SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM-10Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2001
--------------------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
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Commission file number 33-48887
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HOLLYWOOD CASINO CORPORATION
HWCC-TUNICA, INC.
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(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 November 13, 2001
------------------------------ ------------------------------ --------------------------------
Hollywood Casino Corporation Common Stock, $.0001 par value 25,048,296 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 47% 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 the expansion of
the Aurora Casino's operating facilities currently under construction.
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
September 30, 2001 and for the three and nine month periods ended September 30,
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 September 30, 2001, the
results of their operations for the three and nine month periods ended September
30, 2001 and 2000 and their cash flows for the nine month periods ended
September 30, 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 nine
month period ended September 30, 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 September 30, 2001, the
related condensed consolidated statements of operations for the three and nine
month periods ended September 30, 2001 and 2000 and of cash flows for the nine
month periods ended September 30, 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
November 2, 2001
4
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
September 30,
2001 December 31,
(Unaudited) 2000
------------- -------------
Current Assets:
Cash and cash equivalents $ 155,856,000 $ 155,570,000
Receivables, net of allowances of
$3,675,000 and $2,668,000, respectively 5,691,000 5,552,000
Inventories 3,639,000 3,603,000
Deferred income taxes 2,635,000 3,054,000
Refundable deposits and other
current assets 3,622,000 4,153,000
Due from affiliates, net of valuation allowances 6,500,000 6,661,000
------------- -------------
Total current assets 177,943,000 178,593,000
------------- -------------
Property and Equipment:
Land and land improvements 9,640,000 9,594,000
Buildings and improvements 224,652,000 222,637,000
Riverboats and barges 89,823,000 89,421,000
Operating equipment 140,598,000 134,362,000
Construction in progress 25,235,000 4,849,000
------------- -------------
489,948,000 460,863,000
Less - accumulated depreciation
and amortization (140,972,000) (105,406,000)
------------- -------------
Net property and equipment 348,976,000 355,457,000
------------- -------------
Cash restricted for construction projects - 9,530,000
------------- -------------
Other Assets:
Deferred financing costs 13,604,000 14,875,000
Land rights 6,690,000 6,843,000
Other assets 12,609,000 12,602,000
------------- -------------
Total other assets 32,903,000 34,320,000
------------- -------------
$ 559,822,000 $ 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
September 30,
2001 December 31,
(Unaudited) 2000
------------- -------------
Current Liabilities:
Current maturities of long-term debt
and capital lease obligations $ 4,260,000 $ 16,493,000
Note payable - 2,499,000
Accounts payable 16,052,000 22,177,000
Accrued liabilities -
Salaries and wages 7,239,000 9,657,000
Interest 23,627,000 18,067,000
Gaming and other taxes 10,284,000 3,229,000
Insurance 5,295,000 2,816,000
Other 8,665,000 5,398,000
Federal income taxes payable 1,600,000 3,299,000
Other current liabilities 3,201,000 3,560,000
------------- -------------
Total current liabilities 80,223,000 87,195,000
------------- -------------
Long-Term Debt 551,131,000 510,868,000
------------- -------------
Capital Lease Obligations 17,243,000 37,861,000
------------- -------------
Other Noncurrent Liabilities 5,362,000 5,658,000
------------- -------------
Commitments and Contingencies (Note 9)
Minority Interest 2,114,000 2,078,000
------------- -------------
Shareholders' Deficit:
Common Stock -
Class A common stock, $.0001 par value per share;
50,000,000 shares authorized; 25,023,000 and
24,997,000 shares issued and outstanding, respectively 3,000 2,000
Class B, non-voting, $.01 par value per share;
10,000,000 shares authorized; no shares issued - -
Additional paid-in capital 217,150,000 217,030,000
Accumulated deficit (313,404,000) (282,792,000)
------------- -------------
Total shareholders' deficit (96,251,000) (65,760,000)
------------- -------------
$ 559,822,000 $ 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
September 30,
----------------------------
2001 2000
------------ ------------
Revenues:
Casino $122,893,000 $ 85,305,000
Rooms 5,872,000 2,836,000
Food and beverage 14,772,000 8,383,000
Other 1,969,000 1,309,000
------------ ------------
145,506,000 97,833,000
Less - promotional allowances (28,995,000) (18,689,000)
------------ ------------
Net revenues 116,511,000 79,144,000
------------ ------------
Expenses:
Casino 77,993,000 50,726,000
Rooms 768,000 353,000
Food and beverage 3,906,000 2,274,000
Other 1,065,000 557,000
General and administrative 8,901,000 4,568,000
Depreciation and amortization 13,641,000 3,252,000
Preopening - 3,154,000
Development 149,000 293,000
------------ ------------
Total expenses 106,423,000 65,177,000
------------ ------------
Income from operations 10,088,000 13,967,000
------------ ------------
Non-operating income (expense):
Interest income 1,023,000 2,779,000
Interest expense, net of capitalized interest of
$328,000 and $3,686,000, respectively (16,130,000) (13,005,000)
Equity in losses of unconsolidated affiliates (43,000) (23,000)
Gain (loss) on disposal of assets 9,000 (1,000)
Gain on settlement of litigation, net of related expenses - 7,274,000
------------ ------------
Total non-operating expense, net (15,141,000) (2,976,000)
------------ ------------
(Loss) income before income taxes and other item (5,053,000) 10,991,000
Income tax benefit (provision) 2,513,000 (476,000)
------------ ------------
(Loss) income before other item (2,540,000) 10,515,000
Minority interest in Hollywood Casino Shreveport (Note 1) (372,000) -
------------ ------------
Net (loss) income $ (2,912,000) $ 10,515,000
============ ============
Basic net (loss) income per common share $(.12) $.42
============ ============
Diluted net (loss) income per common share $(.12) $.39
============ ============
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 OPERATIONS
(Unaudited)
Nine Months Ended
September 30,
---------------------------
2001 2000
------------ ------------
Revenues:
Casino $365,418,000 $247,864,000
Rooms 17,214,000 7,946,000
Food and beverage 44,224,000 24,535,000
Other 6,546,000 3,602,000
------------ ------------
433,402,000 283,947,000
Less - promotional allowances (87,067,000) (53,267,000)
------------ ------------
Net revenues 346,335,000 230,680,000
------------ ------------
Expenses:
Casino 243,171,000 148,606,000
Rooms 2,290,000 889,000
Food and beverage 13,351,000 6,731,000
Other 4,434,000 1,380,000
General and administrative 29,767,000 15,180,000
Depreciation and amortization 36,797,000 9,766,000
Preopening - 4,562,000
Development 459,000 715,000
------------ ------------
Total expenses 330,269,000 187,829,000
------------ ------------
Income from operations 16,066,000 42,851,000
------------ ------------
Non-operating income (expense):
Interest income 3,969,000 9,038,000
Interest expense, net of capitalized interest of
$466,000 and $7,504,000, respectively (50,506,000) (42,219,000)
Equity in losses of unconsolidated affiliates (130,000) (23,000)
(Loss) gain on disposal of assets (55,000) 191,000
Gain on settlement of litigation, net of related expenses - 7,274,000
------------ ------------
Total non-operating expense, net (46,722,000) (25,739,000)
------------ ------------
(Loss) income before income taxes, extraordinary and other items (30,656,000) 17,112,000
Income tax benefit (provision) 1,996,000 (1,552,000)
------------ ------------
(Loss) income before extraordinary and other items (28,660,000) 15,560,000
Minority interest in Hollywood Casino Shreveport (Note 1) (1,109,000) -
------------ ------------
(Loss) income before extraordinary item (29,769,000) 15,560,000
Extraordinary item - loss on early extinguishment of debt (843,000) -
------------ ------------
Net (loss) income $(30,612,000) $ 15,560,000
============ ============
Basic net (loss) income per common share:
(Loss) income before extraordinary item $ (1.19) $.62
Extraordinary item (.03) -
------------ ------------
Net (loss) income $ (1.22) $.62
============ ============
Diluted net (loss) income per common share:
(Loss) income before extraordinary item $ (1.19) $.58
Extraordinary item (.03) -
------------ ------------
Net (loss) income $ (1.22) $.58
============ ============
The accompanying introductory notes and notes to consolidated financial
statements
are an integral part of these consolidated statements.
8
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
September 30,
-----------------------------
2001 2000
------------ -------------
OPERATING ACTIVITIES:
Net (loss) income $(30,612,000) $ 15,560,000
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Depreciation and amortization, including accretion
of debt discount and amortization of premium 38,954,000 11,565,000
Extraordinary item 843,000 -
Loss (gain) on disposal of assets 55,000 (191,000)
Minority interest in Hollywood Casino Shreveport 1,109,000 -
Grant of stock options - 15,000
Equity in losses of unconsolidated affiliates 130,000 23,000
Provision for doubtful accounts 2,197,000 985,000
Deferred income taxes (489,000) (291,000)
Increase in accounts receivable (2,336,000) (1,889,000)
Increase in accounts payable and accrued expenses 9,818,000 18,876,000
Net change in other current assets and liabilities (1,402,000) 280,000
Net change in other noncurrent assets and liabilities 679,000 (1,069,000)
------------ -------------
Net cash provided by operating activities 18,946,000 43,864,000
------------ -------------
INVESTING ACTIVITIES:
Purchases of property and equipment (30,278,000) (105,317,000)
Net change in restricted cash 9,530,000 87,082,000
Proceeds from disposal of assets 62,000 2,414,000
Investments in unconsolidated affiliates (206,000) -
------------ -------------
Net cash used in investing activities (20,892,000) (15,821,000)
------------ -------------
FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt 41,251,000 139,000
Payment to Sodak Gaming, Inc. (2,499,000) -
Deferred financing costs (1,691,000) (1,916,000)
Repayments of long-term debt (3,388,000) (2,021,000)
Payments on capital lease obligations (30,489,000) (453,000)
Issuance of common stock 121,000 75,000
Limited partner distributions (1,073,000) -
------------ -------------
Net cash provided by (used in) financing activities 2,232,000 (4,176,000)
------------ -------------
Net increase in cash and cash equivalents 286,000 23,867,000
Cash and cash equivalents at beginning of period 155,570,000 115,351,000
------------ -------------
Cash and cash equivalents at end of period $155,856,000 $ 139,218,000
============ =============
The accompanying introductory notes and notes to consolidated financial
statements
are an integral part of these consolidated statements.
9
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 53% 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 35% 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 September 30, 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
10
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.
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 September 30, 2001 and for the
three and nine month periods ended September 30, 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 September 30, 2001, the results of its operations for the
three and nine month periods ended September 30, 2001 and 2000 and its cash
flows for the nine month periods ended September 30, 2001 and 2000.
During January and April 2001, the Emerging Issues Task Force ("EITF") of the
Financial Accounting Standards Board reached consensuses requiring that the
"cash-back" feature of customer loyalty programs should be reported as a
reduction in net revenues rather than as an expense. The new presentation
requirements have been adopted by the Company 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 (loss) income from operations or net (loss) income.
In July 2001, the Financial Accounting Standards Board issued Statement No.
141, "Business Combinations" ("SFAS 141") and Statement No. 142, "Goodwill and
Other Intangible Assets" ("SFAS 142"). SFAS 141 requires the use of the
purchase method of accounting for all business combinations initiated after June
30, 2001. SFAS 142 establishes new standards for goodwill acquired in a
business combination and requires that goodwill and other intangible assets be
periodically reviewed for impairment rather than being amortized. SFAS 142 is
effective for fiscal years beginning after December 15, 2001 with earlier
application permitted. The Company is currently evaluating the impact of the
adoption of SFAS 142; however, it does not expect the adoption to have a
material effect on its consolidated financial statements.
The Financial Accounting Standards Board issued Statement No. 143,
"Accounting for Asset Retirement Obligations" ("SFAS 143") in August 2001 and
Statement No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" ("SFAS 144") in October 2001. SFAS 143 addresses reporting for
obligations associated with the retirement of tangible long-lived assets and the
related asset retirement costs. SFAS 143 is effective for fiscal years
beginning after June 15, 2002 with earlier application permitted. SFAS 144
supercedes earlier guidance with respect to such accounting and is effective for
fiscal years beginning after December 15, 2001. The Company does not expect the
adoption of SFAS 143 and SFAS 144 to have a material effect on its consolidated
financial statements.
11
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(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.
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 Nine Months Ended
September 30, September 30,
----------------------- -----------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
Shares used in the calculation of:
Basic net (loss) income per share 25,002,550 24,965,574 24,998,912 24,956,728
Diluted net (loss) income per share 25,002,550 26,912,206 24,998,912 26,615,837
No potential common shares or options are included in the calculation of
diluted earnings per share for the three and nine month periods ended September
30, 2001 as the inclusion of such shares would be antidilutive due to the net
losses incurred during those periods. The weighted average number of potential
common shares and options excluded from the diluted earnings per share
calculations for the three and nine month periods ended September 30, 2001 was
1,836,324 and 1,976,031, respectively. In addition, options to purchase a
weighted average of 67,300 shares and 41,432 shares during the three and nine
month periods ended September 30, 2001 were excluded from the diluted earnings
per share calculations because the exercise price was greater than the average
market price of the common shares. The number of shares used in the calculation
of diluted earnings per share for the three and nine month periods ended
September 30, 2000 has been adjusted to include all potential common shares and
stock options held by employees and directors.
(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 approximately
$70,000,000 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. Up to
$40,000,000 of the estimated project costs for the proposed Aurora Casino
expansion may be 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
12
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
of its existing riverboats and other fixed assets being replaced to reduce the
recorded net book value of such assets ($17,298,000 at September 30, 2001) to
their estimated net realizable value at the time they are expected to be removed
from service. Consequently, depreciation expense during the three and nine month
periods ended September 30, 2001 subsequent to the announcement of the expansion
project increased by $6,428,000 and $15,002,000, respectively; such additional
depreciation is expected to amount to approximately $6.4 million during the
remainder of 2001.
(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.
September 30, 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) 435,000 1,145,000
------------ ------------
Indebtedness of HCT:
Equipment loans (c) 452,000 1,188,000
Bank credit facility (d) 1,032,000 89,000
------------ ------------
1,484,000 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
13% Shreveport Senior Secured Notes, with contingent
interest, due 2006, including premium of $1,121,000 (f) 40,121,000 -
Note payable, net of discount of $87,000 at
December 31, 2000 (g) 200,000 1,913,000
Other 29,000 33,000
------------ ------------
190,350,000 151,946,000
------------ ------------
Total indebtedness 554,162,000 516,261,000
Less - current maturities (3,031,000) (5,393,000)
------------ ------------
Total long-term debt $551,131,000 $510,868,000
============ ============
---------------------------------------
(a) During May 1999, HCC refinanced 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
13
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
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, to 10.51% effective May 1, 2001
and to 8.45% effective November 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 partially 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 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 amount of 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 were
payable in 36 monthly installments of $62,000 including interest at the
rate of 7.5% per annum. The outstanding borrowings were repaid in 2001.
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.
14
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(c) The equipment loans are payable monthly including interest at effective
rates ranging from 8.5% to 11.3% per annum and mature at various dates
between 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 were collateralized by equipment purchased with
the loan proceeds and were repaid in 2001. The credit facility was not
renewed by HCT.
In June 2001, HCT entered into a bank credit facility in the amount of
$3,000,000 available through June 30, 2002. Borrowings under the line of
credit are payable over a 36 month period and accrue interest at the bank's
prime lending rate plus .75% per annum on either a fixed or floating rate
basis. Borrowings under the line of credit are collateralized by equipment
purchased with the loan proceeds. The line of credit agreement requires
the provision of certain financial reports. During June 2001, HCT borrowed
$731,000 under the credit facility at an interest rate of 7.5% per annum.
HCT made additional borrowings of $130,000 at the rate of 7.5% per annum in
July 2001 and $220,000 at the rate of 7.25% per annum in August 2001.
(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. Contingent interest amounting to $130,000 was incurred during
the three and nine month periods ended September 30, 2001. Accrued
contingent interest amounted to $207,000 and $77,000 at September 30, 2001
and December 31, 2000, respectively. 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 assets secured by the
Shreveport Senior Secured Notes (see 4(f)) and up to $6,000,000 in assets
that may be acquired with future equipment financing 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.
15
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
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 June 2001, the Shreveport Partnership issued $39,000,000 of 13% Senior
Secured Notes, with contingent interest, due August 2006 (the "Shreveport
Senior Secured Notes"). The Shreveport Senior Secured Notes were issued at
an initial premium of $1,170,000 to yield interest at an effective rate of
12.21% per annum. Fixed interest on the Shreveport Senior Secured Notes at
the annual rate of 13% is payable on each February 1 and August 1. In
addition, contingent interest accrues and is payable on each interest
payment date. The amount of contingent interest is equal to 1.3% of the
consolidated cash flow of the Shreveport Partnership for the applicable
period subject to a maximum contingent interest of $1,300,000 for any four
consecutive fiscal quarters. Contingent interest amounting to $33,000 was
incurred during the three and nine month periods ended September 30, 2001.
Accrued contingent interest amounted to $33,000 at September 30, 2001.
Payment of contingent interest may be deferred to the extent that payment
would result in certain financial coverage ratios not being met. Proceeds
from the Shreveport Senior Secured Notes were used, in part, to retire the
Shreveport Partnership's capital lease obligations (see Note 5) with the
remainder available for working capital purposes.
Under the terms of certain intercreditor collateral agreements, the
Shreveport Senior Secured Notes are secured by, among other things, (1) a
security interest in certain furniture, fixtures and equipment acquired
prior to the opening of the Shreveport Casino for $30,000,000 and (2) a
security interest on an equal basis in up to $10,000,000 of the collateral
which secures the Shreveport First Mortgage Notes (see (4e)). The
furniture, fixtures and equipment in (1) above were obtained with the
proceeds from the capital lease obligation retired with a portion of the
proceeds from the Shreveport Senior Secured Notes.
The Shreveport Senior Secured Notes may be redeemed on the same terms and
conditions as the Shreveport First Mortgage Notes (see (4e)). The
indenture to the Shreveport Senior Secured Notes also carries substantially
the same limitations, covenants and restrictions as those included in the
indenture to the Shreveport First Mortgage Notes (see (4e)).
(g) 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
16
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
original amount of $308,000, and the associated project costs were recorded
upon the issuance of the Shreveport First Mortgage Notes in August 1999.
The obligation was repaid in October 2001.
Scheduled payments of long-term debt as of September 30, 2001 are set forth
below:
2001 (three months) $ 2,222,000
2002 946,000
2003 549,000
2004 318,000
2005 6,000
Thereafter 549,000,000
------------
Total $553,041,000
============
Interest paid, net of amounts capitalized, amounted to $42,789,000 and
$41,188,000, respectively, during the nine month periods ended September 30,
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 which expired 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 Tunica Casino and Aurora Casino previously leased certain gaming and
other equipment under capital lease agreements which have expired. No future
payment obligations exist with respect to these capital leases although the
equipment remains in use.
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
twelve equal quarterly installments plus interest at LIBOR plus 4%. The lease
was treated as a capital lease for financial reporting purposes. Borrowings
under the lease were collateralized by the furniture, fixtures and equipment
purchased. The
17
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
lease was retired in June 2001 with a portion of the proceeds from the
Shreveport Senior Secured Notes (see Note 4(f)).
The $30,000,000 original cost of the assets acquired under the capital lease
agreement by the Shreveport Partnership was included in furniture and equipment
on the accompanying consolidated balance sheet at December 31, 2000.
Accumulated amortization at December 31, 2000 with respect to these assets
amounted to $172,000. No revisions were made to the carrying value or the
estimated useful lives of the assets as a result of the satisfaction and
discharge of the capital lease obligation; however, operating equipment under
capital leases of $30,000,000 and the accumulated amortization thereon of
$2,610,000 as of the June 15, 2001 lease termination date have been removed from
the table below. Assets under capital leases and the related accumulated
amortization are included on the accompanying consolidated balance sheets as
follows:
September 30, December 31,
2001 2000
------------ ------------
Buildings $ 27,358,000 $ 27,358,000
Operating equipment 6,219,000 36,219,000
------------ ------------
33,577,000 63,577,000
Less - accumulated amortization (12,088,000) (11,579,000)
------------ ------------
$ 21,489,000 $ 51,998,000
============ ============
Amortization expense with respect to assets under capital leases amounted to
$227,000 and $3,119,000, respectively, during the three and nine month periods
ended September 30, 2001 (including $2,438,000 for the Shreveport Casino's
leased assets prior to the June 15, 2001 lease termination date) and $227,000
and $681,000, respectively, for the three and nine month periods ended September
30, 2000.
18
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Future minimum lease payments under capital lease obligations as of September
30, 2001 are as follows:
2001 (three months) $ 1,122,000
2002 2,643,000
2003 2,660,000
2004 2,677,000
2005 2,477,000
Thereafter 16,262,000
-----------
Total minimum lease payments 27,841,000
Less amount representing interest (9,369,000)
-----------
Present value of future
minimum lease payments 18,472,000
Current capital lease obligation (1,229,000)
-----------
Long-term capital lease obligation $17,243,000
===========
(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(e)) 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.
(7) Income Taxes
Components of HCC's benefit (provision) for income taxes consist of the
following:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- ----------------------------
2001 2000 2001 2000
----------- ----------- ------------ -----------
Current:
Federal $ 1,699,000 $ (318,000) $ 1,699,000 $ (318,000)
State 632,000 (464,000) (192,000) (1,525,000)
Deferred:
Federal 1,595,000 (3,427,000) 10,444,000 (5,171,000)
State 739,000 (12,000) 3,570,000 (27,000)
Change in valuation allowance (2,152,000) 3,745,000 (13,525,000) 5,489,000
----------- ----------- ------------ -----------
$2,513,000 $ (476,000) $ 1,996,000 $(1,522,000)
=========== =========== ============ ===========
19
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
No federal income tax payments were made during the nine month period ended
September 30, 2001; federal tax payments of $35,000 were made during the nine
month period ended September 30, 2000. The current federal income tax benefit
for the three and nine month periods ended September 30, 2001 consists of an
adjustment to management's estimate of the federal taxes payable with respect to
an examination by the Internal Revenue Service (see below). Current federal
income taxes for the three and nine month periods ended September 30, 2000 were
offset through the use of available tax net operating loss carryforwards
("NOL's"). State income tax payments of $11,000 and $1,705,000, respectively,
were made during the nine month periods ended September 30, 2001 and 2000.
At September 30, 2001, HCC and its subsidiaries have NOL's for federal income
tax purposes totaling approximately $67,264,000, 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 $749,000,
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 $6,021,000 and $5,532,000
at September 30, 2001 and December 31, 2000, respectively.
The Internal Revenue Service has substantially completed its examination of
the consolidated federal income tax returns of HCC for the years 1993 through
1998, pending receipt of the final Revenue Agent Report. Management's estimate
of the current federal income tax obligation resulting from such examination is
included in current federal income taxes payable on the accompanying
consolidated balance sheets at September 30, 2001 and December 31, 2000. HCC's
consolidated net deferred tax asset has also been adjusted to reflect the
projected results of the tax audit.
20
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, a wholly owned subsidiary of GBCC. 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 November 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 December 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 September 30, 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 August 10, 2001, three executive officers of the Company were not
re-elected to their positions. These individuals continue to serve on the
Company's Board of Directors and are all subject to employment agreements. The
Compensation Committee of the Board annually reviews and sets compensation for
these individuals, subject to a minimum level of compensation. Under the terms
of the agreements, (1) the employment period (terminating December 31, 2002 for
two executives and December 31, 2003 for the third) will be followed immediately
by a four-year period consulting arrangement, (2) upon expiration of the
consulting arrangement, each individual will be entitled to receive a lifetime
pension benefit, (3) upon the death of any of the executives, their designated
beneficiary will receive an annual death benefit for a period of ten years and
(4) aggregate annual compensation during the employment periods is currently
$1,380,000 for 2002 and $710,000 for 2003. All these employment agreements
contain non-compete clauses. The individuals, at their option, may elect to
terminate their respective employment agreements. Such a termination may result
in the Company being required to make certain payments in amounts that cannot be
reasonably estimated at this time.
The Company is continuing to evaluate these agreements. Such evaluation is
expected to be completed in the near future. The pension and death benefits as
provided for under these agreements have been accrued. At September 30, 2001
and December 31, 2000, retirement benefits accrued under the employment
agreements were $5,073,000 and $4,965,000, respectively. Such obligations are
included in other noncurrent liabilities on the accompanying consolidated
balance sheets.
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 September
30, 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.
The Shreveport Partnership has agreed to reimburse up to $579,000 of
construction finish out costs to be incurred by an outside lessee with respect
to approximately 42,000 square feet of restaurant and entertainment facilities
to be operated on property leased from the Shreveport Casino. No liability for
such reimbursement has been reflected on the accompanying consolidated balance
sheets at September 30, 2001 or December 31, 2000 as the underlying construction
work has not been performed. Once the rental period commences, the Shreveport
Casino is to receive $6 per square foot annually, payable on a monthly basis,
together with percentage rentals as specified in the lease agreement. The
lessee is a limited liability company in which certain relatives of a principal
stockholder and director of HCC hold directly or indirectly a 22.5% interest.
21
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(10) Unrestricted Subsidiaries
Under the terms of the indenture to the Senior Secured Notes (see Note 4(a)),
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 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 contained in the indenture to the Senior Secured Notes.
Condensed Balance Sheet
Equity Method for Investment in Unrestricted Subsidiaries
September 30, 2001
(amounts in thousands)
Current Assets: Current Liabilities:
Cash and cash items $129,414 Current maturities of long-
Accounts receivable, net of allowance term debt and capital leases $ 4,054
of $2,615 3,787 Accounts payable and accrued
Inventories 1,401 liabilities 50,133
Prepaid expenses and other current assets 5,147 Other current liabilities 2,416
---------
Due from affiliates 6,500 56,603
--------
146,249
--------
Investment in and advances to Long-term debt 360,987
Unrestricted Subsidiaries 8,730 --------
--------
Capital lease obligations 17,243
--------
Property and equipment, net of
accumulated depreciation and Other noncurrent liabilities 5,108
amortization of $128,576 165,166 --------
-------- Shareholders' deficit:
Other Assets: Common stock 3
Deferred finance costs 7,824 Additional paid-in capital 217,150
Other assets 15,721 Accumulated deficit (313,404)
-------- ---------
23,545 (96,251)
-------- ---------
$343,690 $ 343,690
======== =========
22
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Condensed Statements of Operations
Equity Method for Investment in Unrestricted Subsidiaries
Three and Nine Month Periods Ended September 30, 2001
(amounts in thousands)
Three Months Ended Nine Months Ended
September 30, 2001 September 30, 2001
------------------- -------------------
Net revenues $80,081 $237,639
------- --------
Expenses:
Departmental expenses 54,295 160,950
General and administrative 4,821 15,666
Depreciation and amortization 9,650 24,913
Development 149 459
------- --------
Total expenses 68,915 201,988
------- --------
Income from operations 11,166 35,651
Non-operating expense, net (8,715) (28,576)
------- --------
Income before taxes and other item 2,451 7,075
Income tax benefit 2,513 1,996
------- --------
Income before other item 4,964 9,071
Equity in losses of unrestricted subsidiaries (7,876) (39,683)
------- --------
Net loss $(2,912) $(30,612)
======= ========
(11) Supplemental Cash Flow Information
During the first nine months of 2000, the Shreveport Partnership obtained
proceeds under capital lease obligations amounting to $19,025,000 used to
purchase fixed assets during the construction period (see Note 5).
A contingent liability in the amount of $2,499,000 with respect to HCL's
acquisition of its partner's interest in the Shreveport Partnership was
converted to a note payable and has been excluded from the accompanying
consolidated statement of cash flows for the nine month period ended September
30, 2000 as a noncash transaction.
(12) Gain on Settlement of Litigation
On October 8, 1998, the Company filed a complaint against its former
independent accountants and tax advisors in the District Court of Dallas County,
Texas. On September 8, 2000, a mutually acceptable agreement was reached
concluding the dispute and resulting in the dismissal of the lawsuit. Terms of
the settlement are confidential; however, the Company recognized a pretax gain
on the settlement, net of
23
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
related legal fees and other expenses, amounting to $7,274,000, which is
included in non-operating income on the accompanying consolidated statements of
operations for the three and nine month periods ended September 30, 2000.
(13) Reclassifications
Certain reclassifications have been made to the prior year's consolidated
financial statements to conform to the 2001 consolidated financial statement
presentation.
24
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 September 30, 2001, the related condensed statements of
operations for the three and nine month periods ended September 30, 2001 and
2000 and of cash flows for the nine month periods ended September 30, 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
November 2, 2001
25
HOLLYWOOD CASINO - AURORA, INC.
(wholly owned by Hollywood Casino Corporation)
BALANCE SHEETS
ASSETS
September 30,
2001 December 31,
(Unaudited) 2000
------------- ------------
Current Assets:
Cash and cash equivalents $ 29,295,000 $ 21,164,000
Accounts receivable, net of allowances
of $822,000 and $942,000, respectively 1,175,000 1,188,000
Inventories 794,000 997,000
Deferred income taxes 1,967,000 1,958,000
Due from affiliates 119,000 129,000
Prepaid expenses and other current assets 1,154,000 1,033,000
------------ ------------
Total current assets 34,504,000 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 42,365,000 42,377,000
Operating equipment 43,431,000 42,996,000
Construction in progress 22,620,000 2,137,000
------------ ------------
157,788,000 136,882,000
Less - accumulated depreciation and amortization (74,271,000) (54,782,000)
------------ ------------
Net property and equipment 83,517,000 82,100,000
------------ ------------
Other Assets 2,253,000 2,213,000
------------ ------------
$120,274,000 $110,782,000
============ ============
The accompanying introductory notes and notes to financial statements are an
integral part of these balance sheets.
26
HOLLYWOOD CASINO - AURORA, INC.
(wholly owned by Hollywood Casino Corporation)
BALANCE SHEETS
LIABILITIES AND SHAREHOLDER'S EQUITY
September 30,
2001 December 31,
(Unaudited) 2000
------------- ------------
Current Liabilities:
Current maturities of long-term debt
and capital lease obligations $ 1,382,000 $ 1,847,000
Accounts payable 7,651,000 1,659,000
Accrued liabilities -
Salaries and wages 2,121,000 2,819,000
Interest 3,755,000 1,756,000
Gaming and other taxes 4,528,000 1,573,000
Insurance 572,000 746,000
Other 2,476,000 1,865,000
Due to affiliates 5,971,000 482,000
Other current liabilities 1,158,000 1,361,000
------------ ------------
Total current liabilities 29,614,000 14,108,000
------------ ------------
Long-Term Debt 66,289,000 66,405,000
------------ ------------
Capital Lease Obligations 17,243,000 17,861,000
------------ ------------
Deferred Income Taxes 1,188,000 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 (19,616,000) (19,366,000)
------------ ------------
Total shareholder's equity 5,940,000 6,190,000
------------ ------------
$120,274,000 $110,782,000
============ ============
The accompanying introductory notes and notes to financial statements are an
integral part of these balance sheets.
27
HOLLYWOOD CASINO - AURORA, INC.
(wholly owned by Hollywood Casino Corporation)
STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
September 30,
-------------------------
2001 2000
----------- -----------
Revenues:
Casino $58,444,000 $56,593,000
Food and beverage 3,507,000 4,062,000
Other 779,000 949,000
----------- -----------
62,730,000 61,604,000
Less - promotional allowances (8,430,000) (8,808,000)
----------- -----------
Net revenues 54,300,000 52,796,000
----------- -----------
Expenses:
Casino 33,018,000 32,585,000
Food and beverage 1,308,000 1,229,000
Other 262,000 310,000
General and administrative 1,312,000 1,329,000
Depreciation and amortization 8,181,000 1,768,000
----------- -----------
Total expenses 44,081,000 37,221,000
----------- -----------
Income from operations 10,219,000 15,575,000
----------- -----------
Non-operating income (expense):
Interest income 155,000 301,000
Interest expense, net of capitalized interest
of $328,000 in 2001 (1,894,000) (2,255,000)
Gain (loss) on disposal of assets 1,000 (8,000)
----------- -----------
Total non-operating expense, net (1,738,000) (1,962,000)
----------- -----------
Income before income taxes 8,481,000 13,613,000
Income tax provision (2,903,000) (4,926,000)
----------- -----------
Net income $ 5,578,000 $ 8,687,000
=========== ===========
The accompanying introductory notes and notes to financial statements
are an integral part of these statements.
28
HOLLYWOOD CASINO - AURORA, INC.
(wholly owned by Hollywood Casino Corporation)
STATEMENTS OF OPERATIONS
(Unaudited)
Nine Months Ended
September 30,
---------------------------
2001 2000
------------ ------------
Revenues:
Casino $171,925,000 $165,642,000
Food and beverage 10,905,000 11,892,000
Other 2,329,000 2,538,000
------------ ------------
185,159,000 180,072,000
Less - promotional allowances (24,982,000) (25,065,000)
------------ ------------
Net revenues 160,177,000 155,007,000
------------ ------------
Expenses:
Casino 97,988,000 96,238,000
Food and beverage 4,084,000 3,699,000
Other 710,000 800,000
General and administrative 3,842,000 4,080,000
Depreciation and amortization 20,340,000 5,260,000
------------ ------------
Total expenses 126,964,000 110,077,000
------------ ------------
Income from operations 33,213,000 44,930,000
------------ ------------
Non-operating income (expense):
Interest income 604,000 897,000
Interest expense, net of capitalized interest
of $466,000 in 2001 (6,217,000) (6,786,000)
Loss on disposal of assets (65,000) (7,000)
------------ ------------
Total non-operating expense, net (5,678,000) (5,896,000)
------------ ------------
Income before income taxes 27,535,000 39,034,000
Income tax provision (9,742,000) (14,322,000)
------------ ------------
Net income $ 17,793,000 $ 24,712,000
============ ============
The accompanying introductory notes and notes to financial statements
are an integral part of these statements.
29
HOLLYWOOD CASINO - AURORA, INC.
(wholly owned by Hollywood Casino Corporation)
STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
September 30,
---------------------------
2001 2000
------------ ------------
OPERATING ACTIVITIES:
Net income $ 17,793,000 $ 24,712,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 20,340,000 5,260,000
Provision for doubtful accounts 135,000 135,000
Loss on disposal of assets 65,000 7,000
Deferred income tax (benefit) provision (5,039,000) 316,000
Increase in receivables (122,000) (388,000)
Increase in accounts payable and accrued liabilities 10,685,000 4,026,000
Net change in affiliate accounts 5,499,000 3,916,000
Net change in other current assets and liabilities (121,000) (623,000)
Net change in other assets and liabilities (40,000) (40,000)
------------ ------------
Net cash provided by operating activities 49,195,000 37,321,000
------------ ------------
INVESTING ACTIVITIES:
Purchases of property and equipment (21,872,000) (6,859,000)
Proceeds from sale of assets 50,000 7,000
------------ ------------
Net cash used in investing activities (21,822,000) (6,852,000)
------------ ------------
FINANCING ACTIVITIES:
Repayments of debt (710,000) (600,000)
Payments on capital lease obligations (489,000) (453,000)
Dividends (18,043,000) (23,803,000)
------------ ------------
Net cash used in financing activities (19,242,000) (24,856,000)
------------ ------------
Net increase in cash and cash equivalents 8,131,000 5,613,000
Cash and cash equivalents at beginning of period 21,164,000 22,148,000
------------ ------------
Cash and cash equivalents at end of period $ 29,295,000 $ 27,761,000
============ ============
The accompanying introductory notes and notes to financial statements
are an integral part of these statements.
30
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 September 30, 2001 and for the three and nine
month periods ended September 30, 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 September 30, 2001, the
results of its operations for the three and nine month periods ended September
30, 2001 and 2000 and its cash flows for the nine month periods ended September
30, 2001 and 2000.
During January and April 2001, the Emerging Issues Task Force ("EITF") of the
Financial Accounting Standards Board reached consensuses requiring that the
"cash-back" feature of customer loyalty programs should be reported as a
reduction in net revenues rather than as an expense. The new
31
HOLLYWOOD CASINO - AURORA, INC.
(wholly owned by Hollywood Casino Corporation)
NOTES TO FINANCIAL STATEMENTS (Continued)
(Unaudited)
presentation requirements have been adopted by HCA 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.
In July 2001, the Financial Accounting Standards Board issued Statement No.
141, "Business Combinations" ("SFAS 141") and Statement No. 142, "Goodwill and
Other Intangible Assets" ("SFAS 142"). SFAS 141 requires the use of the
purchase method of accounting for all business combinations initiated after June
30, 2001. SFAS 142 establishes new standards for goodwill acquired in a
business combination and requires that goodwill and other intangible assets be
periodically reviewed for impairment rather than being amortized. SFAS 142 is
effective for fiscal years beginning after December 15, 2001 with earlier
application permitted. HCA is currently evaluating the impact of the adoption
of SFAS 142; however, it does not expect the adoption to have a material effect
on its financial statements.
The Financial Accounting Standards Board issued Statement No. 143,
"Accounting for Asset Retirement Obligations" ("SFAS 143") in August 2001 and
Statement No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets") ("SFAS 144") in October 2001. SFAS 143 addresses reporting for
obligations associated with the retirement of tangible long-lived assets and the
related asset retirement costs. SFAS 143 is effective for fiscal years
beginning after June 15, 2002 with earlier application permitted. SFAS 144
supercedes earlier guidance with respect to such accounting and is effective for
fiscal years beginning after December 15, 2001. HCA does not expect the
adoption of SFAS 143 and SFAS 144 to have a material effect on its financial
statements.
(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 approximately $70,000,000 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. Up to $40,000,000 of
the estimated project costs for the proposed Aurora Casino expansion may 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 ($17,298,000 at September 30,
2001) to their estimated net realizable value at the time they are expected to
be removed from service. Consequently, depreciation expense during the three
and nine month periods ended September 30, 2001 subsequent to the announcement
of the expansion project increased by $6,428,000 and $15,002,000, respectively;
such additional depreciation is expected to amount to approximately $6.4 million
during the remainder of 2001.
32
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:
September 30, 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) 435,000 1,145,000
----------- -----------
Total indebtedness 66,442,000 67,152,000
Less - current maturities (153,000) (747,000)
----------- -----------
Total long-term debt $66,289,000 $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 were
payable in 36 monthly installments of $62,000 including interest at the
rate of 7.5% per annum. The outstanding borrowings were repaid in 2001.
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.
33
HOLLYWOOD CASINO - AURORA, INC.
(wholly owned by Hollywood Casino Corporation)
NOTES TO FINANCIAL STATEMENTS (Continued)
(Unaudited)
As of September 30, 2001, future maturities of long-term debt are as follows:
2001 (three months) $ 37,000
2002 156,000
2003 168,000
2004 74,000
2005 -
Thereafter 66,007,000
-----------
$66,442,000
===========
Interest paid for the nine month periods ended September 30, 2001 (net of
capitalized interest) and 2000 amounted to $4,218,000 and $4,780,000,
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 which expired 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 September 30, 2001 and
December 31, 2000 in the amount of $27,358,000. Amortization expense with
respect to these assets amounted to $227,000 and $681,000, respectively, during
each of the three and nine month periods ended September 30, 2001 and 2000.
Accumulated amortization at September 30, 2001 and December 31, 2000 with
respect to these assets amounted to $8,315,000 and $7,634,000, respectively.
34
Future minimum lease payments under capital lease obligations as of September
30, 2001 are as follows:
2001 (three months) $ 1,122,000
2002 2,643,000
2003 2,660,000
2004 2,677,000
2005 2,477,000
Thereafter 16,262,000
------------
Total minimum lease payments 27,841,000
Less amount representing interest (9,369,000)
------------
Present value of future
minimum lease payments 18,472,000
Current capital lease obligation (1,229,000)
------------
Long-term capital lease obligation $ 17,243,000
------------
(5) Income Taxes
HCA's provision for income taxes consists of the following:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- ----------------------------
2001 2000 2001 2000
----------- ----------- ------------ -------------
Current (provision) benefit:
Federal $(5,401,000) $(4,318,000) $(14,605,000) $(12,482,000)
State 647,000 (463,000) (176,000) (1,524,000)
Deferred benefit (provision):
Federal 1,669,000 (133,000) 4,550,000 (289,000)
State 182,000 (12,000) 489,000 (27,000)
----------- ----------- ------------ -------------
$(2,903,000) $(4,926,000) $ (9,742,000) $(14,322,000)
=========== =========== ============ =============
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 federal income taxes amounting to
$8,640,000 and $9,020,000, respectively, during the nine month periods ended
September 30, 2001 and 2000 and state income taxes of $9,000 and $1,705,000,
respectively, during the nine month periods ended September 30, 2001 and 2000.
The Internal Revenue Service has substantially completed its examination of
the consolidated federal income tax returns of HCC for the years 1993 through
1998, pending receipt of the final Revenue Agent Report, 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 projected results of
such examination.
35
HOLLYWOOD CASINO - AURORA, INC.
(wholly owned by Hollywood Casino Corporation)
NOTES TO FINANCIAL STATEMENTS (Continued)
(Unaudited)
(6) Reclassifications
Certain reclassifications have been made to the prior year's financial
statements to conform to the 2001 financial statement presentation.
36
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 September 30, 2001, the related condensed
consolidated statements of operations for the three and nine month periods ended
September 30, 2001 and 2000 and of cash flows for the nine month periods ended
September 30, 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
November 2, 2001
37
HWCC - TUNICA, INC. AND SUBSIDIARY
(wholly owned by Hollywood Casino Corporation)
CONSOLIDATED BALANCE SHEETS
ASSETS
September 30,
2001 December 31,
(Unaudited) 2000
------------- ------------
Current Assets:
Cash and cash equivalents $ 19,582,000 $ 16,038,000
Accounts receivable, net of allowances of
$1,793,000 and $1,636,000, respectively 2,533,000 3,295,000
Inventories 607,000 780,000
Deferred income taxes 1,717,000 1,403,000
Prepaid expenses and other current assets 1,124,000 1,182,000
Due from affiliates 310,000 163,000
------------ ------------
Total current assets 25,873,000 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 48,545,000 47,019,000
Construction in progress 1,853,000 91,000
------------ ------------
134,431,000 131,143,000
Less - accumulated depreciation and amortization (53,521,000) (49,408,000)
------------ ------------
Net property and equipment 80,910,000 81,735,000
------------ ------------
Other Assets:
Land rights 6,690,000 6,843,000
Other assets 4,267,000 4,667,000
------------ ------------
Total other assets 10,957,000 11,510,000
------------ ------------
$117,740,000 $116,106,000
============ ============
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated balance sheets.
38
HWCC - TUNICA, INC. AND SUBSIDIARY
(wholly owned by Hollywood Casino Corporation)
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDER'S EQUITY
September 30,
2001 December 31,
(Unaudited) 2000
------------- ------------
Current Liabilities:
Current maturities of long-term debt
and capital lease obligations $ 779,000 $ 1,032,000
Accounts payable 1,421,000 1,890,000
Accrued liabilities -
Salaries and wages 2,357,000 1,792,000
Interest 437,000 437,000
Gaming and other taxes 1,170,000 1,473,000
Insurance 2,407,000 1,986,000
Other 3,677,000 2,856,000
Other current liabilities 1,158,000 1,375,000
------------ ------------
Total current liabilities 13,406,000 12,841,000
------------ ------------
Long-Term Debt 88,079,000 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 (6,382,000) (6,991,000)
------------ ------------
Total shareholder's equity 16,255,000 15,646,000
------------ ------------
$117,740,000 $116,106,000
============ ============
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated balance sheets.
39
HWCC - TUNICA, INC. AND SUBSIDIARY
(wholly owned by Hollywood Casino Corporation)
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
September 30,
--------------------------
2001 2000
------------ -----------
Revenues:
Casino $ 27,576,000 $28,712,000
Rooms 3,446,000 2,836,000
Food and beverage 4,496,000 4,321,000
Other 469,000 360,000
------------ -----------
35,987,000 36,229,000
Less - promotional allowances (10,952,000) (9,881,000)
------------ -----------
Net revenues 25,035,000 26,348,000
------------ -----------
Expenses:
Casino 18,361,000 18,141,000
Rooms 233,000 353,000
Food and beverage 884,000 1,045,000
Other 229,000 247,000
General and administrative 1,231,000 1,218,000
Depreciation and amortization 1,415,000 1,417,000
------------ -----------
Total expenses 22,353,000 22,421,000
------------ -----------
Income from operations 2,682,000 3,927,000
------------ -----------
Non-operating income (expenses):
Interest income 74,000 66,000
Interest expense (2,484,000) (2,499,000)
Equity in losses of unconsolidated affiliate (43,000) (23,000)
Gain on disposal of assets 10,000 7,000
------------ -----------
Total non-operating expenses, net (2,443,000) (2,449,000)
------------ -----------
Income before income taxes 239,000 1,478,000
Income tax provision (121,000) (148,000)
------------ -----------
Net income $ 118,000 $ 1,330,000
============ ===========
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated statements.
40
HWCC - TUNICA, INC. AND SUBSIDIARY
(wholly owned by Hollywood Casino Corporation)
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Nine Months Ended
September 30,
---------------------------
2001 2000
------------ ------------
Revenues:
Casino $ 81,974,000 $ 82,222,000
Rooms 9,619,000 7,946,000
Food and beverage 13,094,000 12,643,000
Other 1,356,000 1,064,000
------------ ------------
106,043,000 103,875,000
Less - promotional allowances (30,800,000) (28,202,000)
------------ ------------
Net revenues 75,243,000 75,673,000
------------ ------------
Expenses:
Casino 54,170,000 52,368,000
Rooms 721,000 889,000
Food and beverage 2,597,000 3,032,000
Other 680,000 580,000
General and administrative 4,524,000 3,734,000
Depreciation and amortization 4,407,000 4,356,000
------------ ------------
Total expenses 67,099,000 64,959,000
------------ ------------
Income from operations 8,144,000 10,714,000
------------ ------------
Non-operating income (expenses):
Interest income 250,000 163,000
Interest expense (7,446,000) (7,528,000)
Equity in losses of unconsolidated affiliate (130,000) (23,000)
Gain on disposal of assets 12,000 7,000
------------ ------------
Total non-operating expenses, net (7,314,000) (7,381,000)
------------ ------------
Income before income taxes 830,000 3,333,000
Income tax provision (221,000) (491,000)
------------ ------------
Net income $ 609,000 $ 2,842,000
============ ============
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated statements.
41
HWCC - TUNICA, INC. AND SUBSIDIARY
(wholly owned by Hollywood Casino Corporation)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
September 30,
-------------------------
2001 2000
----------- -----------
OPERATING ACTIVITIES:
Net income $ 609,000 $ 2,842,000
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 4,407,000 4,356,000
Gain on disposal of assets (12,000) (7,000)
Provision for doubtful accounts 1,092,000 850,000
Deferred income tax provision 10,000 -
Equity in losses of unconsolidated affiliate 130,000 23,000
Increase in accounts receivable (330,000) (1,615,000)
Increase in accounts payable and accrued expenses 1,035,000 1,090,000
Net change in other current assets and liabilities (133,000) 464,000
Net change in other noncurrent assets and liabilities (45,000) (5,000)
----------- -----------
Net cash provided by operating activities 6,763,000 7,998,000
----------- -----------
INVESTING ACTIVITIES:
Purchases of property and equipment (3,428,000) (2,634,000)
Proceeds from sale of assets 12,000 -
Investment in unconsolidated affiliate (10,000) -
----------- -----------
Net cash used in investing activities (3,426,000) (2,634,000)
----------- -----------
FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt 1,081,000 104,000
Repayments of long-term debt (874,000) (1,280,000)
----------- -----------
Net cash provided by (used in) financing activities 207,000 (1,176,000)
----------- -----------
Net increase in cash and cash equivalents 3,544,000 4,188,000
Cash and cash equivalents at beginning of period 16,038,000 10,339,000
----------- -----------
Cash and cash equivalents at end of period $19,582,000 $14,527,000
=========== ===========
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated statements.
42
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 20, 2004.
The accompanying consolidated financial statements include the accounts of
HCT and its wholly owned subsidiary, HWCC-Golf Course Partners, Inc. ("Golf").
All significant intercompany balances have been eliminated in consolidation.
Golf, a Delaware corporation, was formed in 1996 to own an initial one-third
interest in Tunica Golf Course LLC, a limited liability company organized to
develop and operate a golf course to be used by patrons of the Tunica Casino and
other participating casino/hotel properties. The golf course opened for
business in November 1998. Golf's investment in Tunica Golf Course, LLC is
accounted for under the equity method of accounting and is included in other
noncurrent assets on the accompanying consolidated balance sheets at September
30, 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 September 30, 2001 and for the
three and nine month periods ended September 30, 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 September 30, 2001, the results of its operations for the
three and nine month periods ended September 30, 2001 and 2000 and its cash
flows for the nine month periods ended September 30, 2001 and 2000.
During January and April 2001, the Emerging Issues Task Force ("EITF") of
the Financial Accounting Standards Board reached consensuses requiring that the
"cash-back" feature of customer loyalty programs should be reported as a
reduction in net revenues rather than as an expense. The new presentation
requirements have been adopted by HCT 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 income.
43
HWCC - TUNICA, INC. AND SUBSIDIARY
(wholly owned by Hollywood Casino Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
In July 2001, the Financial Accounting Standards Board issued Statement No.
141, "Business Combinations" ("SFAS 141") and Statement No. 142, "Goodwill and
Other Intangible Assets" ("SFAS 142"). SFAS 141 requires the use of the
purchase method of accounting for all business combinations initiated after June
30, 2001. SFAS 142 establishes new standards for goodwill acquired in a
business combination and requires that goodwill and other intangible assets be
periodically reviewed for impairment rather than being amortized. SFAS 142 is
effective for fiscal years beginning after December 15, 2001 with earlier
application permitted. HCT is currently evaluating the impact of the adoption
of SFAS 142; however, it does not expect the adoption to have a material effect
on its consolidated financial statements.
The Financial Accounting Standards Board issued Statement No. 143,
"Accounting for Asset Retirement Obligations" ("SFAS 143") in August 2001 and
Statement No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" ("SFAS 144") in October 2001. SFAS 143 addresses reporting for
obligations associated with the retirement of tangible long-lived assets and the
related asset retirement costs. SFAS 143 is effective for fiscal years
beginning after June 15, 2002 with earlier application permitted. SFAS 144
supercedes earlier guidance with respect to such accounting and is effective for
fiscal years beginning after December 15, 2001. HCT does not expect the
adoption of SFAS 143 and SFAS 144 to have a material effect on its consolidated
financial statements.
(2) Long-Term Debt and Pledge of Assets
Substantially all of HCT's assets are pledged in connection with its long-
term indebtedness. Long-term debt consists of the following:
September 30, December 31,
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) 452,000 1,188,000
Bank credit facility (c) 1,032,000 89,000
----------- -----------
Total indebtedness 88,858,000 88,651,000
Less - current maturities (779,000) (1,032,000)
----------- -----------
Total long-term debt $88,079,000 $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
44
HWCC - TUNICA, INC. AND SUBSIDIARY
(wholly owned by Hollywood Casino Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
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 amount of 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 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 11.3% 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 were collateralized by equipment purchased with
the loan proceeds and were repaid in 2001. The credit facility was not
renewed by HCT.
In June 2001, HCT entered into a bank credit facility in the amount of
$3,000,000 available through June 30, 2002. Borrowings under the line of
credit are payable over a 36 month period and accrue interest at the bank's
prime lending rate plus .75% per annum on either a fixed or floating rate
basis. Borrowings under the line of credit are collateralized by equipment
purchased with the loan proceeds. The line of credit agreement requires
the provision of certain financial reports. During June 2001, HCT borrowed
$731,000 under the credit facility at an interest rate of 7.5% per annum.
HCT made additional borrowings of $130,000 at the rate of 7.5% per annum in
July 2001 and $220,000 at the rate of 7.25% per annum in August 2001.
Scheduled payments of long-term debt as of September 30, 2001 are set forth
below:
2001 (three months) $ 288,000
2002 586,000
2003 374,000
2004 236,000
2005 -
Thereafter 87,374,000
-----------
Total $88,858,000
===========
45
HWCC - TUNICA, INC. AND SUBSIDIARY
(wholly owned by Hollywood Casino Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Interest paid amounted to $7,446,000 and $7,528,000, respectively, during
the nine month periods ended September 30, 2001 and 2000.
(3) Income Taxes
HCT's provision for income taxes consists of the following:
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- -------------------------
2001 2000 2001 2000
---------- --------- ---------- ---------
Provision for current federal
income taxes $(153,000) $(148,000) $(211,000) $(491,000)
Deferred federal income tax
benefit (provision) 61,000 (388,000) (128,000) (682,000)
Change in valuation allowance (29,000) 388,000 118,000 682,000
--------- --------- --------- ---------
$(121,000) $(148,000) $(221,000) $(491,000)
========= ========= ========= =========
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.
HCT is included in HCC's consolidated federal income tax return. HCT's
provision for federal income taxes is based on the amount of tax which would be
provided if a separate federal income tax return were filed. HCT paid federal
income taxes of $319,000 and $33,000, respectively, during the nine month
periods ended September 30, 2001 and 2000. HCT paid no state income taxes
during either of the nine month periods ended September 30, 2001 or 2000.
At September 30, 2001, HCT had net operating loss carryforwards ("NOL's")
totaling approximately $2,358,000, which do not expire until the year 2019.
Additionally, HCT has alternative minimum and other tax credits available
totaling $1,196,000 and $385,000, 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 $2,115,000 and $2,125,000,
respectively, at September 30, 2001 and December 31, 2000.
46
HWCC - TUNICA, INC. AND SUBSIDIARY
(wholly owned by Hollywood Casino Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The Internal Revenue Service has substantially completed its examination of
the consolidated federal income tax returns of HCC for the years 1993 through
1998, pending receipt of the final Revenue Agent Report, 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 projected results of such
examination.
(4) Reclassifications
Certain reclassifications have been made to the prior year's consolidated
financial statements to conform to the 2001 consolidated financial statement
presentation.
47
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, impact from the recent terrorist
attack 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, earnings forecasts, objectives, plans, intentions or
goals are also forward-looking statements.
Events of September 11, 2001
----------------------------
Entertainment-related companies, already suffering from the general economic
downturn, experienced an additional setback from the tragic events of September
11, 2001. While difficult to measure with any degree of precision, management
believes the Company's operating results for the third quarter were negatively
impacted by the difficult operating environment triggered by the tragic
September events. At the request of the Illinois Gaming Board all Illinois
casinos closed at 4:00 p.m. on September 11, resulting in an estimated loss of
approximately $400,000 in revenues at the Aurora Casino. Management analyzed
the operating revenues and gaming activity for its three facilities relative to
their internal budgets for the period from September 1 through September 10 and
for the period from September 11 through the end of the month. By comparing the
operating trends for these two periods, management has estimated that the
Company's revenues for the month of September were reduced by approximately $2.5
million (5.7%) as a result of the terrorist attacks.
October revenues have continued to underperform budgeted amounts at the
Tunica Casino and Shreveport Casino. There is no way for management to
determine when gaming levels at these facilities might return to their pre-
September 11 levels. The Aurora Casino has regained its budgeted levels in
spite of the opening of a new, larger facility by Harrah's in Joliet on
September 24, 2001. October casino win for the four casinos in the Chicago
market increased by 4.8% over October 2000, which management believes indicates
that the market remains under served.
48
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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 Nine Months Ended
September 30, September 30,
-------------------------- --------------------------------
2001 2000 2001 2000
------------ ----------- ------------ ------------
Revenues:
Aurora Casino $ 54,300,000 $52,796,000 $160,177,000 $155,007,000
Tunica Casino 25,035,000 26,348,000 75,243,000 75,673,000
Shreveport Casino 37,176,000 - 110,915,000 -
------------ ----------- ------------ ------------
Net revenues 116,511,000 79,144,000 346,335,000 230,680,000
------------ ----------- ------------ ------------
Departmental Expenses:
Aurora Casino 34,588,000 34,124,000 102,782,000 100,737,000
Tunica Casino 19,707,000 19,786,000 58,168,000 56,869,000
Shreveport Casino 29,437,000 - 102,296,000 -
------------ ----------- ------------ ------------
Total departmental expenses 83,732,000 53,910,000 263,246,000 157,606,000
------------ ----------- ------------ ------------
Departmental profit 32,779,000 25,234,000 83,089,000 73,074,000
------------ ----------- ------------ ------------
Other Operating Expenses:
General and administrative 8,901,000 4,568,000 29,767,000 15,180,000
Depreciation and amortization 13,641,000 3,252,000 36,797,000 9,766,000
Preopening - 3,154,000 - 4,562,000
Development 149,000 293,000 459,000 715,000
------------ ----------- ------------ ------------
Total other operating
expenses 22,691,000 11,267,000 67,023,000 30,223,000
------------ ----------- ------------ ------------
Income from operations $ 10,088,000 $13,967,000 $ 16,066,000 $ 42,851,000
============ =========== ============ ============
49
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 Nine Months Ended
September 30, September 30,
-------------------------- --------------------------------
2001 2000 2001 2000
------------ ----------- ------------ ------------
Revenues:
Casino $ 58,444,000 $56,593,000 $171,925,000 $165,642,000
Food and beverage 3,507,000 4,062,000 10,905,000 11,892,000
Other 779,000 949,000 2,329,000 2,538,000
Promotional allowances (8,430,000) (8,808,000) (24,982,000) (25,065,000)
------------ ----------- ------------ ------------
Net revenues 54,300,000 52,796,000 160,177,000 155,007,000
------------ ----------- ------------ ------------
Departmental Expenses:
Casino 33,018,000 32,585,000 97,988,000 96,238,000
Food and beverage 1,308,000 1,229,000 4,084,000 3,699,000
Other 262,000 310,000 710,000 800,000
------------ ----------- ------------ ------------
Total departmental expenses 34,588,000 34,124,000 102,782,000 100,737,000
------------ ----------- ------------ ------------
Departmental profit $ 19,712,000 $18,672,000 $ 57,395,000 $ 54,270,000
============ =========== ============ ============
Departmental profit margin 36.3% 35.4% 35.8% 35.0%
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 slightly during both the three and nine
month periods ended September 30, 2001. During the latter part of 2000, the
Aurora Casino reconfigured its gaming mix to remove ten table games, which are
more labor intensive, and replace them with 61 slot machines. Despite this
reduction of nearly 20% in the number of table games, table game drop did not
change appreciably during the 2001 periods compared to the same periods in 2000.
Slot machine handle was also relatively unchanged during the 2001 periods
compared to the prior year periods.
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 third quarter and year to date increases in casino revenues
primarily reflect higher slot machine revenues of 7.3% and 7%, respectively,
resulting from higher slot machine hold percentages. These increases were
partially offset by third quarter and year to date declines in table game
revenues of approximately 10.8% and 7.6%, respectively. The decreases in table
game revenues resulted from declines in the table game hold percentages to 15.6%
and 15.7%, respectively, in the 2001 three and nine periods from 17.4% and
17.0%, respectively, in the 2000 periods. Poker revenues decreased by 11.8%
during the 2001 third quarter period resulting in a nine month period decrease
of 4% 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.
50
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The Aurora Casino presently conducts gaming operations on two riverboats
connected by a link barge. The smaller of the two riverboats contains slightly
more than one-third of the total gaming positions, but generates less than 25%
of total gaming revenues. As more fully described under "Liquidity and Capital
Resources -- Capital Expenditures and Other Investing Activities," the Aurora
Casino began a major expansion in 2001. In order to take better advantage of
dockside gaming legislation passed in 1999 and improve its gaming amenities, a
new dockside facility is being constructed to replace the Aurora Casino's two
existing riverboats. Management believes the new dockside facility will
significantly increase passenger capacity and provide a premier gaming and
entertainment facility for the Aurora Casino's patrons. The expansion, as
currently planned, is projected to cost approximately $70 million and is
expected to be completed and opened in two stages, with the entire project to be
completed during the summer of 2002.
Food and beverage revenues decreased by 13.7% and 8.3%, respectively, during
the three and nine month periods ended September 30, 2001 compared to the 2000
periods primarily due to a reduction in the amount of complimentary food
revenues. The estimated value of such complimentaries is reflected as revenues
with a corresponding amount deducted as promotional allowances. Other revenues
decreased 17.9% and 8.2%, respectively, during the third quarter and first nine
months of 2001 compared to the same periods in 2000 due primarily to reductions
in theater revenues and retail store sales in the 2001 periods.
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 decreased 4.3% during the third quarter of 2001 compared to the prior
year period bringing the 2001 nine month allowances in line with the
corresponding period in 2000. Increases in both cash incentive programs and
customer loyalty program awards were substantially offset by reductions in food
complimentaries as described above.
Departmental Expenses
Casino expenses did not change significantly during the third quarter or
first nine months of 2001 compared to the prior year periods. Gaming taxes and
payroll and benefit costs increased slightly during the three and nine month
periods in 2001 compared to the prior year periods; however, such increases were
substantially offset by decreases in marketing expenses and admission taxes.
Food and beverage expenses increased by 6.4% and 10.4%, respectively, during
the three and nine month periods ended September 30, 2001 compared to the 2000
periods. Such increases reflect higher food costs due to, among other things,
efforts to upgrade the food quality. Other expenses decreased 15.5% and 11.3%,
respectively, during the 2001 periods compared to the same periods in 2000
consistent with the decreases in the related revenue accounts.
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HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Tunica Casino
-------------
Departmental profit from operations at the Tunica Casino is summarized in the
following table:
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- --------------------------------
2001 2000 2001 2000
------------ ----------- ------------ ------------
Revenues:
Casino $ 27,576,000 $28,712,000 $ 81,974,000 $ 82,222,000
Rooms 3,446,000 2,836,000 9,619,000 7,946,000
Food and beverage 4,496,000 4,321,000 13,094,000 12,643,000
Other 469,000 360,000 1,356,000 1,064,000
Promotional allowances (10,952,000) (9,881,000) (30,800,000) (28,202,000)
------------ ----------- ------------ ------------
Net revenues 25,035,000 26,348,000 75,243,000 75,673,000
------------ ----------- ------------ ------------
Departmental Expenses:
Casino 18,361,000 18,141,000 54,170,000 52,368,000
Rooms 233,000 353,000 721,000 889,000
Food and beverage 884,000 1,045,000 2,597,000 3,032,000
Other 229,000 247,000 680,000 580,000
------------ ----------- ------------ ------------
Total departmental expenses 19,707,000 19,786,000 58,168,000 56,869,000
------------ ----------- ------------ ------------
Departmental profit $ 5,328,000 $ 6,562,000 $ 17,075,000 $ 18,804,000
============ =========== ============ ============
Departmental profit margin 21.3% 24.9% 22.7% 24.8%
Revenues
Total gross wagering at the Tunica Casino decreased 4.6% and 1.9%,
respectively, during the three and nine month periods ended September 30, 2001
compared to the same periods in 2000. Slot machine gross wagering ("handle") at
the Tunica Casino decreased by 4.6% and 1.5%, respectively, while gross wagering
on table games ("drop") declined 6.1% and 8.4%, respectively, during the third
quarter and first nine months of 2001 compared to the same periods in 2000.
Management believes the decreases in gross wagering during 2001 reflect a
softening in the Tunica gaming market attributable to the economic downturn.
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 third quarter and year to date decreases in casino revenues as
set forth in the table above primarily reflect the aforementioned declines in
gross wagering, partially offset by increases in the slot machine hold
percentages. Table game hold percentages decreased to 11.8% and 15.3%,
respectively, for the three and nine month periods ended September 30, 2001 from
14% and 15.8%, respectively, during the same periods in 2000.
Room revenues increased 21.5% and 21.1%, respectively, during the 2001
periods compared to 2000. Hotel occupancy rates increased to 91.9% and 89.1%,
respectively, during the 2001 periods from
52
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
85.6% and 84.6%, respectively, during the same periods in 2000 and the average
daily room rate increased to $77 and $75, respectively, in 2001 from $68 and
$64, respectively, in 2000.
Food and beverage revenues did not change significantly during the third
quarter and first nine months of 2001 compared to the prior year periods. Other
revenues increased 30.3% and 27.4%, respectively, during the three and nine
month periods ended September 30, 2001 compared to the same periods in 2000 due
to rebates and commission receipts as well as 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 10.8% and 9.2%, respectively, during the third quarter
and first nine months of 2001 compared to the same periods in 2000. Goods and
services provided to patrons without charge increased as a percentage of the
associated revenues to 79.1% and 78.3%, respectively, during the 2001 three and
nine month periods from 73% and 72.4%, respectively, during the 2000 periods.
Such increases reflect the expansion of the Tunica Casino's marketing programs,
primarily in food and beverage complimentaries, in order to compete for
overnight guests. Such increases were partially offset by decreases in cash
incentive and customer loyalty program awards during the third quarter and first
nine months of 2001 compared to the prior year periods.
Departmental Expenses
Casino expenses increased slightly during the third quarter and first nine
months of 2001compared to the same periods in 2000 primarily as a result of
increased marketing efforts, including the allocation of additional costs from
other operating departments to the casino department. Marketing efforts have
been increased in response to a highly competitive Tunica gaming market
environment.
The 34% and 18.9% decreases in rooms expense during the third quarter and
first nine months of 2001, respectively, compared to the prior year periods
reflect the increases in room complimentaries previously discussed which result
in additional allocations of room department expenses to the casino department.
The 15.4% and 14.3% decreases in food and beverage expenses during the third
quarter and first nine months of 2001, respectively, compared to the same
periods in 2000 reflect increased allocations to the casino department as a
result of the Tunica Casino's marketing efforts. A decrease of 7.3% in other
departmental expenses during the 2001 third quarter period reduced the nine
month increase to 17.2%. The nine month increase compared to the prior year
period reflects higher costs in the retail sales department.
53
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 comparable period historical operations, the discussion of
departmental operations which follows will be based on comparisons between the
second and third quarters of 2001. The following table presents departmental
operating results for each of the second and third quarters of 2001 together
with percentages of departmental revenues to total net revenues and of
departmental expenses as a percentage of the associated revenues for such
periods.
Three Months Ended Three Months Ended
September 30, 2001 June 30, 2001
----------------------------------- ----------------------------
Revenues:
Casino $36,873,000 99.2% $37,927,000 105.4%
Rooms 2,426,000 6.5 2,737,000 7.6
Food and beverage 6,769,000 18.2 6,748,000 18.8
Other 721,000 1.9 880,000 2.4
Promotional allowances (9,613,000) (25.8) (12,300,000) (34.2)
----------- ----- ----------- -----
Net revenues 37,176,000 100.0 35,992,000 100.0
----------- ----- ----------- -----
Departmental Expenses:
Casino 26,614,000 72.2 30,399,000 80.2
Rooms 535,000 22.1 421,000 15.4
Food and beverage 1,714,000 25.3 1,924,000 28.5
Other 574,000 79.6 1,167,000 132.6
----------- ----- ----------- -----
Total departmental expenses 29,437,000 79.2 33,911,000 94.2
----------- ----- ----------- ----
Departmental profit $ 7,739,000 20.8% $ 2,081,000 5.8%
=========== ===== =========== ====
The opening of the Shreveport Casino increased gaming capacity in the
Shreveport/Bossier City market by approximately 32%. However, the market has
not yet been able to fully absorb the increase in capacity, growing by only 19%
during the third quarter of 2001 and by only 15.1% during the second quarter of
2001 compared to the corresponding periods in 2000. The revenue growth
experienced in the market during 2001 also reflects heavy promotional activity
associated with the opening of the Shreveport Casino and the opening of a
competitor's hotel; accordingly, management believes that the real market growth
is somewhat less than the calculated amounts above. In addition, management
believes the lack of market growth reflects the current economic slowdown which
has negatively affected the Shreveport market during the first nine months 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. Construction delays resulted in a
severe reduction in the time available to finalize preparations to open the
facility and to train 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,
54
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
resulted in lower gaming activity at the Shreveport Casino in January and
February 2001 than management originally anticipated. With the implementation of
its marketing programs, the Shreveport Casino experienced a favorable trend in
its gaming revenues with significant increases in February and March compared to
the prior month periods. Revenues continued to show improvement in April and
May; however, these increases remained below management expectations, primarily
due to the economic slowdown. The Shreveport Partnership is continuing to fine-
tune its marketing efforts to maximize the effectiveness of its marketing
programs while minimizing their costs. To this end, the Shreveport Partnership
terminated certain marketing programs that targeted less profitable market
segments which resulted in a reduction of the Shreveport Casino's gaming
revenues in June. However, as a result of the elimination of the marketing
programs and other cost cutting efforts, the Shreveport Casino generated
positive earnings before interest, taxes, depreciation, amortization, management
fees, land lease and non-recurring items in every month from June through
October.
Gaming Operations
Total gross wagering at the Shreveport Casino as measured by table game drop
and slot machine handle amounted to $436.1 million during the third quarter and
$466.6 million during the second quarter of 2001. The third quarter decline
compared to the second quarter reflects a 7.8% decrease in slot machine wagering
partially offset by a 3.2% increase in table game wagering. As previously
noted, management is continuing to refine its marketing strategies to most
effectively and efficiently reach its targeted patrons.
Revenues
Casino revenues totaled $36.9 million during the third quarter and $37.9
million during the second quarter of 2001. During the third quarter of 2001,
slot machine and table games revenues accounted for 73.5% and 26.5% ,
respectively, of total casino revenues. During the second quarter, slot machine
and table game revenues accounted for 74.3% and 25.7%, respectively, of total
casino revenues. The third quarter decline in casino revenues reflects the
decrease in slot machine wagering previously noted partially offset by a slight
increase in the slot machine hold percentage. Table games experienced a
decline in hold percentage to 17.6% during the third quarter of 2001 compared to
18.1% during the second quarter. A casino's hold percentage is the percentage
of money that it retains as revenue out of the total amount wagered.
Room revenues decreased to $2.4 million during the third quarter from $2.7
million during the second quarter of 2001 reflecting hotel occupancy rates of
93.1% and 88.4%, respectively, and average daily rates of $70 and $84,
respectively. Room rates have been lowered to meet competitive pressures in the
Shreveport/Bossier City marketplace; however, such reductions have been
partially offset by the improvement in hotel occupancy.
Food and beverage revenues did not change significantly between the second
and third quarters of 2001. Other revenues declined to $721,000 in the third
quarter from $880,000 in the second quarter reflecting declines in retail sales
and commission revenues.
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 programs. Such allowances
decreased as a percent of revenues to 25.8% during the third quarter of 2001
compared to 34.2% during the second quarter. Promotional allowances
representing the value of free goods and services were virtually unchanged as a
percentage of the associated revenues during the third quarter of 2001 while
cash incentive programs and the cost of customer loyalty programs decreased
significantly as
55
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
the marketing programs implemented during the second quarter were scaled back to
better focus on targeted patrons.
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 second quarter
of 2001 were higher than those experienced by other HCC operated gaming
facilities during their initial periods. As reflected in the above table,
casino and food and beverage costs as a percentage of the associated revenues
all showed significant declines during the third quarter of 2001 compared to the
second quarter. As cost savings initiatives implemented by management are
completed and the volume of business continues to grow, management anticipates
such cost ratios should continue to improve. Room costs increased as a
percentage of room revenues during the third quarter, reflecting both the
decline in revenues due to a lower average daily rate as well as additional
costs associated with higher occupancy rates.
In March 2001, the Louisiana legislature approved an increase in the gaming
tax on riverboat casinos to 21.5% of net gaming proceeds from 18.5%. The tax
increase is being 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 increase been in effect during 2001, the Shreveport Casino's
operating expenses would have increased by $625,000 during the third quarter and
by $772,000 during the second quarter.
Other Consolidated Items
------------------------
Other operating expenses of HCC and its subsidiaries, exclusive of property
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 $4.3 million (94.9%) and
$14.6 million (96.1%), respectively, during the third quarter and first nine
months of 2001 compared to the prior year periods. Such expenses at the Aurora
Casino decreased slightly during the third quarter of 2001 resulting in an
overall decrease of $238,000 (5.8%) during the 2001 nine month period. Such
fluctuations primarily result from variations in the allocation of
administrative costs to operating departments. As a result of management
initiatives to control such costs at the Tunica Casino, general and
administrative expenses were virtually unchanged from the prior year period
during the third quarter of 2001. The resulting nine month period increase of
$790,000 (21.2%) compared to the prior year periods primarily reflects increases
in personnel costs, utilities and insurance costs. During the third quarter and
first nine months of 2001, the Shreveport Casino incurred general and
administrative expenses of $4 million and $14 million, respectively, exclusive
of management fees payable to a subsidiary of HCC. The remaining third quarter
2001 increase in corporate general and administrative expenses was 14.6%, which
brought the nine month period increase to 1.1%. The three month 2001 increase
results from a credit realized during the corresponding prior year period with
respect to litigation costs.
56
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Depreciation and Amortization
Depreciation and amortization expense increased by $10.4 million (319.5%) and
$27 million (276.8%), respectively, during the third quarter and first nine
months of 2001 compared to the prior year periods. Substantially all of the
increases result from (1) the Shreveport Casino's fixed assets being placed in
service in December 2000 resulting in depreciation expense of $4 million and
$11.9 million, respectively, and (2) additional depreciation expense recorded by
the Aurora Casino of $6.4 million and $15 million, respectively, as a result of
its announced expansion and the resulting acceleration of depreciation on the
assets to be replaced (see "Liquidity and Capital Resources-Capital Expenditures
and Investing Activities-Aurora Casino" below).
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 49.1% and 35.8%, respectively, during
the third quarter and first nine months of 2001 compared to the prior year
periods 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 $3.2 million and $4.6
million, respectively, during the third quarter and first nine months of 2000.
Non-operating Income (Expenses)
-------------------------------
Interest Income
Interest income decreased 63.2% and 56.1%, respectively, during the three and
nine month periods ended September 30, 2001 compared to the prior year periods
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 $3.1 million (24%) and $8.3 million (19.6%),
respectively, during the three and nine month periods ended September 30, 2001
compared to the prior year periods due primarily to significant reductions in
the amount of construction period interest being capitalized and to an increase
in HCC's long-term indebtedness. Interest capitalized on the Shreveport First
Mortgage Notes during the third quarter and first nine months of 2000 amounted
to $3.7 million and $7.5 million, respectively, compared to interest capitalized
with respect to the Aurora Casino expansion of $328,000 and $466,000,
respectively, during the corresponding periods in 2001. The Shreveport Casino
entered into a $30 million lease financing arrangement prior to opening. In
June 2001, the $27.5 million outstanding principal amount of the lease financing
was retired with a portion of the proceeds from the issue of $39 million of
Shreveport Senior Secured Notes, which also provided the Shreveport Casino with
additional working capital. The increase in overall borrowings, coupled with a
higher interest rate (an
57
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
effective rate of 12.21% on the Shreveport Senior Secured Notes versus a
floating rate on the lease financing of 8.9% at the time of their retirement),
also contributed to additional interest expense in the 2001 periods. The 2001
increases in interest expense were partially offset by a third quarter
adjustment in the amount of $953,000 to the accrual of interest on federal
income taxes payable.
Gain on Settlement of Litigation
On October 8, 1998, the Company filed a complaint against its former
accountants and tax advisors in the District Court of Dallas County, Texas. On
September 8, 2000, a mutually acceptable agreement was reached concluding the
dispute and resulting in the dismissal of the lawsuit. Terms of the settlement
are confidential; however, the Company recognized a pretax gain on the
settlement, net of related legal fees and other expenses, amounting to $7.3
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 $6 million as of September
30, 2001.
The Company recognized a benefit for income taxes during the 2001 three and
nine month periods resulting from (1) an adjustment in the amount of $1.7
million to the estimated federal taxes payable with respect to an examination by
the Internal Revenue Service and (2) an adjustment to the effective state tax
rate utilized by the Aurora Casino, which prepares its Illinois tax return on a
unitary basis.
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 affect HCC's future utilization of its loss
carryforwards.
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. The
allocation of this interest is reflected by HCC as minority interest in
Hollywood Casino Shreveport. Such interest, which commenced upon the opening of
the Shreveport Casino, amounted to $372,000 and $1.1 million, respectively,
during the three and nine month periods ended September 30, 2001.
Extraordinary Item - Loss on Early Extinguishment of Debt
During June 2001, the Shreveport Partnership retired its outstanding capital
lease financing with a portion of the proceeds from the Shreveport Senior
Secured Notes. The extraordinary loss from early retirement of debt consists of
the write off of unamortized deferred finance costs associated with the lease
financing.
58
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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.
The floating rate loan was entered into for non-trading purposes as a source
of funding for the Company and management believes that this financing has no
other material market risk other than interest rate risk. Such interest rate
risk is beyond management's control; however, the obligation could be prepaid
should increases in the underlying interest rate result in an excessive
financing cost; however, prepayment would require a premium in the amount of 3%
as of May 1, 2001, decreasing by 1% each subsequent May 1.
Both the Shreveport First Mortgage Notes issued to finance construction of
the Shreveport Casino and the Shreveport Senior Secured Notes issued to retire
lease financing and provide working capital include interest at the rate of 13%
payable semiannually as well as contingent interest. Contingent interest under
the indentures to the Shreveport First Mortgage Notes and the Shreveport Senior
Secured Notes is equal to 5% and 1.3%, respectively of consolidated cash flow
for the applicable period subject to maximum contingent interest of $5 million
and $1.3 million, respectively, 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% and the maximum potential interest with
respect to the Shreveport Senior Secured Notes for a fiscal year could be $6.4
million, resulting in an effective annual interest rate of 15.5%. These
maximums would assume an annual consolidated cash flow for the Shreveport Casino
of at least $100 million. The contingent component of interest under the
Shreveport First Mortgage Notes and the Shreveport Senior Secured Notes was
negotiated with the lenders as part of determining the fixed rate component of
interest. Management believes that because the contingent interest component is
determined by the cash flows and can only be paid if certain coverage ratios are
met, liquidity and capital resources of the Shreveport Partnership will not be
comprised by the payment, if any, of contingent interest.
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 $23.7 million.
59
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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 nine months of 2001, HCC generated cash flow from operations
of $18.9 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 $49.2 million of cash
flow from operations during the first nine months of 2001 while the Tunica
Casino provided $6.8 million of cash from operations. The Shreveport Casino
experienced negative cash flow from operations during the first nine months of
2001 amounting to $30.4 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 ($2.5 million). In addition to operating expenses at its three
casino facilities, other uses of operating cash by HCC during the first nine
months of 2001 included costs to pursue development opportunities ($459,000) and
corporate overhead costs ($7.6 million).
The Internal Revenue Service has completed its examination of the
consolidated federal income tax returns of HCC for the years 1993 through 1998
pending receipt of the final Revenue Agent Report. Management's estimate of the
current federal income tax obligation resulting from such examination is
included in current federal income taxes payable on the accompanying
consolidated balance sheets at September 30, 2001 and December 31, 2000. HCC's
consolidated net deferred tax asset has also been adjusted to reflect the
results of the tax audit.
Financing Activities
Senior Secured Notes -
During May 1999, HCC completed the refinancing of its outstanding 12.75%
Senior Secured Notes through a 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%; and on November 1,
2001, the interest rate changed to 8.45%. In addition to refinancing existing
debt, the Company used proceeds from the debt offering to fund a portion of the
Company's equity investment in the Shreveport Casino and, during October 1999,
to acquire the management and consulting contracts on the Aurora Casino and
Tunica Casino. The Company also plans to use up to $40 million of the proceeds
from the debt offering to partially 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
60
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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 current amount of the lien described in (2) above is
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 Obligations -
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. Contingent interest amounting to $130,000
was incurred during the nine month period ended September 30, 2001. Total
accrued contingent interest amounted to $207,000 at September 30, 2001. 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 assets secured by
the Shreveport Senior Secured Notes (see below) and up to $6 million in assets
that may be acquired with future equipment financing as well as by a pledge of
the common stock of the HCC subsidiaries which hold the partnership interests.
In June 2001, the Shreveport Partnership issued $39 million of 13% Senior
Secured Notes, with contingent interest, due August 2006 (the "Shreveport Senior
Secured Notes"). The Shreveport Senior Secured Notes were issued with a premium
to yield interest at an effective annual rate of 12.21% per annum. Fixed
interest on the Shreveport Senior Secured Notes at an annual rate of 13% is
payable on each February 1 and August 1. In addition, contingent interest
accrues and is payable on each interest payment date. The amount of contingent
interest is equal to 1.3% of the consolidated cash flow of the Shreveport
Partnership for the applicable period subject to a maximum contingent interest
of $1.3 million
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HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
for any four consecutive fiscal quarters. Contingent interest amounting to
$33,000 was incurred during the nine month period ended September 30, 2001.
Payment of contingent interest may be deferred to the extent that payment would
result in certain financial coverage ratios not being met. Proceeds from the
Shreveport Senior Secured Notes were used, in part, to retire the Shreveport
Partnership's capital lease obligations with the remainder available for working
capital purposes.
Under the terms of certain intercreditor collateral agreements, the
Shreveport Senior Secured Notes are secured by, among other things, (1) a
security interest in certain furniture, fixtures and equipment acquired prior to
the opening of the Shreveport Casino for $30 million and (2) a security interest
on an equal basis in up to $10 million of the collateral which secures the
Shreveport First Mortgage Notes.
The Shreveport First Mortgage Notes and Shreveport Senior Secured 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 and Shreveport
Senior Secured 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 indentures for the Shreveport First Mortgage Notes and the Shreveport
Senior Secured Notes contain 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 to
the Shreveport First Mortgage Notes also limit 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 a subsidiary of
GBCC. 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 November 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 December 1,
2001. During October 2000, HCC received $900,000 of the outstanding principal
balance from GBCC and entered into an agreement to offset an additional $146,000
of principal against other payables due to GBCC while negotiations to
restructure the debt continued.
62
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
During September 1998, HCA entered into a bank loan agreement to borrow up to
$2 million on an unsecured basis. Borrowings under the agreement were payable
in 36 monthly installments of $62,000 including interest at the rate of 7.5% per
annum. The outstanding borrowings were repaid in 2001. During May 1999, HCA
borrowed an additional $750,000 from the bank at the rate of 7.5% per annum on
an unsecured basis to be repaid over 60 months.
In June 2001, HCT entered into a bank credit facility in the amount of $3
million available through June 30, 2002. Borrowings under the line of credit
are payable over a 36 month period and accrue interest at the bank's prime
lending rate plus .75% per annum, on either a fixed or floating rate basis.
During June 2001, HCT borrowed $731,000 under the credit facility at an interest
rate of 7.5% per annum. HCT made additional borrowings of $130,000 at the rate
of 7.5% per annum in July 2001 and $220,000 at the rate of 7.25% per annum in
August 2001.
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 $1.5
million during the nine month period ended September 30, 2001, including
percentage rentals amounting to $1.1 million. 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. These
additional charges amounted to $4.3 million during the nine month period ended
September 30, 2001.
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
paid by HCL in June 2001. Such obligation was paid in June 2001. 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 was payable in monthly installments of $200,000,
without interest, commencing with the opening of the Shreveport Casino and was
repaid in October 2001.
As of September 30, 2001, HCC's scheduled maturities of long-term debt and
payments under capital leases during the remainder of 2001 are approximately
$2.2 million and $1.1 million, respectively.
63
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 nine month period ended
September 30, 2001 (exclusive of expansion project costs-see below) were $1.1
million; management anticipates spending less than $1 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
approximately $70 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. Up to $40 million of the estimated project costs for the
proposed Aurora Casino expansion may be obtained from proceeds 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 nine month period
ended September 30, 2001 with respect to the expansion project have totaled
approximately $20.8 million.
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 $17.3 million at September 30, 2001) to
their estimated net realizable value at the time they are expected to be removed
from service. Consequently, depreciation expense during the first nine months of
2001 subsequent to the announcement of the expansion project increased by $15
million; such additional depreciation is expected to amount to approximately
$6.4 million during the remainder of 2001.
Tunica Casino -
Capital expenditures at the Tunica Casino during the first nine months of
2001 amounted to $3.4 million; management anticipates spending $1.2 million
during the remainder of the year.
64
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Expenditures planned for 2001 consist primarily of updating existing and
acquiring new slot machines, replacing the casino carpeting and other
departmental expenditures.
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
$56.3 million of equity investments ($55.3 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. During May 2001, HCC
made an additional capital contribution of $8.7 million to the Shreveport
Partnership.
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 nine months of
2001 amounted to $4.9 million, primarily for the completion of certain hotel
suites and a health spa facility. Management anticipates minimal expenditures
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 nine months of
2001 amounted to $244,000 (including $196,000 during 2001). Given the difficult
market conditions, the partners in the golf course are currently reviewing the
economic feasibility of proceeding with the golf course at this time. In
addition, the partners are awaiting certain material permits and approvals
required to initiate construction of the golf course. If the partners do
proceed, the Shreveport Partnership will be required to make approximately $2.4
million in additional capital contributions to complete construction.
The Shreveport Partnership has agreed to reimburse up to $579,000 of
construction finish out costs to be incurred by an outside lessee with respect
to approximately 42,000 square feet of restaurant and entertainment facilities
to be operated on property leased from the Shreveport Casino. Once the rental
period commences, the Shreveport Casino is to receive $6 per square foot
annually, payable on a monthly basis, together with percentage rentals as
specified in the lease agreement. The lessee is a limited liability company in
which certain relatives of a principal stockholder and director of HCC hold
directly or indirectly a 22.5% interest.
65
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Other -
HCC continues to pursue several additional potential gaming opportunities.
HCC intends to finance any future ventures with cash flow from operations,
together with third party financing, including non-recourse project financing.
Conclusion
The Company has the ability under its existing loan agreements to make
approximately $1 million in additional capital contributions to the Shreveport
Partnership. To the extent the Company desires to make additional contributions
to the Shreveport Partnership in excess of the $1 million amount, the Company
would currently be required to obtain a waiver from a majority of the holders of
its $360 million in outstanding Senior Secured Notes. Management also hopes to
receive payments on the Company's outstanding receivables from GBCC which would
provide the Company with additional flexibility to make future capital
contributions to the Shreveport Partnership. The Company is currently
negotiating with GBCC to restructure its outstanding obligations to the Company.
Other than trade payables, the Company is GBCC's sole creditor. Because the fair
market value of GBCC's assets is less than its obligations to the Company , the
Company will receive any proceeds realized from the restructuring, sale or
liquidation of GBCC or its assets. Proceeds received by the Company from the
restructuring of GBCC will not be restricted by the terms of the Company's loan
agreements and, therefore, would be available for any corporate purpose,
including making additional capital contributions to the Shreveport Partnership.
While management continues to aggressively pursue a prompt restructuring of
GBCC's obligations to the Company, it is uncertain when such restructuring will
ultimately be consummated. It is also likely that a restructuring of GBCC will
require that GBCC file for bankruptcy protection pursuant to a pre-packaged plan
of reorganization.
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. Management believes that the Shreveport
Casino's existing cash together with cash from its operations and additional
capital contributions from HCC as described above, will be sufficient to meets
its liquidity and capital resource needs for the next 24 months.
66
PART II: OTHER INFORMATION
---------------------------
Item 6.(a). - Exhibits
9.1 Voting Trust Agreement dated as of May 17, 2000 by and among William D.
Pratt, Sr., Linda M. Pratt, William D. Pratt, Jr., Shawn Denise Bradshaw
and Michael Shannan Pratt and William D. Pratt, Sr., Michael Shannon
Pratt and Jack E. Pratt, Sr. as amended by the First Amendment to
Hollywood Casino Corporation Voting Trust Agreement.
10.1 First Amendment to Employment Agreement dated as of May 1, 2001 between
Hollywood Casino - Aurora, Inc. and George Patt Medchill.
#10.2 Employment Agreement by and between Hollywood Casino Shreveport and Gary
A. Gregg. (Exhibit 10.20).
--------------------
# Incorporated by reference from the exhibit shown in parenthesis filed in
Amendment No. 1 to Form S-4 Registration Statement No. 333-68380 of Hollywood
Casino Shreveport and Shreveport Capital Corporation on October 1, 2001.
Item 6.(b). - Reports on Form 8-K
The Registrants filed reports on Forms 8-K on August 13, 2001 and October 22,
2001 to report certain changes in management.
67
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, each of
the Registrants has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HOLLYWOOD CASINO CORPORATION
Date: November 13, 2001 By: /s/ Paul C. Yates
---------------------------- ---------------------------------
Paul C. Yates
Treasurer, Executive Vice
President and Chief Financial
Officer
HWCC - TUNICA, INC.
Date: November 13, 2001 By: /s/ Paul C. Yates
---------------------------- ---------------------------------
Paul C. Yates
Executive Vice President and
Chief Financial Officer
68