SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM-10Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
----------------- -----------------
Commission file number 33-48887
HOLLYWOOD CASINO CORPORATION
HWCC - TUNICA, INC.
--------------------------------------------------------------------------------
(Exact name of each Registrant as specified in its charter)
Delaware 75-2352412
Texas 75-2513808
---------------------------------- ------------------------
(States or other jurisdictions of (I.R.S. Employer
incorporation or organization) Identification No.'s)
Two Galleria Tower, Suite 2200
13455 Noel Road, LB 48
Dallas, Texas 75240
----------------------------------------- -------------
(Address of principal executive offices) (Zip Code)
(Registrants' telephone number, including area code) (972) 392-7777
(Not Applicable)
--------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether each of the Registrants (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that each
of the Registrants was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes X No
---
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Registrant Class Outstanding at May 10, 2002
---------------------------- ------------------------------ ----------------------------
Hollywood Casino Corporation Common Stock, $.0001 par value 25,361,025 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 dockside 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 also receives an amount equal to 1% of "complex net revenues", as
defined, of the Shreveport Casino. 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 and its only expense is a services fee paid to HCC of not
less than 90% of the management fees it earns 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.
2
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 Company is also using
proceeds from the debt offering to expand the Aurora Casino's operating
facilities.
During August 1999, the Shreveport Partnership issued $150,000,000 of 13%
First Mortgage Notes, with contingent interest, which are non-recourse to HCC.
During June 2001, the Shreveport Partnership issued $39,000,000 of 13% Senior
Secured Notes, with contingent interest, which are also 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 accompanying consolidated financial statements and financial statements
as of March 31, 2002 and for the three month periods ended March 31, 2002 and
2001 have been prepared by HCC, HCA and HCT without audit, pursuant to the rules
and regulations of the Securities and Exchange Commission. In the opinion of
management, these consolidated financial statements and financial statements
contain all adjustments (consisting of only normal recurring adjustments)
necessary to present fairly the consolidated financial position of HCC and HCT
and the financial position of HCA as of March 31, 2002, and the results of their
operations and cash flows for the three month periods ended March 31, 2002 and
2001.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America 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 2001 Amended Annual Report on Form 10-K/A.
Historically, the Aurora Casino and Tunica Casino have experienced some
degree of seasonality and management anticipates that the Shreveport Casino may
be modestly seasonal. Consequently, the results of operations for the three
month period ended March 31, 2002 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:
We have reviewed the accompanying condensed consolidated balance sheet of
Hollywood Casino Corporation and subsidiaries as of March 31, 2002, and the
related condensed consolidated statements of operations and cash flows for the
three month periods ended March 31, 2002 and 2001. 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, 2001, 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 19, 2002, 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, 2001 is
fairly stated, in all material respects, in relation to the consolidated balance
sheet from which it has been derived.
DELOITTE & TOUCHE LLP
Dallas, Texas
May 7, 2002
4
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
March 31,
2002 December 31,
(Unaudited) 2001
------------- -------------
Current Assets:
Cash and cash equivalents $ 135,738,000 $ 131,849,000
Receivables, net of allowances of
$3,795,000 and $3,571,000, respectively 5,710,000 5,232,000
Inventories 3,491,000 3,305,000
Deferred income taxes 2,431,000 2,233,000
Refundable deposits and other
current assets 3,986,000 3,525,000
Federal income taxes receivable 2,982,000 --
Due from affiliates, net of valuation allowances 12,963,000 12,962,000
------------- -------------
Total current assets 167,301,000 159,106,000
------------- -------------
Property and Equipment:
Land and improvements 9,640,000 9,640,000
Buildings and improvements 226,165,000 224,897,000
Riverboats and barges 106,604,000 89,836,000
Operating equipment 150,952,000 142,224,000
Construction in progress 24,412,000 47,904,000
------------- -------------
517,773,000 514,501,000
Less - accumulated depreciation
and amortization (155,447,000) (153,769,000)
------------- -------------
Net property and equipment 362,326,000 360,732,000
------------- -------------
Other Assets:
Deferred financing costs 12,838,000 13,535,000
Land rights 6,588,000 6,639,000
Other assets 13,367,000 13,385,000
------------- -------------
Total other assets 32,793,000 33,559,000
------------- -------------
$ 562,420,000 $ 553,397,000
============= =============
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated balance sheets.
5
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' DEFICIT
March 31,
2002 December 31,
(Unaudited) 2001
------------- -------------
Current Liabilities:
Current maturities of long-term debt
and capital lease obligations $ 1,741,000 $ 2,056,000
Accounts payable 16,309,000 19,520,000
Accrued liabilities -
Salaries and wages 7,619,000 9,913,000
Interest 21,747,000 17,570,000
Gaming and other taxes 12,793,000 3,587,000
Insurance 4,451,000 4,588,000
Other 8,360,000 8,409,000
Federal income taxes payable -- 157,000
Other current liabilities 4,008,000 4,414,000
------------- -------------
Total current liabilities 77,028,000 70,214,000
------------- -------------
Long-Term Debt 550,569,000 550,950,000
------------- -------------
Capital Lease Obligations 16,335,000 16,554,000
------------- -------------
Other Noncurrent Liabilities 7,456,000 7,380,000
------------- -------------
Commitments and Contingencies
Minority Interest 2,141,000 2,111,000
------------- -------------
Shareholders' Deficit:
Common Stock -
Class A common stock, $.0001 par value per
share; 50,000,000 shares authorized;
25,361,000 and 25,334,000 shares issued
and outstanding, respectively, net of
44,000 treasury shares at par 3,000 3,000
Class B, non-voting, $.0001 par value per
share; 10,000,000 shares authorized; no
shares issued -- --
Additional paid-in capital 217,769,000 217,727,000
Accumulated deficit (308,881,000) (311,542,000)
------------- -------------
Total shareholders' deficit (91,109,000) (93,812,000)
------------- -------------
$ 562,420,000 $ 553,397,000
============= =============
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated balance sheets.
6
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
March 31,
----------------------------
2002 2001
------------ ------------
Revenues:
Casino $129,143,000 $121,112,000
Rooms 3,848,000 4,038,000
Food and beverage 13,267,000 14,861,000
Other 1,656,000 2,423,000
------------ ------------
147,914,000 142,434,000
Less - promotional allowances (24,730,000) (26,144,000)
------------ ------------
Net revenues 123,184,000 116,290,000
------------ ------------
Expenses:
Casino 76,672,000 84,795,000
Rooms 857,000 882,000
Food and beverage 3,786,000 5,310,000
Other 1,101,000 1,665,000
General and administrative 10,405,000 9,288,000
Depreciation and amortization 14,098,000 9,381,000
Development 42,000 166,000
------------ ------------
Total expenses 106,961,000 111,487,000
------------ ------------
Income from operations 16,223,000 4,803,000
------------ ------------
Non-operating income (expense):
Interest income 358,000 1,690,000
Interest expense, net of capitalized interest of
$791,000 and $22,000, respectively (16,562,000) (17,340,000)
Equity in losses of unconsolidated affiliates (48,000) (116,000)
Gain (loss) on disposal of assets 21,000 (66,000)
------------ ------------
Total non-operating expense, net (16,231,000) (15,832,000)
------------ ------------
(Loss) income before income taxes and other item (8,000) (11,029,000)
Income tax benefit (provision) 3,052,000 (294,000)
------------ ------------
Income (loss) before other item 3,044,000 (11,323,000)
Minority interest in Hollywood Casino Shreveport (Note 1) (383,000) (382,000)
------------ ------------
Net income (loss) $ 2,661,000 $(11,705,000)
============ ============
Basic net income (loss) per common share $ .11 $ (.47)
============ ============
Diluted net income (loss) per common share $ .10 $ (.47)
============ ============
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated statements.
7
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
March 31,
---------------------------
2002 2001
------------ ------------
OPERATING ACTIVITIES:
Net income (loss) $ 2,661,000 $(11,705,000)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization, including accretion
of debt discount and amortization of premium 14,752,000 10,152,000
(Gain) loss on disposal of assets (21,000) 66,000
Minority interest in Hollywood Casino Shreveport 383,000 382,000
Equity in losses of unconsolidated affiliates 48,000 116,000
Provision for doubtful accounts 243,000 489,000
Deferred income taxes (267,000) (117,000)
Increase in accounts receivable (721,000) (1,757,000)
Increase in accounts payable and accrued expenses 7,092,000 5,901,000
Net change in current federal income taxes (3,139,000) --
Net change in other current assets and liabilities (1,054,000) 1,998,000
Net change in other noncurrent assets and liabilities 115,000 588,000
------------ ------------
Net cash provided by operating activities 20,092,000 6,113,000
------------ ------------
INVESTING ACTIVITIES:
Purchases of property and equipment (15,041,000) (5,120,000)
Net change in restricted cash -- 9,530,000
Proceeds from disposal of assets 22,000 48,000
Investments in unconsolidated affiliates -- (96,000)
------------ ------------
Net cash (used in) provided by investing activities (15,019,000) 4,362,000
------------ ------------
FINANCING ACTIVITIES:
Deferred financing costs (3,000) --
Repayments of long-term debt (667,000) (1,122,000)
Payments on capital lease obligations (203,000) (2,660,000)
Issuance of common stock 42,000 --
Limited partner distributions (353,000) (319,000)
------------ ------------
Net cash used in financing activities (1,184,000) (4,101,000)
------------ ------------
Net increase in cash and cash equivalents 3,889,000 6,374,000
Cash and cash equivalents at beginning of period 131,849,000 155,570,000
------------ ------------
Cash and cash equivalents at end of period $135,738,000 $161,944,000
============ ============
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated statements.
8
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) Organization, Business and Basis of Presentation
Hollywood Casino Corporation ("HCC" or the "Company"), is a Delaware
corporation which was organized and incorporated on November 5, 1990.
Approximately 53% of the issued and outstanding stock of HCC is 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 Pratt's 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 ("Greate Bay"), 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, until February 2002, operated
an approximately 32,000 square foot riverboat gaming operation 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"). In March 2001, the Aurora Casino began construction of a
major expansion highlighted by the construction of a new dockside facility to
replace the Aurora Casino's two riverboats. The first half of the dockside
facility and a new casino entrance were completed and opened on February 15,
2002. The second half of the dockside casino and a new parking facility are
expected to open by the end of June 2002. The estimated total project cost,
including a new buffet which opened in May 2002, is approximately $78,200,000.
Until the second half of the dockside casino is completed, the Aurora Casino
will continue to operate the larger of its two riverboat casinos. Once
completed, the combined dockside facility will have 53,000 square feet of gaming
space on a single level. 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 505-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. The joint venture partner
also receives an amount equal to 1% of "complex net revenues",
9
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
as defined, of the Shreveport Casino. Accordingly, the Shreveport Partnership is
included in the consolidated financial statements of HCC. The remaining joint
venture partner's interest is reflected as minority interest on the accompanying
consolidated balance sheets at March 31, 2002 and December 31, 2001.
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 Company was organized in 2000 to develop and
operate a golf course to be used by patrons of the Shreveport Casino. The
investments are included on the accompanying consolidated balance sheets at
March 31, 2002 and December 31, 2001.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
The consolidated financial statements as of March 31, 2002 and for the
three month periods ended March 31, 2002 and 2001 have been prepared by HCC
without audit. In the opinion of management these consolidated financial
statements contain all adjustments (consisting of only normal recurring
adjustments) necessary to present fairly the consolidated financial position of
HCC as of March 31, 2002 and the results of its operations and cash flows for
the three month periods ended March 31, 2002 and 2001.
(2) Earnings per Common Share
Basic earnings per common share is calculated by dividing the net income
(loss) by the weighted average number of shares of common stock outstanding.
Diluted earnings per common share is calculated for periods in which income from
continuing operations was earned by dividing the components of net income (loss)
by the weighted average number of shares of common stock and potential common
shares outstanding. All potential shares are excluded from the calculation of
diluted net loss per share for periods during which a loss was incurred because
the effect of their inclusion would be antidilutive.
10
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The weighted average number of shares of common stock and potential common
shares outstanding used for the calculation of earnings per share is as follows:
Three Months Ended
March 31,
-----------------------
2002 2001
---------- ----------
Shares used in the calculation of:
Basic net income (loss) per share 25,340,757 24,996,676
Diluted net income (loss) per share 27,269,435 24,996,676
The number of shares used in the calculation of diluted earnings per share
for the three month period ended March 31, 2002 has been adjusted to include
potential common shares arising from stock options held by certain employees and
directors. No potential common shares were included in the calculation of
diluted earnings per share for the three month period ended March 31, 2001 as
the inclusion of such shares would be antidilutive due to the net loss incurred
during the period. The weighted average number of potential common shares and
options excluded for the three month period ended March 31, 2001 was 2,038,663.
(3) Change in Depreciable Lives
Upon committing to proceed with the Aurora Casino expansion project (see
Note 1), 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 existed and no write down of its assets was required. 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 $3,528,000 remaining at March 31, 2002) to
their estimated net realizable value at the time they are removed from service.
Consequently, depreciation expense during the three month period ended March 31,
2002 increased by $6,592,000; such additional depreciation is expected to amount
to approximately $3,133,000 during the second quarter of 2002.
11
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(4) Long-Term Debt and Pledge of Assets
Substantially all of HCC's assets are pledged in connection with its
long-term indebtedness. The obligations of HCL and its subsidiaries are
non-recourse to HCC.
March 31, December 31,
2002 2001
------------ ------------
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
------------ ------------
360,000,000 360,000,000
------------ ------------
Indebtedness of HCA:
Promissory notes to bank (b) -- 398,000
------------ ------------
Indebtedness of HCT:
Equipment loans (c) 61,000 245,000
Bank credit facility (d) 866,000 950,000
------------ ------------
927,000 1,195,000
------------ ------------
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 $1,033,000 and
$1,078,000, respectively (f) 40,033,000 40,078,000
Other 26,000 27,000
------------ ------------
190,059,000 190,105,000
------------ ------------
Total indebtedness 550,986,000 551,698,000
Less - current maturities (417,000) (748,000)
------------ ------------
Total long-term debt $550,569,000 $550,950,000
============ ============
----------
(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 semiannually. Interest on the floating rate notes was 8.45% and 13%
per annum, respectively, during the three month periods ended March 31,
2002 and 2001. The interest rate was reset to 8.38% per annum effective May
1, 2002. 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 the
management and consulting contracts on the Aurora Casino and Tunica Casino.
The Company is also using proceeds from the debt offering to finance
construction of its new, dockside gaming facility at the Aurora Casino (see
Note 1). 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
12
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Management and may be guaranteed by certain future subsidiaries of HCC.
Neither HCA nor HCL are guarantors. The Senior Secured Notes and related
guarantees are secured by, among other things, (1) substantially all of the
assets of HCT and future guarantors, (2) a lien not to exceed approximately
$108,000,000 on substantially all of the assets of HCA, (3) a pledge of the
capital stock of certain subsidiaries of HCC, including HCA and HCT, and
(4) the collateral assignment of the management contract for the Shreveport
Casino. The limitation on the lien described in (2) above was $81,007,000
as of March 31, 2002 and was subsequently increased to $86,007,000.
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
9).
(b) During May 1999, HCA borrowed $750,000 under a bank loan agreement on an
unsecured basis. The loan was payable in 60 monthly installments of $15,000
including interest at the rate of 7.5% per annum. The outstanding borrowing
was repaid in March 2002.
(c) The equipment loans are payable monthly including interest at effective
rates ranging from 8.5% to 9% per annum and mature at various dates in 2002
and 2003.
(d) 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.
13
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(e) During August 1999, the Shreveport Partnership issued $150,000,000 of 13%
First Mortgage Notes, with contingent interest (the "Shreveport First
Mortgage Notes"), which are non-recourse to HCC.
Fixed interest on the Shreveport First Mortgage Notes is payable on each
February 1 and August 1. In addition, contingent interest accrues and is
payable on each interest payment date subsequent to the opening of the
Shreveport Casino. The amount of the contingent interest is equal to 5% of
the Shreveport Partnership's cash flow, as defined, for the applicable
period subject to a maximum of $5,000,000 for any four consecutive fiscal
quarters. Contingent interest amounting to $324,000 was incurred during the
three month period ended March 31, 2002. No contingent interest was
incurred during the three month period ended March 31, 2001. Accrued
contingent interest amounted to $710,000 and $386,000, respectively, at
March 31, 2002 and December 31, 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 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 may be redeemed at any time on or after
August 1, 2003 by the Shreveport Partnership at 106.5% of the then
outstanding principal amount, decreasing to 103.25% on August 1, 2004 and
100% on or after August 1, 2005. Up to 35% of the original aggregate amount
of the Shreveport First Mortgage Notes may also be redeemed at a price of
113% plus accrued interest at any time prior to August 1, 2002 with
proceeds of contributions to the Shreveport Partnership made by HCC from
certain offerings of equity securities by HCC.
The indenture for the Shreveport First Mortgage Notes contains various
provisions limiting the ability of the Shreveport Partnership to borrow
money, pay dividends, make investments, pledge or sell its assets or enter
into mergers or consolidations. The indenture also limits the ability of
certain HCC subsidiaries which guarantee the debt to acquire additional
assets, become liable for additional obligations or engage in any business
activities other than holding partnership interests or acting as managing
general partner.
(f) In 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 $81,000 was
incurred during the three month period ended March 31, 2002. Accrued
contingent interest amounted to $159,000 and $78,000 at March 31, 2002 and
December 31, 2001, respectively, and is included in accrued interest
payable on the accompanying consolidated balance sheets. Payment of
contingent interest may be deferred to the extent that payment would result
in certain financial coverage ratios not being
14
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
met. Proceeds from the Shreveport Senior Secured Notes were used, in part,
to retire the Shreveport Partnership's capital lease obligation (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)).
Scheduled payments of long-term debt as of March 31, 2002 are set forth
below:
2002 (nine months) $ 323,000
2003 380,000
2004 244,000
2005 6,000
2006 239,000,000
Thereafter 310,000,000
------------
Total $549,953,000
============
Interest paid, net of amounts capitalized, amounted to $11,730,000 and
$10,773,000, respectively, during the three month periods ended March 31, 2002
and 2001.
(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 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.
15
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
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
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 lease was retired in June 2001 with a portion of the proceeds
from the Shreveport Senior Secured Notes (see Note 4(f)).
Assets under capital leases and the related accumulated amortization are
included on the accompanying consolidated balance sheets as follows:
March 31, December 31,
2002 2001
------------ -------------
Buildings $ 27,358,000 $ 27,358,000
Operating equipment 6,219,000 6,219,000
------------ ------------
33,577,000 33,577,000
Less - accumulated amortization (12,543,000) (12,316,000)
------------ ------------
$ 21,034,000 $ 21,261,000
============ ============
Amortization expense with respect to assets under capital leases amounted
to $227,000 and $1,556,000, respectively, during the three month periods ended
March 31, 2002 and 2001 (including $1,329,000 for the Shreveport Casino's leased
assets during 2001).
16
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Future minimum lease payments under capital lease obligations as of March
31, 2002 are as follows:
2002 (nine months) $ 2,244,000
2003 2,660,000
2004 2,677,000
2005 2,710,000
2006 2,712,000
Thereafter 13,318,000
-----------
Total minimum lease payments 26,321,000
Less amount representing interest (8,662,000)
-----------
Present value of future
minimum lease payments 17,659,000
Current capital lease obligation (1,324,000)
-----------
Long-term capital lease obligation $16,335,000
===========
(6) Income Taxes
Components of HCC's provision for income taxes consist of the following:
Three Months Ended
March 31,
-------------------------
2002 2001
----------- -----------
Current income tax benefit (provision):
Federal $ 3,139,000 $ --
State (354,000) (411,000)
Deferred income tax (provision) benefit:
Federal (1,353,000) 4,212,000
State 617,000 1,368,000
Change in valuation allowance 1,003,000 (5,463,000)
----------- -----------
$ 3,052,000 $ (294,000)
=========== ===========
No federal income tax payments were made during the three month periods
ended March 31, 2002 and 2001. State income tax payments of $525,000 and $9,000,
respectively, were made during the three month periods ended March 31, 2002 and
2001.
On March 19, 2002, new tax legislation was enacted which extends the
carryback period for net operating losses ("NOL's") originating in tax years
ending in 2001 or 2002. As a result of this change, the Company will be able to
utilize NOL's originating in 2001 to request a refund of taxes previously paid
in the amount of approximately $3.1 million. The refund receivable and related
tax benefit were recognized during the first quarter of 2002.
17
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (Continued)
(Unaudited)
At March 31, 2002, HCC and its subsidiaries have NOL's available for
carryforward into future years for federal income tax purposes totaling
approximately $59,477,000, none of which begin to expire until the year 2019.
Additionally, HCC and its subsidiaries have alternative minimum and other tax
credits available totaling $990,000 and $805,000, 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 $6,279,000 and $6,012,000 at March 31, 2002 and December
31, 2001, respectively.
(7) Transactions with Related Parties
During December 2001, HCC and Greate Bay reached an agreement to
restructure obligations existing between the two companies. Obligations owed by
Greate Bay to HCC consisted of (1) demand notes from Greate Bay with a carrying
value of $5,704,000 and interest thereon with a carrying value of $781,000 and
(2) deferred interest notes (the "PPI Funding Notes") issued by a subsidiary of
Greate Bay which had a final maturity value of $47,603,000 and which were fully
reserved by HCC. The notes and interest were carried at management's estimate of
the value of the underlying collateral of the obligations. Because the loans
were considered to be impaired and management believed that the recorded amount
of the obligations reflected its best estimate of ultimate recovery, no interest
income was recognized on a cash-basis method with respect to either of the
obligations from Greate Bay. HCC owed remaining principal of $1,893,000 and
interest of $498,000 to a subsidiary of Greate Bay with respect to HCC's
acquisition in 1997 of the general partnership interest in the entity which held
the management contract for the Aurora Casino. Payments under the obligation to
the Greate Bay subsidiary had been suspended since March 1, 2000 while
negotiations to restructure the obligations continued.
Greate Bay is insolvent and, together with certain of its subsidiaries,
filed voluntary petitions for protection under Chapter 11 of the United States
Bankruptcy Code on December 28, 2001. As part of its pre-packaged bankruptcy
reorganization, Greate Bay sold its primary asset, with the net proceeds from
the sale and Greate Bay's other remaining cash to be distributed to an
unrestricted subsidiary of HCC (see Note 9). Greate Bay paid $2,000,000 in
December 2001 to the unrestricted subsidiary and agreed to offset the $2,391,000
owed by HCC against a like amount owed to HCC. The sale of Greate Bay's primary
asset was approved by the bankruptcy court on March 6, 2002 and was completed on
March 19, 2002. Management currently anticipates that the plan of reorganization
will be confirmed in July 2002. As a result of the agreement, HCC has adjusted
the carrying value of the notes and interest due from Greate Bay at March 31,
2002 to $12,922,000 (net of reserves of $48,306,000 and $46,503,000 at March 31,
2002 and December 31, 2001, respectively), management's estimate of the net
proceeds yet to be received, subject to confirmation by the bankruptcy court.
The remaining net receivable balance is included in current due from affiliates
on the accompanying consolidated balance sheets at March 31, 2002 and December
31, 2001 in anticipation of the July 2002 confirmation of Greate Bay's plan of
reorganization.
18
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (Continued)
(Unaudited)
(8) Litigation
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. These matters are the
subject of a lawsuit pending in U.S. District Court in Louisiana. For this and
other reasons, the Shreveport Partnership has withheld payment of approximately
$2.6 million which the general contractor is currently seeking and which is
included in accounts payable on the accompanying consolidated balance sheet at
March 31, 2002. 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.
In February 2002, the Company filed an action in state court in Dallas
County, Texas alleging that one of its former executive officers breached his
fiduciary duties to the Company's stockholders by using Company funds and
property for personal reasons and concealing his and his immediate family's
interests in entities doing business with the Company. The Company seeks
multiple remedies in the lawsuit, including restitution for such improper
actions, as well as a declaratory judgement that the Company be relieved of any
further financial obligations under the former executive's employment agreement
with the Company. As of March 31, 2002, the total of such obligations to the
former executive included on the accompanying consolidated balance sheet
amounted to $3,969,000. The lawsuit may also affect the ability of the former
executive officer to exercise stock options previously granted to him.
In addition to the above action, the Company also filed a lawsuit in
February 2002 in U.S. District Court in Texas against a number of individuals
and their affiliates, including two of the Company's former executive officers,
alleging violations of the federal securities laws. Such allegations include the
failure to properly report that the defendants and their affiliates have been
acting in concert as a group in connection with a planned proxy contest at the
next annual shareholders' meeting and that certain affiliates have acquired
common stock of the Company while in possession of material non-public
information regarding the Company. The Company seeks multiple remedies,
including requiring the defendants to truthfully and accurately report their
activities, as well as seeking an order to enjoin the defendants from further
purchases of stock and from voting their shares of stock.
(9) 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
19
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (Continued)
(Unaudited)
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 accounting principles generally accepted in the United States and is
included for purposes of complying with certain reporting requirements as
contained in the indenture to the Senior Secured Notes.
Condensed Balance Sheet
Equity Method for Investment in Unrestricted Subsidiaries
March 31, 2002
(amounts in thousands)
Current Assets: Current Liabilities:
Cash and cash items $111,231 Current maturities of long-
Accounts receivable, net of allowance term debt and capital leases $ 1,735
of $3,157 3,208 Accounts payable and accrued
Inventories 1,439 liabilities 50,500
Federal income taxes receivable 2,982 Other current liabilities 2,865
---------
Prepaid expenses and other current assets 5,279 55,100
Due from affiliates 41 ---------
--------
124,180 Long-term debt 360,516
-------- ---------
Investment in and advances to
Unrestricted Subsidiaries 14,869 Capital lease obligations 16,335
-------- ---------
Property and equipment, net of Other noncurrent liabilities 7,138
accumulated depreciation and ---------
amortization of $135,079 185,789 Shareholders' deficit:
-------- Common stock 3
Other Assets: Additional paid-in capital 217,769
Deferred finance costs 7,109 Accumulated deficit (308,881)
---------
Other assets 16,033 (91,109)
-------- ---------
23,142
--------
$347,980 $ 347,980
======== =========
20
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (Continued)
(Unaudited)
Condensed Statement of Operations
Equity Method for Investment in Unrestricted Subsidiaries
Three Month Period Ended March 31, 2002
(amounts in thousands)
Net revenues $85,732
-------
Expenses:
Departmental expenses 55,161
General and administrative 6,804
Depreciation and amortization 10,102
Development 42
-------
Total expenses 72,109
-------
Income from operations 13,623
Non-operating expense, net (9,402)
-------
Income before taxes and other item 4,221
Income tax benefit 3,052
-------
Income before other item 7,273
Equity in losses of unrestricted subsidiaries (4,612)
-------
Net income $ 2,661
=======
(10) Reclassifications
Certain reclassifications have been made to the prior year's consolidated
financial statements to conform to the 2002 consolidated financial statement
presentation.
21
INDEPENDENT ACCOUNTANTS' REPORT
To the Board of Directors and Shareholder of
Hollywood Casino - Aurora, Inc.:
We have reviewed the accompanying condensed balance sheet of Hollywood Casino -
Aurora, Inc. as of March 31, 2002, and the related condensed statements of
operations and cash flows for the three month periods ended March 31, 2002 and
2001. 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, 2001, 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 19, 2002, 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, 2001 is fairly stated, in all material respects, in relation to the balance
sheet from which it has been derived.
DELOITTE & TOUCHE LLP
Dallas, Texas
May 7, 2002
22
HOLLYWOOD CASINO - AURORA, INC.
(wholly owned by Hollywood Casino Corporation)
BALANCE SHEETS
ASSETS
March 31,
2002 December 31,
(Unaudited) 2001
------------ ------------
Current Assets:
Cash and cash equivalents $ 24,228,000 $ 21,443,000
Accounts receivable, net of allowances
of $814,000 and $849,000, respectively 1,460,000 1,202,000
Inventories 900,000 803,000
Deferred income taxes 2,036,000 1,995,000
Due from affiliates 77,000 147,000
Prepaid expenses and other current assets 1,220,000 1,327,000
------------ ------------
Total current assets 29,921,000 26,917,000
------------ ------------
Property and Equipment:
Land improvements 3,167,000 3,167,000
Buildings and improvements 47,457,000 46,205,000
Riverboats and barge 59,133,000 42,365,000
Operating equipment 52,070,000 43,999,000
Construction in progress 22,160,000 46,668,000
------------ ------------
183,987,000 182,404,000
Less - accumulated depreciation and amortization (78,832,000) (82,392,000)
------------ ------------
Net property and equipment 105,155,000 100,012,000
------------ ------------
Other Assets:
Deferred income taxes 2,928,000 731,000
Other assets 2,256,000 2,290,000
------------ ------------
Total other assets 5,184,000 3,021,000
------------ ------------
$140,260,000 $129,950,000
============ ============
The accompanying introductory notes and notes to financial statements are an
integral part of these balance sheets.
23
HOLLYWOOD CASINO - AURORA, INC.
(wholly owned by Hollywood Casino Corporation)
BALANCE SHEETS
LIABILITIES AND SHAREHOLDER'S EQUITY
March 31,
2002 December 31,
(Unaudited) 2001
------------ ------------
Current Liabilities:
Current maturities of long-term debt
and capital lease obligations $ 1,324,000 $ 1,464,000
Accounts payable 7,172,000 11,125,000
Accrued liabilities -
Salaries and wages 2,092,000 3,515,000
Interest 4,459,000 2,041,000
Gaming and other taxes 8,770,000 1,260,000
Insurance 559,000 501,000
Other 2,746,000 2,873,000
Due to affiliates 7,283,000 1,532,000
Other current liabilities 1,379,000 1,226,000
------------ ------------
Total current liabilities 35,784,000 25,537,000
------------ ------------
Long-Term Debt 81,007,000 81,249,000
------------ ------------
Capital Lease Obligations 16,335,000 16,554,000
------------ ------------
Commitments and Contingencies
Shareholder's Equity:
Common stock, $.01 par value per share;
2,000,000 shares authorized; 1,501,000
shares issued and outstanding 15,000 15,000
Additional paid-in capital 25,541,000 25,541,000
Accumulated deficit (18,422,000) (18,946,000)
------------ ------------
Total shareholder's equity 7,134,000 6,610,000
------------ ------------
$140,260,000 $129,950,000
============ ============
The accompanying introductory notes and notes to financial statements are an
integral part of these balance sheets.
24
HOLLYWOOD CASINO - AURORA, INC.
(wholly owned by Hollywood Casino Corporation)
STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
March 31,
--------------------------
2002 2001
----------- -----------
Revenues:
Casino $65,016,000 $57,121,000
Food and beverage 3,465,000 3,864,000
Other 776,000 760,000
----------- -----------
69,257,000 61,745,000
Less - promotional allowances (8,275,000) (8,390,000)
----------- -----------
Net revenues 60,982,000 53,355,000
----------- -----------
Expenses:
Casino 36,024,000 32,894,000
Food and beverage 1,411,000 1,418,000
Other 249,000 176,000
General and administrative 1,425,000 1,141,000
Depreciation and amortization 8,651,000 3,943,000
----------- -----------
Total expenses 47,760,000 39,572,000
----------- -----------
Income from operations 13,222,000 13,783,000
----------- -----------
Non-operating income (expense):
Interest income 41,000 228,000
Interest expense, net of capitalized interest
of $791,000 and $22,000, respectively (1,831,000) (2,212,000)
Gain (loss) on disposal of assets 1,000 (67,000)
----------- -----------
Total non-operating expense, net (1,789,000) (2,051,000)
----------- -----------
Income before income taxes 11,433,000 11,732,000
Income tax provision (4,219,000) (4,180,000)
----------- -----------
Net income $ 7,214,000 $ 7,552,000
=========== ===========
The accompanying introductory notes and notes to financial statements are an
integral part of these financial statements.
25
HOLLYWOOD CASINO - AURORA, INC.
(wholly owned by Hollywood Casino Corporation)
STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
March 31,
--------------------------
2002 2001
------------ -----------
OPERATING ACTIVITIES:
Net income $ 7,214,000 $ 7,552,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 8,651,000 3,943,000
Provision for doubtful accounts -- 45,000
(Gain) loss on disposal of assets (1,000) 67,000
Deferred income tax benefit (2,238,000) (737,000)
Increase in accounts receivables (258,000) (11,000)
Increase in accounts payable and accrued liabilities 4,483,000 7,403,000
Net change in affiliate balances 5,821,000 4,155,000
Net change in other current assets and liabilities 163,000 138,000
Net change in other noncurrent assets and liabilities 34,000 23,000
------------ -----------
Net cash provided by operating activities 23,869,000 22,578,000
------------ -----------
INVESTING ACTIVITIES:
Purchases of property and equipment (13,794,000) (1,113,000)
Proceeds from sale of assets 1,000 48,000
------------ -----------
Net cash used in investing activities (13,793,000) (1,065,000)
------------ -----------
FINANCING ACTIVITIES:
Repayments of long-term debt (398,000) (212,000)
Payments on capital lease obligations (203,000) (160,000)
Dividends (6,690,000) (7,116,000)
------------ -----------
Net cash used in financing activities (7,291,000) (7,488,000)
------------ -----------
Net increase in cash and cash equivalents 2,785,000 14,025,000
Cash and cash equivalents at beginning of period 21,443,000 21,164,000
------------ -----------
Cash and cash equivalents at end of period $ 24,228,000 $35,189,000
============ ===========
The accompanying introductory notes and notes to financial statements
are an integral part of these financial statements.
26
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 for the
purpose of developing and holding the ownership interest in a riverboat gaming
operation located in Aurora, Illinois (the "Aurora Casino") and was acquired by
HCC in May 1992 through the issuance of HCC stock.
Prior to February 15, 2002, the Aurora Casino conducted its gaming
operations on two, four-level riverboats having a combined casino space of
approximately 32,000 square feet. In March 2001, the Aurora Casino began
construction of a major expansion, highlighted by the construction of a new
dockside facility to replace the Aurora Casino's two riverboats. The first half
of the dockside facility and a new casino entrance were completed and opened on
February 15, 2002. The second half of the dockside casino, together with a new
parking facility are expected to open by the end of June 2002. The estimated
total project cost, including a new buffet which opened in May 2002, is
approximately $78,200,000, of which approximately $58,200,000 has been spent
through March 31, 2002. Until the second half of the dockside casino is
completed, the Aurora Casino will continue to operate the larger of its two
existing riverboat casinos. The combined dockside facility will have 53,000
square feet of gaming space on a single level. Admissions, food service and
various administrative functions are housed in an adjacent four-level pavilion.
The Aurora Casino also currently 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 (see Note 4).
The Aurora Casino commenced operations on June 17, 1993. HCA's current
Owner's License was renewed by the Illinois Gaming Board in December 2000 for a
period of four years to December 2004. Gaming taxes imposed by the state of
Illinois are determined using a graduated tax rate applied to the licensee's
gaming revenues. HCA expenses such gaming taxes based on its anticipated annual
effective tax rate.
HCA estimates that a significant amount of the Aurora Casino's revenues are
derived from patrons living in the Chicago area and surrounding northern and
western suburbs. The Aurora Casino faces intense competition from other
riverboat gaming operations in Illinois and Indiana which serve the Chicago area
and management believes that this competition will continue in the future.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
The financial statements as of March 31, 2002 and for the three month
periods ended March 31, 2002 and 2001 have been prepared by HCA without audit.
In the opinion of management, these financial
27
HOLLYWOOD CASINO - AURORA, INC.
(wholly owned by Hollywood Casino Corporation)
NOTES TO FINANCIAL STATEMENTS (Continued)
(Unaudited)
statements contain all adjustments (consisting of only normal recurring
adjustments) necessary to present fairly the financial position of HCA as of
March 31, 2002 and the results of its operations and cash flows for the three
month periods ended March 31, 2002 and 2001.
(2) Change in Depreciable Lives
Upon committing to proceed with the Aurora Casino expansion project (see
Note 1), 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 existed and no write down of its assets was required. 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 $3,528,000 remaining at March 31, 2002) to
their estimated net realizable value at the time they are removed from service.
Consequently, depreciation expense during the three month period ended March 31,
2002 increased by $6,592,000; such additional depreciation is expected to amount
to approximately $3,133,000 during the second quarter of 2002.
(3) Long-Term Debt and Pledge of Assets
HCA's long-term indebtedness consists of the following:
March 31, December 31,
2002 2001
----------- ------------
11.25% Promissory note to HCC, due on
May 1, 2007 (a) $81,007,000 $81,007,000
Promissory note to bank (b) -- 398,000
----------- -----------
Total indebtedness 81,007,000 81,405,000
Less - current maturities -- (156,000)
----------- -----------
Total long-term debt $81,007,000 $81,249,000
=========== ===========
----------
(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. During the fourth quarter of 2001, HCA
borrowed an additional $15,000,000 from HCC under the note agreement in
connection with the Aurora Casino expansion project (see Note 1); an
additional $5,000,000 was borrowed in April 2002. 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
28
HOLLYWOOD CASINO - AURORA, INC.
(wholly owned by Hollywood Casino Corporation)
NOTES TO FINANCIAL STATEMENTS (Continued)
(Unaudited)
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 May 1999, HCA borrowed $750,000 under a bank loan agreement on an
unsecured basis. The loan was payable in 60 monthly installments of $15,000
including interest at the rate of 7.5% per annum and was repaid in March
2002.
HCA's only future maturity of long-term debt is its intercompany note to
HCC (see (a) above) due in 2007. No interest was paid (net of amounts
capitalized) during the three month period ended March 31, 2002; interest paid
for the three month period ended March 31, 2001 (net of amounts capitalized)
amounted to $202,000.
(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 currently pays base rent equal to $15,000 per
month for improvements made to the lessor's North Island Center banquet and
meeting facilities. HCA is also responsible for additional rent, consisting of
costs such as maintenance costs, insurance premiums and utilities, arising out
of its operation of both parking garages.
The original cost of HCA's parking garages is included in buildings and
improvements on the accompanying balance sheets at both March 31, 2002 and
December 31, 2001 in the amount of $27,358,000. Amortization expense with
respect to these assets amounted to $227,000 during each of the three month
periods ended March 31, 2002 and 2001. Accumulated amortization at March 31,
2002 and December 31, 2001 with respect to these assets amounted to $8,770,000
and $8,543,000, respectively.
29
HOLLYWOOD CASINO - AURORA, INC.
(wholly owned by Hollywood Casino Corporation)
NOTES TO FINANCIAL STATEMENTS (Continued)
(Unaudited)
Future minimum lease payments under capital lease obligations as of March
31, 2002 are as follows:
2002 (nine months) $ 2,244,000
2003 2,660,000
2004 2,677,000
2005 2,710,000
2006 2,712,000
Thereafter 13,318,000
-----------
Total minimum lease payments 26,321,000
Less amount representing interest (8,662,000)
-----------
Present value of future
minimum lease payments 17,659,000
Current capital lease obligation (1,324,000)
-----------
Long-term capital lease obligation $16,335,000
===========
(5) Income Taxes
HCA's provision for income taxes consists of the following:
Three Months Ended
March 31,
--------------------------
2002 2001
----------- -----------
Current provision:
Federal $(6,103,000) $(4,506,000)
State (354,000) (411,000)
Deferred benefit:
Federal 1,972,000 620,000
State 266,000 117,000
----------- -----------
$(4,219,000) $(4,180,000)
=========== ===========
HCA is included in HCC's consolidated federal income tax return. Pursuant
to agreements between HCC and HCA, HCA's current provision for federal income
taxes is based on the amount of tax which would be provided if a separate
federal income tax return were filed. HCA paid no federal income taxes during
either of the three month periods ended March 31, 2002 or 2001. HCA paid state
income taxes of $525,000 and $9,000, respectively, during the three month
periods ended March 31, 2002 and 2001.
30
INDEPENDENT ACCOUNTANTS' REPORT
To the Board of Directors and Shareholder of
HWCC - Tunica, Inc.:
We have reviewed the accompanying condensed consolidated balance sheet of HWCC -
Tunica, Inc. and subsidiary as of March 31, 2002, and the related condensed
consolidated statements of operations and cash flows for the three month periods
ended March 31, 2002 and 2001. 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, 2001, 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 19,
2002, 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, 2001 is fairly stated,
in all material respects, in relation to the consolidated balance sheet from
which it has been derived.
DELOITTE & TOUCHE LLP
Dallas, Texas
May 7, 2002
31
HWCC - TUNICA, INC. AND SUBSIDIARY
(wholly owned by Hollywood Casino Corporation)
CONSOLIDATED BALANCE SHEETS
ASSETS
March 31,
2002 December 31,
(Unaudited) 2001
------------ ------------
Current Assets:
Cash and cash equivalents $ 21,298,000 $ 19,922,000
Accounts receivable, net of allowances of
$2,343,000 and $2,188,000, respectively 1,713,000 1,822,000
Inventories 539,000 568,000
Deferred income taxes 789,000 679,000
Prepaid expenses and other current assets 1,391,000 1,052,000
Due from affiliates 46,000 58,000
------------ ------------
Total current assets 25,776,000 24,101,000
------------ ------------
Property and Equipment:
Land and improvements 4,808,000 4,808,000
Buildings 76,954,000 76,946,000
Barges 2,524,000 2,524,000
Operating equipment 50,210,000 49,554,000
Construction in progress 890,000 474,000
------------ ------------
135,386,000 134,306,000
Less - accumulated depreciation and amortization (55,427,000) (54,168,000)
------------ ------------
Net property and equipment 79,959,000 80,138,000
------------ ------------
Other Assets:
Land rights 6,588,000 6,639,000
Other assets 4,146,000 4,195,000
------------ ------------
Total other assets 10,734,000 10,834,000
------------ ------------
$116,469,000 $115,073,000
============ ============
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated balance sheets.
32
HWCC - TUNICA, INC. AND SUBSIDIARY
(wholly owned by Hollywood Casino Corporation)
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDER'S EQUITY
March 31,
2002 December 31,
(Unaudited) 2001
------------ ------------
Current Liabilities:
Current maturities of long-term debt $ 411,000 $ 586,000
Accounts payable 1,320,000 911,000
Accrued liabilities -
Salaries and wages 2,754,000 1,988,000
Interest 437,000 437,000
Gaming and other taxes 1,201,000 1,282,000
Insurance 2,343,000 2,194,000
Other 2,802,000 2,907,000
Due to affiliates 874,000 695,000
Other current liabilities 1,322,000 1,812,000
------------ ------------
Total current liabilities 13,464,000 12,812,000
------------ ------------
Long-Term Debt 87,890,000 87,983,000
------------ ------------
Deferred Income Taxes 789,000 679,000
------------ ------------
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 (8,311,000) (9,038,000)
------------ ------------
Total shareholder's equity 14,326,000 13,599,000
------------ ------------
$116,469,000 $115,073,000
============ ============
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated balance sheets.
33
HWCC - TUNICA, INC. AND SUBSIDIARY
(wholly owned by Hollywood Casino Corporation)
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
March 31,
-------------------------
2002 2001
----------- -----------
Revenues:
Casino $26,188,000 $27,272,000
Rooms 1,634,000 1,606,000
Food and beverage 3,702,000 4,289,000
Other 406,000 403,000
----------- -----------
31,930,000 33,570,000
Less - promotional allowances (7,945,000) (8,382,000)
----------- -----------
Net revenues 23,985,000 25,188,000
----------- -----------
Expenses:
Casino 16,112,000 17,901,000
Rooms 318,000 269,000
Food and beverage 859,000 860,000
Other 188,000 186,000
General and administrative 1,701,000 1,640,000
Depreciation and amortization 1,400,000 1,494,000
----------- -----------
Total expenses 20,578,000 22,350,000
----------- -----------
Income from operations 3,407,000 2,838,000
----------- -----------
Non-operating income (expenses):
Interest income 28,000 92,000
Interest expense (2,488,000) (2,484,000)
Equity in losses of unconsolidated affiliate (48,000) (116,000)
Gain on disposal of asset 13,000 --
----------- -----------
Total non-operating expenses, net (2,495,000) (2,508,000)
----------- -----------
Income before income taxes 912,000 330,000
Income tax provision (185,000) --
----------- -----------
Net income $ 727,000 $ 330,000
=========== ===========
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated statements.
34
HWCC - TUNICA, INC. AND SUBSIDIARY
(wholly owned by Hollywood Casino Corporation)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
March 31,
-------------------------
2002 2001
----------- -----------
OPERATING ACTIVITIES:
Net income $ 727,000 $ 330,000
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 1,400,000 1,494,000
Gain on disposal of asset (13,000) --
Provision for doubtful accounts 150,000 335,000
Equity in losses of unconsolidated affiliate 48,000 116,000
Increase in accounts receivable (41,000) (242,000)
Increase in accounts payable
and accrued expenses 1,138,000 515,000
Net change in other current assets and liabilities (609,000) 135,000
Net change in other noncurrent assets and liabilities -- (18,000)
----------- -----------
Net cash provided by operating activities 2,800,000 2,665,000
----------- -----------
INVESTING ACTIVITIES:
Purchases of property and equipment (1,170,000) (606,000)
Proceeds from disposal of assets 14,000 --
----------- -----------
Net cash used in investing activities (1,156,000) (606,000)
----------- -----------
FINANCING ACTIVITIES:
Repayments of long-term debt (268,000) (309,000)
----------- -----------
Net increase in cash and cash equivalents 1,376,000 1,750,000
Cash and cash equivalents at beginning of period 19,922,000 16,038,000
----------- -----------
Cash and cash equivalents at end of period $21,298,000 $17,788,000
=========== ===========
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated statements.
35
HWCC - TUNICA, INC. AND SUBSIDIARY
(wholly owned by Hollywood Casino Corporation)
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, 505 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 March 31, 2002 and December
31, 2001.
HCT estimates that a significant amount of the Tunica Casino's revenues are
derived from patrons living in the Memphis, Tennessee area, northern Mississippi
and Arkansas. The Tunica Casino faces intense competition from other casinos
operating in northern Tunica County and management believes that this
competition will continue in the future.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
The consolidated financial statements as of March 31, 2002 and for the
three month periods ended March 31, 2002 and 2001 have been prepared by HCT
without audit. In the opinion of management, these consolidated financial
statements contain all adjustments (consisting of only normal recurring
adjustments) necessary to present fairly the consolidated financial position of
HCT as of March 31, 2002 and the results of its operations and cash flows for
the three month periods ended March 31, 2002 and 2001.
36
HWCC - TUNICA, INC. AND SUBSIDIARY
(wholly owned by Hollywood Casino Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(2) Long-Term Debt and Pledge of Assets
Substantially all of HCT's assets are pledged in connection with its
long-term indebtedness. Long-term debt consists of the following:
March 31, December 31,
2002 2001
----------- ------------
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) 61,000 245,000
Bank credit facility (c) 866,000 950,000
----------- -----------
Total indebtedness 88,301,000 88,569,000
Less - current maturities (411,000) (586,000)
----------- -----------
Total long-term debt $87,890,000 $87,983,000
=========== ===========
----------
(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% per annum. 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. Interest on advances is
payable each April 15 and October 15. The intercompany note is pledged as
security with respect to HCC's $360,000,000 Senior Secured Notes due in
2006 and 2007 which are unconditionally guaranteed on a senior secured
basis by HCT and by certain other current and future subsidiaries of HCC.
HCC's Senior Secured Notes and related guarantees are secured by, among
other things, (1) substantially all of the assets of HCT and other future
guarantors, (2) a limited lien on substantially all of the assets of
another gaming facility operated by a wholly owned subsidiary of HCC, (3) a
pledge of the capital stock of HCT and certain other subsidiaries of HCC
and (4) the collateral assignment of any future management contracts
entered into by HCC. The limitation on the lien described in (2) above was
$81,007,000 on March 31, 2002 and was subsequently increased to
$86,007,000. The lien 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.
37
HWCC - TUNICA, INC. AND SUBSIDIARY
(wholly owned by Hollywood Casino Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(b) The equipment loans are payable monthly including interest at effective
rates ranging from 8.5% to 9% per annum and mature at various dates in 2002
and 2003.
(c) 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 March 31, 2002 are set forth
below:
2002 (nine months) $ 318,000
2003 373,000
2004 236,000
2005 --
2006 --
Thereafter 87,374,000
-----------
Total $88,301,000
===========
Interest paid amounted to $2,488,000 and $2,484,000, respectively, during
the three month periods ended March 31, 2002 and 2001.
(3) Income Taxes
HCT's provision for income taxes consists of the following:
Three Months Ended
March 31,
---------------------
2002 2001
--------- ---------
Federal income tax provision:
Current $(185,000) $ --
Deferred (113,000) (154,000)
Change in valuation allowance 113,000 154,000
--------- ---------
$(185,000) $ --
========= =========
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.
38
HWCC - TUNICA, INC. AND SUBSIDIARY
(wholly owned by Hollywood Casino Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
HCT is included in HCC's consolidated federal income tax return. HCT's
provision for federal income taxes is based on the amount of tax which would be
provided if a separate federal income tax return were filed. HCT paid no federal
or state income taxes during either of the three month periods ended March 31,
2002 or 2001.
At March 31, 2002, HCT had net operating loss carryforwards ("NOL's")
totaling approximately $1,873,000, which do not begin to expire until the year
2019. Additionally, HCT has alternative minimum and other tax credits available
totaling $1,439,000 and $356,000, 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 near-term expectation of taxable losses, management has
provided valuation allowances to fully reserve the net deferred tax assets at
both March 31, 2002 and December 31, 2001.
(4) Reclassifications
Certain reclassifications have been made to the prior year's consolidated
financial statements to conform to the 2002 consolidated financial statement
presentation.
39
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This Quarterly Report on Form 10-Q contains forward-looking statements
about the business, operating results, cash flows, financial condition,
construction and development activities, expansion projects and prospects of the
Company. The actual results could differ materially from those indicated by the
forward-looking statements because of various risks and uncertainties including,
among other things, changes in competition, economic conditions, tax
regulations, state regulations or legislation applicable to the gaming industry
in general or the Company in particular, decisions of courts and other risks
indicated in the Company's filings with the Securities and Exchange Commission.
Such risks and uncertainties are beyond management's ability to control and, in
many cases, can not be predicted by management. When used in this Quarterly
Report on Form 10-Q, the words "believes", "estimates", "expects", "anticipates"
and similar expressions as they relate to the Company or its management are
intended to identify forward-looking statements. Similarly, statements herein
that describe the Company's business strategy, outlook, objectives, plans,
intentions or goals are also forward-looking statements.
RESULTS OF OPERATIONS
The following table summarizes HCC's consolidated income from operations
reflecting departmental operations at each of its casino properties.
Departmental operations include, as applicable, casino, rooms, food and beverage
and other. Accordingly, departmental profit, as used in the discussion which
follows, consists of departmental revenues less departmental expenses and
represents income from operations before general and administrative expenses,
depreciation and amortization.
Three Months Ended March 31,
----------------------------
2002 2001
------------ -------------
Revenues:
Aurora Casino $ 60,982,000 $ 53,355,000
Tunica Casino 23,985,000 25,188,000
Shreveport Casino 38,217,000 37,747,000
------------ ------------
Net revenues 123,184,000 116,290,000
------------ ------------
Departmental Expenses:
Aurora Casino 37,684,000 34,488,000
Tunica Casino 17,477,000 19,216,000
Shreveport Casino 27,255,000 38,948,000
------------ ------------
Total departmental expenses 82,416,000 92,652,000
------------ ------------
Departmental profit 40,768,000 23,638,000
------------ ------------
Other Operating Expenses:
General and administrative 10,405,000 9,288,000
Depreciation and amortization 14,098,000 9,381,000
Development 42,000 166,000
------------ ------------
Total other operating expenses 24,545,000 18,835,000
------------ ------------
Income from operations $ 16,223,000 $ 4,803,000
============ ============
40
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Aurora Casino
-------------
Departmental profit from operations at the Aurora Casino is summarized in
the following table:
Three Months Ended March 31,
----------------------------
2002 2001
----------- -----------
Revenues:
Casino $65,016,000 $57,121,000
Food and beverage 3,465,000 3,864,000
Other 776,000 760,000
Promotional allowances (8,275,000) (8,390,000)
----------- -----------
Net revenues 60,982,000 53,355,000
----------- -----------
Departmental Expenses:
Casino 36,024,000 32,894,000
Food and beverage 1,411,000 1,418,000
Other 249,000 176,000
----------- -----------
Total departmental expenses 37,684,000 34,488,000
----------- -----------
Departmental profit $23,298,000 $18,867,000
=========== ===========
Departmental profit margin 38.2% 35.4%
Revenues
During 2001, the Aurora Casino conducted its gaming operations on two
riverboats connected by a link barge. The smaller of the two riverboats
contained slightly more than one-third of the total gaming positions, but
generated 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, the Aurora Casino began construction of a new dockside
facility to replace the Aurora Casino's two riverboats. Management believed the
new dockside facility would significantly increase passenger capacity and
provide a premier gaming and entertainment facility for the Aurora Casino's
patrons. The first half of the dockside facility and a new casino entrance were
completed and opened on February 15, 2002. A new, state-of-the-art buffet with
the latest in presentation cooking opened in May 2002 and increased seating
capacity by 27%. The second half of the dockside casino, together with a new
parking facility which will increase parking capacity by at least 30%, are
expected to open by the end of June 2002. The expansion, when completed, is
projected to cost approximately $78.2 million.
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 $57.4 million (6.9%) during the
three month period ended March 31, 2002 compared to the same period in 2001. The
increase in gross wagering is primarily attributable to the opening of the first
half of the dockside casino. In addition, the mix of games was altered with the
addition of 22 slot machines in place of three table games.
41
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Casino revenues consist of the portion of gross wagering retained by the
casino and, as a percentage of gross wagering, is referred to as the "hold
percentage." The first quarter of 2002 increase in casino revenues compared to
the prior year period reflects the increase in gross wagering noted above,
combined with increases in both the table games and slot machine hold
percentages. The Aurora Casino set a new monthly record for casino revenues in
February 2002 with the mid-month opening of the first half of the new dockside
casino; a new monthly revenue record was subsequently established in March.
April 2002 revenues declined from the record March figures, reflecting both
seasonal patterns and a lower table games hold percentage, but were still more
than 12% above April 2001 revenues. These record results have been achieved
despite the ongoing disruption from construction of the property's new buffet.
Furthermore, management believes the property has not realized the full
potential from the dockside facility because the majority of the Aurora Casino's
gaming positions continue to be located on the remaining riverboat rather than
on the first half of its dockside casino.
Food and beverage revenues decreased 10.3% during the first quarter of 2002
compared to the same period in 2001 due to a reduction in food complementaries.
Additionally, one restaurant facility was closed and two restaurant facilities
were relocated as part of the dockside construction activities discussed above.
Other revenues did not change significantly during the first quarter of 2002
compared to the same period in 2001.
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 slightly during the first quarter of 2002 compared to the
prior year period due to reductions in beverage complimentaries, which were
virtually offset by increases in promotional activities and customer loyalty
program awards.
Departmental Expenses
The 9.5% increase in casino expenses during the first three months of 2002
compared to the prior year period primarily reflects additional gaming taxes
incurred as a result of the increase in casino revenues, coupled with increased
marketing expenses. Gaming and admissions taxes increased by $2.9 million in
2002 compared to the prior year period. Marketing expenses increased by
$500,000, primarily due to additional radio production and advertising. These
increases were partially offset by reductions in the allocation of expenses from
other operating departments to the casino department during the 2002 first
quarter period.
Food and beverage expenses did not change significantly during the first
quarter of 2002 compared to the same period in 2001 despite a decrease in the
associated revenues. Since the decline in revenues resulted from a reduction in
promotional activities, there was a similar reduction in the amount of food and
beverage costs allocated to the casino department.
Other expenses decreased by 41.5% during the first quarter of 2002 compared
to the same period in 2001 due again to a reduction in promotional activities,
the cost of which is allocated to the casino department, and to an increase in
theater expenses.
42
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 March 31,
----------------------------
2002 2001
----------- -----------
Revenues:
Casino $26,188,000 $27,272,000
Rooms 1,634,000 1,606,000
Food and beverage 3,702,000 4,289,000
Other 406,000 403,000
Promotional allowances (7,945,000) (8,382,000)
----------- -----------
Net revenues 23,985,000 25,188,000
----------- -----------
Departmental Expenses:
Casino 16,112,000 17,901,000
Rooms 318,000 269,000
Food and beverage 859,000 860,000
Other 188,000 186,000
----------- -----------
Total departmental expenses 17,477,000 19,216,000
----------- -----------
Departmental profit $ 6,508,000 $ 5,972,000
=========== ===========
Departmental profit margin 27.1% 23.7%
Revenues
Total gross wagering at the Tunica Casino decreased $14.9 million (3.3%)
during the first three months of 2002 compared to the same period in 2001 as the
Tunica market continues to be a highly competitive market in which to operate.
Both slot machine and table game revenues declined compared to the comparable
prior year period. Slot machine handle decreased $16.2 million (3.7%) during the
2002 first quarter, while the slot machine hold percentage remained unchanged
from 2001. Table game drop increased $1.3 million (6.4%) during the 2002 period;
however, a decrease in the table game hold percentage to 16.7% in the 2002
period from 18.8% in the prior year period resulted in an overall decline in
table game revenues.
Room revenues increased slightly during the 2002 period compared to 2001.
Hotel occupancy rates decreased to 83.7% during the 2002 period from 86.1%
during the prior year period. The decrease in the occupancy rate was more than
offset by an increase in the average daily room rate to $40 in 2002 from $38 in
2001.
Food and beverage revenues decreased 13.7% during the first quarter of 2002
compared to the prior year period primarily due to a reduction in food and
beverage complimentaries. Other revenues did not change significantly in the
first quarter of 2002 compared to the prior year period.
43
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Promotional allowances include the estimated value of goods and services
provided free of charge to casino customers under various marketing programs,
the cost of certain cash incentive programs and the estimated cost of the "cash
back" award feature of the casino's customer loyalty program. Promotional
allowances decreased by 5.2% during the 2002 first quarter compared to the same
period in 2001. Cash incentive and customer loyalty program awards decreased by
1.3% during the first quarter of 2002 compared to the prior year period. Such
decrease was partially offset by a slight increase in goods and services
provided to patrons without charge, which increased as a percentage of the
associated revenues to 72.1% during the 2002 period from 71.9% during 2001.
Departmental Expenses
The 10% decrease in casino expenses during the first quarter of 2002
compared to the same period in 2001 primarily results from decreases in
advertising and other expenses as part of management's efforts to control costs
in a highly competitive market. Additional decreases reflect reductions in the
allocation of costs associated with promotional activities from other operating
departments to the casino department.
The increase in rooms expense during the first quarter of 2002 compared to
the prior year period results from a reduction in the allocation of such
expenses to the casino department.
Food and beverage expenses did not change significantly during the first
quarter of 2002 compared to the same period in 2001 despite a decrease in the
associated revenues. Since the decline in revenues resulted from a reduction in
promotional activities, there was a similar reduction in the amount of food and
beverage costs allocated to the casino department. Other departmental expenses
did not change significantly during the first quarter of 2002 compared to the
same period in 2001.
Shreveport Casino
-----------------
Departmental profit from operations at the Shreveport Casino is summarized
in the following table:
Three Months Ended March 31,
----------------------------
2002 2001
----------- -----------
Revenues:
Casino $37,939,000 $36,719,000
Rooms 2,214,000 2,432,000
Food and beverage 6,100,000 6,708,000
Other 474,000 1,260,000
Promotional allowances (8,510,000) (9,372,000)
----------- -----------
Net revenues 38,217,000 37,747,000
----------- -----------
Departmental Expenses:
Casino 24,536,000 34,000,000
Rooms 539,000 613,000
Food and beverage 1,516,000 3,032,000
Other 664,000 1,303,000
----------- -----------
Total departmental expenses 27,255,000 38,948,000
----------- -----------
Departmental profit (loss) $10,962,000 $(1,201,000)
=========== ===========
Departmental profit (loss) margin 28.7% (3.2%)
44
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The Shreveport Casino commenced operations on December 20, 2000 and
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, resulted in lower gaming activity at the
Shreveport Casino in January and February 2001 than originally anticipated by
management. 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.
Management of the Shreveport Partnership responded by fine-tuning 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. Management
also instituted a series of measures to significantly reduce the operating costs
of the Shreveport Casino. As a result of the elimination of marketing programs
and other significant cost cutting efforts, the Shreveport Casino has generated
positive earnings before interest, taxes, depreciation, amortization and
non-recurring items in every month since June 2001. The Shreveport Partnership
is continuing to aggressively manage its marketing programs to increase its
customer base while maximizing near and long-term profitability by decreasing
the operating cost structure of the property.
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, as total casino win for
the first quarter of 2002 has only grown by 21.2% compared to the same period in
2000 (the most recent first quarter period prior to the opening of the
Shreveport Casino). The market grew by only 2% during the first quarter of 2002
compared to the same period in 2001; management believes such lack of growth
reflects the current economic slowdown which has negatively affected the
Shreveport market.
Total gross wagering at the Shreveport Casino as measured by table game
drop and slot machine handle amounted to $456 million and $450 million,
respectively, during the first three months of 2002 and 2001. Slot machine
handle increased by 2.6% during the first quarter of 2002 compared to the same
period in 2001, while table game drop declined 7.6%.
Revenues
Casino revenues at the Shreveport Casino increased $1.2 million (3.3%)
during the first three months of 2002 compared to the 2001 period. This increase
reflects the overall increase in gross wagering combined with an increase in the
table games hold percentage to 22% from 18.9%. During the first three months of
2002, slot machine and table games revenue accounted for 70.5% and 29.5% of
casino revenues, respectively, compared to the 71.7% and 28.3%, respectively,
during the 2001 period.
45
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Room revenues decreased 9% during the 2002 period compared to 2001. Hotel
occupancy rates increased to 90.4% during the 2002 period from 75.7% in 2001 due
to more aggressive marketing programs. The average daily room rate decreased to
$68 during the 2002 period from $98 in 2001. 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 decreased 9.1% during the first quarter of 2002
compared to the prior year period primarily as a result of a decrease in
promotional activities.
Other revenues decreased 62.4% during the three month period ended March
31, 2002 compared to the same period in 2001 due to reductions in theater
revenues and retail store sales.
Promotional allowances represent 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. Promotional
allowances decreased $862,000 (9.2%) during the first quarter of 2002 compared
to the same period in 2001 primarily due to reductions in complimentaries as
part of management's cost savings initiatives.
Departmental Expenses
The Shreveport Casino was designed to be a major destination resort.
Accordingly, its initial cost structure was based on the facility generating a
significant level of gaming revenues. As noted previously, management
concentrated its efforts in January and early February 2001 on fully
implementing operating and training programs to ensure that customers were
provided with a superior level of service. Because the Shreveport Casino was in
a longer start up phase, departmental expense ratios during the first half of
2001 were higher than those experienced by other HCC operated gaming facilities
during their initial periods. During the summer of 2001, management initiated a
new business plan for the Shreveport Casino in response to the difficult
operating conditions experienced by the property. Due to the economic recession
and the impact of the events of September 11th, the Shreveport market grew much
more slowly in 2001 than anticipated and experienced a significant increase in
marketing and promotional activity. Over the second six months of 2001 and first
three months of 2002, management made significant progress in achieving the
principal elements of its new business plan. Specifically, departmental
expenditures have been significantly reduced while maintaining the Shreveport
Casino's level of service. Management reduced the property's operating costs in
the first three months of 2002 by approximately $11.7 million (30%) compared to
the first three months of 2001, while maintaining revenue levels. As cost
savings initiatives implemented by management are continued and the volume of
business grows, management anticipates cost ratios and departmental profit
should continue to improve.
In March 2001, the Louisiana legislature approved an increase in the gaming
tax on riverboat casinos to 21.5% of net gaming proceeds from the current 18.5%.
The tax increase will be phased in over a 25-month period for all riverboats in
the Shreveport/Bossier City area; accordingly, the gaming tax imposed on the
Shreveport Casino increased to 19.5% effective April 1, 2001 and to 20.5%
effective April 1, 2002 with an additional 1% increase scheduled for April 1,
2003. Had the entire 3% gaming tax increase been in effect during the first
quarter of 2002, the Shreveport Casino's operating expenses would have increased
by $774,000.
The 27.8% decrease in casino expenses during the first quarter of 2002
compared to the same period in 2001 was due to managements cost savings
initiatives discussed above. Expenditures were
46
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
reduced in the areas of payroll, cage operations, and advertising, as well as in
the allocations of promotional related costs from other operating departments to
the casino department.
The 12.1% decrease in rooms expense during the first quarter of 2002
compared to the prior year period reflects management cost savings initiatives
discussed above partially offset by reduced allocations to the casino
department.
During the first three months of 2002, food and beverage expenses decreased
by 50% and other expenses decreased by 49% compared to the prior year period.
These decreases are due to reductions in the cost of goods sold, consistent with
the reductions in revenues, as well as by reductions in payroll costs and
increases in operating efficiency.
Other Consolidated Items
------------------------
Other operating expenses of HCC and its subsidiaries, exclusive of casino
departmental expenses, consist primarily of general and administrative expenses,
depreciation and amortization, and development expenses incurred in connection
with the pursuit of additional gaming venues.
General and Administrative
General and administrative expenses increased by $1.1 million (12%) during
the first quarter of 2002 compared to the prior year period. Such expenses at
the Aurora Casino increased by $284,000 (24.9%) during the 2002 period primarily
as a result of increases in personnel costs related to the opening of the first
half of the dockside casino. The Tunica Casino experienced a 3.7% increase in
general and administrative expenses during the 2002 first quarter compared to
the prior year period primarily as a result in increases in personnel costs.
During the 2002 first quarter period, the Shreveport Casino's general and
administrative expenses decreased $197,000 (5.3%), exclusive of management fees
payable to a subsidiary of HCC. The decrease is attributable to reductions in
personnel costs resulting from management's cost savings initiatives. Corporate
general and administrative expenses increased $969,000 (34.8%) due to increased
legal and professional fees primarily related to ongoing litigation against
certain former executive officers of HCC.
Depreciation and Amortization
Depreciation and amortization expense increased by $4.7 million (50.3%)
during the 2002 period compared to the prior year period. Substantially all of
the increase results from additional depreciation expense recorded by the Aurora
Casino as a result of its expansion and the acceleration of depreciation on the
assets to be replaced (see "Liquidity and Capital Resources-Capital Expenditures
and Investing Activities-Aurora Casino" below). Such accelerated depreciation
increased by $4.4 million during the first quarter of 2002 compared to the same
period of 2001.
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 and abroad. Such costs decreased by 74.7% during the first
quarter of 2002 compared to the prior year period due to fewer potential
jurisdictions contemplating the legalization of gaming.
47
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Non-operating Income (Expenses)
-------------------------------
Interest Income
Interest income decreased 78.8% during the first quarter of 2002 compared
to the prior year period as unexpended cash proceeds of HCC's issue of Senior
Secured Notes on May 19, 1999 and Hollywood Casino Shreveport's debt issue on
August 10, 1999 (see "Liquidity and Capital Resources - Financing Activities")
were spent in connection with the construction of the Shreveport Casino and the
Aurora Casino expansion project.
Interest Expense
Interest expense decreased by $778,000 (4.5%) during the three month period
ended March 31, 2002 compared to the prior year period due primarily to interest
capitalized with respect to the Aurora Casino expansion project.
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 $6.3 million as
of March 31, 2002.
On March 19, 2002, new tax legislation was enacted which extends the
carryback period for NOL's originating in tax years ending in 2001 or 2002. As a
result of this change, the Company will be able to utilize NOL's originating in
2001 to request a refund of taxes previously paid in the amount of approximately
$3.1 million. The refund receivable and related tax benefit were recognized
during the first quarter of 2002.
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.
Allocations of this interest are reflected as minority interest in Hollywood
Casino Shreveport. Such interest, which commenced upon the opening of the
Shreveport Casino, amounted to $383,000 during the first quarter of 2002.
48
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 sources
of funding for the Company and management believes that this financing has no
other material market risks 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 of the floating rate notes would require a
premium in the amount of 2% as of May 1, 2002, 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 a 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 that the annual consolidated cash flow of the Shreveport Casino was
at least $100 million. The contingent component of interest under the Shreveport
First Mortgage Notes 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 cash flows and can only be paid if certain coverage ratios are met, liquidity
and capital resources of the Shreveport Partnership will not be compromised by
the payment, if any, of contingent interest.
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 $21.6 million.
Seasonality and Other Fluctuations
Historically, the Aurora Casino's operations have experienced some
seasonality due to severe winter weather. Consequently, the results of HCC's
operations for the first and fourth quarters have traditionally been less
profitable than the other quarters of the fiscal year. Furthermore, management
49
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
believes that seasonality may also cause fluctuations in reported results at the
Tunica Casino and the Shreveport Casino. In addition, the operations of HCC's
casinos may fluctuate significantly due to a number of factors, including
chance. Such seasonality and fluctuations may materially affect HCC's casino
revenues and overall profitability.
LIQUIDITY AND CAPITAL RESOURCES
Operating Activities
During the first quarter of 2002, HCC generated cash flow from operations
of $20.1 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 $23.9 million of cash
flow from operations during the first quarter of 2002 while the Tunica Casino
provided $2.8 million of cash from operations. The Shreveport Casino experienced
negative cash flow from operations during the first quarter of 2002 amounting to
$4.5 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 ($230,000). In
addition to operating expenses at its three casino facilities, other uses of
operating cash by HCC during the first quarter of 2001 included corporate
overhead costs ($3.8 million) and costs to pursue development opportunities
($42,000).
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 May 1, 2002, the interest rate decreased to 8.38%
from 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 is also
using proceeds from the debt offering to finance construction of its new,
dockside gaming facility at the Aurora Casino (see "Liquidity and Capital
Resources - Capital Expenditures and Other Investing Activities"). Interest on
the Senior Secured Notes is payable semiannually each May 1 and November 1. The
Senior Secured Notes are unconditionally guaranteed on a senior secured basis by
HCT and Shreveport Management and may be guaranteed by certain future
subsidiaries of HCC. Neither HCA nor HCL are guarantors. The Senior Secured
Notes and related guarantees are secured by, among other things, (1)
substantially all of the assets of HCT and future guarantors, (2) a lien not to
exceed approximately $108 million on substantially all of the assets of HCA, (3)
a pledge of the capital stock of certain subsidiaries of HCC, including HCA and
HCT, and (4) the collateral assignment of the management contract for the
Shreveport Casino. The amount of the lien described in (2) above was
approximately $81 million on March 31, 2002 and was subsequently increased to
approximately $86 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
50
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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 Debt 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 guaranteed by HCL, but 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 commencement of the Shreveport
Casino's operations. The amount of the contingent interest is equal to 5% of the
Shreveport Casino's cash flow, as defined, for the applicable period subject to
maximum of $5 million for any four consecutive fiscal quarters. Contingent
interest with respect to the Shreveport First Mortgage Notes amounted to
$324,000 during the three month period ended March 31, 2002, payment of which
has been deferred. Payment of contingent interest may be deferred to the extent
that payment would result in certain financial coverage ratios not being met.
Accrued contingent interest with respect to the Shreveport First Mortgage Notes
amounted to $710,000 at March 31, 2002. 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 for any four consecutive fiscal quarters. Contingent interest
amounted to $81,000 during the three month period ended March 31, 2002, payment
of which has been deferred. Total accrued contingent interest with respect to
the Shreveport Senior Secured Notes amounted to $159,000 at March 31, 2002.
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
51
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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 Senior First Mortgage Notes and
Shreveport 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 indenture for the Shreveport First Mortgage Notes and Shreveport Senior
Secured Notes contains various provisions limiting the ability the Shreveport
Partnership to borrow money, pay dividends, make investments, pledge or sell its
assets or enter into mergers or consolidations. The indenture to the Shreveport
First Mortgage Notes also limits the ability of certain HCC subsidiaries which
guarantee the debt to acquire additional assets, become liable for additional
obligations or engage in any business activities other than holding the
partnership interests or acting as managing general partner of the Shreveport
Partnership.
Ground Leases -
HCT entered into a ground lease covering 70 acres of land on which the
Tunica Casino was constructed. The ground lease was for an initial term of five
years from the opening date of the facility and, at HCT's option, may be renewed
for nine additional five-year periods. The lease is currently in its first
five-year renewal term. Obligations under the ground lease include both minimum
monthly fixed payments and percentage rent, which in the aggregate will be the
greater of 4% of Gross Revenues, as defined, or $1.1 million per year. HCT is
responsible for all operating and other expenses of the property in accordance
with the lease terms. HCT expensed $1.1 million during the three month period
ended March 31, 2002 in connection with the ground lease.
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 ending December 20, 2010 with subsequent renewals available to
the Shreveport Partnership 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. During the first five-year rental term, the
base annual rental will be $402,500. The annual base rental payment will be
$462,875 for the second five-year renewal term, $532,306 for the third five-year
renewal term, $612,512 for the fourth five-year renewal term and $703,957 for
the fifth five-year renewal term with no further increases. This base rental
portion of the ground lease is being amortized by the Shreveport Casino on a
straight-line basis. 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 $526,000
during the three month period ended March 31, 2002, including percentage rentals
amounting to $383,000. In addition, the ground lease agreement also calls for
payments in lieu of admission fees to the City of Shreveport and payments to the
local school board amounting to 3.225% and .5375% of Net Gaming Proceeds (as
defined in the agreement), respectively. These additional charges amounted to
$1.5 million during the 2002 first quarter period.
52
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Other -
During December 2001, HCC and Greate Bay reached an agreement to
restructure obligations existing between the two companies. Obligations owed by
Greate Bay to HCC consisted of (1) demand notes from Greate Bay with a carrying
value of $5.7 million and interest thereon with a carrying value of $781,000 and
(2) deferred interest notes (the "PPI Funding Notes") issued by a subsidiary of
Greate Bay which had a final maturity value of $47.6 million and which were
fully reserved by HCC. The notes and interest were carried at management's
estimate of the value of the underlying collateral of the obligations. Because
the loans were considered to be impaired and management believed that the
recorded amount of the obligations reflected its best estimate of ultimate
recovery, no interest income was recognized on a cash-basis method with respect
to either of the obligations from Greate Bay. HCC owed remaining principal of
$1.9 million and interest of $498,000 to a subsidiary of Greate Bay with respect
to HCC's acquisition in 1997 of the general partnership interest in the entity
which held the management contract for the Aurora Casino. Payments under the
obligation to the Greate Bay subsidiary had been suspended since March 1, 2000
while negotiations to restructure the intercompany obligations continued.
Greate Bay is insolvent and, together with certain of its subsidiaries,
filed voluntary petitions for protection under Chapter 11 of the United States
Bankruptcy Code on December 28, 2001. As part of its pre-packaged bankruptcy
reorganization, Greate Bay sold its primary asset, with the net proceeds from
the sale and Greate Bay's other remaining cash to be distributed to an
unrestricted subsidiary of HCC. Greate Bay paid $2 million in December 2001 to
the unrestricted subsidiary and agreed to offset the $2.4 million owed by HCC
(see (2) above) against a like amount owed to HCC. The sale of Greate Bay's
primary asset was approved by the bankruptcy court on March 6, 2002 and
completed on March 19, 2002. Management currently anticipates that the plan of
reorganization will be confirmed in July 2002. As a result of the agreement, HCC
has adjusted the carrying value of the notes and interest due from Greate Bay at
March 31, 2002 to $12.9 million (net of reserves of $48.3 million), management's
estimate of the net proceeds yet to be received, subject to confirmation by the
bankruptcy court.
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 7.5% per annum in August
2001.
HCC Consolidated Commitments -
As of March 31, 2002, HCC's remaining maturities of long-term debt are
$323,000 during 2002, $380,000 in 2003 and $244,000 in 2004. During 2006, the
floating rate Senior Secured Notes, Shreveport First Mortgage Notes and
Shreveport Senior Secured Notes become due aggregating $239 million. In 2007,
the $310 million 11.25% Senior Secured Notes become due. Remaining minimum lease
payments under capital lease obligations are $2.2 million for the remainder of
2002 and approximately $2.7 annually between 2003 and 2006 and total $26.3
million in the aggregate.
Commitments under noncancellable operating leases, exclusive of the ground
leases in Shreveport and Tunica previously discussed, amount to $1.1 million
during the remainder of 2002. In future years, such commitments decline steadily
from $1.2 million in 2003 to $380,000 in 2006 and amount to approximately $5.6
million in the aggregate.
53
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Capital Expenditures and Other Investing Activities
Aurora Casino -
Capital expenditures at the Aurora Casino during the three month period
ended March 31, 2002 (exclusive of barge costs - see below) were $161,000;
management anticipates spending $3.8 million during the remainder of 2002 toward
its ongoing capital improvements program. Significant projects planned for 2002
include new slot machines, renovations to restaurants and other departmental
expenditures.
Prior to February 15, 2002, the Aurora Casino conducted its gaming
operations on two, four-level riverboats having a combined casino space of
approximately 32,000 square feet. In March 2001, the Aurora Casino began
construction of a major expansion, highlighted by the construction of a new
dockside facility to replace the Aurora Casino's two riverboats. The first half
of the dockside facility and a new casino entrance were completed and opened on
February 15, 2002. A new, state-of-the-art buffet with the latest in
presentation cooking opened in May 2002 and increased seating capacity by 27%.
The second half of the dockside casino, together with a new parking facility are
expected to open by the end of June 2002. Management believes the new dockside
facility, which will have 53,000 square feet of gaming space on a single level,
will significantly increase passenger capacity and provide a premier gaming and
entertainment facility for the Aurora Casino's patrons. The estimated total
project cost is approximately $78.2 million. Until the second half of the
dockside casino is completed, the Aurora Casino will continue to operate the
larger of its two existing riverboat casinos. Up to $40 million of the estimated
project costs for the Aurora Casino expansion are being provided from HCC's debt
offering completed in May 1999 with the remainder to come from cash on hand and
cash available from operations. Costs incurred during the three month period
ended March 31, 2002 with respect to the expansion project have totaled
approximately $13.6 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 dockside casino has been constructed in two halves which have now been
connected to form a single dockside casino. This strategy was developed in order
to minimize disruption of the Aurora Casino's operations during the construction
period and allow for at least a partial opening at a much earlier date. The
Aurora Casino prospectively adjusted the remaining useful lives of its
riverboats and
54
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
other fixed assets being replaced to reduce the recorded net book value of such
assets (approximately $3.5 million at March 31, 2002) to their estimated net
realizable value at the time they are removed from service. Consequently,
depreciation expense during the three month period ended March 31, 2002
increased by $6.6 million; such additional depreciation is expected to amount to
approximately $3.1 million during the remainder second quarter of 2002.
Tunica Casino -
Capital expenditures at the Tunica Casino during the first quarter of 2002
amounted to $1.2 million; management anticipates spending $2.8 million during
the remainder of 2002 for its on-going capital improvements program.
Expenditures planned consist primarily of updating slot machines, replacing the
casino carpeting and other departmental expenditures. During the third quarter
of 2002, the Company will commence a substantial capital expenditure project at
the Tunica property that includes the conversion of 22 hotel rooms into 11 new
suites and the renovation of all other hotel rooms. As currently planned, the
renovation will cost an estimated $8 million and is expected to be completed in
late 2003.
HCT entered into an agreement with two other casino operators during 1996
providing for the joint construction and ownership of a golf course.
Contributions by HCT to the limited liability corporation formed to develop and
operate the golf course, which opened in November 1998, have totalled
approximately $2.3 million.
Shreveport Casino -
Capital expenditures at the Shreveport Casino during the first quarter of
2002 amounted to $66,000; management anticipates spending less than $1.5 million
during the remainder of 2002 with respect to the Shreveport Casino's program of
ongoing capital improvements.
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. These matters are the
subject of a lawsuit pending in U. S. District Court in Louisiana. 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 the results of the litigation
and management is unable to determine the amounts, if any, that will ultimately
be received or paid.
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 March 31, 2002 amounted to
$313,000 (no contributions were made during the three month period ended March
31, 2002). Given the difficult market conditions, the partners in the golf
course provided notice in April 2002 that they were terminating the lease for
the land on which the golf course would have been constructed. The partners
intend to liquidate the joint venture; accordingly, the Shreveport Partnership
provided a reserve during April 2002 to write down their investment in the
limited liability corporation to a zero value.
55
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Conclusion
The Company has the ability under its existing loan agreements to make
approximately $3 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 $3 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
anticipates receiving between $11 million and $13 million in payments on the
Company's outstanding receivables from Greate Bay which would provide the
Company with additional flexibility to make future capital contributions to the
Shreveport Partnership. The Company has entered into definitive agreements with
Greate Bay to realize value on the significant indebtedness Greate Bay owes the
Company. Other than trade payables, the Company is Greate Bay's sole creditor.
As part of a pre-packaged bankruptcy reorganization of Greate Bay, Greate Bay
sold its primary asset and the net proceeds from the sale, as well as Greate
Bay's other cash, are to be distributed to an unrestricted subsidiary of HCC.
Proceeds received by the HCC subsidiary from Greate Bay 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. Greate Bay filed its petition for reorganization and
plan with the United States Bankruptcy Court for the District of Delaware on
December 28, 2001. The sale of Greate Bay's primary asset was approved on March
6, 2002 and was completed on March 19, 2002. Management currently anticipates
that the restructuring will be confirmed in July 2002.
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, will be sufficient to meets its liquidity and
capital resource needs for the next 24 months. Under the indenture to the Senior
Secured Notes, the Shreveport Partnership will also be able to borrow, if
needed, up to an additional $6 million to finance the purchase of furniture,
fixtures and equipment.
56
PART II: OTHER INFORMATION
--------------------------
Item 6(a). Exhibits
10.1 License Agreement dated as of December 19, 2001 by and between
Advanced Casino Systems Corporation and Hollywood Casino-Aurora, Inc.
10.2 Amended and Restated Maintenance Agreement made and entered into as
of December 19, 2001 by and between Advanced Casino Systems
Corporation and Hollywood Casino-Aurora, Inc.
10.3 License Agreement dated as of December 19, 2001 by and between
Advanced Casino Systems Corporation and HWCC-Tunica, Inc.
10.4 Maintenance Agreement dated as of December 19, 2001 by and between
Advanced Casino Systems Corporation and HWCC-Tunica, Inc.
* 10.5 License Agreement dated as of December 19, 2001 by and between
Advanced Casino Systems Corporation and Hollywood Casino Shreveport.
(Exhibit 10.1)
* 10.6 Maintenance Agreement dated as of December 19, 2001 by and between
Advanced Casino Systems Corporation and Hollywood Casino Shreveport.
(Exhibit 10.2)
----------
* Incorporated by reference to the exhibit in parenthesis included in
Hollywood Casino Shreveport and Shreveport Capital Corporation's Quarterly
Report on Form 10-Q for the quarter ended March 31, 2002.
Item 6(b). Reports on Form 8-K
The Registrants filed a report on Form 8-K on February 19, 2002 to
announce the filing by Hollywood Casino Corporation of two lawsuits in
connection with the activities of two of its directors and former officers.
The Registrants filed a Report on Form 8-K on March 7, 2002 to
announce the bankruptcy court's approval of Greate Bay Casino Corporation's
sale of Advanced Casino Systems Corporation and the Registrant's
expectation of proceeds from such sale.
The Registrants filed a Report on Form 8-K on March 20, 2002 to
announce the closing of Greate Bay Casino Corporation's sale of Advanced
Casino Systems Corporation and the Registrant's expectation of proceeds
from such sale.
57
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, each
of the Registrants has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HOLLYWOOD CASINO CORPORATION
Date: May 13, 2002 By: /s/ Paul C. Yates
-----------------------------------------
Paul C. Yates
Treasurer, Executive Vice President and
Chief Financial Officer
HWCC - TUNICA, INC.
Date: May 13, 2002 By: /s/ Paul C. Yates
-----------------------------------------
Paul C. Yates
Executive Vice President and
Chief Financial Officer
58