pratt Casino Corporation ("PCC"), and the holders of $85 million of senior notes currently in default which were issued by PRT Funding. Under the terms of the agreement, the Company would purchase the stock of PCC from GBCC for nominal consideration as part of a debt restructuring (the "Restructuring") of PRT Funding, PCC and other subsidiaries of PCC. Upon completion of the Restructuring, PCC's assets will consist of its limited partnership interest in PML and a consulting agreement for the Tunica Casino. These assets will serve as collateral for $39.3 million of new notes to be issued by PCC to the holders of the senior notes as part of the Restructuring. The acquisition of PCC will also result in a charge to expense by the Company of approximately $39.3 million during 1999 as no asset value will be attributed to the management contract and consulting agreement when acquired. After the acquisition of PCC, the Company will have incurred additional debt and associated interest, but will no longer report a minority interest in PML nor pay the Tunica consulting fee to a GBCC subsidiary. The minority interest and consulting fee expense totaled $7.7 million for the year ended December 31, 1998. The successful completion of the Restructuring is subject to the execution of definitive documents and will require that PCC and PRT Funding file for protection under Chapter 11 of the United States Bankruptcy Code with the above transactions included as part of a pre-negotiated plan of reorganization. Such plan will require approval of the bankruptcy court as well as by the various gaming regulatory organizations having jurisdiction over PCC and PRT Funding. FINANCING ACTIVITIES In October 1995, HCC issued $210 million of 12 3/4% Senior Secured Notes due November 1, 2003, discounted to yield 13 3/4% per annum. Interest on the Senior Secured Notes is payable semiannually on May 1 and November 1 of each year commencing on May 1, 1996. The Senior Secured Notes are unconditionally guaranteed on a senior secured basis by HCT and by certain future subsidiaries of HCC. HCA is not a guarantor. The Senior Secured Notes and related guarantees are secured by, among other things, (i) substantially all of the assets of HCT and future guarantors, (ii) a limited first mortgage on substantially all of the assets of HCA, (iii) a pledge of the capital stock of certain subsidiaries of HCC and (iv) the collateral assignment of any future management contracts entered into by HCC. The limitation on the first mortgage described in (ii) above is currently $31.5 million and is subject to reduction for principal payments on an intercompany note between HCC and HCA. The intercompany note requires semiannual principal payments of $2.5 million commencing October 15, 1997 with the balance due November 1, 2003. The Senior Secured Notes are redeemable at the option of HCC any time on or after November 1, 1999 at 106.375% of the then outstanding principal amount, decreasing to 103.1875% and 100%, respectively, on November 1, 2000 and 2001. Commencing with the November 1, 1997 interest payment date and at each subsequent interest payment date, HCC is required to make an offer to purchase not more than $2.5 million in principal amount of the Senior Secured Notes at a price of 106.375% of the principal amount tendered. As a result of such offers, HCC has redeemed a total of $5.3 million principal amount of the Senior Secured Notes. 33 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 September 1998, HCA entered into a bank loan agreement to borrow up to $2 million on an unsecured basis. Borrowings under the agreement are payable in 36 monthly installments including interest at the rate of 7.5% per annum. HCA borrowed $2 million under the agreement during October 1998. HCT had a $1.3 million bank credit facility available to borrow against through September 30, 1998. Outstanding borrowings on the line of credit ($462,000 at December 31, 1998) are to be repaid in monthly installments over 36 months and accrue interest at the rate of prime plus 1 1/4% per annum subject to a minimum of 8.75%. Effective as of April 1, 1997, HCC acquired from PPI Corporation, a GBCC subsidiary, the general partnership interest in the limited partnership which holds the Aurora management agreement. The acquisition price for the general partnership interest included a note in the amount of $3.8 million and the assignment of $13.8 million undiscounted principal amount of PPI Funding Notes and $350,000 accrued interest due from GBCC to PPI Corporation. Annual principal and interest payments by HCC on the $3.8 million note approximate the general partner's share of partnership distributions now being made to HCC. As of December 31, 1998, HCC's scheduled maturities of long-term debt and payments under capital leases during 1999 are approximately $7 million and $2.5 million, respectively. The estimated long-term debt maturities include the potential redemption of $5 million principal amount of Senior Secured Notes pursuant to the mandatory redemption offer previously described. CAPITAL EXPENDITURES AND OTHER INVESTING ACTIVITIES Capital expenditures at the Aurora Casino were $6 million during 1998. Management anticipates spending $4.5 million during 1999 primarily for its ongoing capital improvements program. Significant projects planned for 1999 include new slot machines and casino equipment, renovations to one of the Aurora Casino's riverboats, new telephone and point-of-sale systems and the renovation of a restaurant facility. The Company has also developed plans to replace the smaller of the Aurora Casino's two riverboats with a larger, newly constructed riverboat. The new riverboat would increase passenger capacity by approximately 20% and provide a second premier gaming facility for the Aurora Casino's patrons. The new riverboat is projected to cost approximately $40 million and would require a construction period of 14 months. The Company intends to seek financing for this expansion. Capital expenditures during 1998 at the Tunica Casino amounted to $5.9 million and management anticipates spending $7 million in 1999. Such expenditures are part of a two-year capital improvement plan which includes the upgrading of all of hotel accommodations and public areas, the replacement of certain slot machines and the development of a new VIP check-in and private entertainment lounge to enhance the level of service provided to premium gaming patrons. Projects completed in 1998 included upgrades to hotel rooms, the completion of an 18-hole championship golf course and the expansion of the recreational vehicle parking area. HCT entered into an agreement with two other casino operators during 1996 providing for the joint construction and ownership of a golf course. Contributions by HCT to the limited liability corporation formed to develop and operate the golf course amounted to $2 million during the first quarter of 1997 and an additional $53,000 during 1998. Additional contributions are currently anticipated to be approximately $100,000 during 1999. 34 In September 1998, the Company received a preliminary license to develop, own and operate a Hollywood-themed hotel and casino complex on the Red River in Shreveport, Louisiana. The Company originally planned to develop the Shreveport Casino with two partners in a joint venture in which HCC would have had an interest of approximately 50%. On March 31, 1999, HCC entered into a definitive agreement with one of the joint venture partners to acquire their interest in the Shreveport Casino for $2.5 million (the amount the joint venture partner contributed to the project), $1,000 of which is to be paid at closing and the remainder to be paid six months after the opening of the Shreveport Casino. Subject to obtaining final approval by the Louisiana Gaming Control Board, HCC will have a 100% interest in the Shreveport Casino with the remaining joint venture partner holding a 10% residual interest in the event the project is sold. The total estimated cost of the Shreveport Casino is approximately $200 million. The Company anticipates contributing approximately $50 million as an equity investment in the project with the remaining construction and preopening costs, estimated at $150 million, to come from non-recourse project financing. The Company anticipates securing financing for a portion of the equity investment and all of the project financing and commencing construction in the summer of 1999 with a planned opening date approximately 14 months later. HCC continues to pursue several additional potential gaming opportunities. HCC intends to finance any future ventures with cash flow from operations, together with third party financing, including non-recourse project financing. CONCLUSION Management anticipates that 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. 35 ITEM 8. INDEX TO FINANCIAL STATEMENTS
PAGE ---- HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES: Report of Independent Auditors................................................. 37 Report of Independent Public Accountants....................................... 38 Consolidated Balance Sheets as of December 31, 1998 and 1997 (restated).......................................................... 39 Consolidated Statements of Operations for the Years Ended December 31, 1998, 1997 (restated) and 1996............................ 41 Consolidated Statement of Changes in Shareholders' Equity (Deficit) for the Three Years Ended December 31, 1998 (restated).............................................................. 42 Consolidated Statements of Cash Flows for the Years Ended December 31, 1998, 1997 (restated) and 1996............................ 43 Notes to Consolidated Financial Statements..................................... 44 HOLLYWOOD CASINO-AURORA, INC Report of Independent Auditors................................................. 69 Balance Sheets as of December 31, 1998 and 1997................................ 70 Statements of Operations for the Years Ended December 31, 1998, 1997 and 1996.............................................. 72 Statement of Changes in Shareholder's Equity for the Three Years Ended December 31, 1998....................................................... 73 Statements of Cash Flows for the Years Ended December 31, 1998, 1997, and 1996...................................................................... 74 Notes to Financial Statements.................................................. 75 HWCC-TUNICA, INC Report of Independent Auditors................................................. 86 Consolidated Balance Sheets as of December 31, 1998 and 1997................... 87 Consolidated Statements of Operations for the Years Ended December 31, 1998, 1997 and 1996........................................ 89 Consolidated Statement of Changes in Shareholder's Equity for the Three Years Ended December 31, 1998....................................................... 90 Consolidated Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and 1996.............................................. 91 Notes to Consolidated Financial Statements..................................... 92
36 REPORT OF INDEPENDENT AUDITORS To Hollywood Casino Corporation: We have audited the accompanying consolidated balance sheets of Hollywood Casino Corporation (the Company and a Delaware corporation) and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of operations, changes in shareholders' equity (deficit) and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the consolidated financial statements of GB Holdings, Inc. (a consolidated subsidiary until December 31, 1996 when it was a spun-off to the Company's shareholders, see Note 2), which statements for the year ended December 31, 1996 reflect net revenues constituting approximately 50% of consolidated net revenues and a net loss (adjusted to exclude intercompany transactions) constituting approximately 47% of consolidated net loss for the year then ended. Those statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for GB Holdings, Inc. and subsidiaries, is based solely on the report of such other auditors. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the report of the other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the report of the other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Hollywood Casino Corporation and subsidiaries as of December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998 in conformity with generally accepted accounting principles. As discussed in Note 3, the accompanying 1997 and 1996 financial statements have been restated. Deloitte & Touche LLP Dallas, Texas February 23, 1999 37 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ---------------------------------------- To GB Holdings, Inc.: We have audited the consolidated statements of operations, changes in shareholder's deficit and cash flows of GB Holdings, Inc. (the Company and a Delaware Corporation) and subsidiaries for the year ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated statements of operations, changes in shareholder's deficit and cash flows referred to above present fairly, in all material respects, the results of operations and cash flows of GB Holdings, Inc. and subsidiaries for the year ended December 31, 1996 in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Roseland, New Jersey March 21, 1997 38 HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ASSETS
DECEMBER 31, ---------------------------- 1997 (AS RESTATED- 1998 NOTE 3) ------------ ------------ Current Assets: Cash and cash equivalents $ 42,118,000 $ 40,259,000 Short-term investments 3,905,000 3,876,000 Accounts receivable, net of allowances of $1,468,000 and $1,188,000, respectively 2,368,000 2,747,000 Inventories 1,385,000 1,454,000 Deferred income taxes 890,000 2,481,000 Refundable deposits and other current assets 1,908,000 2,274,000 Due from affiliates, net of valuation allowance 8,893,000 7,811,000 ------------ ------------ Total current assets 61,467,000 60,902,000 ------------ ------------ Investment in unconsolidated affiliates 4,581,000 2,000,000 ------------ ------------ Property and Equipment: Land 7,812,000 6,621,000 Buildings and improvements 120,060,000 119,534,000 Riverboats and barges 40,166,000 39,494,000 Operating equipment 77,192,000 70,390,000 Construction in progress 3,227,000 1,222,000 ------------ ------------ 248,457,000 237,261,000 Less - accumulated depreciation and amortization (80,642,000) (66,099,000) ------------ ------------ Net property and equipment 167,815,000 171,162,000 ------------ ------------ Other Assets: Deferred financing costs 4,792,000 5,558,000 Notes receivable, net of allowance - 6,000,000 Land rights 7,250,000 7,454,000 Due from affiliates, net of valuation allowance 12,359,000 12,322,000 Land held for sale, net of valuation allowance 6,232,000 6,264,000 Other assets 6,244,000 4,556,000 ------------ ------------ Total other assets 36,877,000 42,154,000 ------------ ------------ $270,740,000 $276,218,000 ============ ============
The accompanying notes to consolidated financial statements are an integral part of these consolidated balance sheets. 39 HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS LIABILITIES AND SHAREHOLDERS' EQUITY
DECEMBER 31, ------------------------------ 1997 (AS RESTATED- 1998 NOTE 3) ------------- ------------- Current Liabilities: Current maturities of long-term debt and capital lease obligations $ 7,914,000 $ 7,661,000 Accounts payable 4,578,000 3,724,000 Accrued liabilities - Salaries and wages 5,023,000 4,916,000 Interest 4,872,000 4,792,000 Gaming and other taxes 1,613,000 2,469,000 Insurance 2,940,000 2,667,000 Other 4,503,000 2,748,000 Federal income taxes payable - 6,878,000 Other current liabilities 3,311,000 2,549,000 ------------- ------------- Total current liabilities 34,754,000 38,404,000 ------------- ------------- Long-Term Debt 199,667,000 198,420,000 ------------- ------------- Capital Lease Obligations 19,948,000 20,841,000 ------------- ------------- Other Noncurrent Liabilities 5,755,000 7,180,000 ------------- ------------- Commitments and Contingencies Minority Interest in Limited Partnership 3,104,000 2,256,000 ------------- ------------- Shareholders' Equity: Common Stock - Class A common stock, $.0001 par value per share; 50,000,000 shares authorized; 24,950,000 and 24,910,000 shares issued and outstanding, respectively 2,000 2,000 Class B, non-voting, $.01 par value per share; 10,000,000 shares authorized; no shares issued - - Additional paid-in capital 216,926,000 216,926,000 Accumulated deficit (209,416,000) (207,811,000) ------------- ------------- Total shareholders' equity 7,512,000 9,117,000 ------------- ------------- $ 270,740,000 $ 276,218,000 ============= =============
The accompanying notes to consolidated financial statements are an integral part of these consolidated balance sheets. 40 HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, --------------------------------------------- 1997 (AS RESTATED - 1998 NOTE 3) 1996 ------------- -------------- --------------- Revenues: Casino $252,863,000 $251,471,000 $487,374,000 Rooms 9,386,000 9,651,000 18,834,000 Food and beverage 28,810,000 28,533,000 61,620,000 Other 4,229,000 3,270,000 13,339,000 ------------ ------------- ------------ 295,288,000 292,925,000 581,167,000 Less - promotional allowances (26,528,000) (25,168,000) (50,587,000) ------------ ------------- ------------ Net revenues 268,760,000 267,757,000 530,580,000 ------------ ------------- ------------ Expenses: Casino 184,589,000 171,623,000 393,022,000 Rooms 1,752,000 1,835,000 6,029,000 Food and beverage 8,778,000 9,210,000 20,708,000 Other 2,717,000 3,085,000 7,010,000 General and administrative 17,778,000 16,790,000 37,169,000 Management and consulting fees 1,200,000 3,927,000 - Depreciation and amortization 16,562,000 18,901,000 40,836,000 Development 779,000 1,480,000 1,065,000 ------------ ------------- ------------ Total expenses 234,155,000 226,851,000 505,839,000 ------------ ------------- ------------ Income from operations before write down of assets 34,605,000 40,906,000 24,741,000 Write down of assets - (19,678,000) (22,141,000) ------------ ------------- ------------ Income from operations 34,605,000 21,228,000 2,600,000 ------------ ------------- ------------ Non-operating income (expenses): Interest income 2,844,000 1,896,000 3,101,000 Interest expense, net of capitalized interest of $1,006,000 in 1996 (30,260,000) (30,437,000) (59,090,000) Tax settlement costs (1,087,000) - - (Loss) gain on disposal of assets (61,000) 552,000 (1,841,000) ------------ ------------- ------------ Total non-operating expenses, net (28,564,000) (27,989,000) (57,830,000) ------------ ------------- ------------ Income (loss) before income taxes, extraordinary and other items 6,041,000 (6,761,000) (55,230,000) Income tax provision (816,000) (5,359,000) (63,000) ------------ ------------- ------------ Income (loss) before extraordinary and other items 5,225,000 (12,120,000) (55,293,000) Minority interest in earnings of Limited Partnership (Note 1) (6,494,000) (5,012,000) - ------------ ------------- ------------ Loss before extraordinary item (1,269,000) (17,132,000) (55,293,000) Extraordinary item: Loss on early extinguishment of debt, net of related tax benefit in 1997 (336,000) (215,000) - ------------ ------------- ------------ Net loss $ (1,605,000) $(17,347,000) $(55,293,000) ============ ============= ============ Basic and diluted net loss per common share: Loss before extraordinary item $ (.05) $ (.69) $ (2.24) Extraordinary item (.01) (.01) - ------------ ------------- ------------ Net loss $ (.06) $ (.70) $ (2.24) ============ ============= ============
The accompanying notes to consolidated financial statements are an integral part of these consolidated statements. 41 HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT) FOR THE THREE YEARS ENDED DECEMBER 31, 1998
CLASS A ADDITIONAL COMMON STOCK PAID-IN ACCUMULATED ------------------ SHARES AMOUNT CAPITAL DEFICIT ---------- ------ ------------ ------------- BALANCE, JANUARY 1, 1996 24,720,000 $2,000 $ 77,936,000 $(135,171,000) Distribution of Greate Bay Casino Corporation common stock (1) - - 151,362,000 - Exercise of stock options 40,000 - - - Net loss - - - (55,293,000) ---------- ------ ------------ ------------- BALANCE, DECEMBER 31, 1996 (1) 24,760,000 2,000 229,298,000 (190,464,000) Stock issued for loan commitment 100,000 - 375,000 - Acquisition of general partnership interest - - (12,747,000) - Exercise of stock options 50,000 - - - Net loss (1) - - - (17,347,000) ---------- ------ ------------ ------------- BALANCE, DECEMBER 31, 1997 (1) 24,910,000 2,000 216,926,000 (207,811,000) Exercise of stock options 40,000 - - - Net loss - - - (1,605,000) ---------- ------ ------------ ------------- BALANCE, DECEMBER 31, 1998 24,950,000 $2,000 $216,926,000 $(209,416,000) ========== ====== ============ =============
_________________ (1) Restated - see Note 3. The accompanying notes to consolidated financial statements are an integral part of this consolidated statement. 42 HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, ----------------------------------------------- 1997 1996 (AS RESTATED - (AS RESTATED - 1998 NOTE 3) NOTE 3) --------------- --------------- ------------- OPERATING ACTIVITIES: Net loss $ (1,605,000) $(17,347,000) $(55,293,000) Adjustments to reconcile net loss to net cash provided by operating activities: Extraordinary item 336,000 215,000 - Depreciation and amortization, including accretion of debt discount 17,581,000 19,801,000 41,621,000 Write down of assets - 19,678,000 22,141,000 Loss (gain) on disposal of assets 61,000 (552,000) 1,841,000 Minority interest in earnings of Limited Partnership 6,494,000 5,012,000 - Provision for doubtful accounts 845,000 698,000 3,031,000 Deferred income tax provision (benefit) 81,000 592,000 (2,154,000) Increase in accounts receivable (377,000) (305,000) (769,000) Increase in accounts payable and accrued expenses 2,035,000 116,000 649,000 (Decrease) increase in federal taxes payable (6,878,000) 4,678,000 2,200,000 Net change in other current assets and liabilities (11,000) (1,107,000) (677,000) Net change in other noncurrent assets and liabilities (1,811,000) 134,000 (281,000) ------------ ------------ ------------ Net cash provided by operating activities 16,751,000 31,613,000 12,309,000 ------------ ------------ ------------ INVESTING ACTIVITIES: Purchases of property and equipment (12,037,000) (5,101,000) (53,078,000) Collections on notes receivable 6,000,000 - 9,361,000 Proceeds from sale of assets 129,000 12,487,000 2,699,000 Obligatory investments - - (3,062,000) Short-term investments (29,000) (3,876,000) (2,000,000) Investments in unconsolidated affiliates (2,553,000) (2,000,000) (2,946,000) Increase in cash from purchase of limited partnership interest - 451,000 - Distribution of GBCC cash and cash equivalents - - (22,991,000) Decrease in cash restricted for construction projects - - 29,874,000 ------------ ------------ ------------ Net cash (used in) provided by investing activities (8,490,000) 1,961,000 (42,143,000) ------------ ------------ ------------ FINANCING ACTIVITIES: Proceeds from issuance of long-term debt 2,687,000 601,000 2,203,000 Net borrowings on short-term credit facilities - - 2,000,000 Deferred financing costs (248,000) (24,000) (126,000) Repayments of long-term debt (2,334,000) (8,548,000) (6,840,000) Payments on capital lease obligations (861,000) (1,976,000) (2,453,000) Limited partnership distributions (5,646,000) (4,856,000) - ------------ ------------ ------------ Net cash used in financing activities (6,402,000) (14,803,000) (5,216,000) ------------ ------------ ------------ Net increase (decrease) in cash and cash equivalents 1,859,000 18,771,000 (35,050,000) Cash and cash equivalents at beginning of year 40,259,000 21,488,000 56,538,000 ------------ ------------ ------------ Cash and cash equivalents at end of year $ 42,118,000 $ 40,259,000 $ 21,488,000 ============ ============ ============
The accompanying notes to consolidated financial statements are an integral part of these consolidated statements. 43 HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) ORGANIZATION AND BUSINESS Hollywood Casino Corporation ("HCC" or the "Company"), is a Delaware corporation which was organized and incorporated on November 5, 1990. Approximately 54% of the issued and outstanding stock of HCC is owned by Jack E. Pratt, Edward T. Pratt, Jr. and William D. Pratt (the "Pratt Brothers"), by certain general partnerships and trusts controlled by the Pratt Brothers and by other family members (collectively, the "Pratt Family"). HCC owns all of the outstanding common stock of both Hollywood Casino - Aurora, Inc. ("HCA") and HWCC - Tunica, Inc. ("HCT"). HCA is an Illinois corporation organized during 1990 which owns and operates a 32,100 square foot riverboat gaming operation together with docking and other entertainment facilities under the service mark Hollywood Casino(R) in Aurora, Illinois (the "Aurora Casino"). HCT is a Texas corporation formed by HCC during 1993 which owns and operates a 54,000 square foot gaming facility, adjacent support facilities and a 506-room hotel complex under the service mark Hollywood Casino(R) in northern Tunica County, Mississippi (the "Tunica Casino"). The Aurora Casino and the Tunica Casino commenced operations in June 1993 and August 1994, respectively. The Company believes that its two gaming operations derive a significant amount of their gaming revenues from patrons living in the surrounding areas. Competition within the Company's gaming markets is intense and management believes that this competition will continue in the future. Prior to December 31, 1996, HCC also owned approximately 80% of the common stock of Greate Bay Casino Corporation ("GBCC"), also a Delaware corporation. On December 31, 1996, HCC distributed to its shareholders the common stock of GBCC owned by HCC. As a result of the dividend, GBCC is no longer a subsidiary of HCC. While owned by HCC, GBCC's principal asset was the Sands Hotel and Casino in Atlantic City, New Jersey (the "Sands"). GBCC also has a limited partnership interest in Pratt Management L.P. ("PML"), the limited partnership which holds the management contract on the Aurora Casino, and has a consulting contract with the Tunica Casino. Effective as of April 1, 1997, HCC acquired the general partnership interest in PML from PPI Corporation, a wholly owned subsidiary of GBCC (see Note 8). For all periods subsequent to the acquisition date (April 1, 1997), PML is reflected as a consolidated subsidiary of HCC. The assets and liabilities of PML were recorded at historical cost at the date of acquisition with the difference between acquisition cost and the historical net book value ($12,747,000) recorded as a charge to paid-in capital (see Note 13). PML earns management fees from the Aurora Casino and incurs operating and other expenses with respect to its management thereof. As general partner, HCC receives 99% of the first $84,000 of net income earned by PML each month together with 1% of any income earned above such amount. The remaining limited partnership interest continues to be held by Pratt Casino Corporation ("PCC"), a wholly owned subsidiary of GBCC, and is reflected on the accompanying consolidated financial statements as a minority interest (see Note 15). The accompanying consolidated financial statements also reflect HCT's initial one-third investment ($2,000,000) in Tunica Golf Course LLC under the equity method of accounting. This limited liability company was organized in 1996 to develop and operate a golf course to be used by patrons of the Tunica Casino and other participating casino/hotel properties. The golf course was completed in November 1998. HCC also has an approximate 50% interest in a joint venture which holds a gaming license for a site in Shreveport, Louisiana. Construction of a casino and hotel project is scheduled to begin in mid-1999. HCC's investment in the joint venture ($2,500,000) is reflected on the accompanying consolidated financial statements under the equity method of accounting (see Note 15). 44 HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The Board of Directors approved the adoption in May 1993 of a Rights Agreement providing that stockholders of HCC receive rights to acquire Series A Junior Participating Preferred Stock of HCC at an initial price of $60 per one one-hundredth of a share, subject to adjustment, for each share of HCC Common Stock owned. The rights become exercisable if a person (other than the Pratt Family) acquires 20% or more, or announces a tender offer for 20% or more, of the Company's Common Stock. If the Company is acquired in a merger or other business combination, each right will enable the holder to exercise such right for Common Stock of the acquiring company at a 50% discount. The rights, which expire on May 7, 2003, may be redeemed by the Company at its option at a price of $.0001 per right at any time prior to the earlier of 10 days following the date after which a person has acquired at least 20% of the Company's outstanding shares or May 7, 2003. Until such time as it becomes likely that the rights will be exercised, the calculation of basic and diluted earnings per share does not reflect the retroactive adjustment for the bonus element of the Rights Agreement. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The significant accounting policies followed in the preparation of the accompanying consolidated financial statements are discussed below. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include the accounts of HCC and its wholly owned subsidiaries and, prior to December 31, 1996, the accounts of GBCC (which was majority owned) and GBCC's wholly owned subsidiaries. The accompanying consolidated financial statements include GBCC's operations and cash flows through the date of disposition (December 31, 1996). The dividend of GBCC's common stock to HCC's shareholders (adjusted for related transactions) has been reflected in the accompanying consolidated financial statements as an adjustment to additional paid-in capital at December 31, 1996. All significant intercompany balances and transactions have been eliminated. Investments in unconsolidated affiliates including joint ventures that were 50% or less owned are accounted for by the equity method. CASINO REVENUES, PROMOTIONAL ALLOWANCES AND DEPARTMENTAL EXPENSES - HCC recognizes the net win from gaming activities (the difference between gaming wins and losses) as casino revenues. Casino revenues are net of accruals for anticipated payouts of progressive and certain other slot machine jackpots and certain progressive table game payouts. Such anticipated jackpots and payouts are reflected as other accrued liabilities on the accompanying consolidated balance sheets. The estimated value of rooms, food and beverage and other items which were provided to customers without charge has been included in revenues and a corresponding amount has been deducted as promotional allowances. The costs of such complimentaries have been included as casino expenses on the accompanying consolidated statements of operations. Costs of complimentaries allocated from the rooms, 45 HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) food and beverage and other operating departments to the casino department during the years ended December 31, 1998, 1997 and 1996 are as follows:
1998 1997 1996 ----------- ----------- ----------- Rooms $ 1,940,000 $ 1,870,000 $ 7,332,000 Food and beverage 20,887,000 19,894,000 49,860,000 Other 1,431,000 1,061,000 5,956,000 ----------- ----------- ----------- $24,258,000 $22,825,000 $63,148,000 =========== =========== ===========
CASH AND CASH EQUIVALENTS - Cash and cash equivalents are generally comprised of cash and investments with original maturities of three months or less, such as commercial paper, certificates of deposit and fixed repurchase agreements. ALLOWANCE FOR DOUBTFUL ACCOUNTS - The allowance for doubtful accounts is maintained at a level considered adequate to provide for possible future losses. Provisions for doubtful accounts amounting to $756,000, $698,000 and $3,031,000 were made during the years ended December 31, 1998, 1997 and 1996, respectively. INVENTORIES - Inventories are stated at the lower of cost (on a first-in, first-out basis) or market. PROPERTY AND EQUIPMENT - Property and equipment have been recorded at cost and are being depreciated utilizing the straight-line method over the estimated useful lives of the assets as follows: 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 by $886,000 and net loss by approximately $578,000. Both basic and diluted net loss per share were reduced by $.02 for 1996. Interest costs related to property and equipment acquisitions were capitalized during the development period and are being amortized over the useful lives of the related assets. 46 HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DEFERRED FINANCING COSTS - The costs of issuing long-term debt, including all underwriting, licensing, legal and accounting fees, have been capitalized and are being amortized over the term of the related debt issue using the straight-line method which approximates the effective interest method. Amortization of such costs was $952,000, $963,000 and $2,044,000 for the years ended December 31, 1998, 1997 and 1996, respectively, and is included in depreciation and amortization expense on the accompanying consolidated statements of operations. Deferred financing costs, net of accumulated amortization, amounting to $62,000 and $68,000, respectively were written off during 1998 and 1997, with respect to the reacquisition of outstanding debt. LONG-LIVED ASSETS - Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" requires, among other things, that an entity review its long-lived assets and certain related intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable. Long-lived assets held for sale are carried at the lower of carrying amount or fair value less cost to sell. During 1996, certain real property held as potential gaming development sites in Texas was offered for sale; consequently management conducted a review to determine the estimated fair value of these properties less costs to sell. As a result of the review, HCC recorded an anticipated loss from the disposition of assets held for sale of $3,400,000 during 1996. The loss is included in write down of assets on the accompanying consolidated statement of operations for the year ended December 31, 1996. During 1997, a parcel of the real property was sold at a price approximating its net book value; accordingly, no gain or loss was recognized on the sale. Land held for sale is shown net of valuation allowances of approximately $3,400,000 on the accompanying consolidated balance sheets at both December 31, 1998 and 1997. ACCRUED INSURANCE - HCC is self insured for a portion of its general liability, certain health care and other liability exposures. Accrued insurance includes estimates of such accrued liabilities based on an evaluation of the merits of individual claims and historical claims experience; accordingly, HCC's ultimate liability may differ from the amounts accrued. INCOME TAXES - HCC complies with the provisions of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"), which utilizes the liability method and results in the determination of deferred taxes based on the estimated future tax effects of differences between the financial statement and tax bases of assets and liabilities. INTEREST EXPENSE - Interest expense includes the accretion of debt discount amounting to $1,019,000, $900,000 and $785,000 during the years ended December 31, 1998, 1997 and 1996, respectively. 47 HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) LAND RIGHTS - Land rights are being amortized on a straight-line basis over the estimated useful life of the Tunica facility, which is less than the term of the ground lease including renewals (see Note 12); such amortization commenced with the opening of the Tunica Casino. The estimated economic benefit of the land rights was revised from 25 years to 40 years effective on October 1, 1996 consistent with the change in estimated useful life of the Tunica facility as discussed under "Property and Equipment" above. Management presently intends to renew the ground lease at least through the estimated 40-year useful life of the facility. Accumulated amortization of such land rights amounted to $1,195,000 and $991,000, respectively, at December 31, 1998 and 1997. EMPLOYEE STOCK OPTIONS - During 1996, HCC adopted the provisions of statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). SFAS 123 requires that an entity account for employee stock compensation under a fair value based method. However, SFAS 123 also allows an entity to continue to measure compensation cost for employee stock-based compensation plans using the intrinsic value based method of accounting prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("Opinion 25"). Entities electing to remain with the accounting under Opinion 25 are required to make pro forma disclosures of net income and earnings per share as if the fair value based method of accounting under SFAS 123 had been applied. HCC has elected to continue to account for employee stock-based compensation under Opinion 25 with the requisite additional disclosures included in Note 7. NET (LOSS) INCOME PER COMMON SHARE - During 1997, HCC adopted the provisions of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128"). SFAS 128 requires the calculation and disclosure of earnings per common share assuming no dilution (basic earnings per share) and earnings per common share assuming full dilution (diluted earnings per share). SFAS 128 requires the restatement of earnings per share for all prior years presented. Under SFAS 128, basic earnings per common share is calculated by dividing the net (loss) income by the weighted average number of shares of common stock outstanding. Diluted earnings per common share is calculated for periods in which income from continuing operations was earned by dividing the components of net income by the weighted average number of shares of common stock and potential common shares outstanding. All potential common shares are excluded from the calculation of diluted net loss per share for periods during which a loss was incurred because the effect of their inclusion would be antidilutive. The weighted average number of shares of common stock outstanding used for the calculation of both basic and diluted loss per share before extraordinary item and basic and diluted net loss per share was 24,946,359, 24,833,393 and 24,721,279 for the years ended December 31, 1998, 1997 and 1996, respectively. No potential common shares were included in the calculation of diluted earnings per share for the years ended December 31, 1998, 1997 and 1996 as the inclusion of such shares would have been antidilutive due to the net losses incurred in those years. The weighted average number of shares excluded was 962,260, 535,296 and 161,319, respectively, for the years ended December 31, 1998, 1997 and 1996. 48 HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) RECENT ACCOUNTING PRONOUNCEMENTS - The Financial Accounting Standards Board (the "FASB") recently issued a new standard, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 requires the presentation and disclosure of comprehensive income, which is defined as the change in a company's equity resulting from non-owner transactions and events. SFAS 130 became effective for fiscal years beginning after December 15, 1997 and requires the reclassification of all prior periods presented. The Company has adopted the provisions of SFAS 130; however, the statement provides that an enterprise that has no items of other comprehensive income for any period presented need only report net income. The Company has no such other comprehensive income items for any period presented; accordingly, the presentation and disclosure requirements of SFAS 130 are not applicable. The FASB has also issued Statement 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131"). SFAS 131, which became effective for fiscal years beginning after December 15, 1997, requires publicly- held companies to report financial and descriptive information concerning its reportable operating segments. An operating segment is defined as a component of a business which (i) earns revenues and incurs expenses, (ii) has its operating results reviewed on a regular basis by the company's chief operating decision maker to determine how the company's resources should be allocated and to assess its performance and (iii) has separate financial information available. Substantially all of HCC's operations consist of its two casino facilities. Because of the similarity of these operations with respect to the services provided, the class of customers served and the regulatory environments in which they operate, the Company believes that these operations have similar economic characteristics and will exhibit similar long-term financial performance. Accordingly, these operations are considered a single operating segment and additional segment information is not presented herein. In June 1998, the FASB issued a new statement, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"), effective for fiscal years beginning after June 15, 1999. SFAS 133 requires, among other things, that derivatives be recorded on the balance sheet at fair value. Changes in the fair value of derivatives may, depending on circumstances, be recognized in earnings or deferred as a component of shareholders' equity until a hedged transaction occurs. The Company does not believe the adoption of SFAS 133 will have a significant impact on its financial position or results of operations. RECLASSIFICATIONS - Certain reclassifications have been made to the prior years' consolidated financial statements to conform to the 1998 consolidated financial statement presentation. (3) RESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENTS As previously disclosed in HCC's quarterly report on Form 10-Q for the period ended September 30, 1998, and subsequent to the issuance of the Company's 1997 consolidated financial statements, the Company has determined that it should revise its tax treatment of the spin-off of the stock of GBCC which occurred on December 31, 1996. The 1997 and 1996 consolidated financial statements have been restated from amounts previously reported to record the appropriate amounts for income taxes, accrued income taxes, deferred taxes, interest and penalties due to the recognition of additional taxable income resulting from the revised tax treatment of the spin-off. 49 HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) For the year ended December 31, 1996, HCC utilized approximately $9,000,000 of its available net operating loss carryforwards ("NOL's") as a result of the additional taxable income the Company recognized from the spin-off. For alternative minimum tax ("AMT") purposes, the revised tax treatment resulted in the Company utilizing all of its remaining AMT loss carryforwards and being liable for the payment of approximately $2,200,000 in additional AMT taxes. HCC paid its $2,200,000 AMT obligation for 1996 plus accrued interest thereon during the fourth quarter of 1998. As a result of the obligation for AMT payments and the impact on net deferred tax assets, the Company has restated its December 31, 1996 consolidated statement of changes in shareholders' equity (deficit) from amounts previously reported to provide an additional $6,308,000 charge to paid- in capital consistent with the treatment of the other effects of the spin-off transaction. For the year ended December 31, 1997, the revised tax treatment resulted in HCC's recognition of additional income tax expense of $2,070,000 and the accrual of interest on the underpayment of its federal tax obligations. HCC paid $4,678,000 during September 1998 with respect to its revised estimated 1997 federal income tax obligation. The effect of the restatement on HCC's consolidated financial statements as of and for the year ended December 31, 1997 is as follows:
AS PREVIOUSLY REPORTED AS RESTATED ---------------------- ----------- Loss before income taxes, extraordinary and other items $ (6,629,000) $ (6,761,000) Income tax provision (3,289,000) (5,359,000) Loss before extraordinary and other items (9,918,000) (12,120,000) Net loss (15,145,000) (17,347,000) Basic and diluted net loss per common share: Loss before extraordinary item $ (.60) $ (.69) Extraordinary item (.01) (.01) ------------ --------------- Net loss $ (.61) $ (.70) ============ ===============
The effects of the restatement on the consolidated balance sheet at December 31, 1997 were to decrease additional paid-in capital by $6,308,000, to increase taxes payable by $6,878,000, to decrease net deferred tax assets by $1,500,000, to increase interest payable with respect to the underpayment of taxes by $132,000 and to increase accumulated deficit by $2,202,000. In connection with the revised tax treatment, HCC has commenced litigation against its former independent accountants and tax advisors alleging negligent advice and breach of contract (see Note 10). Tax settlement costs of $1,087,000 included on the accompanying consolidated statement of operations for the year ended December 31, 1998 represent both costs incurred to date as well as management's estimate of probable costs to be incurred arising from and directly related to the modification of HCC's tax treatment of the spin-off of GBCC stock. 50 HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (4) LONG-TERM DEBT AND PLEDGE OF ASSETS Substantially all of HCC's assets are pledged in connection with its long- term indebtedness.
DECEMBER 31, ---------------------------- 1998 1997 ------------- ------------- Indebtedness of HCC: 12 3/4% Senior Secured Notes, due 2003, net of discount of $7,013,000 and $8,128,000, respectively (a) $200,199,000 $199,372,000 Promissory note due to affiliate (Note 8) 2,836,000 3,447,000 ------------ ------------ 203,035,000 202,819,000 ------------ ------------ Indebtedness of HCA: Promissory note to bank (b) 1,900,000 350,000 Equipment loans - 413,000 ------------ ------------ 1,900,000 763,000 ------------ ------------ Indebtedness of HCT : Equipment loans 1,291,000 1,638,000 Bank credit facility (c) 462,000 - ------------ ------------ 1,753,000 1,638,000 ------------ ------------ Total indebtedness 206,688,000 205,220,000 Less - current maturities (7,021,000) (6,800,000) ------------ ------------ Total long-term debt $199,667,000 $198,420,000 ============ ============
_____________________ (a) During October 1995, HCC completed the refinancing of certain outstanding indebtedness through a public offering of $210,000,000 of 12 3/4% Senior Secured Notes (the "Senior Secured Notes") due November 1, 2003, discounted to yield 13 3/4% per annum. Interest on the Senior Secured Notes is payable semiannually on May 1 and November 1 of each year. The Senior Secured Notes are unconditionally guaranteed on a senior secured basis by HCT and may be guaranteed by certain future subsidiaries of HCC. HCA is not a guarantor. The Senior Secured Notes and related guarantees are secured by, among other things, (i) substantially all of the assets of HCT and future guarantors, (ii) a limited first mortgage on substantially all of the assets of HCA, (iii) a pledge of the capital stock of certain subsidiaries of HCC and (iv) the collateral assignment of any future management contracts entered into by HCC. The limitation on the first mortgage in (ii) above was originally $39,007,000 and is subject to reduction for principal payments on an intercompany note between HCC and HCA. The outstanding balance of the intercompany note was $31,507,000 and $36,507,000 at December 31, 1998 and 1997, respectively. The note requires semiannual principal payments of $2,500,000 commencing October 15, 1997 with the balance due November 1, 2003. The Senior Secured Notes are redeemable at the option of HCC any time on or after November 1, 1999 at 106.375% of the then outstanding principal amount, decreasing to 103.1875% and 100%, respectively, on November 1, 2000 and 2001. Commencing with the November 1, 1997 interest 51 HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) payment date and at each subsequent interest payment date, HCC is required to make an offer within 30 business days to purchase not more than $2,500,000 in principal amount of the Senior Secured Notes at a price of 106.375% of the principal amount tendered. During 1998, HCC made two such offers resulting in the redemption of $2,788,000 in principal amount of the Senior Secured Notes of which $2,500,000 was paid in January 1999. The 1998 redemptions of the Senior Secured Notes resulted in an extraordinary loss of $336,000 consisting of the premium paid ($178,000) together with the write off of associated deferred finance costs ($62,000) and discount on the notes ($96,000). During 1997, HCC redeemed $2,500,000 principal amount of the Senior Secured Notes resulting in an extraordinary loss of $215,000, net of a related income tax benefit of $111,000, and consisting of the premium paid ($159,000) together with the write off of associated deferred finance costs ($68,000) and discount on the notes ($99,000). The indenture to the Senior Secured Notes contains various provisions limiting the ability of HCC and certain defined subsidiaries to, among other things, pay dividends or make other restricted payments; incur additional indebtedness or issue preferred stock; create liens; create dividend or other payment restrictions affecting certain defined subsidiaries; enter into mergers or consolidations or make sales of all or substantially all assets of HCC, HCT or any future guarantor; and enter into transactions with certain affiliates. (b) During September 1998, HCA entered into a bank loan agreement to borrow up to $2,000,000 on an unsecured basis. Borrowings under the agreement are payable in 36 monthly installments including interest at the rate of 7.5% per annum. HCA borrowed $2,000,000 under the agreement during October 1998. The promissory note outstanding at December 31, 1997 accrued interest at the bank's prime lending rate plus 1% per annum and was repaid in 1998. (c) HCT had a bank credit facility in the amount of $1,300,000 available to borrow against through September 30, 1998. HCT borrowed $541,000 under the credit facility during 1998 at the rate of 8.875% per annum; no borrowings were outstanding under the credit facility at December 31, 1997. Borrowings under the credit facility are to be repaid in monthly installments over a period of 36 months and are collateralized by equipment purchased with the loan proceeds. The credit facility was not renewed by HCT. Scheduled payments of long-term debt as of December 31, 1998 are set forth below:
1999 $ 7,021,000 2000 7,138,000 2001 6,697,000 2002 5,633,000 2003 187,212,000 ------------ Total $213,701,000 ============
Interest paid, net of capitalized interest in 1996, amounted to $29,161,000, $29,479,000 and $59,404,000, respectively, during the years ended December 31, 1998, 1997 and 1996. 52 HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (5) CAPITAL LEASES HCA leases two parking garages under capital lease agreements. The first lease has an initial 30-year term ending in June 2023 with the right to extend the term under renewal options for an additional 67 years. Rental payments through June 2012 equal the City of Aurora's financing costs related to its general obligation bond issue used to finance the construction of the parking garage. The general obligation bond issue includes interest at rates between 7% and 7 5/8% per annum. The second lease has an initial term ending in September 2026 with the right to extend the lease for up to 20 additional years. Rental payments during the first 15 years equal the lessor's debt service costs related to the industrial revenue bond issue used to finance a portion of the construction costs of the parking garage. The remaining construction costs were funded by HCA. In addition, HCA pays base rent equal to $15,000 per month, subject to a credit of $615,000 at the rate of $10,000 per month, for improvements made to the lessor's North Island Center banquet and meeting facilities. HCA is also responsible for additional rent, consisting of costs such as maintenance costs, insurance premiums and utilities, arising out of its operation of both parking garages. HCA also leased certain equipment under capital lease agreements which provided for interest at the rate of 11.2% per annum and expired in 1998. HCT leased certain gaming and other equipment under capital lease agreements which provided for interest at rates ranging up to 13 1/4% per annum and expired during 1997. The original cost of HCA's parking garages is included in buildings in the accompanying consolidated balance sheets at both December 31, 1998 and 1997 in the amount of $27,358,000. Assets under capital leases with an original cost of $7,260,000, are included in operating equipment on the accompanying consolidated balance sheets at both December 31, 1998 and 1997. Amortization expense with respect to these assets amounted to $1,281,000, $2,042,000 and $2,723,000 during the years ended December 31, 1998, 1997 and 1996, respectively. Accumulated amortization at December 31, 1998 and 1997 with respect to these assets amounted to $10,805,000 and $9,524,000, respectively. Future minimum lease payments under capital lease obligations as of December 31, 1998 are as follows:
1999 $ 2,457,000 2000 2,483,000 2001 2,532,000 2002 2,643,000 2003 2,660,000 Thereafter 21,417,000 ------------ Total minimum lease payments 34,192,000 Less amount representing interest (13,351,000) ------------ Present value of future minimum lease payments 20,841,000 Current capital lease obligation (893,000) ------------ Long-term capital lease obligation $ 19,948,000 ============
53 HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (6) INCOME TAXES As discussed in Note 3, the Company modified its tax treatment of the spin- off of the stock of GBCC. The tax presentation and other disclosures for the year ended December 31, 1997 as set forth in this footnote have been restated accordingly. Components of HCC's provision for income taxes consist of the following:
YEAR ENDED DECEMBER 31, --------------------------------------- 1997 AS RESTATED 1998 (NOTE 3) 1996 ---------- ------------ ------------- Current income tax benefit (provision): Federal $ - $(4,678,000) $ (2,272,000) State (735,000) (200,000) 55,000 Deferred income tax (provision) benefit: Federal 731,000 9,289,000 17,778,000 State (103,000) (205,000) (46,000) Change in valuation allowance (709,000) (9,565,000) (15,578,000) --------- ----------- ------------ $(816,000) $(5,359,000) $ (63,000) ========= =========== ============
Total federal income tax payments of $6,878,000 and $72,000, respectively, were made during the years ended December 31, 1998 and 1996; no such payments were made during the year ended December 31, 1997. State tax payments of $797,000, $683,000 and $151,000, respectively, were made during the years ended December 31, 1998, 1997 and 1996. 54 HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) A reconciliation between the calculated tax benefit on income based on the statutory rates in effect and the effective tax rates follows:
YEAR ENDED DECEMBER 31, -------------------------------------- 1997 AS RESTATED 1998 (NOTE 3) 1996 --------- ----------- ------------ Calculated income tax benefit $ 268,000 $ 4,003,000 $ 18,778,000 Valuation allowance change (709,000) (9,565,000) (15,578,000) Amortization of excess purchase price - - (601,000) Lobbying costs (98,000) (168,000) (306,000) Disallowance of meals and entertainment (64,000) (76,000) (404,000) State income taxes, net of federal benefit (553,000) (267,000) 6,000 Other 340,000 714,000 (1,958,000) --------- ----------- ------------ Tax provision as shown on consolidated statements of operations $(816,000) $(5,359,000) $ (63,000) ========= =========== ============
At December 31, 1998, HCC and its subsidiaries have NOL's for federal income tax purposes totaling approximately $3,800,000, none of which begin to expire until the year 2018. Additionally, HCC and its subsidiaries have alternative minimum and other tax credits available totaling $4,913,000 and $415,000, respectively. Alternative minimum tax credits do not expire and none of the other tax credits begin to expire until the year 2010. SFAS 109 requires that the tax benefit of such NOL's and credit carryforwards, together with the tax benefit of deferred tax assets resulting from temporary differences, be recorded as an asset and, to the extent that management can not assess that the utilization of all or a portion of such NOL's and deferred tax assets is more likely than not, a valuation allowance should be recorded. Management believes that it is more likely than not that future consolidated taxable income of HCC (primarily from the Aurora Casino and the Tunica Casino) will be sufficient to utilize a portion of the net deferred tax assets. Accordingly, valuation allowances have been established which result in net deferred tax assets of $1,843,000 and $1,924,000 at December 31, 1998 and 1997, respectively. 55 HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The components of the net deferred tax asset and classification on the accompanying consolidated balance sheets are as follows:
DECEMBER 31, ---------------------------- 1997 AS RESTATED 1998 (NOTE 3) ------------ ------------ Deferred tax assets: Net operating loss carryforwards $ 1,305,000 $ - Valuation and other allowances 8,241,000 9,093,000 Alternative minimum tax credit 4,913,000 4,791,000 Investment and jobs tax credits 415,000 311,000 Basis in limited partnership 2,890,000 2,890,000 Other liabilities and accruals 4,145,000 2,749,000 Benefits accrual 1,711,000 1,710,000 Other 724,000 733,000 ------------ ------------ Total deferred tax assets 24,344,000 22,277,000 ------------ ------------ Deferred tax liabilities: Depreciation and amortization (8,610,000) (6,422,000) Amortization of note discount - (621,000) Basis in debt obligations (727,000) (855,000) ------------ ------------ Total deferred tax liabilities (9,337,000) (7,898,000) ------------ ------------ Net deferred tax asset 15,007,000 14,379,000 Valuation allowance (13,164,000) (12,455,000) ------------ ------------ $ 1,843,000 $ 1,924,000 ============ ============ Classified as: Current deferred income tax asset $ 890,000 $ 2,481,000 Other assets 1,524,000 - Other noncurrent liabilities (571,000) (557,000)
No deferred tax benefit was attributed to the extraordinary item in 1998. The deferred tax benefit attributed to the extraordinary loss on early extinguishment of debt in 1997 was $111,000. Sales by HCC or existing shareholders of common stock can cause a "change of control", as defined in Section 382 of the Internal Revenue Code of 1986, as amended (the "Code"), which would limit the ability of HCC or its subsidiaries to utilize these loss carryforwards in later tax periods. Should such a change of control occur, the amount of loss carryforwards available for use in any one year would most likely be substantially reduced. Future treasury regulations, administrative rulings or court decisions may also effect HCC's utilization of its loss carryforwards. 56 HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The Internal Revenue Service is currently examining the consolidated Federal income tax returns of HCC for the years 1993 through 1996. Management believes that the results of such examination will not have a material adverse effect on the consolidated financial position or results of operations of HCC. (7) STOCK OPTIONS AND COMPENSATION PLANS HOLLYWOOD CASINO CORPORATION STOCK OPTION PLANS - HCC currently has two employee stock option plans in effect: the Hollywood Casino Corporation 1996 Long-Term Incentive Plan (the "1996 Plan") and the Hollywood Casino Corporation 1992 Stock Option Plan (the "1992 Plan"). The 1996 Plan and the 1992 Plan provide for the granting of nonqualified stock options and incentive stock options that are intended to qualify for the special tax treatment under the Internal Revenue Code; the 1996 Plan also provides for the granting of restricted stock. The shares to be offered under the 1996 Plan and the 1992 Plan consist of shares of Class A Common Stock. The 1996 Plan and the 1992 Plan provide for the granting of 3,000,000 and 1,197,000 shares, respectively, of Class A Common Stock of which 1,910,000 and 147,006, respectively, remain available for future grant as of December 31, 1998. The 1996 Plan and the 1992 Plan are administered by committees of HCC's Board of Directors. Options granted under the 1996 Plan become vested at the discretion of the Committee of the Board of Directors (however, vesting for certain officers, directors and shareholders may not be less than six months) and may be exercised for a period of not more than ten years (five years in the case of incentive stock options) from the date of grant. No more than 150,000 shares may be awarded to any individual during any fiscal year and incentive stock options are subject to a $100,000 calendar year limitation. Options granted under the 1992 Plan become vested over a three year period, are exercisable for a term ending not more than seven years (five years in the case of incentive stock options) from the date of the grant and incentive stock options are subject to limitations on the quantity exercised in a calendar year. All options granted through December 31, 1998 under both the 1996 Plan and the 1992 Plan have been granted at an exercise price equal to the fair market value as of the date of the grant. As of December 31, 1998, options to purchase 1,090,000 shares remain outstanding under the 1996 Plan, of which over 98% are at exercise prices ranging from $1.75 per share to $3.13 per share. The remaining options have an exercise price of $5.25 per share. Options outstanding under the 1996 plan have a weighted average exercise price of $2.51 and a weighted average remaining contractual life of 56 months. As of December 31, 1998, no options are outstanding under the 1992 Plan. 57 HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The following table lists the combined activity of the 1996 Plan and the 1992 Plan:
YEAR ENDED DECEMBER 31, ----------------------------------------------------------------------------- 1998 1997 1996 ----------------------------------------------------------------------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE ----------------------------------------------------------------------------- Outstanding options at beginning of year 660,008 $ 2.86 410,008 $ 2.54 150,008 $ .80 Options cancelled (50,000) 2.06 - - (20,000) 6.00 Options granted 520,000 1.83 300,000 2.81 320,000 3.26 Options exercised (40,008) .0006 (50,000) .0006 (40,000) .0006 --------- ------- ------- Outstanding options at end of year 1,090,000 $ 2.51 660,008 $ 2.86 410,008 $ 2.54 ========= ======= ======= Exercisable options at end of year 920,000 $ 2.62 360,008 $ 2.90 110,008 $ .95
During 1996, HCC also adopted the Hollywood Casino Corporation 1996 Non- Employee Director Stock Plan (the "Directors' Plan") providing for the grant of non-qualified stock options of Class A common stock of HCC. The Directors' Plan provides for the granting of 150,000 shares of Class A common stock of which 107,500 remain available for future grant as of December 31, 1998. An initial option grant of 10,000 shares was made to the two non-employee directors upon adoption of the plan; future outside directors receive an option grant of 10,000 shares upon election to the Board of Directors. In addition, each outside director receives a grant of 2,500 shares on January 15 of each year. All such grants are at an exercise price equal to the fair market value as of the date of the grant, vest after six months and expire no later than ten years from the date of grant. The Directors' Plan is administered by a Committee of the Board of Directors. As of December 31, 1998, 42,500 shares remain outstanding at a weighted average exercise price of $1.72 per share. The following table lists the activity of the Directors' Plan:
YEAR ENDED DECEMBER 31, ----------------------------------------------------------------------------- 1998 1997 1996 ----------------------------------------------------------------------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE ----------------------------------------------------------------------------- Outstanding options at beginning of year 35,000 (1) $ 4.93 20,000 $ 6.25 - $ - Options granted 7,500 1.56 15,000 3.17 20,000 6.25 Options exercised - - - - - - ------ ------ ------ Outstanding options at end of year 42,500 $ 1.72 35,000 $ 4.93 20,000 $ 6.25 ====== ====== ====== Exercisable options at end of year 42,500 $ 1.72 25,000 $ 5.78 - $ -
58 HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) _______________ (1) During June 1998, the Board of Directors authorized the repricing of options to purchase 35,000 shares of common stock granted during 1996 and 1997 to non-employee directors of the Company. The exercise price was adjusted to $1.75 per share, the fair market value as of the date of the repricing; all of the repriced options are fully vested. No shareholder owning 1% or more of the Company's common stock participated in the repricing. The Company has elected to apply Opinion 25 with respect to accounting for options. Based on such election, no compensation expense has been recognized in the accompanying consolidated financial statements as a result of the granting of stock options. Had compensation expense been determined consistent with SFAS 123, the net loss (net of income taxes) for the years ended December 31, 1998 and 1997 would have increased by approximately $138,000 and $251,000, respectively, increasing both basic and diluted net loss per common share for each year by $.01. For the year ended December 31, 1996, the net loss would have increased by approximately $41,000, with no effect on either basic or diluted net loss per common share. The fair value of each option grant was estimated on the date of grant using a method approximating the Black-Scholes option pricing model. The assumptions applied are set forth below:
YEAR ENDED DECEMBER 31, ---------------------------- 1998 1997 1996 ---------- ------- ------- Risk free interest rate 5.4% 5.3% 5.5% Dividend Yield - - - Expected Life 1-4 years 1 year 1 year Volatility 45.5% 57.6% 62.1% Weighted Average Fair Value $.42 $.70 $.91
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, 1998, 1997 and 1996 were $4,000, $18,000 and $660,000, respectively. Obligations accrued under the agreements at December 31, 1998 and 1997 amounted to $5,033,000 and $5,029,000, respectively, and are included in other noncurrent liabilities on the accompanying consolidated balance sheets. EMPLOYEE RETIREMENT SAVINGS PLAN - The Company has a retirement savings plan under Section 401(k) of the Internal Revenue Code covering all of its employees who meet certain eligibility requirements as to age and period of employment. 59 HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The plan allows employees to contribute up to 15% of their salary on a pre-tax basis (subject to statutory limitations) and invest such monies in a choice of mutual funds on a tax-deferred basis. The Company matches a portion of the participating employees' contributions to the plan and may, from time to time, make additional discretionary contributions. For the years ended December 31, 1998, 1997 and 1996, HCC made company contributions to the plan totaling $778,000, $559,000 and $1,670,000, respectively. (8) TRANSACTIONS WITH RELATED PARTIES As a result of the distribution by HCC of the GBCC common stock it owned, GBCC is no longer a consolidated subsidiary. Accordingly, intercompany transactions between HCC and GBCC and its subsidiaries which eliminated in consolidation during 1996 are considered transactions with affiliates during 1998 and 1997. HCC has advanced funds to GBCC totaling $6,750,000 as of both December 31, 1998 and 1997. During the third quarter of 1996, GBCC borrowed $6,500,000 from HCC on a demand basis with interest at the rate of 13 3/4% per annum payable quarterly commencing October 1, 1996. An additional $250,000 note became due on April 1, 1998 for which payment has not been received. This advance continues to bear interest at the rate of 14% per annum, payable semiannually. Interest receivable amounting to $1,781,000 and $839,000 is included in due from affiliates on the accompanying consolidated balance sheets at December 31, 1998 and 1997, respectively. Interest income accrued on loans and advances to GBCC amounted to $942,000 and $977,000, respectively, during the years ended December 31, 1998 and 1997. In connection with its acquisition of the general partnership interest in PML (see Note 1), HCC issued a five-year note in the original amount of $3,800,000 and assigned $13,750,000 undiscounted principal amount of PPI Funding Notes (see below) and $350,000 accrued interest due from GBCC to PPI Corporation. The $3,800,000 note is payable in monthly installments of $83,000, including interest at the rate of 14% per annum, commencing on May 1, 1997, with additional quarterly variable principal payments commencing on July 1, 1997 in an amount equal to the general partner's share of quarterly cash distributions, as defined, from PML. HCC incurred interest expense with respect to the note amounting to $439,000 and $383,000, respectively, during the years ended December 31, 1998 and 1997. Accrued interest of $34,000 and $41,000 is included in interest payable on the accompanying consolidated balance sheets at December 31, 1998 and 1997, respectively. On February 17, 1994, PPI Funding Corp., a subsidiary of GBCC, issued $40,524,000 discounted principal amount of new deferred interest notes (the "PPI Funding Notes") to HCC in exchange for $38,779,000 principal amount of 15 1/2% unsecured notes (the "PCPI Notes") held by HCC and issued by PCPI Funding Corp., another subsidiary of GBCC. The PPI Funding Notes were discounted to yield interest at the rate of 14 7/8% per annum and had an original face value of $110,636,000. Subsequent principal payments by PPI Funding Corp. reduced the maturity value of the notes to $98,353,000 at December 31, 1996. During the second quarter of 1997, HCC assigned $13,750,000 undiscounted principal amount of the PPI Funding Notes to PPI Corporation as consideration, in part, for HCC's acquisition of the general partnership interest in PML. Such assignment reduced the maturity value of the notes to $84,603,000. On January 5, 1998, GBCC's most significant subsidiary, Greate Bay Hotel and 60 HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Casino, Inc. ("GBHC"), filed for protection under Chapter 11 of the United States Bankruptcy Code. It was anticipated that GBCC's equity ownership of GBHC would be significantly reduced in the reorganization under Chapter 11 and, as a consequence, HCC forgave $37,000,000 undiscounted principal amount of the PPI Funding Notes at December 31, 1997, further reducing the maturity value to $47,603,000. Payment of interest is deferred through February 17, 2001 at which time interest will become payable semiannually, with the unpaid principal balance due on February 17, 2006. The PPI Funding Notes are collateralized by a pledge of all of the common stock of a subsidiary of GBCC. Prior to December 31, 1996, when GBCC and its subsidiaries were members of the HCC consolidated group, it was anticipated that one of HCC's primary methods of realizing the carrying value of the PPI Funding Notes would be through the utilization of NOL's of GBCC. As a result of HCC's distribution of GBCC stock at December 31, 1996, GBCC's NOL's are no longer available for utilization in HCC's consolidated federal income tax returns. Accordingly, HCC provided a valuation allowance in the amount of $18,741,000 at December 31, 1996 which reduced the carrying amount of the PPI Funding Notes to their estimated realizable value of $35,597,000 at that date. As a result of GBHC's January 1998 Chapter 11 filing discussed above, HCC took an additional write down of $23,275,000 undiscounted principal amount during 1997, further reducing the carrying amount of the PPI Funding Notes at both December 31, 1998 and 1997 to an estimated realizable value of $12,322,000. The discounted amount of the 1997 write down ($15,678,000) and the 1996 valuation allowance ($18,741,000) are included in write down of assets on the accompanying consolidated statements of operations for the years ended December 31, 1997 and 1996, respectively. Management presently anticipates that the remaining balance will be realized through a combination of repayments from GBCC and additional asset acquisitions from GBCC and its subsidiaries. Pursuant to a management services agreement, HCA pays PML a base management fee equal to 5% of the Aurora Casino's operating revenues (as defined in the agreement) subject to a maximum of $5,500,000 annually, and an incentive fee equal to 10% of gross operating profit (as defined in the agreement to generally include all revenues, less expenses other than depreciation, interest, amortization and taxes). HCA incurred such fees totaling $2,727,000 during the three month period ended March 31, 1997 while PML was wholly-owned by subsidiaries of GBCC. Subsequent to March 31, 1997, PML is included in the consolidated financial statements of HCC; accordingly, HCA's management fee expense to PML is eliminated in consolidation (see Note 1). HCT incurs a monthly consulting fee of $100,000 pursuant to a ten-year consulting agreement with PCC (see Note 15). Such fees amounted to $1,200,000 for the years ended December 31, 1998 and 1997. Advanced Casino Systems Corporation ("ACSC"), a subsidiary of GBCC provides computer, marketing and other administrative services to HCC and its subsidiaries. Computer services provided include hardware, software, and operator support and, for the most part, such services are billed by ACSC at its direct costs plus expenses incurred. ACSC and HCT entered into a Computer Services Agreement dated as of January 1, 1994 and renewed through December 31, 1999 to provide such services and to license or sublicense to HCT computer software necessary to operate HCT's casino, hotel and related facilities and business operations. HCT pays ACSC for such equipment and licenses such software at amounts and on terms and conditions that ACSC provides to unrelated third parties. HCT also pays ACSC 61 HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) a fixed license fee of $33,600 per month. ACSC's billings to HCC and its subsidiaries for such products and services during the year ended December 31, 1998 and 1997 amounted to $1,147,000 and $809,000, respectively. At December 31, 1998 and 1997, unpaid charges of $109,000 and $78,000, respectively, are included in due to affiliates on the accompanying consolidated balance sheets. Many of the marketing and administrative services now provided by ACSC were previously provided to HCC and its subsidiaries by GBHC. Charges for such services amounted to $704,000 during the year ended December 31, 1997. HCC allocates certain general and administrative costs to GBCC and its subsidiaries pursuant to services agreements. Such allocated costs and fees amounted to $1,026,000 and $1,843,000 for the years ended December 31, 1998 and 1997, respectively. In connection with such charges, receivables in the amount of $179,000 and $156,000 are included in due from affiliates on the accompanying consolidated balance sheets at December 31, 1998 and 1997, respectively. As a result of the revised tax treatment for the spin-off of GBCC stock to HCC's shareholders at December 31, 1996 (see Note 3), shareholders of the Company on the distribution date would also have been required to revise their method of reporting the distribution received on their separate federal income tax returns. The Company committed to assume the obligation for additional federal income taxes owed by its shareholders arising from the revised tax treatment. Consequently, the Company reached an agreement with the Internal Revenue Service to settle such obligations on behalf of its shareholders, exclusive of the Pratt Family, for $100,000 and to issue new tax reporting forms to the Pratt Family. Such forms will require the Pratt Family members to amend their federal income tax returns for 1996 resulting in substantial additional tax obligations which total approximately $790,000. The shareholder obligations assumed by the Company are included in tax settlement costs totalling $1,087,000 on the accompanying consolidated statement of operations for the year ended December 31, 1998 and are included in other accrued liabilities on the accompanying consolidated balance sheet at December 31, 1998. In September 1994, a subsidiary of HCC entered into an agreement with an entity owned by a member of the Pratt Family to manage the operation and maintenance of a Company-owned aircraft and to make such aircraft available for charter by third parties. The aircraft was sold during the first quarter of 1997. Subsequent to the sale, HCC has occasionally chartered aircraft from the maintenance company. Such charter fees amounted to $20,000 during the year ended December 31, 1998; charter fees, expenses and commissions amounted to $268,000 and $499,000, respectively, during the years ended December 31, 1997 and 1996. (9) STATE GAMING REGULATIONS Riverboat gaming operations in Illinois are subject to regulatory control by the Illinois Gaming Board. Under the provisions of the Illinois gaming regulations, HCA is required to maintain its ownership license. Such license was renewed in July 1998 for a period of one year and subsequently extended by the IGB to December 1999. Gaming operations in Mississippi are subject to regulatory control by the Mississippi Gaming Commission. Under the provisions of the Mississippi gaming regulations, HCT is 62 HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) required to maintain all necessary licenses. The ownership license for the Tunica Casino has been renewed until October 18, 1999. If it were determined that gaming laws were violated by a licensee, the gaming licenses held by each licensee could be limited, conditioned, suspended or revoked. In addition, the licensees and other persons involved could be subject to substantial fines. While a subsidiary of HCC, the Sands was required under the New Jersey Casino Control Act to either make certain approved investments in New Jersey or pay an investment alternative tax. The Sands elected to satisfy the investment requirement by purchasing bonds at below-market interest rates from a governmental agency established to administer such monies. During the year ended December 31, 1996, the Sands paid $3,062,000 to purchase these obligatory investments and provided a valuation allowance amounting to $1,344,000 on such investments. (10) LITIGATION PLANET HOLLYWOOD LITIGATION - Planet Hollywood International, Inc., a Delaware corporation, and Planet Hollywood (Region IV), Inc., a Minnesota corporation (collectively, "PHII"), filed a complaint in the United States District Court for the Northern District of Illinois, Eastern Division on July 29, 1996 against HCC, HCA and a member of the Pratt Family (collectively, the "Original Hollywood Defendants"). The Original Hollywood Defendants filed with the Court on September 18, 1996 an answer to PHII's lawsuit, along with numerous counterclaims against PHII, Robert Earl and Keith Barish (collectively, the "PHII Defendants"). PHII filed with the Court on January 21, 1997, an amendment to their complaint which, among other things, added HCT (together with the Original Hollywood Defendants, the "Hollywood Defendants") and GBCC as defendants. The Original Hollywood Defendants filed with the Court on February 4, 1997, and GBCC and HCT filed with the Court on February 20, 1997, answers and counterclaims to such amended complaint. In its lawsuit, PHII alleges, among other things, that the Hollywood Defendants and GBCC have, in opening and operating the Hollywood Casino concept, infringed on PHII's trademark, service mark and trade dress and have engaged in unfair competition and deceptive trade practices. In their counterclaims, the Hollywood Defendants and GBCC allege, among other things, that the PHII Defendants have, through their planned use of their mark in connection with casino services, infringed on certain of HCC's service marks and trade dress and have engaged in unfair competition. Given the uncertainties inherent in litigation, no assurance can be given that the Hollywood Defendants will prevail in this litigation; however, the Hollywood Defendants believe that PHII's claims are without merit and intend to defend their position and pursue their counterclaims vigorously. The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of the uncertainties described above. 63 HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) OTHER LITIGATION - On October 8, 1998, HCC filed a complaint in the District Court of Dallas County, Texas against Arthur Andersen LLP, HCC's independent accountants, and selected partners alleging negligent advice and breach of contract with respect to the tax consequences resulting from the spin-off of GBCC's stock to HCC's shareholders on December 31, 1996. The lawsuit is currently in the initial stages of discovery. HCC and its subsidiaries are parties in various legal proceedings with respect to the conduct of casino and hotel operations. Although a possible range of loss cannot be estimated, in the opinion of management, based upon the advice of counsel, settlement or resolution of these proceedings should not have a material adverse impact on the consolidated financial position or results of operations of HCC and its subsidiaries. (11) COMMITMENTS AND CONTINGENCIES HCT entered into a ground lease covering 70 acres of land on which the Tunica Casino was constructed. The ground lease is for an initial term of five years from the opening date of the facility and, at HCT's option, may be renewed for nine additional five-year periods. Obligations under the ground lease during the initial term include both minimum monthly fixed payments and percentage rent, which in the aggregate will be the greater of 4% of Gross Revenues, as defined, or $1,100,000 per year. HCT is responsible for all operating and other expenses of the property in accordance with the lease terms. During 1998, 1997 and 1996, HCT expensed $3,899,000, $3,935,000 and $3,486,000, respectively, in connection with the ground lease. (12) THIRD PARTY NOTES RECEIVABLE During November 1995, HCC loaned $10,000,000 of the proceeds from the Senior Secured Notes to an unaffiliated gaming company in the form of two $5,000,000 notes. On February 27, 1998, both parties agreed to settle the outstanding obligations with the payment of $4,400,000 and the issuance of two new, short- term obligations totaling $1,600,000, which were paid in April 1998. The $4,000,000 difference between the $10,000,000 carrying amount of the notes receivable and the agreed upon settlement was reflected as a write down of the notes receivable at December 31, 1997 and is included in write down of assets on the accompanying consolidated statement of operations. (13) SUPPLEMENTAL CASH FLOW INFORMATION During the second quarter of 1997, HCC issued 100,000 shares of its common stock in exchange for a $10,000,000 loan commitment from unrelated third parties. The commitment fee was valued at $375,000, the fair market value of the stock on the date of its issuance, and was expensed during 1997. 64 HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Also during the second quarter of 1997, HCC acquired the general partnership interest in PML (see Notes 1 and 8). The purchase price included the assignment of certain receivables from GBCC and the issuance of a note to GBCC. In connection with the acquisition, certain liabilities were assumed as follows:
Assignment of PPI Funding Notes $(7,597,000) Assignment of interest receivable (350,000) Note issued (3,800,000) Charge to paid-in capital (Note 1) 12,747,000 ----------- Net liabilities assumed $ 1,000,000 ===========
During 1996, HCA entered into a capital lease obligation in the original amount of $13,195,000 with respect to a new parking garage (see Note 5). Additional escrowed construction and financing costs totaling $4,163,000 were capitalized in 1996 as part of the cost of the facility. At December 31, 1996, HCC contributed certain receivables from GBCC and its subsidiaries to GBCC. Notes receivable amounting to $8,738,000 together with accrued interest thereon totaling $1,753,000 and other receivables of $4,283,000 with respect to pension obligations assumed during 1995 were contributed to GBCC. At December 31, 1996, HCC distributed the common stock of GBCC it owned to its shareholders. The following net liabilities were distributed to HCC's shareholders in the form of a dividend:
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 =============
(14) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value: CASH AND CASH EQUIVALENTS - The carrying amounts approximate fair value ------------------------- because of the short maturity of these instruments. SHORT-TERM INVESTMENTS - The carrying amounts approximate fair value because ---------------------- of the short maturity of these investments. 65 HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTES RECEIVABLE - The fair value of notes receivable is calculated based on ---------------- the estimated realizable value. INTEREST PAYABLE - The carrying amount of interest payable approximates fair ---------------- value because of the short maturity of the obligation. LONG-TERM DEBT - The fair value of HCC's long-term debt is estimated based -------------- on either the quoted market price of the underlying debt issue or on the discounted cash flow of future payments utilizing current rates available to HCC for debt of similar remaining maturities. Debt obligations with a short remaining maturity are valued at the carrying amount. The estimated carrying amounts and fair values of HCC's financial instruments are as follows:
DECEMBER 31, 1998 DECEMBER 31, 1997 -------------------------- -------------------------- CARRYING CARRYING AMOUNT FAIR VALUE AMOUNT FAIR VALUE ------------ ------------ ------------ ------------ Financial Assets Cash and cash equivalents $ 42,118,000 $ 42,118,000 $ 40,259,000 $ 40,259,000 Short-term investments 3,905,000 3,905,000 3,876,000 3,876,000 Notes receivable - - 6,000,000 6,000,000 Notes receivable - affiliates 6,750,000 6,750,000 6,750,000 6,750,000 PPI Funding Notes 12,322,000 12,322,000 12,322,000 12,322,000 Financial Liabilities Interest payable $ 4,872,000 $ 4,872,000 $ 4,792,000 $ 4,792,000 12 3/4% Senior Secured Notes 207,212,000 220,681,000 207,500,000 223,063,000 Equipment loans 1,291,000 1,335,000 2,051,000 2,063,000 Bank debt 1,900,000 1,900,000 350,000 350,000 Bank credit facility 462,000 462,000 - - Note payable - affiliate 2,836,000 2,972,000 3,447,000 3,597,000
(15) SUBSEQUENT EVENTS (UNAUDITED) In March 1999, HCC reached an agreement in principle with GBCC, PCC and the holders of $85,000,000 of senior notes currently in default which were issued by PRT Funding Corp. ("PRT Funding"), a wholly owned subsidiary of PCC. Under the terms of the agreement, HCC would purchase the stock of PCC from GBCC for nominal consideration as part of a debt restructuring (the "Restructuring") of PRT Funding, PCC and other subsidiaries of PCC. Upon completion of the Restructuring, PCC's assets will consist of its limited partnership interest in PML and a consulting contract for the Tunica Casino (see Notes 1 and 8). These assets will serve as collateral for approximately $39,250,000 of new notes to be issued by PCC to the holders of the senior notes as part of the Restructuring. The acquisition of PCC will also result in a charge to expense by the Company of approximately $39,250,000 during 1999 as no asset value will be attributed to the management contract and consulting agreement when acquired. 66 HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) After the acquisition of PCC, the Company will have incurred additional debt and associated interest, but will no longer report a minority interest in PML nor pay the Tunica consulting fee to a subsidiary of GBCC. The minority interest and consulting fee expense totaled $7,694,000 for the year ended December 31, 1998. The successful completion of the Restructuring is subject to the execution of definitive documents and will require that PCC and PRT Funding file for protection under Chapter 11 with the above transactions included as part of a pre-negotiated plan of reorganization. Such plan will require approval by the bankruptcy court as well as by the various gaming regulatory organizations having jurisdiction over PCC and PRT Funding. In September 1998, the Company received a preliminary license to develop, own and operate a Hollywood-themed hotel and casino complex on the Red River in Shreveport, Louisiana (the "Shreveport Casino"). The Company originally planned to develop the Shreveport Casino with two partners in a joint venture in which HCC would have had an interest of approximately 50%. On March 31, 1999, HCC entered into a definitive agreement with one of the joint venture partners to acquire their interest in the Shreveport Casino for $2,500,000 (the amount the joint venture partner contributed to the project), $1,000 of which is to be paid at closing and the remainder to be paid six months after the opening of the Shreveport Casino. Subject to obtaining final approval by the Louisiana Gaming Control Board, HCC will have a 100% interest in the Shreveport Casino with the remaining joint venture partner holding a 10% residual interest in the event the project is sold. The total estimated cost of the Shreveport Casino is approximately $200,000,000. The Company anticipates contributing approximately $50,000,000 as an equity investment in the project with the remaining construction and preopening costs, estimated at $150,000,000, to come from non- recourse project financing. The Company anticipates securing financing for a portion of the equity investment and all of the project financing and commencing construction in the summer of 1999 with a planned opening date approximately 14 months later. 67 HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (16) SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
QUARTER ------------------------------------------------------ FIRST SECOND THIRD FOURTH ----------- ------------ ------------ ------------- YEAR ENDED DECEMBER 31, 1998: Net revenues $63,807,000 $66,353,000 $70,848,000 $ 67,752,000 =========== =========== =========== ============ Net income (loss) $ 69,000 $ 145,000 $ 204,000 $ (2,023,000) =========== ----------- =========== ------------ Basic and diluted net income (loss) per common share (1) $ .00 $ .01 $ .01 $ (.08) =========== =========== =========== ============ YEAR ENDED DECEMBER 31, 1997: Net revenues $67,470,000 $66,301,000 $69,839,000 $ 64,147,000 =========== =========== =========== ============ Net income (loss) as previously reported $ 1,491,000 $ 1,193,000 $ 1,701,000 $(19,530,000) Restatement - Note 3 - (44,000) (1,918,000) (240,000) ----------- ----------- ----------- ------------ Net income (loss) $ 1,491,000 $ 1,149,000 $ (217,000) $(19,770,000) =========== =========== =========== ============ Basic and diluted net income (loss) per common share as previously reported $ .06 $ .05 $ .07 $ (.79) Restatement - Note 3 - - (.08) (.01) ----------- ----------- ----------- ------------ Basic and diluted net income (loss) per common share (1) $ .06 $ .05 $ (.01) $ (.80) =========== =========== =========== ============
(1) In accordance with the provisions of SFAS 128, earnings per share are calculated separately for each quarter and the full year. Accordingly, annual earnings per share will not necessarily equal the total of the interim periods. 68 REPORT OF INDEPENDENT AUDITORS To Hollywood Casino - Aurora, Inc.: We have audited the accompanying balance sheets of Hollywood Casino - Aurora, Inc. (the Company and an Illinois corporation) as of December 31, 1998 and 1997, and the related statements of operations, changes in shareholder's equity and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Hollywood Casino - Aurora, Inc. as of December 31, 1998 and 1997, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1998 in conformity with generally accepted accounting principles. Deloitte & Touche LLP Dallas, Texas February 23, 1999 69 HOLLYWOOD CASINO - AURORA, INC. (WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION) BALANCE SHEETS ASSETS
DECEMBER 31, ---------------------------- 1998 1997 ------------- ------------- Current Assets: Cash and cash equivalents $ 9,718,000 $ 11,594,000 Accounts receivable, net of allowances of $655,000 and $483,000, respectively 1,128,000 1,603,000 Inventories 606,000 794,000 Deferred income taxes 1,540,000 1,336,000 Due from affiliates 428,000 558,000 Prepaid expenses and other current assets 1,010,000 932,000 ------------ ------------ Total current assets 14,430,000 16,817,000 ------------ ------------ Property and Equipment: Land improvements 3,167,000 3,165,000 Buildings and improvements 46,205,000 46,205,000 Riverboats 37,642,000 36,970,000 Operating equipment 37,192,000 32,159,000 Construction in progress 615,000 534,000 ------------ ------------ 124,821,000 119,033,000 Less - accumulated depreciation and amortization (41,114,000) (33,919,000) ------------ ------------ Net property and equipment 83,707,000 85,114,000 ------------ ------------ Other Assets 2,173,000 2,140,000 ------------ ------------ $100,310,000 $104,071,000 ============ ============
The accompanying notes to financial statements are an integral part of these balance sheets. 70 HOLLYWOOD CASINO - AURORA, INC. (WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION) BALANCE SHEETS LIABILITIES AND SHAREHOLDER'S EQUITY
DECEMBER 31, -------------------------- 1998 1997 ------------ ------------ Current Liabilities: Current maturities of long-term debt and capital lease obligations $ 6,517,000 $ 6,624,000 Accounts payable 2,199,000 2,023,000 Accrued liabilities - Salaries and wages 2,300,000 2,228,000 Interest 1,058,000 1,192,000 Gaming and other taxes 981,000 938,000 Insurance 965,000 1,115,000 Other 1,374,000 1,120,000 Due to affiliates 2,109,000 2,185,000 Other current liabilities 993,000 1,209,000 ------------ ------------ Total current liabilities 18,496,000 18,634,000 ------------ ------------ Long-Term Debt 27,783,000 31,507,000 ------------ ------------ Capital Lease Obligations 19,948,000 20,841,000 ------------ ------------ Deferred Income Taxes 5,363,000 4,141,000 ------------ ------------ Commitments and Contingencies Shareholder's Equity: Common stock, $.01 par value per share; 2,000,000 shares authorized; 1,501,000 shares issued and outstanding 15,000 15,000 Additional paid-in capital 25,541,000 24,541,000 Retained earnings 3,164,000 4,392,000 ------------ ------------ Total shareholder's equity 28,720,000 28,948,000 ------------ ------------ $100,310,000 $104,071,000 ============ ============
The accompanying notes to financial statements are an integral part of these balance sheets. 71 HOLLYWOOD CASINO - AURORA, INC. (WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION) STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, ------------------------------------------- 1998 1997 1996 ------------- ------------- ------------- Revenues: Casino $156,404,000 $153,965,000 $157,124,000 Food and beverage 13,771,000 14,213,000 13,780,000 Other 2,816,000 1,919,000 3,895,000 ------------ ------------ ------------ 172,991,000 170,097,000 174,799,000 Less - promotional allowances (10,044,000) (9,790,000) (11,408,000) ------------ ------------ ------------ Net revenues 162,947,000 160,307,000 163,391,000 ------------ ------------ ------------ Expenses: Casino 112,272,000 102,127,000 108,014,000 Food and beverage 4,855,000 4,885,000 4,926,000 Other 1,332,000 1,641,000 1,066,000 General and administrative 14,136,000 14,673,000 14,645,000 Depreciation and amortization 7,350,000 7,491,000 8,834,000 ------------ ------------ ------------ Total expenses 139,945,000 130,817,000 137,485,000 ------------ ------------ ------------ Income from operations 23,002,000 29,490,000 25,906,000 ------------ ------------ ------------ Non-operating income (expense): Interest income 112,000 156,000 205,000 Interest expense (6,046,000) (6,847,000) (6,704,000) Gain on disposal of assets 4,000 134,000 - ------------ ------------ ------------ Total non-operating expense, net (5,930,000) (6,557,000) (6,499,000) ------------ ------------ ------------ Income before income taxes 17,072,000 22,933,000 19,407,000 Income tax provision (6,559,000) (8,419,000) (6,883,000) ------------ ------------ ------------ Net income $ 10,513,000 $ 14,514,000 $ 12,524,000 ============ ============ ============
The accompanying notes to financial statements are an integral part of these financial statements. 72 HOLLYWOOD CASINO - AURORA, INC. (WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION) STATEMENT OF CHANGES IN SHAREHOLDER'S EQUITY FOR THE THREE YEARS ENDED DECEMBER 31, 1998
ADDITIONAL COMMON STOCK PAID-IN RETAINED ------------ SHARES AMOUNT CAPITAL EARNINGS ------------ ------- ----------- ------------- BALANCE, JANUARY 1, 1996 1,501,000 $15,000 $24,541,000 $ 993,000 Net income - - - 12,524,000 Dividends - - - (10,040,000) ------------ ------- ----------- ------------ BALANCE, DECEMBER 31, 1996 1,501,000 15,000 24,541,000 3,477,000 Net income - - - 14,514,000 Dividends - - - (13,599,000) ------------ ------- ----------- ------------ BALANCE, DECEMBER 31, 1997 1,501,000 15,000 24,541,000 4,392,000 Capital contributions - - 1,000,000 - Net income - - - 10,513,000 Dividends - - - (11,741,000) ------------ ------- ----------- ------------ BALANCE, DECEMBER 31, 1998 1,501,000 $15,000 $25,541,000 $ 3,164,000 ============ ======= =========== ============
The accompanying notes to financial statements are an integral part of this financial statement. 73 HOLLYWOOD CASINO - AURORA, INC. (WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION) STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, ------------------------------------------- 1998 1997 1996 ------------- ------------- ------------- OPERATING ACTIVITIES: Net income $ 10,513,000 $ 14,514,000 $ 12,524,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 7,350,000 7,491,000 8,834,000 Provision for doubtful accounts 273,000 200,000 325,000 Gain on disposal of assets (4,000) (134,000) - Deferred income tax provision 1,018,000 2,183,000 1,119,000 Decrease in accounts receivable 202,000 92,000 393,000 Increase in accounts payable and accrued liabilities 261,000 151,000 954,000 Increase in due to affiliates 54,000 395,000 (770,000) Net change in other current assets and liabilities (106,000) 85,000 (1,116,000) Net change in other noncurrent assets and liabilities (33,000) (120,000) (442,000) ------------ ------------ ------------ Net cash provided by operating activities 19,528,000 24,857,000 21,821,000 ------------ ------------ ------------ INVESTING ACTIVITIES: Purchases of property and equipment (5,986,000) (2,413,000) (10,104,000) Proceeds from sale of assets 47,000 173,000 - Decrease in cash restricted for construction projects - - 1,955,000 ------------ ------------ ------------ Net cash used in investing activities (5,939,000) (2,240,000) (8,149,000) ------------ ------------ ------------ FINANCING ACTIVITIES: Proceeds from issuance of long-term debt 2,000,000 - - Capital contributions 1,000,000 - - Repayments of long-term debt (5,863,000) (5,681,000) (2,870,000) Payments on capital lease obligations (861,000) (777,000) (724,000) Dividends (11,741,000) (13,599,000) (10,040,000) ------------ ------------ ------------ Net cash used in financing activities (15,465,000) (20,057,000) (13,634,000) ------------ ------------ ------------ Net (decrease) increase in cash and cash equivalents (1,876,000) 2,560,000 38,000 Cash and cash equivalents at beginning of year 11,594,000 9,034,000 8,996,000 ------------ ------------ ------------ Cash and cash equivalents at end of year $ 9,718,000 $ 11,594,000 $ 9,034,000 ============ ============ ============
The accompanying notes to financial statements are an integral part of these financial statements. 74 HOLLYWOOD CASINO - AURORA, INC. (WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION) NOTES TO FINANCIAL STATEMENTS (1) ORGANIZATION AND BUSINESS Hollywood Casino - Aurora, Inc. ("HCA") is an Illinois corporation and a wholly owned subsidiary of Hollywood Casino Corporation ("HCC"), a Delaware corporation. HCA was organized and incorporated during December 1990 by certain relatives of Jack E. Pratt, Edward T. Pratt, Jr. and William D. Pratt (collectively, the "Pratt Family") for the purpose of developing and holding the ownership interest in a riverboat gaming operation located in Aurora, Illinois (the "Aurora Casino"). In May 1992, HCC, which was then wholly owned by members of the Pratt Family or by certain general partnerships and trusts controlled by the Pratt Family, acquired all of the outstanding stock of HCA through the issuance of HCC stock. Prior to December 31, 1996, HCC also owned approximately 80% of Greate Bay Casino Corporation ("GBCC"), a Delaware corporation. Prior to April 1, 1997, subsidiaries of GBCC held the management services contract for the Aurora Casino (see Note 6). A GBCC subsidiary continues to have a limited partnership interest in the entity which holds such management contract. The Aurora Casino consists of two, four-level riverboats having a combined casino space of approximately 32,000 square feet and a four-level pavilion and docking facility which houses ticketing, food service, passenger waiting, and various administrative functions. The Aurora Casino also includes two parking structures with approximately 1,350 parking spaces. HCA was responsible for the design and construction of the parking garages; however, it leases the facilities under long-term lease agreements. The leases are treated as capital leases for financial reporting purposes (see Note 4). On June 17, 1993, the Illinois Gaming Board (the "IGB") issued HCA a temporary operating permit and the Aurora Casino commenced operations. The IGB issued HCA an owner's license on July 20, 1993 pursuant to the Illinois Riverboat Gambling Act. HCA's current owner's license was renewed in July 1998 for a period of one year and subsequently extended by the IGB to December 1999. Gaming taxes imposed by the state of Illinois are determined using a graduated tax rate applied to the licensee's gaming revenues. HCA expenses such gaming taxes based on its anticipated annual effective tax rate. HCA estimates that a significant amount of the Aurora Casino's revenues are derived from patrons living in the Chicago area and surrounding northern and western suburbs. The Aurora Casino faces intense competition from other riverboat gaming operations in Illinois and Indiana which serve the Chicago area and management believes that this competition will continue in the future. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The significant accounting policies followed in the preparation of the accompanying financial statements are discussed below. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. CASINO REVENUES, PROMOTIONAL ALLOWANCES AND DEPARTMENTAL EXPENSES - HCA recognizes the net win from gaming activities (the difference between gaming wins and losses) as casino revenues. Casino revenues are net of accruals for anticipated payouts of progressive jackpots. Such anticipated jackpot payouts are reflected as current liabilities on the accompanying balance sheets. 75 HOLLYWOOD CASINO - AURORA, INC. (WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION) NOTES TO FINANCIAL STATEMENTS (CONTINUED) The estimated value of food and beverage, admissions and other items which were provided to customers without charge has been included in revenues and a corresponding amount has been deducted as promotional allowances. The costs of such complimentaries have been included as casino expenses on the accompanying statements of operations. Costs of complimentaries allocated from the food and beverage and other operating departments to the casino department during the years ended December 31, 1998, 1997 and 1996 are as follows:
1998 1997 1996 ---- ---- ---- Food and beverage $ 8,721,000 $9,057,000 $10,280,000 Other 1,131,000 921,000 1,318,000 ---------- ---------- ----------- $9,852,000 $9,978,000 $11,598,000 ========== ========== ===========
CASH AND CASH EQUIVALENTS - Cash and cash equivalents are generally comprised of cash and investments with original maturities of three months or less, such as treasury bills and fixed repurchase agreements. ALLOWANCE FOR DOUBTFUL ACCOUNTS - The allowance for doubtful accounts is maintained at a level considered adequate to provide for possible future losses. Provisions for doubtful accounts amounting to $273,000, $200,000 and $325,000, respectively, were made during the years ended December 31, 1998, 1997 and 1996. INVENTORIES - Inventories are stated at the lower of cost (on a first-in, first-out basis) or market. PROPERTY AND EQUIPMENT - Property and equipment have been recorded at cost and are being depreciated utilizing the straight-line method over the estimated useful lives of the assets as follows: 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 by $274,000 and increased net income by approximately $171,000. 76 HOLLYWOOD CASINO - AURORA, INC. (WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION) NOTES TO FINANCIAL STATEMENTS (CONTINUED) LONG-LIVED ASSETS - Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" requires, among other things, that an entity review its long-lived assets and certain related intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable. HCA does not believe that any such events or changes have occurred. ACCRUED INSURANCE - HCA is self insured for a portion of its general liability, certain health care and other liability exposures. Accrued insurance includes estimates of such accrued liabilities based on an evaluation of the merits of individual claims and historical claims experience; accordingly, HCA's ultimate liability may differ from the amounts accrued. INCOME TAXES - HCA is included in HCC's consolidated federal income tax return. Pursuant to agreements between HCC and HCA, HCA's provision for federal income taxes is based on the amount of tax which would be provided if a separate federal income tax return were filed. HCA paid $4,691,000, $5,394,000 and $6,774,000 to HCC in connection with its current federal tax provisions for the years ended December 31, 1998, 1997 and 1996, respectively. For the years ended December 31, 1998, 1997 and 1996, HCA paid state income taxes of $781,000, $682,000 and $28,000, respectively. RECENT ACCOUNTING PRONOUNCEMENTS - The Financial Accounting Standards Board has issued a new standard, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 requires the presentation and disclosure of comprehensive income, which is defined as the change in a company's equity resulting from non-owner transactions and events. SFAS 130 became effective December 15, 1997 and requires the reclassification of all prior periods presented. HCA has adopted the provisions of SFAS 130; however, the statement provides that an enterprise that has no items of other comprehensive income for any period presented need only report net income. HCA has no such other comprehensive income items for any period presented; accordingly, the presentation and disclosure requirements of SFAS 130 are not applicable. The FASB has also issued Statement 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131"). SFAS 131, which became effective for fiscal years beginning after December 15, 1997, requires publicly- held companies to report financial and descriptive information concerning its reportable operating segments. An operating segment is defined as a component of a business which (i) earns revenues and incurs expenses, (ii) has its operating results reviewed on a regular basis by the company's chief operating decision maker to determine how the company's resources should be allocated and to assess its performance and (iii) has separate financial information available. HCA's operations consist of its casino and related facilities. The Aurora Casino is considered a single operating unit due to the dependence of the food and beverage and other operations on casino patrons. Such non-casino activities are considered ancillary to the gaming business, are reviewed as such by management and 77 HOLLYWOOD CASINO - AURORA, INC. (WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION) NOTES TO FINANCIAL STATEMENTS (CONTINUED) can not reasonably be presented as separate operating segments. Accordingly, additional segment information is not presented herein. In June 1998, the FASB issued a new statement, "Accounting for Derivative Instruments and Hedging Activities," ("SFAS 133"), effective for fiscal years beginning after June 15, 1999. SFAS 133 requires, among other things, that derivatives be recorded on the balance sheet at fair value. Changes in the fair value of derivatives may, depending on circumstances, be recognized in earnings or deferred as a component of shareholders' equity until a hedged transaction occurs. HCA does not believe the adoption of SFAS 133 will have a significant impact on its financial position or results of operations. (3) LONG-TERM DEBT AND PLEDGE OF ASSETS HCA's long-term indebtedness consists of the following:
DECEMBER 31, -------------------------- 1998 1997 ------------ ------------ 12 3/4% Promissory Note to HCC, due on November 1, 2003 (a) $31,507,000 $36,507,000 Promissory note to bank (b) 1,900,000 350,000 Equipment loans (c) - 413,000 ----------- ----------- Total indebtedness 33,407,000 37,270,000 Less - current maturities (5,624,000) (5,763,000) ----------- ----------- Total long-term debt $27,783,000 $31,507,000 =========== ===========
________________ (a) The intercompany note accrues interest at the rate of 12 3/4% per annum payable semiannually on October 15 and April 15 of each year and requires semiannual principal repayments of $2,500,000 commencing October 15, 1997 with the balance of the note due November 1, 2003. The note is pledged as security with respect to HCC's 12 3/4% Senior Secured Notes due in 2003. HCA is not a guarantor of HCC's indebtedness; however, the indebtedness is secured, in part, by a first mortgage (limited to the outstanding principal amount of the intercompany note to HCC) on substantially all of the assets of HCA and by a pledge of the capital stock of HCA. (b) During September 1998, HCA entered into a bank loan agreement to borrow up to $2,000,000 on an unsecured basis. Borrowings under the agreement are payable in 36 monthly installments including interest at the rate of 7.5% per annum. HCA borrowed $2,000,000 under the agreement during October 1998. The promissory note outstanding at December 31, 1997 accrued interest at the bank's prime lending rate plus 1% per annum and was repaid in 1998. (c) HCA financed the purchase of certain equipment from vendors through the issuance of note obligations totaling $2,985,000. The promissory notes were repaid in 1998. 78 HOLLYWOOD CASINO - AURORA, INC. (WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION) NOTES TO FINANCIAL STATEMENTS (CONTINUED) As of December 31, 1998, future maturities of long-term debt are as follows: 1999 $ 5,624,000 2000 5,674,000 2001 5,602,000 2002 5,000,000 2003 11,507,000 ----------- $33,407,000 =========== Interest paid for the years ended December 31, 1998, 1997 and 1996 amounted to $6,180,000, $6,970,000 and $6,509,000, respectively. (4) CAPITAL LEASES HCA leases two parking garages under capital lease agreements. The first lease has an initial 30-year term ending in June 2023 with the right to extend the term under renewal options for an additional 67 years. Rental payments through June 2012 equal the City of Aurora's financing costs related to its general obligation bond issue used to finance the construction of the parking garage. The general obligation bond issue includes interest at rates between 7% and 7 5/8% per annum. The second lease has an initial term ending in September 2026 with the right to extend the lease for up to 20 additional years. Rental payments during the first 15 years equal the lessor's debt service costs related to the industrial revenue bond issue used to finance a portion of the construction costs of the parking garage. The remaining construction costs were funded by HCA. In addition, HCA pays base rent equal to $15,000 per month, subject to a credit of $615,000 at the rate of $10,000 per month for improvements made to the lessor's North Island Center banquet and meeting facilities. HCA is also responsible for additional rent, consisting of costs such as maintenance costs, insurance premiums and utilities, arising out of its operation of both parking garages. HCA also leased certain equipment under capital lease agreements which provided for interest at the rate of 11.2% and expired in 1998. The original cost of HCA's parking garages is included in buildings and improvements on the accompanying balance sheets at both December 31, 1998 and 1997 in the amount of $27,358,000. Assets under capital leases with an original cost of $2,446,000 are included in operating equipment on the accompanying balance sheets at both December 31, 1998 and 1997. Amortization expense with respect to these assets amounted to $983,000, $1,097,000 and $1,223,000, respectively, during each of the years ended December 31, 1998, 1997 and 1996. Accumulated amortization at December 31, 1998 and 1997 with respect to these assets amounted to $5,991,000 and $5,008,000, respectively. 79 HOLLYWOOD CASINO - AURORA, INC. (WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION) NOTES TO FINANCIAL STATEMENTS (CONTINUED) Future minimum lease payments under capital lease obligations as of December 31, 1998 are as follows: 1999 $ 2,457,000 2000 2,483,000 2001 2,532,000 2002 2,643,000 2003 2,660,000 Thereafter 21,417,000 ----------- Total minimum lease payments 34,192,000 Less - amount representing interest (13,351,000) ----------- Present value of future minimum lease payments 20,841,000 Current capital lease obligation (893,000) ----------- Long-term capital lease obligation $19,948,000 ===========
(5) INCOME TAXES HCA's provision for income taxes consists of the following:
YEAR ENDED DECEMBER 31, --------------------------------------------- 1998 1997 1996 ----------- ----------- ----------- Current (provision) benefit: Federal $(4,856,000) $(5,859,000) $(5,927,000) State (685,000) (377,000) 163,000 Deferred (provision) benefit: Federal (915,000) (1,978,000) (1,125,000) State (103,000) (205,000) 6,000 ----------- ----------- ----------- $(6,559,000) $(8,419,000) $(6,883,000) =========== =========== ===========
80 HOLLYWOOD CASINO - AURORA, INC. (WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION) NOTES TO FINANCIAL STATEMENTS (CONTINUED) A reconciliation between the calculated tax provision on income based on the statutory rates in effect and the effective tax rates for the years ended December 31, 1998, 1997 and 1996 follows:
YEAR ENDED DECEMBER 31, ------------------------------------------------ 1998 1997 1996 ------------ ------------ ------------ Calculated income tax provision at statutory rate $(5,975,000) $(8,027,000) $(6,792,000) State income taxes, net of federal benefit (512,000) (378,000) (110,000) Political contributions and lobbying costs (43,000) (67,000) (89,000) Other (29,000) 53,000 (112,000) ----------- ----------- ----------- Tax provision as shown on statements of operations $(6,559,000) $(8,419,000) $(6,883,000) =========== =========== ===========
Deferred taxes are computed based on the expected future tax consequences of temporary differences between the carrying amounts and tax bases of assets and liabilities, using enacted tax rates. Deferred income taxes result primarily from the use of the allowance method rather than the direct write-off method for doubtful accounts, the use of accelerated methods of depreciation for federal income tax purposes and differences in the timing of deductions taken between tax and financial reporting purposes for the amortization of preopening costs and other accruals. The components of HCA's net deferred tax liability are as follows:
DECEMBER 31, -------------------------- 1998 1997 ------------ ------------ Deferred tax assets: Allowance for doubtful accounts $ 246,000 $ 182,000 Other liabilities and reserves 1,420,000 1,271,000 ----------- ----------- Total deferred tax assets 1,666,000 1,453,000 ----------- ----------- Deferred tax liabilities: Depreciation and amortization (5,489,000) (4,258,000) ----------- ----------- Net deferred tax liability $(3,823,000) $(2,805,000) =========== ===========
81 HOLLYWOOD CASINO - AURORA, INC. (WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION) NOTES TO FINANCIAL STATEMENTS (CONTINUED) Receivables and payables to HCC in connection with the aforementioned tax allocation agreements at December 31, 1998 and 1997 are as follows:
DECEMBER 31, -------------------------- 1998 1997 ------------ ------------ Deferred tax assets $ 1,373,000 $ 1,194,000 Due from affiliates 347,000 538,000 Deferred tax liabilities (4,793,000) (3,700,000)
The Internal Revenue Service is currently examining the consolidated Federal income tax returns of HCC for the years 1993 through 1996. Management believes that the results of such examination will not have a material adverse effect on the financial position or results of operations of HCA. (6) TRANSACTIONS WITH RELATED PARTIES Pursuant to a management services agreement, HCA pays base management and incentive fees to Pratt Management, L.P. ("PML"), a limited partnership which, prior to April 1, 1997, was wholly owned by GBCC. Effective as of April 1, 1997, HCC acquired the general partnership interest in PML. The base management fee is equal to 5% of operating revenues (as defined in the agreement) subject to a maximum of $5,500,000 in any consecutive twelve month period. The incentive fee is equal to 10% of gross operating profit (as defined in the agreement to generally include all revenues less expenses other than depreciation, interest, amortization and income taxes). HCA incurred such fees totaling $8,872,000, $9,609,000 and $9,360,000, respectively, during the years ended December 31, 1998, 1997 and 1996. Management and incentive fees payable at December 31, 1998 and 1997 amounting to $2,067,000 and $2,130,000, respectively, are included in due to affiliates on the accompanying balance sheets. HCA incurred interest with respect to its promissory note payable to HCC (see Note 3) amounting to $4,361,000, $4,906,000 and $4,973,000, respectively, for the years ended December 31, 1998, 1997 and 1996. Interest payable to HCC on such note amounted to $848,000 and $983,000, respectively, at December 31, 1998 and 1997 and is included in accrued interest payable on the accompanying balance sheets. HCA has acquired computer software and hardware from GBCC and has been allocated certain other expenses from HCC and GBCC. In addition, HCA is reimbursed by HCC and GBCC for certain administrative and other services it performs on their behalf. Such transactions resulted in net charges to HCA during the years ended December 31, 1998, 1997 and 1996 totaling $249,000, $427,000 and $720,000, respectively. At December 31, 1998 and 1997, HCA had net receivables of $37,000 and net payables of $36,000, respectively, in connection with such charges. (7) ILLINOIS REGULATORY MATTERS Riverboat gaming operations in Illinois are subject to regulatory control by the Illinois Gaming Board (the "IGB"). Under the provisions of the Illinois gaming regulations, HCA is required to maintain its ownership license. HCA's owner's license was renewed in July 1998 for a period of one year and was 82 HOLLYWOOD CASINO - AURORA, INC. (WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION) NOTES TO FINANCIAL STATEMENTS (CONTINUED) subsequently extended by the IGB to December 1999. Management intends to file for renewal of HCA's owner's license and anticipates that such renewal will be approved by the IGB during 1999. If it were determined that gaming laws were violated by a licensee, the gaming licenses held by each licensee could be limited, conditioned, suspended, or revoked. In addition, the licensees and other persons involved could be subject to substantial fines. Limitation or conditioning or suspension of any gaming license could, and revocation would, have a materially adverse affect on the operations of HCA. (8) COMMITMENTS AND CONTINGENCIES PLANET HOLLYWOOD LITIGATION - Planet Hollywood International, Inc., a Delaware corporation, and Planet Hollywood (Region IV), Inc., a Minnesota corporation (collectively, "PHII"), filed a complaint in the United States District Court for the Northern District of Illinois, Eastern Division on July 29, 1996 against HCC, HCA and a member of the Pratt Family (collectively, the "Original Hollywood Defendants"). The Original Hollywood Defendants filed with the Court on September 18, 1996 an answer to PHII's lawsuit, along with numerous counterclaims against PHII, Robert Earl and Keith Barish (collectively, the "PHII Defendants"). PHII filed with the Court on January 21, 1997, an amendment to their complaint which, among other things, added HWCC-Tunica, Inc., the HCC subsidiary which owns and operates a casino in Tunica, Mississippi ("HCT", and together with the Original Hollywood Defendants, the "Hollywood Defendants"), and GBCC as defendants. The Original Hollywood Defendants filed with the Court on February 4, 1997, and GBCC and HCT filed with the Court on February 20, 1997, answers and counterclaims to such amended complaint. In its lawsuit, PHII alleges, among other things, that the Hollywood Defendants and GBCC have, in opening and operating the Hollywood Casino concept, infringed on PHII's trademark, service mark and trade dress and have engaged in unfair competition and deceptive trade practices. In their counterclaims, the Hollywood Defendants and GBCC allege, among other things, that the PHII Defendants have, through their planned use of their mark in connection with casino services, infringed on certain of HCC's service marks and trade dress and have engaged in unfair competition. Given the uncertainties inherent in litigation, no assurance can be given that the Hollywood Defendants will prevail in this litigation; however, the Hollywood Defendants believe that PHII's claims are without merit and intend to defend their position and pursue their counterclaims vigorously. The accompanying financial statements do not include any adjustments that might result from the outcome of the uncertainties described above. OTHER LITIGATION - HCA is a party in various legal proceedings with respect to the conduct of casino operations. Although a possible range of loss can not be estimated, in the opinion of management, based upon the advice of counsel, settlement or resolution of the proceedings should not have a material adverse impact on the financial position or results of operations of HCA. 83 HOLLYWOOD CASINO - AURORA, INC. (WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION) NOTES TO FINANCIAL STATEMENTS (CONTINUED) (9) EMPLOYEE RETIREMENT SAVINGS PLAN HCA participates in a retirement savings plan under Section 401(k) of the Internal Revenue Code sponsored by HCC which covers all of its employees who meet certain eligibility requirements as to age and period of employment. The plan allows employees to contribute up to 15% of their salary on a pre-tax basis (subject to statutory limitations) and invest such monies in a choice of mutual funds on a tax-deferred basis. HCA matches a portion of the participating employees' contributions to the plan and may, from time to time, make additional discretionary contributions. For the years ended December 31, 1998, 1997 and 1996, HCA made company contributions to the plan totaling $473,000, $289,000 and $440,000, respectively. (10) SUPPLEMENTAL CASH FLOW INFORMATION During 1996, HCA entered into a capital lease obligation in the original amount of $13,195,000 with respect to a new parking garage (see Note 4). Additional escrowed construction and financing costs totaling $4,163,000 were capitalized in 1996 as part of the cost of the facility. (11) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value: CASH AND CASH EQUIVALENTS - The carrying amounts approximate fair value ------------------------- because of the short maturity of these instruments. INTEREST PAYABLE - The carrying amount of interest payable approximates ---------------- fair value because of the short maturity of the obligation. LONG-TERM DEBT - The fair value of HCA's long-term debt is estimated based -------------- on the quoted market price of the underlying debt issue. Debt obligations with a short remaining maturity are valued at the carrying amount. 84 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, 1998 DECEMBER 31, 1997 ---------------------------- ------------------------------ CARRYING CARRYING AMOUNT FAIR VALUE AMOUNT FAIR VALUE ----------- ----------- ----------- ----------- Financial Assets: Cash and cash equivalents $ 9,718,000 $ 9,718,000 $11,594,000 $11,594,000 Financial Liabilities: Interest payable $ 1,058,000 $ 1,058,000 $ 1,192,000 $ 1,192,000 12 3/4% promissory note 31,507,000 33,555,000 36,507,000 39,245,000 Promissory note to bank 1,900,000 1,900,000 350,000 350,000 Equipment loans - - 413,000 413,000
(12) SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
QUARTER ----------------------------------------------------------------------- FIRST SECOND THIRD FOURTH ----------- ----------- ----------- ----------- Year Ended December 31, 1998 Net revenues $38,720,000 $40,093,000 $41,712,000 $42,422,000 =========== =========== =========== =========== Net income $ 2,458,000 $ 3,061,000 $ 2,782,000 $ 2,212,000 =========== =========== =========== =========== Year Ended December 31, 1997 Net revenues $40,350,000 $38,931,000 $41,741,000 $39,285,000 =========== =========== =========== =========== Net income $ 3,431,000 $ 3,852,000 $ 3,894,000 $ 3,337,000 =========== =========== =========== ===========
85 REPORT OF INDEPENDENT AUDITORS To HWCC - Tunica, Inc.: We have audited the accompanying consolidated balance sheets of HWCC - Tunica, Inc. (the Company and a Texas Corporation) and subsidiary as of December 31, 1998 and 1997, and the related consolidated statements of operations, changes in shareholder's equity and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of HWCC - Tunica, Inc. and subsidiary as of December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998 in conformity with generally accepted accounting principles. Deloitte & Touche LLP Dallas, Texas February 23, 1999 86 HWCC - TUNICA, INC. AND SUBSIDIARY (WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION) CONSOLIDATED BALANCE SHEETS ASSETS
DECEMBER 31, --------------------------- 1998 1997 ------------ ------------ Current Assets: Cash and cash equivalents $ 16,325,000 $ 11,851,000 Short-term investments 3,905,000 3,876,000 Accounts receivable, net of allowances of $813,000 and $705,000, respectively 1,167,000 1,510,000 Inventories 779,000 660,000 Deferred income taxes 1,451,000 1,632,000 Prepaid expenses and other current assets 770,000 1,129,000 ------------ ------------ Total current assets 24,397,000 20,658,000 ------------ ------------ Property and Equipment: Land and improvements 4,645,000 3,456,000 Buildings 73,948,000 73,422,000 Barges 2,524,000 2,524,000 Operating equipment 39,169,000 37,588,000 Construction in progress 2,612,000 688,000 ------------ ------------ 122,898,000 117,678,000 Less - accumulated depreciation and amortization (38,910,000) (31,760,000) ------------ ------------ Net property and equipment 83,988,000 85,918,000 ------------ ------------ Other Assets: Land rights 7,250,000 7,454,000 Other assets 4,826,000 4,697,000 ------------ ------------ Total other assets 12,076,000 12,151,000 ------------ ------------ $120,461,000 $118,727,000 ============ ============
The accompanying notes to consolidated financial statements are an integral part of these consolidated balance sheets. 87 HWCC - TUNICA, INC. AND SUBSIDIARY (WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION) CONSOLIDATED BALANCE SHEETS LIABILITIES AND SHAREHOLDER'S EQUITY
DECEMBER 31, --------------------------- 1998 1997 ------------ ------------ Current Liabilities: Current maturities of long-term debt and capital lease obligations $ 775,000 $ 485,000 Accounts payable 1,638,000 1,372,000 Accrued liabilities - Salaries and wages 1,685,000 1,579,000 Interest 476,000 476,000 Gaming and other taxes 453,000 1,230,000 Insurance 1,975,000 1,553,000 Other 1,866,000 1,627,000 Other current liabilities 1,283,000 1,325,000 ------------ ------------ Total current liabilities 10,151,000 9,647,000 ------------ ------------ Long-Term Debt 85,023,000 85,198,000 ------------ ------------ Commitments and Contingencies Shareholder's Equity: Common stock, $.01 par value per share; 100,000 shares authorized; 1,000 shares issued and outstanding - - Additional paid-in capital 34,637,000 34,637,000 Accumulated deficit (9,350,000) (10,755,000) ------------ ------------ Total shareholder's equity 25,287,000 23,882,000 ------------ ------------ $120,461,000 $118,727,000 ============ ============
The accompanying notes to consolidated financial statements are an integral part of these consolidated balance sheets. 88 HWCC - TUNICA, INC. AND SUBSIDIARY (WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION) CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, ------------------------------------------- 1998 1997 1996 ------------- ------------- ------------- Revenues: Casino $ 96,459,000 $ 97,506,000 $ 87,361,000 Rooms 9,386,000 9,651,000 5,329,000 Food and beverage 15,039,000 14,320,000 11,987,000 Other 1,373,000 1,164,000 1,097,000 ------------ ------------ ------------ 122,257,000 122,641,000 105,774,000 Less - promotional allowances (16,484,000) (15,378,000) (11,250,000) ------------ ------------ ------------ Net revenues 105,773,000 107,263,000 94,524,000 ------------ ------------ ------------ Expenses: Casino 72,317,000 69,496,000 66,018,000 Rooms 1,752,000 1,835,000 1,573,000 Food and beverage 3,923,000 4,325,000 3,752,000 Other 1,336,000 1,402,000 1,259,000 General and administrative 5,813,000 5,769,000 5,962,000 Depreciation and amortization 8,123,000 9,916,000 10,906,000 ------------ ------------ ------------ Total expenses 93,264,000 92,743,000 89,470,000 ------------ ------------ ------------ Income from operations 12,509,000 14,520,000 5,054,000 ------------ ------------ ------------ Non-operating income (expenses): Interest income 587,000 281,000 835,000 Interest expense, net of capitalized interest of $1,006,000 in 1996 (10,937,000) (10,980,000) (10,060,000) (Loss) gain on disposal of assets (65,000) 6,000 (45,000) ------------ ------------ ------------ Total non-operating expenses, net (10,415,000) (10,693,000) (9,270,000) ------------ ------------ ------------ Income (loss) before income taxes 2,094,000 3,827,000 (4,216,000) Income tax (provision) benefit (689,000) 845,000 - ------------ ------------ ------------ Net income (loss) $ 1,405,000 $ 4,672,000 $ (4,216,000) ============ ============ ============
The accompanying notes to consolidated financial statements are an integral part of these consolidated statements. 89 HWCC - TUNICA, INC. AND SUBSIDIARY (WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION) CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDER'S EQUITY FOR THE THREE YEARS ENDED DECEMBER 31, 1998
ADDITIONAL COMMON STOCK PAID-IN ACCUMULATED ---------------------- SHARES AMOUNT CAPITAL DEFICIT --------- ----------- ------------ ------------ BALANCE, JANUARY 1, 1996 1,000 $ - $34,637,000 $(11,211,000) Net loss - - - (4,216,000) --------- ----------- ------------ ------------ BALANCE, DECEMBER 31, 1996 1,000 - 34,637,000 (15,427,000) Net income - - - 4,672,000 --------- ----------- ------------ ------------ BALANCE, DECEMBER 31, 1997 1,000 - 34,637,000 (10,755,000) Net income - - - 1,405,000 --------- ----------- ------------ ------------ BALANCE, DECEMBER 31, 1998 1,000 $ - $34,637,000 $ (9,350,000) ========= =========== ============ ============
The accompanying notes to consolidated financial statements are an integral part of this consolidated statement. 90 HWCC - TUNICA, INC. AND SUBSIDIARY (WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION) CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, ----------------------------------------- 1998 1997 1996 ------------ ------------ ------------- OPERATING ACTIVITIES: Net income (loss) $ 1,405,000 $ 4,672,000 $ (4,216,000) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 8,123,000 9,916,000 10,906,000 Loss (gain) on disposal of assets 65,000 (6,000) 45,000 Provision for doubtful accounts 483,000 498,000 539,000 Deferred income tax provision (benefit) 115,000 (1,071,000) - Increase in accounts receivable (140,000) (645,000) (474,000) Increase (decrease) in accounts payable and accrued expenses 256,000 (2,097,000) 721,000 Net change in other current assets and liabilities 199,000 232,000 (280,000) Net change in other noncurrent assets and liabilities (223,000) 488,000 (740,000) ----------- ----------- ------------ Net cash provided by operating activities 10,283,000 11,987,000 6,501,000 ----------- ----------- ------------ INVESTING ACTIVITIES: Purchases of property and equipment (5,924,000) (2,635,000) (35,038,000) Short-term investments (29,000) (3,876,000) - Investment in unconsolidated affiliate (53,000) (2,000,000) - Proceeds from sale of assets 82,000 16,000 105,000 Decrease in cash restricted for construction projects - - 27,919,000 ----------- ----------- ------------ Net cash used in investing activities (5,924,000) (8,495,000) (7,014,000) ----------- ----------- ------------ FINANCING ACTIVITIES: Proceeds from issuance of long-term debt 687,000 601,000 1,503,000 Repayments of long-term debt (572,000) (364,000) (1,469,000) Payments on capital lease obligations - (1,199,000) (1,729,000) ----------- ----------- ------------ Net cash provided by (used in) financing activities 115,000 (962,000) (1,695,000) ----------- ----------- ------------ Net increase (decrease) in cash and cash equivalents 4,474,000 2,530,000 (2,208,000) Cash and cash equivalents at beginning of year 11,851,000 9,321,000 11,529,000 ----------- ----------- ------------ Cash and cash equivalents at end of year $16,325,000 $11,851,000 $ 9,321,000 =========== =========== ============
The accompanying notes to consolidated financial statements are an integral part of these consolidated statements. 91 HWCC - TUNICA, INC. AND SUBSIDIARY (WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) ORGANIZATION, BUSINESS AND BASIS OF PRESENTATION HWCC - Tunica, Inc. ("HCT") is a Texas corporation and a wholly owned subsidiary of Hollywood Casino Corporation ("HCC"), a Delaware corporation. HCT was incorporated in December 1993 for the purpose of acquiring and completing a gaming facility in northern Tunica County, Mississippi approximately 27 miles southwest of Memphis, Tennessee. The facility (the "Tunica Casino") was completed and commenced operations on August 8, 1994 under the service mark Hollywood Casino(R). The Tunica Casino currently includes a casino with 54,000 square feet of gaming space, 506 hotel rooms and suites, a 123-space recreational vehicle park and related amenities. HCT's gaming license has been renewed by the Mississippi Gaming Commission through October 18, 1999. The accompanying consolidated financial statements include the accounts of HCT and its wholly owned subsidiary, HWCC-Golf Course Partners, Inc. ("Golf"). All significant intercompany balances have been eliminated in consolidation. Golf, a Delaware corporation, was formed in 1996 to own an initial one-third interest in Tunica Golf Course LLC, a limited liability company organized to develop and operate a golf course to be used by patrons of the Tunica Casino and other participating casino/hotel properties. The golf course opened for business in November 1998. Golf's investment in Tunica Golf Course, LLC is accounted for under the equity method of accounting and is included in other noncurrent assets on the accompanying consolidated balance sheets at December 31, 1998 and 1997. HCT estimates that a significant amount of the Tunica Casino's revenues are derived from patrons living in the Memphis, Tennessee area, northern Mississippi and Arkansas. The Tunica Casino faces intense competition from other casinos operating in northern Tunica County and management believes that this competition will continue in the future. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The significant accounting policies followed in the preparation of the accompanying consolidated financial statements are discussed below. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. CASINO REVENUES, PROMOTIONAL ALLOWANCES AND DEPARTMENTAL EXPENSES - The Tunica Casino recognizes the net win from gaming activities (the difference between gaming wins and losses) as casino revenues. Casino revenues are net of accruals for anticipated payouts of progressive slot machine jackpots and certain progressive table game payouts. Such anticipated jackpots and payouts are reflected as current liabilities on the accompanying consolidated balance sheets. The estimated value of rooms, food and beverage and other items which are provided to customers without charge has been included in revenues and a corresponding amount has been deducted as promotional 92 HWCC - TUNICA, INC. AND SUBSIDIARY (WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) allowances. The costs of such complimentaries have been included as casino expenses on the accompanying consolidated statements of operations. Costs of complimentaries allocated from the rooms, food and beverage and other operating departments to the casino department during the years ended December 31, 1998, 1997 and 1996 were as follows: 1998 1997 1996 ----------- ----------- ----------- Rooms $ 1,940,000 $ 1,870,000 $ 1,162,000 Food and beverage 12,166,000 10,837,000 10,223,000 Other 300,000 140,000 203,000 ----------- ----------- ----------- $14,406,000 $12,847,000 $11,588,000 =========== =========== =========== CASH AND CASH EQUIVALENTS - Cash and cash equivalents are generally comprised of cash and investments with original maturities of three months or less, such as commercial paper, certificates of deposit and fixed repurchase agreements. ALLOWANCE FOR DOUBTFUL ACCOUNTS - The allowance for doubtful accounts is maintained at a level considered adequate to provide for possible future losses. Provisions for doubtful accounts amounting to $483,000, $498,000 and $539,000, respectively, were made during the years ended December 31, 1998, 1997 and 1996. INVENTORIES - Inventories are stated at the lower of cost (on a first-in, first-out basis) or market. PROPERTY AND EQUIPMENT - Property and equipment have been recorded at cost and are being depreciated utilizing the straight-line method over the estimated useful lives of the assets as follows: Hotel, dockside facilities and improvements 25-40 years Barges 25-40 years Operating equipment 3 - 7 years 93 HWCC - TUNICA, INC. AND SUBSIDIARY (WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) On October 1, 1996, HCT revised the estimated useful lives of its buildings, barges and related land rights (see below) from 25 years to 40 years and the estimated useful life of its slot machines from three years to five years. Management believes the changes in estimated lives more appropriately reflect the timing of the economic benefits to be received from these assets. For the year ended December 31, 1996, such changes reduced depreciation and amortization expense and net loss by approximately $612,000. Interest incurred in connection with property and equipment acquisitions totalling $1,006,000 in 1996 has been capitalized during the development period and is being amortized over the useful lives of the related assets. LAND RIGHTS - Land rights are being amortized on a straight-line basis over the estimated useful life of the facility, which is less than the term of the ground lease including renewals (see Note 8); such amortization commenced with the opening of the Tunica Casino. The estimated economic benefit of the land rights was revised from 25 years to 40 years effective on October 1, 1996 consistent with the change in estimated useful life of the Tunica facility as discussed under "Property and Equipment" above. Management presently intends to renew the ground lease at least through the estimated 40-year useful life of the facility. Accumulated amortization of such land rights amounted to $1,195,000 and $991,000, respectively, at December 31, 1998 and 1997. LONG-LIVED ASSETS - Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" requires, among other things, that an entity review its long-lived assets and certain related intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable. HCT does not believe that any such events or changes have occurred. 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 94 HWCC - TUNICA, INC. AND SUBSIDIARY (WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) were filed. HCT made payments to HCC in lieu of federal income taxes amounting to $307,000 and $494,000 during the years ended December 31, 1998 and 1997, respectively; no such payments were made during the year ended December 31, 1996. HCT paid no state income taxes during 1998, 1997 or 1996. RECENT ACCOUNTING PRONOUNCEMENTS - The Financial Accounting Standards Board has issued a new standard, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 requires the presentation and disclosure of comprehensive income, which is defined as the change in a company's equity resulting from non-owner transactions and events. SFAS 130 became effective December 15, 1997 and requires the reclassification of all prior periods presented. HCT has adopted the provisions of SFAS 130; however, the statement provides that an enterprise that has no items of other comprehensive income for any period presented need only report net income. HCT has no such other comprehensive income items for any period presented; accordingly, the presentation and disclosure requirements of SFAS 130 are not applicable. The FASB has also issued Statement 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131"). SFAS 131, which became effective for fiscal years beginning after December 15, 1997, requires publicly- held companies to report financial and descriptive information concerning its reportable operating segments. An operating segment is defined as a component of a business which (i) earns revenues and incurs expenses, (ii) has its operating results reviewed on a regular basis by the company's chief operating decision maker to determine how the company's resources should be allocated and to assess its performance and (iii) has separate financial information available. HCT's operations consist of its casino, hotel and related facilities. The Tunica Casino is considered a single operating unit due to the dependence of the hotel, food and beverage and other operations on casino patrons. Such non-casino activities are considered ancillary to the gaming business, are reviewed as such by management and can not reasonably be presented as separate operating segments. Accordingly, additional segment information is not presented herein. In June 1998, the FASB issued a new statement, "Accounting for Derivative Instruments and Hedging Activities," ("SFAS 133"), effective for fiscal years beginning after June 15, 1999. SFAS 133 requires, among other things, that derivatives be recorded on the balance sheet at fair value. Changes in the fair value of derivatives may, depending on circumstances, be recognized in earnings or deferred as a component of shareholders' equity until a hedged transaction occurs. HCT does not believe the adoption of SFAS 133 will have a significant impact on its financial position or results of operations. 95 HWCC - TUNICA, INC. AND SUBSIDIARY (WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (3) LONG-TERM DEBT AND PLEDGE OF ASSETS Substantially all of HCT's assets are pledged in connection with its long- term indebtedness. Long-term debt consists of the following:
DECEMBER 31, ------------------------- 1998 1997 ----------- ----------- Promissory notes to HCC due November 1, 2003 (a) $ 84,045,000 $ 84,045,000 Equipment loans (b) 1,291,000 1,638,000 Bank credit facility (c) 462,000 - ----------- ----------- Total indebtedness 85,798,000 85,683,000 Less - current maturities (775,000) (485,000) ----------- ----------- Total long-term debt $ 85,023,000 $ 85,198,000 =========== ===========
______________________ (a) During October 1995, HCC loaned $54,045,000 to HCT to repay its outstanding mortgage indebtedness, together with the associated call premium and certain accrued interest thereon, and loaned an additional $30,000,000 to HCT to finance construction of a 352-room hotel tower and related amenities and to fund development and construction of a themed gaming area. Such intercompany loans were made with a portion of the note proceeds from HCC's issue of $210,000,000 of 12 3/4% Senior Secured Notes (the "Senior Secured Notes") due November 1, 2003, discounted to yield 13 3/4% per annum. Interest on the loans from HCC accrues at the rate of 12 3/4% per annum and is payable semiannually on April 15 and October 15 of each year. The Senior Secured Notes are unconditionally guaranteed on a senior secured basis by HCT and by certain future subsidiaries of HCC. The Senior Secured Notes and related guarantees are secured by, among other things, (i) substantially all of the assets of HCT and other future guarantors, (ii) a limited first mortgage on substantially all of the assets of another gaming facility operated by a wholly owned subsidiary of HCC, (iii) a pledge of the capital stock of HCT and certain other subsidiaries of HCC and (iv) the collateral assignment of any future management contracts entered into by HCC. The limitation on the first mortgage described in (ii) above is currently $31,507,000 subject to semiannual reductions of $2,500,000. The indenture to the Senior Secured Notes contains various provisions limiting the ability of HCC, HCT and certain defined subsidiaries to, among other things, pay dividends or make other restricted payments; incur additional indebtedness or issue preferred stock; create liens; create dividend or other payment restrictions affecting certain defined subsidiaries; enter into mergers or consolidations or make sales of all or substantially all assets of HCC, HCT or any future guarantor; and enter into transactions with certain affiliates. 96 HWCC - TUNICA, INC. AND SUBSIDIARY (WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (b) The loans outstanding at December 31, 1998 are payable monthly including interest at effective rates ranging from 7.8% to 12.9% per annum and mature at various dates between 1999 and 2001. (c) HCT had a bank credit facility in the amount of $1,300,000 available to borrow against until September 30, 1998. HCT borrowed $541,000 under the credit facility during 1998 at the rate of 8.875% per annum; no borrowings were outstanding under the credit facility at December 31, 1997. Borrowings under the credit facility are to be repaid in monthly installments over a period of 36 months and are collateralized by equipment purchased with the loan proceeds. The credit facility was not renewed by HCT. Scheduled payments of long-term debt as of December 31, 1998 are set forth below: 1999 $ 775,000 2000 729,000 2001 249,000 2002 - 2003 84,045,000 ----------- Total $ 85,798,000 =========== Interest paid, net of amounts capitalized, amounted to $10,937,000, $12,766,000 and $10,001,000, respectively, during the years ended December 31, 1998, 1997 and 1996. (4) CAPITAL LEASES HCT leased certain gaming and other equipment under capital lease agreements which provided for interest at rates ranging up to 13 1/4% per annum and which expired during 1997. Assets under capital leases with an original cost of $4,814,000 are included in operating equipment in the accompanying consolidated balance sheets at both December 31, 1998 and 1997. Amortization expense for the years ended December 31, 1998, 1997 and 1996 was $298,000, $945,000 and $1,500,000, respectively. 97 HWCC - TUNICA, INC. AND SUBSIDIARY (WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Accumulated amortization at December 31, 1998 and 1997 with respect to these assets amounted to $4,814,000 and $4,516,000, respectively. No future payment obligations exist with respect to such capital leases. (5) INCOME TAXES HCT's (provision) benefit for income taxes consists of the following:
YEAR ENDED DECEMBER 31, ------------------------------------- 1998 1997 1996 ---------- ----------- ------------ Federal income tax (provision) benefit: Current $(574,000) $ (226,000) $ - Deferred (185,000) (812,000) 1,453,000 Change in valuation allowance 70,000 1,883,000 (1,453,000) ---------- ---------- ----------- $(689,000) $ 845,000 $ - ========== ========= ===========
State income taxes have not been provided for since a credit for state gaming taxes based on gross revenues is allowed to offset income taxes incurred. The credit is the lesser of total gaming taxes paid or the state income tax, with no credit carryforward permitted. A reconciliation between the calculated tax (provision) benefit on income (loss) based on the statutory rates in effect and the effective tax rates for the years ended December 31, 1998, 1997 and 1996 follows:
YEAR ENDED DECEMBER 31, ------------------------------------------------ 1998 1997 1996 -------------- ------------- ------------- Calculated income tax (provision) benefit $(712,000) $ (1,301,000) $ 1,433,000 Valuation allowance change 70,000 1,883,000 - Tax benefit of operating loss not utilized - - (1,400,000) Disallowance of meals and entertainment (32,000) (43,000) (25,000) Other (15,000) 306,000 (8,000) --------- ------------ ----------- Tax (provision) benefit as shown on statement of operations $(689,000) $ 845,000 $ - ========= ============= ===========
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. 98 HWCC - TUNICA, INC. AND SUBSIDIARY (WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) At December 31, 1998, HCT had net operating loss carryforwards ("NOL's") totaling approximately $15,350,000, which do not begin to expire until the year 2010. Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes", requires that the tax benefit of such NOL's, together with the tax benefit of deferred tax assets resulting from temporary differences, be recorded as an asset and, to the extent that management can not assess that the utilization of all or a portion of such deferred tax assets is more likely than not, a valuation allowance should be recorded. Based on the taxable income earned by HCT during 1998 and 1997 and the expectation of future taxable income, management believes that it is more likely than not that a portion of the NOL's and deferred tax assets will be utilized. Accordingly, a valuation allowance has been established which has resulted in the recording of net deferred tax assets of $1,993,000 and $2,107,000, respectively, at December 31, 1998 and 1997. The components of HCT's net deferred tax asset are as follows:
DECEMBER 31, -------------------------- 1998 1997 ------------ ------------ Deferred tax assets: Net operating loss carryforwards $ 5,221,000 $ 5,200,000 Alternative minimum tax credit carryforward 800,000 226,000 Allowance for doubtful accounts 277,000 240,000 Other liabilities and accruals 1,286,000 1,108,000 ----------- ----------- Total deferred tax assets 7,584,000 6,774,000 Deferred tax liabilities: Depreciation and amortization (3,092,000) (2,097,000) ----------- ----------- Net deferred tax asset 4,492,000 4,677,000 Valuation allowance (2,500,000) (2,570,000) ----------- ----------- $ 1,992,000 $ 2,107,000 =========== ===========
Receivables from HCC in connection with HCT's federal income taxes are included in the accompanying consolidated financial statements as follows:
DECEMBER 31, ---------------------- 1998 1997 ---------- ---------- Accounts receivable $ - $ 268,000 Deferred income taxes 1,451,000 1,632,000 Other noncurrent assets 541,000 475,000
99 HWCC - TUNICA, INC. AND SUBSIDIARY (WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The Internal Revenue Service is currently examining the consolidated Federal income tax returns of HCC for the years 1993 through 1996. Management believes that the results of such examination will not have a material adverse effect on the financial position or results of operations of HCT. (6) TRANSACTIONS WITH RELATED PARTIES Pursuant to a ten-year consulting agreement with Pratt Casino Corporation, an affiliated company, HCT incurs a monthly consulting fee of $100,000. Such fees amounted to $1,200,000 during each of the years ended December 31, 1998, 1997 and 1996. HCT and Advanced Casino Systems Corporation ("ACSC"), an affiliated company, entered into a Computer Services Agreement dated as of January 1, 1994 and renewed through December 31, 1999. The agreement provides, among other things, that ACSC will sell HCT computer hardware and information systems equipment and will license or sublicense to HCT computer software necessary to operate HCT's casino, hotel and related facilities and business operations. HCT pays ACSC for such equipment and licenses such software at amounts and on terms and conditions that ACSC provides to unrelated third parties. HCT also pays ACSC a fixed license fee of $33,600 per month ($30,000 prior to January 1, 1997) and reimburses ACSC for its direct costs and expenses incurred under the agreement. Since the latter part of 1997, ACSC also performs and bills HCT for certain administrative and marketing services. Total charges incurred by HCT amounted to $656,000, $635,000 and $477,000, respectively, for the years ended December 31, 1998, 1997 and 1996. At both December 31, 1998 and 1997, HCT had payables of $44,000 included in accounts payable with respect to such charges. Prior to 1998, Greate Bay Hotel and Casino, Inc. ("GBHC"), an affiliated company which owns and operates the Sands Hotel and Casino in Atlantic City, New Jersey, performed certain administrative and marketing services on behalf of HCT. During the years ended December 31, 1997 and 1996, fees charged to HCT by GBHC totaled $428,000 and $653,000, respectively. HCT is charged for certain legal, accounting, and other expenses incurred by HCC and its subsidiaries that relate to HCT's business. HCT also bills HCC and its subsidiaries for services provided to those companies. For the years ended December 31, 1998, 1997 and 1996, such charges amounted to $167,000, $362,000 and $439,000, respectively. At December 31, 1998 and 1997, HCT had net receivables of $97,000 and $31,000, respectively, with respect to such charges. (7) MISSISSIPPI REGULATORY MATTERS Gaming operations in Mississippi are subject to regulatory control by the Mississippi Gaming Commission. Under the provisions of the Mississippi gaming regulations, HCT is required to maintain all necessary licenses. The ownership license for the Tunica Casino has been renewed through October 18, 1999. If it were determined that gaming laws were violated by a licensee, the gaming licenses held by each licensee could be limited, conditioned, suspended or revoked. In addition, the licensees and other persons involved could be subject to substantial fines. 100 HWCC - TUNICA, INC. AND SUBSIDIARY (WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (8) COMMITMENTS AND CONTINGENCIES GROUND LEASE - HCT entered into a ground lease covering 70 acres of land on which the Tunica Casino was constructed. The ground lease is for an initial term of five years from the opening date of the facility and, at HCT's option, may be renewed for nine additional five-year periods. Obligations under the ground lease during the initial term include both minimum monthly fixed payments and percentage rent, which in the aggregate will be the greater of 4% of Gross Revenues, as defined, or $1,100,000 per year. HCT is responsible for all operating and other expenses of the property in accordance with the lease terms. During 1998, 1997 and 1996, HCT expensed $3,899,000, $3,935,000 and $3,486,000, respectively, in connection with the ground lease. PLANET HOLLYWOOD LITIGATION - Planet Hollywood International, Inc., a Delaware corporation, and Planet Hollywood (Region IV), Inc., a Minnesota corporation (collectively, "PHII"), filed a complaint in the United States District Court for the Northern District of Illinois, Eastern Division on July 29, 1996 against HCC, the wholly owned subsidiary of HCC which owns and operates a casino in Aurora, Illinois and a member of the Pratt Family (collectively, the "Original Hollywood Defendants"). The Original Hollywood Defendants filed with the Court on September 18, 1996 an answer to PHII's lawsuit, along with numerous counterclaims against PHII, Robert Earl and Keith 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. 101 HWCC - TUNICA, INC. AND SUBSIDIARY (WHOLLY OWNED BY HOLLYWOOD CASINO CORPORATION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) OTHER - HCT is a party in various legal proceedings with respect to the conduct of casino and hotel operations. Although a possible range of loss can not be estimated, in the opinion of management, based upon the advice of counsel, settlement or resolution of the proceedings should not have a material adverse impact on the consolidated financial position or results of operations of HCT. (9) EMPLOYEE RETIREMENT SAVINGS PLAN - HCT participates in a retirement savings plan under Section 401(k) of the Internal Revenue Code sponsored by HCC which covers all of its employees who meet certain eligibility requirements as to age and period of employment. The plan allows employees to contribute up to 15% of their salary on a pre-tax basis (subject to statutory limitations) and invest such monies in a choice of mutual funds on a tax-deferred basis. HCT matches a portion of the participating employees' contributions to the plan and may, from time to time, make additional discretionary contributions. For the years ended December 31, 1998, 1997 and 1996, HCT made company contributions to the plan totaling $203,000, $198,000 and $97,000, respectively. (10) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value: CASH AND CASH EQUIVALENTS - The carrying amounts approximate fair value ------------------------- because of the short maturity of these instruments. SHORT-TERM INVESTMENTS - The carrying amounts approximate fair value ---------------------- because of the short maturity of these investments. INTEREST PAYABLE - The carrying amount of interest payable approximates ---------------- fair value because of the short maturity of the obligation. LONG-TERM DEBT - The fair value of HCT's long-term debt is estimated based -------------- on either the quoted market price of the underlying debt issue or on the discounted cash flow of future payments utilizing current rates available to HCT for debt of similar remaining maturities. Debt obligations with a short remaining maturity are valued at the carrying amount. 102 The estimated carrying amounts and fair values of HCT's financial instruments are as follows:
DECEMBER 31, 1998 DECEMBER 31, 1997 ------------------------ ------------------------------ CARRYING CARRYING AMOUNT FAIR VALUE AMOUNT FAIR VALUE ----------- ----------- ----------- ----------------- Financial Assets Cash and cash equivalents $16,325,000 $16,325,000 $11,851,000 $11,851,000 Short-term investments 3,905,000 3,905,000 3,876,000 3,876,000 Financial Liabilities Interest payable $ 476,000 $ 476,000 $ 476,000 $ 476,000 Promissory notes to HCC 84,045,000 89,508,000 84,045,000 90,348,000 Equipment loans 1,291,000 1,335,000 1,638,000 1,649,000 Bank credit facility 462,000 462,000 - -
(11) SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
QUARTER --------------------------------------------------- FIRST SECOND THIRD FOURTH ----------- ----------- ----------- ------------ YEAR ENDED DECEMBER 31, 1998: Net revenues $25,072,000 $26,245,000 $29,126,000 $25,330,000 =========== =========== =========== =========== Net income (loss) $ 732,000 $ 153,000 $ 639,000 $ (119,000) =========== =========== =========== =========== YEAR ENDED DECEMBER 31, 1997: Net revenues $26,979,000 $27,354,000 $28,084,000 $24,846,000 =========== =========== =========== =========== Net income $ 1,431,000 $ 1,781,000 $ 1,442,000 $ 18,000 =========== =========== =========== ===========
103 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE HCC filed a complaint on October 8, 1998 in the District Court of Dallas County, Texas against Arthur Andersen LLP ("Andersen"), HCC's former certifying accountants, and selected partners alleging negligent advice and breach of contract with respect to the tax consequences resulting from the spin off of the stock of Greate Bay Casino Corporation ("GBCC") to HCC's shareholders on December 31, 1996. In view of the pending litigation discussed above, the Audit Committee of the Company's Board of Directors voted on October 16, 1998 to terminate Andersen as HCC's independent accountants. There were no disagreements with Andersen of the type which would require disclosure under Item 304 of Regulation S-K. Andersen's report on the consolidated financial statements of HCC for the past two years was unqualified. The Company, with the consideration and approval of its Audit Committee, engaged the firm of Deloitte & Touche LLP as its new certifying accountants. 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 26, 1999 (the "Definitive Proxy Statement") under the captions "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 "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 36. 104 2. FINANCIAL STATEMENT SCHEDULES Hollywood Casino Corporation and Subsidiaries --------------------------------------------- - Report of Independent Auditors -- 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 Hollywood Casino - Aurora, Inc. -- Report of Independent Auditors -- Schedule II; Valuation and Qualifying Accounts HWCC-Tunica, Inc. -- Report of Independent Auditors -- Schedule II; Valuation and Qualifying Accounts All other schedules for which provision is made in the applicable accounting regulations 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, between PBC, Inc. and HCC and Certificate of Correction of Agreement of Merger dated as of 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, Fixture Filing and Financing Statement made 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 by HCA, as Mortgagor, to the Company, as 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) 105 ++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 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) 9.1 -- Voting Trust Agreement dated as of December 29, 1998 by and among Jill Pratt LaFerney, formerly Jill A. Pratt, and John R. Pratt and Jack E. Pratt, Sr. 9.2 -- Voting Trust Agreement dated as of December 29, 1998 by and among Shawn Denise Bradshaw and Michael Shannon Pratt and William D. Pratt, Sr. 9.3 -- Voting Trust Agreement dated as of December 29, 1998 by and among Carolyn S. Hickey, Diana Pratt-Wyatt, formerly Diana L. Heisler, and Sharon A. Naftel, formerly Sharon R. Nash, and Edward T. Pratt III. +++10.1 -- Sixth Amendment to Employment Agreement dated January 1, 1998, between HCC and Jack E. Pratt. (Exhibit 10.1) +++10.2 -- Sixth Amendment to Employment Agreement dated January 1, 1998, between HCC and Edward T. Pratt, Jr. (Exhibit 10.2) +++10.3 -- Sixth Amendment to Employment Agreement dated January 1, 1998, between HCC and William D. Pratt. (Exhibit 10.3) #10.4 -- Employment Agreement dated May 1, 1996, between HCC and Edward T. Pratt III. (Exhibit 10.4) 106 ###10.5 -- Agreement dated as of September 2, 1998 by and among GBHC, GB Holdings, Inc., and GB Property Funding Corp., on the one hand, and GBCC, PHC Acquisition Corp., Lieber Check Cashing, LLC, Jack E. Pratt, William D. Pratt, Edward T. Pratt, Jr. and HCC, on the other. (Exhibit 10.3) *10.6 -- Development Agreement dated as of June 4, 1991, between the City of Aurora, Illinois and HCA. (Exhibit 10.33) *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. (Exhibit 10.46) @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) @@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 -- Hollywood Casino Corporation 1996 Long-Term Incentive Plan, as amended. (Exhibit 10.28) #10.25 -- Hollywood Casino Corporation 1996 Non-Employee Director Stock Plan. (Exhibit 10.29) ##10.26 -- General Partnership Interest Purchase Agreement dated as of April 1, 1997 by and between HWCC-Aurora Management, Inc. and PPI Corporation. (Exhibit 10.30) ###10.2 -- Amended and Restated Joint Venture Agreement by and among Shreveport Paddlewheels, L.L.C., Sodak Louisiana, L.L.C. and HWCC-Louisiana, Inc. dated July 31, 1998. (Exhibit 10.1) ###10.2 -- September 1998 Amendment to the July Amended and Restated Joint Venture Agreement. (Exhibit 10.2) 10.29 -- Employment Agreement dated as of May 11, 1998 by and between HCC and Paul C. Yates. 10.30 -- Amended and Restated Services Agreement dated as of October 1, 1998 by and between HCC and Pratt Management, L.P. 10.31 -- Management and Administrative Services Agreement dated as of October 1, 1998 by and between HCC and Greate Bay Casino Corporation. 10.32 -- Membership Interest Purchase Agreement dated as of March 31, 1999 by and among HWCC- Louisiana, Inc., Sodak Gaming, Inc. and Sodak Louisiana, L.L.C. 11.1 -- Statement regarding computation of Per Share Losses. 21.1 -- Subsidiaries of HCC. 27.1 -- Financial Data Schedule-Hollywood Casino Corporation 107 27.2 -- Financial Data Schedule-HWCC-Tunica, Inc. ***99.1 -- Petition filed on October 8, 1998 in the District Court of Dallas County, Texas by Hollywood Casino Corporation and Greate Bay Casino Corporation ("Plaintiffs") against Arthur Andersen L.L.P., Richard L. Robbins, Michael E. Gamache, Daniel J. Meehan, and Brent A. Railsback ("Defendants") (Exhibit 99.1) __________________________ + Incorporated by reference from the exhibit shown in parenthesis to Form S-1 Registration Statement (Registration 33-58732) for HCC 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 the Form 8-K for HCC as filed with the SEC on October 22, 1998. @ Incorporated by reference from the exhibit shown in parenthesis to Form S-1 Registration Statement (Registration No. 33-77502) for HCC 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. # 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, 1996. ## Incorporated by reference from the exhibit shown in parenthesis filed in HCC's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997 as filed with the SEC on August 2, 1997. ### Incorporated by reference to the exhibit shown in parenthesis filed in HCC's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998 as filed with the SEC on November 13, 1998. (b) Reports on Form 8-K. On October 22, 1998, the Registrants filed a Form 8-K to report a change in certifying accountants. On October 30, 1998 the Registrants filed a Form 8-K/A to include their former accountants' letter to the Securities and Exchange Commission as an exhibit. 108 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 April 13, 1999. 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 April 13, 1999 - --------------------------- ----------------- Jack E. Pratt Officer and Director /s/ Edward T. Pratt, Jr. Vice President, Treasurer April 13, 1999 - --------------------------- ----------------- Edward T. Pratt, Jr. and Director /s/ William D. Pratt Executive Vice President, April 13, 1999 - --------------------------- ----------------- William D. Pratt Secretary, General Counsel and Director /s/ Edward T. Pratt III President, Chief Operating April 13, 1999 - --------------------------- ----------------- Edward T. Pratt III Officer and Director /s/ Paul C. Yates Executive Vice President April 13, 1999 - --------------------------- ----------------- Paul C. Yates and Chief Financial Officer /s/ Charles F. LaFrano III Vice President - Finance and April 13, 1999 - --------------------------- ----------------- Charles F. LaFrano III Principal Accounting Officer /s/ James A. Colquitt Director April 13, 1999 - --------------------------- ----------------- James A. Colquitt /s/ Theodore H. Strauss Director April 13, 1999 - --------------------------- ----------------- Theodore H. Strauss /s/ Oliver B. Revell III Director April 13, 1999 - --------------------------- ----------------- Oliver B. Revell III 109 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 April 13, 1999. 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 April 13, 1999 - ----------------------------- ---------------- Jack E. Pratt Officer and Director /s/ Edward T. Pratt, Jr. Director April 13, 1999 - ----------------------------- ---------------- Edward T. Pratt, Jr. /s/ William D. Pratt Executive Vice President, April 13, 1999 - ----------------------------- ---------------- William D. Pratt Secretary, General Counsel and Director /s/ Edward T. Pratt III President and Director April 13, 1999 - ----------------------------- ---------------- Edward T. Pratt III /s/ John R. Osborne Vice President of Operations April 13, 1999 - ----------------------------- ---------------- John R. Osborne /s/ Charles F. LaFrano III Vice President, Assistant April 13, 1999 - ----------------------------- ---------------- Charles F. LaFrano III Secretary and Principal Accounting Officer 110 INDEX TO FINANCIAL STATEMENT SCHEDULES HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES -- Report of Independent Auditors -- 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 Auditors -- Schedule II; Valuation and Qualifying Accounts HWCC-TUNICA, INC. -- Report of Independent Auditors -- Schedule II; Valuation and Qualifying Accounts REPORT OF INDEPENDENT AUDITORS To Hollywood Casino Corporation: We have audited the consolidated financial statements of Hollywood Casino Corporation and subsidiaries as of December 31, 1998 and 1997, and for each of the three years in the period ended December 31, 1998, and have issued our report thereon dated February 23, 1999 (included elsewhere in this Form 10-K). Our audits also include the financial statement schedules listed in the index to financial statement schedules. These financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein. Deloitte & Touche LLP Dallas, Texas February 23, 1999 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ---------------------------------------- To GB Holdings, Inc.: We have audited in accordance with generally accepted auditing standards, the consolidated statements of operations, changes in shareholder's deficit and cash flows of GB Holdings, Inc. and subsidiaries for the year ended December 31, 1996 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. Schedule II - Valuation and Qualifying Accounts for the year ended December 31, 1996 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. The 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 I Page 1 HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES Condensed Financial Information of Registrant Hollywood Casino Corporation (Parent Company) BALANCE SHEETS
ASSETS December 31, --------------------------------------- 1997 (As Restated - 1998 Note 1) ----------------- ----------------- Cash and cash equivalents $ 14,785,000 $ 15,696,000 Accounts receivable 222,000 29,000 Due from affiliates, net of valuation allowance 18,963,000 16,136,000 Deferred federal income taxes 721,000 2,338,000 Other current assets 31,000 108,000 ----------------- ----------------- Total current assets 34,722,000 34,307,000 ----------------- ----------------- Investment in and advances to affiliates 51,424,000 48,132,000 Property and equipment, net 137,000 191,000 Due from affiliates, net of valuation allowance 122,874,000 127,874,000 Notes receivable - 6,000,000 Land held for sale, net of allowance 6,232,000 6,264,000 Other assets 6,315,000 5,572,000 ----------------- ----------------- $ 221,704,000 $ 228,340,000 ================= ================= LIABILITIES AND SHAREHOLDERS' EQUITY Current maturities of long-term debt $ 5,000,000 $ 5,000,000 Accounts payable and accrued liabilities 4,092,000 1,613,000 Accrued interest payable 4,628,000 4,541,000 Federal income taxes payable - 6,878,000 ----------------- ----------------- Total current liabilities 13,720,000 18,032,000 ----------------- ----------------- Long-term debt, net of discount 195,199,000 194,372,000 ----------------- ----------------- Other noncurrent liabilities 5,170,000 6,716,000 ----------------- ----------------- Shareholders' equity: Class A common stock, $.0001 par value per share, 50,000,000 shares authorized, 24,950,000 and 24,910,000 shares issued and outstanding, respectively 2,000 2,000 Class B common stock, non-voting, $.01 par value per share; 10,000,000 authorized; no shares issued - - Additional paid-in capital 42,945,000 42,945,000 Retained earnings (35,332,000) (33,727,000) ----------------- ----------------- Total shareholders' equity 7,615,000 9,220,000 ----------------- ----------------- $ 221,704,000 $ 228,340,000 ================= =================
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
Year Ended December 31, ----------------------------------------------------- 1997 (As Restated - 1998 Note 1) 1996 ------------------ --------------- ----------------- Revenues: Interest income $ 17,217,000 $ 17,189,000 $ 25,725,000 Other income 41,000 60,000 60,000 ------------------ --------------- ----------------- 17,258,000 17,249,000 25,785,000 ------------------ --------------- ----------------- Expenses: General and administrative 5,509,000 5,021,000 7,376,000 Interest 27,915,000 27,851,000 27,786,000 Depreciation and amortization 1,068,000 1,447,000 1,106,000 Settlement costs 1,087,000 - - Write down of assets - 19,678,000 22,141,000 ------------------ --------------- ----------------- Total expenses 35,579,000 53,997,000 58,409,000 ------------------ --------------- ----------------- Loss before income taxes, extraordinary and other items (18,321,000) (36,748,000) (32,624,000) Income tax provision - (4,954,000) (72,000) ------------------ --------------- ----------------- Loss before extraordinary and other items (18,321,000) (41,702,000) (32,696,000) Extraordinary item: Loss on early extinguishment of debt, net of income tax benefit in 1997 (336,000) (215,000) - ------------------ --------------- ----------------- Loss before other item (18,657,000) (41,917,000) (32,696,000) Equity in income of consolidated subsidiaries 17,052,000 24,570,000 12,958,000 ------------------ --------------- ----------------- Net loss $ (1,605,000)$ (17,347,000) $ (19,738,000) ================== =============== =================
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
YEAR ENDED DECEMBER 31, ----------------------------------------------- 1997 (AS RESTATED - 1998 NOTE 1) 1996 ------------- --------------- ------------- NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES $ (6,876,000) $ 4,503,000 $ (150,000) ------------- --------------- ------------- INVESTING ACTIVITIES: Net property and equipment additions (62,000) (7,000) (91,000) Proceeds from sale of assets - 9,643,000 142,000 Collections on notes receivable 6,000,000 - - Investments in consolidated affiliates (2,937,000) (1,316,000) (2,621,000) Net repayments from (advances to) affiliates 3,500,000 4,650,000 (1,600,000) ------------- --------------- ------------- Net cash provided by (used in) investing activities 6,501,000 12,970,000 (4,170,000) ------------- --------------- ------------- FINANCING ACTIVITIES: Repayments of long-term debt (288,000) (4,650,000) (150,000) Deferred financing costs (248,000) (24,000) (116,000) ------------- --------------- ------------- Net cash used in financing activities (536,000) (4,674,000) (266,000) ------------- --------------- ------------- Net (decrease) increase in cash and cash equivalents (911,000) 12,799,000 (4,586,000) Cash and cash equivalents at beginning of year 15,696,000 2,897,000 7,483,000 ------------- --------------- ------------- Cash and cash equivalents at end of year $ 14,785,000 $ 15,696,000 $ 2,897,000 ============= =============== =============
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) RESTATEMENT OF PARENT COMPANY FINANCIAL STATEMENTS As previously disclosed in its quarterly report on Form 10-Q for the period ended September 30, 1998, and subsequent to the issuance of its 1997 consolidated financial statements, Hollywood Casino Corporation ("HCC") determined that it should revise its tax treatment of the spin-off of the stock of Greate Bay Casino Corporation ("GBCC") which occurred on December 31, 1996. The 1997 and 1996 parent company financial statements have been restated from amounts previously reported to record the appropriate amounts for income taxes, accrued income taxes, deferred taxes, interest and penalties due to the recognition of additional taxable income resulting from the revised tax treatment of the spin-off. For the year ended December 31, 1996, HCC utilized approximately $9,000,000 of its available net operating loss carryforwards ("NOL's") as a result of the additional taxable income it was required to recognized from the spin-off. For alternative minimum tax ("AMT") purposes, the revised tax treatment resulted in HCC utilizing all of its remaining AMT loss carryforwards and being liable for the payment of approximately $2,200,000 in additional AMT taxes. HCC paid its $2,200,000 AMT obligation for 1996 plus accrued interest thereon during the fourth quarter of 1998. As a result of the obligation for AMT payments and the impact on net deferred tax assets, HCC has restated its consolidated balance sheet at December 31, 1996 from amounts previously reported to provide an additional $6,308,000 charge to paid-in capital consistent with the treatment of other effects of the spin-off transaction. For the year ended December 31, 1997, the revised tax treatment resulted in HCC's recognition of additional income tax expense of $2,070,000 and additional interest expense of $132,000 on the underpayment of its federal tax obligations. HCC paid $4,678,000 during September 1998 with respect to its revised estimated 1997 federal income tax obligation. In connection with the revised tax treatment, HCC has commenced litigation against its former independent accountants and tax advisors alleging negligent advice and breach of contract. Tax settlement costs of $1.1 million represent both costs incurred to date as well as management's estimate of probable costs to be incurred arising from and directly related to the modification of HCC's tax treatment of the spin-off of GBCC stock. (2) GUARANTEES OF REGISTRANT As of December 31, 1998, HCC had not guaranteed any obligations of its subsidiaries or unconsolidated affiliates. 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) (3) SCHEDULED PAYMENTS OF LONG-TERM DEBT OF THE REGISTRANT Scheduled payments of long-term debt outstanding at December 31, 1998 are set forth below: 1999 $ 5,000,000 2000 5,000,000 2001 5,000,000 2002 5,000,000 2003 187,212,000 ----------------- Total $ 207,212,000 ================= (4) DIVIDENDS AND DISTRIBUTIONS HCC received dividends from its consolidated subsidiaries amounting to $11,741,000, $13,599,000 and $10,040,000, respectively, during the years ended December 31, 1998, 1997 and 1996. On December 31, 1996, HCC distributed to its shareholders the common stock of Greate Bay Casino Corporation ("GBCC") owned by HCC. Prior to the distribution, HCC owned approximately 80% of GBCC's outstanding common stock. (5) SUPPLEMENTAL CASH FLOW INFORMATION During 1997, HCC issued 100,000 shares of common stock in exchange for a $10,000,000 loan commitment from unrelated third parties. The commitment fee was valued at $375,000, the fair market value of the stock on the date of its issuance, and was expensed during 1997. Also during 1997, HCC made non-cash capital contributions consisting of notes receivable with a net book value of $7,597,000 and accrued interest receivable of $350,000 to a newly formed, wholly-owned subsidiary. The subsidiary acquired a general partnership interest from an affiliated entity using, in part, the contributed note and interest receivable. Because the historical net book value of the partnership interest acquired was less than the consideration paid, the subsidiary recorded a $12,747,000 change to paid-in capital. HCC recorded a like charge to paid-in capital to reflect the reduction in equity value of its investment in the subsidiary. The accompanying notes to consolidated financial statements are an integral part of this schedule. SCHEDULE I PAGE 6 HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES CONDENSED FINANCIAL INFORMATION OF REGISTRANT HOLLYWOOD CASINO CORPORATION (PARENT COMPANY) NOTES TO PARENT COMPANY FINANCIAL STATEMENTS (CONTINUED) 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. 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 BEGINNING COSTS AND OTHER AT END OF PERIOD EXPENSES DEDUCTIONS CHARGES OF PERIOD ------------- -------------- ------------- ------------- --------------- YEAR ENDED DECEMBER 31, 1998: Allowance for doubtful accounts receivable $ 1,188,000 $ 756,000 $ (476,000)(1) $ - $ 1,468,000 Allowance for affiliate receivables 18,000,000 4,808,000 - - 22,808,000 Allowance for notes receivable - (4,000,000)(1) - - Allowance for properties held for sale 3,400,000 - - 32,000 3,432,000 ------------- -------------- ----------- ------------ -------------- $ 26,588,000 $ 5,564,000 $(4,476,000) $ 32,000 $ 27,708,000 ============= ============== =========== ============ ============== YEAR ENDED DECEMBER 31, 1997: Allowance for doubtful accounts receivable $ 1,693,000 $ 698,000 $(1,203,000)(1) $ - $ 1,188,000 Allowance for affiliate receivable 18,741,000 7,488,000 (7,953,000)(1) (276,000) 18,000,000 Allowance for notes receivable - 4,000,000 - - 4,000,000 Allowance for properties held for sale 3,400,000 - - - 3,400,000 ------------- -------------- ----------- ------------ -------------- $ 23,834,000 $ 12,186,000 $(9,156,000) $ (276,000) $ 26,588,000 ============= ============== =========== ============ ============== 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 affiliate receivables - 18,741,000 - - 18,741,000 Allowance for properties held for sale - 3,400,000 - - 3,400,000 Allowance for obligatory investments 3,792,000 1,344,000 (735,000)(2) (4,401,000)(3) - ------------- -------------- ----------- ------------ -------------- $ 21,467,000 $ 26,516,000 $(4,224,000) $(19,925,000) $ 23,834,000 ============= ============== =========== ============ ==============
___________________ (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 for the Sands Hotel and Casino. (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 AUDITORS To Hollywood Casino - Aurora, Inc.: We have audited the financial statements of Hollywood Casino - Aurora, Inc. as of December 31, 1998 and 1997 and for each of the three years in the period ended December 31, 1998, and have issued our report thereon dated February 23, 1999 (included elsewhere in this Form 10-K). Our audits also include the financial statement schedule listed in the index to financial statement schedules. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. Deloitte & Touche LLP Dallas, Texas February 23, 1999 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, 1998: Allowance for doubtful accounts receivable $ 483,000 $ 273,000 $ (101,000)(1) $ 655,000 ============= ============= =========== ============= YEAR ENDED DECEMBER 31, 1997: Allowance for doubtful accounts receivable $ 1,071,000 $ 200,000 $ (788,000)(1) $ 483,000 ============= ============= =========== ============= YEAR ENDED DECEMBER 31, 1996: Allowance for doubtful accounts receivable $ 866,000 $ 325,000 $ (120,000)(1) $ 1,071,000 ============= ============= =========== =============
_________________ (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 AUDITORS To HWCC - Tunica, Inc.: We have audited the consolidated financial statements of HWCC-Tunica, Inc. and subsidiary as of December 31, 1998 and 1997 and for each of the three years in the period ended December 31, 1998, and have issued our report thereon dated February 23, 1999 (included elsewhere in this Form 10-K). Our audits also include the financial statement schedule listed in the index to financial statement schedules. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. Deloitte & Touche LLP Dallas, Texas February 23, 1999 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, 1998: Allowance for doubtful accounts receivable $ 705,000 $ 483,000 $ (375,000)(1) $ 813,000 ============= ============= ============= ============= YEAR ENDED DECEMBER 31, 1997: Allowance for doubtful accounts receivable $ 622,000 $ 498,000 $ (415,000)(1) $ 705,000 ============= ============= ============= ============= YEAR ENDED DECEMBER 31, 1996: Allowance for doubtful accounts receivable $ 313,000 $ 539,000 $ (230,000)(1) $ 622,000 ============= ============= ============= =============
_________________________ (1) Represents net write-offs of uncollectible accounts. The accompanying notes to consolidated financial statements are an integral part of this schedule. INDEX TO EXHIBITS
Sequentially Exhibit Numbered Number Page - ------ ------------- **2.1 -- Agreement of Merger dated as of May 15, 1992, between PBC, Inc. and HCC and Certificate of Correction of Agreement of Merger dated as of 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, Fixture Filing and Financing Statement made 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 by HCA, as Mortgagor, to the Company, as 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)
Sequentially Exhibit Numbered Number Page - ------ --------------- ++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 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) 9.1 -- Voting Trust Agreement dated as of December 29, 1998 by and among Jill Pratt LaFerney, formerly Jill A. Pratt, and John R. Pratt and Jack E. Pratt, Sr. 9.2 -- Voting Trust Agreement dated as of December 29, 1998 by and among Shawn Denise Bradshaw and Michael Shannon Pratt and William D. Pratt, Sr. 9.3 -- Voting Trust Agreement dated as of December 29, 1998 by and among Carolyn S. Hickey, Diana Pratt-Wyatt, formerly Diana L. Heisler, and Sharon A. Naftel, formerly Sharon R. Nash, and
Sequentially Exhibit Numbered Number Page - ------ ------------ Edward T. Pratt III. +++10.1 -- Sixth Amendment to Employment Agreement dated January 1, 1998, between HCC and Jack E. Pratt. (Exhibit 10.1) +++10.2 -- Sixth Amendment to Employment Agreement dated January 1, 1998, between HCC and Edward T. Pratt, Jr. (Exhibit 10.2) +++10.3 -- Sixth Amendment to Employment Agreement dated January 1, 1998, between HCC and William D. Pratt. (Exhibit 10.3) #10.4 -- Employment Agreement dated May 1, 1996, between HCC and Edward T. Pratt III. (Exhibit 10.4) ###10.5 -- Agreement dated as of September 2, 1998 by and among GBHC, GB Holdings, Inc., and GB Property Funding Corp., on the one hand, and GBCC, PHC Acquisition Corp., Lieber Check Cashing, LLC, Jack E. Pratt, William D. Pratt, Edward T. Pratt, Jr. and HCC, on the other. (Exhibit 10.3) *10.6 -- Development Agreement dated as of June 4, 1991, between the City of Aurora, Illinois and HCA. (Exhibit 10.33) *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. (Exhibit 10.46) @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) @@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)
Sequentially Exhibit Numbered Number Page - ------ ------------ @@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 -- Hollywood Casino Corporation 1996 Long-Term Incentive Plan, as amended. (Exhibit 10.28) #10.25 -- Hollywood Casino Corporation 1996 Non-Employee Director Stock Plan. (Exhibit 10.29) ##10.26 -- General Partnership Interest Purchase Agreement dated as of April 1, 1997 by and between HWCC- Aurora Management, Inc. and PPI Corporation. (Exhibit 10.30) ###10.27 -- Amended and Restated Joint Venture Agreement by and among Shreveport Paddlewheels, L.L.C., Sodak Louisiana, L.L.C. and HWCC-Louisiana, Inc. dated July 31, 1998. (Exhibit 10.1) ###10.28 -- September 1998 Amendment to the July Amended and Restated Joint Venture Agreement. (Exhibit 10.2) 10.29 -- Employment Agreement dated as of May 11, 1998 by and between HCC and Paul C. Yates. 10.30 -- Amended and Restated Services Agreement dated as of October 1, 1998 by and between HCC and Pratt Management, L.P. 10.31 -- Management and Administrative Services Agreement dated as of October 1, 1998 by and between HCC and Greate Bay Casino Corporation. 10.32 -- Membership Interest Purchase Agreement dated as of March 31, 1999 by and among HWCC-Louisiana, Inc., Sodak Gaming, Inc. and Sodak Louisiana, L.L.C. 11.1 -- Statement regarding computation of Per Share Losses. 21.1 -- Subsidiaries of HCC. 27.1 -- Financial Data Schedule-Hollywood Casino Corporation 27.2 -- Financial Data Schedule-HWCC-Tunica, Inc. ***99.1 -- Petition filed on October 8, 1998 in the District Court of Dallas County, Texas by Hollywood Casino Corporation and Greate Bay Casino Corporation ("Plaintiffs") against Arthur Andersen L.L.P., Richard L. Robbins, Michael E. Gamache, Daniel J. Meehan, and Brent A. Railsback ("Defendants") (Exhibit 99.1)
_______________________ + Incorporated by reference from the exhibit shown in parenthesis to Form S-1 Registration Statement (Registration No. 33-58732) for HCC 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 the Form 8-K for HCC as filed with the SEC on October 22, 1998. @ Incorporated by reference from the exhibit shown in parenthesis to Form S-1 Registration Statement (Registration No. 33-77502) for HCC 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. # 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, 1996. ## Incorporated by reference from the exhibit shown in parentheses filed in HCC's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997 as filed with the SEC on August 12, 1997. ### Incorporated by reference to the exhibit shown in parenthesis filed in HCC's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998 as filed with the SEC on November 13, 1998. EX-9.1 2 VOTING TRUST AGREEMENT W/JACK E. PRATT EXHIBIT 9.1 DATED AS OF DECEMBER 29, 1998 HOLLYWOOD CASINO CORPORATION VOTING TRUST AGREEMENT - by and among - JILL PRATT LAFERNEY, FORMERLY JILL A. PRATT, AND JOHN R. PRATT - and - JACK E. PRATT, SR. VOTING TRUST AGREEMENT THIS VOTING TRUST AGREEMENT (the "Agreement") is made and entered into as of the 29/th/ day of December, 1998, by and among JILL PRATT LAFERNEY, FORMERLY JILL A. PRATT, AND JOHN R. PRATT ("Shareholders") and JACK E. PRATT, SR. ("Proxy"). W I T N E S E T H : ------------------- WHEREAS, Shareholders are adult individuals residing as follows: Jill Pratt LaFerney 9054 Briargrove Dallas, Texas 75209 John R. Pratt 5600 Gregory Lane Parker, Texas 75002 and WHEREAS, Each Shareholder is the owner, either directly, indirectly or beneficially, of the shares of the issued and outstanding Common Stock (the "Stock") of Hollywood Casino Corporation, a corporation duly organized and existing under the laws of the State of Delaware (the "Corporation"), specified on Exhibit "A" attached hereto; and, WHEREAS, Proxy Jack E. Pratt, Sr.. is an adult individual residing at 5055 Park Lane, Dallas, Texas 75220; and WHEREAS, Each Shareholder, having a special trust and confidence in Proxy, wishes to irrevocably assign all of Shareholders' voting and other rights incident to the Stock in Proxy under the terms and pursuant to the conditions set forth in this Agreement; NOW, THEREFORE, for and in consideration of the mutual promises, representations, covenants, agreements, understandings and undertakings hereinafter set forth, Shareholders and Proxy do hereby covenant and agree as follows: 1. APPOINTMENT OF PROXY. Each Shareholder hereby (a) irrevocably appoints Proxy as his or her attorney-in-fact and (b) irrevocably grants and assigns to Proxy any and all voting rights such Shareholder may now have, or may during the Term of this Agreement acquire, all with respect to the Stock owned by such Shareholder. 2. PROXY'S DUTIES/LIMITATION OF LIABILITY. In the discharge of his obligations under this Agreement, Proxy shall have the right to vote the Stock in such form and manner as Proxy, in the exercise of good faith and his prudent business judgment, may deem in the best interests of Shareholders. Other than as specifically set forth in this Paragraph 2, Proxy shall have no further duties or obligations owing to Shareholders with regard to the Stock. Provided Proxy acts pursuant to this Agreement in the exercise of good faith and his prudent business judgment, Proxy shall not be personally liable to any person or entity for any act or omission to act under this Agreement. 3. COVENANT NOT TO INFLUENCE. Each Shareholder hereby covenants and agrees that he or she shall not exercise or attempt to exercise, directly or indirectly, any control or influence over Proxy with regard to any matter concerning the voting of the Stock. 4. DISPOSITION OF THE STOCK. Shareholders, during the Term of this Agreement, shall not transfer, sell, dispose of, assign, hypothecate or otherwise encumber the Stock without the prior written approval of Proxy. 5. RELATIONSHIP BETWEEN SHAREHOLDERS AND PROXY. Except as otherwise specifically set forth in this Agreement, nothing contained or set forth in this Agreement shall be construed so as to create any fiduciary or other relationship between Shareholders and Proxy. In the course of exercising his duties under this Agreement, Proxy shall not be entitled to receive any 2 compensation or other remuneration from Shareholders, provided, however, that Proxy shall be entitled to retain and pay, on account of and for the benefit of Shareholders, such professional service providers as Proxy may deem necessary or desirable. In such event, Proxy shall pay for, and Shareholders shall reimburse Proxy for, the costs of such professional service providers. 6. SUCCESSOR TRUSTEE. In the event Proxy is unable or unwilling to serve, Shareholders shall have the right to appoint a Successor Proxy. Any such Successor Proxy shall assume all rights and responsibilities of Proxy pursuant to this Agreement but shall not be responsible for any acts or failures to act which occurred prior to such Successor Proxy assuming all rights and responsibilities of Proxy under this Agreement. 7. EFFECTIVE DATE/TERM/TERMINATION. (a) EFFECTIVE DATE AND TERM. This Agreement shall become effective as of the date and year first above written and shall continue in force until December 31, 2001, unless sooner terminated as provided in Paragraph 7(b) of this Agreement (the "Term"). (b) TERMINATION. This Agreement shall immediately terminate upon the occurrence of Shareholders' sale of all of the Stock pursuant to the provisions of Paragraph 4 of this Agreement. 8. BEST EVIDENCE. This Agreement shall be executed in original and "Xerox" or photostatic copies and each copy bearing original signatures of Shareholders and Proxy in ink shall be deemed an original. 9. SUCCESSION. Subject to the provisions of Paragraph 6 of this Agreement, this Agreement shall be binding upon and inure to the benefits of Shareholders' and Proxy's respective heirs, successors and assigns. 3 10. AMENDMENT OR MODIFICATION. This Agreement may not be amended or modified except upon a writing (i) signed by both Shareholders and Proxy and (ii) approved, if required, by any gaming regulatory authority having jurisdiction. 11. ASSIGNMENT. This Agreement shall not be assigned by either Shareholders or Proxy without the prior written consent of the non-assigning party. Any purported assignment in violation of the provisions of this Paragraph 11 shall be deemed null and void and shall have no force or effect. 12. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of Texas, except to the extent that applicable gaming laws, rules and regulations and applicable resolutions and requirements of gaming regulatory authorities having jurisdiction shall necessarily control and govern. 13. NOTICES. Any and all written notices required by this Agreement shall be either (i) hand delivered, (ii) mailed via certified mail, return receipt requested, or (ii) delivered via any commercial courier service, addressed to the following: TO SHAREHOLDERS: Jill Pratt LaFerney ---------------- 9054 Briarwood Lane Dallas, Texas 75220 John R. Pratt 5600 Gregory Lane Parker, Texas 75002 TO PROXY: Jack E. Pratt, Sr. --------- 5055 Park Lane Dallas, Texas 75220 4 WITH COPIES TO: General Counsel --------------- Hollywood Casino Corporation Two Galleria Tower, Suite 2200 13455 Noel Road, LB 48 Dallas, Texas 75240 All notices hand delivered shall be deemed delivered as of the date actually delivered. All notices mailed via certified mail, return receipt requested, shall be deemed delivered as of four (4) business days after the date postmarked. All notices delivered by telecopy shall be effective upon receipt of the confirmed answerback. All notices delivered via a commercial courier service shall be deemed delivered as of the next business day after the date entrusted to such commercial courier service. Any changes in any of the addresses listed in this Paragraph 13 shall be made by written notice as provided in this Paragraph 13. 14. 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. 15. 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. 5 IN WITNESS WHEREOF, Shareholders and Proxy have executed and delivered this Agreement as of the date and year first above written. WITNESS: WITNESS: /s/ Jill Pratt LaFerney ____________________________ ----------------------- Jill Pratt LaFerney, Shareholder WITNESS: /s/ John R. Pratt ____________________________ ----------------- John R. Pratt, Shareholder WITNESS: /s/ Jack E. Pratt, Sr. ____________________________ ---------------------- Jack E. Pratt, Sr., Proxy 6 EXHIBIT "A" 1. Jill Pratt LaFerney - 539,816 shares of the Class A common stock of Hollywood Casino Corporation 2. John R. Pratt - 539,816 shares of the Class A common stock of Hollywood Casino Corporation EX-9.2 3 VOTING TRUST AGREEMENT W/WILLIAM D. PRATT EXHIBIT 9.2 DATED AS OF DECEMBER 29, 1998 HOLLYWOOD CASINO CORPORATION VOTING TRUST AGREEMENT - by and among - SHAWN DENISE BRADSHAW AND MICHAEL SHANNAN PRATT - and - WILLIAM D. PRATT, SR. VOTING TRUST AGREEMENT THIS VOTING TRUST AGREEMENT (the "Agreement") is made and entered into as of the 29th day of December, 1998, by and among SHAWN DENISE BRADSHAW and MICHAEL SHANNAN PRATT ("Shareholders") and WILLIAM D. PRATT, SR. ("Proxy"). W I T N E S E T H : ------------------- WHEREAS, Shareholder Shawn Denise Bradshaw is an adult individual residing at 6229 Genoa Road, Fort Worth, Texas 76116 and Shareholder Michael Shannan Pratt is an adult individual residing at 577 Fern Avenue, Elmhurst, Illinois 60126; and WHEREAS, each Shareholder is the owner, either directly, indirectly or beneficially, of shares of the issued and outstanding Class A Common Stock (the "Stock") of Hollywood Casino Corporation, a corporation duly organized and existing under the laws of the State of Delaware (the "Corporation"), and specified on Exhibit "A" attached hereto and made a part hereof; and WHEREAS, Proxy is an adult individual residing at 5505 Westgrove Drive, Dallas, Texas 75248; and WHEREAS, Shareholders, having a special trust and confidence in Proxy, wish to irrevocably assign all of Shareholders' voting and other rights incident to the Stock in Proxy under the terms and pursuant to the conditions set forth in this Agreement; NOW, THEREFORE, for and in consideration of the mutual promises, representations, covenants, agreements, understandings and undertakings hereinafter set forth, Shareholders and Proxy do hereby covenant and agree as follows: 1. APPOINTMENT OF PROXY. Each Shareholder hereby (a) irrevocably appoints Proxy as his or her attorney-in-fact and (b) irrevocably grants and assigns to Proxy any and all voting rights such Shareholder may now have, or may during the Term of this Agreement acquire, all with respect to the Stock owned by such Shareholder. 2. PROXY'S DUTIES/LIMITATION OF LIABILITY. In the discharge of his obligations under this Agreement, Proxy shall have the right to vote the Stock in such form and manner as Proxy, in the exercise of good faith and his prudent business judgment, may deem in the best interests of Shareholders. Other than as specifically set forth in this Paragraph 2, Proxy shall have no further duties or obligations owing to Shareholders with regard to the Stock. Provided Proxy acts pursuant to this Agreement in the exercise of good faith and his prudent business judgment, Proxy shall not be personally liable to any person or entity for any act or omission to act under this Agreement. 3. COVENANT NOT TO INFLUENCE. Each Shareholder hereby covenants and agrees that he or she shall not exercise or attempt to exercise, directly or indirectly, any control or influence over Proxy with regard to any matter concerning the voting of the Stock. 4. DISPOSITION OF THE STOCK. Except as otherwise provided in this Paragraph 4, Shareholders, during the Term of this Agreement, shall not transfer, sell, dispose of, assign, hypothecate or otherwise encumber the Stock without the prior written approval of Proxy. 5. RELATIONSHIP BETWEEN SHAREHOLDERS AND PROXY. Except as otherwise specifically set forth in this Agreement, nothing contained or set forth in this Agreement shall be construed so as to create any fiduciary or other relationship between Shareholders and Proxy. In the course of exercising his duties under this Agreement, Proxy shall not be entitled to receive any compensation or other remuneration from Shareholders, provided, however, that Proxy shall be entitled 2 to retain and pay, on account of and for the benefit of Shareholders, such professional service providers as Proxy may deem necessary or desirable. In such event, Proxy shall pay for, and Shareholders shall reimburse Proxy for, the costs of such professional service providers. 6. SUCCESSOR TRUSTEE. In the event Proxy is unable or unwilling to serve, Shareholders shall have the right to appoint a Successor Proxy. Any such Successor Proxy shall assume all rights and responsibilities of Proxy pursuant to this Agreement but shall not be responsible for any acts or failures to act which occurred prior to such Successor Proxy assuming all rights and responsibilities of Proxy under this Agreement. 7. EFFECTIVE DATE/TERM/TERMINATION. (a) EFFECTIVE DATE AND TERM. This Agreement shall become effective as of the date and year first above written and shall continue in force until December 31, 2001, unless sooner terminated as provided in Paragraph 7(b) of this Agreement (the "Term"). (b) TERMINATION. This Agreement shall immediately terminate upon the occurrence of Shareholders' sale of all of the Stock pursuant to the provisions of Paragraph 4 of this Agreement. 8. BEST EVIDENCE. This Agreement shall be executed in original and "Xerox" or photostatic copies and each copy bearing original signatures of Shareholders and Proxy in ink shall be deemed an original. 3 9. SUCCESSION. Subject to the provisions of Paragraph 6 of this Agreement, this Agreement shall be binding upon and inure to the benefits of Shareholders' and Proxy's respective heirs, successors and assigns. 10. AMENDMENT OR MODIFICATION. This Agreement may not be amended or modified except upon a writing (i) signed by both Shareholders and Proxy and (ii) approved, if required, by any gaming regulatory authority having jurisdiction. 11. ASSIGNMENT. This Agreement shall not be assigned by either Shareholders or Proxy without the prior written consent of the non-assigning party. Any purported assignment in violation of the provisions of this Paragraph 11 shall be deemed null and void and shall have no force or effect. 12. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of Texas, except to the extent that applicable gaming laws, rules and regulations and applicable resolutions and requirements of gaming regulatory authorities having jurisdiction shall necessarily control and govern. 13. NOTICES. Any and all written notices required by this Agreement shall be either (i) hand delivered, (ii) mailed via certified mail, return receipt requested, (iii) telecopied (with confirmed answerback) or (iv) delivered via any commercial courier service, addressed to the following: TO SHAREHOLDERS: Shawn Denise Bradshaw - ---------------- 6229 Genoa Road Fort Worth, Texas 76116 Michael Shannan Pratt 577 Fern Avenue Elmhurst, Illinois 60126 4 TO PROXY: William D. Pratt, Sr. - --------- 5505 Westgrove Drive Dallas, Texas 75248 WITH COPIES TO: General Counsel - --------------- Hollywood Casino Corporation Two Galleria Tower, Suite 2200 13455 Noel Road, LB 48 Dallas, Texas 75240 All notices hand delivered shall be deemed delivered as of the date actually delivered. All notices mailed via certified mail, return receipt requested, shall be deemed delivered as of four (4) business days after the date postmarked. All notices delivered by telecopy shall be effective upon receipt of the confirmed answerback. All notices delivered via a commercial courier service shall be deemed delivered as of the next business day after the date entrusted to such commercial courier service. Any changes in any of the addresses listed in this Paragraph 13 shall be made by written notice as provided in this Paragraph 13. 14. 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. 15. 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. 5 IN WITNESS WHEREOF, Shareholders and Proxy have executed and delivered this Agreement as of the date and year first above written. WITNESS: /s/ Roberta Hamann /s/ Michael Shannan Pratt - -------------------------------- --------------------------------------- MICHAEL SHANNAN PRATT, Shareholder WITNESS: /s/ Roberta Hamann /s/ Shawn Denise Bradshaw - -------------------------------- --------------------------------------- SHAWN DENISE BRADSHAW, Shareholder WITNESS: /s/ Roberta Hamann /s/ William D. Pratt, Sr. - -------------------------------- --------------------------------------- WILLIAM D. PRATT, SR., Proxy 6 EXHIBIT "A" ----------- 1. Shawn Denise Bradshaw, 190,544 shares of the common stock of Hollywood Casino Corporation 2. Michael Shannan Pratt, 190,544 shares of the common stock of Hollywood Casino Corporation EX-9.3 4 VOTING TRUST AGREEMENT W/EDWARD T. PRATT EXHIBIT 9.3 DATED AS OF DECEMBER 29, 1998 HOLLYWOOD CASINO CORPORATION VOTING TRUST AGREEMENT - by and among - CAROLYN S. HICKEY, DIANA PRATT-WYATT, FORMERLY DIANA L. HEISLER, AND SHARON R. NAFTEL, FORMERLY SHARON R. NASH - and - EDWARD T. PRATT III VOTING TRUST AGREEMENT THIS VOTING TRUST AGREEMENT (the "Agreement") is made and entered into as of the 29th day of December, 1998, by and among CAROLYN S. HICKEY, DIANA PRATT- WYATT, FORMERLY DIANA L. HEISLER, AND SHARON R. NAFTEL, FORMERLY SHARON R. NASH ("Shareholders") and EDWARD T. PRATT III ("Proxy"). W I T N E S E T H : ------------------- WHEREAS, Shareholders are adult individuals residing as follows: Carolyn S. Hickey 1060 Brazos Heights Mineral Wells, Texas 76067 Diana Pratt-Wyatt 2309 Arlington Place Bossier City, Louisiana 71111 Sharon R. Naftel 2025 Austin Drive Mesquite, Texas 75181 and WHEREAS, each Shareholder is the owner, either directly, indirectly or beneficially, of the shares of the issued and outstanding Common Stock (the "Stock") of Hollywood Casino Corporation, a corporation duly organized and existing under the laws of the State of Delaware (the "Corporation") specified on Exhibit "A" attached hereto and made a part hereof; and WHEREAS, Proxy Edward T. Pratt III is an adult individual residing at 3307 Beverly Drive, Dallas, Texas 75205; and 2 WHEREAS, Shareholders, having a special trust and confidence in Proxy, wish to irrevocably assign all of Shareholders' voting and other rights incident to the Stock in Proxy under the terms and pursuant to the conditions set forth in this Agreement; NOW, THEREFORE, for and in consideration of the mutual promises, representations, covenants, agreements, understandings and undertakings hereinafter set forth, Shareholders and Proxy do hereby covenant and agree as follows: 1. APPOINTMENT OF PROXY. Each Shareholder hereby (a) irrevocably appoints Proxy as his or her attorney-in-fact and (b) irrevocably grants and assigns to Proxy any and all voting rights such Shareholder may now have, or may during the Term of this Agreement acquire, all with respect to the Stock owned by such Shareholder. 2. PROXY'S DUTIES/LIMITATION OF LIABILITY. In the discharge of his obligations under this Agreement, Proxy shall have the right to vote the Stock in such form and manner as Proxy, in the exercise of good faith and his prudent business judgment, may deem in the best interests of Shareholders. Other than as specifically set forth in this Paragraph 2, Proxy shall have no further duties or obligations owing to Shareholders with regard to the Stock. Provided Proxy acts pursuant to this Agreement in the exercise of good faith and his prudent business judgment, Proxy shall not be personally liable to any person or entity for any act or omission to act under this Agreement. 3. COVENANT NOT TO INFLUENCE. Each Shareholder hereby covenants and agrees that he or she shall not exercise or attempt to exercise, directly or indirectly, any control or influence over Proxy with regard to any matter concerning the voting of the Stock. 3 4. DISPOSITION OF THE STOCK. Shareholders, during the Term of this Agreement, shall not transfer, sell, dispose of, assign, hypothecate or otherwise encumber the Stock without the prior written approval of the Proxy. 5. RELATIONSHIP BETWEEN SHAREHOLDERS AND PROXY. Except as otherwise specifically set forth in this Agreement, nothing contained or set forth in this Agreement shall be construed so as to create any fiduciary or other relationship between Shareholders and Proxy. In the course of exercising his duties under this Agreement, Proxy shall not be entitled to receive any compensation or other remuneration from Shareholders, provided, however, that Proxy shall be entitled to retain and pay, on account of and for the benefit of Shareholders, such professional service providers as Proxy may deem necessary or desirable. In such event, Proxy shall pay for, and Shareholders shall reimburse Proxy for, the costs of such professional service providers. 6. SUCCESSOR TRUSTEE. In the event Proxy is unable or unwilling to serve, Shareholders shall have the right to appoint a Successor Proxy. Any such Successor Proxy shall assume all rights and responsibilities of Proxy pursuant to this Agreement but shall not be responsible for any acts or failures to act which occurred prior to such Successor Proxy assuming all rights and responsibilities of Proxy under this Agreement. 7. EFFECTIVE DATE/TERM/TERMINATION. (a) EFFECTIVE DATE AND TERM. This Agreement shall become effective as of the date and year first above written and shall continue in force until December 31, 2001, unless sooner terminated as provided in Paragraph 7(b) of this Agreement (the "Term"). 4 (b) TERMINATION. This Agreement shall immediately terminate upon the occurrence of Shareholders' sale of all of the Stock pursuant to the provisions of Paragraph 4 of this Agreement. 8. BEST EVIDENCE. This Agreement shall be executed in original and "Xerox" or photostatic copies and each copy bearing original signatures of Shareholders and Proxy in ink shall be deemed an original. 9. SUCCESSION. Subject to the provisions of Paragraph 6 of this Agreement, this Agreement shall be binding upon and inure to the benefits of Shareholders' and Proxy's respective heirs, successors and assigns. 10. AMENDMENT OR MODIFICATION. This Agreement may not be amended or modified except upon a writing (i) signed by both Shareholders and Proxy and (ii) approved, if required, by any gaming regulatory authority having jurisdiction. 11. ASSIGNMENT. This Agreement shall not be assigned by either Shareholders or Proxy without the prior written consent of the non-assigning party. Any purported assignment in violation of the provisions of this Paragraph 11 shall be deemed null and void and shall have no force or effect. 12. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of Texas, except to the extent that applicable gaming laws, rules and regulations and applicable resolutions and requirements of gaming regulatory authorities having jurisdiction shall necessarily control and govern. 5 13. NOTICES. Any and all written notices required by this Agreement shall be either (i) hand delivered, (ii) mailed via certified mail, return receipt requested, (iii) telecopied (with confirmed answerback)or (iv) delivered via any commercial courier service, addressed to the following: TO SHAREHOLDERS: Carolyn S. Hickey --------------- 1060 Brazos Heights Mineral Wells, Texas 76067 Diana Pratt-Wyatt 2309 Arlington Place Bossier City, Louisiana 71111 Sharon R. Naftel 2025 Austin Drive Mesquite, Texas 75181 TO PROXY: Edward T. Pratt III --------- 3307 Beverly Drive Dallas, Texas 75205 WITH COPIES TO: General Counsel --------------- Hollywood Casino Corporation Two Galleria Tower, Suite 2200 13455 Noel Road, LB 48 Dallas, Texas 75240 All notices hand delivered shall be deemed delivered as of the date actually delivered. All notices mailed via certified mail, return receipt requested, shall be deemed delivered as of four (4) business days after the date postmarked. All notices delivered by telecopy shall be effective upon receipt of the confirmed answerback. All notices delivered via a commercial courier service shall be deemed delivered as of the next business day after the date entrusted to such commercial courier service. Any changes in any of the addresses listed in this Paragraph 13 shall be made by written notice as provided in this Paragraph 13. 6 14. 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. 15. 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. IN WITNESS WHEREOF, Shareholders and Proxy have executed and delivered this Agreement as of the date and year first above written. WITNESS: /s/ Evelyn Johnstone /s/ Carolyn S. Hickey - --------------------------------- ---------------------------------- CAROLYN S. HICKEY, Shareholder WITNESS: /s/ Peggy L. Mitchell /s/Diana Pratt-Wyatt - --------------------------------- ---------------------------------- DIANA PRATT-WYATT, Shareholder /s/ Brenda Stephens Brenda Stephens, Notary Public Caddo Parish, Louisiana My Commission is FOR LIFE WITNESS: /s/ Evelyn Johnstone /s/ Sharon R. Naftel - --------------------------------- ---------------------------------- SHARON R. NAFTEL, Shareholder WITNESS: /s/ Evelyn Johnstone /s/ Edward T. Pratt III - --------------------------------- ---------------------------------- Edward T. Pratt III, Proxy 7 EXHIBIT "A" 1. Diana Pratt-Wyatt - 479,604 shares of the Class Common Stock of Hollywood Casino Corporation 2. Carolyn S. Hickey - 479,604 shares of the Class A Common Stock of Hollywood Casino Corporation 3. Sharon R. Naftel - 479,604 shares of the Class A Common Stock of Hollywood Casino Corporation EX-10.29 5 EMPLOYMENT AGREEMENT W/PAUL C. YATES EXHIBIT 10.29 ____________________________________________ EMPLOYMENT AGREEMENT ____________________________________________ THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered into as of this 11/th/ day of May, 1998, by and between HOLLYWOOD CASINO CORPORATION ("Employer") and PAUL C. YATES ("Employee"). W I T N E S S E T E T H: WHEREAS, Employer is a corporation, duly organized and existing under the laws of the State of Delaware, which owns and operates various casino properties throughout the United States and which has a need for qualified, experienced personnel; WHEREAS, Employee is an adult individual currently residing at 809 Malcolm Avenue, Los Angeles, California. NOW, THEREFORE, for and in consideration of the foregoing recitals, and in consideration of the mutual covenants, agreements, understandings, undertakings, representations, 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) "Just Cause" means any of the following: (i) the Employee's willful ---------- refusal to perform, or his substantial neglect of, the duties assigned to the Employee pursuant to Paragraph 4 hereof (for any reason other than as the result of a Complete Disability), and the failure by the Employee to promptly cure the breach or failure of performance upon written notice thereof from the Employer; (ii) Employee's willful engagement in any personal misconduct involving dishonesty, illegality, or moral turpitude which is materially detrimental or materially injurious to the business interests, reputation or goodwill of Employer or Employer's Affiliates; (iii) Employee's willful engagement in any material act of dishonesty, disloyalty, or infidelity against Employer or Employer's Affiliates; (iv) the material breach by the Employee of his covenants under this Agreement, and the failure by the Employee to promptly cure the breach or failure of performance upon written notice thereof from the Employer; (v) Employee's willful violation of any material policy established by Employer with respect to the operation of Employer's business and affairs, or the conduct of Employer's employees; (vi) Employee's insubordination with respect to, or willful failure, in any material respect, to carry out all reasonable and lawful instructions issued by, the President or Chief Executive Officer of Employer and the failure by the Employee to promptly cure such failure to perform upon written notice thereof from the Employer; and (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 and such failure is not the result of any negligence or omission by the Employer. All determinations of the existence of "Just Cause," including without limitation any determination with respect to performance, reasonableness, effectiveness, materiality and injury, shall be made in good faith by the Employer's Board of Directors and shall be conclusive as to all parties. (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 one hundred eighty (180) 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 one hundred eightieth (180th) day. (c) "Effective Date" means the date first above written. -------------- (d) "Employee" means Employee as earlier defined in this Agreement. -------- (e) "Employer" means Employer as earlier defined in this Agreement. -------- (f) "Employer's Affiliates" means any parent, subsidiary or affiliated --------------------- corporation or other legal entity of Employer. (g) "Prior Employment" means any prior employment Employee has had with ---------------- either Employer or Employer's Affiliates. 2 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 pursuant to the terms of this Agreement. 4. DUTIES OF EMPLOYEE. Employee shall perform such duties assigned to ------------------ Employee by Employer as are generally associated with the duties of Executive Vice President and Chief Financial Officer, 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. The foregoing notwithstanding, 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. 3 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 (the "Term") shall commence on the ---- Effective Date and, unless sooner terminated as provided herein, expire on May 10, 2000 (the "Original Expiration Date"), with an automatic renewal of the Term for one year through May 10, 2001, unless either Employer or Employee shall have provided written notice to the other on or prior to February 10, 2000 of its/his intention for the Term to expire on the Original Expiration Date. 7. TERMINATION BY THE EMPLOYER. Notwithstanding the provisions of Paragraph --------------------------- 6 above, this Agreement and each party's rights and obligations hereunder shall terminate upon the occurrence of any of the following events: (a) the death of Employee; (b) the giving of written notice from Employer to Employee of the termination of this Agreement upon the Complete Disability of Employee; (c) the giving of written notice by Employer to Employee of the termination of this Agreement upon the discharge of Employee for Just Cause; or (d) the giving of written notice by Employer to Employee of the termination of this Agreement without Just Cause; provided, however, that such notice must be accompanied by Employer's written tender to Employee of Employer's unconditional commitment to continue to pay to Employee the Base Salary and Minimum Bonus as set forth in Paragraphs 8(a) and 8(b) of this Agreement for the remainder of the Term of this Agreement. 4 8. COMPENSATION TO EMPLOYEE. For and in complete consideration of ------------------------ 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 Two Hundred Fifty Thousand and No/100 Dollars ($250,000) (the "Base Salary"), effective on the Effective Date, 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) Incentive Compensation Plan. In addition to receiving the Base --------------------------- Salary, Employee shall also be entitled to participate in the incentive compensation plan of the Corporation as and when implemented. Employee will participate on the same terms as senior executive officers of Employer generally. The incentive compensation will be payable by Employer to Employee in accordance with the terms of such incentive compensation plan, and, where applicable, shall be prorated based upon the number of weeks Employee was employed by Employer during such calendar year. Any incentive compensation shall be in addition to Employee's participation in any and all profit sharing plans, bonus participation plans, stock option plans or other incentive compensation and profit sharing plans which are from time to time made generally available by Employer to Employer's Affiliates to senior 5 executive officers. Notwithstanding anything to the contrary set forth in this Agreement, Employee's additional compensation under this Paragraph 8(b) will in no event be less than $75,000 during any year of the Term (the "Minimum Bonus"). (c) 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. In the event that the Employer terminates the Employee without Just Cause pursuant to Paragraph 7(d) of this Agreement, the Employer shall continue to include the Employee in the employee benefits plans described in this Paragraph 8(c) for the remainder of the Term of this Agreement. (d) Expense Reimbursement. During the Term of this Agreement, Employer --------------------- shall either pay directly or reimburse Employee 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 travel expenses, dues and expenses of membership in professional societies 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. (e) 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. 6 (f) 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, Memorial Day, Independence Day, Labor Day, Thanksgiving Day, Christmas Day and up to three (3) additional floating holidays which vary from year to year. (g) Relocation Expenses. Promptly upon presentation of receipts therefor, ------------------- Employer shall reimburse Employee for the actual out-of-pocket expenses incurred by Employee in moving from Employee's residence in California to Dallas, Texas, other than any such costs relating to the purchase or sale of any house. In the event that any of the Employee's relocation expenses which are paid for or reimbursed by the Employer constitute taxable income to the Employee, the Employer shall reimburse the Employee for the payment of such tax liability. 9. LICENSING REQUIREMENTS. ---------------------- (a) Employer and Employee hereby covenant and agree that this Agreement may be subject to the approval of the Illinois Gaming Board and the Mississippi Gaming Commission and any other jurisdiction in which Employer or Employer's Affiliates conducts business (collectively, the "Gaming Authorities") pursuant to the provisions of the Illinois Riverboat Gambling Act, the Mississippi Gaming Control Act and any other applicable law and the regulations promulgated thereunder (collectively, the "Gaming Acts"). In the event this Agreement is required to be approved by the Gaming Authorities and is not so approved by the Gaming Authorities, then both the Employer and the Employee covenant that they will attempt in good faith to enter into a modified agreement that would be approved by the Gaming Authorities provided, however, that, in no event will any modified 7 agreement reduce the Base Salary and Minimum Bonus provisions of Paragraphs 8(a) and 8(b) of this Agreement. In the event that the Employer and Employee cannot in good faith enter into a modified agreement or if a modified agreement is not approved by the Gaming Authorities, then this Agreement shall immediately terminate and shall be null and void and of no further force or effect. (b) Employer and Employee hereby covenant and agree that, in order for Employee to discharge the duties required under this Agreement, Employee may be required to continue to hold casino key employee licenses (the "Licenses") as issued by one or more Gaming Authorities pursuant to the terms of the Gaming Acts and as otherwise required by this Agreement. In the event that any of the Gaming Authorities objects to the renewal of Employee's License, or any of the Gaming Authorities refuses to renew Employee's applicable 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 attempt to secure such Gaming Authority's approval. The foregoing notwithstanding, if such Gaming Authority's refusal to renew Employee's License arises 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. TERMINATION BY EMPLOYEE. The Employee shall have the option to ----------------------- terminate this Agreement, effective upon the effective date set forth in written notice of such termination to the Employer, for "Good Reason". For purposes of this Agreement, Good Reason shall mean the occurrence of any one or more of the following events: (i) any material breach of this Agreement by the Employer that is not promptly remedied by the Employer after receipt of written notice thereof from the Employee; and (ii) for any reason within one year following the occurrence of a Change in Control 8 (as defined in that certain Indenture dated as of October 17, 1995, among Employer, HWCC-Tunica, Inc. and Shawmut Bank, National Association, predecessor- in-interest to State Street Bank and Trust Company, as Trustee) (a "Change in Control"). A termination of this Agreement by the Employee for Good Reason shall be effectuated by giving Employer written notice of the termination, setting forth in reasonable detail the specific conduct of the Employer that constitutes Good Reason and the specific provision(s) of this Agreement on which the Employee relies, and shall be given within sixty (60) days of the event giving rise to the Good Reason. Upon termination of this Agreement by the Employee for Good Reason, the Employee shall be entitled to the unpaid portion of the Base Salary and Minimum Bonus as set forth in Paragraphs 8(a) and 8(b) for the remainder of the Term of this Agreement. 11. 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 data, including, but not limited to (i) information or other documents concerning Employer's business, customers or suppliers; (ii) Employer's marketing methods, files and credit and collection techniques and files; or (iii) Employer's trade secrets 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 Paragraph 11 shall not expire, shall survive this Agreement and shall be binding upon Employee without regard to the passage of time or other events. 12. RESTRICTIVE COVENANT. Employee hereby covenants and agrees that, -------------------- during the Term of this Agreement, 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 9 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 any navigable 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 12 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. 13. 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. 14. SUCCESSION. ---------- (a) This Agreement shall be binding upon and inure to the benefit of Employer and Employee and their respective successors and assigns; provided, however, in the event of a Change of Control, Employer shall have the option, in its sole discretion, to either (a) retain Employee for the services set forth in Paragraph 4 and otherwise abide by the terms and conditions of this Agreement or (b) terminate Employee's employment and pay to Employee an amount (the "Severance Amount") equal to the aggregate Base Salary under Paragraph 8(a) and the Minimum Bonus set forth under the last sentence of Paragraph 8(b) which would have been paid by Employer to Employee during the period (the "Severance Period") from the date of termination of the Agreement to the expiration of this Agreement had it not been so terminated. Employer shall have the right, exercisable by written notice to 10 Employee, to elect to pay the Severance Amount 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. (b) Except as otherwise set forth in the immediately preceding sentence, the Employer will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Employer, to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Employer would be required to perform it if no such succession had taken place. Failure of the Employer to obtain such assumption and agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle the Employee to compensation from the Employer in the same amount and on the same terms as he would be entitled to hereunder if he terminated this Agreement for Good Reason. 15. 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 15 shall be null and void and of no force or effect. 16. AMENDMENT OR MODIFICATION. This Agreement may not be amended, modified, ------------------------- changed or altered except by a writing signed by both Employer and Employee. 17. 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. 11 18. NOTICES. Any and all notices required under this Agreement shall be in ------- writing and shall be either hand-delivered; mailed by certified mail, return receipt requested; or sent via telecopier addressed to: TO EMPLOYER: Hollywood Casino Corporation Two Galleria Tower, Suite 2200 13455 Noel Road, LB 48 Dallas, Texas 75240 Attention: General Counsel TO EMPLOYEE: Paul C. Yates c/o Hollywood Casino Corporation Two Galleria Tower, Suite 2200 13455 Noel road, LB 48 Dallas, Texas 75240 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 18. 19. 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. 20. 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 provisions shall be deemed modified or amended so as to fulfill the intent of the parties hereto. 12 21. DISPUTE RESOLUTION. Except for equitable actions seeking to enforce the ------------------ provisions of Paragraphs 11 and 12 of this Agreement, jurisdiction and venue for which is hereby granted to the District Court of 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. 22. WAIVER. None of the terms of this Agreement, including this Paragraph ------ 22, 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. 23. 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. 13 IN WITNESS WHEREOF 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. HOLLYWOOD CASINO CORPORATION By /s/ Edward T. Pratt III ------------------------------------ Name: Edward T. Pratt III Title: President and Chief Operating Officer /s/ Paul C. Yates ----------------------------------------- Paul C. Yates 14 EX-10.30 6 AMENDED AND RESTATED SERVICES AGREEMENT EXHIBIT 10.30 AMENDED AND RESTATED SERVICES AGREEMENT ------------------ THIS AMENDED AND RESTATED SERVICES AGREEMENT (the "AGREEMENT") is entered into as of the 1/st/ day of October, 1998, by and between Hollywood Casino Corporation, a Delaware corporation ("HCC"), and Pratt Management, L.P., a Delaware limited partnership ("PMLP"). RECITALS A. PMLP is the current operator under that certain Management Services Agreement dated as of June 21, 1991 (as amended, the "AURORA MANAGEMENT SERVICES AGREEMENT") between Hollywood Casino-Aurora, Inc. (fka Aurora Riverboats, Inc.), as owner, and PMLP (assignee of PPI Corporation, the successor by merger to Greate Bay Casino Corporation), as operator; B. HCC is a corporation engaged in managing and operating hotel and casino gaming complexes and has the personnel and the expertise to enable PMLP to perform its obligations and duties under the Aurora Management Services Agreement; C. HCC previously provided to PMLP the services of personnel of HCC and its subsidiaries pursuant to that certain Services Agreement dated as of February 17, 1994 (the "2/17/94 HCC/PMLP SERVICES AGREEMENT"), between HCC and PMLP, in order to enable PMLP to perform its obligations and duties under the Aurora Management Services Agreement; D. The fee structure of the 2/17/94 HCC/PMLP Services Agreement was based on HCC providing services not only to PMLP to enable PMLP to perform its obligations and duties under the Aurora Management Services Agreement but also to New Jersey Management, Inc., a New Jersey corporation ("NJMI"), to enable NJMI to perform its obligations and duties under that certain Management Services Agreement dated as of August 19, 1987 (as amended, the "SANDS MANAGEMENT CONTRACT"), between NJMI and Greate Bay Hotel and Casino, Inc., a New Jersey corporation ("GBH&C") which owns the Sands Hotel and Casino in Atlantic City, New Jersey; E. On January 5, 1998, GBH&C et al filed a petition for bankruptcy (the "SANDS BANKRUPTCY") under Chapter 11 of the United States Code in the United States Bankruptcy Court for the District of New Jersey, Camden Vicinage (the "BANKRUPTCY COURT"); F. As a result of the grant by the Bankruptcy Court in the Sands Bankruptcy of final approval of the motion by GBH&C to reject the Sands Management Contract on September 28, 1998, the Sands Management Contract and related HCC/NJMI Services Agreement are no longer in effect; G. In light of the termination of the Sands Management Contract and related HCC/NJMI Services Agreement, the arrangement contemplated by the 2/17/94 HCC/PMLP Services Agreement (the "PRIOR HCC/PMLP SERVICES ARRANGEMENT") no longer works in the calculation of the fee thereunder and must be amended and restated; and H. PMLP now desires to enter into a new services arrangement with HCC replacing the Prior HCC/PMLP Services Arrangement pursuant to which HCC will provide to PMLP the services of personnel of HCC and its subsidiaries for the consideration and upon the other terms and conditions set forth below. AGREEMENTS NOW, THEREFORE, in consideration of the mutual covenants of the parties contained herein and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows: 1. DEFINITIONS. As used herein, the following terms shall have the meanings ----------- herein specified: "GAMING LAWS" shall mean (i) the New Jersey Casino Control Act and any successor statute and any and all rules, regulations, policies, orders and resolutions promulgated thereunder, (ii) the Mississippi Gaming Control Act and any successor statute and any and all rules, regulations, policies, orders and resolutions promulgated thereunder, (iii) the Illinois Riverboat Gambling Act and any successor statute and any and all rules, regulations, policies, orders and resolutions promulgated thereunder, (iv) the Louisiana Riverboat Economic Development and Gaming Control Act and any successor statute and any and all rules, regulations, policies, orders and resolutions promulgated thereunder and (v) any and all other gaming statutes, rules, regulations, policies, orders and resolutions, to the extent that such gaming laws apply to HCC and/or PMLP. "GAMING REGULATORY AUTHORITIES" shall mean (i) the New Jersey Casino Control Commission, (ii) the Mississippi Gaming Commission, (iii) the Illinois Gaming Board, (iv) the Louisiana Riverboat Gaming Commission and (v) any other gaming regulatory authority, to the extent that any of the foregoing has jurisdiction over HCC and/or PMLP. "SERVICES" shall mean the services provided by HCC to PMLP hereunder, including, without limitation, executive management functions (including the formulation of corporate policy and strategic planning), in-house legal services (including regulatory compliance), financial reporting services (including internal management reports and regulatory compliance reporting), budgeting, planning and forecasting, cash management and treasury functions, accounting services (including the maintenance of books and records and the processing of transactions), federal and state tax planning (including tax return preparation), insurance procurement and risk management and the Special Services. "SPECIAL SERVICES" shall mean certain special services which PMLP may specifically request HCC or a subsidiary thereof to provide to it in connection with a special project and HCC or such subsidiary may agree to provide. 2. SERVICES. During the term of this Agreement, HCC, or at the direction of -------- HCC one or more of its subsidiaries, shall perform such services as PMLP may reasonably request from time to time in connection with the operations of PMLP, including, without limitation, the Services. These Services will be performed by the President of HCC and such other employees of HCC, or any HCC subsidiary, as may be necessary. In providing such Services HCC or such subsidiary shall provide whatever facilities, supplies and administrative office functions, which may be required by PMLP, including, without limitation, office space, equipment, supplies, transportation, telephone and utility services, bookkeeping, accounting and record keeping services, insurance, advertising, data processing, handling of cash receipts and cash disbursements, check writing, training and such other functions, facilities and services as PMLP shall require. 2 3. TERM; TERMINATION. ----------------- a. Term. This Agreement shall commence on the effective date hereof ---- and shall continue in effect for the term of the Aurora Management Services Agreement, unless sooner terminated in accordance with the terms and provisions hereof. Unless one party delivers written notice of termination to the other party that is received no later than one hundred eighty (180) days prior to the expiration date of the initial or any renewal term of this Agreement, this Agreement shall be automatically renewed upon the same terms and conditions for a five (5) year period, and the same notice and renewal terms shall apply to each renewal period. The initial term and any renewal thereof are hereinafter referred to as the "TERM". b. Reciprocal Termination. Notwithstanding any other provision of this ---------------------- Agreement, each party shall have the right to terminate this Agreement if the non-defaulting party gives written notice to the defaulting party of the occurrence of any of the following events of default and the defaulting party shall fail to cure such default within thirty (30) days of the effective date of such written notice: (i) a material breach of this Agreement which is not cured prior to the expiration of the thirty (30) day period of cure specified above; or (ii) an admission in writing of its inability to pay its debts generally as they become due; or (iii) a bankruptcy, dissolution, appointment of a receiver, or the voluntary filing of any petition therefor or consent thereto, or any assignment for the benefit of creditors, under any applicable insolvency laws; or (iv) any action to suspend normal business operations; or (v) any materially adverse levy or judgment is filed, which is not satisfied or otherwise removed or set aside within ten (10) days of the filing thereof. c. HCC's Right to Terminate. Any other provision of this Agreement ------------------------ to the contrary notwithstanding, HCC may terminate this Agreement upon the failure of PMLP to compensate or reimburse HCC as provided for in this Agreement, such termination to become effective thirty (30) days following the effective date of receipt by PMLP of written notice of such failure, unless otherwise cured by PMLP within such period. Should HCC terminate this Agreement as provided in this Paragraph 3.c., PMLP shall immediately pay to HCC as -------------- liquidated damages, and HCC shall accept from PMLP, an amount equal to twice the fees earned by HCC hereunder in the preceding fiscal year under this Agreement. d. Damages. If this Agreement shall be terminated as set forth in ------- this Paragraph 3 and the aggrieved party (i) has a claim for damages pursuant to the specific terms of this Agreement, or (ii) believes it otherwise has a claim for damages, it may claim such damages suffered by reason of the other's non- compliance, breach or default. 4. FEES. As remuneration for the Services rendered by HCC to PMLP, (i) PMLP ---- shall pay to HCC during the Term a fee equal to $85,000 per month on the 1/st/ day of each month and (ii) in the event that HCC performs Special Services for PMLP, PMLP shall pay to HCC during the Term a monthly fee equal to the actual cost to HCC of the Special Services for such month (which fee shall be (A) set forth in an invoice delivered by HCC to PMLP on or before the 10/th/ day of the month following the month in which the services were performed 3 (which invoice shall describe such services and show the calculation of such fee) and (B) payable on the 15/th/ day of such month). 5. NOTICES. All notices, requests, consents and other communications ------- required or permitted under this Agreement shall be in writing and shall be: (i) personally delivered; (ii) transmitted by United States certified or registered mail, postage prepaid, return receipt requested, or by commercial courier or express service; or (iii) transmitted by telecopier, to the party to whom such notice, request, consent or other communication is being given at the address of such party set forth below, or at such other address as any party may designate by written notice to the other parties: (a) If to HCC, to it at: Hollywood Casino Corporation Two Galleria Tower, Suite 2200 13455 Noel Road, LB 48 Dallas, Texas 75240 Attention: William D. Pratt, Esq. (b) If to PMLP, to it at: Pratt Management, L.P. Two Galleria Tower, Suite 2200 13455 Noel Road, LB 48 Dallas, Texas 75240 Attention: Charles F. LaFrano III All notices, requests, consents and other communications shall be effective or deemed delivered upon (i) the date of receipt if delivered personally, (ii) the earlier to occur of the actual receipt thereof by the addressee or three (3) days after the date of deposit if transmitted by mail or commercial courier or express service or (iii) the date of transmission with confirmed answerback if transmitted by telecopier. 6. AGENCY RELATIONSHIP. In taking any action pursuant to this Agreement, ------------------- HCC (or any of its subsidiaries providing services hereunder) shall act only as the appointed agent or representative of PMLP 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. 7. SEVERABILITY. If any provision of this Agreement or the application ------------ hereof to any person or circumstances shall to any extent be held void, unenforceable or invalid, then the remainder of this Agreement 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 effective hereby, and each provision of this Agreement shall be valid and enforced to the fullest extent permitted by law. 8. COSTS OF LITIGATION. In any action or proceeding brought by any party ------------------- against any other party under this Agreement, the prevailing party shall be entitled to recover from the other party attorneys' fees, investigation costs, and other legal expenses and court costs incurred by such party in such action or proceeding as the court may find to be reasonable. 4 9. COUNTERPARTS. This Agreement may be executed in counterparts, each of ------------ which shall be deemed an original, but all of which together shall constitute one and the same instrument. 10. HEADINGS. Headings of paragraphs in this Agreement are for convenience -------- of reference only and shall not define or limit any of the terms or provisions hereof. 11. ENTIRE AGREEMENT; WAIVER. This Agreement contains the entire agreement ------------------------ between the parties hereto with respect to the transactions contemplated herein, supersedes all prior written agreements and negotiations and oral understandings, if any, and may not be amended, supplemented or discharged, except by an instrument in writing signed by each party hereto. No failure by any party to insist upon strict compliance with the terms and conditions hereof shall be deemed to be a waiver thereof. 12. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon, and shall ---------------------- inure to the benefit of and be enforceable by, the parties hereto and their respective successors and assigns. 13. GOVERNING LAW. This Agreement shall be construed and enforced in -------------- accordance with the laws of the State of Texas, provided, however, that this Agreement shall be specifically subject to the provisions of the Gaming Laws (if applicable) and the requirements of the Gaming Regulatory Authorities (if applicable). 5 IN WITNESS WHEREOF, the parties have caused this agreement to be executed and delivered by their respective officers hereunto duly authorized as of the effective date hereof. HOLLYWOOD CASINO CORPORATION By: /s/ William D. Pratt ---------------------------------- Name: William D. Pratt Title: Executive Vice President, General Counsel and Secretary PRATT MANAGEMENT, L.P. By: HWCC-Aurora Management, Inc., an Illinois corporation, its General Partner By: /s/ Charles F. LaFrano III ----------------------------- Name: Charles F. LaFrano III Title: Vice President CONSENT The undersigned, Pratt Casino Corporation, being the sole limited partner of PMLP, hereby consents to the foregoing Amended and Restated Services Agreement and to the terms and provisions thereof. PRATT CASINO CORPORATION By: /s/ John C. Hull ---------------------------------- Name: John C. Hull Title: Chairman of the Board and Chief Executive Officer 6 EX-10.31 7 MANAGEMENT AND ADMINISTRATIVE SERVICES AGREEMENT EXHIBIT 10.31 MANAGEMENT AND ADMINISTRATIVE SERVICES AGREEMENT ------------------ THIS MANAGEMENT AND ADMINISTRATIVE SERVICES AGREEMENT (the "AGREEMENT") is entered into as of the 1st day of October, 1998, by and between Hollywood Casino Corporation, a Delaware corporation ("HCC"), and Greate Bay Casino Corporation, a Delaware corporation ("GBCC"). RECITALS A. HCC owned approximately 80% of GBCC until the spin-off by HCC of its GBCC stock ownership to the HCC stockholders on December 31, 1996; B. As of the date hereof, (i) HCC is owned approximately 53% by Jack E. Pratt, Edward T. Pratt, Jr., William D. Pratt and Edward T. Pratt III and certain family trusts and partnerships (collectively, the "PRATT FAMILY") and (ii) GBCC is owned approximately 36% by the Pratt Family; C. HCC previously provided to New Jersey Management, Inc., a New Jersey corporation ("NJMI") which is an indirect 100% owned subsidiary of GBCC, the services of personnel of HCC and its subsidiaries at cost pursuant to that certain Services Agreement dated as of January 1, 1994 (the "1/1/94 HCC/NJMI SERVICES AGREEMENT"), between HCC and NJMI, in order to enable NJMI to perform its obligations and duties under that certain Management Services Agreement dated as of August 19, 1987 (as amended, the "SANDS MANAGEMENT CONTRACT"), between NJMI and Greate Bay Hotel and Casino, Inc., a New Jersey corporation ("GBH&C") which is an indirectly owned subsidiary of GBCC and owns the Sands Hotel and Casino in Atlantic City, New Jersey; D. On January 5, 1998, GBH&C et al filed a petition for bankruptcy (the "SANDS BANKRUPTCY") under Chapter 11 of the United States Code in the United States Bankruptcy Court for the District of New Jersey, Camden Vicinage (the "BANKRUPTCY COURT"); E. As a result of the grant by the Bankruptcy Court in the Sands Bankruptcy of final approval of the motion by GBH&C to reject the Sands Management Contract on September 28, 1998, the arrangements contemplated by the Sands Management Contract and related 1/1/94 HCC/NJMI Services Agreement (the "PRIOR HCC/GBCC SERVICES ARRANGEMENT") are no longer in effect; and F. GBCC now desires to enter into a new services arrangement with HCC replacing the Prior HCC/GBCC Services Arrangement pursuant to which HCC will provide to GBCC and certain of its subsidiaries the services of personnel of HCC and its subsidiaries for the consideration and upon the other terms and conditions set forth below. AGREEMENTS NOW, THEREFORE, in consideration of the mutual covenants of the parties contained herein and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows: 1. DEFINITIONS. As used herein, the following terms shall have the meanings ----------- herein specified: "ACSC" means Advanced Casino Systems Corporation, a Delaware corporation. "ACSC SERVICES" shall mean the services provided by HCC to ACSC hereunder, including, without limitation, in-house legal services (including regulatory compliance), accounting services, state tax return preparation, insurance procurement and risk management and services relating to the participation by ACSC employees in the retirement savings plan of HCC. "GBCC SERVICES" shall mean the services provided by HCC to GBCC hereunder, including, without limitation, executive management functions (including the formulation of corporate policy and strategic planning), in-house legal services (including regulatory compliance), financial reporting services (including internal management reports, SEC and regulatory compliance reporting and coordination of annual independent audits), budgeting, planning and forecasting, cash management and treasury functions, accounting services (including the maintenance of books and records and the processing of transactions), federal and state tax planning (including tax return preparation), insurance procurement and risk management, investor and public relations (including press releases, quarterly earning reports, annual stockholder meetings and related proxy statements) and services relating to the participation by GBCC employees in the retirement savings plan of HCC. "GBCC SUBSIDIARIES" mean the subsidiaries of GBCC above the GB Holdings, Inc. level. "GAMING LAWS" shall mean (i) the New Jersey Casino Control Act and any successor statute and any and all rules, regulations, policies, orders and resolutions promulgated thereunder, (ii) the Mississippi Gaming Control Act and any successor statute and any and all rules, regulations, policies, orders and resolutions promulgated thereunder, (iii) the Illinois Riverboat Gambling Act and any successor statute and any and all rules, regulations, policies, orders and resolutions promulgated thereunder, (iv) the Louisiana Riverboat Economic Development and Gaming Control Act and any successor statute and any and all rules, regulations, policies, orders and resolutions promulgated thereunder, (v) the Indiana Riverboat Gambling Act and any successor statute and any and all rules, regulations, policies, orders and resolutions promulgated thereunder and (vi) any and all other gaming statutes, rules, regulations, policies, orders and resolutions, to the extent that such gaming laws apply to HCC and/or GBCC. "GAMING REGULATORY AUTHORITIES" shall mean (i) the New Jersey Casino Control Commission, (ii) the Mississippi Gaming Commission, (iii) the Illinois Gaming Board, (iv) the Louisiana Riverboat Gaming Commission, (v) the Indiana Gaming Commission and (vi) any other gaming regulatory authority, to the extent that any of the foregoing has jurisdiction over HCC and/or GBCC. "PCC" means Pratt Casino Corporation, a Delaware corporation. "PCC SERVICES" shall mean the services provided by HCC to PCC and its subsidiaries above the GB Holdings, Inc. level hereunder, including, without limitation, accounting and financial reporting services. -2- "SERVICES" shall mean the ACSC Services, the GBCC Services, the PCC Services and any and all other services provided by HCC to GBCC and the GBCC Subsidiaries hereunder, including, without limitation, the Special Services. "SPECIAL SERVICES" shall mean certain special services which GBCC or a GBCC Subsidiary may specifically request HCC or a subsidiary thereof to provide to it in connection with a special project and HCC or such subsidiary may agree to provide. 2. SERVICES. During the term of this Agreement, HCC, or at the direction of -------- HCC one or more of its subsidiaries, shall perform such services as GBCC may reasonably request from time to time in connection with the operations of GBCC and the GBCC Subsidiaries, including, without limitation, the ACSC Services, the GBCC Services, the PCC Services and the Special Services. These Services will be performed by the President of HCC and such other employees of HCC, or any HCC subsidiary, as may be necessary. In providing such Services HCC or such subsidiary shall provide whatever facilities, supplies and administrative office functions, which may be required by GBCC, including, without limitation, office space, equipment, supplies, transportation, telephone and utility services, bookkeeping, accounting and record keeping services, insurance, advertising, data processing, handling of cash receipts and cash disbursements, check writing, training and such other functions, facilities and services as GBCC shall require. 3. TERM; TERMINATION. ----------------- a. Term. This Agreement shall commence on the effective date hereof ---- and shall continue in effect for the term of one year, unless sooner terminated in accordance with the terms and provisions hereof. Unless one party delivers written notice of termination to the other party that is received no later than thirty (30) days prior to the expiration date of the initial or any renewal term of this Agreement, this Agreement shall be automatically renewed upon the same terms and conditions for an additional one year period, and the same notice and renewal terms shall apply to each renewal period. The initial term and any renewal thereof are hereinafter referred to as the "TERM". b. Reciprocal Termination. Notwithstanding any other provision of this ---------------------- Agreement, each party shall have the right to terminate this Agreement if the non-defaulting party gives written notice to the defaulting party of the occurrence of any of the following events of default and the defaulting party shall fail to cure such default within thirty (30) days of the effective date of such written notice: (i) a material breach of this Agreement which is not cured prior to the expiration of the thirty (30) day period of cure specified above; or (ii) an admission in writing of its inability to pay its debts generally as they become due; or (iii) a bankruptcy, dissolution, appointment of a receiver, or the voluntary filing of any petition therefor or consent thereto, or any assignment for the benefit of creditors, under any applicable insolvency laws; or (iv) any action to suspend normal business operations; or (v) any materially adverse levy or judgment is filed, which is not satisfied or otherwise removed or set aside within ten (10) days of the filing thereof. -3- c. Damages. If this Agreement shall be terminated as set forth in this ------- Paragraph 3 and the aggrieved party (i) has a claim for damages pursuant to the specific terms of this Agreement, or (ii) believes it otherwise has a claim for damages, it may claim such damages suffered by reason of the other's non- compliance, breach or default. 4. FEES. As remuneration for the Services rendered by HCC to GBCC and the ---- GBCC Subsidiaries, (i) GBCC shall pay to HCC during the Term a fee equal to $47,500 per month for the GBCC Services on the 1st day of each month, (ii) GBCC shall cause ACSC to pay to HCC during the Term a fee equal to $9,000 per month for the ACSC Services on the 1st day of each month, (iii) GBCC shall cause PCC or its subsidiaries to pay to HCC during the Term a monthly fee equal to the actual cost to HCC of the PCC Services for such month (which fee shall be (A) set forth in an invoice delivered by HCC to GBCC on or before the 10th day of the month following the month in which the services were performed (which invoice shall describe such services and show the calculation of such fee) and (B) payable on the 15th day of such month) and (iv) in the event that HCC performs Special Services for GBCC and/or the GBCC Subsidiaries, GBCC shall pay or shall cause such GBCC Subsidiaries to pay to HCC during the Term a monthly fee equal to the actual cost to HCC of the Special Services for such month (which fee shall be (A) set forth in an invoice delivered by HCC to GBCC or the GBCC Subsidiaries on or before the 10th day of the month following the month in which the services were performed (which invoice shall describe such services and show the calculation of such fee) and (B) payable on the 15th day of such month). HCC and GBCC shall undertake a semi-annual review of the Services rendered hereunder and the fees for such services beginning on June 30, 1999 and continuing on June 30th of each succeeding year during the Term hereafter. Based on such review, HCC and GBCC shall make any necessary adjustments to the scope of the Services and the fees for such Services. 5. NOTICES. All notices, requests, consents and other communications ------- required or permitted under this Agreement shall be in writing and shall be: (i) personally delivered; (ii) transmitted by United States certified or registered mail, postage prepaid, return receipt requested, or by commercial courier or express service; or (iii) transmitted by telecopier, to the party to whom such notice, request, consent or other communication is being given at the address of such party set forth below, or at such other address as any party may designate by written notice to the other parties: (a) If to HCC, to it at: Hollywood Casino Corporation Two Galleria Tower, Suite 2200 13455 Noel Road, LB 48 Dallas, Texas 75240 Attention: William D. Pratt, Esq. (b) If to GBCC, to it at: Greate Bay Casino Corporation Two Galleria Tower, Suite 2200 13455 Noel Road, LB 48 Dallas, Texas 75240 Attention: John C. Hull All notices, requests, consents and other communications shall be effective or deemed delivered upon (i) the date of receipt if delivered personally, (ii) the earlier to occur of the actual receipt thereof by the addressee or three (3) days after the date of deposit if transmitted by mail or commercial courier or express service or (iii) the date of transmission with confirmed answerback if transmitted by telecopier. -4- 6. AGENCY RELATIONSHIP. In taking any action pursuant to this Agreement, ------------------- HCC (or any of its subsidiaries providing services hereunder) shall act only as the appointed agent or representative of GBCC 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. 7. SEVERABILITY. If any provision of this Agreement or the application ------------ hereof to any person or circumstances shall to any extent be held void, unenforceable or invalid, then the remainder of this Agreement 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 effective hereby, and each provision of this Agreement shall be valid and enforced to the fullest extent permitted by law. 8. COSTS OF LITIGATION. In any action or proceeding brought by any party ------------------- against any other party under this Agreement, the prevailing party shall be entitled to recover from the other party attorneys' fees, investigation costs, and other legal expenses and court costs incurred by such party in such action or proceeding as the court may find to be reasonable. 9. COUNTERPARTS. This Agreement may be executed in counterparts, each of ------------ which shall be deemed an original, but all of which together shall constitute one and the same instrument. 10. HEADINGS. Headings of paragraphs in this Agreement are for convenience -------- of reference only and shall not define or limit any of the terms or provisions hereof. 11. ENTIRE AGREEMENT; WAIVER. This Agreement contains the entire agreement ------------------------ between the parties hereto with respect to the transactions contemplated herein, supersedes all prior written agreements and negotiations and oral understandings, if any, and may not be amended, supplemented or discharged, except by an instrument in writing signed by each party hereto. No failure by any party to insist upon strict compliance with the terms and conditions hereof shall be deemed to be a waiver thereof. 12. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon, and shall ---------------------- inure to the benefit of and be enforceable by, the parties hereto and their respective successors and assigns. 13. GOVERNING LAW. This Agreement shall be construed and enforced in -------------- accordance with the laws of the State of Texas, provided, however, that this Agreement shall be specifically subject to the provisions of the Gaming Laws (if applicable) and the requirements of the Gaming Regulatory Authorities (if applicable). -5- IN WITNESS WHEREOF, the parties have caused this agreement to be executed and delivered by their respective officers hereunto duly authorized as of the effective date hereof. HOLLYWOOD CASINO CORPORATION By: /s/ William D. Pratt ---------------------------------------- Name: William D. Pratt Title: Executive Vice President, General Counsel and Secretary GREATE BAY CASINO CORPORATION By: /s/ John C. Hull ---------------------------------------- Name: John C. Hull Title: Chairman of the Board and Chief Executive Officer -6- EX-10.32 8 MEMBERSHIP INTEREST PURCHASE AGREEMENT EXHIBIT 10.32 MEMBERSHIP INTEREST PURCHASE AGREEMENT This Membership Interest Purchase Agreement (the "Agreement") is made and entered into this 31st day of March, 1999 by and among HWCC-Louisiana, Inc., a Louisiana corporation ("Purchaser"), Sodak Gaming, Inc., a South Dakota corporation ("Seller"), and Sodak Louisiana, L.L.C., a Louisiana limited liability company (the "Company"). Certain definitions for this Agreement are set forth in Section 10.15. ------------- RECITALS: A. Purchaser, the Company and Shreveport Paddlewheels, L.L.C. ("Paddlewheels") are parties to that certain Amended and Restated Joint Venture Agreement of QNOV (formerly known as the "Queen of New Orleans at the Hilton Joint Venture") dated July 31, 1998 (as amended from time to time, the "Joint Venture Agreement"). B. Pursuant to the Joint Venture Agreement, Purchaser, the Company and Paddlewheels agreed to enter into a joint venture named QNOV (the "Joint Venture") for the purposes of participating in, constructing and operating a riverboat gaming vessel, hotel and casino in Shreveport, Louisiana. C. Seller owns all of the outstanding membership interest in the Company (the "Membership Interest"); D. Seller desires to sell the Membership Interest to Purchaser, and Purchaser desires to purchase the Membership Interest from Seller, all on the terms and subject to the conditions set forth herein; THEREFORE, Purchaser, Seller and the Company agree as follows: ARTICLE I SALE OF MEMBERSHIP INTEREST AND CLOSING 1.1 Purchase and Sale of Membership Interest. Subject to the terms and ---------------------------------------- conditions of this Agreement, Seller agrees to sell the Membership Interest to Purchaser and Purchaser agrees to purchase the Membership Interest from Seller. 1.2 Purchase Price. -------------- Purchaser shall pay to Seller the amount of $2,500,000 in cash in consideration for the sale of the Membership Interest (the "Purchase Price"), $1,000 of which is payable at Closing (as defined herein) and the balance of which is payable on the six month anniversary of the Commencement Date (as defined in the Joint Venture Agreement) (the "Subsequent Payment Date"). 1.3 Closing. ------- (a) Within 5 days after the satisfaction of the conditions set forth in ARTICLES V and VI, the closing (the "Closing") will take place at the offices ---------- -- of Purchaser, or at such other place as Seller and Purchaser may agree in writing. (b) At the Closing, Purchaser shall deliver to Seller (i) a check payable to Seller in the amount of $1,000 and (ii) such documents and instruments required to be delivered by Purchaser pursuant to this Agreement. On the Subsequent Payment Date, Purchaser shall deliver to Seller via wire transfer of immediately available funds, cash in the amount of $2,499,000. (c) At the Closing, Seller will deliver to Purchaser (i) a certificate or certificates, if any, representing all the Membership Interest in appropriate form for transfer to Purchaser duly endorsed in blank and (ii) such other documents and instruments required to be delivered by Seller pursuant to this Agreement. ARTICLE II REPRESENTATIONS AND WARRANTIES OF SELLER AND COMPANY Each of Seller and the Company hereby represents and warrants to Purchaser as follows: 2.1 Organization of Seller. Seller is a corporation duly organized, ---------------------- validly existing and in good standing under the laws of the State of South Dakota. 2.2 Corporate Authority. Seller has all requisite corporate power and ------------------- authority to enter into this Agreement and to perform its obligations hereunder. Seller's execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly and validly authorized by all requisite corporate action on the part of Seller. This Agreement has been duly and validly executed and delivered by Seller and constitutes the legal, valid and binding obligation of Seller, enforceable against it in accordance with its terms. 2.3 Organization and Operation of the Company. The Company is a limited ----------------------------------------- liability company duly organized, validly existing and in good standing under the laws of the State of Louisiana and has all requisite limited liability company power and authority to own, lease and operate its assets and carry on its business as it is now being conducted. The Company has no, and has never had any, (i) assets or property or debts, obligations or other liabilities (whether absolute, accrued, contingent, fixed or otherwise) (collectively, "Liabilities"), other than by virtue of its ownership interest in the Joint Venture or (ii) employees. Since its formation, the Company has not conducted any business other than any business related to its ownership in the Joint Venture. 2.4 Membership Interest of the Company. The Membership Interest is duly ---------------------------------- authorized, validly issued, fully paid and nonassessable, and has not been issued in violation of any preemptive or 2 similar rights. Seller is the owner of record and beneficially of the Membership Interest, free and clear of all mortgages, pledges, encumbrances, security interests, charges, agreements or claims of any kind (collectively, "Liens). There are no authorized or outstanding options, warrants, calls, subscriptions or rights, commitments or other agreements of any kind to purchase any membership interest or other capital stock of the Company or to cause the Company to issue any membership interest or other shares of capital stock or securities convertible into or exchangeable or exercisable for any membership interest or other shares of such stock. There are no authorized or outstanding securities of the Company convertible into or exchangeable or exercisable for any membership interest or other capital stock of the Company. There are no agreements or understandings to which the Company is a party or by which it is bound with respect to the voting, sale or transfer of the Membership Interest, other than the Joint Venture Agreement. Upon delivery of the Membership Interest against payment therefor in accordance with this Agreement, Purchaser will acquire good and marketable title to the Membership Interest, free and clear of any and all Liens. 2.5 Interest in the Joint Venture. The Company owns 2,500,000 JV ----------------------------- Interests (as defined in the Joint Venture Agreement), which accounts for 50% of the total JV Interests of the Joint Venture (the "Company JV Interests"). The Company is the owner of record and beneficially of the Company JV Interests, free and clear of all Liens. There are no agreements or understandings to which the Company is a party or by which it is bound with respect to the voting, sale or transfer of the Company JV Interests, other than the Joint Venture Agreement. As of the date hereof, the Company has made all capital contributions required by it to be made to the Joint Venture pursuant to the Joint Venture Agreement. 2.6 Consents and Approvals. Neither the Seller, the Company nor the Joint ---------------------- Venture is required to make any filing with, or to obtain any permit, authorization, consent or approval of or from, any governmental authority as a condition to the consummation of the transactions contemplated by this Agreement, except to obtain the approval of the State of Louisiana Gaming Control Board (the "Gaming Board"). The execution and delivery of this Agreement by Seller does not, and the performance by Seller of its obligations under this Agreement will not: (i) conflict with or result in a breach of any of the terms, conditions or provisions of the certificate of incorporation or bylaws of Seller or the articles of organization or operating agreement of the Company; (ii) conflict with or constitute a default under, or give rise to any right to terminate, cancel, modify or accelerate, or to the loss of any material right under, any contract, agreement, license, mortgage, note, debenture or other evidence of indebtedness to which Seller or the Company is a party or by which any of their respective properties may be bound; (iii) violate any term or provision of any law, rule or regulation or any permit, concession, grant, franchise, license, writ, judgment, decree, injunction, order or ruling of any court or governmental or regulatory authority applicable to Seller or the Company; or (iv) result in the creation or imposition of any Lien upon Seller or the Company or any of their respective assets. 2.7 Absence of Changes. Except as set forth in Schedule 2.7, since its ------------------ ------------ formation, there has not been (i) any material adverse change in the condition, financial or otherwise, business, assets, properties or results of operations of the Company, or any event, occurrence or circumstance that could reasonably be expected to result in such a material adverse change, (ii) any event which, if it had taken 3 place after the execution of this Agreement, would not have been permitted by ARTICLE IV hereof, or (iii) any condition, event or occurrence which could - ---------- reasonably be expected to prevent, hinder or materially delay the ability of the Company to consummate the transactions contemplated by this Agreement. Without limiting the generality of the foregoing, since the formation of the Company, there has not been: (a) any declaration, setting aside, or payment of any dividend or distribution (whether in cash, securities, property or a combination thereof) in respect of the Membership Interest of the Company or any direct or indirect redemption, purchase, or other acquisition by the Company of any membership interest of the Company or of any interest in or right to acquire any such membership interest; (b)(i) any employment, deferred compensation, or other salary, wage, or compensation contract entered into between the Company and any of its officers, managers, agents, consultants or representatives; (ii) any salary, wages, or other compensation, whether current or deferred, of any officer, manager, agent, consultant or representative of the Company or (iii) any creation of an Employee Benefit Plan (as hereinafter defined); (c) any mortgage or pledge of, or the creation of any Lien on, any assets of the Company securing Liabilities of the Company or another person or the creation of any Liabilities of the Company; (d) any change in any financial reporting, tax, or accounting practice or policy followed by the Company or in any assumption underlying such a practice or policy, or in any method of calculating any contingency or other reserve for financial reporting purposes or for any other tax or accounting purposes; (e) any cancellation of any Liability owed to the Company by any other person; (f) any write-off or write-down of, or any determination to write off or write down, the assets of the Company or any portion thereof; (g) any sale, transfer, or conveyance of any assets of the Company; (h) any amendment, termination, waiver, disposal, or lapse of, or other failure to preserve, any license, permit, or other form of authorization of the Company, the result of which individually or in the aggregate has had or could have a material adverse effect on the business, condition (financial or otherwise), assets, results of operations or prospects of the Company; (i) any transaction or arrangement under which the Company paid, lent, advanced 4 or invested any amount to or in respect of, or sold, transferred, or leased any of its assets or any services to, (i) Seller, (ii) any officer or manager of the Company or of any affiliate of Seller; (iii) any affiliate of Seller, the Company or any subsidiary or of any such officer or manager, or (iv) any business or other person in which Seller, the Company, any subsidiary, any such officer or manager, or any such affiliate has any material interest; (j) any amendment to the articles of organization or operating agreement of the Company; (k) any agreement or commitment to take any of the actions that should be disclosed as exceptions to this Section 2.7. ----------- 2.8 Taxes. Except as disclosed on Schedule 2.8, ----- ------------ (a) Since the date of the organization of the Company, all of the Membership Interests of the Company have been owned by Seller; (b) For federal and Louisiana income tax purposes, at all times the Company has been a disregarded entity and all of its assets have been properly treated as being owned directly by Seller; (c) Since the date of its organization, the Company's only asset has been its interest in the Joint Venture; (d) Since the date of its organization, the Company has not been required to file any Tax Returns in any Taxing Jurisdiction; (e) There are no encumbrances for Taxes upon the assets or properties of the Company, except for statutory encumbrances for current Taxes not yet due; (f) The Company is not liable for Taxes of any other Person by agreement or pursuant to any applicable law or regulation; (g) No power of attorney has been granted with respect to either of the Company and the Joint Venture as to any matter relating to Taxes; (h) No property owned by any of the Company and the Joint Venture (i) is property required to be treated as being owned by another person pursuant to the provisions of Section 168(f)(8) of the Internal Revenue Code of 1954, as amended, and in effect immediately prior to the enactment of the Tax Reform Act of 1986, (ii) constitutes "tax-exempt use property" within the meaning of Section 168(h)(1) of the Code, or (iii) is tax-exempt bond financed property within the meaning of Section 168(g) of the Code; 5 (i) Since its formation, the Company has not incurred any liability for Taxes other than in the ordinary course of business; (j) Schedule 2.8 sets forth each and every Taxing Jurisdiction ------------ in which (A) consummation of the transactions that are the subject of this Agreement subjects the Purchaser to a liability for any Taxes of the Seller or the Company, or (B) the nature of the Seller's or the Company's business or assets requires the Seller, the Company or the Purchaser to notify a Taxing Authority of the transactions that are the subject of this Agreement, if the failure to make such notification would subject the Purchaser to a liability for any Taxes of Seller or the Company; and (k) The Seller is not a foreign person within the meaning of Section 1445 of the Code. 2.9 Litigation. Except as disclosed in Schedule 2.9: ---------- ------------ (a) There are no actions, suits, investigations, arbitrations, or proceedings pending, or, to the knowledge of Seller or the Company, threatened, against Seller or the Company or, to the knowledge of the Seller or the Company, the Joint Venture or any of their assets that questions the validity or enforceability of this Agreement or that could have an adverse effect on the ability of Seller to perform its obligations hereunder. (b) There are no actions, suits, investigations, arbitrations, or proceedings pending, or, to the knowledge of Seller or the Company, threatened, against the Seller or Company or, to the knowledge of the Seller or the Company, the Joint Venture, which relates to, or effects the Company, the Joint Venture or any of their assets. (c) There are no writs, judgments, decrees, injunctions, or similar orders of any court or governmental or arbitral authority outstanding against Seller or the Company or to the knowledge of Seller or the Company, the Joint Venture, which relates to, or effects the Company, the Joint Venture or any of their assets. 2.10 Compliance With Laws. Except as disclosed in Schedule 2.10, since its -------------------- ------------- formation, the Company has not been in violation (or with or without notice or lapse of time or both would be in violation) of any term or provision of any law, rule or regulation or any writ, judgment, decree, injunction, or similar order applicable to such entity or any of its assets. Without limiting the generality of the foregoing the Company has duly and validly filed or caused to be filed all reports, statements, documents, registrations, filings, or submissions that were required by law, rule or regulation to be filed with any court or other governmental authority. All such filings complied with applicable laws, rules or regulations in all material respects when filed, and to the knowledge of Seller and the Company, no deficiencies have been asserted by any person with respect to any such filings. 6 2.11 ERISA. The Company does not employ, and has never employed, any ----- person. The Company does not sponsor, maintain or contribute to, and has never sponsored, maintained or contributed to, any "employee benefit plan" (within the meaning of Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA")), nor does the Company have any direct or indirect liability with respect to any employee benefit plan. 2.12 Contracts. Schedule 2.12 contains a true and complete list of each of --------- ------------- the contracts (whether or not in writing) or other documents or arrangements (true and complete copies, or, in the case of oral contracts or arrangements, written summaries of the terms, of which have been furnished to Purchaser), to which the Company is a party or by which any of its assets is or may be bound. 2.13 Licenses and Permits. Except as disclosed in Schedule 2.13, the -------------------- ------------- Company owns or validly holds all licenses, franchises, permits, approvals, authorizations, exemptions, classifications, certificates, registrations and similar documents or instruments that are required for its business, operations and affairs. All such licenses, franchises, permits, approvals, authorizations, exemptions, classifications, certificates, registrations and similar documents or instruments are valid, binding and in full force and effect. 2.14 Insurance. Schedule 2.14 contains a true and complete list and --------- ------------- description of all liability, property, workers compensation, managers and officers liability and other similar insurance contracts that insure the business, operations, or affairs of the Company or that affect or relate to the ownership, use, or operations of any of its assets. 2.15 Intercompany Liabilities. Except as disclosed in Schedule 2.15, ------------------------ ------------- (a) neither Seller nor any other Affiliate of Seller or the Company provides or causes to be provided to the Company any products, services, equipment, facilities, or similar items and (b) there are no Liabilities between the Company and Seller or any other affiliate of the Company or the Seller. 2.16 Limited Liability Company Records. The minute books and membership --------------------------------- records of the Company contain complete and accurate records of all proceedings and actions taken at all meetings, or by written consent in lieu of meetings, of the members and the managers and all authorized committees of the managers thereof. 2.17 Bank Accounts. Schedule 2.17 contains (a) a true and complete list of ------------- ------------- the names and locations of all banks, trust companies, securities brokers and other financial institutions at which the Company has accounts or safe deposit boxes or maintain banking, custodial, trading, or other similar relationships and (b) a true and complete list and description of each such account, box and relationship. 7 2.18 Disclosure. No representation or warranty made by Seller or the ---------- Company in this Agreement, in the schedules hereto, or in any certificate furnished by Seller or the Company to Purchaser in connection with this Agreement or the transactions contemplated hereby contains any untrue statement of material fact or omits to state a material fact necessary to make the statements herein or therein not misleading in light of the circumstances under which they were made. ARTICLE III REPRESENTATIONS, WARRANTIES AND COVENANTS OF PURCHASER ------------------------------------------------------ Purchaser hereby represents and warrants, with respect to Sections 3.1 ------------ through 3.4, and covenants, with respect to Section 3.5, to Seller as follows: --- ----------- 3.1 Organization. Purchaser is a corporation duly organized, validly ------------ existing and in good standing under the laws of the State of Louisiana. 3.2 Corporate Authority. Purchaser has full corporate power and authority ------------------- to enter into this Agreement and to perform its obligations hereunder. The Purchaser's execution and delivery of this Agreement and the performance of its obligations hereunder have been duly and validly authorized by all necessary corporate action on the part of Purchaser. This Agreement constitutes a legal, valid and binding obligation of Purchaser, enforceable against Purchaser in accordance with its terms. 3.3 Consents and Approvals. Purchaser is not required to make any filing ---------------------- with, or to obtain any permit, authorization, consent or approval of, any governmental authority as a condition to the lawful consummation of the transactions contemplated by this Agreement, except to obtain the approval of the Gaming Board. The execution and delivery of this Agreement by Purchaser does not, and the performance by Purchaser of its obligations under this Agreement will not: (i) conflict with or result in a breach of any of the terms, conditions or provisions of the articles of incorporation or bylaws of Purchaser; (ii) conflict with or constitute a default under, or give rise to any right to terminate, cancel, modify or accelerate, any contract, agreement, license, mortgage, note, bond, debenture or other evidence of indebtedness to which Purchaser is a party or by which any of its assets may be bound; or (iii) violate any term or provision of any law, rule or regulation or any permit, concession, grant, franchise, license, writ, judgment, decree, injunction, order or ruling of any court or governmental or regulatory authority applicable to Purchaser. 3.4 Purchase for Investment. Purchaser is acquiring the Membership ----------------------- Interest for its own account for investment purposes and not with a view to the distribution of the Membership Interest. Purchaser has such knowledge and experience in financial and business matters so as to be capable of evaluating the merits and risks of its investment in the Membership Interest. Purchaser will not, directly or indirectly, dispose of the Membership Interest except in compliance with applicable federal and state securities laws. 8 3.5 Contract and Regulatory Approvals. Purchaser will (a) take all --------------------------------- commercially reasonable steps necessary or desirable, and proceed diligently and in good faith and use all commercially reasonable efforts, to obtain as promptly as practicable all (i) approvals and consents of any person under all contracts to which Purchaser is a party, or by which its assets may be bound, necessary to permit Purchaser to consummate the transactions contemplated hereby and (ii) all approvals, authorizations and clearances of governmental authorities required of Purchaser to consummate the transactions contemplated hereby, (b) provide such other information and communications to such governmental authorities as Seller or such authorities may reasonably request and (c) cooperate with Seller in pursuing, as promptly as practicable, all approvals, authorizations and clearances of governmental authorities (including the Gaming Board) and other persons required of Seller to consummate the transactions contemplated hereby. ARTICLE IV COVENANTS OF SELLER ------------------- Each of Seller and the Company covenants and agrees with Purchaser as follows: 4.1 Contract and Regulatory Approvals. Seller will take and will cause the --------------------------------- Company to, and the Company will, (a) take all commercially reasonable steps necessary or desirable, and proceed diligently and in good faith and use all commercially reasonable efforts, to obtain as promptly as practicable all (i) approvals and consents of any person under all contracts to which the Seller or the Company is a party, or by which their respective assets may be bound, necessary to permit Seller to consummate the transactions contemplated hereby and (ii) all approvals, authorizations and clearances of governmental authorities required of the Seller or the Company to consummate the transactions contemplated hereby, (b) provide such other information and communications to such governmental authorities as Purchaser or such authorities may reasonably request and (c) cooperate with Purchaser in pursuing, as promptly as practicable, all approvals, authorizations and clearances of governmental authorities (including the Gaming Board) and other persons required of Purchaser to consummate the transactions contemplated hereby. 4.2 Investigation by Purchaser. Seller will provide and will cause the -------------------------- Company to, and the Company will, provide, Purchaser, its counsel, accountants and other representatives (including its financing sources and their respective representatives) with full access, upon prior notice and during normal business hours, to all facilities, officers, agents, accountants, assets and books and records of the Company and will furnish Purchaser and such other persons with all such information and data (including without limitation copies of contracts, and other books and records) concerning the business, operations and affairs of the Company as Purchaser or any of such other persons reasonably may request. 4.3 No Negotiations. Seller shall not initiate or encourage (including --------------- by way of furnishing information or assistance), or take any other action to facilitate, any inquiries or the making of any proposal that constitutes, or may be reasonably expected to lead to, any Company Acquisition Proposal (as defined below), or enter into discussions or negotiate with any person or 9 entity in furtherance of such inquiries or to obtain a Company Acquisition Proposal, or authorize or permit any of the officers, directors or employees of Seller or the Company, or any investment bank, financial advisor, attorney, accountant or other representative of Seller or the Company to take any such action; provided, however, in the event that the Gaming Board fails to approve -------- ------- the transactions contemplated by this Agreement by May 31, 1999, this sentence shall not prohibit Thomas Celani and Roland Gentner from filing after May 31, 1999 documentation with the Gaming Board and any other regulatory authority necessary to obtain approval for such individuals to own an interest in the Joint Venture and/or the Company. Seller shall promptly notify Purchaser of all relevant terms of any such inquiries and proposals received by it or the Company or by any such officer, director, employee, investment banker, financial advisor, attorney, accountant or other representative relating to such matters, and if such inquiry or proposal is in writing, Seller shall deliver or cause to be delivered to Purchaser a copy of such inquiry or proposal. For purposes of this Agreement, "Company Acquisition Proposal" shall mean any of the following (other than the transactions between Seller and Purchaser contemplated hereunder) involving the Company: (i) any merger, consolidation, share exchange, business combination, or other similar transaction; (ii) any sale, lease, exchange, mortgage, pledge, transfer or other disposition of any of the assets or securities of the Company in a single transaction or series of transactions; or (iii) any acquisition, issuance or transfer of shares of capital stock or other securities of the Company. 4.4 No Disposal of Property. Seller will cause the Company to refrain ----------------------- from (a) disposing of any assets of the Company and from permitting any of such assets to be subjected to any Liens, (b) entering into any contracts obligating the Company to administer or manage the operations of any other person, and (c) entering into any contracts permitting any person, other than the Company to administer or manage the operations of the Company. 4.5 No Breach or Default. Seller will cause the Company to, and the -------------------- Company will, refrain from violating, breaching, or defaulting and from taking or failing to take any action that (with or without notice or lapse of time or both) would constitute a violation, breach, or default, under any term or provision of any contract listed in Schedule 2.12. ------------- 4.6 No Acquisitions. Seller will cause each of the Company to, and the --------------- Company will, refrain from (a) merging, consolidating, or otherwise combining or agreeing to merge, consolidate, or otherwise combine with any other person, (b) acquiring or agreeing to acquire all or substantially all assets or capital stock or other equity securities of any other person, or (c) otherwise acquiring or agreeing to acquire control or ownership of any other person. 4.7 Resignations of Managers. Seller will cause such managers and such ------------------------ officers of the Company as are designated by Purchaser to tender, effective at the Closing, their resignations as managers and officers. If requested by Purchaser, Seller will cause the election of Purchaser's nominees as managers of the Company. 10 4.8 Tax Matters. ----------- (a) The Company shall not, prior to the Closing Date, admit any new members. (b) All transfer and sales Taxes incurred in connection with this Agreement and the transactions contemplated hereby shall be borne by Seller, and the Seller shall, at its own expense, file to the extent required by applicable law all necessary Tax Returns and other documentation with respect to all such transfer or sales Taxes and, if required by applicable law, the Purchaser will join in the execution of any such Tax Returns or other documentation. 4.9 Books and Records. On the date of the Closing (the "Closing Date") ----------------- Seller will deliver to Purchaser all books and records of the Company. If (at any time after the Closing) Seller discovers in its possession or under its control any other books and records of the Company, Seller will forthwith deliver such books and records to Purchaser. 4.10 Notice and Cure. Seller will notify Purchaser promptly in --------------- writing of and contemporaneously will provide Purchaser with true and complete copies of any and all information or documents relating to, any event, transaction, or circumstance occurring after the date hereof that causes or will cause any covenant or agreement of Seller or the Company under this Agreement to be breached or that renders or will render untrue any representation or warranty of Seller or the Company contained in this Agreement. Seller will use all commercially reasonable efforts to cure, before the Closing, (a) any such breach or misrepresentation and (b) any violation or breach of any representation, warranty, covenant, or agreement made by it in this Agreement, whether occurring or arising before or after the date hereof. ARTICLE V CONDITIONS TO OBLIGATIONS OF PURCHASER The obligation of Purchaser to close is subject to the following conditions precedent: 5.1 Representations and Warranties. Each representation and warranty made ------------------------------ by Seller or the Company in this Agreement, in the certificates delivered by Seller or the Company pursuant to this Agreement and in schedules hereto shall be true in all material respects on the date on which made and shall be true in all material respects on and as of the Closing Date as though such representation and warranty were made on and as of the Closing Date. 5.2 Performance. Each of Seller and the Company shall have performed or ----------- complied with all its agreements, covenants and obligations required to be performed or complied with by this Agreement on or before the Closing Date. 5.3 No Injunctions. There shall not be in effect on the Closing Date any -------------- injunction or similar restraining order of any court or governmental authority of competent jurisdiction 11 preventing either party from consummating any of the transactions contemplated by this Agreement nor shall there be any writ, injunction, decree or similar order or any court or governmental authority of competent jurisdiction that would impose any limitation on Purchaser's ability to exercise full rights of ownership of the Membership Interest. 5.4 Consents and Authorizations. Each of the governmental and other --------------------------- approvals, consents, permits, or waivers listed in Schedule 2.6 and in Schedule ------------ -------- 3.3 and the consent of the Gaming Board shall have been obtained for the - --- consummation of the transactions contemplated by this Agreement. 5.5 No Adverse Change. Prior to the Closing Date, there shall not have ----------------- been, occurred, or arisen any change in, or any event, condition, or state of facts of any character that individually or in the aggregate has or may reasonably be expected to have a material adverse effect on the business, condition (financial or otherwise), assets, results of operations or properties of the Company or the Joint Venture. 5.6 Officer's Certificates. Seller and the Company shall have delivered ---------------------- to Purchaser a certificate, dated the Closing Date and signed by a duly authorized officer of the Seller and the Company, to the effect of the statements set forth in Sections 5.1 and 5.2. In addition, Seller and the ------------ --- Company shall have delivered to Purchaser a certificate, dated the Closing Date and executed by the secretary or any assistant secretary of Seller and the Company, certifying as to the certificate of incorporation, bylaws, resolutions and encumbancy of the Seller and certificate of formation, operating agreement, resolution and encumbancy of the Company. Each such certificate shall be in form and substance reasonably satisfactory to Purchaser. 5.7 Resignations. Seller shall have delivered to Purchaser the written ------------ resignations of the managers and officers of the Company. 5.8 Consulting Agreement. On or before the Closing, the Seller and the -------------------- Joint Venture shall execute any necessary documents to (i) terminate the Consulting Agreement between the Joint Venture and the Seller dated September 22, 1998, and (ii) release Seller and the Joint Venture from all obligations thereunder. ARTICLE VI CONDITIONS TO OBLIGATIONS OF SELLER ----------------------------------- The obligation of Seller to close is subject to the following conditions precedent: 6.1 Representations and Warranties. Each representation and warranty ------------------------------ made by Purchaser in this Agreement, in the certificates delivered by Purchaser pursuant to this Agreement and in schedules hereto shall be true in all material respects on the date on which made and shall be true in all material respects on and as of the Closing Date as though such representations and warranties were made on and as of the Closing Date. 12 6.2 Performance. Purchaser shall have performed or complied with all ----------- its agreements, covenants and obligations required to be performed or complied with by this Agreement on or before the Closing Date. 6.3 No Injunctions. There shall not be in effect on the Closing Date -------------- any injunction or similar restraining order of any court or governmental authority of competent jurisdiction preventing either party from consummating any of the transactions contemplated by this Agreement. 6.4 Consents and Authorizations. The consent of the Gaming Board shall --------------------------- have been obtained. 6.5 Officer's Certificates. Purchaser shall have delivered to Seller a ---------------------- certificate, dated the Closing Date and signed by an authorized officer, to the effect of the statements set forth in Sections 6.1 and 6.2. In addition, ------------ --- Purchaser shall have delivered to Seller a certificate, dated the Closing Date and executed by the secretary or any assistant secretary of Purchaser certifying as to the articles of incorporation, bylaws, resolutions and encumbancy of Purchaser. Such certificates shall be in the form and substance reasonably satisfactory to Seller. ARTICLE VII SURVIVAL OF PROVISIONS ---------------------- 7.1 Survival of Representations and Warranties. The representations and ------------------------------------------ warranties respectively made by Seller, the Company (before the Closing Date) and Purchaser in this Agreement, in the schedules hereto and in any certificate delivered pursuant to this Agreement will survive the Closing and will remain in full force and effect for 18 months thereafter; provided, however, that the -------- ------- representations and warranties in (i) Sections 2.1, 2.2, 2.3, 2.4, 2.5 and 2.6 ------------ --- --- --- --- --- shall survive forever, and (ii) Section 2.8 shall survive until the expiration ----------- of the applicable statues of limitations relating to such taxes. 7.2 Survival of Covenants and Agreements. All covenants and agreements ------------------------------------ respectively made by Seller, the Company (before the Closing Date) and Purchaser in this Agreement to be performed after the date hereof will survive the Closing and will remain in full force and effect thereafter, until the expiration of the terms or periods specified therein or (if there is no such specified term or period) indefinitely without regard to duration. ARTICLE VIII INDEMNIFICATION --------------- 8.1 Indemnification by Seller. Subject to the provisions of Sections 7.1, ------------------------- --- 8.4 and 8.5 hereof, Seller, and the Company before the Closing Date, will - --- --- indemnify and hold harmless the Purchaser and its officers, directors, shareholders, employees and agents (each a "Purchaser Party") 13 (whether or not such Purchaser Party owns any Membership Interest) in respect of any and all taxes, monetary damages, Liabilities, fines, fees, penalties, interest obligations, deficiencies, losses and expenses (including without limitation punitive, treble, or other exemplary or extra contractual damages, amounts paid in settlement, interest, court costs, costs of investigation, fees and expenses of attorneys, accountants, actuaries, consultants and other experts and other expenses of litigation or of any claim, default, or assessment) (collectively, "Damages") resulting from or relating to any breach by Seller or the Company of any representation, warranty, covenant, or agreement made by Seller or the Company in this Agreement, in the schedules hereto, or in any certificate delivered by Seller or the Company in connection with this Agreement. 8.2 Indemnification by Purchaser. Subject to the provisions of ---------------------------- Sections 8.4 and 8.5 hereof, Purchaser will indemnify and hold harmless Seller - ------------ --- and its officers, directors, shareholders, employees and agents (each a "Seller Party") (whether or not such Seller Party sells any Membership Interest) in respect of any and all Damages resulting from or relating to any breach by Purchaser of any representation, warranty, covenant, or agreement made by Purchaser in this Agreement or in any schedule hereto or certificate delivered by Purchaser in connection with this Agreement. 8.3 ERISA Indemnification. Seller shall indemnify and hold Purchaser --------------------- harmless with respect to any Damages arising as a result of any "employee benefit plan" (within the meaning of Section 3(3) of ERISA) maintained, sponsored or contributed to at any time by the Company or any trade or business (whether or not incorporated) which is under common control or treated as a single employer with the Company under Sections 414(b), (c), (m) or (o) of the Code. 8.4 Indemnification Procedures. -------------------------- (a) If any Purchaser Party or Seller Party, as the case may be (each an "Indemnitee") becomes aware of any matter for which it believes it is entitled to indemnification hereunder that involves (i) any claim made against the Indemnitee by any person or entity other than a Purchaser Party or a Seller Party or (ii) the commencement of any action, suit, investigation, arbitration, or similar proceeding against the Indemnitee by any person other than a Purchaser Party or a Seller Party, the Indemnitee will give the Seller or Purchaser, as appropriate (each an "Indemnifying Party") prompt written notice of such claim or the commencement of such action, suit, investigation, arbitration, or similar proceeding. Such notice will (A) provide (with reasonable specificity) the basis on which indemnification is being asserted, (B) set forth the actual or estimated amount of Damages for which indemnification is being asserted, if known, and (C) be accompanied by copies of all relevant pleadings, demands and other papers served on the Indemnitee. (b) The Indemnifying Party will have a period of 30 days after the delivery of each notice required by Section 8.4(a) hereof during which to -------------- respond to such notice. If the Indemnifying Party elects to defend the claim described in such notice or does not respond within such 30-day period, the Indemnifying Party will be obligated to compromise or defend (and will control the defense of) such claim, at its own expense and by counsel chosen by the 14 Indemnifying Party and reasonably satisfactory to the Indemnitee. The Indemnitee will cooperate fully with the Indemnifying Party and counsel for the Indemnifying Party in the defense against any such claim and the Indemnitee will have the right to participate at its own expense in the defense of any such claim. If the Indemnifying party responds within such 30-day period and elects not to defend such claim, the Indemnitee will be free to compromise or defend (and control the defense of) such claim and to pursue such remedies as may be available to the Indemnitee under applicable law. (c) Any compromise or settlement of any claim (whether defended by the Indemnitee or by the Indemnifying Party) will require the prior written consent of the Indemnitee and the Indemnifying Party. (d) If an Indemnitee becomes aware of any matter for which it believes it is entitled to indemnification hereunder and such matter involves a claim made by any Purchaser Party or Seller Party, the Indemnitee will give the Indemnifying Party prompt written notice of such claim. Such notice will (i) provide (with reasonable specificity) the basis for which indemnification is being asserted and (ii) set forth the actual or estimated amount of Damages for which indemnification is being asserted. The Indemnifying Party will have a period of 10 days after the delivery of each notice required by this Section ------- 8.4(d) during which to respond to such notice. If the Indemnifying Party - ------ accepts (in writing) full responsibility for the claim described in such notice, the actual or estimated amount of Damages reflected in such notice will be conclusively deemed a Liability that the Indemnifying Party owes and will pay (in cash) upon demand, to the Indemnitee. If the Indemnifying Party has disputed such claim or does not respond within such 10-day period, the Indemnifying Party and the Indemnitee agree to proceed in good faith to negotiate a resolution of such dispute. If all such disputes are not resolved through negotiations within 10 days after such negotiations begin, either the Indemnifying Party or the Indemnitee may initiate litigation to resolve such disputes. If the Indemnifying Party does not respond within 10 days after delivery of any claim notice required by this Section 8.4(d), the Indemnitee may initiate litigation to -------------- resolve such claim. 8.5 Indemnification Payments. Seller and Purchaser agree that any payment ------------------------ made under ARTICLE VIII hereof will be treated by the parties on their Tax ------------ Returns as an adjustment to the aggregate consideration for the Membership Interest. If, notwithstanding such treatment by the parties, any indemnity payment is determined to be taxable to Purchaser by any taxing authority, Seller shall indemnify Purchaser for any Taxes payable by Purchaser by reason of the receipt of such indemnity payment (including any payments under this Section 8.5), determined at a Tax rate equal to the maximum marginal federal, state and local corporate income Tax rate for the taxable year in which the indemnity is determined to be taxable to Purchaser. 15 ARTICLE IX TERMINATION ----------- 9.1 Termination. Without limiting the rights or remedies that any party ----------- hereto may otherwise have, this Agreement may be terminated and the transactions contemplated hereby may be abandoned: (a) at any time before the Closing by written agreement of Seller and Purchaser; or (b) at any time after August 31, 1999, by Seller or Purchaser if the Closing has not occurred on or before such date and such failure to close is not caused by a breach of this Agreement (or any representation, warranty, covenant, or agreement included herein) by the party electing to terminate pursuant to this Section 9.1(b). 9.2 Effect of Termination. If this Agreement is validly terminated --------------------- pursuant to Section 9.1 hereof, (a) the obligation of Purchaser to purchase the ----------- Membership Interest and the obligation of Seller to sell the Membership Interest will terminate, (b) the provisions of Sections 10.5, 10.7 and 10.8 hereof will ------------- ----- ---- continue to apply following any such termination and (c) no party hereto will be relieved of any Liability for Damages that such party may have to the other party by reason of such party's breach of this Agreement (or any representation, warranty, covenant, or agreement included herein). ARTICLE X MISCELLANEOUS 10.1 Notices. Any notice or other communication given pursuant to ------- this Agreement must be in writing and (a) delivered personally, (b) sent by telefacsimile or other similar facsimile transmission, (c) delivered by overnight express, charges prepaid, or (d) sent by registered or certified mail, postage prepaid, as follows: (i) If to Seller or Company: Sodak Gaming, Inc. 5301 South Highway 16 Rapid City, South Dakota 57701 Attention: General Counsel Facsimile Number: (605) 355-4976 16 with a copy to: John T. Kramer Dorsey & Whitney LLP 220 South Sixth Street Minneapolis, Minnesota 55402 Facsimile Number: (612) 340-8738 (ii) If to Purchaser: HWCC-Louisiana, Inc. c/o Hollywood Gaming Corporation Two Galleria Tower, Suite 2200 13455 Noel Road, LB48 Dallas, Texas 75240 Attention: General Counsel Facsimile Number: (972) 716-3903 with copies to: Weil, Gotshal & Manges 100 Crescent Court, Suite 1300 Dallas, Texas 75201-6950 Attention: Michael A. Saslaw Facsimile number: 214-746-7777 All notices and other communications required or permitted under this Agreement that are addressed as provided in this Section 10.1 will (A) if ------------ delivered personally or by overnight express, be deemed given upon delivery; (B) if delivered by telefacsimile or similar facsimile transmission, be deemed given when electronically confirmed; and (C) if sent by registered or certified mail, be deemed given on the third day after delivery of such notice to the United States Post Office for delivery. Any party from time to time may change its address for the purpose of notices to that party by giving a similar notice specifying a new address, but no such notice will be deemed to have been given until it is actually received by the party sought to be charged with the contents thereof. 17 10.2 Entire Agreement; Interpretation. Except for documents executed -------------------------------- by Seller, the Company and Purchaser pursuant hereto, this Agreement supersedes all prior discussions and agreements between the parties with respect to the subject matter of this Agreement and this Agreement contains the sole and entire agreement between the parties hereto with respect to the subject matter hereof. Unless the context of this Agreement otherwise requires, (a) words of any gender are deemed to include each other gender; (b) words using the singular or plural number also include the plural or singular number, respectively; (c) the terms "hereof," "herein," "hereby," "hereto," and derivative or similar words refer to this entire Agreement; (d) the terms "ARTICLE" or "Section" refer to the specified ARTICLE or Section of this Agreement; (e) the term "or" means "and/or"; (f) the term "party" means, on the one hand, Purchaser and, on the other hand, Seller and the Company (before the Closing Date) and (g) all references to "dollars" or "$" refer to currency of the United States of America. 10.3 Expenses. Except as otherwise expressly provided in this -------- Agreement (including without limitation as provided in ARTICLE VIII hereof), ------------ each of Seller and Purchaser will pay its own costs and expenses in connection with this Agreement and the transactions contemplated hereby. 10.4 Brokers. Seller will indemnify and hold harmless each Purchaser ------- Party in respect of any and all claims or demands for commission, compensation, or other Damages by any broker, finder, or other agent (whether or not a present or former employee or agent of Seller or the Company) claiming to have been engaged by Seller or the Company in connection with the transactions contemplated by this Agreement. 10.5 Further Assurances. Seller and Purchaser agree that, from time ------------------ to time after the Closing, upon the reasonable request of the other, they will cooperate and will cause their respective Affiliates to cooperate with each other to effect the orderly transition of the business, operations and affairs of the Company. Without limiting the generality of the foregoing, (a) Seller will provide, and will cause its Affiliates to provide, representatives of Purchaser reasonable access to all books and records of the Company reasonably requested by Purchaser in the preparation of any post-Closing financial statements, reports, or tax returns of the Company; (b) Purchaser will provide representatives of Seller reasonable access to all pre-closing books and records of the Company reasonably requested by Seller in the preparation of any post- Closing financial statements, reports, or tax returns of Seller; and (c) each party hereto will execute such documents and instruments as the other party hereto may reasonably request containing terms and conditions mutually satisfactory to each party hereto to further effectuate the terms hereof. 10.6 Waiver. Any term or condition of this Agreement may be waived at ------ any time by the party that is entitled to the benefit thereof. Such waiver must be in writing and must be executed by an executive officer of such party. A waiver on one occasion will not be deemed to be a waiver of the same or any other breach or nonfulfillment on a future occasion. All remedies, either under this Agreement, or by law or otherwise afforded, will be cumulative and not alternative. 18 10.7 Amendment. This Agreement may be modified or amended only by a --------- writing duly executed by or on behalf of Seller, the Company and Purchaser. 10.8 Counterparts. This Agreement may be executed simultaneously in ------------ any number of counterparts, each of which will be deemed an original, but all of which will constitute one and the same instrument. 10.9 No Third Party Beneficiary. The terms and provisions of this -------------------------- Agreement are intended solely for the benefit of Seller, Purchaser, each Seller Party, each Purchaser Party and their respective successors and permitted assigns and it is not the intention of the parties to confer third-party beneficiary rights upon any other person. 10.10 Governing Law. This Agreement will be governed by and construed ------------- and enforced in accordance with the laws of the State of Louisiana (without regard to the principles of conflict of laws) applicable to a contract executed and performable in such state. 10.11 Binding Effect. This Agreement is binding upon and will inure to -------------- the benefit of the parties and their respective successors and permitted assigns. 10.12 No Assignment. Neither this Agreement nor any right or ------------- obligation hereunder or part hereof may be assigned by any party hereto without the prior written consent of the other party hereto (and any attempt to do so will be void), except as otherwise specifically provided herein and except that Purchaser may assign all or any part of the rights or obligations of Purchaser hereunder to one or more affiliates of Purchaser without the consent Seller; provided, however, that upon such assignment Purchaser shall not be deemed to be - -------- ------- released from any of its obligations hereunder. 10.13 Invalid Provisions. If any provision of this Agreement is held ------------------ to be illegal, invalid, or unenforceable under any present or future law and if the rights or obligations under this Agreement of Seller and Purchaser will not be materially and adversely affected thereby, (a) such provision will be fully severable; (b) this Agreement will be construed and enforced as if such illegal, invalid, or unenforceable provision had never comprised a part hereof; (c) the remaining provisions of this Agreement will remain in full force and effect and will not be affected by the illegal, invalid, or unenforceable provision or by its severance herefrom; and (d) in lieu of such illegal, invalid, or unenforceable provision, there will be added automatically as a part of this Agreement a legal, valid and enforceable provision as similar in terms to such illegal, invalid, or unenforceable provision as may be possible. 10.14 Confidentiality. (a) Each of Purchaser and Seller will refrain, --------------- and will cause its respective officers, directors, employees, agents and other representatives to refrain, from disclosing to any other person any confidential documents or confidential information concerning the other party hereto furnished to it in connection with this Agreement or the transactions contemplated hereby and (b) Seller will refrain, and will cause its respective officers, directors, employees, agents and other representatives to refrain, from disclosing to any person any confidential documents or confidential information concerning the Company or the Joint Venture 19 unless (i) such disclosure is compelled by judicial or administrative process or by other requirements of law and notice of such disclosure is furnished to such other party hereto; (ii) either party hereto deems it advisable (upon advice of such party's legal counsel) to disclose any such confidential documents or information in connection with the requirements of any securities law; or (iii) such confidential documents or information can be shown to have been (A) previously known by the party hereto receiving such documents or information, (B) in the public domain through no fault of such receiving party, or (C) later acquired by such receiving party from other public sources. 10.15 Certain Definitions. ------------------- "Code" means the Internal Revenue Code of 1986, as amended unless otherwise ---- provided. "Person" means any individual, corporation, partnership, firm, joint ------ venture, association, joint-stock company, trust, ,unincorporated organization, governmental body or other entity. "Taxing Authority" means any department, bureau or agency of any Taxing ---------------- Jurisdiction having the legal authority to collect taxes, or administer the tax laws of any Taxing Jurisdiction, or with whom or which Tax Returns are required to be filed. "Taxing Jurisdiction" means the United States of America, any foreign ------------------- country, any state or local government, or any political subdivision of any of the foregoing, that imposes or administers any Tax, or which requires, by statue, regulation or otherwise, the filing of any Tax Return. "Taxes" means (i) all federal, state, local or foreign taxes, charges, ----- fees, imposts, levies or other assessments, including, without limitation, all net income, gross receipts, capital sales, use, ad valorem, value added, transfer, franchise, profits, inventory, capital stock, license, withholding, payroll, employment, social security, unemployment, excise, severance, stamp, occupation, property and estimated taxes, customs duties, fees, assessments and charges of any kind whatsoever, (ii) all interest, penalties, fines, additions to tax or additional amounts imposed by any Taxing Authority in connection with any item described in clause (i), and (iii) any transferee liability in respect of any items described in clauses (i) and (ii). "Tax Returns" means all returns, declarations, reports, estimates, ----------- information returns and statements required to be filed in respect of any Taxes. 20 IN WITNESS WHEREOF, this Agreement has been duly executed and delivered as of the date first written above by the duly authorized officers of Seller, the Company and Purchaser. PURCHASER: HWCC-LOUISIANA, INC. By: /s/ Jack E. Pratt --------------------------- Name: Jack E. Pratt Title: President SELLER: SODAK GAMING, INC. By: /s/ ROLAND GENTNER ----------------------------- Name: Roland Gentner --------------------------- Title: CEO -------------------------- COMPANY: SODAK LOUISIANA, L.L.C. By: /s/ MICHAEL G. DIEDRICH ----------------------------- Name: Michael G. Diedrich --------------------------- Title: Manager -------------------------- 21 EX-11.1 9 RE COMPUTATION OF PER SHARE(LOSSES) INCOME EXHIBIT 11.1 HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES STATEMENT RE COMPUTATION OF PER SHARE (LOSS) INCOME
YEAR ENDED DECEMBER 31, ---------------------------------------------------------------------- 1998 1997 (2) 1996 1995 1994 ------------ ------------- ------------- ------------- ----------- Calculation of (loss) income: Net (loss) income before extraordinary items $(1,269,000) $(17,132,000) $(55,293,000) $ 6,520,000 $ 1,744,000 Extraordinary items (336,000) (215,000) - (23,808,000) 126,000 ----------- ------------ ------------ ------------ ----------- Net (loss) income to common stockholders $(1,605,000) $(17,347,000) $(55,293,000) $(17,288,000) $ 1,870,000 =========== ============ ============ ============ =========== Calculation of number of shares: Weighted average shares outstanding used for basic per share calculation 24,946,000 24,833,000 24,721,000 24,602,000 23,490,000 Weighted average options outstanding (1) - - - 248,000 575,000 Weighted average warrants outstanding (1) - - - - 786,000 ----------- ------------ ------------ ------------ ----------- Weighted average shares outstanding used for diluted per share calculation 24,946,000 24,833,000 24,721,000 24,850,000 24,851,000 =========== ============ ============ ============ =========== Basic per share data: Net (loss) income to commons stockholders before extraordinary items $ (0.05) $ (0.69) $ (2.24) $ 0.27 $ 0.07 Extraordinary items (0.01) (0.01) - (0.97) 0.01 ----------- ------------ ------------ ------------ ----------- Net (loss) income to common stockholders $ (0.06) $ (0.70) $ (2.24) $ (0.70) $ 0.08 =========== ============ ============ ============ =========== Diluted per share data: Net (loss) income to common stockholders before extraordinary items $ (0.05) $ (0.69) $ (2.24) $ 0.26 $ 0.07 Extraordinary items (0.01) (0.01) - (0.96) 0.01 ----------- ------------ ------------ ------------ ----------- Net (loss) income to common stockholders $ (0.06) $ (0.70) $ (2.24) $ (0.70) $ 0.08 =========== ============ ============ ============ ===========
________________ (1) Not included for loss periods as the effect would be antidilutive. (2) Restated to reflect the modification of taxes resulting from the distribution of the common stock of Greate Bay Casino Corporation--see Note 3 of Notes to Consolidated Financial Statements of HCC. EX-21.1 10 SUBSIDIARIES OF HOLLYWOOD CASINO CORPORATION 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 HWCC-Shreveport, Inc. 13455 Noel Road Louisiana Suite 2200, LB48 Dallas, TX 75240 EX-27.1 11 FINANCIAL DATA SCHEDULE HOLLYWOOD CASINO CORP.
5 THIS SCHEDULE CONTIANS 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 12-MOS 12-MOS 12-MOS DEC-31-1998 DEC-31-1997 DEC-31-1996 JAN-01-1998 JAN-01-1997 JAN-01-1996 DEC-31-1998 DEC-31-1997 DEC-31-1996 42,118 40,259 21,488 0 0 0 3,836 3,935 4,833 1,468 1,188 1,693 1,385 1,454 1,620 61,467 60,902 42,166 248,457 237,261 235,240 80,642 66,099 49,740 270,740 276,218 308,158 34,754 38,404 36,018 219,615 219,261 223,764 0 0 0 0 0 0 2 2 2 7,510 9,115 38,834 270,740 276,218 308,158 0 0 0 268,760 267,757 530,580 0 0 0 196,991 185,055 423,738 43,961 45,558 80,911 845 20,376 25,172 27,416 28,541 55,989 (453) (11,773) (55,230) 816 5,359 63 (1,269) (17,132) (55,293) 0 0 0 (336) (215) 0 0 0 0 (1,605) (17,347) (55,293) (.06) (.70) (2.24) (.06) (.70) (2.24)
EX-27.2 12 FINANCIAL DATA SCHEDULE TUNICA, INC.
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 12-MOS 12-MOS DEC-31-1998 DEC-31-1997 JAN-01-1998 JAN-01-1997 DEC-31-1998 DEC-31-1997 16,325 11,851 0 0 1,980 2,215 813 705 779 660 24,397 20,658 122,898 117,678 38,910 31,760 120,461 118,727 10,151 9,647 85,023 85,198 0 0 0 0 0 0 25,287 23,882 120,461 118,727 0 0 105,773 107,263 0 0 78,845 76,560 14,001 15,679 483 498 10,350 10,699 2,094 3,827 689 (845) 1,405 4,672 0 0 0 0 0 0 1,405 4,672 0 0 0 0
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