<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 March 31, 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>
Registrant Class Outstanding at May 25, 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 commenced operations in New Orleans in February 1994.
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. QNOV discontinued
its riverboat casino operations in New Orleans in October 1997 while it
continued negotiations to transfer its interests to a new group of 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, 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 former partners had originally proposed a plan to jointly construct a
hotel in Shreveport with an unaffiliated casino operator to provide amenities
for their riverboat casino project. When the former partners decided in 1997 not
to relocate, all such plans were abandoned and all associated costs were written
off. 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"). In order to open the new facility, the
partners of HCS had to obtain financing for the project and will have to
maintain licensing by the LGCB and incur all the risks inherent in the
construction of a new facility. Upon completion, HCS's riverboat casino will
operate under a different name, with a different theme, in a different
geographic market and with different management and employees than that operated
by QNOV. Accordingly, the accompanying financial statements reflect the
operations and cash flows of HCS for the period from September 22, 1998 through
March 31, 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 1,370 slot
machines and 75 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
1
<PAGE>
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 , 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, 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. Construction began in
August 1999 with a planned opening date in early November 2000, although the
actual opening date may be delayed due to the tornado damage described below.
On April 23, 2000, the construction site for the Shreveport Casino suffered
tornado damage. While the project sustained no structural damage, the interior
and exterior finish on several floors of the hotel was damaged. Although HCS
remains in the initial stage of assessing the impact of the tornado, based on
management's assessment of the condition of the site, the progress of
construction since the date of the tornado and discussions with its insurance
carriers, management believes that the damage from the tornado will not be
material. Management believes that HCS's insurance policies will cover these
losses; however, repair or replacement could take several weeks and could delay
the early November planned opening date. In order to mitigate all or part of the
delay, management intends to utilize provisions in its insurance coverage,
including the use of overtime and additional workers, to attempt to keep the
project on schedule. This strategy may require scheduling overtime for existing
workers and/or hiring additional construction workers, which are currently in
short supply. In addition, it may be necessary for HCS to purchase additional
construction materials on an expedited basis. If the opening of the Shreveport
Casino is delayed due to the tornado damage, HCS will seek to recover lost
profits under its business interruption insurance coverage.
The consolidated financial statements as of March 31, 2000 and for the
three month periods ended March 31, 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 March 31, 2000, the results of their operations and cash flows
for the three month periods ended March 31, 2000 and 1999 and, with respect to
HCS, their results of operations and cash flows for the period from September
22, 1998 through March 31, 2000.
2
<PAGE>
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.
3
<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 March 31, 2000, and the related
condensed consolidated statements of operations and cash flows for the three
month periods ended March 31, 2000 and 1999 and for the period from September
22, 1998 through March 31, 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
May 19, 2000
4
<PAGE>
HOLLYWOOD CASINO SHREVEPORT AND SUBSIDIARY
A Development Stage General Partnership
CONSOLIDATED BALANCE SHEETS (NOTE 1)
<TABLE>
<CAPTION>
March 31,
2000 December 31,
(Unaudited) 1999
------------ ------------
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $ 1,533,000 $ 19,014,000
Interest receivable 584,000 1,432,000
Prepaid expenses and other current assets 692,000 620,000
------------ ------------
Total current assets 2,809,000 21,066,000
------------ ------------
Property and Equipment:
Furniture and equipment 35,000 23,000
Construction in progress 64,814,000 36,155,000
------------ ------------
64,849,000 36,178,000
Less - accumulated depreciation (5,000) (2,000)
------------ ------------
64,844,000 36,176,000
------------ ------------
Cash restricted for construction project 133,159,000 147,310,000
------------ ------------
Deferred financing costs, net 6,162,000 4,928,000
------------ ------------
$206,974,000 $209,480,000
============ ============
Liabilities and Partners' Capital
Current Liabilities:
Current maturities of long-term debt $ 1,000,000 $ 400,000
Bank overdraft 557,000 -
Accounts payable 15,124,000 11,648,000
Interest payable 3,314,000 7,637,000
Other accrued liabilities 61,000 35,000
Due to affiliates 59,000 230,000
------------ ------------
Total current liabilities 20,115,000 19,950,000
------------ ------------
Long-term debt 150,803,000 151,359,000
------------ ------------
Commitments and Contingencies (Note 5)
Partners' Capital:
Partners' capital contributions 47,501,000 47,501,000
Accumulated deficit during the development stage (6,445,000) (4,330,000)
Accumulated deficit at date of change in partners (5,000,000) (5,000,000)
------------ ------------
Total partners' capital 36,056,000 38,171,000
------------ ------------
$206,974,000 $209,480,000
============ ============
</TABLE>
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated balance sheets.
5
<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
March 31, March 31,
---------------------------------------
2000 2000 1999
--------------- ------------------ ------------------
<S> <C> <C> <C>
Expenses:
Development costs $ 240,000 $ - $ 54,000
Preopening expenses 1,237,000 396,000 -
Depreciation 5,000 3,000 -
--------------- ------------------ ------------------
Total expenses 1,482,000 399,000 54,000
--------------- ------------------ ------------------
Non-operating income
(expense):
Interest income 5,784,000 2,085,000 30,000
Interest expense, net of capitalized interest of
$2,452,000 through March 31, 2000 and
$1,400,000 for the three month
period ended March 31, 2000 (10,747,000) (3,801,000) -
------------- ------------------ ------------------
Total non-operating (expense) income (4,963,000) (1,716,000) 30,000
------------- ------------------ -------------------
Net loss $ (6,445,000) $ (2,115,000) $ (24,000)
============= ================== ==================
</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
CONSOLIDATED STATEMENTS OF CASH FLOWS (NOTE 1)
(Unaudited)
<TABLE>
<CAPTION>
Period from
September 22, Three Months Three Months
1998 through Ended Ended
March 31, March 31, March 31,
2000 2000 1999
------------- ------------- ------------
<S> <C> <C> <C>
Operating Activities:
Net loss $ (6,445,000) $ (2,115,000) $ (24,000)
Adjustments to reconcile net loss
to cash provided by (used in)
operating activities:
Depreciation and amortization, including
accretion of discount 601,000 239,000 -
(Increase) decrease in interest receivable (584,000) 848,000 -
Increase (decrease) in accounts payable
and accrued liabilities 13,499,000 (821,000) (274,000)
Net change in other current assets and liabilities (633,000) (243,000) -
------------- ------------- ------------
Cash provided by (used in) operating activities 6,438,000 (2,092,000) (298,000)
------------- ------------- ------------
Investing Activities:
Purchase of property and equipment (65,656,000) (28,671,000) (1,450,000)
(Increase) decrease in cash restricted for construction
project (133,159,000) 14,151,000 -
------------- ------------- ------------
Cash used in investing activities (198,815,000) (14,520,000) (1,450,000)
------------- ------------- ------------
Financing Activities:
Capital contributions 50,000,000 - -
Proceeds from issuance of long-term debt 150,000,000 - -
Bank overdraft 557,000 557,000 -
Deferred financing costs (6,647,000) (1,426,000) -
------------- ------------- ------------
Cash provided by (used in) financing activities 193,910,000 (869,000) -
------------- ------------- ------------
Net increase (decrease) in cash and cash equivalents 1,533,000 (17,481,000) (1,748,000)
Cash and cash equivalents at beginning of period - 19,014,000 3,734,000
------------- ------------- ------------
Cash and cash equivalents at end of period $ 1,533,000 $ 1,533,000 $ 1,986,000
============= ============= ============
</TABLE>
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated financial statements.
7
<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 commenced operations in New Orleans in February 1994.
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. QNOV discontinued
its riverboat casino operations in New Orleans in October 1997 while it
continued negotiations to transfer its interests to a new group of 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, 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).
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. This
liability was recorded by QNOV during 1997 and was to be paid after opening in
Shreveport. When the former partners decided not to relocate to Shreveport, the
status of the obligation became uncertain. During September 1998, HCS and the
former partners of QNOV entered into a Compromise Agreement with the City of New
Orleans under which it was agreed that Hilton would pay $5,000,000 to the City
with QNOV being released from any further relocation claims. QNOV reflected
Hilton's payment as a capital contribution prior to the withdrawal of the former
partners from QNOV. The remaining $5,000,000 obligation continued to be
reflected as a liability by HCS to be paid to the City upon securing financing
for construction of HCS's new riverboat casino in Shreveport (the "Shreveport
Casino"). In the event financing was not obtained, HCS would not be required to
make any payment. 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).
When the former partners decided in 1997 not to relocate to Shreveport, all
of their construction plans were abandoned and all associated costs were written
off. Upon admission of the new partners, HCS proceeded with entirely new plans
to develop, own and operate the Shreveport Casino. In order to open the new
facility, the partners of HCS had to obtain financing and will have to maintain
licensing by the LGCB and incur all the risks inherent in the construction of a
new facility. Upon completion, the Shreveport Casino
8
<PAGE>
HOLLYWOOD CASINO SHREVEPORT AND SUBSIDIARY
A Development Stage General Partnership
Notes to Consolidated Financial Statements
(Unaudited)
will operate under a different name, with a different theme, in a different
geographic market and with different management and employees than the riverboat
casino operated by QNOV. Accordingly, the accompanying financial statements
reflect the operations and cash flows of HCS for the period from September 22,
1998 through March 31, 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 1,370 slot machines and 75 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 opening of the
Shreveport Casino. Because of the contingent nature of the remaining obligation
to Sodak, the accompanying consolidated financial statements of HCS include 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
acquisition price is paid by HCL to Sodak, the adjustment to the recorded value
of construction in progress will be reversed and an additional capital
contribution will be recorded. 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
9
<PAGE>
HOLLYWOOD CASINO SHREVEPORT AND SUBSIDIARY
A Development Stage General Partnership
Notes to Consolidated Financial Statements
(Unaudited)
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 provide
the remaining funding for the project (see Note 5). Construction began in August
1999 with a planned opening date in early November 2000, although the actual
opening date may be delayed due to the tornado damage described in Note 7.
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.
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. 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 March 31, 2000, for the three
month periods ended March 31, 2000 and 1999 and for the period from September
22, 1998 through March 31, 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 March 31, 2000,
the results of its operations and cash flows for the three month periods ended
March 31, 2000 and 1999 and the results of its operations and cash flows for the
period from September 22, 1998 through March 31, 2000.
10
<PAGE>
HOLLYWOOD CASINO SHREVEPORT AND SUBSIDIARY
A Development Stage General Partnership
Notes to Consolidated Financial Statements
(Unaudited)
(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.
Cash restricted for construction project is comprised of the following:
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
------------ ------------
<S> <C> <C>
Construction reserve $109,359,000 $114,964,000
Interest reserve 18,664,000 27,275,000
Completion reserve 5,136,000 5,071,000
------------ ------------
$133,159,000 $147,310,000
============ ============
</TABLE>
(3) Long-term Debt
Long-term debt at March 31, 2000 and December 31, 1999 consists of the
following:
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
------------ ------------
<S> <C> <C>
13% First Mortgage Notes, with contingent
interest, due 2006(a) $150,000,000 $150,000,000
Note payable, net of discount of $197,000
and $241,000, respectively (b) 1,803,000 1,759,000
------------ ------------
Total indebtedness 151,803,000 151,759,000
Less-current maturities (1,000,000) (400,000)
------------ ------------
Total long-term debt $150,803,000 $151,359,000
============ ============
</TABLE>
_______________
(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
11
<PAGE>
HOLLYWOOD CASINO SHREVEPORT AND SUBSIDIARY
A Development Stage General Partnership
Notes to Consolidated Financial Statements
(Unaudited)
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, 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 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 March 31, 2000 are set forth
below:
<TABLE>
<S> <C>
2000 (nine months) $ 400,000
2001 1,600,000
2002 -
2003 -
2004 -
Thereafter 150,000,000
------------
$152,000,000
============
</TABLE>
12
<PAGE>
HOLLYWOOD CASINO SHREVEPORT AND SUBSIDIARY
A Development Stage General Partnership
Notes to Consolidated Financial Statements
(Unaudited)
(4) 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 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 $172,000 for the three month period
ended March 31, 2000 and $463,000 for the period from September 22, 1998 through
March 31, 2000. No such costs were incurred during the three month period ended
March 31, 1999. Amounts payable under the agreement amounting to $58,000 and
$56,000 are included in due to affiliates on the accompanying consolidated
balance sheets at March 31, 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 March 31, 2000.
(5) Commitments
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.
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
13
<PAGE>
HOLLYWOOD CASINO SHREVEPORT AND SUBSIDIARY
A Development Stage General Partnership
Notes to Consolidated Financial Statements
(Unaudited)
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 for the three month period
ended March 31, 2000 and $86,000 for the period from September 22, 1998 through
March 31, 2000. All costs incurred under the ground lease are included in
construction in progress on the accompanying consolidated balance sheets.
HCS has entered into a lease agreement with a third party lessor 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 quarterly including
interest over a three year period to fully amortize the obligation. The lease
will be treated as a capital lease for financial reporting purposes. Borrowings
under the lease will be 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 March 31, 2000, no borrowings were outstanding under the lease 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.
(6) Supplemental Cash Flow Information
HCS paid interest totaling $9,288,000 during both the three month period
ended March 31, 2000 and during the period from September 22, 1998 through March
31, 2000. HCS paid no interest during the three month period ended March 31,
1999. HCS paid no taxes during either of the three month periods ended March 31,
2000 or 1999 or during the period from September 22, 1998 through March 31,
2000.
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 March 31, 2000 as a non-cash transaction.
14
<PAGE>
HOLLYWOOD CASINO SHREVEPORT AND SUBSIDIARY
A Development Stage General Partnership
Notes to Consolidated Financial Statements
(Unaudited)
(7) Subsequent Event
On April 23, 2000, the construction site for the Shreveport Casino suffered
tornado damage. While the project sustained no structural damage, the interior
and exterior finish on several floors of the hotel was damaged. Although HCS
remains in the initial stage of assessing the impact of the tornado, based on
management's assessment of the condition of the site, the progress of
construction since the date of the tornado and discussions with its insurance
carriers, management believes that the damage from the tornado will not be
material. Management believes that HCS's insurance policies will cover these
losses; however, repair or replacement could take several weeks and could delay
the early November planned opening date. In order to mitigate all or part of the
delay, management intends to utilize provisions in its insurance coverage,
including the use of overtime and additional workers, to attempt to keep the
project on schedule. This strategy may require scheduling overtime for existing
workers and/or hiring additional construction workers, which are currently in
short supply. In addition, it may be necessary for HCS to purchase additional
construction materials on an expedited basis. If the opening of the Shreveport
Casino is delayed due to the tornado damage, HCS will seek to recover lost
profits under its business interruption insurance coverage.
15
<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 March 31, 2000, and the related condensed
consolidated statements of operations and cash flows for the three month periods
ended March 31, 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
May 19, 2000
16
<PAGE>
HWCC-LOUISIANA, INC. AND SUBSIDIARIES
(wholly owned by Hollywood Casino Corporation)
CONSOLIDATED BALANCE SHEETS (NOTE 1)
<TABLE>
<CAPTION>
March 31,
2000 December 31,
(Unaudited) 1999
------------ ------------
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $ 4,130,000 $ 21,580,000
Interest receivable 584,000 1,432,000
Prepaid expenses and other current assets 692,000 649,000
------------ ------------
Total current assets 5,406,000 23,661,000
------------ ------------
Property and Equipment:
Furniture and equipment 36,000 24,000
Construction in progress 71,259,000 42,571,000
------------ ------------
71,295,000 42,595,000
Less - accumulated depreciation (5,000) (2,000)
------------ ------------
71,290,000 42,593,000
------------ ------------
Cash Restricted for Construction Project 133,159,000 147,310,000
------------ ------------
Other Assets:
Note receivable, net of discount 955,000 936,000
Deferred financing costs 6,162,000 4,928,000
------------ ------------
Total other assets 7,117,000 5,864,000
------------ ------------
$216,972,000 $219,428,000
============ ============
Liabilities and Shareholder's Equity
Current Liabilities:
Current maturities of long-term debt $ 1,000,000 $ 400,000
Bank overdraft 557,000 -
Accounts payable 15,211,000 11,663,000
Interest payable 3,314,000 7,637,000
Other accrued liabilities 61,000 35,000
Due to affiliates 162,000 334,000
------------ ------------
Total current liabilities 20,305,000 20,069,000
------------ ------------
Long-term debt 150,803,000 151,359,000
------------ ------------
Commitments and Contingencies (Note 7)
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 (7,537,000) (5,401,000)
------------ ------------
Total shareholder's equity 43,864,000 46,000,000
------------ ------------
$216,972,000 $219,428,000
============ ============
</TABLE>
The accompanying introductory notes and footnotes to financial statements are an
integral part of these consolidated balance sheets.
17
<PAGE>
HWCC-LOUISIANA, INC. AND SUBSIDIARIES
(wholly owned by Hollywood Casino Corporation)
CONSOLIDATED STATEMENTS OF OPERATIONS (NOTE 1)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
2000 1999
----------- -----------
<S> <C> <C>
Development and preopening expenses:
Travel $ (34,000) $ (5,000)
Consulting and other professional services (62,000) -
Salaries and related costs (262,000) -
License fees (33,000) -
Public relations (61,000) -
Other, net of reimbursements 56,000 (1,000)
----------- -----------
Total development and preopening expenses (396,000) (6,000)
General and administrative expenses (72,000) -
Depreciation (3,000) -
----------- -----------
Loss from operations (471,000) (6,000)
Interest expense, net of capitalized interest
of $1,400,000 in 2000 (3,801,000) -
Interest income 2,136,000 -
----------- -----------
Loss before taxes and other items (2,136,000) (6,000)
Income tax benefit - -
----------- -----------
Loss before other items (2,136,000) (6,000)
Equity in losses of Hollywood Casino
Shreveport (Note 1) - (12,000)
----------- -----------
Net loss $(2,136,000) $ (18,000)
=========== ===========
</TABLE>
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>
Three Months Ended March 31,
------------------------------
2000 1999
------------- -------------
<S> <C> <C>
Operating Activities:
Net loss $ (2,136,000) $ (18,000)
Adjustments to reconcile net loss to cash
(used in) provided by operating activities:
Depreciation and amortization, including
accretion of discount 220,000 -
Equity in losses of Hollywood Casino Shreveport - 12,000
Decrease in receivables 848,000 -
Increase in other current assets (43,000) -
(Decrease) increase in due to affiliate (172,000) 113,000
Decrease in accounts payable and accrued liabilities (749,000) -
------------- -------------
Cash (used in) provided by operating activities (2,032,000) 107,000
------------- -------------
Investing Activities:
Decrease in cash restricted for construction project 14,151,000 -
Purchase of property and equipment (28,700,000) (107,000)
------------- -------------
Cash used in investing activities (14,549,000) (107,000)
------------- -------------
Financing Activities:
Bank overdraft 557,000 -
Deferred financing costs (1,426,000) -
------------- -------------
Cash used in financing activities (869,000) -
------------- -------------
Net decrease in cash and cash equivalents (17,450,000) -
Cash and cash equivalents at beginning of period 21,580,000 68,000
------------- -------------
Cash and cash equivalents at end of period $ 4,130,000 $ 68,000
============= =============
</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 to be paid to the City upon securing financing for HCS's
planned Shreveport resort (the "Shreveport Casino"). In the event financing was
not obtained, HCS would not be required to make any payment. As a result of
HCL's acquisition of Sodak's interest in HCS (see below), HCS has become
effectively wholly owned by HCL. HCL has treated this $5,000,000 obligation 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 March 31, 2000 and December 31, 1999. The obligation 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).
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 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 6). On March 31, 1999, HCL entered
20
<PAGE>
HWCC - LOUISIANA, INC. AND SUBSIDIARIES
(wholly owned by Hollywood Casino Corporation)
Notes to Consolidated Financial Statements
(Unaudited)
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, 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 1,370 slot machines and 75 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 provide the remaining funding for the project (see Note 7).
Construction began in August 1999 with a planned opening date in early November
2000, although the actual opening date may be delayed due to the tornado damage
described in Note 9.
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 statement of operations for the three
month period ended March 31, 1999 reflects 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)
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. 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 March 31, 2000 and for the
three month periods ended March 31, 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 March 31, 2000 and the results of its operations and cash flows for
the three month periods ended March 31, 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. Until such time as the Shreveport
Casino opens, 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. When the likelihood of completing and opening of the
Shreveport Casino can be considered probable, the contingent consideration will
be recorded and project costs increased to reflect the additional cost incurred
by HCL.
(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 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.
22
<PAGE>
HWCC - LOUISIANA, INC. AND SUBSIDIARIES
(wholly owned by Hollywood Casino Corporation)
Notes to Consolidated Financial Statements
(Unaudited)
Cash restricted for construction project is comprised of the following:
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
------------ ------------
<S> <C> <C>
Construction reserve $109,359,000 $114,964,000
Interest reserve 18,664,000 27,275,000
Completion reserve 5,136,000 5,071,000
------------ ------------
$133,159,000 $147,310,000
============ ============
</TABLE>
(4) Long-term Debt
Long-term debt at March 31, 2000 and December 31, 1999 consists of the
following:
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
------------ ------------
<S> <C> <C>
13% First Mortgage Notes, with contingent
interest, due 2006(a) $150,000,000 $150,000,000
Note payable, net of discount of $197,000
and $241,000, respectively (b) 1,803,000 1,759,000
------------ ------------
Total indebtedness 151,803,000 151,759,000
Less-current maturities (1,000,000) (400,000)
------------ ------------
Total long-term debt $150,803,000 $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.
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
23
<PAGE>
HWCC - LOUISIANA, INC. AND SUBSIDIARIES
(wholly owned by Hollywood Casino Corporation)
Notes to Consolidated Financial Statements
(Unaudited)
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 March 31, 2000 are set forth
below:
<TABLE>
<S> <C>
2000 (nine months) $ 400,000
2001 1,600,000
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) Income Taxes
HCL's benefit for income taxes consists of the following:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------
2000 1999
--------- ---------
<S> <C> <C>
Deferred benefit (provision):
Federal $ 628,000 $ (15,000)
State 146,000 (5,000)
Change in valuation allowance (774,000) 20,000
--------- ---------
$ - $ -
========= =========
</TABLE>
At March 31, 2000 and December 31, 1999, HCL had net operating loss
carryforwards ("NOL's") totaling approximately $5,300,000 and $3,980,000,
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.
The components of HCL's net deferred tax asset are as follows:
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
----------- ------------
<S> <C> <C>
Deferred tax asset -
Net operating loss carryforward $ 2,244,000 $ 1,571,000
Preopening expenses 595,000 460,000
Write off of deferred project costs - 49,000
Other 27,000 12,000
----------- -----------
Net deferred tax asset 2,866,000 2,092,000
Valuation allowance (2,866,000) (2,092,000)
----------- -----------
$ - $ -
=========== ===========
</TABLE>
25
<PAGE>
HWCC - LOUISIANA, INC. AND SUBSIDIARIES
(wholly owned by Hollywood Casino Corporation)
Notes to Consolidated Financial Statements
(Unaudited)
(6) 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 month period ended March 31, 2000; however, charges to
HCL for such services amounted to $106,000 during the three month period ended
March 31, 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 at both March 31, 2000 and December 31, 1999 are included
in due to affiliates on the accompanying consolidated balance sheets.
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 $172,000 for the three month period
ended March 31, 2000; no such costs were incurred during the three month period
ended March 31,1999. Amounts payable under the agreement amounting to $58,000
and $56,000 are included in due to affiliates on the accompanying consolidated
balance sheets at March 31, 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 March 31, 2000.
(7) Commitments
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 March 31, 2000 and December 31, 1999.
The loan to Paddlewheels accrues interest at the rate of prime commencing with
the opening of the Shreveport Casino and will be payable monthly.
26
<PAGE>
HWCC - LOUISIANA, INC. AND SUBSIDIARIES
(wholly owned by Hollywood Casino Corporation)
Notes to Consolidated Financial Statements
(Unaudited)
Because the loan does not bear 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 payable 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.
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 for the three month period ended March 31, 2000. No payments
were made during the three month period ended March 31, 1999. Costs incurred
under the ground lease amounting to $86,000 and $56,000, respectively, are
included in construction in progress on the accompanying consolidated balance
sheets at March 31, 2000 and December 31, 1999.
HCS has entered into a lease agreement with a third party lessor for up to
$30,000,000 to be used to acquire furniture, fixtures and equipment for the
Shreveport Casino. Borrowings under the lease
27
<PAGE>
HWCC - LOUISIANA, INC. AND SUBSIDIARIES
(wholly owned by Hollywood Casino Corporation)
Notes to Consolidated Financial Statements
(Unaudited)
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 quarterly including interest over a three year period to fully
amortize the obligation. The lease will be 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 (see Note 4). As of March 31, 2000, no borrowings were
outstanding under the lease 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 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.
(8) Supplemental Cash Flow Information
HCL paid interest totaling $9,288,000 during the three month period ended
March 31, 2000. HCL paid no interest during the three month period ended March
31, 1999. HCL paid no taxes during either of the three month periods ended March
31, 2000 or 1999
In connection with the acquisition of Sodak, HCL assumed the following
liabilities:
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
===========
28
<PAGE>
HWCC - LOUISIANA, INC. AND SUBSIDIARIES
(wholly owned by Hollywood Casino Corporation)
Notes to Consolidated Financial Statements
(Unaudited)
(9) Subsequent Event
On April 23, 2000, the construction site for the Shreveport Casino suffered
tornado damage. While the project sustained no structural damage, the interior
and exterior finish on several floors of the hotel was damaged. Although HCS
remains in the initial stage of assessing the impact of the tornado, based on
management's assessment of the condition of the site, the progress of
construction since the date of the tornado and discussions with its insurance
carriers, management believes that the damage from the tornado will not be
material. Management believes that HCS's insurance policies will cover these
losses; however, repair or replacement could take several weeks and could delay
the early November planned opening date. In order to mitigate all or part of the
delay, management intends to utilize provisions in its insurance coverage,
including the use of overtime and additional workers, to attempt to keep the
project on schedule. This strategy may require scheduling overtime for existing
workers and/or hiring additional construction workers, which are currently in
short supply. In addition, it may be necessary for HCS to purchase additional
construction materials on an expedited basis. If the opening of the Shreveport
Casino is delayed due to the tornado damage, HCS will seek to recover lost
profits under its business interruption insurance coverage.
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 and prospects of HCS and HCL. The
actual results could differ materially from those indicated by the forward-
looking statements because of various competition, economic conditions, tax
regulations, state regulations applicable to the gaming industry in general or
HCS and HCL in particular 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.
Liquidity and Capital Resources
As currently planned, the Shreveport Casino will consist of a three-level
riverboat casino with approximately 1,370 slot machines and 75 table games, a
405-room, all suite, art deco style hotel, and approximately 42,000 square feet
of restaurant and entertainment facilities. Through March 31, 2000, HCS has
expended approximately $71.1 million in connection with the construction of the
Shreveport Casino. Construction of the Shreveport Casino is expected to be
completed in early November 2000, subject to the comments in the following
paragraph.
On April 23, 2000, the construction site for the Shreveport Casino suffered
tornado damage. While the project sustained no structural damage, the interior
and exterior finish on several floors of the hotel was damaged. Although HCS
remains in the initial stage of assessing the impact of the tornado, based on
management's assessment of the condition of the site, the progress of
construction since the date of the tornado and discussions with its insurance
carriers, management believes that the damage from the tornado will not be
material. Management believes that HCS's insurance policies will cover these
losses; however, repair or replacement could take several weeks and could delay
the early November planned opening date. In order to mitigate all or part of the
delay, management intends to utilize provisions in its insurance coverage,
including the use of overtime and additional workers, to attempt to keep the
project on schedule. This strategy may require scheduling overtime for existing
workers and/or hiring additional construction workers, which are currently in
short supply. In addition, it may be necessary for HCS to purchase additional
construction materials on an expedited basis. If the opening of the Shreveport
Casino is delayed due to the tornado damage, HCS will seek to recover lost
profits under its business interruption insurance coverage.
HCS is using the $150 million in proceeds from the First Mortgage Notes,
together with $50 million of capital contributions and $30 million in furniture,
fixture and equipment financing to provide the estimated $230 million needed to
develop, construct, equip and open the Shreveport Casino. The $230 million
estimated cost includes financing costs 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
30
<PAGE>
HOLLYWOOD CASINO SHREVEPORT AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 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 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.
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 ("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.
31
<PAGE>
HOLLYWOOD CASINO SHREVEPORT AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 $1.5 million of
development and preopening costs in connection with the Shreveport Casino,
including $396,000 during the three month period ended March 31, 2000, $991,000
during 1999 (including $54,000 during the three month period ended March 31,
1999) and $90,000 during 1998. Development and preopening costs during the first
quarter of 2000 consist primarily of salaries and professional fees. Such costs
during the first quarter 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 $ 3.6
million, net of capitalized interest of $1.4 million, during the first quarter
of 2000 and $6.7 million, net of capitalized interest of $1.1 million, during
the year ended December 31, 1999. Interest expense also includes the
amortization of deferred financing costs incurred in connection with the debt
offering amounting to $191,000 during the three month period ended March 31,
2000 and $293,000 during the year 1999. Unexpended proceeds from the debt
offering and from $45 million in capital contributions by HCL and Paddlewheels
generated interest income of $2.1 million during the first quarter of 2000 and
$3.6 million during the year ended December 31, 1999 (including $30,000 during
the first quarter of 1999) compared with $55,000 during the period from
September 22, 1998 through December 31, 1998. No interest expense or
amortization of deferred financing costs were incurred during the three month
period ended March 31, 1999.
HWCC-Louisiana, Inc. HCL did not incur any direct costs in connection with
the Shreveport Casino during the first quarter of 2000. Such costs, exclusive of
those incurred by HCS which are now included in HCL's consolidated results of
operations, amounted to $6,000 during the three month period ended March 31,
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
$72,000 during the first quarter of 2000; no such costs were incurred during the
first quarter of 1999. General and administrative costs during the 2000 period
were partially offset by interest income earned on HCL's loan to Paddlewheels
and on temporary cash investments amounting to $51,000.
32
<PAGE>
HOLLYWOOD CASINO SHREVEPORT AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 $6.5
million.
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
33
<PAGE>
HOLLYWOOD CASINO SHREVEPORT AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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.
34
<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 March 31, 2000. The Registrants filed amendments to their Registration
Statement on Form S-4 on March 22, April 18and May 12, 2000. The Registration
Statement was declared effective on May15, 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: May 26, 2000 By: /s/ Paul C. Yates
---------------------- -----------------------------------
Paul C. Yates
Executive Vice President, Chief Financial
Officer, Treasurer and Assistant Secretary
SHREVEPORT CAPITAL CORPORATION
Date: May 26, 2000 By: /s/ Paul C. Yates
---------------------- --------------------------------------
Paul C. Yates
Executive Vice President, Chief Financial
Officer, Treasurer and Assistant Secretary
HWCC-LOUISIANA, INC.
Date: May 26, 2000 By: /s/ Paul C. Yates
---------------------- --------------------------------------
Paul C. Yates
Executive Vice President, Chief Financial
Officer, Treasurer and Assistant Secretary
35
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL INFORMATION STATEMENTS OF HOLLYWOOD CASINO SHREVEPORT AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
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<NAME> HOLLYWOOD CASINO SHREVEPORT
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<TOTAL-LIABILITY-AND-EQUITY> 206,974 206,974
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<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
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</LEGEND>
<CIK> 0001096354
<NAME> HWCC-LOUISIANA, INC.
<MULTIPLIER> 1,000
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<PERIOD-TYPE> 3-MOS
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