SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM-10Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2001
-------------------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________________ to ____________________
Commission file number 33-48887
--------------------
HOLLYWOOD CASINO CORPORATION
HWCC-TUNICA, INC.
--------------------------------------------------------------------------------
(Exact name of each Registrant as specified in its charter)
Delaware 75-2352412
Texas 75-2513808
---------------------------------------- ---------------------
(States or other jurisdictions of (I.R.S. Employer
incorporation or organization) Identification No.'s)
Two Galleria Tower, Suite 2200
13455 Noel Road, LB 48
Dallas, Texas 75240
---------------------------------------- ---------------------
(Address of principal executive offices) (Zip Code)
(Registrants' telephone number, including area code) (972) 392-7777
--------------------------
(Not Applicable)
--------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether each of the Registrants (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that each
of the Registrants was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Registrant Class Outstanding at May 11, 2001
------------------------------ ------------------------------ ---------------------------
Hollywood Casino Corporation Common Stock, $.0001 par value 24,996,676 Shares
HWCC-Tunica, Inc. Common Stock, $.01 par value 1,000 Shares
1
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
Part I: Financial Information
-----------------------------
Introductory Notes to Consolidated Financial Statements
-------------------------------------------------------
Hollywood Casino Corporation ("HCC" or the "Company") develops, owns and
operates distinctively themed casino entertainment facilities under the service
mark Hollywood Casino(R). Through its subsidiaries, HCC currently owns and
operates a riverboat casino and entertainment facility in Aurora, Illinois
approximately 35 miles west of downtown Chicago (the "Aurora Casino"); a casino,
hotel and entertainment complex in Tunica County, Mississippi located
approximately 30 miles south of Memphis, Tennessee (the "Tunica Casino") and a
destination gaming resort located in Shreveport, Louisiana, approximately 180
miles east of Dallas, Texas (the "Shreveport Casino"). Each of the Company's
facilities features its 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. Approximately 46% of HCC's
outstanding common shares are listed and traded on the American Stock Exchange
under the symbol "HWD". The remaining outstanding HCC common shares are owned by
Jack E. Pratt, Edward T. Pratt, Jr., William D. Pratt, Edward T. Pratt III and
by certain general partnerships and trusts controlled by the Pratts and by other
family members (collectively, the "Pratt Family").
HCC owns all of the outstanding common stock of Hollywood Casino - Aurora,
Inc. ("HCA"), HWCC - Tunica, Inc. ("HCT"), HWCC-Louisiana, Inc. ("HCL") and
HWCC-Shreveport, Inc. ("Shreveport Management"). 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 to
acquire and complete the Tunica Casino. HCL is a Louisiana corporation formed
by HCC in 1993 to pursue gaming opportunities in Louisiana. HCL owns the
partnership (the "Shreveport Partnership") which has an effective 100%
ownership interest in the Shreveport Casino. HCC's joint venture partner holds
a residual interest in the event that the Shreveport Casino is ever sold
amounting to 10% plus any capital contributions made by the joint venture
partner to the Shreveport Partnership or otherwise credited to their account.
The joint venture partner's interest is included in minority interest on the
accompanying consolidated balance sheets. Shreveport Management is a Louisiana
corporation formed by HCC in 1997 which holds the management contract for the
Shreveport Casino.
During May 1999, HCC issued $310,000,000 of 11.25% Senior Secured Notes due
May 1, 2007 and $50,000,000 of floating rate Senior Secured Notes due May 1,
2006 (collectively, the "Senior Secured Notes"). The Senior Secured Notes are
unconditionally guaranteed on a senior secured basis by HCT, Shreveport
Management and by certain future subsidiaries of HCC. The Senior Secured Notes
are secured by, among other things, (1) substantially all of the assets of HCT,
(2) a limited lien on substantially all of the assets of HCA and (3) a pledge of
the capital stock of certain subsidiaries of HCC including HCA and HCT.
Accordingly, the financial statements of HCA and HCT are also included herein.
Shreveport Management's only source of revenues is management fees earned from
the Shreveport Casino. Shreveport Management has no significant operations,
assets or liabilities; accordingly, separate financial statements are not
included herein because management has determined that such information is not
material to investors. HCL has been designated an "Unrestricted Subsidiary" of
HCC and the operations of the Shreveport Casino, other than management fees paid
to Shreveport Management, do not provide credit support for the Senior Secured
Notes.
Proceeds of the debt offering were used to refinance previously outstanding
debt, to fund a portion of HCC's equity investment in the Shreveport Casino and,
during October 1999, to purchase and terminate the management and consulting
agreements on the Aurora Casino and Tunica Casino. The
2
Company also plans to use proceeds from the debt offering for an expansion of
the Aurora Casino's operating facilities.
During August 1999, the Shreveport Partnership issued $150,000,000 of 13%
First Mortgage Notes, with contingent interest, which are non-recourse to HCC.
Because the partnership is effectively owned and controlled by HCL, the
financial statements of the partnership, including its debt obligations, are
included in the accompanying consolidated financial statements of HCC.
The principal executive offices of HCC are located at Two Galleria Tower,
Suite 2200, 13455 Noel Road, Dallas, Texas 75240, telephone (972) 392-7777.
The consolidated financial statements and financial statements as of March
31, 2001 and for the three month periods ended March 31, 2001 and 2000 have been
prepared by HCC, HCA and HCT without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. In the opinion of
management, these consolidated financial statements and financial statements
contain all adjustments (consisting of only normal recurring adjustments)
necessary to present fairly the consolidated financial position of HCC and HCT
and the financial position of HCA as of March 31, 2001, and the results of their
operations and cash flows for the three month periods ended March 31, 2001 and
2000.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. These financial statements should be read in
conjunction with the financial statements and notes thereto included in HCC and
HCT's 2000 Annual Report on Form 10-K.
Historically, the Aurora Casino and Tunica Casino have experienced some
degree of seasonality and it is likely that the Shreveport Casino will also
experience seasonality. Consequently, the results of operations for the three
month period ended March 31, 2001 are not necessarily indicative of the
operating results to be reported for the full year.
3
INDEPENDENT ACCOUNTANTS' REPORT
To the Board of Directors and Stockholders of
Hollywood Casino Corporation
Dallas, Texas
We have reviewed the accompanying condensed consolidated balance sheet of
Hollywood Casino Corporation and subsidiaries as of March 31, 2001, and the
related condensed consolidated statements of operations and cash flows for the
three month periods ended March 31, 2001 and 2000. These financial statements
are the responsibility of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and of making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with auditing standards generally accepted in the United States of
America, the objective of which is the expression of an opinion regarding the
financial statements taken as a whole. Accordingly, we do not express such an
opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to such condensed consolidated financial statements for them to be in
conformity with accounting principles generally accepted in the United States of
America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet of
Hollywood Casino Corporation and subsidiaries as of December 31, 2000, and the
related consolidated statements of operations, shareholders' deficit and cash
flows for the year then ended (not presented herein); and in our report dated
March 15, 2001, we expressed an unqualified opinion on those consolidated
financial statements. In our opinion, the information set forth in the
accompanying condensed consolidated balance sheet as of December 31, 2000 is
fairly stated, in all material respects, in relation to the consolidated balance
sheet from which it has been derived.
DELOITTE & TOUCHE LLP
Dallas, Texas
May 8, 2001
4
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
March 31,
2001 December 31,
(Unaudited) 2000
------------- -------------
Current Assets:
Cash and cash equivalents $ 163,120,000 $ 155,570,000
Receivables, net of allowances of
$2,815,000 and $2,668,000, respectively 6,820,000 5,552,000
Inventories 3,727,000 3,603,000
Deferred income taxes 2,574,000 3,054,000
Refundable deposits and other
current assets 3,205,000 4,153,000
Due from affiliates, net of valuation allowances 6,491,000 6,661,000
------------- -------------
Total current assets 185,937,000 178,593,000
------------- -------------
Property and Equipment:
Land 9,640,000 9,594,000
Buildings and improvements 224,252,000 222,637,000
Riverboats and barges 89,797,000 89,421,000
Operating equipment 137,442,000 134,362,000
Construction in progress 3,887,000 4,849,000
------------- -------------
465,018,000 460,863,000
Less - accumulated depreciation
and amortization (113,885,000) (105,406,000)
------------- -------------
Net property and equipment 351,133,000 355,457,000
------------- -------------
Cash restricted for construction projects - 9,530,000
------------- -------------
Other Assets:
Deferred financing costs 14,147,000 14,875,000
Land rights 6,792,000 6,843,000
Other assets 12,511,000 12,602,000
------------- -------------
Total other assets 33,450,000 34,320,000
------------- -------------
$ 570,520,000 $ 577,900,000
============= =============
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated balance sheets.
5
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' DEFICIT
March 31,
2001 December 31,
(Unaudited) 2000
------------- -------------
Current Liabilities:
Current maturities of long-term debt
and capital lease obligations $ 15,878,000 $ 16,493,000
Note payable 2,499,000 2,499,000
Accounts payable 16,091,000 22,177,000
Accrued liabilities -
Salaries and wages 6,822,000 9,657,000
Interest 23,862,000 18,067,000
Gaming and other taxes 11,032,000 3,229,000
Insurance 3,060,000 2,816,000
Other 6,684,000 5,398,000
Federal income taxes payable 3,299,000 3,299,000
Other current liabilities 4,564,000 3,560,000
------------- -------------
Total current liabilities 93,791,000 87,195,000
------------- -------------
Long-Term Debt 510,446,000 510,868,000
------------- -------------
Capital Lease Obligations 35,159,000 37,861,000
------------- -------------
Other Noncurrent Liabilities 5,578,000 5,658,000
------------- -------------
Commitments and Contingencies (Note 9)
Minority Interest 2,141,000 2,078,000
------------- -------------
Shareholders' Deficit:
Common Stock -
Class A common stock, $.0001 par value per share;
50,000,000 shares authorized; 24,997,000
shares issued and outstanding 2,000 2,000
Class B, non-voting, $.01 par value per share;
10,000,000 shares authorized; no shares issued - -
Additional paid-in capital 217,030,000 217,030,000
Accumulated deficit (293,627,000) (282,792,000)
------------- -------------
Total shareholders' deficit (76,595,000) (65,760,000)
------------- -------------
$ 570,520,000 $ 577,900,000
============= =============
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated balance sheets.
6
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
March 31,
----------------------------
2001 2000
------------ ------------
Revenues:
Casino $122,048,000 $ 80,465,000
Rooms 5,345,000 2,457,000
Food and beverage 14,861,000 7,938,000
Other 2,423,000 1,099,000
------------ ------------
144,677,000 91,959,000
Less - promotional allowances (27,578,000) (16,507,000)
------------ ------------
Net revenues 117,099,000 75,452,000
------------ ------------
Expenses:
Casino 84,952,000 47,913,000
Rooms 880,000 170,000
Food and beverage 5,309,000 2,361,000
Other 1,665,000 346,000
General and administrative 9,072,000 5,454,000
Depreciation and amortization 9,381,000 3,268,000
Preopening - 396,000
Development 166,000 230,000
------------ ------------
Total expenses 111,425,000 60,138,000
------------ ------------
Income from operations 5,674,000 15,314,000
------------ ------------
Non-operating income (expense):
Interest income 1,690,000 3,169,000
Interest expense, net of capitalized interest of
$22,000 and $1,400,000, respectively (17,340,000) (15,080,000)
Equity in losses of unconsolidated affiliates (117,000) (22,000)
(Loss) gain on disposal of assets (66,000) 1,000
------------ ------------
Total non-operating expense, net (15,833,000) (11,932,000)
------------ ------------
(Loss) income before income taxes and other item (10,159,000) 3,382,000
Income tax provision (294,000) (570,000)
------------ ------------
(Loss) income before other item (10,453,000) 2,812,000
Minority interest in Hollywood Casino Shreveport (Note 1) (382,000) -
------------ ------------
Net (loss) income $(10,835,000) $ 2,812,000
============ ============
Basic and diluted net (loss) income per common share $(.43) $.11
============ ============
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated statements.
7
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
March 31,
----------------------------
2001 2000
------------ ------------
OPERATING ACTIVITIES:
Net (loss) income $(10,835,000) $ 2,812,000
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Depreciation and amortization, including accretion
of debt discount 10,152,000 3,843,000
Loss (gain) on disposal of assets 66,000 (1,000)
Minority interest in Hollywood Casino Shreveport 382,000 -
Equity in losses of unconsolidated affiliates 117,000 22,000
Provision for doubtful accounts 489,000 292,000
Deferred income taxes (117,000) 37,000
Increase in accounts receivable (1,757,000) (672,000)
Increase in accounts payable and accrued expenses 6,207,000 14,185,000
Net change in other current assets and liabilities 1,998,000 824,000
Net change in other noncurrent assets and liabilities 587,000 (74,000)
------------ ------------
Net cash provided by operating activities 7,289,000 21,268,000
------------ ------------
INVESTING ACTIVITIES:
Purchases of property and equipment (5,120,000) (30,029,000)
Net change in restricted cash 9,530,000 14,151,000
Proceeds from disposal of assets 48,000 1,000
Investments in unconsolidated affiliates (96,000) -
------------ ------------
Net cash provided by (used in) investing activities 4,362,000 (15,877,000)
------------ ------------
FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt - 104,000
Deferred financing costs - (1,426,000)
Repayments of long-term debt (1,122,000) (814,000)
Payments on capital lease obligations (2,660,000) (147,000)
Issuance of common stock - 4,000
Limited partner distributions (319,000) -
------------ ------------
Net cash used in financing activities (4,101,000) (2,279,000)
------------ ------------
Net increase in cash and cash equivalents 7,550,000 3,112,000
Cash and cash equivalents at beginning of period 155,570,000 115,351,000
------------ ------------
Cash and cash equivalents at end of period $163,120,000 $118,463,000
============ ============
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated statements.
8
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) Organization, Business and Basis of Presentation
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"). The Pratt Family also
owns approximately 36% of the outstanding common stock of Greate Bay Casino
Corporation ("GBCC"), a Delaware corporation, which previously held management
and consulting contracts with casino properties owned by HCC.
HCC owns all of the outstanding common stock of Hollywood Casino - Aurora,
Inc. ("HCA"), HWCC - Tunica, Inc. ("HCT"), HWCC-Louisiana, Inc. ("HCL") and
HWCC-Shreveport, Inc. ("Shreveport Management"). HCA is an Illinois corporation
organized during 1990 which owns and operates a riverboat gaming operation with
approximately 32,000 square feet of gaming space together with docking and other
entertainment facilities under the service mark Hollywood Casino(R) in Aurora,
Illinois approximately 35 miles west of downtown Chicago (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 approximately 30 miles south of Memphis, Tennessee (the
"Tunica Casino"). HCL is a Louisiana corporation formed by HCC in 1993 which
owns and operates a 59,000 square foot dockside gaming facility, adjacent
support facilities, and a 403-room, all suite, art deco style hotel in
Shreveport, Louisiana approximately 180 miles east of Dallas, Texas (the
"Shreveport Casino"). Shreveport Management is a Louisiana corporation formed by
HCC in 1997 which holds the management contract for the Shreveport Casino. The
Aurora Casino, the Tunica Casino and the Shreveport Casino commenced operations
in June 1993, August 1994 and December 2000, respectively.
The Company believes that its three gaming facilities derive a significant
amount of their gaming revenues from patrons living in the surrounding areas.
Competition within the Company's gaming markets is intense and management
believes that this competition will continue or intensify in the future.
In September 1998, a joint venture in which HCL was a partner (the
"Shreveport Partnership") received approval to develop, own and operate the
Shreveport Casino. HCL originally planned to develop the Shreveport Casino with
two partners in a joint venture in which it would have had an interest of
approximately 50%. On March 31, 1999, HCL entered into a definitive agreement
with one of the joint venture partners to acquire its interest in the Shreveport
Partnership. As a result, HCL obtained an effective 100% ownership interest in
the Shreveport Casino with the remaining joint venture partner holding a
residual interest in the event the project is ever sold amounting to 10% plus
any capital contributions made by the joint venture partner to the Shreveport
Partnership or otherwise credited to their account. Accordingly, the Shreveport
Partnership is included in the consolidated financial statements of HCC. The
remaining joint venture partner's interest is reflected as minority interest on
the accompanying consolidated balance sheets at March 31, 2001 and December 31,
2000.
The accompanying consolidated financial statements also reflect HCT's one-
third investment in Tunica Golf Course LLC and the Shreveport Casino's 50%
interest in Shreveport Golf Company under the equity method of accounting.
Tunica Golf Course LLC was organized in 1996 to develop and operate a golf
course to be used by patrons of the Tunica Casino and other participating
casino/hotel properties. The golf course was completed and opened for play in
November 1998. Shreveport Golf
9
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Company was organized in 2000 to develop and operate a golf course to be used by
patrons of the Shreveport Casino and is currently under construction.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America 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.
The consolidated financial statements as of March 31, 2001 and for the
three month periods ended March 31, 2001 and 2000 have been prepared by HCC
without audit. In the opinion of management these consolidated financial
statements contain all adjustments (consisting of only normal recurring
adjustments) necessary to present fairly the consolidated financial position of
HCC as of March 31, 2001 and the results of its operations and cash flows for
the three month periods ended March 31, 2001 and 2000.
During January 2001, the Emerging Issues Task Force ("EITF") of the
Financial Accounting Standards Board reached a consensus requiring that the
"cash-back" feature of a customer loyalty program should be reported as a
reduction in net revenues rather than as an expense. The Company, as required,
adopted the provisions of this new guidance effective with the first quarter of
2001. During April 2001, the EITF concluded that other cash and non-cash
incentives offered to patrons should also be reflected as a reduction in net
revenues rather than as an expense. These new provisions are required to be
adopted for periods beginning after December 15, 2001 with earlier adoption
encouraged. The new presentation requirements have been adopted by the Company
with respect to other cash incentives effective with the first quarter of 2001.
Accordingly, all such costs for the current and prior year periods are now
included in the accompanying consolidated statements of operations as
promotional allowances instead of casino expenses. The changes result only in a
reclassification within the consolidated statements of operations and do not
affect consolidated income from operations or net (loss) income. The
requirements with respect to non-cash incentives are presently under review by
management and will be adopted at a later date.
(2) Earnings per common share
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 (loss) income
by the weighted average number of shares of common stock and potential common
shares outstanding.
10
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The weighted average number of shares of common stock and potential common
shares outstanding used for the calculation of earnings per share is as follows:
Three Months Ended
March 31,
----------------------
2001 2000
---------- ----------
Shares used in the calculation of:
Basic net (loss) income per share 24,996,676 24,951,036
Diluted net (loss) income per share 24,996,676 26,226,754
No potential common shares were included in the calculation of diluted
earnings per share for the three month period ended March 31, 2001 as the
inclusion of such shares would be antidilutive due to the net loss incurred
during the period. The number of shares used in the calculation of diluted
earnings per share for the three month period ended March 31, 2000 has been
adjusted to include potential common shares arising from stock options held by
certain employees and directors; however, the calculation excludes certain
options to purchase common stock which would be antidilutive to the diluted
earnings per share calculation. The weighted average number of potential common
shares and options excluded was 2,038,663 and 26,346, respectively, for the
three month periods ended March 31, 2001 and 2000.
(3) Change in Depreciable Lives
On February 26, 2001, the Company announced the commencement of a major
expansion of the Aurora Casino, highlighted by the construction of a new
dockside facility to replace the Aurora Casino's two riverboats. The Aurora
Casino expansion, as currently planned, is projected to cost between $75,000,000
and $80,000,000 and is expected to be completed and opened during the summer of
2002. HCA received regulatory approval for its planned dockside casino from the
Illinois Gaming Board in April 2000 and construction began in March 2001.
Approximately $40,000,000 of the estimated project costs for the proposed Aurora
Casino expansion were obtained from HCC's issuance of the Senior Secured Notes
(see Note 4(a)) with the remainder to come from cash on hand and cash available
from operations.
As a result of such plans, management conducted a review of its long-lived
assets for possible impairment. Based on the undiscounted cash flows anticipated
to be earned during the construction period, management concluded that no
impairment of the Aurora Casino's assets exists and no write down of its assets
is required. The Aurora Casino has prospectively adjusted the remaining useful
lives of its existing riverboats and other fixed assets being replaced to reduce
the recorded net book value of such assets ($31,431,000 at March 31, 2001) to
their estimated net realizable value at the time they are expected to be removed
from service. Consequently, depreciation expense during the three month period
ended March 31, 2001 subsequent to the announcement of the expansion project
increased by $2,148,000; such additional depreciation is expected to amount to
approximately $19.3 million during the remainder of 2001.
11
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(4) Long-Term Debt and Pledge of Assets
Substantially all of HCC's assets are pledged in connection with its long-
term indebtedness. The obligations of HCL and its subsidiaries are non-recourse
to HCC.
March 31, December 31,
2001 2000
------------ ------------
Indebtedness of HCC:
11.25% Senior Secured Notes, due 2007 (a) $310,000,000 $310,000,000
Floating rate Senior Secured Notes, due 2006 (a) 50,000,000 50,000,000
Promissory note due to affiliate (Note 8) 1,893,000 1,893,000
------------ ------------
361,893,000 361,893,000
------------ ------------
Indebtedness of HCA:
Promissory notes to bank (b) 933,000 1,145,000
------------ ------------
Indebtedness of HCT :
Equipment loans (c) 929,000 1,188,000
Bank credit facility (d) 39,000 89,000
------------ ------------
968,000 1,277,000
------------ ------------
Indebtedness of HCL which is non-recourse to HCC:
13% Shreveport First Mortgage Notes, with contingent
interest, due 2006 (e) 150,000,000 150,000,000
Note payable, net of discount of $44,000
and $87,000, respectively(f) 1,356,000 1,913,000
Other 32,000 33,000
------------ ------------
151,388,000 151,946,000
------------ ------------
Total indebtedness 515,182,000 516,261,000
Less - current maturities (4,736,000) (5,393,000)
------------ ------------
Total long-term debt $510,446,000 $510,868,000
============ ============
----------------------------------------
(a) During May 1999, HCC completed the refinancing of its outstanding 12.75%
senior secured notes through a debt offering of $310,000,000 of 11.25%
Senior Secured Notes due May 1, 2007 and $50,000,000 of floating rate
Senior Secured Notes due May 1, 2006 (collectively, the "Senior Secured
Notes"). Interest on the floating rate notes is equal to the six-month
LIBOR rate plus 6.28% and is reset semiannually. Interest on the floating
rate notes has been adjusted from 12.41% per annum effective November 1,
1999, to 12.89% effective May 1, 2000, to 13% effective November 1, 2000
and to 10.51% effective May 1, 2001. In addition to refinancing existing
debt, the Company used proceeds from the debt offering to fund a portion of
its equity investment in the Shreveport Casino and, during October 1999, to
acquire and terminate management and consulting contracts on the Aurora
Casino and Tunica Casino. The Company also plans to use proceeds from the
debt offering to finance construction of a new, dockside gaming facility at
the Aurora Casino (see Note 3). Interest on the Senior Secured Notes is
payable each May 1 and November 1. The Senior Secured Notes are
unconditionally guaranteed
12
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
on a senior secured basis by HCT and Shreveport Management and may be
guaranteed by certain future subsidiaries of HCC. Neither HCA nor HCL are
guarantors. The Senior Secured Notes and related guarantees are secured by,
among other things, (1) substantially all of the assets of HCT and future
guarantors, (2) a lien not to exceed approximately $108,000,000 on
substantially all of the assets of HCA, (3) a pledge of the capital stock
of certain subsidiaries of HCC, including HCA and HCT, and (4) the
collateral assignment of the management contract for the Shreveport Casino.
The limitation on the lien described in (2) above is currently $66,007,000.
The fixed rate Senior Secured Notes are redeemable at the option of HCC any
time on or after May 1, 2003 at 107% of the then outstanding principal
amount, decreasing to 104.666%, 102.333% and 100%, respectively, on May 1,
2004, 2005 and 2006. The Company may also redeem up to 35% of the fixed
rate Senior Secured Notes at a redemption price of 111.25% plus accrued
interest at any time prior to May 1, 2002 with the proceeds from an
offering of HCC's common stock if net proceeds to the Company from any such
offering are at least $20,000,000.
The floating rate Senior Secured Notes may be redeemed at the option of HCC
at any time at an initial redemption price of 105% plus accrued interest
with the redemption premium decreasing by 1% on May 1 of each year
beginning May 1, 2000.
The indenture for 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, Shreveport Management or any future
guarantor; or enter into certain transactions with affiliates. The
indenture also requires certain financial reporting information (see Note
10).
(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 of $62,000 including interest at the
rate of 7.5% per annum. HCA borrowed $2,000,000 under the agreement during
October 1998.
During May 1999, HCA borrowed an additional $750,000 from the bank on an
unsecured basis. The loan is payable in 60 monthly installments of $15,000
including interest at the rate of 7.5% per annum.
(c) The equipment loans are payable monthly including interest at effective
rates ranging from 8.5% to 12.3% per annum and mature at various dates in
2001and 2003.
(d) HCT had a bank credit facility in the amount of $1,300,000 available to
borrow against through September 30, 1998. HCT borrowed $541,000 under the
credit facility during 1998 at the rate of 8.875% per annum. Borrowings
under the credit facility are to be repaid in monthly installments over a
period of 36 months and are collateralized by equipment purchased with the
loan proceeds. The credit facility was not renewed by HCT.
13
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(e) During August 1999, the Shreveport Partnership issued $150,000,000 of 13%
First Mortgage Notes, with contingent interest (the "Shreveport First
Mortgage Notes"), which are non-recourse to HCC.
Fixed interest on the Shreveport First Mortgage Notes is payable on each
February 1 and August 1. In addition, contingent interest accrues and is
payable on each interest payment date subsequent to the opening of the
Shreveport Casino. The amount of the contingent interest is equal to 5% of
the Shreveport Casino's cash flow, as defined, for the prior two fiscal
quarters up to a maximum of $5,000,000 for any four consecutive fiscal
quarters. No contingent interest was incurred during the three month period
ended March 31, 2001. Accrued contingent interest amounted to $77,000 at
both March 31, 2001 and December 31, 2000. Payment of contingent interest
may be deferred to the extent that payment would result in certain
financial coverage ratios not being met. The notes are collateralized by a
first priority secured interest in substantially all of the Shreveport
Partnership's existing and future assets other than furniture, fixtures and
equipment for which up to $35,000,000 of financing has been or may be
obtained as well as by a pledge of the common stock of the HCC subsidiaries
which hold the partnership interests.
The Shreveport First Mortgage Notes are redeemable at the option of the
Shreveport Partnership at any time on or after August 1, 2003 at 106.5% of
the then outstanding principal amount, decreasing to 103.25% on August 1,
2004 and 100% on or after August 1, 2005. Up to 35% of the original
aggregate amount of the Shreveport First Mortgage Notes may also be
redeemed at a price of 113% plus accrued interest at any time prior to
August 1, 2002 with proceeds of contributions to the Shreveport Partnership
made by HCC from certain offerings of equity securities by HCC.
The indenture for the Shreveport First Mortgage Notes contains various
provisions limiting the ability of the Shreveport Partnership to borrow
money, pay dividends, make investments, pledge or sell its assets or enter
into mergers or consolidations. The indenture also limits the ability of
certain HCC subsidiaries which guarantee the debt to acquire additional
assets, become liable for additional obligations or engage in any business
activities other than holding partnership interests or acting as managing
general partner.
(f) In September 1998, HCC and its partners acquired their interests in the
Shreveport Partnership from its former partners who, prior to October 1997,
conducted riverboat gaming operations in New Orleans. In connection with
moving the licensed site to Shreveport, the current and former partners
negotiated a settlement with the City of New Orleans which, among other
things, required that one of the former partners pay $5,000,000 to the
City. The current partners agreed that the Shreveport Casino would pay the
City an additional $5,000,000 upon securing financing for construction of
the project (the Shreveport Casino); such payment was made in August 1999.
In addition, the current partners agreed that the Shreveport Casino would,
contingent on securing financing, reimburse the former partner $2,000,000
of the amount it paid to the City; such repayment is being made in monthly
installments of $200,000, without interest, commencing with the opening of
the Shreveport Casino. The $2,000,000 liability, net of a discount in the
original amount of $308,000, and the associated project costs were recorded
upon the issuance of the Shreveport First Mortgage Notes in August 1999.
14
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Scheduled payments of long-term debt as of March 31, 2001 are set forth
below:
2001 (nine months) $ 4,358,000
2002 602,000
2003 178,000
2004 82,000
2005 6,000
Thereafter 510,000,000
------------
Total $515,226,000
============
Interest paid, net of amounts capitalized, amounted to $10,773,000 and
$8,274,000, respectively, during the three month periods ended March 31, 2001
and 2000.
(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 7.625% per annum. The second lease has an initial term ending in September
2026 with the right to extend the lease for up to 20 additional years. Rental
payments during the first 15 years equal the lessor's debt service costs related
to the industrial revenue bond issue used to finance a portion of the
construction costs of the parking garage. The remaining construction costs were
funded by HCA. In addition, HCA pays base rent equal to $15,000 per month,
subject to a credit of $10,000 per month expiring in October 2001, 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.
The Shreveport Partnership entered into a financing lease agreement with
third party lessors for $30,000,000 to acquire furniture, fixtures and equipment
for the Shreveport Casino. During the construction period, the Shreveport
Partnership paid only interest on outstanding borrowings together with a fee of
.5% per annum on the undrawn portion of the $30,000,000. Effective with the
opening of the Shreveport Casino, the outstanding borrowings became payable in
equal quarterly installments plus interest at LIBOR plus 4% (currently 8.9%)
over a three year period to fully amortize the obligation. The lease is treated
as a capital lease for financial reporting purposes. Borrowings under the lease
are collateralized by the furniture, fixture and equipment purchased. The lease
agreement contains certain covenants substantially similar to those included in
the indenture for the Shreveport First Mortgage Notes (see Note 4).
The Tunica Casino previously leased certain gaming and other equipment
under capital lease agreements which expired in 1997. No future payment
obligations exist with respect to these capital leases although the equipment
remains in use.
15
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Assets under capital leases and the related accumulated amortization are
included on the accompanying consolidated balance sheet as follows:
March 31, December 31,
2001 2000
------------ ------------
Buildings $ 27,358,000 $ 27,358,000
Operating equipment 36,219,000 36,219,000
------------ ------------
63,577,000 63,577,000
Less - accumulated amortization (13,135,000) (11,579,000)
------------ ------------
$ 50,442,000 $ 51,998,000
============ ============
Amortization expense with respect to these assets amounted to $1,556,000
and $227,000, respectively, during the three month periods ended March 31, 2001
and 2000.
Future minimum lease payments under capital lease obligations as of March
31, 2001 are as follows:
2001 (nine months) $ 11,337,000
2002 14,090,000
2003 13,216,000
2004 2,677,000
2005 2,477,000
Thereafter 16,262,000
------------
Total minimum lease payments 60,059,000
Less amount representing interest (13,758,000)
------------
Present value of future
minimum lease payments 46,301,000
Current capital lease obligation (11,142,000)
------------
Long-term capital lease obligation $ 35,159,000
============
(6) Cash Restricted for Construction Project
Cash restricted for construction project consisted of investments in
government securities which were to be used for specified purposes and which
were purchased with net proceeds from the Shreveport First Mortgage Notes (see
Note 4) as required by the indenture for the Shreveport First Mortgage Notes.
Restricted cash at December 31, 2000 was comprised of an account with the
remaining funds set aside to make interest payments with respect to the
Shreveport First Mortgage Notes; the restrictions on such account were removed
on the February 1, 2001 interest payment date. Interest earned, but not yet
received, on restricted cash investments was included in interest receivable on
the accompanying consolidated balance sheet at December 31, 2000.
16
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(7) Income Taxes
Components of HCC's provision for income taxes consist of the following:
Three Months Ended
March 31,
-------------------------
2001 2000
----------- -----------
Current:
Federal $ - $ -
State provision (411,000) (556,000)
Deferred:
Federal benefit (provision) 3,916,000 (971,000)
State benefit (provision) 1,368,000 (14,000)
Change in valuation allowance (5,167,000) 971,000
----------- -----------
$ (294,000) $ (570,000)
=========== ===========
No federal income tax payments were made during the three month period
ended March 31, 2001; federal tax payments of $35,000 were made during the three
month period ended March 31, 2000. Current federal income taxes for the three
month period ended March 31, 2000 were offset through the use of available tax
net operating loss carryforwards ("NOL's"). State income tax payments of $9,000
and $175,000, respectively, were made during the three month periods ended March
31, 2001 and 2000.
At March 31, 2001, HCC and its subsidiaries have NOL's for federal income
tax purposes totaling approximately $54,000,000, none of which begin to expire
until the year 2019. Additionally, HCC and its subsidiaries have alternative
minimum and other tax credits available totaling $5,018,000 and $781,000,
respectively. Alternative minimum tax credits do not expire and none of the
other tax credits begin to expire until the year 2010. Existing accounting
pronouncements require 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 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 $5,649,000 and $5,532,000
at March 31, 2001 and December 31, 2000, respectively.
The Internal Revenue Service has completed its examination of the
consolidated federal income tax returns of HCC for the years 1993 and 1994. The
additional estimated current federal income tax obligation resulting from such
examination is included in current federal income taxes payable on the
accompanying consolidated balance sheets at March 31, 2001 and December 31,
2000. HCC's consolidated net deferred tax asset has also been adjusted to
reflect the results of the tax audit. The Internal Revenue Service is continuing
its examination of the consolidated federal income tax returns of HCC for 1995
through 1998. 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.
17
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(8) Transactions with Related Parties
As partial consideration for its April 1, 1997 acquisition of the general
partnership interest in the entity which held the management contract for the
Aurora Casino, HCC issued a five-year note in the original amount of $3,800,000
to PPI Corporation. The note payable to PPI Corporation was amended as of
October 1999 to provide for monthly installments of $83,000 including interest
and additional quarterly principal payments of $21,000 beginning January 1,
2000. HCC and PPI Corporation have entered into agreements to defer all payments
of principal and interest on the note otherwise due during the period from March
1, 2000 through June 1, 2001 while negotiations continue between GBCC and HCC to
restructure certain indebtedness owed by GBCC to HCC. These deferrals do not
extend the final maturity of the note or represent a forgiveness of either
principal or interest as all past due amounts, if not otherwise restructured,
will become due and payable on the extended payment due date of July 1, 2001.
The indebtedness owed by GBCC to HCC includes, among other things, demand notes
with an outstanding principal balance of $5,704,000 at March 31, 2001 and other
deferred interest notes with a final maturity value of $47,603,000. The deferred
interest notes have been fully reserved by HCC.
(9) Commitments and Contingencies
On April 23, 2000, the construction site for the Shreveport Casino suffered
tornado damage which contributed to the delay in opening the facility.
Management filed damage claims and received reimbursements from its insurance
carrier during 2000 in the amount of approximately $1,700,000 to cover
substantially all of the cost of repairing the damage incurred. Management is
also pursuing delayed opening claims with its carriers. To the extent the delay
in the facility's opening was the responsibility of contractors, management is
also seeking to recover damages from those entities. For this and other reasons,
the Shreveport Partnership has withheld payment of approximately $2.6 million
which the general contractor is currently seeking and which is included in
accounts payable on the accompanying consolidated balance sheet at March 31,
2001. Both the recovery of any amounts by the Shreveport Partnership from either
its insurance companies or the contractors and the need to pay the general
contractor the amounts being withheld are currently subject to litigation and
management is unable to determine the amounts, if any, that will ultimately be
received or paid.
(10) Unrestricted Subsidiaries
Under the terms of the indenture to the Senior Secured Notes (see Note 4),
certain subsidiaries and investees of HCC have been designated as "Unrestricted
Subsidiaries." Unrestricted Subsidiaries generally do not provide credit support
for the Senior Secured Notes and obligations of Unrestricted Subsidiaries are
non-recourse to HCC. Unrestricted Subsidiaries of HCC presently consist of HCL
and its subsidiaries; HWCC-Holdings, Inc. and HWCC-Golf Course Partners, Inc.
The following presentation summarizes the financial position and results of
operations of the Company reflecting its
18
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Unrestricted Subsidiaries under the equity method of accounting. Such
information is not intended to be a presentation in conformity with generally
accepted accounting principles and is included for purposes of complying with
certain reporting requirements as contained in the indenture to the Senior
Secured Notes.
Condensed Balance Sheet
Equity Method for Investment in Unrestricted Subsidiaries
March 31, 2001
(amounts in thousands)
Current Assets: Current Liabilities:
Cash and cash items $138,973 Current maturities of long-
Accounts receivable, net of allowance term debt and capital leases $ 4,516
of $2,616 4,483 Accounts payable and accrued
Inventories 1,664 liabilities 49,773
Prepaid expenses and other current assets 4,867 Other current liabilities 2,909
Due from affiliates 6,491 ---------
-------- 57,198
156,478 ---------
--------
Investment in and advances to Long-term debt 360,420
Unrestricted Subsidiaries 22,414 ---------
--------
Capital lease obligations 17,659
---------
Property and equipment, net of
accumulated depreciation and Other noncurrent liabilities 5,461
amortization of $109,488 160,872 ---------
--------
Shareholders' deficit:
Other Assets: Common stock 2
Deferred finance costs 8,539 Additional paid-in capital 217,030
Other assets 15,840 Accumulated deficit (293,627)
-------- ---------
24,379 (76,595)
-------- ---------
$364,143 $ 364,143
======== =========
19
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Condensed Statements of Operations
Equity Method for Investment in Unrestricted Subsidiaries
Three Month Period Ended March 31, 2001
(amounts in thousands)
Net revenues $ 80,116
--------
Expenses:
Departmental expenses 53,858
General and administrative 5,299
Depreciation and amortization 5,495
Development 166
--------
Total expenses 64,818
--------
Income from operations 15,298
Non-operating expense, net (10,004)
--------
Income before taxes and other item 5,294
Provision for taxes (294)
--------
Income before other item 5,000
Equity in losses of unrestricted subsidiaries (15,835)
--------
Net loss $(10,835)
========
(11) Reclassifications
Certain reclassifications have been made to the prior year's consolidated
financial statements to conform to the 2001 consolidated financial statement
presentation.
20
INDEPENDENT ACCOUNTANTS' REPORT
To the Board of Directors and Stockholders of
Hollywood Casino Corporation
Dallas, Texas
We have reviewed the accompanying condensed balance sheet of Hollywood Casino-
Aurora, Inc. as of March 31, 2001, and the related condensed statements of
operations and cash flows for the three month periods ended March 31, 2001 and
2000. These financial statements are the responsibility of the Company's
management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and of making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with auditing standards generally accepted in the United States of
America, the objective of which is the expression of an opinion regarding the
financial statements taken as a whole. Accordingly, we do not express such an
opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to such condensed financial statements for them to be in conformity with
accounting principles generally accepted in the United States of America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the balance sheet of Hollywood Casino-
Aurora, Inc. as of December 31, 2000, and the related statements of operations,
shareholder's equity and cash flows for the year then ended (not presented
herein); and in our report dated March 15, 2001, we expressed an unqualified
opinion on those financial statements. In our opinion, the information set forth
in the accompanying condensed balance sheet as of December 31, 2000 is fairly
stated, in all material respects, in relation to the balance sheet from which it
has been derived.
DELOITTE & TOUCHE LLP
Dallas, Texas
May 8, 2001
21
HOLLYWOOD CASINO - AURORA, INC.
(wholly owned by Hollywood Casino Corporation)
BALANCE SHEETS
ASSETS
March 31,
2001 December 31,
(Unaudited) 2000
------------ ------------
Current Assets:
Cash and cash equivalents $ 35,189,000 $ 21,164,000
Accounts receivable, net of allowances
of $915,000 and $942,000, respectively 1,154,000 1,188,000
Inventories 877,000 997,000
Deferred income taxes 1,941,000 1,958,000
Due from affiliates 59,000 129,000
Prepaid expenses and other current assets 860,000 1,033,000
------------ ------------
Total current assets 40,080,000 26,469,000
------------ ------------
Property and Equipment:
Land improvements 3,167,000 3,167,000
Buildings and improvements 46,205,000 46,205,000
Riverboats and barge 42,358,000 42,377,000
Operating equipment 42,679,000 42,996,000
Construction in progress 2,621,000 2,137,000
------------ ------------
137,030,000 136,882,000
Less - accumulated depreciation and amortization (57,875,000) (54,782,000)
------------ ------------
Net property and equipment 79,155,000 82,100,000
------------ ------------
Other Assets 2,190,000 2,213,000
------------ ------------
$121,425,000 $110,782,000
============ ============
The accompanying introductory notes and notes to financial statements
are an integral part of these balance sheets.
22
HOLLYWOOD CASINO - AURORA, INC.
(wholly owned by Hollywood Casino Corporation)
BALANCE SHEETS
LIABILITIES AND SHAREHOLDER'S EQUITY
March 31,
2001 December 31,
(Unaudited) 2000
------------ ------------
Current Liabilities:
Current maturities of long-term debt
and capital lease obligations $ 1,715,000 $ 1,847,000
Accounts payable 1,978,000 1,659,000
Accrued liabilities -
Salaries and wages 1,840,000 2,819,000
Interest 3,766,000 1,756,000
Gaming and other taxes 7,734,000 1,573,000
Insurance 661,000 746,000
Other 1,842,000 1,865,000
Due to affiliates 4,567,000 482,000
Other current liabilities 1,206,000 1,361,000
------------ ------------
Total current liabilities 25,309,000 14,108,000
------------ ------------
Long-Term Debt 66,367,000 66,405,000
------------ ------------
Capital Lease Obligations 17,659,000 17,861,000
------------ ------------
Deferred Income Taxes 5,464,000 6,218,000
------------ ------------
Commitments and Contingencies
Shareholder's Equity:
Common stock, $.01 par value per share;
2,000,000 shares authorized; 1,501,000
shares issued and outstanding 15,000 15,000
Additional paid-in capital 25,541,000 25,541,000
Accumulated deficit (18,930,000) (19,366,000)
------------ ------------
Total shareholder's equity 6,626,000 6,190,000
------------ ------------
$121,425,000 $110,782,000
============ ============
The accompanying introductory notes and notes to financial statements
are an integral part of these balance sheets.
23
HOLLYWOOD CASINO - AURORA, INC.
(wholly owned by Hollywood Casino Corporation)
STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
March 31,
-------------------------
2001 2000
----------- -----------
Revenues:
Casino $57,121,000 $53,832,000
Food and beverage 3,864,000 3,842,000
Other 760,000 751,000
----------- -----------
61,745,000 58,425,000
Less - promotional allowances (8,390,000) (7,778,000)
----------- -----------
Net revenues 53,355,000 50,647,000
----------- -----------
Expenses:
Casino 32,894,000 30,841,000
Food and beverage 1,418,000 1,235,000
Other 176,000 218,000
General and administrative 1,141,000 1,481,000
Depreciation and amortization 3,943,000 1,756,000
----------- -----------
Total expenses 39,572,000 35,531,000
----------- -----------
Income from operations 13,783,000 15,116,000
----------- -----------
Non-operating income (expense):
Interest income 228,000 222,000
Interest expense, net of capitalized interest
of $22,000 in 2001 (2,212,000) (2,268,000)
(Loss) gain on disposal of assets (67,000) 1,000
----------- -----------
Total non-operating expense, net (2,051,000) (2,045,000)
----------- -----------
Income before income taxes 11,732,000 13,071,000
Income tax provision (4,180,000) (4,842,000)
----------- -----------
Net income $ 7,552,000 $ 8,229,000
=========== ===========
The accompanying introductory notes and notes to financial statements
are an integral part of these financial statements.
24
HOLLYWOOD CASINO - AURORA, INC.
(wholly owned by Hollywood Casino Corporation)
STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
March 31,
-------------------------
2001 2000
----------- -----------
OPERATING ACTIVITIES:
Net income $ 7,552,000 $ 8,229,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 3,943,000 1,756,000
Provision for doubtful accounts 45,000 75,000
Loss (gain) on disposal of assets 67,000 (1,000)
Deferred income tax (benefit) provision (737,000) 143,000
Increase in receivables (11,000) (223,000)
Increase in accounts payable and accrued liabilities 7,403,000 7,472,000
Net change in affiliate accounts 4,155,000 4,069,000
Net change in other current assets and liabilities 138,000 (259,000)
Net change in other assets and liabilities 23,000 (45,000)
----------- -----------
Net cash provided by operating activities 22,578,000 21,216,000
----------- -----------
INVESTING ACTIVITIES:
Purchases of property and equipment (1,113,000) (494,000)
Proceeds from sale of assets 48,000 1,000
----------- -----------
Net cash used in investing activities (1,065,000) (493,000)
----------- -----------
FINANCING ACTIVITIES:
Repayments of debt (212,000) (196,000)
Payments on capital lease obligations (160,000) (147,000)
Dividends (7,116,000) (6,889,000)
----------- -----------
Net cash used in financing activities (7,488,000) (7,232,000)
----------- -----------
Net increase in cash and cash equivalents 14,025,000 13,491,000
Cash and cash equivalents at beginning of period 21,164,000 22,148,000
----------- -----------
Cash and cash equivalents at end of period $35,189,000 $35,639,000
=========== ===========
The accompanying introductory notes and notes to financial statements
are an integral part of these financial statements.
25
HOLLYWOOD CASINO - AURORA, INC.
(wholly owned by Hollywood Casino Corporation)
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
(1) Organization, Business and Basis of Presentation
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.
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 1,340 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.
The Aurora Casino commenced operations on June 17, 1993. HCA's current
Owner's License was renewed by the Illinois Gaming Board in December 2000 for a
period of four years to December 2004. 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.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America 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.
The financial statements as of March 31, 2001 and for the three month
periods ended March 31, 2001 and 2000 have been prepared by HCA without audit.
In the opinion of management, these financial statements contain all adjustments
(consisting of only normal recurring adjustments) necessary to present fairly
the financial position of HCA as of March 31, 2001 and the results of its
operations and cash flows for the three month periods ended March 31, 2001 and
2000.
During January 2001, the Emerging Issues Task Force ("EITF") of the
Financial Accounting Standards Board reached a consensus requiring that the
"cash-back" feature of a customer loyalty program should be reported as a
reduction in net revenues rather than as an expense. HCA, as required, adopted
the provisions of this new guidance effective with the first quarter of 2001.
During April 2001,
26
HOLLYWOOD CASINO - AURORA, INC.
(wholly owned by Hollywood Casino Corporation)
NOTES TO FINANCIAL STATEMENTS (Continued)
(Unaudited)
the EITF concluded that other cash and non-cash incentives offered to patrons
should also be reflected as a reduction in net revenues rather than as an
expense. These new provisions are required to be adopted for periods beginning
after December 15, 2001 with earlier adoption encouraged. The new presentation
requirements have been adopted by HCA with respect to other cash incentives
effective with the first quarter of 2001. Accordingly, all such costs for the
current and prior year periods are now included in the accompanying statements
of operations as promotional allowances instead of casino expenses. The changes
result only in a reclassification within the statements of operations and do not
affect income from operations or net income. The requirements with respect to
non-cash incentives are presently under review by management and will be adopted
at a later date.
(2) Change in Depreciable Lives
On February 26, 2001, HCA announced the commencement of a major expansion
of the Aurora Casino, highlighted by the construction of a new dockside facility
to replace the Aurora Casino's two riverboats. The Aurora Casino expansion, as
currently planned, is projected to cost between $75,000,000 and $80,000,000 and
is expected to be completed and opened during the summer of 2002. HCA received
regulatory approval for its planned dockside casino from the Illinois Gaming
Board in April 2000 and construction began in March 2001. Approximately
$40,000,000 of the estimated project costs for the proposed Aurora Casino
expansion will be obtained under HCA's available intercompany borrowings from
HCC (see Note 3(a)) with the remainder to come from cash on hand and cash
available from operations.
As a result of such plans, management conducted a review of its long-lived
assets for possible impairment. Based on the undiscounted cash flows anticipated
to be earned during the construction period, management concluded that no
impairment of the Aurora Casino's assets exists and no write down of its assets
is required. The Aurora Casino has prospectively adjusted the remaining useful
lives of its existing riverboats and other fixed assets being replaced to reduce
the recorded net book value of such assets ($31,431,000 at March 31, 2001) to
their estimated net realizable value at the time they are expected to be removed
from service. Consequently, depreciation expense during the three month period
ended March 31, 2001 subsequent to the announcement of the expansion project
increased by $2,148,000; such additional depreciation is expected to amount to
approximately $19.3 million during the remainder of 2001.
27
HOLLYWOOD CASINO - AURORA, INC.
(wholly owned by Hollywood Casino Corporation)
NOTES TO FINANCIAL STATEMENTS (Continued)
(Unaudited)
(3) Long-Term Debt and Pledge of Assets
HCA's long-term indebtedness consists of the following:
March 31, December 31,
2001 2000
----------- -----------
11.25% Promissory note to HCC, due on
May 1, 2007 (a) $66,007,000 $66,007,000
Promissory notes to bank (b) 933,000 1,145,000
----------- -----------
Total indebtedness 66,940,000 67,152,000
Less - current maturities (573,000) (747,000)
----------- -----------
Total long-term debt $66,367,000 $66,405,000
=========== ===========
---------------
(a) The intercompany note was issued as of May 19, 1999 and accrues interest at
the rate of 11.25% per annum. The initial borrowing on the note in the
amount of $29,007,000 replaced a previous intercompany note with HCC which
accrued interest at the rate of 12.75%. During October 1999, HCA borrowed
an additional $37,000,000 from HCC under the note agreement to acquire and
terminate its management contract. HCA may borrow up to a total of
$108,000,000 under the intercompany note agreement. Interest on advances is
payable each October 15 and April 15. The intercompany note is pledged as
security with respect to HCC's $360,000,000 Senior Secured Notes due in
2006 and 2007. HCA is not a guarantor of HCC's indebtedness; however, the
indebtedness is secured, in part, by a lien on substantially all of the
assets of HCA and by a pledge of the capital stock of HCA. The lien is
limited to the outstanding principal amount on the intercompany note to
HCC.
(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 of $62,000 including interest at the
rate of 7.5% per annum. HCA borrowed $2,000,000 under the agreement during
October 1998.
During May 1999, HCA borrowed an additional $750,000 from the bank on an
unsecured basis. The loan is payable in 60 monthly installments of $15,000
including interest at the rate of 7.5% per annum.
28
HOLLYWOOD CASINO - AURORA, INC.
(wholly owned by Hollywood Casino Corporation)
NOTES TO FINANCIAL STATEMENTS (Continued)
(Unaudited)
As of March 31, 2001, future maturities of long-term debt are as follows:
2001 (nine months) $ 535,000
2002 156,000
2003 168,000
2004 74,000
2005 -
Thereafter 66,007,000
-----------
$66,940,000
===========
Interest paid for the three month periods ended March 31, 2001 (net of
capitalized interest) and 2000 amounted to $202,000 and $257,000, 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 7.625% per annum. The second lease has an initial term ending in September
2026 with the right to extend the lease for up to 20 additional years. Rental
payments during the first 15 years equal the lessor's debt service costs related
to the industrial revenue bond issue used to finance a portion of the
construction costs of the parking garage. The remaining construction costs were
funded by HCA. In addition, HCA pays base rent equal to $15,000 per month,
subject to a credit of $10,000 per month expiring in October 2001, 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.
The original cost of HCA's parking garages is included in buildings and
improvements on the accompanying balance sheets at both March 31, 2001 and
December 31, 2000 in the amount of $27,358,000. Amortization expense with
respect to these assets amounted to $227,000 during each of the three month
periods ended March 31, 2001 and 2000. Accumulated amortization at March 31,
2001 and December 31, 2000 with respect to these assets amounted to $7,861,000
and $7,634,000, respectively.
29
HOLLYWOOD CASINO - AURORA, INC.
(wholly owned by Hollywood Casino Corporation)
NOTES TO FINANCIAL STATEMENTS (Continued)
(Unaudited)
Future minimum lease payments under capital lease obligations as of March
31, 2001 are as follows:
2001 (nine months) $ 2,168,000
2002 2,643,000
2003 2,660,000
2004 2,677,000
2005 2,477,000
Thereafter 16,262,000
------------
Total minimum lease payments 28,887,000
Less amount representing interest (10,086,000)
------------
Present value of future
minimum lease payments 18,801,000
Current capital lease obligation (1,142,000)
------------
Long-term capital lease obligation $ 17,659,000
============
(5) Income Taxes
HCA's provision for income taxes consists of the following:
Three Months Ended
March 31,
---------------------------
2001 2000
------------ ------------
Current provision:
Federal $ (4,506,000) $(4,143,000)
State (411,000) (556,000)
Deferred benefit (provision):
Federal 620,000 (129,000)
State 117,000 (14,000)
------------ -----------
$ (4,180,000) $(4,842,000)
============ ===========
HCA is included in HCC's consolidated federal income tax return. Pursuant
to agreements between HCC and HCA, HCA's current provision for federal income
taxes is based on the amount of tax which would be provided if a separate
federal income tax return were filed. HCA paid no federal income taxes during
either of the three month periods ended March 31, 2001 or 2000. HCA paid state
income taxes of $9,000 and $175,000, respectively, during the three month
periods ended March 31, 2001 and 2000.
The Internal Revenue Service has completed its examination of the
consolidated federal income tax returns of HCC for the years 1993 and 1994 as
they pertain to HCA. The intercompany tax obligation under the tax sharing
agreement and the net deferred tax liability have been adjusted to reflect the
results of such examination. The Internal Revenue Service is continuing its
examination of the consolidated federal income tax returns of HCC for 1995
through 1998. Management believes that the results of such
30
HOLLYWOOD CASINO - AURORA, INC.
(wholly owned by Hollywood Casino Corporation)
NOTES TO FINANCIAL STATEMENTS (Continued)
(Unaudited)
examination will not have a material adverse effect on the financial position or
results of operations of HCA.
(6) Reclassifications
Certain reclassifications have been made to the prior year's financial
statements to conform to the 2001 financial statement presentation.
31
INDEPENDENT ACCOUNTANTS' REPORT
To the Board of Directors and Stockholders of
Hollywood Casino Corporation
Dallas, Texas
We have reviewed the accompanying condensed consolidated balance sheet of HWCC-
Tunica, Inc. and subsidiary as of March 31, 2001, and the related condensed
consolidated statements of operations and cash flows for the three month periods
ended March 31, 2001 and 2000. These financial statements are the responsibility
of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and of making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with auditing standards generally accepted in the United States of
America, the objective of which is the expression of an opinion regarding the
financial statements taken as a whole. Accordingly, we do not express such an
opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to such condensed consolidated financial statements for them to be in
conformity with accounting principles generally accepted in the United States of
America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet of
HWCC-Tunica, Inc. and subsidiary as of December 31, 2000, and the related
consolidated statements of operations, shareholder's equity and cash flows for
the year then ended (not presented herein); and in our report dated March 15,
2001, we expressed an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the accompanying
condensed consolidated balance sheet as of December 31, 2000 is fairly stated,
in all material respects, in relation to the consolidated balance sheet from
which it has been derived.
DELOITTE & TOUCHE LLP
Dallas, Texas
May 8, 2001
32
HWCC - TUNICA, INC. AND SUBSIDIARY
(wholly owned by Hollywood Casino Corporation)
CONSOLIDATED BALANCE SHEETS
ASSETS
March 31,
2001 December 31,
(Unaudited) 2000
------------ ------------
Current Assets:
Cash and cash equivalents $ 18,964,000 $ 16,038,000
Accounts receivable, net of allowances of
$1,701,000 and $1,636,000, respectively 3,202,000 3,295,000
Inventories 787,000 780,000
Deferred income taxes 1,647,000 1,403,000
Prepaid expenses and other current assets 1,104,000 1,182,000
Due from affiliates 76,000 163,000
------------ ------------
Total current assets 25,780,000 22,861,000
------------ ------------
Property and Equipment:
Land and improvements 4,808,000 4,808,000
Buildings 76,701,000 76,701,000
Barges 2,524,000 2,524,000
Operating equipment 47,212,000 47,019,000
Construction in progress 504,000 91,000
------------ ------------
131,749,000 131,143,000
Less - accumulated depreciation and amortization (50,851,000) (49,408,000)
------------ ------------
Net property and equipment 80,898,000 81,735,000
------------ ------------
Other Assets:
Land rights 6,792,000 6,843,000
Other assets 4,438,000 4,667,000
------------ ------------
Total other assets 11,230,000 11,510,000
------------ ------------
$117,908,000 $116,106,000
============ ============
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated balance sheets.
33
HWCC - TUNICA, INC. AND SUBSIDIARY
(wholly owned by Hollywood Casino Corporation)
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDER'S EQUITY
March 31,
2001 December 31,
(Unaudited) 2000
------------ ------------
Current Liabilities:
Current maturities of long-term debt
and capital lease obligations $ 907,000 $ 1,032,000
Accounts payable 2,018,000 1,890,000
Accrued liabilities -
Salaries and wages 2,247,000 1,792,000
Interest 437,000 437,000
Gaming and other taxes 1,003,000 1,473,000
Insurance 2,112,000 1,986,000
Other 3,438,000 2,856,000
Other current liabilities 1,465,000 1,375,000
------------ ------------
Total current liabilities 13,627,000 12,841,000
------------ ------------
Long-Term Debt 87,435,000 87,619,000
------------ ------------
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 22,637,000 22,637,000
Accumulated deficit (5,791,000) (6,991,000)
------------ ------------
Total shareholder's equity 16,846,000 15,646,000
------------ ------------
$117,908,000 $116,106,000
============ ============
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated balance sheets.
34
HWCC - TUNICA, INC. AND SUBSIDIARY
(wholly owned by Hollywood Casino Corporation)
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
March 31,
-------------------------
2001 2000
----------- -----------
Revenues:
Casino $28,208,000 $26,633,000
Rooms 2,913,000 2,457,000
Food and beverage 4,289,000 4,096,000
Other 403,000 348,000
----------- -----------
35,813,000 33,534,000
Less - promotional allowances (9,816,000) (8,729,000)
----------- -----------
Net revenues 25,997,000 24,805,000
----------- -----------
Expenses:
Casino 18,058,000 17,072,000
Rooms 267,000 170,000
Food and beverage 859,000 1,126,000
Other 186,000 128,000
General and administrative 1,425,000 1,207,000
Depreciation and amortization 1,494,000 1,476,000
----------- -----------
Total expenses 22,289,000 21,179,000
----------- -----------
Income from operations 3,708,000 3,626,000
----------- -----------
Non-operating income (expenses):
Interest income 92,000 43,000
Interest expense (2,484,000) (2,520,000)
Equity in losses of unconsolidated affiliate (116,000) (22,000)
----------- -----------
Total non-operating expenses, net (2,508,000) (2,499,000)
----------- -----------
Income before income taxes 1,200,000 1,127,000
Income tax provision - -
----------- -----------
Net income $ 1,200,000 $ 1,127,000
=========== ===========
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated statements.
35
HWCC - TUNICA, INC. AND SUBSIDIARY
(wholly owned by Hollywood Casino Corporation)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
March 31,
--------------------------
2001 2000
----------- -----------
OPERATING ACTIVITIES:
Net income $ 1,200,000 $ 1,127,000
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 1,494,000 1,476,000
Provision for doubtful accounts 335,000 217,000
Deferred income tax benefit (113,000) -
Equity in losses of unconsolidated affiliate 116,000 22,000
Increase in accounts receivable (242,000) (559,000)
Increase in accounts payable
and accrued expenses 821,000 466,000
Net change in other current assets and liabilities 248,000 187,000
Net change in other noncurrent assets and liabilities (18,000) (1,000)
----------- -----------
Net cash provided by operating activities 3,841,000 2,935,000
----------- -----------
INVESTING ACTIVITIES:
Purchases of property and equipment (606,000) (769,000)
----------- -----------
FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt - 104,000
Repayments of long-term debt (309,000) (478,000)
----------- -----------
Net cash used in financing activities (309,000) (374,000)
----------- -----------
Net increase in cash and cash equivalents 2,926,000 1,792,000
Cash and cash equivalents at beginning of period 16,038,000 10,339,000
----------- -----------
Cash and cash equivalents at end of period $18,964,000 $12,131,000
=========== ===========
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated statements.
36
HWCC - TUNICA, INC. AND SUBSIDIARY
(wholly owned by Hollywood Casino Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) Organization, Business and Basis of Presentation
HWCC - Tunica, Inc. ("HCT") is a Texas corporation and a wholly owned
subsidiary of Hollywood Casino Corporation ("HCC"), a Delaware corporation. HCT
was incorporated in December 1993 for the purpose of acquiring and completing a
gaming facility in northern Tunica County, Mississippi approximately 30 miles
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, 2001.
The accompanying consolidated financial statements include the accounts of
HCT and its wholly owned subsidiary, HWCC-Golf Course Partners, Inc. ("Golf").
All significant intercompany balances have been eliminated in consolidation.
Golf, a Delaware corporation, was formed in 1996 to own an initial one-third
interest in Tunica Golf Course LLC, a limited liability company organized to
develop and operate a golf course to be used by patrons of the Tunica Casino and
other participating casino/hotel properties. The golf course opened for business
in November 1998. Golf's investment in Tunica Golf Course, LLC is accounted for
under the equity method of accounting and is included in other noncurrent assets
on the accompanying consolidated balance sheets at March 31, 2001 and December
31, 2000.
HCT estimates that a significant amount of the Tunica Casino's revenues are
derived from patrons living in the Memphis, Tennessee area, northern Mississippi
and Arkansas. The Tunica Casino faces intense competition from other casinos
operating in northern Tunica County and management believes that this
competition will continue in the future.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America 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.
The consolidated financial statements as of March 31, 2001 and for the
three month periods ended March 31, 2001 and 2000 have been prepared by HCT
without audit. In the opinion of management, these consolidated financial
statements contain all adjustments (consisting of only normal recurring
adjustments) necessary to present fairly the consolidated financial position of
HCT as of March 31, 2001 and the results of its operations and cash flows for
the three month periods ended March 31, 2001 and 2000.
During January 2001, the Emerging Issues Task Force ("EITF") of the
Financial Accounting Standards Board reached a consensus requiring that the
"cash-back" feature of a customer loyalty program should be reported as a
reduction in net revenues rather than as an expense. HCT, as required, adopted
the provisions of this new guidance effective with the first quarter of 2001.
During April 2001, the EITF concluded that other cash and non-cash incentives
offered to patrons should also be reflected as a reduction in net revenues
rather than as an expense. These new provisions are required to be adopted for
periods beginning after December 15, 2001 with earlier adoption encouraged. The
new presentation requirements have been adopted by HCT with respect to other
cash incentives effective with the first quarter of 2001. Accordingly, all such
costs for the current and prior year periods are now included in the
accompanying consolidated statements of operations as promotional allowances
instead of casino expenses. The changes result only in a reclassification within
the consolidated statements of operations
37
HWCC - TUNICA, INC. AND SUBSIDIARY
(wholly owned by Hollywood Casino Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
and do not affect consolidated income from operations or net income. The
requirements with respect to non-cash incentives are presently under review by
management and will be adopted at a later date.
(2) Long-Term Debt and Pledge of Assets
Substantially all of HCT's assets are pledged in connection with its long-
term indebtedness. Long-term debt consists of the following:
March 31, December 31,
2001 2000
----------- -----------
11.25% Promissory note to HCC due May 1, 2007 (a) $87,045,000 $87,045,000
Note payable to HCC (a) 329,000 329,000
Equipment loans (b) 929,000 1,188,000
Bank credit facility (c) 39,000 89,000
----------- -----------
Total indebtedness 88,342,000 88,651,000
Less - current maturities (907,000) (1,032,000)
----------- -----------
Total long-term debt $87,435,000 $87,619,000
=========== ===========
-------------
(a) The intercompany note was issued as of May 19, 1999 and accrues interest at
the rate of 11.25% per annum. The initial borrowing on the note in the
amount of $84,045,000 replaced previous intercompany notes with HCC which
accrued interest at the rate of 12.75%. During October 1999, HCT borrowed
the additional $3,000,000 available under the intercompany note as well as
an additional $329,000 under a new note agreement with HCC to acquire and
terminate its consulting agreement. No additional borrowings are available
under the 11.25% intercompany note agreement. Interest on advances is
payable each April 15 and October 15. The intercompany note is pledged as
security with respect to HCC's $360,000,000 Senior Secured Notes due in
2006 and 2007 which are unconditionally guaranteed on a senior secured
basis by HCT and by certain other current and future subsidiaries of HCC.
HCC's Senior Secured Notes and related guarantees are secured by, among
other things, (1) substantially all of the assets of HCT and other future
guarantors, (2) a limited lien on substantially all of the assets of
another gaming facility operated by a wholly owned subsidiary of HCC, (3) a
pledge of the capital stock of HCT and certain other subsidiaries of HCC
and (4) the collateral assignment of any future management contracts
entered into by HCC. The limitation on the lien described in (2) is
currently $66,007,000 and may be increased as a result of additional
borrowings up to a maximum of $108,000,000.
The indenture for HCC's Senior Secured Notes contains various provisions
limiting the ability of HCC, HCT and certain defined subsidiaries to, among
other things, pay dividends or make other restricted payments; incur
additional indebtedness or issue preferred stock; create liens; create
dividend or other payment restrictions affecting certain defined
subsidiaries; enter into mergers
38
HWCC - TUNICA, INC. AND SUBSIDIARY
(wholly owned by Hollywood Casino Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
or consolidations or make sales of all or substantially all assets of HCC,
HCT or any future guarantor; or enter into certain transactions with
affiliates. Dividend payments by HCT to HCC are not restricted under the
terms of the indenture.
(b) The equipment loans are payable monthly including interest at effective
rates ranging from 8.5% to 12.3% per annum and mature at various dates
between 2001 and 2003.
(c) HCT had a bank credit facility in the amount of $1,300,000 available to
borrow against until September 30, 1998. HCT borrowed $541,000 under the
credit facility during 1998 at the rate of 8.875% per annum. Borrowings
under the credit facility are to be repaid in 36 monthly installments of
$17,000 and are collateralized by equipment purchased with the loan
proceeds. The credit facility was not renewed by HCT.
Scheduled payments of long-term debt as of March 31, 2001 are set forth
below:
2001 (nine months) $ 723,000
2002 242,000
2003 3,000
2004 -
2005 -
Thereafter 87,374,000
-----------
Total $88,342,000
===========
Interest paid amounted to $2,484,000 and $2,520,000, respectively, during
the three month periods ended March 31, 2001 and 2000.
(3) Income Taxes
HCT's provision for income taxes consists of the following:
Three Months Ended
March 31,
---------------------
2001 2000
--------- ---------
Provision for current federal income taxes $(113,000) $ -
Deferred federal income tax (provision) benefit (277,000) 389,000
Change in valuation allowance 390,000 (389,000)
--------- ---------
$ - $ -
========= =========
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.
39
HWCC - TUNICA, INC. AND SUBSIDIARY
(wholly owned by Hollywood Casino Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
HCT is included in HCC's consolidated federal income tax return. HCT's
provision for federal income taxes is based on the amount of tax which would be
provided if a separate federal income tax return were filed. HCT paid no federal
or state income taxes during either of the three month periods ended March 31,
2001 or 2000.
At March 31, 2001, HCT had net operating loss carryforwards ("NOL's")
totaling approximately $1,800,000, which do not begin to expire until the year
2019. Additionally, HCT has alternative minimum and other tax credits available
totaling $1,098,000 and $341,000, respectively. Alternative minimum tax credits
do not expire and none of the other tax credits begin to expire before the year
2009. Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes", requires that the tax benefit of such NOL's 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
deferred tax assets is more likely than not, a valuation allowance should be
recorded. Based on the taxable income earned by HCT during 2000 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, valuation allowances have been established which have resulted in
the recording of net deferred tax assets of $2,238,000 and $2,125,000,
respectively, at March 31, 2001 and December 31, 2000.
The Internal Revenue Service has completed its examination of the
consolidated federal income tax returns of HCC for the years 1993 and 1994 as
they pertain to HCT. The intercompany tax receivable under the tax sharing
agreement and the net deferred tax asset have been adjusted to reflect the
results of such examination. The Internal Revenue Service is continuing its
examination of the consolidated federal income tax returns of HCC for 1995
through 1998. 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 HCT.
(4) Reclassifications
Certain reclassifications have been made to the prior year's consolidated
financial statements to conform to the 2001 consolidated financial statement
presentation.
40
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This Quarterly Report on Form 10-Q contains forward-looking statements
about the business, operating results, cash flows, financial condition,
construction and development activities, expansion projects and prospects of the
Company. The actual results could differ materially from those indicated by the
forward-looking statements because of various risks and uncertainties including,
among other things, changes in competition, economic conditions, tax
regulations, state regulations or legislation applicable to the gaming industry
in general or the Company in particular, decisions of courts and other risks
indicated in the Company's filings with the Securities and Exchange Commission.
Such risks and uncertainties are beyond management's ability to control and, in
many cases, can not be predicted by management. When used in this Quarterly
Report on Form 10-Q, the words "believes", "estimates", "expects", "anticipates"
and similar expressions as they relate to the Company or its management are
intended to identify forward-looking statements. Similarly, statements herein
that describe the Company's business strategy, outlook, objectives, plans,
intentions or goals are also forward-looking statements.
RESULTS OF OPERATIONS
The following table summarizes HCC's consolidated income from operations
reflecting departmental operations at each of its casino properties.
Departmental operations include, as applicable, casino, rooms, food and beverage
and other. Accordingly, departmental profit, as used in the discussion which
follows, consists of departmental revenues less departmental expenses and
represents income from operations before general and administrative expenses,
depreciation and amortization.
Three Months Ended March 31,
----------------------------
2001 2000
------------ -----------
Revenues:
Aurora Casino $ 53,355,000 $50,647,000
Tunica Casino 25,997,000 24,805,000
Shreveport Casino 37,747,000 -
------------ -----------
Net revenues 117,099,000 75,452,000
------------ -----------
Departmental Expenses:
Aurora Casino 34,488,000 32,294,000
Tunica Casino 19,370,000 18,496,000
Shreveport Casino 38,948,000 -
------------ -----------
Total departmental expenses 92,806,000 50,790,000
------------ -----------
Departmental profit 24,293,000 24,662,000
------------ -----------
Other Operating Expenses:
General and administrative 9,072,000 5,454,000
Depreciation and amortization 9,381,000 3,268,000
Preopening - 396,000
Development 166,000 230,000
------------ -----------
Total other operating expenses 18,619,000 9,348,000
------------ -----------
Income from operations $ 5,674,000 $15,314,000
============ ===========
41
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Aurora Casino
-------------
Departmental profit from operations at the Aurora Casino is summarized in
the following table:
Three Months Ended March 31,
---------------------------
2001 2000
------------ -----------
Revenues:
Casino $ 57,121,000 $53,832,000
Food and beverage 3,864,000 3,842,000
Other 760,000 751,000
Promotional allowances (8,390,000) (7,778,000)
------------ -----------
Net revenues 53,355,000 50,647,000
------------ -----------
Departmental Expenses:
Casino 32,894,000 30,841,000
Food and beverage 1,418,000 1,235,000
Other 176,000 218,000
------------ -----------
Total departmental expenses 34,488,000 32,294,000
------------ -----------
Departmental profit $ 18,867,000 $18,353,000
============ ===========
Departmental profit margin 35.4% 36.2%
Revenues
Total gross wagering at the Aurora Casino, as measured by the total value
of chips purchased for table games ("drop") and the total amount of coins
wagered in slot machines ("handle"), increased by 2.7% during the three month
period ended March 31, 2001 compared to the same period of 2000. The increase in
gross wagering is primarily attributable to an aggressive marketing program
targeted toward slot patrons. Casino revenues consist of the portion of gross
wagering retained by the casino and, as a percentage of gross wagering, is
referred to as the "hold percentage."
The first quarter 2001 increase in casino revenues compared to the prior
year period reflects the increase in gross wagering noted above, combined with
an increase in the slot machine hold percentage. During the latter part of 2000,
the Aurora Casino reconfigured its gaming mix to remove ten table games and
replace them with 61 slot machines. Despite fewer table games, table game drop
increased during the first quarter of 2001 compared to the same period in 2000;
however, a decline in the table game hold percentage to 14.8% in the 2001 period
from 16.7% in the 2000 period resulted in an overall decline in table game
revenues of approximately 7.2%. Slot machine revenues increased as a result of
additional slot machine wagering due, in part, to the increase in the number of
slot machines as well as to an increase in the slot hold percentage. Poker
revenues also increased slightly during 2001 compared to the prior year period.
As a result of the closing of a competitor's poker room in August 2000, the
Aurora Casino is now the sole Illinois provider of poker in Chicago-area
casinos.
Food and beverage and other revenues did not change significantly during
the first quarter of 2001 compared to the same period in 2000.
42
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Promotional allowances include the estimated value of goods and services
provided free of charge to casino customers under various marketing programs,
the cost of certain cash incentive programs and the estimated cost of the "cash
back" award feature of the casino's customer loyalty program. Promotional
allowances increased during the first quarter of 2001 compared to the prior year
period reflecting increases in both cash incentive programs and customer loyalty
program awards.
Departmental Expenses
The casino expense increase during the first three months of 2001 compared
to the prior year period results primarily from additional gaming taxes
reflecting the increase in casino revenues as well as to increased marketing and
payroll expenses. Gaming taxes increased by $1.3 million in 2001 compared to the
prior year period, marketing expenses increased by $414,000 and payroll and
benefits increased by $330,000. In addition, allocations of expenses from other
operating departments to the casino department increased during the 2001 first
quarter period.
Food and beverage expenses increased during the three month period ended
March 31, 2001 compared to the 2000 period. Such increase reflects higher food
costs due to, among other things, efforts to upgrade the food quality. Other
expenses did not change significantly during 2001 compared to the same period in
2000.
Tunica Casino
-------------
Departmental profit from operations at the Tunica Casino is summarized in
the following table:
Three Months Ended March 31,
----------------------------
2001 2000
----------- -----------
Revenues:
Casino $28,208,000 $26,633,000
Rooms 2,913,000 2,457,000
Food and beverage 4,289,000 4,096,000
Other 403,000 348,000
Promotional allowances (9,816,000) (8,729,000)
----------- -----------
Net revenues 25,997,000 24,805,000
----------- -----------
Departmental Expenses:
Casino 18,058,000 17,072,000
Rooms 267,000 170,000
Food and beverage 859,000 1,126,000
Other 186,000 128,000
----------- -----------
Total departmental expenses 19,370,000 18,496,000
----------- -----------
Departmental profit $ 6,627,000 $ 6,309,000
=========== ===========
Departmental profit margin 25.5% 25.4%
43
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Revenues
Total gross wagering at the Tunica Casino increased by approximately 1%
during the first three months of 2001 compared to the same period in 2000 in
spite of the negative impact of severe winter weather during January 2001. Slot
machine gross wagering ("handle") at the Tunica Casino increased slightly during
the 2001 first quarter period as management continued its refinement of core
marketing programs and its emphasis on customer service. Gross wagering on table
games ("drop") declined slightly during the 2001 period due primarily to the
severe weather. The 5.9% improvement in casino revenues as shown in the above
table reflects the overall improvement in total gross wagering coupled with
increases in both the slot machine and table games hold percentages.
Room revenues increased 18.6% during the 2001 period compared to 2000.
Hotel occupancy rates increased slightly to 86.1% during the 2001 period from
83.2% in 2000 and the average daily room rate increased to $72 in 2001 from $61
in 2000.
Food and beverage revenues increased by 4.7% during the first quarter of
2001 compared to the prior year period primarily as a result of increased patron
volume and price increases.
Other revenues increased 15.8% during the three month period ended March
31, 2001 compared to the same period in 2000 due to increases in retail
promotional activities. The estimated value of retail items provided to
customers without charge is included in other revenues and a corresponding
amount is deducted as a promotional allowance (see below).
Promotional allowances include the estimated value of goods and services
provided free of charge to casino customers under various marketing programs,
the cost of certain cash incentive programs and the estimated cost of the "cash
back" award feature of the casino's customer loyalty program. Promotional
allowances increased by 14% during the 2001 first quarter compared to the same
period in 2000. Goods and services provided to patrons without charge increased
as a percentage of the associated revenues to 76.7% from 72.4% reflecting
increases in the Tunica Casino's marketing programs, primarily in food and
beverage complimentaries. In addition, cash incentive and customer loyalty
program awards increased by 6.6% during the first quarter of 2001 compared to
the prior year period.
Departmental Expenses
The 5.8% increase in casino expenses during the first quarter of 2001
compared to the same period in 2000 primarily results from increased marketing
efforts, including the allocation of additional costs from other operating
departments to the casino department.
The increase in rooms expense during the first quarter of 2001 compared to
the prior year period reflects the increase in occupancy rates previously
discussed which resulted in an increase during 2001 in the allocation of
operating expenses to the rooms department.
The 23.7% decrease in food and beverage expenses during the first three
months of 2001 compared to 2000 results from increased allocations to the casino
department as a result of the Tunica Casino's marketing efforts. Increases in
other departmental expenses during 2001 compared to the prior year period are
due to decreases in allocations to the casino department.
44
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Shreveport Casino
-----------------
The Shreveport Casino commenced operations on December 20, 2000; all
activities prior to that date relate to its development and construction. Due to
the lack of historical operating activities, the presentation and discussion
which follow will be based on the percentages of departmental revenues to total
revenues observed during the first quarter of 2001 and during the period from
opening (December 20, 2000) through December 31, 2000 and on departmental
expenses as a percentage of the associated revenues for the same periods. Such
departmental operating results are summarized in the following table:
Three Months Ended Period from Opening
March 31, 2001 through December 31, 2000
-------------------------- ---------------------------
Departmental Revenues:
Casino $36,719,000 97.3% $7,194,000 92.8%
Rooms 2,432,000 6.4 302,000 3.9
Food and beverage 6,708,000 17.8 1,330,000 17.2
Other 1,260,000 3.3 74,000 .9
Promotional allowances (9,372,000) (24.8) (1,146,000) (14.8)
----------- ---------- ----------- ----------
Net revenues 37,747,000 100.0 7,754,000 100.0
----------- ---------- ----------- ----------
Departmental Expenses:
Casino 34,000,000 92.6% 5,193,000 72.2%
Rooms 613,000 25.2 88,000 29.1
Food and beverage 3,032,000 45.2 413,000 31.1
Other 1,303,000 103.4 143,000 193.2
----------- -----------
Total departmental expenses 38,948,000 5,837,000
---------- -----------
Departmental (loss) profit $(1,201,000) $ 1,917,000
=========== ===========
Departmental (loss) profit margin (3.2%) 24.7%
The opening of the Shreveport Casino increased gaming capacity in the
Shreveport/Bossier City market by approximately 32%. Casino revenues for the
market grew by only 18.8% as the market began to absorb the incremental gaming
capacity. The revenue growth realized in the market also reflects heavy
promotional activity associated with the opening of the Shreveport Casino;
accordingly, management believes that the real market growth was somewhat less
than 18.8%. In addition, management believes the current economic slowdown and
higher gasoline prices negatively affected the Shreveport market in the first
quarter of 2001.
The Shreveport Casino experienced the typical operating inefficiencies
associated with the opening of a new, major resort. In addition, management
sought to open the Shreveport Casino during December 2000 in order to capitalize
on one of the busiest times of the year. Delays in construction of the casino
resulted in a severe reduction in the time available for final preparations to
open the facility and training of personnel. This lack of adequate preparation
and training time, combined with a difficult labor market in Shreveport and the
large volume of business generated by the property during its first 12 days of
operations in 2000, exacerbated the operating inefficiencies. As a result,
management concentrated its efforts in January and early February 2001 on fully
implementing operating and training programs to ensure that customers were
provided with a superior level of service. With these programs completed, the
Shreveport Casino launched major marketing programs in late February and March.
Delays in commencing its marketing efforts, together with inclement weather and
increased competitive pressures in the Shreveport market, resulted in lower
gaming activity at the Shreveport Casino in January and
45
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
February 2001 than management originally anticipated. Since implementing its
marketing programs, the Shreveport Casino experienced a favorable trend in its
gaming revenues with significant increases in both February and March compared
to the prior month periods.
Based on the experience of other area casinos, seasonality in the
Shreveport gaming market results in significantly less gaming revenues being
reported during the month of April than during the month of March and somewhat
less than during the month of February. Based on preliminary results, the
Shreveport Casino expects to report gaming revenues for the month of April that
are less than March, but in excess of February.
Gaming Operations
Total gross wagering at the Shreveport Casino as measured by table game
drop and slot machine handle amounted to $450 million during the first quarter
of 2001 and $83.3 million during the 2000 period subsequent to opening.
Revenues
Casino revenues totaled $36.7 million during the first quarter of 2001 and
$7.2 million during the 2000 period after opening of which slot machine and
table game revenues accounted for 71.7% and 28.3%, respectively, during the 2001
period and 81.3% and 18.7%, respectively, during the 2000 post-opening period.
Because the Shreveport Casino was only open for 12 days during 2000, the mix
between slot machine and table game revenues is not necessarily indicative of
future operations. Accordingly, management believes that the relative revenues
generated from slot machines and table games during the first quarter of 2001
are more representative of ongoing revenues, subject to various uncontrollable
factors, including chance.
Rooms revenues amounted to $2.4 million during the three month period ended
March 31, 2001 with a hotel occupancy rate of 75.7% and an average daily rate of
$98 compared with room revenues of $302,000 during the 2000 post-opening period
with a hotel occupancy rate of 71.4% and an average daily rate of $108.
Food and beverage and other revenues amounted to $6.7 million and $1.3
million, respectively, during the 2001 period and $1.3 million and $74,000,
respectively, in the 2000 period after opening.
Promotional allowances include the estimated value of goods and services
provided free of charge to casino customers under various marketing programs,
the cost of certain cash incentive programs and the estimated cost of the "cash
back" award feature of the casino's customer loyalty program. Such allowances
increased as a percent of revenues to 24.8% during the 2001 period from 14.8%
during the brief 2000 period of operations. Promotional allowances representing
the value of free goods and services declined slightly as a percentage of the
associated revenues during the first quarter of 2001; however, cash incentive
programs and the cost of customer loyalty programs increased significantly as
the Shreveport Casino implemented its marketing programs and developed its
customer base through its players' card program.
46
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Departmental Expenses
The Shreveport Casino was designed to be a major destination resort.
Accordingly, its cost structure is based on the facility generating a
significant level of gaming revenues. As noted previously, management
concentrated its efforts in January and early February 2001 on fully
implementing operating and training programs to ensure that customers were
provided with a superior level of service. Because the Shreveport Casino was in
a longer start up phase, departmental expense ratios during the first quarter of
2001 were higher than those experienced by other HCC operated gaming facilities
during their initial periods. In addition, a significant portion of other
departmental expenses during 2000 were related to opening day activities. As
cost savings initiatives implemented by management are completed and the volume
of business grows, management anticipates that departmental expenses, as a
percentage of the associated revenues, should decline in future periods.
In March 2001, the Louisiana legislature approved an increase in the gaming
tax on riverboat casinos to 21.5% of net gaming proceeds from the current 18.5%.
The tax increase will be phased in over a 25-month period for all riverboats in
the Shreveport/Bossier City area; accordingly, the gaming tax imposed on the
Shreveport Casino increased to 19.5% effective April 1, 2001, with additional 1%
increases scheduled for April 1, 2002 and April 1, 2003. Had the entire 3%
gaming tax been in effect during the first quarter of 2001, the Shreveport
Casino's operating expenses would have increased by $1.2 million.
Other Consolidated Items
------------------------
Other operating expenses of HCC and its subsidiaries, exclusive of casino
departmental expenses, consist primarily of general and administrative expenses,
depreciation and amortization, and development expenses incurred in connection
with the pursuit of additional gaming venues.
General and Administrative
General and administrative expenses increased by $3.6 million (66.3%)
during the first quarter of 2001 compared to the prior year period. Such
expenses at the Aurora Casino decreased by $340,000 (23%) during the 2001 period
primarily as a result of increased allocations to operating departments. The
Tunica Casino experienced an increase in general and administrative expenses of
$218,000 (18.1%) during the 2001first quarter compared to the prior year period
primarily as a result of increases in personnel costs, utilities, property taxes
and insurance costs. During the 2001 first quarter period, the Shreveport Casino
incurred general and administrative expenses of $3.7 million, exclusive of
management fees payable to a subsidiary of HCC. The remaining increase in
corporate general and administrative expenses was less than 1% during the three
month period ended March 31, 2001 compared to the prior year period.
Depreciation and Amortization
Depreciation and amortization expense increased by $6.1 million (187.1%)
during the 2001 period compared to the prior year period. Substantially all of
the increase results from (1) the Shreveport Casino's fixed assets being placed
in service in December 2000 resulting in first quarter 2001 depreciation expense
of $3.9 million and (2) additional depreciation expense recorded by the Aurora
Casino of $2.1 million as a result of its announced expansion and the
acceleration of depreciation on the assets to be replaced (see "Liquidity and
Capital Resources-Capital Expenditures and Investing Activities-Aurora Casino"
below).
47
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Development Expenses
Development expenses represent costs incurred in connection with HCC's
pursuit of potential gaming opportunities in jurisdictions where gaming has not
been legalized. Such costs decreased by 27.8% during the first quarter of 2001
compared to the prior year period due to fewer potential jurisdictions
contemplating the legalization of gaming.
Preopening Costs
Preopening costs represent the start up costs associated with the
development of the Shreveport Casino which, in accordance with existing
accounting pronouncements, were required to be expensed as incurred. Such costs
included, among other things, organizational costs, marketing and promotional
costs, hiring and training of new employees and other operating costs incurred
prior to the opening of the project. Preopening costs amounted to $396,000
during the first quarter of 2000.
Non-operating Income (Expenses)
-------------------------------
Interest Income
Interest income decreased 46.7% during the first quarter of 2001 compared
to the prior year period as unexpended cash proceeds of HCC's issue of Senior
Secured Notes on May 19, 1999 and Hollywood Casino Shreveport's debt issue on
August 10, 1999 (see "Liquidity and Capital Resources - Financing Activities")
were spent in connection with the construction of the Shreveport Casino.
Interest Expense
Interest expense increased by $2.3 million (15%) during the three month
period ended March 31, 2001 compared to the prior year period due primarily to
the increase in HCC's long-term indebtedness from the financing of $30 million
in leased assets and from the cessation of interest capitalization due to the
substantial completion of the Shreveport Casino in December 31, 2000. Interest
capitalized on the Shreveport First Mortgage Notes during the first quarter of
2000 amounted to $1.4 million.
Income Taxes
Management believes that it is more likely than not that future
consolidated taxable income of HCC will be sufficient to utilize at least a
portion of the NOL's, tax credits and other deferred tax assets resulting from
temporary differences. Accordingly, under the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes", the
consolidated balance sheet reflects a net deferred tax asset of $5.6 million as
of March 31, 2001.
Sales by HCC or existing stockholders of common stock, or securities
convertible into common stock, can cause a "change of control", as defined in
Section 382 of the Internal Revenue Code of 1986, as amended, which would limit
the ability of HCC or its subsidiaries to utilize these loss carryforwards in
later tax periods. Should such a change of control occur, the amount of loss
carryforwards available for use in any one year would most likely be
substantially reduced. Future treasury regulations, administrative rulings or
court decisions may also effect HCC's future utilization of its loss
carryforwards.
48
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Minority Interest in Hollywood Casino Shreveport
In accordance with the terms of its joint venture agreement, HCC's joint
venture partner is to receive, among other things, an amount equal to 1% of
"complex net revenues" , as defined, earned by the Shreveport Casino.
Allocations of this interest are reflected as minority interest in Hollywood
Casino Shreveport. Such interest, which commenced upon the opening of the
Shreveport Casino, amounted to $382,000 during the first quarter of 2001.
Other Items
-----------
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.
Market Risk
The Company has $50 million of floating rate Senior Secured Notes
outstanding (see "Liquidity and Capital Resources - Financing Activities"
below). Interest on the floating rate notes is at the LIBOR rate plus 6.28% and
is reset semiannually. Accordingly, an increase in the LIBOR rate of 1% would
increase interest expense by $500,000 per year. Management also has a $30
million financing arrangement for the lease of furniture, fixtures and equipment
for the Shreveport Casino which includes variable interest to be reset
quarterly. Accordingly, based on the remaining scheduled payments under the
capital lease agreement, an increase in the underlying base rate of 1% would
increase interest expense by $413,000 during the remainder of the lease term
through December 2003.
The floating rate loan and the furniture, fixture and equipment financing
were entered into for non-trading purposes as sources of funding for the Company
and management believes that these financings have no other material market
risks other than interest rate risk. Such interest rate risk is beyond
management's control; however, the resulting obligations could be prepaid should
increases in the underlying interest rate result in an excessive financing cost;
however, prepayment of the floating rate notes would require a premium in the
amount of 4% as of May 1, 2000, decreasing by 1% each subsequent May 1.
The Shreveport First Mortgage Notes issued to finance construction of the
Shreveport Casino include interest at the rate of 13% payable semiannually as
well as contingent interest effective with the Shreveport Casino's opening. The
contingent interest is equal to 5% of consolidated cash flow for the applicable
period subject to a maximum contingent interest of $5 million for any four
consecutive fiscal quarters. Accordingly, the maximum potential interest with
respect to the Shreveport First Mortgage Notes for a fiscal year could be $24.5
million, resulting in an effective annual interest rate of 16.33%. This maximum
would assume that the annual consolidated cash flow of the Shreveport Casino was
at least $100 million. The contingent component of interest under the Shreveport
First Mortgage Notes was negotiated with the Shreveport Partnership's lenders as
part of determining the fixed rate component of interest. Management believes
that because the contingent interest component is determined by cash flows and
can only be paid if certain coverage ratios are met, liquidity and capital
resources of the Shreveport Partnership will not be compromised by the payment,
if any, of contingent interest.
49
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Changes in the market interest rate would also impact the fair market value
of the Company's outstanding fixed rate debt instruments. Management estimates
that an increase of 1% in the market interest rate would result in a decrease in
the fair market value of HCC's debt securities of approximately $20.1 million.
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 and the Shreveport Casino. In addition, the operations of HCC's
casinos 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
During the first quarter of 2001, HCC generated cash flow from operations
of $7.3 million. During this period, the operations of the Aurora Casino and
Tunica Casino continued to be HCC's primary sources of liquidity and capital
resources. The Aurora Casino contributed approximately $22.6 million of cash
flow from operations during the first quarter of 2001 while the Tunica Casino
provided $3.8 million of cash from operations. The Shreveport Casino experienced
negative cash flow from operations during the first quarter of 2001 amounting to
$19.3 million. Management believes that the Shreveport Casino will, in time,
become a positive source of operating cash flow. HCC's other primary source of
funds consists of interest income earned on temporary investments ($1.1
million). In addition to operating expenses at its three casino facilities,
other uses of operating cash by HCC during the first quarter of 2001 included
costs to pursue development opportunities ($166,000) and corporate overhead
costs ($2.8 million).
The Internal Revenue Service has completed its examination of the
consolidated federal income tax returns of HCC for the years 1993 and 1994. The
additional current federal income tax obligation resulting from such examination
is included in current federal income taxes payable on the accompanying
consolidated balance sheets at March 31, 2001 and December 31, 2000. HCC's
consolidated net deferred tax asset has also been adjusted to reflect the
results of the tax audit. The Internal Revenue Service is continuing its
examination of the consolidated federal income tax returns of HCC for 1995
through 1998. Management believes that it will have adequate capital resources
to meet the additional tax payments, if any, resulting from such examinations.
Financing Activities
Senior Secured Notes -
During May 1999, HCC completed the refinancing of its outstanding 12.75%
Senior Secured Notes through a private debt offering of $310 million of 11.25%
Senior Secured Notes due May 1, 2007 and $50 million of floating rate Senior
Secured Notes due May 1, 2006 (collectively, the "Senior Secured Notes").
Interest on the floating rate notes is equal to the six-month LIBOR rate plus
6.28% and is reset semiannually. Effective November 1, 2000, the interest rate
increased to 13%; on May 1, 2001, the interest rate dropped to 10.51%. In
addition to refinancing existing debt, the Company used proceeds
50
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
from the debt offering to fund a portion of the Company's equity investment in
the Shreveport Casino and, during October 1999, to acquire the management and
consulting contracts on the Aurora Casino and Tunica Casino. The Company also
plans to use proceeds from the debt offering to finance construction of a new,
dockside gaming facility at the Aurora Casino (see "Liquidity and Capital
Resources -Capital Expenditures and Other Investing Activities"). Interest on
the Senior Secured Notes is payable semiannually each May 1 and November 1. The
Senior Secured Notes are unconditionally guaranteed on a senior secured basis by
HCT and Shreveport Management and may be guaranteed by certain future
subsidiaries of HCC. Neither HCA nor HCL are guarantors. The Senior Secured
Notes and related guarantees are secured by, among other things, (1)
substantially all of the assets of HCT and future guarantors, (2) a lien not to
exceed approximately $108 million on substantially all of the assets of HCA, (3)
a pledge of the capital stock of certain subsidiaries of HCC, including HCA and
HCT, and (4) the collateral assignment of the management contract for the
Shreveport Casino. The lien described in (2) above is currently limited to
approximately $66 million.
The fixed rate Senior Secured Notes are redeemable at the option of HCC any
time on or after May 1, 2003 at 107% of the then outstanding principal amount,
decreasing to 104.666%, 102.333% and 100%, respectively, on May 1, 2004, 2005
and 2006. The Company may also redeem up to 35% of the fixed rate Senior Secured
Notes at a redemption price of 111.25% plus accrued interest at any time prior
to May 1, 2002 with the proceeds from an offering of HCC's common stock if net
proceeds to the Company from any such offering are at least $20 million.
The floating rate Senior Secured Notes may be redeemed at the option of HCC
at any time at an initial redemption price of 105% plus accrued interest with
the redemption premium decreasing by 1% on May 1 of each year beginning May 1,
2000.
The indenture for 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,
Shreveport Management or any future guarantor; or enter into certain
transactions with affiliates.
Shreveport First Mortgage Notes -
On August 10, 1999 the Shreveport Partnership issued $150 million of 13%
First Mortgage Notes, with contingent interest, due 2006 (the "Shreveport First
Mortgage Notes"), which are non-recourse to HCC. Fixed interest on the
Shreveport First Mortgage Notes is payable semiannually on each February 1 and
August 1. In addition, contingent interest accrues and is payable on each
interest payment date after the Shreveport Casino begins operations. The amount
of the contingent interest is equal to 5% of the Shreveport Casino's cash flow,
as defined, for the prior two fiscal quarters up to a maximum of $5 million for
any four consecutive fiscal quarters. No contingent interest was incurred during
the three month period ended March 31, 2001. Accrued contingent interest
amounted to $77,000 at both March 31, 2001 and December 31, 2000. Payment of
contingent interest may be deferred to the extent that payment would result in
certain financial coverage ratios not being met. The notes are collateralized by
a first priority security interest in substantially all of the Shreveport
Partnership's existing and future assets other than furniture, fixtures and
equipment for which up to $35 million of financing has been or may be obtained
as well as by a pledge of the common stock of the HCC subsidiaries which hold
the partnership interests.
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HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The Shreveport First Mortgage Notes are redeemable at the option of the
Shreveport Partnership at any time on or after August 1, 2003 at 106.5% of the
then outstanding principal amount, decreasing to 103.25% on August 1, 2004 and
100% on or after August 1, 2005. Up to 35% of the original aggregate amount of
the Shreveport First Mortgage Notes may also be redeemed at a price of 113% plus
accrued interest at any time prior to August 1, 2002 with proceeds of
contributions to the Shreveport Partnership made by HCC from certain offerings
of equity securities by HCC.
The indenture for the Shreveport First Mortgage Notes contains various
provisions limiting the ability the Shreveport Partnership to borrow money, pay
dividends, make investments, pledge or sell its assets or enter into mergers or
consolidations. The indenture also limits the ability of certain HCC
subsidiaries which guarantee the debt to acquire additional assets, become
liable for additional obligations or engage in any business activities other
than holding the partnership interests or acting as managing general partner of
the Shreveport Partnership.
Other -
Prior to October 14, 1999, HCC was the general partner in the limited
partnership which held the Aurora management agreement, having acquired such
interest in April 1997. HCC's original acquisition price for the general
partnership interest included a note in the amount of $3.8 million and the
assignment of $13.8 million undiscounted principal amount of PPI Funding Notes
and $350,000 accrued interest due from GBCC to PPI Corporation. Annual principal
and interest payments by HCC on the $3.8 million note approximated the general
partner's share of partnership distributions which were made to HCC prior to the
liquidation of the general partnership in October 1999. Effective November 1,
1999, HCC began making monthly payments of principal and interest totaling
$83,000 which, together with additional quarterly principal payments of $21,000
beginning in January 2000, approximated HCC's payment obligations while the
management contract was in effect.
HCC and PPI Corporation have entered into agreements to defer all payments
of principal and interest on the note otherwise due during the period from March
1, 2000 through June 1, 2001 while negotiations continue between GBCC and HCC to
restructure certain indebtedness owed by GBCC to HCC. These deferrals do not
extend the final maturity of the note or represent a forgiveness of either
principal or interest as all past due amounts, if not otherwise restructured,
will become due and payable on the extended payment due date of July 1, 2001.
During October 2000, HCC received $900,000 of the outstanding principal balance
from GBCC and agreed to offset an additional $146,000 of principal against other
payables due to GBCC while negotiations to restructure the debt continued.
During September 1998, HCA entered into a bank loan agreement to borrow up
to $2 million on an unsecured basis. Borrowings under the agreement are payable
in 36 monthly installments including interest at the rate of 7.5% per annum. HCA
borrowed $2 million under the agreement during October 1998. During May 1999,
HCA borrowed an additional $750,000 from the bank on an unsecured basis to be
repaid over 60 months. Interest on such loan is at 7.5% per annum.
HCT had a $1.3 million bank credit facility available to borrow against
through September 30, 1998. Outstanding borrowings on the line of credit
($39,000 at March 31, 2001) are being repaid in monthly installments over 36
months and accrue interest at the rate of 8.875% per annum.
The Shreveport Partnership entered into a lease financing agreement with
third party lessors for $30 million used to acquire furniture, fixtures and
equipment for the Shreveport Casino. Borrowings under the lease agreement accrue
interest at the rate of LIBOR plus 4% (currently 8.9%). During the construction
period, the Shreveport Partnership paid only interest on outstanding borrowings
as well as a
52
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
fee of .5% per annum on the undrawn portion of the $30 million. Effective with
the opening of the Shreveport Casino, the outstanding borrowings became payable
in equal quarterly installments plus interest over a three year period to fully
amortize the obligation. The lease is treated as a capital lease for financial
reporting purposes. Borrowings under the lease are collateralized by the
furniture, fixtures and equipment purchased. The lease agreement contains
certain covenants substantially similar to those included in the indenture for
the Shreveport First Mortgage Notes.
The Shreveport Partnership entered into a ground lease with the city of
Shreveport for the land on which the Shreveport Casino was built. The lease has
an initial term of ten years from the date the Shreveport Casino opened with
subsequent renewals for up to an additional 40 years. Base rental payments under
the lease began when construction commenced and were $10,000 per month during
the construction period. The base rental amount increased to $450,000 per year
upon opening and continuing at that amount for the remainder of the initial ten-
year lease term. In addition to the base rent, the Shreveport Partnership pays
monthly percentage rent equal to the greater of (1) $500,000 per year or (2) the
sum of 1% of adjusted gross revenues of the Shreveport Casino and the amount by
which 50% of the net income from the parking facilities exceeds a specified
parking income credit. Ground lease rentals amounted to $537,000 during the
three month period ended March 31, 2001, including percentage rentals amounting
to $394,000. In addition, the ground lease agreement also calls for payments in
lieu of admission fees to the City of Shreveport and payments to the local
school board amounting to 3.225% and .5375% of Net Gaming Proceeds (as defined
in the agreement), respectively. The payments in lieu of admission fees were
subject to an initial credit of $600,000, which was fully utilized during the
three month period ended March 31, 2001. These additional charges amounted to
$1.4 million during the 2001 first quarter period.
It was originally anticipated that the Shreveport Partnership would develop
the Shreveport Casino with each of HCL and Sodak Louisiana, L.L.C. ("Sodak"), a
former partner, having a 50% interest in the development and subsequent
operations. On March 31, 1999, HCL entered into a definitive agreement with
Sodak's parent to acquire Sodak for the $2.5 million Sodak had contributed to
the Shreveport Partnership, with $1,000 to be paid at closing and the remainder
to be paid six months after the opening of the Shreveport Casino. The revised
structure of the joint venture received approval by the Louisiana Gaming Control
Board on April 20, 1999. As a result, effective as of April 23, 1999, HCL has an
effective 100% ownership interest in the Shreveport Casino with the remaining
joint venture partner holding a 10% residual interest in the event the project
is sold.
When HCL acquired its interest in the Shreveport Partnership, it agreed to
contingently reimburse $2 million to one of the Shreveport Partnership's former
partners. The reimbursement is being paid in monthly installments of $200,000,
without interest, commencing with the opening of the Shreveport Casino.
During November 2000, the Shreveport Partnership entered into bank
revolving credit facilities of $2 million for working capital needs and $4
million to meet liquidity requirements under Louisiana gaming regulations. The
facilities are available for a period of one year and advances under both
facilities accrue interest at the Wall Street Journal Prime Rate plus 2%. The
agreements contain certain reporting requirements and advances are subject to
specified collateral agreements. No amounts were outstanding under the credit
facilities at March 31, 2001.
As of March 31, 2001, HCC's scheduled maturities of long-term debt and
payments under capital leases during the remainder of 2001 are approximately
$4.4 million and $11.3 million, respectively.
53
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Capital Expenditures and Other Investing Activities
Aurora Casino -
Capital expenditures at the Aurora Casino during the three month period
ended March 31, 2001(exclusive of expansion project costs-see below) were
$522,000; management anticipates spending $4 million during the remainder of
2001 toward its ongoing capital improvements program. Significant projects
planned for 2001 include new slot machines, renovations to restaurants and other
departmental expenditures. In addition, the Company has commenced a major
expansion of the Aurora Casino, highlighted by the construction of a new
dockside facility to replace the Aurora Casino's two riverboats. The new
dockside facility should significantly increase passenger capacity and provide a
premier gaming and entertainment facility for the Aurora Casino's patrons. The
Aurora Casino expansion, as currently planned, is projected to cost between $75
million and $80 million and is expected to be completed and opened during the
summer of 2002. The Company received regulatory approval for its planned
dockside casino from the Illinois Gaming Board in April 2000 and construction
began in March 2001. Approximately $40 million of the estimated project costs
for the proposed Aurora Casino expansion were obtained from HCC's debt offering
completed in May 1999 with the remainder to come from cash on hand and cash
available from operations. Costs incurred during the three month period ended
March 31, 2001 with respect to the expansion project have totaled approximately
$591,000.
The commencement of construction of the new dockside facility had
previously been delayed as a result of a complaint filed in late 1999 in an
Illinois state court concerning the constitutionality of a portion of the
legislation that enabled dockside gaming in Illinois. Although the
constitutional challenge centers on the relocation of one of the existing gaming
licenses, a finding that such portion of the legislation is unconstitutional
could result in a finding that all or a portion of the legislation, including
dockside gaming, is invalid. In January 2001, the presiding judge dismissed the
complaint because the plaintiffs lacked standing and failed to exhaust their
administrative remedies. The plaintiffs have filed an appeal of the ruling. If
an appellate court overturns the trial court's original ruling and the state
court rules that all or a portion of the legislation is invalid, management
believes that it may be able to continue to operate its existing riverboats on a
dockside basis pending a final resolution of the litigation. In the unlikely
event that the provisions in question are found to be unconstitutional after all
appeals, and the entire legislation is invalidated so that dockside gaming is
not permitted, the Company will be able to use its two riverboats to conduct
gaming.
The Company plans to build the new dockside casino in two halves, which
will be connected to form a single dockside casino. The first half of the
dockside casino will be towed into place and opened several months earlier than
the second half. It is anticipated that this strategy will minimize disruption
of the Aurora Casino's operations during the construction period. The Aurora
Casino prospectively adjusted the remaining useful lives of its existing
riverboats and other fixed assets being replaced to reduce the recorded net book
value of such assets (approximately $31.4 million at March 31, 2001) to their
estimated net realizable value at the time they are expected to be removed from
service. Consequently, depreciation expense during the first quarter of 2001
subsequent to the announcement of the expansion project increased by $2.1
million; such additional depreciation is expected to amount to approximately
$19.3 million during the remainder of 2001.
Tunica Casino -
Capital expenditures at the Tunica Casino during the first quarter of 2001
amounted to $606,000; management anticipates spending $3.7 million during the
remainder of the year. Expenditures planned for 2001 consist primarily of
updating existing and acquiring new slot machines, replacing the casino
54
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
carpeting and other departmental expenditures. In addition, the Company is
considering the construction of a new buffet to replace the existing facility.
The new Hollywood Epic Buffet would feature a new design and the latest in
kitchen and serving equipment. The new buffet, as currently planned, would more
than double the existing seating capacity. Construction of the buffet, which
would cost an estimated $9 million, could begin in 2001 with a scheduled opening
in late 2001 or early 2002.
Shreveport Casino -
Funding for the Shreveport Casino's construction and preopening costs was
provided by the Shreveport First Mortgage Notes which are non-recourse to HCC
(see "Liquidity and Capital Resources - Financing Activities"), by approximately
$54.9 million of equity investments ($53.9 million by HCC and $1 million by its
joint venture partner made with the proceeds of a loan from HCL) and by $30
million of furniture, fixture and equipment financing.
On April 23, 2000, the construction site for the Shreveport Casino suffered
tornado damage which contributed to the delay in opening the facility.
Management filed damage claims and received reimbursements from its insurance
carrier during 2000 in the amount of approximately $1.7 million to cover
substantially all of the cost of repairing the damage incurred. Management is
also pursuing delayed opening claims with its carriers. To the extent the delay
in the facility's opening was the responsibility of contractors, management is
also seeking to recover damages from those entities. For this and other reasons,
the Shreveport Partnership has withheld payment of approximately $2.6 million
which the general contractor is currently seeking. Both the recovery of any
amounts by the Shreveport Partnership from either its insurance companies or the
contractors and the need to pay the general contractor the amounts being
withheld are currently subject to litigation and management is unable to
determine the amounts, if any, that will ultimately be received or paid.
Capital expenditures at the Shreveport Casino during the first quarter of
2001 amounted to $3.4 million, primarily for the completion of certain hotel
suites and a health spa facility. Management anticipates spending $3 million
during the remainder of 2001 toward the Shreveport Casino's ongoing program of
capital improvements.
The Shreveport Partnership entered into an agreement with a third party
during 2000 providing for the joint construction and ownership of a golf course.
Contributions by the Shreveport Partnership to the limited liability corporation
formed to develop and operate the golf course through the first quarter of 2001
amounted to $144,000; contributions expected to be made during the remainder of
2001 are approximately $2.5 million.
Other -
HCC continues to pursue several additional potential gaming opportunities.
HCC intends to finance any future ventures with cash flow from operations,
together with third party financing, including non-recourse project financing.
55
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Conclusion
Management anticipates that HCC's funding requirements for its operating
activities will continue to be satisfied by existing cash and cash generated by
the Aurora Casino and the Tunica Casino. Such cash is also expected to be
sufficient to fund initial operating cash deficits at the Shreveport Casino.
Pursuant to the terms of its indenture under existing debt obligations, HCC may
make additional capital contributions to HCL of up to $8.6 million. Any such
contributions made to HCL would, in turn, be available to the Shreveport
Partnership. Management may also seek additional working capital or other loans
as permitted under the indenture governing the Shreveport First Mortgage Notes.
Any such issue of debt would likely rank equal in right of payment to the
Shreveport First Mortgage Notes. Approximately $40 million of proceeds remaining
from the Senior Secured Notes, together with cash on hand and cash available
from operations, are expected to be used for the planned expansion of the Aurora
Casino.
56
PART II: OTHER INFORMATION
--------------------------
Item 6. Exhibits and Reports on Form 8-K
The Registrants did not file any reports on Form 8-K during the three month
period ended March 31, 2001.
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, each
of the Registrants has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HOLLYWOOD CASINO CORPORATION
Date: May 14, 2001 By: /s/ Paul C. Yates
----------------------- -----------------------------------
Paul C. Yates
Executive Vice President and
Chief Financial Officer
HWCC - TUNICA, INC.
Date: May 14, 2001 By: /s/ Paul C. Yates
----------------------- -----------------------------------
Paul C. Yates
Executive Vice President and
Chief Financial Officer
57