<PAGE>
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 June 30, 2000
--------------------------------------------------
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 333-88679
---------------
HOLLYWOOD CASINO SHREVEPORT
SHREVEPORT CAPITAL CORPORATION
--------------------------------------------------------------------------------
(Exact name of each Registrant as specified in its charter)
Louisiana 72-1225563
Louisiana 75-2830167
------------------------------------------ ------------------------------------
(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____ No X
-----
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
Registrant Class Outstanding at August 10, 2000
-------------------------------- ---------------------------- ------------------------------
<S> <C> <C>
Hollywood Casino Shreveport None None
Shreveport Capital Corporation Common Stock, $.01 par value 1,000 Shares
</TABLE>
<PAGE>
HOLLYWOOD CASINO SHREVEPORT AND SUBSIDIARY
Part I: Financial Information
Introductory Notes to Consolidated Financial Statements
-------------------------------------------------------
Hollywood Casino Shreveport ("HCS") is currently a development stage
general partnership registered in the state of Louisiana. The original
partnership agreement was amended on September 22, 1998 to include as partners
in what is now referred to as HCS the following companies: HWCC - Louisiana,
Inc. ("HCL"), a Louisiana corporation wholly owned by Hollywood Casino
Corporation ("HCC"); Sodak Louisiana, L.L.C. ("Sodak"), a Louisiana limited
liability company; and Shreveport Paddlewheels, L.L.C. ("Paddlewheels"), a
Louisiana limited liability company. The general partnership was originally
formed in May 1992 for the purpose of developing and operating a riverboat
casino in New Orleans, Louisiana. Originally named Queen of New Orleans at the
Hilton Joint Venture ("QNOV"), the partnership was 50%-owned by Hilton New
Orleans Corporation ("Hilton") and 50%-owned by New Orleans Paddlewheels, Inc.
("NOP"). Hilton and NOP are collectively referred to herein as the "former
partners." QNOV's operations in New Orleans commenced in February 1994 and were
discontinued in October 1997.
During October 1996, QNOV received approval from state gaming authorities
to relocate its license to operate to the City of Shreveport, Louisiana,
approximately 180 miles east of Dallas, Texas. Subsequent to receiving approval
to relocate, QNOV made the decision in 1997 not to conduct gaming operations in
Shreveport. The former partners sought to transfer the license to operate in
Shreveport to another interested party. Under Louisiana gaming regulations, the
license to operate a riverboat gaming operation is not transferable; however,
the ownership of an entity licensed to operate is transferable, subject to the
approval of the Louisiana Gaming Control Board (the "LGCB"). Accordingly, the
transfer of the license to operate in Shreveport was structured as the
acquisition of the interests of the former partners in QNOV.
Upon admission of the new partners, HCS proceeded with entirely new plans
to develop, own and operate a riverboat gaming complex to be constructed in
Shreveport (the "Shreveport Casino"). The accompanying financial statements
reflect the operations and cash flows of HCS for the period from September 22,
1998 through June 30, 2000 as a development stage entity. HCS currently has no
operating activities other than development, financing and construction
activities with respect to the Shreveport Casino. As currently planned, the
Shreveport Casino will consist of a three-level riverboat casino with
approximately 1,409 slot machines and 68 table games; a 405-room, all suite, art
deco style hotel; and approximately 42,000 square feet of restaurant and
entertainment facilities.
It was originally anticipated that HCS would develop the Shreveport Casino
with each of HCL and Sodak having a 50% interest in the development and
subsequent operations. Paddlewheels was to have a residual interest after the
commencement of operations and in the event that the project was ever sold
amounting to 10% plus any capital contributions made by Paddlewheels to HCS. On
March 31, 1999, HCL entered into a definitive agreement with Sodak's parent to
acquire Sodak for the $2,500,000 Sodak had contributed to HCS, with $1,000 to be
paid at closing and the remainder to be paid six months after the opening of the
Shreveport Casino. The revised structure of the partnership was approved by the
LGCB on April 20, 1999. As a result of the acquisition, HCL obtained an
effective 100% ownership interest in HCS with Paddlewheels retaining their
residual interest. During July 1999, Sodak was merged into HCL.
Also during July 1999, HCL formed two new, wholly owned subsidiaries, HCS
I, Inc. and HCS II, Inc., both Louisiana corporations. HCL contributed $1,000 of
capital to each entity, along with 99% of its interest in HCS to HCS I, Inc. and
the remaining 1% to HCS II, Inc. In addition, the HCS joint venture agreement
was amended and restated on July 21, 1999, to reflect, among other things, the
admission of HCS I, Inc. and HCS II, Inc. as partners of HCS and the withdrawal
of HCL as managing partner of HCS. As a result, HCS I, Inc. now has an effective
99% interest in HCS and has become its managing general partner. HCS II, Inc.
now has an effective 1% interest in HCS. Paddlewheels retained its 10% residual
interest in HCS.
1
<PAGE>
Additionally, in July 1999, HCS formed a new, wholly owned subsidiary,
Shreveport Capital Corporation ("Shreveport Capital"), a Louisiana corporation.
HCS contributed $1,000 of capital to Shreveport Capital. Shreveport Capital was
formed for the sole purpose of being a co-issuer with respect to the First
Mortgage Notes, as defined below, and is not expected to have any operating
activities, acquire any assets or incur any other liabilities. Accordingly,
separate financial statements of Shreveport Capital are not included herein
because management has determined that such information is not material to
investors.
The total estimated cost of the Shreveport Casino is $230,000,000. Equity
contributions from HCL and Paddlewheels provided $50,000,000 of the funds
necessary. During August 1999, HCS successfully completed the issuance of
$150,000,000 of 13% First Mortgage Notes with contingent interest (the "First
Mortgage Notes") due 2006; $30,000,000 of furniture, fixture and equipment
financing provides the remaining funding for the project. The Shreveport Casino
is currently scheduled to open in December 2000.
The consolidated financial statements as of June 30, 2000 and for the three
and six month periods ended June 30, 2000 and 1999 have been prepared by HCS and
HCL without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission. 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 positions of
HCS and HCL as of June 30, 2000, the results of their operations and cash flows
for the three and six month periods ended June 30, 2000 and 1999 and, with
respect to HCS, their results of operations and cash flows for the period from
September 22, 1998 through June 30, 2000.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. These financial statements should be read in
conjunction with the financial statements and notes thereto included in HCS and
Shreveport Capital's Registration Statement on Form S-4.
2
<PAGE>
INDEPENDENT ACCOUNTANTS' REPORT
To Hollywood Casino Shreveport:
We have reviewed the accompanying condensed consolidated balance sheet of
Hollywood Casino Shreveport and subsidiary as of June 30, 2000, and the related
condensed consolidated statements of operations for the three and six month
periods ended June 30, 2000 and 1999 and for the period from September 22, 1998
through June 30, 2000 and their cash flows for the six month periods ended June
30, 2000 and 1999 and for the period from September 22, 1998 through June 30,
2000. These financial statements are the responsibility of the Partnership's
management.
We conducted our review 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 review, 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 Shreveport and subsidiary as of December 31, 1999, and the
related consolidated statements of operations, partners' capital and cash flows
for the year then ended and for the period from September 22, 1998 through
December 31, 1999 (not presented herein); and in our report dated May 11, 2000,
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, 1999 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
August 4, 2000
3
<PAGE>
HOLLYWOOD CASINO SHREVEPORT AND SUBSIDIARY
A Development Stage General Partnership
CONSOLIDATED BALANCE SHEETS (NOTE 1)
<TABLE>
<CAPTION>
June 30,
2000 December 31,
(Unaudited) 1999
------------ ------------
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $ 2,567,000 $ 19,014,000
Interest receivable 767,000 1,432,000
Prepaid expenses and other current assets 784,000 620,000
------------ ------------
Total current assets 4,118,000 21,066,000
------------ ------------
Property and Equipment:
Furniture and equipment 62,000 23,000
Construction in progress 107,861,000 36,155,000
------------ ------------
107,923,000 36,178,000
Less - accumulated depreciation (8,000) (2,000)
------------ ------------
107,915,000 36,176,000
------------ ------------
Cash restricted for construction project 101,278,000 147,310,000
------------ ------------
Deferred financing costs, net 6,383,000 4,928,000
------------ ------------
$219,694,000 $209,480,000
============ ============
Liabilities and Partners' Capital
Current Liabilities:
Current maturities of long-term debt
and capital lease obligations $ 2,090,000 $ 400,000
Bank overdraft 1,077,000 -
Accounts payable 17,710,000 11,648,000
Interest payable 8,277,000 7,637,000
Other accrued liabilities 147,000 35,000
Due to affiliates 349,000 230,000
------------ ------------
Total current liabilities 29,650,000 19,950,000
------------ ------------
Long-Term Debt 150,449,000 151,359,000
------------ ------------
Capital Lease Obligations 3,447,000 -
------------ ------------
Commitments and Contingencies (Note 6)
Partners' Capital:
Partners' capital contributions 49,711,000 47,501,000
Accumulated deficit during the development stage (8,563,000) (4,330,000)
Accumulated deficit at date of change in partners (5,000,000) (5,000,000)
------------ ------------
Total partners' capital 36,148,000 38,171,000
------------ ------------
$219,694,000 $209,480,000
============ ============
</TABLE>
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated balance sheets.
4
<PAGE>
HOLLYWOOD CASINO SHREVEPORT AND SUBSIDIARY
A Development Stage General Partnership
CONSOLIDATED STATEMENTS OF OPERATIONS (NOTE 1)
(Unaudited)
<TABLE>
<CAPTION>
Period from
September 22,
1998 through Three Months Ended Six Months Ended
June 30, June 30, June 30,
-------------------------- ------------------------
2000 2000 1999 2000 1999
------------- ------------- ---------- ------------- ----------
<S> <C> <C> <C> <C> <C>
Expenses:
Development costs $ (240,000) $ - $ (22,000) $ - $ (76,000)
Preopening expenses (2,249,000) (1,012,000) - (1,408,000) -
Depreciation (8,000) (3,000) - (6,000) -
------------ ------------ --------- ------------ ---------
Total expenses (2,497,000) (1,015,000) (22,000) (1,414,000) (76,000)
------------ ------------ --------- ------------ ---------
Non-operating income (expense):
Interest income 7,511,000 1,727,000 15,000 3,812,000 45,000
Interest expense, net of capitalized interest of
$4,870,000 through June 30, 2000 and
$2,418,000 and $3,818,000 for the
three and six month periods ended
June 30, 2000, respectively (13,577,000) (2,830,000) - (6,631,000) -
------------ ------------ --------- ------------ ---------
Total non-operating (expense) income (6,066,000) (1,103,000) 15,000 (2,819,000) 45,000
------------ ------------ --------- ------------ ---------
Net loss $ (8,563,000) $ (2,118,000) $ (7,000) $ (4,233,000) $ (31,000)
============ ============ ========= ============ =========
</TABLE>
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated financial statements.
5
<PAGE>
HOLLYWOOD CASINO SHREVEPORT AND SUBSIDIARY
A Development Stage General Partnership
CONSOLIDATED STATEMENTS OF CASH FLOWS (NOTE 1)
(Unaudited)
<TABLE>
<CAPTION>
Period from
September 22, Six Months Six Months
1998 through Ended Ended
June 30, June 30, June 30,
2000 2000 1999
-------------- ------------- ------------
<S> <C> <C> <C>
Operating Activities:
Net loss $ (8,563,000) $ (4,233,000) $ (31,000)
Adjustments to reconcile net loss to cash provided by
(used in) operating activities:
Depreciation and amortization, including accretion of
discount 852,000 490,000 -
(Increase) decrease in interest receivable (767,000) 665,000 -
Increase (decrease) in accounts payable and accrued
liabilities 21,134,000 6,814,000 (145,000)
Net change in other current assets and liabilities (435,000) (45,000) -
------------- ------------ -----------
Cash provided by (used in) operating activities 12,221,000 3,691,000 (176,000)
------------- ------------ -----------
Investing Activities:
Purchase of property and equipment (102,094,000) (65,109,000) (3,056,000)
(Increase) decrease in cash restricted for construction
project (101,278,000) 46,032,000 -
------------- ------------ -----------
Cash used in investing activities (203,372,000) (19,077,000) (3,056,000)
------------- ------------ -----------
Financing Activities:
Capital contributions 50,000,000 - -
Proceeds from issuance of long-term debt 150,000,000 - -
Bank overdraft 1,077,000 1,077,000 -
Partner distributions (289,000) (289,000) -
Deferred financing costs (7,070,000) (1,849,000) -
------------- ------------ -----------
Cash provided by (used in) financing activities 193,718,000 (1,061,000) -
------------- ------------ -----------
Net increase (decrease) in cash and cash equivalents 2,567,000 (16,447,000) (3,232,000)
Cash and cash equivalents at beginning of period - 19,014,000 3,734,000
------------- ------------ -----------
Cash and cash equivalents at end of period $ 2,567,000 $ 2,567,000 $ 502,000
============= ============ ===========
</TABLE>
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated financial statements.
6
<PAGE>
HOLLYWOOD CASINO SHREVEPORT AND SUBSIDIARY
A Development Stage General partnership
Notes to Consolidated Financial Statements
(Unaudited)
(1) Organization, Business and Basis of Presentation
Hollywood Casino Shreveport ("HCS") is currently a development stage general
partnership registered in the state of Louisiana. The original partnership
agreement was amended on September 22, 1998 to include as partners in what is
now referred to as HCS the following companies: HWCC - Louisiana, Inc. ("HCL"),
a Louisiana corporation wholly owned by Hollywood Casino Corporation ("HCC");
Sodak Louisiana, L.L.C. ("Sodak"), a Louisiana limited liability company; and
Shreveport Paddlewheels, L.L.C. ("Paddlewheels"), a Louisiana limited liability
company. The general partnership was originally formed in May 1992 for the
purpose of developing and operating a riverboat casino in New Orleans,
Louisiana. Originally named Queen of New Orleans at the Hilton Joint Venture
("QNOV"), the partnership was 50%-owned by Hilton New Orleans Corporation
("Hilton") and 50%-owned by New Orleans Paddlewheels, Inc. ("NOP"). Hilton and
NOP are collectively referred to herein as the "former partners." QNOV's
operations in New Orleans commenced in February 1994 and were discontinued in
October 1997.
During October 1996, QNOV received approval from state gaming authorities to
relocate its license to operate to the City of Shreveport, Louisiana,
approximately 180 miles east of Dallas, Texas. Subsequent to receiving approval
to relocate, QNOV made the decision in 1997 not to conduct gaming operations in
Shreveport. The former partners sought to transfer the license to operate in
Shreveport to another interested party. Under Louisiana gaming regulations, the
license to operate a riverboat gaming operation is not transferable; however,
the ownership of an entity licensed to operate is transferable, subject to the
approval of the Louisiana Gaming Control Board (the "LGCB"). Accordingly, the
transfer of the license to operate in Shreveport was structured as the
acquisition of the interests of the former partners in QNOV. The former partners
disposed of QNOV's assets other than its license to operate and satisfied all
but one of its obligations so that when the former partners withdrew on
September 22, 1998, QNOV's only asset was its license to operate in Shreveport
(which had no recorded value) and its only liability was a $5,000,000 obligation
to the City of New Orleans. The $5,000,000 obligation was paid by HCS in August
1999 upon the issuance of $150,000,000 of 13% First Mortgage Notes with
contingent interest due 2006 (the "First Mortgage Notes") (see Note 3).
Upon admission of the new partners, HCS proceeded with entirely new plans to
develop, own and operate a new riverboat casino in Shreveport (the "Shreveport
Casino"). The accompanying financial statements reflect the operations and cash
flows of HCS for the period from September 22, 1998 through June 30, 2000 as a
development stage entity. HCS currently has no operating activities other than
its development, financing and construction activities with respect to the
Shreveport Casino. As currently planned, the Shreveport Casino will consist of a
three-level riverboat casino with approximately 1,409 slot machines and 68 table
games; a 405-room, all suite, art deco style hotel; and approximately 42,000
square feet of restaurant and entertainment facilities.
Riverboat gaming operations in Louisiana are subject to regulatory control
by the LGCB. HCS's current license to operate the Shreveport Casino expires on
October 15, 2004.
It was originally anticipated that HCS would develop the Shreveport Casino
with each of HCL and Sodak having a 50% interest in the development and
subsequent operations. Paddlewheels was to have a residual interest after the
commencement of operations and in the event that the project was ever sold
amounting to 10% plus any capital contributions made by Paddlewheels to HCS. On
March 31, 1999, HCL entered into a definitive agreement with Sodak's parent to
acquire Sodak for the $2,500,000 Sodak had contributed to HCS, with $1,000 to be
paid at closing and the remainder to be paid six months after the
7
<PAGE>
HOLLYWOOD CASINO SHREVEPORT AND SUBSIDIARY
A Development Stage General partnership
Notes to Consolidated Financial Statements
(Unaudited)
opening of the Shreveport Casino. Because the remaining obligation to Sodak was
contingent at December 31, 1999, the accompanying consolidated balance sheet of
HCS at that date includes an adjustment in the amount of $2,499,000 to reduce
the recorded value of construction in progress and partners' capital to reflect
the difference between the amount paid by HCL to acquire Sodak's partnership
interest and the previously recorded investment by Sodak in HCS. When the
additional $2,499,000 obligation with respect to the acquisition price to Sodak
was recorded by HCL in June 2000, the adjustment to the recorded value of
construction in progress was reversed and an additional capital contribution was
recorded (see Note 7). The revised structure of the partnership was approved by
the LGCB on April 20, 1999. As a result of the acquisition, HCL obtained an
effective 100% ownership interest in HCS with Paddlewheels retaining their
residual interest. During July 1999, Sodak was merged into HCL.
Also during July 1999, HCL formed two new, wholly owned subsidiaries, HCS I,
Inc. and HCS II, Inc., both Louisiana corporations. HCL contributed $1,000 of
capital to each entity, along with 99% of its interest in HCS to HCS I, Inc. and
the remaining 1% to HCS II, Inc. In addition, the HCS joint venture agreement
was amended and restated on July 21, 1999, to reflect, among other things, the
admission of HCS I, Inc. and HCS II, Inc. as partners of HCS and the withdrawal
of HCL as managing partner of HCS. As a result, HCS I, Inc. now has an effective
99% interest in HCS and has become its managing general partner. HCS II, Inc.
now has an effective 1% interest in HCS. Paddlewheels retained its 10% residual
interest in HCS. The revised partnership structure was approved by the LGCB on
July 20, 1999. HCL contributed an additional $300,000 to HCS through HCS I, Inc.
and HCS II, Inc. in July 1999. Once HCS secured financing for the Shreveport
Casino (see Note 3), HCL contributed an additional $43,700,000 to HCS through
HCS I, Inc. and HCS II, Inc. HCL also loaned $1,000,000 to Paddlewheels which
Paddlewheels contributed to HCS. Capital contributions from HCC, HCL's parent,
were used by HCL to make the capital contributions to its subsidiaries and the
loan to Paddlewheels.
Additionally, in July 1999, HCS formed a new, wholly owned subsidiary,
Shreveport Capital Corporation ("Shreveport Capital"), a Louisiana corporation.
HCS contributed $1,000 of capital to Shreveport Capital. Shreveport Capital was
formed for the sole purpose of being a co-issuer with respect to the First
Mortgage Notes and is not expected to have any operating activities, acquire any
assets or incur any other liabilities. Accordingly, separate financial
statements of Shreveport Capital are not included herein because management has
determined that such information is not material to investors.
The total estimated cost of the Shreveport Casino is $230,000,000. Equity
contributions from HCL and Paddlewheels provided $50,000,000 of the funds
necessary. During August 1999, HCS successfully issued the First Mortgage Notes
(see Note 3); $30,000,000 of furniture, fixture and equipment financing provides
the remaining funding for the project (see Note 4). On April 23, 2000, the
construction site for the Shreveport Casino suffered tornado damage estimated to
be less than $3,000,000. Management believes that HCS's insurance policies will
cover these losses. In addition, management of HCS will seek to recover lost
profits under its business interruption insurance coverage for any delays in
opening attributable to the tornado. The Shreveport Casino is currently
scheduled to open in December 2000.
The accompanying financial statements are consolidated to include Sodak as a
wholly owned subsidiary of HCL for the period from April 23, 1999 until its
merger on July 9, 1999. The accompanying financial statements for periods
subsequent to July 1999 are consolidated to include HCS's wholly owned
subsidiary, Shreveport Capital. All intercompany transactions and balances have
been eliminated in consolidation.
8
<PAGE>
HOLLYWOOD CASINO SHREVEPORT AND SUBSIDIARY
A Development Stage General partnership
Notes to Consolidated Financial Statements
(Unaudited)
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.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin 101, "Revenue Recognition in Financial Statements," which
summarizes the application of generally accepted accounting principles to
revenue recognition in financial statements and which is effective for fiscal
year 2000 financial statements. HCS does not believe the adoption of Staff
Accounting Bulletin 101 will have a significant impact on its consolidated
financial position or results of operations.
In June 1998, the Financial Accounting Standards Board issued a new
statement, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"), which has been amended to be effective for fiscal years beginning after
June 15, 2000. SFAS 133 requires, among other things, that derivatives be
recorded on the balance sheet at fair value. Changes in the fair value of
derivatives may, depending on circumstances, be recognized in earnings or
deferred as a component of partners' capital until a hedged transaction occurs.
HCS does not believe the adoption of SFAS 133 will have a significant impact on
its financial position or results of operations.
The consolidated financial statements as of June 30, 2000, for the three and
six month periods ended June 30, 2000 and 1999 and for the period from September
22, 1998 through June 30, 2000 have been prepared by HCS without audit, pursuant
to the rules and regulations of the Securities and Exchange Commission. 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 HCS as of June 30, 2000,
the results of its operations for the three and six month periods ended June 30,
2000 and 1999, its cash flows for the six month periods ended June 30, 2000 and
1999 and the results of its operations and cash flows for the period from
September 22, 1998 through June 30, 2000.
(2) Cash Restricted for Construction Project
Cash restricted for construction project consists of investments in
government securities which are to be used for specified purposes and which were
purchased with net proceeds from the First Mortgage Notes (see Note 3) as
required by the indenture for the First Mortgage Notes. Such restricted cash
includes (1) funds to be used for construction which are subject to meeting
certain conditions prior to their disbursement, (2) funds to be used to make the
first three semiannual interest payments with respect to the First Mortgage
Notes and (3) funds to be used to complete and open the Shreveport Casino in the
event the construction funds in (1) above are not sufficient. Interest earned,
but not yet received, on such investments is included in interest receivable on
the accompanying consolidated balance sheets. Upon receipt, interest is included
in cash restricted for construction project.
9
<PAGE>
HOLLYWOOD CASINO SHREVEPORT AND SUBSIDIARY
A Development Stage General partnership
Notes to Consolidated Financial Statements
(Unaudited)
Cash restricted for construction project is comprised of the following:
June 30, December 31,
2000 1999
------------ ------------
Construction reserve $ 77,394,000 $114,964,000
Interest reserve 18,761,000 27,275,000
Completion reserve 5,123,000 5,071,000
------------ ------------
$101,278,000 $147,310,000
============ ============
(3) Long-term Debt
Long-term debt at June 30, 2000 and December 31, 1999 consists of the
following:
June 30, December 31,
2000 1999
------------ ------------
13% First Mortgage Notes, with contingent
interest, due 2006(a) $150,000,000 $150,000,000
Note payable, net of discount of $151,000
and $241,000, respectively (b) 1,849,000 1,759,000
------------ ------------
Total indebtedness 151,849,000 151,759,000
Less-current maturities (1,400,000) (400,000)
------------ ------------
Total long-term debt $150,449,000 $151,359,000
============ ============
____________________
(a) In August 1999, HCS and Shreveport Capital Corporation issued the First
Mortgage Notes. Fixed interest on the First Mortgage Notes at the annual
rate of 13% is payable on each February 1 and August 1, beginning February
1, 2000. In addition, contingent interest will accrue and be payable on each
interest date after the Shreveport Casino begins operations. The amount of
contingent interest will be equal to 5% of the consolidated cash flow of HCS
for the applicable period subject to a maximum contingent interest of
$5,000,000 for any four consecutive fiscal quarters.
The First Mortgage Notes are secured by, among other things, (1) a first
priority security interest in the net proceeds from the issue of the First
Mortgage Notes; (2) a first priority security interest in substantially all
of the assets that will comprise the Shreveport Casino other than up to
$35,000,000 in assets secured by equipment financing; (3) a collateral
assignment of the Shreveport Casino's interest in the principal agreements
under which it will be constructed, operated and managed and (4) a
collateral assignment of certain licenses and permits with respect to the
construction, operation and management of the Shreveport Casino. In
addition, the First Mortgage Notes are guaranteed on a senior secured basis
by HCL, HCS I, Inc. and HCS II, Inc. (collectively, the "Guarantors"). Such
guarantees are secured by a first priority secured interest in substantially
all of the Guarantors' assets,
10
<PAGE>
HOLLYWOOD CASINO SHREVEPORT AND SUBSIDIARY
A Development Stage General partnership
Notes to Consolidated Financial Statements
(Unaudited)
including a pledge of the capital stock of HCS I, Inc. and HCS II, Inc. and
their partnership interests in HCS. The security interest does not include
$2,499,000 held by HCL to fund its acquisition of Sodak (see Note 1).
The First Mortgage Notes may be redeemed at any time on or after August 1,
2003 at 106.5% of the then outstanding principal amount, decreasing to
103.25% and 100% on August 1, 2004 and 2005, respectively. HCS may also
redeem up to 35% of the First Mortgage Notes at a redemption price of 113%
plus accrued interest at any time prior to August 1, 2002 with the net cash
proceeds of an equity offering by HCC resulting in at least $20,000,000, but
only to the extent that such proceeds are contributed by HCC as equity to
HCS.
The indenture to the First Mortgage Notes contains various provisions
limiting the ability of HCS to borrow money, pay distributions on its equity
interests or prepay debt, make investments, create liens, sell its assets or
enter into mergers or consolidations. In addition, the indenture restricts
the ability of the Guarantors and Shreveport Capital Corporation to acquire
additional assets, become liable for additional obligations or engage in any
significant business activities.
(b) The partners of HCS agreed that HCS would contingently reimburse Hilton for
$2,000,000 it paid in connection with the relocation of the license to
Shreveport (see Note 1); such repayment is to be made upon the earlier of
the termination of construction of the Shreveport Casino or in monthly
installments of $200,000, without interest, commencing with the opening of
the Shreveport Casino. The $2,000,000 liability, net of a discount in the
original amount of $308,000, and the related adjustment to the recorded
value of project costs were recorded upon the issuance of the First Mortgage
Notes in August 1999.
Scheduled payments of long-term debt as of June 30, 2000 are set forth
below:
2000 (six months) $ 200,000
2001 1,800,000
2002 -
2003 -
2004 -
Thereafter 150,000,000
-----------
$152,000,000
============
(4) Leases
Capital Lease -
HCS entered into a lease agreement with third party lessors for up to
$30,000,000 to be used to acquire furniture, fixtures and equipment for the
Shreveport Casino. Borrowings under the lease agreement must be in amounts of
at least $1,000,000 and accrue interest at the rate of LIBOR plus 4%. No more
than two advances may be requested monthly and no more than ten advances may be
requested during the construction period. During the construction period, HCS
only pays interest on outstanding borrowings as well as a fee of .5% per annum
on the undrawn portion of the $30,000,000. When the Shreveport Casino opens,
the outstanding borrowings will become payable in equal quarterly installments
plus interest over a three year period to fully amortize the obligation. The
lease is treated as a capital lease for financial reporting purposes.
11
<PAGE>
HOLLYWOOD CASINO SHREVEPORT AND SUBSIDIARY
A Development Stage General partnership
Notes to Consolidated Financial Statements
(Unaudited)
Borrowings under the lease are collateralized by the furniture, fixture and
equipment purchased. The lease agreement contains certain covenants
substantially similar to those included in the indenture for the First Mortgage
Notes (see Note 3). As of June 30, 2000, borrowings outstanding under the lease
agreement amounted to $4,137,000.
Based on the borrowings outstanding at June 30, 2000, the future minimum
lease payments under capital lease obligations are as follows:
2000 (six months) $ 186,000
2001 1,769,000
2002 1,620,000
2003 1,472,000
----------
Total minimum lease payments 5,047,000
Less - amount representing interest (910,000)
----------
Present value of future minimum lease payments 4,137,000
Current capital lease obligation (690,000)
----------
Long-term capital lease obligation $3,447,000
==========
Ground Lease -
In May 1999, HCS entered into a ground lease with the City of Shreveport for
the land on which the Shreveport Casino will be built. The term of the lease
began when construction commenced and will end on the tenth anniversary of the
date the Shreveport Casino opens. HSC has options to renew the lease on the same
terms for up to an additional forty years. The lease may be further renewed
after that time at prevailing rates and terms for similar leases. The City of
Shreveport may terminate the lease as a result of, among other things, a default
by HCS under the lease or the failure to substantially complete construction
within the time period established by the LGCB. HCS may terminate the lease at
any time if the operation of the Shreveport Casino becomes uneconomic. Base
rental payments under the lease are $10,000 per month during the construction
period increasing 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 renewal term, the base annual rental will be $402,500. Subsequent
renewal period base rental payments will increase by 15% during each of the next
four five-year renewal terms with no further increases. In addition to the base
rent, HCS will pay monthly percentage rent of not less than $500,000 per year
equal to 1% of monthly adjusted gross revenues and the amount, if any, by which
monthly parking facilities net income exceeds the parking income credit, as all
such terms are defined in the lease agreement. Payments under the ground lease
amounted to $30,000 and $60,000, respectively, for the three and six month
periods ended June 30, 2000 and $116,000 for the period from September 22, 1998
through June 30, 2000. All costs incurred under the ground lease are included in
construction in progress on the accompanying consolidated balance sheets.
(5) Transactions with Affiliates
The operations of the Shreveport Casino will be managed by HWCC -Shreveport,
Inc., a wholly owned subsidiary of HCC, under the terms of a management
agreement. The management agreement became
12
<PAGE>
HOLLYWOOD CASINO SHREVEPORT AND SUBSIDIARY
A Development Stage General Partnership
Notes to Consolidated Financial Statements
(Unaudited)
effective when the LGCB approved the development of the Shreveport Casino and
will remain in effect as long as HCS holds its license, unless sooner terminated
in accordance with its terms. Under the terms of the management agreement, HCS
will pay HWCC-Shreveport basic and incentive management fees for its services.
The basic fee will be equal to 2% of gross revenues, as defined in the
agreement, from the operations of the Shreveport Casino. The incentive fee will
be equal to the sum of (1) 5% of earnings before interest, taxes, depreciation
and amortization ("EBITDA"), as defined in the agreement, in excess of
$25,000,000 and up to $35,000,000; (2) 7% of EBITDA in excess of $35,000,000 and
up to $40,000,000; and (3) 10% of EBITDA over $40,000,000. In addition, HCS will
reimburse HWCC-Shreveport for expenses incurred in connection with services
provided under the management agreement.
HCS has also entered into a Technical Services Agreement with HWCC-
Shreveport to provide certain construction and project supervision services
prior to the opening of the Shreveport Casino. HCS reimburses HWCC-Shreveport
for expenses incurred in connection with services provided under the Technical
Services Agreement. Such costs amounted to $214,000 and $386,000, respectively,
for the three and six month periods ended June 30, 2000 and $677,000 for the
period from September 22, 1998 through June 30, 2000. No such costs were
incurred during either of the three or six month periods ended June 30, 1999.
Amounts payable under the agreement amounting to $75,000 and $56,000 are
included in due to affiliates on the accompanying consolidated balance sheets at
June 30, 2000 and December 31, 1999, respectively.
HCS has also entered into a Marine Services Agreement with Paddlewheels to
provide certain marine services for so long as Paddlewheels remains a joint
venture partner in HCS. The Marine Services Agreement became effective on
September 22, 1998 and, in addition to the reimbursement of Paddlewheels for its
direct expenses incurred, if any, HCS will pay a monthly fee of $30,000
effective with the opening of the Shreveport Casino. No payments have been made
under the agreement through June 30, 2000.
(6) Commitments and Contingencies
For so long as it remains a joint venture partner in HCS, Paddlewheels will
receive, among other things, an amount equal to 1% of "complex net revenues", as
defined, of the Shreveport Casino, which approximates net revenues, in exchange
for the assignment by Paddlewheels and its affiliates of their joint venture
interest in HCS to HCL and Sodak.
HCC has entered into a completion capital agreement providing for the
contribution of up to an additional $5,000,000 in cash if at any time there are
insufficient funds available to enable the Shreveport Casino to be operating by
April 30, 2001. In addition, if the Shreveport Casino is not operating by April
30, 2001, HCC will contribute to HCS through HCL, HCS I, Inc. and HCS II, Inc.
on that date $5,000,000 in additional equity less any amounts previously
contributed under the completion capital agreement.
Third parties could assert obligations against HCS for liabilities that have
arisen or that might arise against QNOV or the former partners with respect to
any period prior to September 22, 1998. Management believes in the event such a
claim arises, it would be adequately covered under either existing
indemnification agreements with the former partners or insurance policies
maintained by QNOV or the former partners.
13
<PAGE>
HOLLYWOOD CASINO SHREVEPORT AND SUBSIDIARY
A Development Stage General Partnership
Notes to Consolidated Financial Statements
(Unaudited)
(7) Supplemental Cash Flow Information
HCS paid interest totaling $9,288,000 during both the six month period ended
June 30, 2000 and during the period from September 22, 1998 through June 30,
2000. HCS paid no interest during the six month period ended June 30, 1999. HCS
paid no income taxes during either of the six month periods ended June 30, 2000
or 1999 or during the period from September 22, 1998 through June 30, 2000.
During June 2000, HCS obtained proceeds under capital lease obligations
amounting to $4,137,000 used to purchase fixed assets during the construction
period (Note 4).
During June 2000, HCS I, Inc. and HCS II, Inc. made a non-cash capital
contribution in the amount of $2,499,000 to HCS consisting of project costs
incurred by Sodak which were acquired by HCL and contributed to HCS I, Inc. and
HCS II, Inc.
The issuance of a note to Hilton by HCS at a discounted face amount of
$1,692,000 (see Note 3(b)) and the associated project costs have been excluded
from the accompanying consolidated statement of cash flows for the period from
September 22, 1998 through June 30, 2000 as a non-cash transaction.
14
<PAGE>
INDEPENDENT ACCOUNTANTS' REPORT
To HWCC-Louisiana, Inc.:
We have reviewed the accompanying condensed consolidated balance sheet of HWCC-
Louisiana, Inc. and subsidiaries as of June 30, 2000, and the related condensed
consolidated statements of operations for the three and six month periods ended
June 30, 2000 and 1999 and their cash flows for the six month periods ended June
30, 2000 and 1999. These financial statements are the responsibility of the
Company's management.
We conducted our review 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 review, 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-Louisiana, Inc. and subsidiaries as of December 31, 1999, 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 May 11,
2000, 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, 1999 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
August 4, 2000
15
<PAGE>
HWCC-LOUISIANA, INC. AND SUBSIDIARIES
(wholly owned by Hollywood Casino Corporation)
CONSOLIDATED BALANCE SHEETS (NOTE 1)
June 30,
2000 December 31,
(Unaudited) 1999
------------ ------------
Assets
Current Assets:
Cash and cash equivalents $ 5,095,000 $ 21,580,000
Interest receivable 767,000 1,432,000
Prepaid expenses and other current assets 928,000 649,000
------------ ------------
Total current assets 6,790,000 23,661,000
------------ ------------
Property and Equipment:
Furniture and equipment 63,000 24,000
Construction in progress 114,306,000 42,571,000
------------ ------------
114,369,000 42,595,000
Less - accumulated depreciation (8,000) (2,000)
------------ ------------
114,361,000 42,593,000
------------ ------------
Cash Restricted for Construction Project 101,278,000 147,310,000
------------ ------------
Other Assets:
Note receivable, net of discount 973,000 936,000
Deferred financing costs, net 6,383,000 4,928,000
------------ ------------
Total other assets 7,356,000 5,864,000
------------ ------------
$229,785,000 $219,428,000
============ ============
Liabilities and Shareholder's Equity
Current Liabilities:
Current maturities of long-term debt
and capital lease obligations $ 2,090,000 $ 400,000
Payable to Sodak Gaming, Inc. 2,499,000 -
Bank overdraft 1,077,000 -
Accounts payable 17,725,000 11,663,000
Interest payable 8,277,000 7,637,000
Other accrued liabilities 147,000 35,000
Due to affiliates 349,000 334,000
------------ ------------
Total current liabilities 32,164,000 20,069,000
------------ ------------
Long-term Debt 150,449,000 151,359,000
------------ ------------
Capital Lease Obligations 3,447,000 -
------------ ------------
Commitments and Contingencies (Note 8)
Minority Interest 2,000,000 2,000,000
------------ ------------
Shareholder's Equity:
Common stock, $1 par value per share,
1,000,000 shares authorized, 1,000 shares
issued and outstanding 1,000 1,000
Additional paid-in capital 51,400,000 51,400,000
Accumulated deficit (9,676,000) (5,401,000)
------------ ------------
Total shareholder's equity 41,725,000 46,000,000
------------ ------------
$229,785,000 $219,428,000
============ ============
The accompanying introductory notes and footnotes to financial statements are an
integral part of these consolidated balance sheets.
16
<PAGE>
HWCC-LOUISIANA, INC. AND SUBSIDIARIES
(wholly owned by Hollywood Casino Corporation)
CONSOLIDATED STATEMENTS OF OPERATIONS (NOTE 1)
(Unaudited)
Three Months Ended June 30,
---------------------------
2000 1999
-------- --------
Development and preopening expenses:
Travel $ (81,000) $(13,000)
Consulting and other professional services (94,000) (15,000)
Salaries and related costs (415,000) -
License fees (36,000) -
Public relations (161,000) -
Other, net of reimbursements (225,000) (6,000)
----------- --------
Total development and preopening expenses (1,012,000) (34,000)
General and administrative expenses (74,000) (4,000)
Depreciation (3,000) -
----------- --------
Loss from operations (1,089,000) (38,000)
Interest expense, net of capitalized interest
of $2,418,000 in 2000 (2,830,000) -
Interest income 1,780,000 15,000
----------- --------
Loss before taxes (2,139,000) (23,000)
Income tax benefit - -
----------- --------
Net loss $(2,139,000) $(23,000)
=========== ========
The accompanying introductory notes and footnotes to consolidated financial
statements are an integral part of these consolidated financial statements.
17
<PAGE>
HWCC-LOUISIANA, INC. AND SUBSIDIARIES
(wholly owned by Hollywood Casino Corporation)
CONSOLIDATED STATEMENTS OF OPERATIONS (NOTE 1)
(Unaudited)
Six Months Ended June 30,
----------------------------
2000 1999
-------- --------
Development and preopening expenses:
Travel $ (115,000) $(20,000)
Consulting and other professional services (156,000) (63,000)
Salaries and related costs (677,000) -
License fees (69,000) -
Public relations (222,000) -
Other, net of reimbursements (169,000) (11,000)
----------- --------
Total development and preopening expenses (1,408,000) (94,000)
General and administrative expenses (146,000) (4,000)
Depreciation (6,000) -
----------- --------
Loss from operations (1,560,000) (98,000)
Interest expense, net of capitalized interest
of $3,818,000 in 2000 (6,631,000) -
Interest income 3,916,000 45,000
----------- --------
Loss before taxes and other items (4,275,000) (53,000)
Income tax benefit - -
----------- --------
Loss before other items (4,275,000) (53,000)
Preacquisition losses (Note 1) - 12,000
----------- --------
Net loss $(4,275,000) $(41,000)
=========== ========
The accompanying introductory notes and footnotes to consolidated financial
statements are an integral part of these consolidated financial statements.
18
<PAGE>
HWCC-LOUISIANA, INC. AND SUBSIDIARIES
(wholly owned by Hollywood Casino Corporation)
CONSOLIDATED STATEMENTS OF CASH FLOWS (NOTE 1)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30,
--------------------------
2000 1999
------------ -----------
<S> <C> <C>
Operating Activities:
Net loss $ (4,275,000) $ (41,000)
Adjustments to reconcile net loss to cash provided by
(used in) operating activities:
Depreciation and amortization, including
accretion of discount 453,000 -
Preacquisition losses - 12,000
Decrease in receivables 665,000 -
Increase in other current assets (279,000) -
Increase (decrease) in due to affiliate 15,000 (1,212,000)
Increase in accounts payable
and accrued liabilities 6,814,000 78,000
------------ -----------
Cash provided by (used in) operating activities 3,393,000 (1,163,000)
------------ -----------
Investing Activities:
Increase in cash from acquisition (Notes 1 and 9) - 1,524,000
Decrease in cash restricted for construction project 46,032,000 -
Purchase of property and equipment (65,138,000) (1,301,000)
------------ -----------
Cash (used in) provided by investing activities (19,106,000) 223,000
------------ -----------
Financing Activities:
Capital contributions - 1,400,000
Bank overdraft 1,077,000 -
Deferred financing costs (1,849,000) -
------------ -----------
Cash (used in) provided by financing activities (772,000) 1,400,000
------------ -----------
Net (decrease) increase in cash and cash equivalents (16,485,000) 460,000
Cash and cash equivalents at beginning of period 21,580,000 68,000
------------ -----------
Cash and cash equivalents at end of period $ 5,095,000 $ 528,000
============ ===========
</TABLE>
The accompanying introductory notes and footnotes to consolidated financial
statements are an integral part of these consolidated financial statements.
19
<PAGE>
HWCC-LOUISIANA, INC. AND SUBSIDIARIES
(wholly owned by Hollywood Casino Corporation)
Notes to Consolidated Financial Statements
(Unaudited)
(1) Organization, Business and Basis of Presentation
HWCC - Louisiana, Inc. ("HCL") is a Louisiana corporation and wholly owned
subsidiary of Hollywood Casino Corporation ("HCC"). HCL was formed in April 1993
for the purpose of obtaining a license to develop and own a riverboat casino in
Louisiana. HCL's initial efforts to obtain sites in Lake Charles and Bossier
City, Louisiana proved unsuccessful. In September 1998, HCL, Sodak Louisiana,
L.L.C. ("Sodak") and Shreveport Paddlewheels, L.L.C. ("Paddlewheels") acquired
the interests of Queen of New Orleans at the Hilton Joint Venture ("QNOV"). QNOV
was a general partnership which owned and operated a riverboat gaming facility
in New Orleans, Louisiana. QNOV ceased operating the riverboat casino in October
1997 having requested and obtained approval from the Louisiana Gaming Control
Board (the "LGCB") to move their licensed site to the city of Shreveport,
approximately 180 miles east of Dallas, Texas. Subsequent to receiving approval
to relocate the license, QNOV made the decision not to conduct gaming operations
in Shreveport. The partners of QNOV sought to transfer the license to operate in
Shreveport to another interested party. Under Louisiana gaming regulations, the
license to operate a riverboat gaming operation is not transferable; however,
the ownership of an entity licensed to operate is transferable, subject to the
approval of the LGCB. Accordingly, the acquisition by HCL, Sodak and
Paddlewheels of the license to operate in Shreveport was structured as an
acquisition of the interests of QNOV's partners. The former partners disposed of
QNOV's assets other than its license to operate and satisfied all but one of its
obligations so that when the former partners withdrew on September 22, 1998
transferring their interests to HCL, Sodak and Paddlewheels, QNOV's only asset
was its license to operate in Shreveport (which had no recorded value) and its
only liability was a $5,000,000 obligation to the City of New Orleans (see
below). HCL, Sodak and Paddlewheels obtained the necessary approvals from the
LGCB to proceed with the project in Shreveport. In June 1999, HCL obtained
approval to change the name of the partnership to Hollywood Casino Shreveport
("HCS").
When the former partners of QNOV proposed moving to Shreveport, they
negotiated a settlement with the City of New Orleans to pay $10,000,000 with
respect to claims asserted by the City in connection with the relocation.
During September 1998, HCS, the former partners of QNOV and the City of New
Orleans entered into a Compromise Agreement under which one of QNOV's former
partners agreed to pay $5,000,000 to the City and QNOV was released from any
further relocation claims. The remaining $5,000,000 obligation continued to be
reflected as a liability by HCS until it was paid in August 1999 upon the
issuance of the $150,000,000 of 13% First Mortgage Notes with contingent
interest due 2006 (the "First Mortgage Notes") (see Note 4). HCL has treated
this $5,000,000 as part of the cost of acquiring their interest in HCS and has
included the cost as an adjustment to construction in progress on the
accompanying consolidated balance sheets at June 30, 2000 and December 31, 1999.
For the period from September 22, 1998 until April 23, 1999, HCL's
investment in HCS was accounted for under the equity method of accounting. It
was originally anticipated that HCS would develop its planned Shreveport resort
(the "Shreveport Casino") with each of HCL and Sodak having a 50% interest in
the development and subsequent operations. Paddlewheels was to have a residual
interest after the commencement of operations and in the event that the project
was ever sold amounting to 10% plus any capital contributions made by
Paddlewheels to HCS or otherwise credited to their account (see Note 8). On
March 31, 1999, HCL entered into a definitive agreement with Sodak's parent to
acquire Sodak for the $2,500,000 Sodak had contributed to HCS, with $1,000 to be
paid at closing and the remainder to be paid six months after the opening of the
Shreveport Casino (see Note 2). The revised structure of the partnership
20
<PAGE>
HWCC-LOUISIANA, INC. AND SUBSIDIARIES
(wholly owned by Hollywood Casino Corporation)
Notes to Consolidated Financial Statements
(Unaudited)
was approved by the LGCB on April 20, 1999. As a result, HCL obtained an
effective 100% ownership interest in HCS with Paddlewheels retaining their 10%
residual interest. The acquisition was accounted for under the purchase method
of accounting. Accordingly, effective as of the April 23, 1999 closing of HCL's
acquisition of Sodak, Sodak became a consolidated subsidiary of HCL.
In July 1999, HCL formed two new, wholly owned subsidiaries, HCS I, Inc.
and HCS II, Inc., both Louisiana corporations. HCL contributed $1,000 of
capital to each entity along with 99% of its interest in HCS to HCS I, Inc. and
the remaining 1% of its interest to HCS II, Inc. In addition, the HCS joint
venture agreement was amended and restated on July 21, 1999, to reflect, among
other things, the admission of HCS I, Inc. and HCS II, Inc. as partners of HCS
and the withdrawal of HCL as managing partner of HCS. As a result, HCS I, Inc.
now has an effective 99% interest in HCS, and has become its managing general
partner. HCS II, Inc. now has an effective 1% interest in HCS. HCS I, Inc. and
HCS II, Inc. currently have no other operating activities or assets other than
their ownership interests in HCS. Paddlewheels retained its 10% residual
interest in HCS. The revised partnership structure was approved by the LGCB on
July 20, 1999.
Additionally, in July 1999, HCS formed a new, wholly owned subsidiary,
Shreveport Capital Corporation ("Shreveport Capital"), a Louisiana corporation.
HCS contributed $1,000 of capital to Shreveport Capital. Shreveport Capital was
formed for the sole purpose of being a co-issuer with respect to the First
Mortgage Notes and is not expected to have any operating activities, acquire any
assets or incur any other liabilities. Accordingly, separate financial
statements of Shreveport Capital are not included herein because management has
determined that such information is not material to investors.
As currently planned, the Shreveport Casino will consist of a three-level
riverboat casino with approximately 1,409 slot machines and 68 table games; a
405-room, all suite, art deco style hotel; and approximately 42,000 square feet
of restaurant and entertainment facilities. The total estimated cost of the
Shreveport Casino is $230,000,000. Equity contributions from HCC provided
$50,000,000 of the funds necessary. During August 1999, HCS successfully issued
the First Mortgage Notes (see Note 4); $30,000,000 of furniture, fixture and
equipment financing provides the remaining funding for the project (see Note 5).
On April 23, 2000, the construction site for the Shreveport Casino suffered
tornado damage estimated to be less than $3,000,000. Management believes that
HCS's insurance policies will cover these losses. In addition, management of
HCS will seek to recover lost profits under its business interruption insurance
coverage for any delays in opening attributable to the tornado. The Shreveport
Casino is currently scheduled to open in December 2000.
Riverboat gaming operations in Louisiana are subject to regulatory control
by the LGCB. HCS's current license to operate the Shreveport Casino expires on
October 15, 2004.
The accompanying consolidated financial statements reflect (1) the April
23, 1999 acquisition of Sodak and the resulting consolidation of Sodak and HCS
with HCL and (2) the formation of HCS I, Inc., HCS II, Inc. and Shreveport
Capital. The accompanying consolidated statements of operations for the three
and six month periods ended June 30, 1999 reflect the operations of HCL on a
consolidated basis, including Sodak and HCS, for the period from January 1, 1999
with the pre-acquisition losses of Sodak from its investment in HCS reflected as
a nonoperating item. Sodak had no other operations during the period presented.
All intercompany balances and transactions have been eliminated in
consolidation.
21
<PAGE>
HWCC-LOUISIANA, INC. AND SUBSIDIARIES
(wholly owned by Hollywood Casino Corporation)
Notes to Consolidated Financial Statements
(Unaudited)
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.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin 101, "Revenue Recognition in Financial Statements," which
summarizes the application of generally accepted accounting principles to
revenue recognition in financial statements and which is effective for fiscal
year 2000 financial statements. HCL does not believe the adoption of Staff
Accounting Bulletin 101 will have a significant impact on its consolidated
financial position or results of operations.
In June 1998, the Financial Accounting Standards Board issued a new
statement, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"), which has been amended to be effective for fiscal years beginning after
June 15, 2000. SFAS 133 requires, among other things, that derivatives be
recorded on the balance sheet at fair value. Changes in fair value of
derivatives may, depending on circumstances, be recognized in earnings or
deferred as a component of shareholder's equity until a hedged transaction
occurs. HCL does not believe the adoption of SFAS 133 will have a significant
impact on its consolidated financial position or results of operations.
The consolidated financial statements as of June 30, 2000 and for the
three and six month periods ended June 30, 2000 and 1999 have been prepared by
HCL without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission. 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
HCL as of June 30, 2000, the results of its operations for the three and six
month periods ended June 30, 2000 and 1999 and its cash flows for the six month
periods ended June 30, 2000 and 1999.
(2) Acquisition of Sodak Louisiana, L.L.C.
As discussed in Note 1, HCL acquired Sodak on April 23, 1999 for a cash
payment of $1,000 and contingent consideration of $2,499,000 to be paid six
months after the Shreveport Casino opens. At December 31, 1999, the $2,499,000
difference between Sodak's basis in the assets acquired and the $1,000 paid by
HCL is treated as an adjustment to reduce the recorded amount of project costs
to the amount paid with respect to such costs in accordance with Accounting
Principles Board Statement Number 16, "Business Combinations." Sodak had no
operating activities prior to the acquisition date other than equity from its
investment in HCS and its only asset was its investment in HCS. During the
second quarter of 2000, the contingent consideration was recorded by HCL and
project costs were increased to reflect this additional cost incurred by HCL
(see Note 9).
(3) Cash Restricted for Construction Project
Cash restricted for construction project consists of investments in
government securities which are to be used for specified purposes and which were
purchased with net proceeds from the First Mortgage Notes (see Note 4) as
required by the indenture for the First Mortgage Notes. Such restricted cash
includes (1)
22
<PAGE>
HWCC-LOUISIANA, INC. AND SUBSIDIARIES
(wholly owned by Hollywood Casino Corporation)
Notes to Consolidated Financial Statements
(Unaudited)
funds to be used for construction which are subject to meeting certain
conditions prior to their disbursement, (2) funds to be used to make the first
three semiannual interest payments with respect to the First Mortgage Notes and
(3) funds to be used to complete and open the Shreveport Casino in the event the
construction funds in (1) above are not sufficient. Interest earned, but not yet
received, on such investments is included in interest receivable on the
accompanying consolidated balance sheets. Upon receipt, interest is included in
cash restricted for construction project.
Cash restricted for construction project is comprised of the following:
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
------------ ------------
<S> <C> <C>
Construction reserve $ 77,394,000 $114,964,000
Interest reserve 18,761,000 27,275,000
Completion reserve 5,123,000 5,071,000
------------ ------------
$101,278,000 $147,310,000
============ ============
</TABLE>
(4) Long-term Debt
Long-term debt at June 30, 2000 and December 31, 1999 consists of the
following:
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
------------ ------------
<S> <C> <C>
13% First Mortgage Notes, with contingent $150,000,000 $150,000,000
interest, due 2006(a)
Note payable, net of discount of $151,000 1,849,000 1,759,000
and $241,000, respectively (b) ------------ ------------
Total indebtedness 151,849,000 151,759,000
(1,400,000) (400,000)
Less-current maturities ------------ ------------
Total long-term debt $150,449,000 $151,359,000
============ ============
</TABLE>
______________
(a) In August 1999, HCS and Shreveport Capital issued the First Mortgage Notes.
Fixed interest on the First Mortgage Notes at the annual rate of 13% is
payable on each February 1 and August 1, beginning February 1, 2000. In
addition, contingent interest will accrue and be payable on each interest
date after the Shreveport Casino begins operations. The amount of
contingent interest will be equal to 5% of the consolidated cash flow of
HCS for the applicable period subject to a maximum contingent interest of
$5,000,000 for any four consecutive fiscal quarters.
23
<PAGE>
HWCC - LOUISIANA, INC. AND SUBSIDIARIES
(wholly owned by Hollywood Casino Corporation)
Notes to Consolidated Financial Statements
(Unaudited)
The First Mortgage Notes are secured by, among other things, (1) a first
priority security interest in the net proceeds from the issue of the First
Mortgage Notes; (2) a first priority security interest in substantially all
of the assets that will comprise the Shreveport Casino other than up to
$35,000,000 in assets secured by equipment financing; (3) a collateral
assignment of the Shreveport Casino's interest in the principal agreements
under which it will be constructed, operated and managed and (4) a
collateral assignment of certain licenses and permits with respect to the
construction, operation and management of the Shreveport Casino. In
addition, the First Mortgage Notes are guaranteed on a senior secured basis
by HCL, HCS I, Inc. and HCS II, Inc. (collectively, the "Guarantors"). Such
guarantees are secured by a first priority secured interest in
substantially all of the Guarantors' assets, including a pledge of the
capital stock of HCS I, Inc. and HCS II, Inc. and their partnership
interests in HCS. The security interest does not include $2,499,000 held by
HCL to fund its acquisition of Sodak (see Note 2).
The First Mortgage Notes may be redeemed at any time on or after August 1,
2003 at 106.5% of the then outstanding principal amount, decreasing to
103.25% and 100% on August 1, 2004 and 2005, respectively. HCS may also
redeem up to 35% of the First Mortgage Notes at a redemption price of 113%
plus accrued interest at any time prior to August 1, 2002 with the net cash
proceeds of an equity offering by HCC resulting in at least $20,000,000,
but only to the extent that such proceeds are contributed by HCC as equity
to HCS.
The indenture to the First Mortgage Notes contains various provisions
limiting the ability of HCS to borrow money, pay distributions on its
equity interests or prepay debt, make investments, create liens, sell its
assets or enter into mergers or consolidations. In addition, the indenture
restricts the ability of the Guarantors and Shreveport Capital to acquire
additional assets, become liable for additional obligations or engage in
any significant business activities.
(b) The partners of HCS agreed that HCS would contingently reimburse one of
QNOV's former partners for $2,000,000 of the amount it paid to the City of
New Orleans under the Compromise Agreement (see Note 1); such repayment is
to be made upon the earlier of the termination of construction of the
Shreveport Casino or in monthly installments of $200,000, without interest,
commencing with the opening of the Shreveport Casino. The $2,000,000
liability, net of a discount in the original amount of $308,000, and the
related adjustment to the recorded value of project costs were recorded
upon the issuance of the First Mortgage Notes in August 1999.
Scheduled payments of long-term debt as of June 30, 2000 are set forth
below:
<TABLE>
<S> <C>
2000 (six months) $ 200,000
2001 1,800,000
2002 -
2003 -
2004 -
Thereafter 150,000,000
------------
$152,000,000
============
</TABLE>
24
<PAGE>
HWCC - LOUISIANA, INC. AND SUBSIDIARIES
(wholly owned by Hollywood Casino Corporation)
Notes to Consolidated Financial Statements
(Unaudited)
(5) Leases
Capital Lease -
HCS entered into a lease agreement with third party lessors for up to
$30,000,000 to be used to acquire furniture, fixtures and equipment for the
Shreveport Casino. Borrowings under the lease agreement must be in amounts of at
least $1,000,000 and will accrue interest at the rate of LIBOR plus 4%. No more
than two advances may be requested monthly and no more than ten advances may be
requested during the construction period. During the construction period, HCS
only pays interest on outstanding borrowings as well as a fee of .5% per annum
on the undrawn portion of the $30,000,000. When the Shreveport Casino opens, the
outstanding borrowings will become payable in equal quarterly installments plus
interest over a three year period to fully amortize the obligation. The lease is
treated as a capital lease for financial reporting purposes. Borrowings under
the lease are collateralized by the furniture, fixture and equipment purchased.
The lease agreement contains certain covenants substantially similar to those
included in the indenture for the First Mortgage Notes (see Note 4). As of June
30, 2000, borrowings outstanding under the lease agreement amounted to
$4,137,000.
Based on the borrowings outstanding at June 30, 2000, the future minimum
lease payments under capital lease obligations are as follows:
<TABLE>
<S> <C>
2000 (six months) $ 186,000
2001 1,769,000
2002 1,620,000
2003 1,472,000
----------
Total minimum lease payments 5,047,000
Less - amount representing interest (910,000)
----------
Present value of future minimum lease payments 4,137,000
Current capital lease obligation (690,000)
----------
Long-term capital lease obligation $3,447,000
==========
</TABLE>
Ground Lease -
In May 1999, HCS entered into a ground lease with the city of Shreveport
for the land on which the Shreveport Casino will be built. The term of the lease
began when construction commenced and will end on the tenth anniversary of the
date the Shreveport Casino opens. HSC has options to renew the lease on the same
terms for up to an additional forty years. The lease may be further renewed
after that time at prevailing rates and terms for similar leases. The City of
Shreveport may terminate the lease as a result of, among other things, a default
by HCS under the lease or the failure to substantially complete construction
within the time period established by the LGCB. HCS may terminate the lease at
any time if the operation of the Shreveport Casino becomes uneconomic. Base
rental payments under the lease are $10,000 per month during the
25
<PAGE>
HWCC - LOUISIANA, INC. AND SUBSIDIARIES
(wholly owned by Hollywood Casino Corporation)
Notes to Consolidated Financial Statements
(Unaudited)
construction period increasing 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 renewal term, the base annual rental will be $402,500.
Subsequent renewal period base rental payments will increase by 15% during each
of the next four five-year renewal terms with no further increases. In addition
to the base rent, HCS will pay monthly percentage rent of not less than $500,000
per year equal to 1% of monthly adjusted gross revenues and the amount, if any,
by which monthly parking facilities net income exceeds the parking income
credit, as all such terms are defined in the lease agreement. Payments under the
ground lease amounted to $30,000 and $60,000, respectively, for the three and
six month periods ended June 30, 2000. No payments were made during either the
three or six month periods ended June 30, 1999. Costs incurred under the ground
lease amounting to $166,000 and $56,000, respectively, are included in
construction in progress on the accompanying consolidated balance sheets at June
30, 2000 and December 31, 1999.
(6) Income Taxes
HCL's benefit for income taxes consists of the following:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- ---------------------
2000 1999 2000 1999
--------- -------- ----------- -------
<S> <C> <C> <C> <C>
Deferred benefit (provision):
Federal $ 713,000 $ 14,000 $ 1,341,000 $(1,000)
State 175,000 1,000 321,000 (4,000)
Change in valuation allowance (888,000) (15,000) (1,662,000) 5,000
--------- -------- ----------- -------
$ - $ _ $ - $ -
========= ======== =========== =======
</TABLE>
At June 30, 2000 and December 31, 1999, HCL had net operating loss
carryforwards ("NOL's") totaling approximately $6,600,000 and $4,000,000,
respectively, which do not begin to expire until 2012. Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes", requires that the
benefit of such NOL's 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
asset is more likely than not, a valuation allowance should be recorded. Based
on the losses incurred to date and the lack of any current operating income,
management has provided a valuation allowance for the entire deferred tax asset
for all periods presented.
26
<PAGE>
HWCC - LOUISIANA, INC. AND SUBSIDIARIES
(wholly owned by Hollywood Casino Corporation)
Notes to Consolidated Financial Statements
(Unaudited)
The components of HCL's net deferred tax asset are as follows:
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
----------- -----------
<S> <C> <C>
Deferred tax asset -
Net operating loss carryforward $ 2,695,000 $ 1,571,000
Preopening expenses 984,000 460,000
Write off of deferred project costs - 49,000
Other 75,000 12,000
----------- -----------
Net deferred tax asset 3,754,000 2,092,000
Valuation allowance (3,754,000) (2,092,000)
----------- -----------
$ - $ -
=========== ===========
</TABLE>
(7) Transactions with Affiliates
HCC and certain of its subsidiaries provide services to HCL and pay direct
costs on HCL's behalf. Services provided include personnel for project,
administrative and other purposes. HCL either expenses or capitalizes such costs
in accordance with its normal capitalization policies. No such costs were
incurred during the three or six month periods ended June 30, 2000; however,
charges to HCL for such services amounted to $64,000 and $170,000, respectively,
during the three and six month periods ended June 30, 1999. Amounts payable to
HCC and its subsidiaries for services and for the reimbursement to affiliates
for third party costs paid on HCL's behalf amounting to $64,000 are included in
due to affiliates on the accompanying consolidated balance sheet at December 31,
1999. No such amounts were outstanding at June 30, 2000.
The operations of the Shreveport Casino will be managed by HWCC -
Shreveport, Inc., a wholly owned subsidiary of HCC, under the terms of a
management agreement. The management agreement became effective when the LGCB
approved the development of the Shreveport Casino and will remain in effect for
so long as HCS holds its license, unless the management agreement is terminated
earlier in accordance with its terms. Under the terms of the management
agreement, HCS will pay HWCC-Shreveport basic and incentive management fees for
its services. The basic fee will be equal to 2% of gross revenues, as defined in
the agreement, from the operation of the Shreveport Casino. The incentive fee
will be equal to the sum of (1) 5% of earnings before interest, taxes,
depreciation and amortization ("EBITDA"), as defined in the agreement, in excess
of $25,000,000 and up to $35,000,000; (2) 7% of EBITDA in excess of $35,000,000
and up to $40,000,000; and (3) 10% of EBITDA over $40,000,000. In addition, HCS
will reimburse HWCC-Shreveport for expenses incurred in connection with services
provided under the management agreement.
HCS has also entered into a Technical Services Agreement with HWCC-
Shreveport to provide certain construction and project supervision services
prior to the opening of the Shreveport Casino. HCS reimburses HWCC-Shreveport
for expenses incurred in connection with services provided under the Technical
Services Agreement. Such costs amounted to $214,000 and $386,000, respectively,
for the three and six
27
<PAGE>
HWCC - LOUISIANA, INC. AND SUBSIDIARIES
(wholly owned by Hollywood Casino Corporation)
Notes to Consolidated Financial Statements
(Unaudited)
month periods ended June 30, 2000; no such costs were incurred during either of
the three or six month periods ended June 30, 1999. Amounts payable under the
agreement amounting to $75,000 and $56,000 are included in due to affiliates on
the accompanying consolidated balance sheets at June 30, 2000 and December 31,
1999, respectively.
HCS has also entered into a Marine Services Agreement with Paddlewheels to
provide certain marine services for so long as Paddlewheels remains a joint
venture partner in HCS. The Marine Services Agreement became effective on
September 22, 1998 and, in addition to the reimbursement of Paddlewheels for its
direct expenses incurred, if any, HCS will pay a monthly fee of $30,000
effective with the opening of the Shreveport Casino. No payments have been made
under the agreement through June 30, 2000.
(8) Commitments and Contingencies
HCL agreed that upon obtaining construction financing for the Shreveport
Casino, it would loan $1,000,000 to Paddlewheels which Paddlewheels would use to
make a $1,000,000 capital contribution to HCS. HCL loaned the $1,000,000 to
Paddlewheels and Paddlewheels made its capital contribution to HCS in August
1999; the $1,000,000 is included in minority interest on the accompanying
consolidated balance sheets of HCL at both June 30, 2000 and December 31, 1999.
The loan to Paddlewheels earns interest at the rate of prime commencing with
the opening of the Shreveport Casino and will be payable monthly. Because the
loan has no stated interest prior to completion of the Shreveport Casino, HCL
recorded a discount on the note which is being accreted during the construction
period and which will result in a note receivable balance of $1,000,000 at the
projected completion date. Principle on the loan is due to be repaid on the
tenth anniversary of the opening of the Shreveport Casino.
Paddlewheels was also given credit for an additional $1,000,000 capital
contribution at the time construction financing was obtained and the $5,000,000
liability described in Note 1 was paid. Such credit was in recognition of
guarantees provided by an affiliate of Paddlewheels necessary to obtain LGCB
approval for the Shreveport Casino. The additional $1,000,000 credit to
Paddlewheels's capital account results in an additional $1,000,000 minority
interest on HCL's consolidated balance sheets and has been treated as an
additional project cost.
For so long as it remains a joint venture partner in HCS, Paddlewheels will
also receive, among other things, an amount equal to 1% of "complex net
revenues", as defined, of the Shreveport Casino, which approximates net
revenues, in exchange for the assignment by Paddlewheels and its affiliates of
their joint venture interest in HCS to HCL and Sodak.
HCC has entered into a completion capital agreement providing for the
contribution of up to an additional $5,000,000 in cash if any time there are
insufficient funds available to enable the Shreveport Casino to be operating by
April 30, 2001. In addition, if the Shreveport Casino is not operating by April
30, 2001, HCC will contribute to HCS through HCL, HCS I, Inc. and HCS II, Inc.
on that date $5,000,000 in additional equity less any amounts previously
contributed under the completion capital agreement.
Third parties could assert obligations against HCS for liabilities that
have arisen or that might arise against QNOV or QNOV's partners with respect to
any period prior to September 22, 1998. Management
28
<PAGE>
HWCC - LOUISIANA, INC. AND SUBSIDIARIES
(wholly owned by Hollywood Casino Corporation)
Notes to Consolidated Financial Statements
(Unaudited)
believes in the event such a claim arises, it would be adequately covered under
either existing indemnification agreements with QNOV's partners or insurance
policies maintained by QNOV or its partners.
(9) Supplemental Cash Flow Information
HCL paid interest totaling $9,288,000 during the six month period ended
June 30, 2000. HCL paid no interest during the six month period ended June 30,
1999. HCL paid no income taxes during either of the six month periods ended June
30, 2000 or 1999
During June 2000, HCS obtained proceeds under capital lease obligations
amounting to $4,137,000 used to purchase fixed assets during the construction
period (see Note 5).
The issuance of a note to Hilton by HCS at a discounted face amount of
$1,692,000 (see Note 4(b)) and the associated project costs have been excluded
from the accompanying consolidated statement of cash flows for the period from
September 22, 1998 through June 30, 2000 as a non-cash transaction.
In connection with the acquisition of Sodak, HCL assumed the following
liabilities:
<TABLE>
<S> <C>
Fair value of non-cash assets acquired $ 1,465,000
Cash acquired 1,525,000
Contingent liability for purchase (2,499,000)
Pre-acquisition losses attributable to joint
venture partner 12,000
Cash paid for capital stock (1,000)
-----------
Liabilities assumed $ 502,000
===========
</TABLE>
The contingent liability of $2,499,000 shown above and described in Note 2
was recorded as a non-cash transaction during the second quarter of 2000.
29
<PAGE>
HOLLYWOOD CASINO SHREVEPORT AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The accompanying consolidated financial statements of HCS and HCL and
management's discussion and analysis of financial condition and results of
operations contain forward-looking statements about the business, results of
operations, cash flows, financial condition, construction and development
activities and prospects of HCS and HCL. 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 HCS and HCL in
particular, decisions of courts and other risks indicated in their 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 herein, the words "believes", "estimates", "anticipates"
and similar expressions as they relate to HCS and HCL or their management are
intended to identify forward-looking statements. Similarly, statements herein
that describe HCS and HCL's business strategy, outlook, objectives, plans,
intentions or goals are forward-looking statements.
Liquidity and Capital Resources
As currently planned, the Shreveport Casino will consist of a three-level
riverboat casino with approximately 1,409 slot machines and 68 table games; a
405-room, all suite, art deco style hotel; and approximately 42,000 square feet
of restaurant and entertainment facilities. Through June 30, 2000, HCS has
expended approximately $108.1 million in connection with the construction of the
Shreveport Casino.
On April 23, 2000, the construction site for the Shreveport Casino suffered
tornado damage estimated to be less than $3,000,000. Management believes that
HCS's insurance policies will cover these losses. In addition, management of HCS
will seek to recover lost profits under its business interruption insurance
coverage for any delays in opening attributable to the tornado. The Shreveport
Casino is currently scheduled to open in December 2000.
HCS is using the proceeds from its August 1999 issue of $150 million in
First Mortgage Notes, together with $50 million of capital contributions and $30
million in furniture, fixture and equipment financing (see below) to provide the
estimated $230 million needed to develop, construct, equip and open the
Shreveport Casino. The $230 million estimated cost includes financing costs
($7.1 million) and the $5 million payment made in August 1999 to the City of New
Orleans with respect to moving the license to Shreveport.
The funds provided by these sources are expected to be sufficient to
develop and commence operations of the Shreveport Casino and to provide a
reserve for the July 1, 2000 and February 1, 2001 scheduled payments of fixed
interest on the notes. A portion of these funds was used to make the first such
interest payment on February 1, 2000. The net proceeds from the First Mortgage
Notes were deposited into a construction disbursement account, an interest
reserve account and a completion reserve account. The proceeds in the interest
reserve account were invested in U.S. government securities that mature just
before each interest payment date and the remaining proceeds were invested in
U.S. government securities. In addition, HCC has entered into a completion
capital agreement providing for the contribution of up to an additional $5
million in cash if at any time there are insufficient funds available to enable
the Shreveport Casino to be operating by April 30, 2001. In addition, if the
Shreveport Casino is not operating by April 30, 2001, HCC will contribute to HCS
through HCL, HCS I, Inc. and HCS II, Inc. on that date $5 million in additional
equity less any amount previously contributed under the completion capital
agreement. In the absence of construction overruns, management believes that
once the Shreveport Casino is opened, cash flow
30
<PAGE>
HOLLYWOOD CASINO SHREVEPORT AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
from operations will be sufficient to meet the liquidity and capital resource
needs of the Shreveport Casino for the next 24 months.
HCS has entered into a lease agreement with third party lessors for up to
$30,000,000 to be used to acquire furniture, fixtures and equipment for the
Shreveport Casino. Borrowings under the lease agreement must be in amounts of
at least $1,000,000 and will accrue interest at the rate of LIBOR plus 4%. No
more than two advances may be requested monthly and no more than ten advances
may be requested during the construction period. During the construction
period, HCS will only pay interest on outstanding borrowings as well as a fee of
.5% per annum on the undrawn portion of the $30,000,000. When the Shreveport
Casino opens, the outstanding borrowings will become payable in equal quarterly
installments plus interest over a three year period to fully amortize the
obligation. The lease is treated as a capital lease for financial reporting
purposes. Borrowings under the lease will be collateralized by the furniture,
fixtures and equipment purchased. The lease agreement contains certain
covenants substantially similar to those included in the indenture for the First
Mortgage Notes. As of June 30, 2000, borrowings outstanding under the lease
agreement amounted to $4,137,000.
HCS has entered into a ground lease with the city of Shreveport for the
land on which the Shreveport Casino will be built. The lease has an initial
term of ten years from the date the Shreveport Casino opens with subsequent
renewals for up to an additional 40 years. Base rental payments under the lease
began when construction commenced and will be $10,000 per month during the
construction period increasing 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 renewal 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, $612,152 for the fourth
five-year renewal term and $703,975 for the fifth five year renewal term with no
further increases. In addition to the base rent, HCS will pay 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.
It was originally anticipated that HCS would develop the Shreveport Casino
with each of HCL and Sodak having a 50% interest in the development and
subsequent operations. On March 31, 1999, HCL entered into a definitive
agreement with Sodak's parent to acquire Sodak for the $2.5 million Sodak had
contributed to HCS, with $1,000 to be paid at closing and the remainder to be
paid six months after the opening of the Shreveport Casino.
In connection with the Compromise Agreement, HCS agreed to contingently
reimburse Hilton $2 million of the amount it paid to the City of New Orleans.
The reimbursement is to be paid upon the earlier of the termination of the
construction of the Shreveport Casino or in monthly installments of $200,000,
without interest, commencing with the opening of the Shreveport Casino. The $2
million liability, net of a discount in the original amount of $308,000, and the
associated project costs were recorded upon the issuance of the First Mortgage
Notes.
The operations of the Shreveport Casino will be managed by HWCC-Shreveport
under the terms of a management agreement. Under the terms of the management
agreement, HCS will pay HWCC-Shreveport basic and incentive management fees for
its services. The basic fee will equal approximately 2% of the Shreveport
Casino's net revenues and the incentive fee will equal the sum of (1) 5% of the
Shreveport Casino's earnings before interest, taxes, depreciation and
amortization as defined in the agreement
31
<PAGE>
HOLLYWOOD CASINO SHREVEPORT AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
("EBITDA") between $25 million and $35 million, (2) 7% of the Shreveport
Casino's EBITDA between $35 million and $40 million, and (3) 10% of the
Shreveport Casino's EBITDA over $40 million. In addition, HCS will reimburse
HWCC-Shreveport for expenses incurred in connection with services provided under
the management agreement.
HCS I, Inc. and HCS II, Inc. have assumed an obligation of HCL to cause HCS
to pay Paddlewheels an amount equal to approximately 1% of the Shreveport
Casino's net revenues in exchange for the assignment by Paddlewheels of its
joint venture interest in HCS to HCL and Sodak in September 1998. HCS will also
be obligated to pay Paddlewheels a $30,000 monthly fee for marine services and
to reimburse Paddlewheels for its direct expenses, if any, incurred with respect
to those services. The payments to Paddlewheels are to be made for so long as
they remain a joint venture partner in HCS.
Third parties could assert obligations against HCS for liabilities that
have arisen or that might arise against its predecessors or the partners of its
predecessors with respect to any period prior to September 22, 1998. Management
believes that if such a claim arises, it would be adequately covered under
either existing indemnification agreements with the former partners or insurance
policies maintained by the predecessors or their partners.
HCS has also entered into an agreement to sub-lease the retail portion of
the Shreveport Casino to Red River Entertainment. HCS expects to receive rental
payments under the sub-lease of approximately $250,000 annually, plus an amount
equal to the sum of (1) 50% of the retail facility's first $550,000 of net cash
flow, (2) 25% of the next $65,000 of the retail facility's net cash flow and (3)
40% of the retail facility's annual net cash flow above $615,000.
Results of Operations
HCS has no present operating activities other than costs incurred in
developing the Shreveport Casino. HCS became a development stage entity
effective on September 22, 1998 and has since been engaged in the design,
preliminary site work, construction and financing on the Shreveport Casino.
Hollywood Casino Shreveport. HCS has incurred a total of $2.5 million of
development and preopening costs in connection with the Shreveport Casino,
including $1 million and $1.4 million, respectively, during the three and six
month periods ended June 30, 2000, $991,000 during 1999 (including $22 ,000 and
$76,000, respectively, during the three and six month periods ended June 30,
1999) and $90,000 during 1998. Development and preopening costs during the
first half of 2000 consist primarily of salaries, public relations activities
and professional fees. Such costs during the first six months of 1999
consisted primarily of legal and professional fees and licensing costs.
In August 1999, HCS successfully completed the issuance of $150 million of
First Mortgage Notes (see "Liquidity and Capital Resources"). As a result, HCS
incurred interest expense amounting to $2.8 million and $6.6 million,
respectively, net of capitalized interest of $2.4 million and $3.8 million,
respectively, during the three and six month periods ended June 30, 2000 and
$6.9 million, net of capitalized interest of $1.1 million, during the year ended
December 31, 1999, all of which was subsequent to June 30, 1999. Such interest
expense includes the amortization of deferred financing costs incurred in
connection with the debt offering amounting to $192,000 and $394,000,
respectively, during the three and six month periods ended June 30, 2000 and
$293,000 during the year 1999 (all subsequent to June 30, 1999). Unexpended
proceeds from the debt offering and from $45 million in capital contributions by
HCL and
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<PAGE>
HOLLYWOOD CASINO SHREVEPORT AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Paddlewheels generated interest income of $1.7 million and $3.8 million,
respectively, during the three and six month periods ended June 30, 2000 and
$3.6 million during the year ended December 31, 1999 (including $15,000 and
$45,000, respectively, during the three and six month periods ended June 30,
1999) compared with $55,000 during the period from September 22, 1998 through
December 31, 1998.
HWCC-Louisiana, Inc. HCL did not incur any direct costs in connection
with the Shreveport Casino during the first half of 2000. Such costs, exclusive
of those incurred by HCS which are now included in HCL's consolidated results of
operations, amounted to $12,000 and $18,000, respectively, during the three and
six month periods ended June 30, 1999 and consisted primarily of professional
fees, travel and reimbursements to HCC and its subsidiaries for the use of their
personnel. HCL and its subsidiaries other than HCS also incurred general and
administrative expenses of $74,000 and $146,000, respectively, during the three
and six month periods ended June 30, 2000; $4,000 of such costs were incurred
during both the three and six month periods ended June 30, 1999. General and
administrative costs during the 2000 three and six month periods were partially
offset by interest income earned on HCL's loan to Paddlewheels and on temporary
cash investments amounting to $53,000 and $104,000, respectively.
Market Risk
HCS's only financing arrangement that is subject to fluctuating market
interest rates is the $30 million lease commitment to acquire furniture,
fixtures and equipment. Interest under this agreement is variable and will be
reset quarterly. The rate of interest on borrowings is the LIBOR plus 4%
(currently 10.57%). If the interest rate increases by 100 basis points, or 1%,
then interest expense will increase by $300,000. Management believes that all
other market risks are immaterial. The furniture, fixture and equipment
financing was entered into for non-trading purposes as a source of funding for
the Shreveport Casino 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 resulting obligation could be prepaid
should increases in the underlying interest rate result in an excessive
financing cost to HCS.
The First Mortgage Notes issued by HCS to finance construction of the
Shreveport Casino include interest at the rate of 13% payable semiannually as
well as contingent interest once the Shreveport Casino opens. The contingent
interest will be equal to 5% of HCS's consolidated cash flow for the applicable
period subject to a maximum contingent interest of $5 million for any four
consecutive fiscal quarters. Accordingly, the maximum potential interest with
respect to the First Mortgage Notes for a fiscal year could be $24.5 million,
resulting in an effective annual interest rate of 16.33%. This maximum would
assume that consolidated cash flow was at least $100 million. The contingent
component of interest under the First Mortgage Notes was negotiated with the
lenders as part of determining the fixed rate component of interest. Management
believes that because the contingent interest component is determined by the
cash flows of HCS and can only be paid if it meets certain coverage ratios,
HCS's liquidity and capital resources 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 HCS'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 HCS's debt securities in the amount of approximately $5.8
million.
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<PAGE>
HOLLYWOOD CASINO SHREVEPORT AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Seasonality
The Shreveport Casino has no operating history. Management anticipates
that activity at the Shreveport Casino may be modestly seasonal, with stronger
results expected during the third fiscal quarter. In addition, its operations
may be impacted by adverse weather conditions. Accordingly, the results of
operations may fluctuate from quarter to quarter and the results for any fiscal
quarter may not be indicative of results for future fiscal quarters.
Year 2000 Issues
At the beginning of the year 2000, computer programs that had date
sensitive software might have recognized a date using "00" as the year 1900
rather than 2000. This type of error could have resulted in a system failure or
miscalculations which might have caused disruptions of operations including,
among other things, a temporary inability to process transactions or engage in
similar normal business activities.
HCL and HCS continue to depend on the computer systems of HCC for their
administrative, financial and construction management operations. In
preparation for the year 2000, management of HCC conducted a program to prepare
its computer systems and applications as well as its non-information technology,
embedded microchip systems for the Year 2000. The initial stage of the program
consisted of identifying those systems which might be at risk. All identified
systems were categorized as (1) those necessary for regulatory compliance
purposes; (2) essential systems; and (3) non-essential systems.
Within the essential systems group, an additional rating factor of one to
five was assigned to each system with a factor of one indicating the greatest
significance. Readiness of information technology and non-information
technology systems for the Year 2000 was investigated or determined by means of
vendor certification or internal testing. HCC's essential and regulatory
systems were determined to be Year 2000 compliant. Two major information
technology systems identified as not Year 2000-compliant were replaced.
HCL, HCS and HCC also initiated formal communication with all of their
material third party suppliers with which they continue to do business to
determine the extent to which their operating and information systems could have
been vulnerable to those third parties' failure to resolve their Year 2000
compliance issues. These suppliers notified HCL, HCS and HCC that they were
Year 2000 compliant.
As a result of these planning and implementation efforts, HCS experienced
no significant disruptions to any of its computer systems and non-information
technology systems and management believes that all such systems have
successfully responded to the Year 2000 change. HCS has also encountered no
significant Year 2000 problems with its vendors or suppliers. Management is
continuing to monitor HCC and HCS's systems and communicate with their suppliers
and vendors to ensure that any latent Year 2000 problems that might arise are
promptly addressed.
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<PAGE>
PART II: OTHER INFORMATION
---------------------------
Item 6. - Exhibits and Reports on Form 8-K
The Registrants did not file any reports on Form 8-K during the quarter ended
June 30, 2000. The Registrants filed amendments to their Registration Statement
on Form S-4 on April 18 and May 12, 2000. The Registration Statement was
declared effective on May 15, 2000. The Registrants filed a quarterly report on
Form 10-Q on May 26, 2000.
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 SHREVEPORT
By: HCS I, Inc.
Date: August 10, 2000 By: /s/ Paul C. Yates
-------------------- -----------------------------------------
Paul C. Yates
Executive Vice President, Chief Financial
Officer, Treasurer and Assistant Secretary
SHREVEPORT CAPITAL CORPORATION
Date: August 10, 2000 By: /s/ Paul C. Yates
-------------------- -----------------------------------------
Paul C. Yates
Executive Vice President, Chief Financial
Officer, Treasurer and Assistant Secretary
HWCC-LOUISIANA, INC.
Date: August 10, 2000 By: /s/ Paul C. Yates
-------------------- ------------------------------------------
Paul C. Yates
Executive Vice President, Chief Financial
Officer, Treasurer and Assistant Secretary
35
