<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 September 30, 2000
---------------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
--------------------- ----------------------
Commission file number 33-48887
--------------------
HOLLYWOOD CASINO CORPORATION
HWCC-TUNICA, INC.
------------------------------------------------------------------------------
(Exact name of each Registrant as specified in its charter)
Delaware 75-2352412
Texas 75-2513808
------------------------------------------ --------------------------
(States or other jurisdictions of (I.R.S. Employer
incorporation or organization) Identification No.'s)
Two Galleria Tower, Suite 2200
13455 Noel Road, LB 48
Dallas, Texas 75240
------------------------------------------ --------------------------
(Address of principal executive offices) (Zip Code)
(Registrants' telephone number, including area code) (972) 392-7777
------------------------
(Not Applicable)
------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether each of the Registrants (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that each
of the Registrants was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
Registrant Class Outstanding at November 9, 2000
---------------------------- ------------------------------ -------------------------------
<S> <C> <C>
Hollywood Casino Corporation Common Stock, $.0001 par value 24,995,076 Shares
HWCC-Tunica, Inc. Common Stock, $.01 par value 1,000 Shares
</TABLE>
1
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
Part I: Financial Information
------------------------------
Introductory Notes to Consolidated Financial Statements
-------------------------------------------------------
Hollywood Casino Corporation ("HCC" or the "Company") develops, owns and
operates distinctively themed casino entertainment facilities under the service
mark Hollywood Casino(R). Through its subsidiaries, HCC currently owns and
operates a riverboat casino and entertainment facility in Aurora, Illinois
approximately 35 miles west of Chicago (the "Aurora Casino") and a casino, hotel
and entertainment complex in Tunica County, Mississippi approximately 30 miles
southwest of Memphis, Tennessee (the "Tunica Casino"). In addition, the Company
has a license to own and operate and is currently constructing a destination
gaming resort in Shreveport, Louisiana approximately 180 miles east of Dallas,
Texas (the "Shreveport Casino"). Approximately 46% of HCC's outstanding common
shares are listed and traded on the American Stock Exchange under the symbol
"HWD". The remaining outstanding HCC common shares are owned by Jack E. Pratt,
Edward T. Pratt, Jr., William D. Pratt, Edward T. Pratt III and by certain
general partnerships and trusts controlled by the Pratts and by other family
members (collectively, the "Pratt Family"). The Pratt Family also owns
approximately 36% of the outstanding common stock of Greate Bay Casino
Corporation ("GBCC"), a Delaware corporation, which previously held management
and consulting contracts with the Aurora Casino and Tunica Casino.
HCC owns all of the outstanding common stock of Hollywood Casino - Aurora,
Inc. ("HCA"), HWCC - Tunica, Inc. ("HCT"), HWCC - Louisiana, Inc. ("HCL") and
HWCC - Shreveport, Inc. ("Shreveport Management"). HCA is an Illinois
corporation which owns and operates the Aurora Casino. HCT is a Texas
corporation which owns and operates the Tunica Casino. HCL is a Louisiana
corporation formed to pursue gaming opportunities in Louisiana. HCL owns the
partnership (the "Shreveport Partnership") which owns and is currently
constructing the Shreveport Casino. Shreveport Management is a Louisiana
corporation formed by HCC in 1997 which holds the management contract for the
Shreveport Casino.
In October 1999, HCC acquired all of the capital stock of Pratt Casino
Corporation ("PCC") from GBCC. PCC owned the limited partnership interest in
Pratt Management, L.P. ("PML"), which held a management contract for the Aurora
Casino and a consulting agreement with the Tunica Casino. When acquired by HCC,
PCC's assets consisted of its management contract for the Aurora Casino and its
consulting agreement with the Tunica Casino and its liabilities consisted of a
$40.3 million obligation payable in satisfaction of certain notes issued by a
subsidiary of PCC. The payment of the $40.3 million obligation by HCC in
October 1999 resulted in the termination of the management contract and
consulting agreement and was reflected by HCC as a charge to expense during
1999.
As further discussed in the Notes to Consolidated Financial Statements, HCC
issued $310,000,000 of 11.25% Senior Secured Notes due May 1, 2007 and
$50,000,000 of floating rate Senior Secured Notes due May 1, 2006 (collectively,
the "Senior Secured Notes"). The Senior Secured Notes are unconditionally
guaranteed on a senior secured basis by HCT, Shreveport Management and by
certain future subsidiaries of HCC. The Senior Secured Notes are secured by,
among other things, (1) substantially all of the assets of HCT, (2) a limited
lien on substantially all of the assets of HCA and (3) a pledge of the capital
stock of certain subsidiaries of HCC including HCA, HCT and HCL. Accordingly,
the financial statements of HCA and HCT are also included herein. Shreveport
Management currently has no operations or significant assets; accordingly,
separate financial statements are not included herein. HCL has been designated
an "Unrestricted Subsidiary" of HCC and the operations of the Shreveport Casino,
other than management fees paid to Shreveport Management, will not provide
credit support for the Senior Secured Notes.
Proceeds of the debt offering were used to refinance previously outstanding
debt, to fund a portion of HCC's equity investment in the Shreveport Casino and,
during October 1999, to purchase and terminate the management and consulting
agreements on the Aurora Casino and Tunica Casino. The remaining proceeds
2
<PAGE>
are planned to be used for, among other things, a proposed expansion of the
Aurora Casino's operating facilities.
During August 1999, the Shreveport Partnership issued $150,000,000 of 13%
First Mortgage Notes, with contingent interest, which are non-recourse to HCC.
Because the partnership is effectively owned and controlled by HCL, the
financial statements of the partnership, including its debt obligations, are
included in the accompanying consolidated financial statements of HCC.
The consolidated financial statements and financial statements as of
September 30, 2000 and for the three and nine month periods ended September 30,
2000 and 1999 have been prepared by HCC, HCA and HCT without audit, pursuant to
the rules and regulations of the Securities and Exchange Commission. In the
opinion of management, these consolidated financial statements and financial
statements contain all adjustments (consisting of only normal recurring
adjustments) necessary to present fairly the consolidated financial position of
HCC and HCT and the financial position of HCA as of September 30, 2000, and the
results of their operations for the three and nine month periods ended September
30, 2000 and 1999 and their cash flows for the nine month periods ended
September 30, 2000 and 1999.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. These financial statements should be read in
conjunction with the financial statements and notes thereto included in HCC and
HCT's 1999 Annual Report on Form 10-K.
Historically, the Aurora Casino and Tunica Casino have experienced some
degree of seasonality. Consequently, the results of operations for the nine
month period ended September 30, 2000 are not necessarily indicative of the
operating results to be reported for the full year.
3
<PAGE>
INDEPENDENT ACCOUNTANTS' REPORT
To the Board of Directors and Stockholders of
Hollywood Casino Corporation
Dallas, Texas
We have reviewed the accompanying condensed consolidated balance sheet of
Hollywood Casino Corporation and subsidiaries as of September 30, 2000, and the
related condensed consolidated statements of operations for the three and nine
month periods ended September 30, 2000 and 1999 and their cash flows for the
nine month periods ended September 30, 2000 and 1999. These financial
statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and of making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in
accordance with auditing standards generally accepted in the United States of
America, the objective of which is the expression of an opinion regarding the
financial statements taken as a whole. Accordingly, we do not express such an
opinion.
Based on our review, we are not aware of any material modifications that should
be made to such condensed consolidated financial statements for them to be in
conformity with accounting principles generally accepted in the United States of
America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet of
Hollywood Casino Corporation and subsidiaries as of December 31, 1999, and the
related consolidated statements of operations, shareholders' deficit and cash
flows for the year then ended (not presented herein); and in our report dated
February 25, 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
October 27, 2000
4
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
September 30,
2000 December 31,
(Unaudited) 1999
------------- ------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 139,218,000 $115,351,000
Accounts receivable, net of allowances of
$2,437,000 and $1,826,000, respectively 4,914,000 4,010,000
Inventories 1,650,000 1,630,000
Deferred income taxes 2,262,000 1,776,000
Refundable deposits and other
current assets 3,618,000 4,096,000
Due from affiliates, net of valuation allowances 7,610,000 7,705,000
------------- ------------
Total current assets 159,272,000 134,568,000
------------- ------------
Property and Equipment:
Land 7,975,000 7,948,000
Buildings and improvements 122,221,000 122,122,000
Riverboats and barges 44,676,000 40,367,000
Operating equipment 89,288,000 85,812,000
Construction in progress 162,319,000 44,331,000
------------- ------------
426,479,000 300,580,000
Less - accumulated depreciation
and amortization (101,605,000) (92,958,000)
------------- ------------
Net property and equipment 324,874,000 207,622,000
------------- ------------
Cash restricted for construction projects 60,228,000 147,310,000
------------- ------------
Other Assets:
Deferred financing costs 15,456,000 15,256,000
Land rights 6,894,000 7,047,000
Land held for sale, net of a valuation allowance of
$3,084,000 in 1999 - 2,216,000
Other assets 12,726,000 11,798,000
------------- ------------
Total other assets 35,076,000 36,317,000
------------- ------------
$ 579,450,000 $525,817,000
============= ============
</TABLE>
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated balance sheets.
5
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' DEFICIT
<TABLE>
<CAPTION>
September 30,
2000 December 31,
(Unaudited) 1999
------------- -------------
<S> <C> <C>
Current Liabilities:
Current maturities of long-term debt
and capital lease obligations $ 11,096,000 $ 4,538,000
Note payable 2,499,000 -
Accounts payable 25,470,000 15,293,000
Accrued liabilities -
Salaries and wages 5,232,000 6,019,000
Interest 23,400,000 16,784,000
Gaming and other taxes 4,747,000 2,586,000
Insurance 2,786,000 2,890,000
Other 4,836,000 4,330,000
Federal income tax payable 3,541,000 3,234,000
Other current liabilities 2,521,000 2,749,000
------------- -------------
Total current liabilities 86,128,000 58,423,000
------------- -------------
Long-Term Debt 511,447,000 514,959,000
------------- -------------
Capital Lease Obligations 32,741,000 18,961,000
------------- -------------
Other Noncurrent Liabilities 5,641,000 5,631,000
------------- -------------
Commitments and Contingencies
Minority Interest in Limited Partnership 2,000,000 2,000,000
------------- -------------
Shareholders' Deficit:
Common Stock -
Class A common stock, $.0001 par value per share;
50,000,000 shares authorized; 24,987,000 and 24,950,000
shares issued and outstanding, respectively 2,000 2,000
Class B, non-voting, $.01 par value per share;
10,000,000 shares authorized; no shares issued - -
Additional paid-in capital 217,018,000 216,928,000
Accumulated deficit (275,527,000) (291,087,000)
------------- -------------
Total shareholders' deficit (58,507,000) (74,157,000)
------------- -------------
$ 579,450,000 $ 525,817,000
============= =============
</TABLE>
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated balance sheets.
6
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
---------------------------
2000 1999
------------ ------------
<S> <C> <C>
Revenues:
Casino $ 85,305,000 $ 79,252,000
Rooms 2,836,000 2,864,000
Food and beverage 8,383,000 7,946,000
Other 1,315,000 1,394,000
------------ ------------
97,839,000 91,456,000
Less - promotional allowances (8,806,000) (8,508,000)
------------ ------------
Net revenues 89,033,000 82,948,000
------------ ------------
Expenses:
Casino 60,609,000 55,813,000
Rooms 353,000 347,000
Food and beverage 2,274,000 2,028,000
Other 580,000 731,000
General and administrative 4,574,000 5,413,000
Depreciation and amortization 3,252,000 3,571,000
Preopening 3,154,000 285,000
Development 293,000 204,000
------------ ------------
Total expenses 75,089,000 68,392,000
------------ ------------
Income from operations 13,944,000 14,556,000
------------ ------------
Non-operating income (expense):
Interest income 2,779,000 3,094,000
Interest expense, net of capitalized interest of $3,686,000
and $256,000, respectively (13,005,000) (13,595,000)
Gain on settlement of litigation, net of related expenses 7,274,000 -
(Loss) gain on disposal of assets (1,000) 1,000
------------ ------------
Total non-operating expense, net (2,953,000) (10,500,000)
------------ ------------
Income before income taxes and other item 10,991,000 4,056,000
Income tax provision (476,000) (574,000)
------------ ------------
Income before other item 10,515,000 3,482,000
Minority interest in earnings of Limited Partnership (Note 1) - (2,380,000)
------------ ------------
Net income $ 10,515,000 $ 1,102,000
============ ============
Basic net income per common share $ .42 $ .05
============ ============
Diluted net income per common share $ .39 $ .04
============ ============
</TABLE>
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated statements.
7
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------------------
2000 1999
------------ ------------
<S> <C> <C>
Revenues:
Casino $247,864,000 $218,011,000
Rooms 7,946,000 7,889,000
Food and beverage 24,535,000 22,264,000
Other 3,608,000 3,537,000
------------ ------------
283,953,000 251,701,000
Less - promotional allowances (25,100,000) (22,829,000)
------------ ------------
Net revenues 258,853,000 228,872,000
------------ ------------
Expenses:
Casino 176,773,000 156,089,000
Rooms 889,000 959,000
Food and beverage 6,731,000 6,381,000
Other 1,403,000 1,809,000
General and administrative 15,186,000 15,413,000
Depreciation and amortization 9,766,000 10,913,000
Preopening 4,562,000 285,000
Development 715,000 688,000
------------ ------------
Total expenses 216,025,000 192,537,000
------------ ------------
Income from operations 42,828,000 36,335,000
------------ ------------
Non-operating income (expense):
Interest income 9,038,000 4,550,000
Interest expense, net of capitalized interest of $7,504,000
and $256,000, respectively (42,219,000) (30,578,000)
Gain on settlement of litigation, net of related expenses 7,274,000 -
Gain (loss) on disposal of assets 191,000 (55,000)
------------ ------------
Total non-operating expense, net (25,716,000) (26,083,000)
------------ ------------
Income before income taxes, extraordinary and other items 17,112,000 10,252,000
Income tax provision (1,552,000) (1,128,000)
------------ ------------
Income before extraordinary and other items 15,560,000 9,124,000
Minority interest in earnings of Limited Partnership (Note 1) - (5,470,000)
------------ ------------
Income before extraordinary item 15,560,000 3,654,000
Extraordinary item - early extinguishment of debt - (30,353,000)
------------ ------------
Net income (loss) $ 15,560,000 $(26,699,000)
============ ============
Basic income (loss) per share:
Before extraordinary item $ .62 $ .15
Extraordinary item - (1.22)
------------ ------------
Net income (loss) $ .62 $ (1.07)
============ ============
Diluted income (loss) per share:
Before extraordinary item $ .59 $ .15
Extraordinary item - (1.21)
------------ ------------
Net income (loss) $ .59 $ (1.06)
============ ============
</TABLE>
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated statements.
8
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------------------
2000 1999
------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ 15,560,000 $ (26,699,000)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Extraordinary item - 30,353,000
Depreciation and amortization, including accretion
of debt discount 11,565,000 12,313,000
(Gain) loss on disposal of assets (191,000) 55,000
Minority interest in earnings of Limited Partnership - 5,470,000
Grant of stock options 15,000 -
Provision for doubtful accounts 985,000 657,000
Deferred income taxes (291,000) (3,000)
Increase in accounts receivable (1,889,000) (854,000)
Increase in accounts payable and accrued expenses 18,876,000 21,690,000
Net change in other current assets and liabilities 280,000 (2,444,000)
Net change in other noncurrent assets and liabilities (1,046,000) (165,000)
------------- -------------
Net cash provided by operating activities 43,864,000 40,373,000
------------- -------------
INVESTING ACTIVITIES:
Purchases of property and equipment (105,317,000) (25,166,000)
Short-term investments - 3,905,000
Restricted cash - (41,467,000)
Decrease (increase) in cash restricted for construction projects 87,082,000 (145,762,000)
Increase in cash from acquisition - 1,525,000
Proceeds from disposal of assets 2,414,000 3,944,000
Loan to joint venture partner - (1,000,000)
Investment in unconsolidated affiliate - (45,000)
------------- -------------
Net cash used in investing activities (15,821,000) (204,066,000)
------------- -------------
FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt 139,000 493,395,000
Deferred financing costs (1,916,000) (16,316,000)
Repayments of long-term debt (2,021,000) (209,244,000)
Payments on capital lease obligations (453,000) (421,000)
Issuance of common stock 75,000 -
Investment by joint venture partner - 1,000,000
Limited partnership distributions - (5,205,000)
------------- -------------
Net cash (used in) provided by financing activities (4,176,000) 263,209,000
------------- -------------
Net increase in cash and cash equivalents 23,867,000 99,516,000
Cash and cash equivalents at beginning of period 115,351,000 42,118,000
------------- -------------
Cash and cash equivalents at end of period $ 139,218,000 $ 141,634,000
============= =============
</TABLE>
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated statements.
9
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) Organization, Business and Basis of Presentation
Hollywood Casino Corporation ("HCC" or the "Company"), is a Delaware
corporation which was organized and incorporated on November 5, 1990.
Approximately 54% of the issued and outstanding stock of HCC is owned by Jack E.
Pratt, Edward T. Pratt, Jr., William D. Pratt, Edward T. Pratt III and by
certain general partnerships and trusts controlled by the Pratts and by other
family members (collectively, the "Pratt Family"). The Pratt Family also owns
approximately 36% of the outstanding common stock of Greate Bay Casino
Corporation ("GBCC"), a Delaware corporation, which previously held management
and consulting contracts with casino properties owned by HCC.
HCC owns all of the outstanding common stock of Hollywood Casino - Aurora,
Inc. ("HCA"), HWCC - Tunica, Inc. ("HCT"), HWCC-Louisiana, Inc. ("HCL") and
HWCC-Shreveport, Inc. ("Shreveport Management"). HCA is an Illinois corporation
organized during 1990 which owns and operates a riverboat gaming operation with
approximately 30,000 square feet of gaming space together with docking and other
entertainment facilities under the service mark Hollywood Casino(R) in Aurora,
Illinois approximately 35 miles west of Chicago (the "Aurora Casino"). HCT is a
Texas corporation formed by HCC during 1993 which owns and operates a 54,000
square foot gaming facility, entertainment facilities and a 506-room hotel
complex under the service mark Hollywood Casino(R) in northern Tunica County,
Mississippi approximately 30 miles southwest of Memphis, Tennessee (the "Tunica
Casino"). The Aurora Casino and the Tunica Casino commenced operations in June
1993 and August 1994, respectively. HCL is a Louisiana corporation formed by
HCC in 1993 to pursue gaming opportunities in Louisiana. HCC owns the
partnership (the "Shreveport Partnership") which owns and is currently
constructing a destination gaming resort including a dockside casino, all suite
hotel and other entertainment facilities located in Shreveport, Louisiana
approximately 180 miles east of Dallas, Texas (the "Shreveport Casino").
Shreveport Management is a Louisiana corporation formed by HCC in 1997 which
holds the management contract for the Shreveport Casino.
The Company believes that its two currently operating gaming facilities
derive a significant amount of their gaming revenues from patrons living in the
surrounding areas. Competition within the Company's gaming markets is intense
and management believes that this competition will continue or intensify in the
future.
Prior to October 14, 1999, HCC was the general partner in Pratt Management,
L.P. ("PML"), having acquired such interest in April 1997 from PPI Corporation,
a wholly owned subsidiary of GBCC (see Note 7). PML held a management contract
on and earned management fees from the Aurora Casino and incurred operating and
other expenses with respect to its management thereof. The remaining limited
partnership interest was held by Pratt Casino Corporation ("PCC"), which was a
wholly owned subsidiary of GBCC until it was acquired by HCC in October 1999
(see below). While owned by GBCC, PCC's limited partnership interest was
reflected on the accompanying consolidated financial statements as a minority
interest. PCC also held a consulting contract with the Tunica Casino.
HCC acquired all of the capital stock of PCC from GBCC in October 1999.
When acquired by HCC, PCC's assets consisted of its management contract for the
Aurora Casino and its consulting agreement with the Tunica Casino and its
liabilities consisted of a $40.3 million obligation payable in satisfaction of
certain notes issued by a subsidiary of PCC and guaranteed by PCC . The payment
of the $40.3 million obligation
10
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
by HCC in October 1999 resulted in the termination of the management contract
and consulting agreement and was reflected as a charge to expense by the
affected entities during 1999.
The accompanying consolidated financial statements also reflect HCT's one-
third investment in Tunica Golf Course LLC under the equity method of
accounting. This limited liability company was organized in 1996 to develop and
operate a golf course to be used by patrons of the Tunica Casino and other
participating casino/hotel properties. The golf course was completed and opened
for play in November 1998.
In September 1998, the Shreveport Partnership received approval to develop,
own and operate the Shreveport Casino. HCL originally planned to develop the
Shreveport Casino with two partners in a joint venture in which it would have
had an interest of approximately 50%. On March 31, 1999, HCL entered into a
definitive agreement with one of the joint venture partners to acquire its
interest in the Shreveport Partnership. The acquisition price was $2,500,000
(the amount the joint venture partner contributed to the project), $1,000 of
which was paid at closing with the remainder to be paid six months after the
opening of the Shreveport Casino (see Note 9). The revised structure of the
joint venture received approval by the Louisiana Gaming Control Board (the
"LGCB") on April 20, 1999. Consequently, HCL now has an effective 100% ownership
interest in the Shreveport Casino with the remaining joint venture partner
holding a residual interest after the commencement of operations and in the
event that the project is ever sold amounting to 10% plus any capital
contributions made by the joint venture partner to the Shreveport Partnership or
otherwise credited to their account. The joint venture partner's interest is
included in minority interest on the accompanying consolidated balance sheets in
the amount of $2,000,000.
The $150,000,000 Shreveport First Mortgage Notes (see Note 3), together
with a total of $49,000,000 of capital contributions from HCL, a $1,000,000
capital contribution from HCL's joint venture partner made with funds loaned by
HCL and $30,000,000 in furniture, fixture and equipment financing (see Note 4)
are expected to provide the estimated $230,000,000 needed to construct and open
the Shreveport Casino. In addition, HCC has agreed to contribute up to an
additional $5,000,000 in equity to the Shreveport Casino under certain
circumstances which include cost overruns or delays. As currently planned, the
Shreveport Casino will consist of a three-level riverboat casino with
approximately 1,436 slot machines and 68 table games and a 403-room, all suite,
art deco style hotel. The project also includes approximately 42,000 square feet
of restaurant and entertainment facilities being developed by a third party. On
April 23, 2000, the construction site for the Shreveport Casino suffered tornado
damage estimated to be less than $3,000,000. Management believes that HCS's
insurance policies will cover these losses. In addition, management of HCS will
seek to recover lost profits under its business interruption insurance coverage
for any delays in opening attributable to the tornado. The Shreveport Casino is
currently scheduled to open in December 2000.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
HCC is self insured for a portion of its general liability, certain health
care and other liability exposures. Accrued insurance includes estimates of
such accrued liabilities based on an evaluation of the merits of individual
claims and historical claims experience; accordingly, HCC's ultimate liability
may differ from the amounts accrued.
11
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(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 and which is effective for fiscal
year end 2000 financial statements. HCC 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 FASB 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 shareholders' equity
until a hedged transaction occurs. The Company 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 September 30, 2000 and for the
three and nine month periods ended September 30, 2000 and 1999 have been
prepared by HCC without audit. In the opinion of management these consolidated
financial statements contain all adjustments (consisting of only normal
recurring adjustments) necessary to present fairly the consolidated financial
position of HCC as of September 30, 2000 and the results of its operations for
the three and nine month periods ended September 30, 2000 and 1999 and its cash
flows for the nine month periods ended September 30, 2000 and 1999.
(2) Earnings per common share
Basic earnings per common share is calculated by dividing the net income
(loss) by the weighted average number of shares of common stock outstanding.
Diluted earnings per common share is calculated for periods in which income from
continuing operations was earned by dividing the components of net income (loss)
by the weighted average number of shares of common stock and potential common
shares outstanding.
The weighted average number of shares of common stock and potential common
shares outstanding used for the calculation of earnings per share is as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Shares used in the calculation of:
Basic net income per share 24,965,574 24,949,976 24,956,728 24,949,976
Diluted net income per share 26,678,218 25,489,395 26,408,044 25,231,700
</TABLE>
The number of shares used in the calculation of diluted earnings per share
for the three and nine month periods ended September 30, 2000 and 1999 has been
adjusted to include potential common shares arising from stock options held by
certain employees and directors. All such options have been included in the
calculation of diluted earnings per share for the 2000 three and nine month
periods. The calculation of diluted earnings per share for the 1999 three and
nine month periods excludes certain options to purchase
12
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
common stock which would be antidilutive to the diluted earnings per share
calculation. The weighted average number of options excluded was 620,000 and
1,125,000, respectively, for the three and nine month periods ended September
30, 1999.
(3) Long-Term Debt and Pledge of Assets
Substantially all of HCC's assets are pledged in connection with its long-
term indebtedness. The obligations of HCL and its subsidiaries are non-recourse
to HCC.
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------ ------------
<S> <C> <C>
Indebtedness of HCC:
11.25% Senior Secured Notes, due 2007 (a) $310,000,000 $310,000,000
Floating rate Senior Secured Notes, due 2006 (a) 50,000,000 50,000,000
Promissory note due to affiliate (Note 7) 1,893,000 2,033,000
------------ ------------
361,893,000 362,033,000
------------ ------------
Indebtedness of HCA:
Promissory note to bank (b) 1,352,000 1,952,000
------------ ------------
Indebtedness of HCT :
Equipment loans (c) 1,440,000 2,488,000
Bank credit facility (d) 150,000 278,000
------------ ------------
1,590,000 2,766,000
------------ ------------
Indebtedness of HCL which is non-recourse to HCC:
13% Shreveport First Mortgage Notes, with contingent
interest, due 2006 (e) 150,000,000 150,000,000
Note payable, net of discount of $105,000
and $241,000, respectively (f) 1,895,000 1,759,000
Other 34,000 -
------------ ------------
151,929,000 151,759,000
------------ ------------
Total indebtedness 516,764,000 518,510,000
Less - current maturities (5,317,000) (3,551,000)
------------ ------------
Total long-term debt $511,447,000 $514,959,000
============ ============
</TABLE>
--------------------
(a) During May 1999, HCC completed the refinancing of its outstanding 12.75%
senior indebtedness through a debt offering of $310,000,000 of 11.25%
Senior Secured Notes due May 1, 2007 and $50,000,000 of floating rate
Senior Secured Notes due May 1, 2006 (collectively, the "Senior Secured
Notes"). Interest on the floating rate notes is equal to the six-month
LIBOR rate plus 6.28% and is reset semiannually. Interest on the floating
rate notes has been adjusted from an initial rate of 11.36% to 12.41% per
annum effective November 1, 1999, to 12.89% effective May 1, 2000 and to
13% effective November 1, 2000. In addition to refinancing existing debt,
the Company used proceeds from the debt offering to fund a portion of its
equity investment in the Shreveport Casino (see Note 1) and, during October
1999, to acquire the management and consulting contracts on the
13
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Aurora Casino and Tunica Casino (see Note 1). The Company also plans to use
proceeds from the debt offering to finance construction of a new, dockside
gaming facility at the Aurora Casino and, to the extent available, for
working capital purposes. Interest on the Senior Secured Notes is payable
each May 1 and November 1. The Senior Secured Notes are unconditionally
guaranteed on a senior secured basis by HCT and Shreveport Management and
may be guaranteed by certain future subsidiaries of HCC. Neither HCA nor
HCL are guarantors. The Senior Secured Notes and related guarantees are
secured by, among other things, (1) substantially all of the assets of HCT
and future guarantors, (2) a lien not to exceed approximately $108,000,000
on substantially all of the assets of HCA, (3) a pledge of the capital
stock of certain subsidiaries of HCC and (4) the collateral assignment of
the management contract for the Shreveport Casino. The limitation on the
lien described in (2) above is currently $66,007,000.
The fixed rate Senior Secured Notes are redeemable at the option of HCC any
time on or after May 1, 2003 at 107% of the then outstanding principal
amount, decreasing to 104.666%, 102.333% and 100%, respectively, on May 1,
2004, 2005 and 2006. The Company may also redeem up to 35% of the fixed
rate Senior Secured Notes at a redemption price of 111.25% plus accrued
interest at any time prior to May 1, 2002 with the proceeds from an
offering of HCC's common stock if net proceeds to the Company from any such
offering are at least $20,000,000.
The floating rate Senior Secured Notes may be redeemed at the option of HCC
at any time at an initial redemption price of 105% plus accrued interest
with the redemption premium decreasing by 1% on May 1 of each year
beginning May 1, 2000.
The indenture for the Senior Secured Notes contains various provisions
limiting the ability of HCC and certain defined subsidiaries to, among
other things, pay dividends or make other restricted payments; incur
additional indebtedness or issue preferred stock, create liens, create
dividend or other payment restrictions affecting certain defined
subsidiaries; enter into mergers or consolidations or make sales of all or
substantially all assets of HCC, HCT, Shreveport Management or any future
guarantor; or enter into certain transactions with affiliates. The
indenture also requires certain financial reporting information (see Note
8).
(b) During September 1998, HCA entered into a bank loan agreement to borrow up
to $2,000,000 on an unsecured basis. Borrowings under the agreement are
payable in 36 monthly installments of $62,000 including interest at the
rate of 7.5% per annum. HCA borrowed $2,000,000 under the agreement during
October 1998.
On May 18, 1999, HCA borrowed an additional $750,000 from the bank on an
unsecured basis. The loan is payable in 60 monthly installments of $15,000
including interest at the rate of 7.5% per annum.
(c) The equipment loans are payable monthly including interest at effective
rates ranging from 8.5% to 12.9% per annum and mature at various dates
between 2000 and 2002. Current maturities of long-term debt with respect
to HCT also includes short-term equipment loans with balances of $26,000
and $51,000 at September 30, 2000 and December 31, 1999, respectively,
which do not accrue interest and which mature during 2000.
14
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(d) HCT had a bank credit facility in the amount of $1,300,000 available to
borrow against until September 30, 1998. HCT borrowed $541,000 under the
credit facility during 1998 at the rate of 8.875% per annum. Borrowings
under the credit facility are to be repaid in monthly installments over a
period of 36 months and are collateralized by equipment purchased with the
loan proceeds. The credit facility was not renewed by HCT.
(e) During August 1999, the Shreveport Partnership issued $150,000,000 of 13%
First Mortgage Notes, with contingent interest, due August 1, 2006 (the
"Shreveport First Mortgage Notes"), which are non-recourse to HCC.
Fixed interest on the Shreveport First Mortgage Notes is payable on each
February 1 and August 1. In addition, contingent interest will accrue and
be payable on each interest payment date after the Shreveport Casino begins
operations. The amount of contingent interest will be equal to 5% of the
Shreveport Casino's cash flow, as defined, for the prior two fiscal
quarters up to a maximum of $5,000,000 for any four consecutive fiscal
quarters. The notes are collateralized by a first priority secured
interest in substantially all of the partnership's existing and future
assets other than furniture, fixtures and equipment for which up to
$35,000,000 of financing has been or will be obtained as well as by a
pledge of the common stock of the HCC subsidiaries which hold the
partnership interests.
The Shreveport First Mortgage Notes are redeemable at the option of the
partnership 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. The Shreveport Partnership may also redeem up
to 35% of the Shreveport First Mortgage Notes at any time prior to August
1, 2002 with proceeds of contributions to the Shreveport Partnership made
by HCC from certain offerings of equity securities by HCC.
The indenture for the Shreveport First Mortgage Notes contains various
provisions limiting the ability of the Shreveport Partnership to borrow
money, pay distributions on its equity interests or prepay debt, make
investments, create liens, sell its assets or enter into mergers or
consolidations. The indenture also restricts the ability of certain HCC
subsidiaries which guarantee the debt to acquire additional assets, become
liable for additional obligations or engage in any business activities
other than holding the partnership interests or acting as managing general
partner of the partnership.
(f) In September 1998, HCL and its partners acquired their interests in the
Shreveport Partnership from its former partners who, prior to October 1997,
conducted riverboat gaming operations in New Orleans. In connection with
moving the licensed site to Shreveport, the current and former partners
negotiated a settlement with the City of New Orleans which, among other
things, required that one of the former partners pay $5,000,000 to the
City. The current partners agreed that the Shreveport Casino would pay the
City of New Orleans $5,000,000 upon securing financing for construction of
their project (the Shreveport Casino); such payment was made in August
1999. In addition, the current partners agreed that the Shreveport Casino
would, contingent on securing financing, reimburse the former partner
$2,000,000 of the amount it paid to the City; such repayment is to be made
at 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
15
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
adjustments to the recorded value of project costs were recorded upon the
issuance of the Shreveport First Mortgage Notes in August 1999.
Scheduled payments of long-term debt as of September 30, 2000 are set forth
below:
2000 (three months) $ 723,000
2001 5,281,000
2002 602,000
2003 175,000
2004 82,000
Thereafter 510,006,000
------------
Total $516,869,000
============
Interest paid, net of amounts capitalized, amounted to $41,188,000 and
$16,278,000, respectively, during the nine month periods ended September 30,
2000 and 1999.
(4) Capital leases
HCA leases two parking garages under capital lease agreements. The first
lease has an initial 30-year term ending in June 2023 with the right to extend
the term under renewal options for an additional 67 years. Rental payments
through June 2012 equal the City of Aurora's financing costs related to its
general obligation bond issue used to finance the construction of the parking
garage. The general obligation bond issue includes interest at rates between 7%
and 7.625% per annum. The second lease has an initial term ending in September
2026 with the right to extend the lease for up to 20 additional years. Rental
payments during the first 15 years equal the lessor's debt service costs related
to the industrial revenue bond issue used to finance a portion of the
construction costs of the parking garage. The remaining construction costs were
funded by HCA. In addition, HCA pays base rent equal to $15,000 per month,
subject to a credit of $615,000 at the rate of $10,000 per month, for
improvements made to the lessor's North Island Center banquet and meeting
facilities. HCA is also responsible for additional rent, consisting of costs
such as maintenance costs, insurance premiums and utilities arising out of its
operation of both parking garages.
HCS entered into a lease agreement with third party lessors for up to
$30,000,000 to be used to acquire furniture, fixture and equipment for the
Shreveport Casino. Borrowings under the lease agreement must be in amounts of
at least $1,000,000 and accrue interest at the rate of LIBOR plus 4%. No more
than two advances may be requested monthly and no more than ten advances may be
requested during the construction period. During the construction period, HCS
only pays interest on outstanding borrowings as well as a fee of .5% per annum
on the undrawn portion of the $30,000,000. When the Shreveport Casino opens,
the outstanding borrowings will become payable in equal quarterly installments
plus interest over a three year period to fully amortize the obligation. The
lease is treated as a capital lease for financial reporting purposes. Borrowings
under the lease are collateralized by the furniture, fixture and equipment
purchased. The lease agreement contains certain covenants substantially similar
to those included in the indenture for the Shreveport First Mortgage Notes (see
Note 3(e)). As of September 30, 2000, borrowings outstanding under the lease
agreement amounted to $19,025,000.
16
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Assets under capital leases and the related accumulated amortization are
included on the accompanying consolidated balance sheets as follows:
September 30, December 31,
2000 1999
----------- -----------
Buildings $27,358,000 $27,358,000
Construction in progress 19,025,000 -
----------- -----------
46,383,000 27,358,000
Less - accumulated amortization (4,960,000) (4,279,000)
----------- -----------
$41,423,000 $23,079,000
=========== ===========
Amortization expense with respect to these assets amounted to $227,000 and
$681,000, respectively, for each of the three and nine month periods ended
September 30, 2000 and 1999.
Based on the borrowings outstanding at September 30, 2000, the future
minimum lease payments under capital lease obligation are as follows:
2000 (three months) $ 1,574,000
2001 10,667,000
2002 10,095,000
2003 9,428,000
2004 2,677,000
Thereafter 18,739,000
------------
Total minimum lease payments 53,180,000
Less - amount representing interest (14,660,000)
------------
Present value of future minimum lease payments 38,520,000
Current capital lease obligation (5,779,000)
------------
Long-term capital lease obligation $ 32,741,000
============
(5) 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 Shreveport First Mortgage Notes (see Note
3) as required by the indenture for the Shreveport 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
Shreveport 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 other current assets on the accompanying consolidated balance
sheets. Upon receipt, interest is included in cash restricted for construction
project.
17
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Cash restricted for construction project is comprised of the following:
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
----------- -----------
<S> <C> <C>
Construction reserve $45,445,000 $114,964,000
Interest reserve 9,504,000 27,275,000
Completion reserve 5,279,000 5,071,000
----------- ------------
$60,228,000 $147,310,000
=========== ============
</TABLE>
(6) Income Taxes
Components of HCC's provision for income taxes consist of the following:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- ----------------------------
2000 1999 2000 1999
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Current:
Federal $ (318,000) $ - $ (318,000) $ -
State (464,000) (579,000) (1,525,000) (1,131,000)
Deferred:
Federal (3,427,000) (259,000) (5,171,000) 9,233,000
State (12,000) 5,000 (27,000) 3,000
Change in valuation allowance 3,745,000 259,000 5,489,000 (9,233,000)
----------- ----------- ------------ ------------
$ (476,000) $ (574,000) $ (1,552,000) $ (1,128,000)
=========== =========== ============ ============
</TABLE>
Federal income tax payments of $35,000 and $169,000, respectively, were
made during the nine month periods ended September 30, 2000 and 1999. State
income tax payments of $1,705,000 and $877,000, respectively, were made during
the nine month periods ended September 30, 2000 and 1999. Current federal income
taxes for the three and nine month periods ended September 30, 2000 were offset
through the use of available tax net operating loss carryforwards ("NOL's").
At September 30, 2000, HCC and its subsidiaries continue to have NOL's
available totaling approximately $35,300,000, none of which begin to expire
until the year 2019. Additionally, HCC and its subsidiaries have alternative
minimum and other tax credits available totaling $4,918,000 and $713,000,
respectively. Alternative minimum tax credits do not expire and none of the
other tax credits begin to expire until the year 2010. Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109")
requires that the tax benefit of such NOL's and credit carryforwards, together
with the tax benefit of deferred tax assets resulting from temporary
differences, be recorded as an asset and, to the extent that management can not
assess that the utilization of all or a portion of such NOL's and deferred tax
assets is more likely than not, a valuation allowance should be recorded.
Management believes that it is more likely than not that future consolidated
taxable income of HCC (primarily from the Aurora Casino and the Tunica Casino)
will be sufficient to utilize a portion of the net deferred tax assets.
Accordingly, valuation
18
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
allowances have been established which result in net deferred tax assets of
$5,537,000 and $5,246,000 at September 30, 2000 and December 31, 1999,
respectively.
The Internal Revenue Service has completed its examination of the
consolidated federal income tax returns of HCC for the years 1993 and 1994. The
additional estimated current federal income tax obligation resulting from such
examination is included in current federal income taxes payable on the
accompanying consolidated balance sheets at September 30, 2000 and December 31,
1999. HCC's consolidated net deferred tax asset has also been adjusted to
reflect the results of the tax audit. The Internal Revenue Service is
continuing its examination of the consolidated federal income tax returns of HCC
for 1995 and 1996. Management believes that the results of such examination will
not have a material adverse effect on the consolidated financial position or
results of operations of HCC.
(7) Transactions with Related Parties
As partial consideration for its April 1, 1997 acquisition of the general
partnership interest in PML (see Note 1), HCC issued a five-year note in the
original amount of $3,800,000 to PPI Corporation. The note payable to PPI
Corporation was amended as of the October 1999 acquisition of PCC (see Note 1)
to provide for monthly installments of $83,000 including interest and additional
quarterly principal payments of $21,000 beginning January 1, 2000. HCC and PPI
Corporation have entered into agreements to defer all payments of principal and
interest on the note otherwise due during the period from March 1, 2000 through
December 1, 2000 while negotiations continue between GBCC and HCC to restructure
certain indebtedness owned by GBCC to HCC. These deferrals do not extend the
final maturity of the note or represent a forgiveness of either principal or
interest as all past due amounts, if not otherwise restructured, will become due
and payable on the extended payment due date of January 1, 2001. The
indebtedness owed by GBCC to HCC had an outstanding principal balance of
$6,750,000 at September 30, 2000. During October 2000, GBCC paid $900,000 of
the outstanding principal balance and agreed to offset an additional $146,000 of
principal against other receivables due from HCC while negotiations to
restructure the debt continue.
(8) Unrestricted Subsidiaries
Under the terms of the indenture to the Senior Secured Notes (see Note 3),
certain subsidiaries and investees of HCC have been designated as "Unrestricted
Subsidiaries." Unrestricted Subsidiaries generally do not provide credit
support for the Senior Secured Notes and obligations of Unrestricted
Subsidiaries are non-recourse to HCC. Unrestricted Subsidiaries of HCC
presently consist of HCL and its subsidiaries; HWCC-Holdings, Inc. and HWCC-Golf
Course Partners, Inc. The following presentation summarizes the
19
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
financial position and results of operations of the Company reflecting its
Unrestricted Subsidiaries under the equity method of accounting. Such
information is not intended to be a presentation in conformity with generally
accepted accounting principles and is included for purposes of complying with
certain reporting requirements as contained in the indenture to the Senior
Secured Notes.
Condensed Balance Sheet
Equity Method for Investment in Unrestricted Subsidiaries
September 30, 2000
(amounts in thousands)
<TABLE>
<S> <C> <C> <C>
Current Assets: Current Liabilities:
Cash and cash items $128,473 Current maturities of long-
Accounts receivable, net of allowance term debt and capital leases $ 4,439
of $2,437 4,914 Accounts payable and accrued
Inventories 1,650 liabilities 45,833
Prepaid expenses and other current assets 4,729 Other current liabilities 2,521
---------
Due from affiliates 7,610 52,793
-------- ---------
147,376
--------
Investment in and advances to Long-term debt 361,419
Unrestricted Subsidiaries 40,886 ---------
--------
Capital lease obligations 18,472
Property and equipment, net of ---------
accumulated depreciation and Other noncurrent liabilities 5,641
amortization of $101,584 165,604 ---------
--------
Shareholders' deficit:
Other Assets: Common stock 2
Deferred finance costs 9,254 Additional paid-in capital 217,018
Other assets 16,698 Accumulated deficit (275,527)
-------- ---------
25,952 (58,507)
-------- ---------
$379,818 $ 379,818
======== =========
</TABLE>
20
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Condensed Statements of Operations
Equity Method for Investment in Unrestricted Subsidiaries
Three and Nine Month Periods Ended September 30, 2000
(amounts in thousands)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, 2000 September 30, 2000
------------------ ------------------
<S> <C> <C>
Net revenues $ 89,033 $ 258,853
------------ ------------
Expenses:
Departmental expenses 63,793 185,773
General and administrative 4,501 14,962
Depreciation and amortization 3,240 9,747
Development 293 715
------------ ------------
Total expenses 71,827 211,197
------------ ------------
Income from operations 17,206 47,656
Non-operating expense, net (2,576) (22,643)
------------ ------------
Income before taxes and other item 14,630 25,013
Provision for taxes (476) (1,552)
------------ ------------
Income before other item 14,154 23,461
Equity in losses of unrestricted subsidiaries (3,639) (7,901)
------------ ------------
Net income $ 10,515 $ 15,560
============ ============
</TABLE>
(9) Supplemental Cash Flow Information
During the first nine months of 2000, HCS obtained proceeds under capital
lease obligations amounting to $19,025,000 used to purchase fixed assets during
the construction period (see Note 4).
21
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
In connection with the acquisition by HCL of one of its joint venture
partners in the Shreveport Partnership (see Note 1) during April 1999, the joint
venture became a consolidated subsidiary of HCC. The acquisition of the joint
venture interest and consolidation of the joint venture resulted in the
assumption of liabilities as follows:
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
===========
The contingent liability of $2,499,000 shown above was recorded as a non-
cash transaction during the second quarter of 2000 and is reflected as a note
payable on the accompanying consolidated balance sheet at September 30, 2000.
The issuance of a note to a former partner of the Shreveport Partnership at
a discounted face amount of $1,692,000 (see Note 3(f)) and the associated
project costs have been excluded from the accompanying consolidated statement of
cash flows for the nine month period ended September 30, 1999 as a non-cash
transaction.
HCL's joint venture partner was credited with an additional $1,000,000
capital contribution to the Shreveport Partnership in recognition of certain
guarantees it provided in order to obtain LGCB approval for the Shreveport
Casino. The increase in minority interest and the corresponding addition to
construction in progress have been excluded from the accompanying consolidated
statement of cash flows for the nine month period ended September 30, 1999 as a
non-cash transaction.
(10) Litigation
On October 8, 1998, the Company filed a complaint against its former
independent accountants and tax advisors in the District Court of Dallas County,
Texas. On September 8, 2000, a mutually acceptable agreement was reached
concluding the dispute and resulting in the dismissal of the lawsuit. Terms of
the settlement are confidential; however, the Company recognized a pretax gain
on the settlement, net of related legal fees and other expenses, amounting to
$7,274,000, which is included in non-operating income on the accompanying
consolidated statements of operations for the three and nine month periods ended
September 30, 2000.
(11) Reclassifications
Certain reclassifications have been made to the prior year's consolidated
financial statements to conform to the 2000 consolidated financial statement
presentation.
22
<PAGE>
INDEPENDENT ACCOUNTANTS' REPORT
To the Board of Directors and Stockholders of
Hollywood Casino Corporation
Dallas, Texas
We have reviewed the accompanying condensed balance sheet of Hollywood Casino-
Aurora, Inc. as of September 30, 2000, and the related condensed statements of
operations for the three and nine month periods ended September 30, 2000 and
1999 and its cash flows for the nine month periods ended September 30, 2000 and
1999. These financial statements are the responsibility of the Company's
management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and of making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with auditing standards generally accepted in the United States of America, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to such condensed financial statements for them to be in conformity with
accounting principles generally accepted in the United States of America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the balance sheet of Hollywood Casino-
Aurora, Inc. as of December 31, 1999, and the related statements of operations,
shareholder's equity and cash flows for the year then ended (not presented
herein); and in our report dated February 25, 2000, we expressed an unqualified
opinion on those financial statements. In our opinion, the information set forth
in the accompanying condensed balance sheet as of December 31, 1999 is fairly
stated, in all material respects, in relation to the balance sheet from which it
has been derived.
DELOITTE & TOUCHE LLP
Dallas, Texas
October 27, 2000
23
<PAGE>
HOLLYWOOD CASINO - AURORA, INC.
(wholly owned by Hollywood Casino Corporation)
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
September 30,
2000 December 31,
(Unaudited) 1999
------------ ------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 27,761,000 $ 22,148,000
Accounts receivable, net of allowances
of $948,000 and $836,000, respectively 1,245,000 992,000
Inventories 924,000 845,000
Deferred income taxes 2,047,000 1,809,000
Due from affiliates 7,000 1,956,000
Prepaid expenses and other current assets 1,016,000 758,000
------------ ------------
Total current assets 33,000,000 28,508,000
------------ ------------
Property and Equipment:
Land improvements 3,167,000 3,167,000
Buildings and improvements 46,205,000 46,205,000
Riverboats and barge 42,152,000 37,843,000
Operating equipment 42,190,000 39,898,000
Construction in progress 1,855,000 1,625,000
------------ ------------
135,569,000 128,738,000
Less - accumulated depreciation and amortization (52,963,000) (47,717,000)
------------ ------------
Net property and equipment 82,606,000 81,021,000
------------ ------------
Other Assets 2,270,000 2,230,000
------------ ------------
$117,876,000 $111,759,000
============ ============
</TABLE>
The accompanying introductory notes and notes to financial statements are an
integral part of these balance sheets.
24
<PAGE>
HOLLYWOOD CASINO - AURORA, INC.
(wholly owned by Hollywood Casino Corporation)
BALANCE SHEETS
LIABILITIES AND SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
September 30,
2000 December 31,
(Unaudited) 1999
------------- ------------
<S> <C> <C>
Current Liabilities:
Current maturities of long-term debt
and capital lease obligations $ 1,878,000 $ 1,794,000
Accounts payable 2,187,000 1,857,000
Accrued liabilities -
Salaries and wages 1,972,000 2,758,000
Interest 3,775,000 1,769,000
Gaming and other taxes 3,959,000 1,129,000
Insurance 849,000 1,051,000
Other 1,963,000 2,115,000
Due to affiliates 2,185,000 218,000
Other current liabilities 1,193,000 1,479,000
------------ ------------
Total current liabilities 19,961,000 14,170,000
------------ ------------
Long-Term Debt 66,504,000 67,152,000
------------ ------------
Capital Lease Obligations 18,472,000 18,961,000
------------ ------------
Deferred Income Taxes 5,983,000 5,429,000
------------ ------------
Commitments and Contingencies
Shareholder's Equity:
Common stock, $.01 par value per share;
2,000,000 shares authorized; 1,501,000
shares issued and outstanding 15,000 15,000
Additional paid-in capital 25,541,000 25,541,000
Accumulated deficit (18,600,000) (19,509,000)
------------ ------------
Total shareholder's equity 6,956,000 6,047,000
------------ ------------
$117,876,000 $111,759,000
============ ============
</TABLE>
The accompanying introductory notes and notes to financial statements are an
integral part of these balance sheets.
25
<PAGE>
HOLLYWOOD CASINO - AURORA, INC.
(wholly owned by Hollywood Casino Corporation)
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
-------------------------
2000 1999
----------- -----------
<S> <C> <C>
Revenues:
Casino $56,593,000 $51,714,000
Food and beverage 4,062,000 3,806,000
Other 949,000 1,025,000
----------- -----------
61,604,000 56,545,000
Less - promotional allowances (3,317,000) (3,101,000)
----------- -----------
Net revenues 58,287,000 53,444,000
----------- -----------
Expenses:
Casino 38,076,000 34,452,000
Food and beverage 1,229,000 1,105,000
Other 310,000 376,000
General and administrative 1,329,000 4,308,000
Depreciation and amortization 1,768,000 1,763,000
----------- -----------
Total expenses 42,712,000 42,004,000
----------- -----------
Income from operations 15,575,000 11,440,000
----------- -----------
Non-operating income (expense):
Interest income 301,000 184,000
Interest expense (2,255,000) (1,251,000)
(Loss) gain on disposal of assets (8,000) 1,000
----------- -----------
Total non-operating expense, net (1,962,000) (1,066,000)
----------- -----------
Income before income taxes 13,613,000 10,374,000
Income tax provision (4,926,000) (4,613,000)
----------- -----------
Net income $ 8,687,000 $ 5,761,000
=========== ===========
</TABLE>
The accompanying introductory notes and notes to financial statements
are an integral part of these financial statements.
26
<PAGE>
HOLLYWOOD CASINO - AURORA, INC.
(wholly owned by Hollywood Casino Corporation)
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
---------------------------
2000 1999
------------ ------------
<S> <C> <C>
Revenues:
Casino $165,642,000 $139,716,000
Food and beverage 11,892,000 10,756,000
Other 2,538,000 2,511,000
------------ ------------
180,072,000 152,983,000
Less - promotional allowances (9,428,000) (8,282,000)
------------ ------------
Net revenues 170,644,000 144,701,000
------------ ------------
Expenses:
Casino 111,875,000 96,742,000
Food and beverage 3,699,000 3,585,000
Other 800,000 900,000
General and administrative 4,080,000 10,992,000
Depreciation and amortization 5,260,000 5,318,000
------------ ------------
Total expenses 125,714,000 117,537,000
------------ ------------
Income from operations 44,930,000 27,164,000
------------ ------------
Non-operating income (expense):
Interest income 897,000 337,000
Interest expense (6,786,000) (4,004,000)
(Loss) gain on disposal of assets (7,000) 2,000
------------ ------------
Total non-operating expense, net (5,896,000) (3,665,000)
------------ ------------
Income before income taxes 39,034,000 23,499,000
Income tax provision (14,322,000) (9,592,000)
------------ ------------
Net income $ 24,712,000 $ 13,907,000
============ ============
</TABLE>
The accompanying introductory notes and notes to financial statements
are an integral part of these financial statements.
27
<PAGE>
HOLLYWOOD CASINO - AURORA, INC.
(wholly owned by Hollywood Casino Corporation)
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
---------------------------
2000 1999
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 24,712,000 $ 13,907,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 5,260,000 5,318,000
Provision for doubtful accounts 135,000 225,000
Loss (gain) on disposal of assets 7,000 (2,000)
Deferred income tax (provision) benefit 316,000 (68,000)
Increase in receivables (388,000) (134,000)
Increase in accounts payable and accrued liabilities 4,026,000 3,512,000
Net change in affiliate accounts 3,916,000 7,952,000
Net change in other current assets and liabilities (623,000) 194,000
Net change in other assets and liabilities (40,000) (5,000)
------------ ------------
Net cash provided by operating activities 37,321,000 30,899,000
------------ ------------
INVESTING ACTIVITIES:
Purchases of property and equipment (6,859,000) (2,939,000)
Proceeds from sale of assets 7,000 2,000
------------ ------------
Net cash used in investing activities (6,852,000) (2,937,000)
------------ ------------
FINANCING ACTIVITIES:
Proceeds from the issuance of long-term debt - 29,757,000
Repayments of debt (600,000) (32,012,000)
Payments on capital lease obligations (453,000) (421,000)
Dividends (23,803,000) (6,120,000)
------------ ------------
Net cash used in financing activities (24,856,000) (8,796,000)
------------ ------------
Net increase in cash and cash equivalents 5,613,000 19,166,000
Cash and cash equivalents at beginning of period 22,148,000 9,718,000
------------ ------------
Cash and cash equivalents at end of period $ 27,761,000 $ 28,884,000
============ ============
</TABLE>
The accompanying introductory notes and notes to financial statements
are an integral part of these financial statements.
28
<PAGE>
HOLLYWOOD CASINO - AURORA, INC.
(wholly owned by Hollywood Casino Corporation)
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
(1) Organization, Business and Basis of Presentation
Hollywood Casino - Aurora, Inc. ("HCA") is an Illinois corporation and a
wholly owned subsidiary of Hollywood Casino Corporation ("HCC"), a Delaware
corporation. HCA was organized and incorporated during December 1990 by certain
relatives of Jack E. Pratt, Edward T. Pratt, Jr. and William D. Pratt
(collectively, the "Pratt Family") for the purpose of developing and holding the
ownership interest in a riverboat gaming operation located in Aurora, Illinois
(the "Aurora Casino"). In May 1992, HCC, which was then wholly owned by members
of the Pratt Family or by certain general partnerships and trusts controlled by
the Pratt Family, acquired all of the outstanding stock of HCA through the
issuance of HCC stock.
The Aurora Casino consists of two, four-level riverboats having a combined
casino space of approximately 32,000 square feet and a four-level pavilion and
docking facility which houses ticketing, food service, passenger waiting, and
various administrative functions. The Aurora Casino also includes two parking
structures with approximately 1,350 parking spaces. HCA was responsible for the
design and construction of the parking garages; however, it leases the
facilities under long-term lease agreements. The leases are treated as capital
leases for financial reporting purposes.
The Aurora Casino commenced operations on June 17, 1993. HCA's current
Owner's License was renewed in December 1999 for a period of one year to
December 2000. Gaming taxes imposed by the state of Illinois are determined
using a graduated tax rate applied to the licensee's gaming revenues. HCA
expenses such gaming taxes based on its anticipated annual effective tax rate.
HCA estimates that a significant amount of the Aurora Casino's revenues are
derived from patrons living in the Chicago area and surrounding northern and
western suburbs. The Aurora Casino faces intense competition from other
riverboat gaming operations in Illinois and Indiana which serve the Chicago area
and management believes that this competition will continue in the future.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
HCA is self insured for a portion of its general liability, certain health
care and other liability exposures. Accrued insurance includes estimates of
such accrued liabilities based on an evaluation of the merits of individual
claims and historical claims experience; accordingly, HCA's ultimate liability
may differ from the amounts accrued.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin 101, "Revenue Recognition in Financial Statements," which
summarizes the application of generally accepted accounting principles to
revenue recognition in financial statements and which is effective for fiscal
year end 2000 financial statements. HCA does not believe the adoption of Staff
Accounting Bulletin 101 will have a significant impact on its financial position
or results of operations.
29
<PAGE>
HOLLYWOOD CASINO - AURORA, INC.
(wholly owned by Hollywood Casino Corporation)
NOTES TO FINANCIAL STATEMENTS (Continued)
(Unaudited)
In June 1998, the FASB 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 shareholder's equity
until a hedged transaction occurs. HCA does not believe the adoption of SFAS
133 will have a significant impact on its financial position or results of
operations.
The financial statements as of September 30, 2000 and for the three and
nine month periods ended September 30, 2000 and 1999 have been prepared by HCA
without audit. In the opinion of management, these financial statements contain
all adjustments (consisting of only normal recurring adjustments) necessary to
present fairly the financial position of HCA as of September 30, 2000 and the
results of its operations for the three and nine month periods ended September
30, 2000 and 1999 and its cash flows for the nine month periods ended September
30, 2000 and 1999.
(2) Long-Term Debt and Pledge of Assets
HCA's long-term indebtedness consists of the following:
September 30, December 31,
2000 1999
----------- -----------
11.25% Promissory note to HCC, due on
May 1, 2007 (a) $66,007,000 $66,007,000
Promissory notes to bank (b) 1,352,000 1,952,000
----------- -----------
Total indebtedness 67,359,000 67,959,000
Less - current maturities (855,000) (807,000)
----------- -----------
Total long-term debt $66,504,000 $67,152,000
=========== ===========
--------------------
(a) The intercompany note was issued as of May 19, 1999 and accrues interest at
the rate of 11.25% per annum. The initial borrowing on the note in the
amount of $29,007,000 replaced a previous intercompany note with HCC which
accrued interest at the rate of 12.75%. During October 1999, HCA borrowed
an additional $37,000,000 from HCC under the note agreement to acquire and
terminate its management contract (see Note 4). HCA may borrow up to a
total of $108,000,000 under the intercompany note agreement. Interest on
advances is payable each October 15 and April 15. The intercompany note is
pledged as security with respect to HCC's $360,000,000 Senior Secured Notes
due in 2006 and 2007. HCA is not a guarantor of HCC's indebtedness;
however, the indebtedness is secured, in part, by a lien on substantially
all of the assets of HCA and by a pledge of the capital stock of HCA. The
lien is limited to the outstanding principal amount on the intercompany
note to HCC.
30
<PAGE>
HOLLYWOOD CASINO - AURORA, INC.
(wholly owned by Hollywood Casino Corporation)
NOTES TO FINANCIAL STATEMENTS (Continued)
(Unaudited)
(b) During September 1998, HCA entered into a bank loan agreement to borrow up
to $2,000,000 on an unsecured basis. Borrowings under the agreement are
payable in 36 monthly installments of $62,000 including interest at the
rate of 7.5% per annum. HCA borrowed $2,000,000 under the agreement during
October 1998.
On May 18, 1999, HCA borrowed an additional $750,000 from the bank on an
unsecured basis. The loan is payable in 60 monthly installments of $15,000
including interest at the rate of 7.5% per annum.
As of September 30, 2000, future maturities of long-term debt are as
follows:
2000 (three months) $ 207,000
2001 747,000
2002 156,000
2003 168,000
2004 74,000
Thereafter 66,007,000
-----------
$67,359,000
===========
Interest paid for the nine month periods ended September 30, 2000 and 1999
amounted to $4,780,000 and $3,497,000, respectively.
(3) Income Taxes
HCA's (provision) benefit for income taxes consists of the following:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- --------------------------
2000 1999 2000 1999
----------- ----------- ------------ -----------
Current:
Federal $(4,318,000) $(4,154,000) $(12,482,000) $(8,559,000)
State (463,000) (567,000) (1,524,000) (1,101,000)
Deferred:
Federal (133,000) 103,000 (289,000) 65,000
State (12,000) 5,000 (27,000) 3,000
----------- ----------- ------------ -----------
$(4,926,000) $(4,613,000) $(14,322,000) $(9,592,000)
=========== =========== ============ ===========
HCA is included in HCC's consolidated federal income tax return. Pursuant
to agreements between HCC and HCA, HCA's current provision for federal income
taxes is based on the amount of tax which would
31
<PAGE>
be provided if a separate federal income tax return were filed. HCA paid federal
income taxes amounting to $9,020,000 and $956,000, respectively, during the nine
month periods ended September 30, 2000 and 1999 and state income taxes of
$1,705,000 and $864,000, respectively, during the nine month periods ended
September 30, 2000 and 1999.
The Internal Revenue Service has completed its examination of the
consolidated federal income tax returns of HCC for the years 1993 and 1994 as
they pertain to HCA. The intercompany tax obligation under the tax sharing
agreement and the net deferred tax liability have been adjusted to reflect the
results of such examination. The Internal Revenue Service is continuing its
examination of the consolidated federal income tax returns of HCC for 1995 and
1996. Management believes that the results of such examination will not have a
material adverse effect on the financial position or results of operations of
HCA.
(4) Transactions with Related Parties
Pursuant to a management services agreement which was terminated in October
1999, HCA paid base management and incentive fees to Pratt Management, L.P.
("PML"), a limited partnership in which HCC was the general partner and a
subsidiary of Greate Bay Casino Corporation ("GBCC") was the limited partner.
Prior to December 31, 1996, GBCC was an approximately 80% owned subsidiary of
HCC. HCA incurred management and incentive fees totaling $3,061,000 during the
three month period ended September 30, 1999 and $7,273,000 during the nine month
period ended September 30, 1999. During October 1999, HCC acquired the GBCC
subsidiary which held the limited partnership in PML. HCA borrowed an additional
$37,000,000 under its intercompany note with HCC (see Note 2) to acquire and
terminate the management contract. Accordingly, effective October 13, 1999, HCA
no longer pays a management fee. HCA reflected the $37,000,000 payment as an
expense to terminate the management contract during the fourth quarter of 1999.
(5) Reclassifications
Certain reclassifications have been made to the prior year's financial
statements to conform to the 2000 financial statement presentation.
32
<PAGE>
INDEPENDENT ACCOUNTANTS' REPORT
To the Board of Directors and Stockholders of
Hollywood Casino Corporation
Dallas, Texas
We have reviewed the accompanying condensed consolidated balance sheet of HWCC-
Tunica, Inc. and subsidiary as of September 30, 2000, and the related condensed
consolidated statements of operations for the three and nine month periods ended
September 30, 2000 and 1999 and their cash flows for the nine month periods
ended September 30, 2000 and 1999. These financial statements are the
responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and of making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in
accordance with auditing standards generally accepted in the United States of
America, the objective of which is the expression of an opinion regarding the
financial statements taken as a whole. Accordingly, we do not express such an
opinion.
Based on our review, we are not aware of any material modifications that should
be made to such condensed consolidated financial statements for them to be in
conformity with accounting principles generally accepted in the United States of
America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet of
HWCC-Tunica, Inc. and subsidiary 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 February 25,
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
October 27, 2000
33
<PAGE>
HWCC - TUNICA, INC. AND SUBSIDIARY
(wholly owned by Hollywood Casino Corporation)
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
September 30,
2000 December 31,
(Unaudited) 1999
------------- ------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 14,527,000 $ 10,339,000
Accounts receivable, net of allowances of
$1,489,000 and $990,000, respectively 3,487,000 2,722,000
Inventories 726,000 785,000
Deferred income taxes 1,261,000 1,346,000
Prepaid expenses and other current assets 1,319,000 1,190,000
Due from affiliates 44,000 503,000
------------ ------------
Total current assets 21,364,000 16,885,000
------------ ------------
Property and Equipment:
Land and improvements 4,808,000 4,781,000
Buildings 76,109,000 76,011,000
Barges 2,524,000 2,524,000
Operating equipment 45,180,000 44,815,000
Construction in progress 1,483,000 134,000
------------ ------------
130,104,000 128,265,000
Less - accumulated depreciation and amortization (47,975,000) (44,575,000)
------------ ------------
Net property and equipment 82,129,000 83,690,000
------------ ------------
Other Assets:
Land rights 6,894,000 7,047,000
Other assets 4,837,000 4,776,000
------------ ------------
Total other assets 11,731,000 11,823,000
------------ ------------
$115,224,000 $112,398,000
============ ============
</TABLE>
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated balance sheets.
34
<PAGE>
HWCC - TUNICA, INC. AND SUBSIDIARY
(wholly owned by Hollywood Casino Corporation)
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
September 30,
2000 December 31,
(Unaudited) 1999
------------- ------------
<S> <C> <C>
Current Liabilities:
Current maturities of long-term debt
and capital lease obligations $ 1,138,000 $ 1,491,000
Accounts payable 1,577,000 1,081,000
Accrued liabilities -
Salaries and wages 2,084,000 1,569,000
Interest 437,000 437,000
Gaming and other taxes 747,000 1,340,000
Insurance 1,939,000 1,839,000
Other 2,786,000 2,214,000
Other current liabilities 1,238,000 1,168,000
------------ ------------
Total current liabilities 11,946,000 11,139,000
------------ ------------
Long-Term Debt 87,826,000 88,649,000
------------ ------------
Commitments and Contingencies
Shareholder's Equity:
Common stock, $.01 par value
per share; 100,000 shares authorized;
1,000 shares issued and outstanding - -
Additional paid-in capital 22,637,000 22,637,000
Accumulated deficit (7,185,000) (10,027,000)
------------ ------------
Total shareholder's equity 15,452,000 12,610,000
------------ ------------
$115,224,000 $112,398,000
============ ============
</TABLE>
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated balance sheets.
35
<PAGE>
HWCC - TUNICA, INC. AND SUBSIDIARY
(wholly owned by Hollywood Casino Corporation)
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
--------------------------
2000 1999
----------- -----------
<S> <C> <C>
Revenues:
Casino $28,712,000 $27,538,000
Rooms 2,836,000 2,864,000
Food and beverage 4,321,000 4,140,000
Other 360,000 370,000
----------- -----------
36,229,000 34,912,000
Less - promotional allowances (5,489,000) (5,407,000)
----------- -----------
Net revenues 30,740,000 29,505,000
----------- -----------
Expenses:
Casino 22,533,000 21,361,000
Rooms 353,000 347,000
Food and beverage 1,045,000 923,000
Other 247,000 294,000
General and administrative 1,218,000 1,510,000
Depreciation and amortization 1,417,000 1,800,000
----------- -----------
Total expenses 26,813,000 26,235,000
----------- -----------
Income from operations 3,927,000 3,270,000
----------- -----------
Non-operating income (expenses):
Interest income 66,000 90,000
Interest expense (2,499,000) (2,450,000)
Equity in losses of unconsolidated affiliate (23,000) (61,000)
Gain on disposal of assets 7,000 -
----------- -----------
Total non-operating expenses, net (2,449,000) (2,421,000)
----------- -----------
Income before income taxes 1,478,000 849,000
Income tax provision (148,000) (563,000)
----------- -----------
Net income $ 1,330,000 $ 286,000
=========== ===========
</TABLE>
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated statements.
36
<PAGE>
HWCC - TUNICA, INC. AND SUBSIDIARY
(wholly owned by Hollywood Casino Corporation)
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------------------
2000 1999
------------ ------------
<S> <C> <C>
Revenues:
Casino $ 82,222,000 $ 78,295,000
Rooms 7,946,000 7,889,000
Food and beverage 12,643,000 11,508,000
Other 1,064,000 1,022,000
------------ ------------
103,875,000 98,714,000
Less - promotional allowances (15,672,000) (14,547,000)
------------ ------------
Net revenues 88,203,000 84,167,000
------------ ------------
Expenses:
Casino 64,898,000 59,347,000
Rooms 889,000 959,000
Food and beverage 3,032,000 2,796,000
Other 580,000 848,000
General and administrative 3,734,000 4,561,000
Depreciation and amortization 4,356,000 5,558,000
------------ ------------
Total expenses 77,489,000 74,069,000
------------ ------------
Income from operations 10,714,000 10,098,000
------------ ------------
Non-operating income (expenses):
Interest income 163,000 297,000
Interest expense (7,528,000) (7,803,000)
Equity in losses of unconsolidated affiliate (23,000) (61,000)
Gain (loss) on disposal of assets 7,000 (57,000)
------------ ------------
Total non-operating expenses, net (7,381,000) (7,624,000)
------------ ------------
Income before income taxes 3,333,000 2,474,000
Income tax provision (491,000) (563,000)
------------ ------------
Net income $ 2,842,000 $ 1,911,000
============ ============
</TABLE>
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated statements.
37
<PAGE>
HWCC - TUNICA, INC. AND SUBSIDIARY
(wholly owned by Hollywood Casino Corporation)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
--------------------------
2000 1999
----------- ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 2,842,000 $ 1,911,000
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 4,356,000 5,558,000
Provision for doubtful accounts 850,000 432,000
(Gain) loss on disposal of assets (7,000) 57,000
Equity in losses of unconsolidated affiliate 23,000 61,000
Increase in accounts receivable (1,615,000) (1,690,000)
Deferred tax provision - (151,000)
Increase in accounts payable
and accrued expenses 1,090,000 2,232,000
Net change in other current assets and liabilities 464,000 (22,000)
Net change in other noncurrent assets and liabilities (5,000) 25,000
----------- ------------
Net cash provided by operating activities 7,998,000 8,413,000
----------- ------------
INVESTING ACTIVITIES:
Purchases of property and equipment (2,634,000) (5,359,000)
Short-term investments - 3,905,000
Investment in unconsolidated affiliate - (45,000)
Proceeds from sale of assets - 55,000
----------- ------------
Net cash used in investing activities (2,634,000) (1,444,000)
----------- ------------
FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt 104,000 86,271,000
Repayments of long-term debt (1,280,000) (85,045,000)
Dividends - (8,000,000)
----------- ------------
Net cash used in financing activities (1,176,000) (6,774,000)
----------- ------------
Net increase in cash and cash equivalents 4,188,000 195,000
Cash and cash equivalents at beginning of period 10,339,000 16,325,000
----------- ------------
Cash and cash equivalents at end of period $14,527,000 $ 16,520,000
=========== ============
</TABLE>
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated statements.
38
<PAGE>
HWCC - TUNICA, INC. AND SUBSIDIARY
(wholly owned by Hollywood Casino Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) Organization, Business and Basis of Presentation
HWCC - Tunica, Inc. ("HCT") is a Texas corporation and a wholly owned
subsidiary of Hollywood Casino Corporation ("HCC"), a Delaware corporation. HCT
was incorporated in December 1993 for the purpose of acquiring and completing a
gaming facility in northern Tunica County, Mississippi approximately 30 miles
southwest of Memphis, Tennessee. The facility (the "Tunica Casino") was
completed and commenced operations on August 8, 1994 under the service mark
Hollywood Casino(R). The Tunica Casino currently includes a casino with 54,000
square feet of gaming space, 506 hotel rooms and suites, a 123-space
recreational vehicle park and related amenities. HCT's gaming license has been
renewed by the Mississippi Gaming Commission through October 18, 2001.
The accompanying consolidated financial statements include the accounts of
HCT and its wholly owned subsidiary, HWCC-Golf Course Partners, Inc. ("Golf").
All significant intercompany balances have been eliminated in consolidation.
Golf, a Delaware corporation, was formed in 1996 to own an initial one-third
interest in Tunica Golf Course LLC, a limited liability company organized to
develop and operate a golf course to be used by patrons of the Tunica Casino and
other participating casino/hotel properties. The golf course opened for
business in November 1998. Golf's investment in Tunica Golf Course, LLC is
accounted for under the equity method of accounting and is included in other
noncurrent assets on the accompanying consolidated balance sheets at September
30, 2000 and December 31, 1999.
HCT estimates that a significant amount of the Tunica Casino's revenues are
derived from patrons living in the Memphis, Tennessee area, northern Mississippi
and Arkansas. The Tunica Casino faces intense competition from other casinos
operating in northern Tunica County and management believes that this
competition will continue in the future.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
HCT is self insured for a portion of its general liability, certain health
care and other liability exposures. Accrued insurance includes estimates of
such accrued liabilities based on an evaluation of the merits of individual
claims and historical claims experience; accordingly, HCT's ultimate liability
may differ from the amounts accrued.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin 101, "Revenue Recognition in Financial Statements", which
summarizes the application of generally accepted accounting principles to
revenue recognition in financial statements and which is effective for fiscal
year end 2000 financial statements. HCT 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 FASB 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
shareholder's equity until a hedged transaction occurs. HCT does not believe
the adoption of SFAS 133 will have a significant impact on its consolidated
financial position or results of operations.
39
<PAGE>
HWCC - TUNICA, INC. AND SUBSIDIARY
(wholly owned by Hollywood Casino Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The consolidated financial statements as of September 30, 2000 and for the
three and nine month periods ended September 30, 2000 and 1999 have been
prepared by HCT without audit. In the opinion of management, these consolidated
financial statements contain all adjustments (consisting of only normal
recurring adjustments) necessary to present fairly the consolidated financial
position of HCT as of September 30, 2000 and the results of its operations for
the three and nine month periods ended September 30, 2000 and 1999 and its cash
flows for the nine month periods ended September 30, 2000 and 1999.
(2) Long-Term Debt and Pledge of Assets
Substantially all of HCT's assets are pledged in connection with its long-
term indebtedness. Long-term debt consists of the following:
September 30, December 31,
2000 1999
------------ -----------
11.25% Promissory note to HCC due May 1, 2007 (a) $ 87,045,000 $87,045,000
Note payable to HCC (a) 329,000 329,000
Equipment loans (b) 1,440,000 2,488,000
Bank credit facility (c) 150,000 278,000
------------ -----------
Total indebtedness 88,964,000 90,140,000
Less - current maturities (1,138,000) (1,491,000)
------------ -----------
Total long-term debt $ 87,826,000 $88,649,000
============ ===========
--------------------
(a) The intercompany note was issued as of May 19, 1999 and accrues interest at
the rate of 11.25% per annum. The initial borrowing on the note in the
amount of $84,045,000 replaced previous intercompany notes with HCC which
accrued interest at the rate of 12.75%. During October 1999, HCT borrowed
the additional $3,000,000 available under the intercompany note as well as
an additional $329,000 under a new note agreement with HCC to acquire and
terminate its consulting agreement (see Note 4). No additional borrowings
are available under the 11.25% intercompany note agreement. Interest on
advances is payable each April 15 and October 15. The intercompany note is
pledged as security with respect to HCC's $360,000,000 Senior Secured Notes
due in 2006 and 2007 which are unconditionally guaranteed on a senior
secured basis by HCT and by certain other current and future subsidiaries
of HCC. HCC's Senior Secured Notes and related guarantees are secured by,
among other things, (1) substantially all of the assets of HCT and other
future guarantors, (2) a limited lien on substantially all of the assets of
another gaming facility operated by a wholly owned subsidiary of HCC, (3) a
pledge of the capital stock of HCT and certain other subsidiaries of HCC
and (4) the collateral assignment of any future management contracts
entered into by HCC. The limitation on the lien described in (2) is
currently $66,007,000 and may be increased as a result of additional
borrowings up to a maximum of $108,000,000.
40
<PAGE>
HWCC - TUNICA, INC. AND SUBSIDIARY
(wholly owned by Hollywood Casino Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The indenture for HCC's Senior Secured Notes contains various provisions
limiting the ability of HCC, HCT and certain defined subsidiaries to, among
other things, pay dividends or make other restricted payments; incur
additional indebtedness or issue preferred stock; create liens; create
dividend or other payment restrictions affecting certain defined
subsidiaries; enter into mergers or consolidations or make sales of all or
substantially all assets of HCC, HCT or any future guarantor; or enter into
certain transactions with affiliates. Dividend payments by HCT to HCC are
not restricted under the terms of the indenture.
(b) The equipment loans are payable monthly including interest at effective
rates ranging from 8.5% to 12.9% per annum and mature at various dates
between 2000 and 2002. Current maturities of long-term debt includes
short-term equipment loans with balances of $26,000 and $51,000 at
September 30, 2000 and December 31, 1999, respectively, which do not accrue
interest and which mature during 2000.
(c) HCT had a bank credit facility in the amount of $1,300,000 available to
borrow against until September 30, 1998. HCT borrowed $541,000 under the
credit facility during 1998 at the rate of 8.875% per annum. Borrowings
under the credit facility are to be repaid in monthly installments over a
period of 36 months and are collateralized by equipment purchased with the
loan proceeds. The credit facility was not renewed by HCT.
Scheduled payments of long-term debt as of September 30, 2000 are set forth
below:
2000 (three months) $ 315,000
2001 1,033,000
2002 242,000
2003 -
2004 -
Thereafter 87,374,000
-----------
Total $88,964,000
===========
Interest paid amounted to $7,528,000 and $7,857,000, respectively, during
the nine month periods ended September 30, 2000 and 1999.
41
<PAGE>
HWCC - TUNICA, INC. AND SUBSIDIARY
(wholly owned by Hollywood Casino Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(3) Income Taxes
HCT's provision for income taxes consists of the following:
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ---------------------
2000 1999 2000 1999
--------- --------- --------- ---------
Provision for current federal
income taxes $(148,000) $(562,000) $(491,000) $(714,000)
Provision for deferred
federal income taxes (388,000) (114,000) (682,000) (304,000)
Changes in valuation allowance 388,000 113,000 682,000 455,000
--------- --------- --------- ---------
$(148,000) $(563,000) $(491,000) $(563,000)
========= ========= ========= =========
State income taxes have not been provided for since a credit for state
gaming taxes based on gross revenues is allowed to offset income taxes incurred.
The credit is the lesser of total gaming taxes paid or the state income tax,
with no credit carryforward permitted.
HCT is included in HCC's consolidated federal income tax return. HCT's
provision for federal income taxes is based on the amount of tax which would be
provided if a separate federal income tax return were filed. HCT paid federal
income taxes of $33,000 and $288,000, respectively, during the nine month
periods ended September 30, 2000 and 1999. HCT paid no state income taxes
during either of the nine month periods ended September 30, 2000 or 1999.
At September 30, 2000, HCT had net operating loss carryforwards ("NOL's")
totaling approximately $3,050,000, which do not begin to expire until the year
2010. Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes", requires that the tax benefit of such NOL's, together with the
tax benefit of deferred tax assets resulting from temporary differences, be
recorded as an asset and, to the extent that management can not assess that the
utilization of all or a portion of such deferred tax assets is more likely than
not, a valuation allowance should be recorded. Based on the taxable income
currently being earned by HCT and the expectation of future taxable income,
management believes that it is more likely than not that a portion of the NOL's
and deferred tax assets will be utilized. Accordingly, a valuation allowance
has been established which has resulted in the recording of a net deferred tax
asset of $2,125,000 at both September 30, 2000 and December 31, 1999.
The Internal Revenue Service has completed its examination of the
consolidated federal income tax returns of HCC for the years 1993 and 1994 as
they pertain to HCT. The intercompany tax receivable under the tax sharing
agreement and the net deferred tax asset have been adjusted to reflect the
results of such examination. The Internal Revenue Service is continuing its
examination of the consolidated federal income tax returns of HCC for 1995 and
1996. Management believes that the results of such examination will not have a
material adverse effect on the consolidated financial position or results of
operations of HCT.
42
<PAGE>
HWCC - TUNICA, INC. AND SUBSIDIARY
(wholly owned by Hollywood Casino Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(4) Transactions with Related Parties
Pursuant to a consulting agreement which was terminated during October
1999, HCT incurred a $100,000 per month consulting fee to Pratt Casino
Corporation ("PCC"), an affiliated company. During October 1999, HCC acquired
all of the common stock of PCC. HCT borrowed an additional $3,329,000 from HCC
(see Note 2) to acquire and terminate the consulting agreement. Accordingly,
effective October 13, 1999, HCT no longer pays a consulting fee. HCT reflected
the $3,329,000 payment as an expense to terminate the consulting agreement
during the fourth quarter of 1999.
(5) Reclassifications
Certain reclassifications have been made to the prior year's consolidated
financial statements to conform to the 2000 consolidated financial statement
presentation.
43
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This Quarterly Report on Form 10-Q contains forward-looking statements
about the business, results of operations, cash flows, financial condition,
construction and development activities and prospects of the Company. The actual
results could differ materially from those indicated by the forward-looking
statements because of various risks and uncertainties including, among other
things, changes in competition, economic conditions, tax regulations, state
regulations or legislation applicable to the gaming industry in general or the
Company in particular, decisions of courts and other risks indicated in the
Company's filings with the Securities and Exchange Commission. Such risks and
uncertainties are beyond management's ability to control and, in many cases, can
not be predicted by management. When used in this Quarterly Report on Form 10-Q,
the words "believes", "estimates", "anticipates" and similar expressions as they
relate to the Company or its management are intended to identify forward-looking
statements. Similarly, statements herein that describe the Company's business
strategy, outlook, objectives, plans, intentions or goals are also forward-
looking statements.
RESULTS OF OPERATIONS
HCC had net revenues for the three and nine month periods ended September
30, 2000 of $89 million and $258.9 million, respectively, representing increases
of 7.3% and 13.1%, respectively, from the corresponding periods of 1999. The
increases are attributable to improved net revenues at the Aurora Casino of $4.8
million (9.1%) and $25.9 million (17.9%), respectively, and at the Tunica Casino
of $1.2 million (4.2%) and $4 million (4.8%), respectively. Consolidated
operating expenses (including preopening costs with respect to the Shreveport
Casino) increased by $6.7 million (9.8%) and $23.5 million (12.2%) to $75.1
million and $216 million, respectively, during the three and nine month periods
ended September 30, 2000 from $68.4 million and $192.5 million, respectively,
during the same periods of 1999. Exclusive of preopening costs, operating
expenses increased by only 5.6% and 10%, respectively, during the 2000 three and
nine month periods.
HCC's income from operations decreased by $612,000 (4.2%) and increased
$6.5 million (17.9%), respectively, during the third quarter and first nine
months of 2000 compared to the same periods of 1999. Without preopening costs,
consolidated income from operations increased $2.3 million (43.2%) and $10.8
million (29.4%), respectively, during the three and nine month periods of 2000
compared to the prior year periods, primarily due to improved operating results
at the Aurora Casino.
Aurora Casino
-------------
General
Income from operations at the Aurora Casino amounted to $15.6 million and
$44.9 million, respectively, for the three and nine month periods ended
September 30, 2000 compared to $14.5 million and $34.4 million, respectively,
during the same periods in 1999 adjusted to exclude management fees. Management
fees were discontinued in October 1999 when the Aurora Casino acquired and
terminated its management contract. The 2000 increases in income from
operations result from improvements in casino revenues, primarily from the
commencement of dockside gaming on June 26, 1999 as well as from aggressive
marketing strategies, the addition on August 4, 2000 of a new barge connecting
the two riverboats and enhancements to the Aurora Casino's slot product.
44
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following table sets forth certain unaudited financial and operating
data for the Aurora Casino's operations for the three and nine month periods
ended September 30, 2000 and 1999.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- ------------------------------
2000 1999 2000 1999
------------ ------------ -------------- --------------
<S> <C> <C> <C> <C>
Revenues:
Table games $ 11,739,000 $ 11,480,000 $ 34,632,000 $ 33,034,000
Slot machines 44,000,000 39,504,000 128,549,000 104,781,000
Poker revenues 854,000 730,000 2,461,000 1,901,000
------------ ------------ -------------- --------------
Total $ 56,593,000 $ 51,714,000 $ 165,642,000 $ 139,716,000
============ ============ ============== ==============
Gross Wagering (1) $820,561,000 $745,054,000 $2,451,341,000 $1,997,936,000
</TABLE>
--------------------
(1) Gross wagering consists of the total value of chips purchased for table
games ("drop") and coins wagered in slot machines ("handle").
Total gross wagering at the Aurora Casino, as measured by table drop and
slot machine handle, increased $75.5 million (10.1%) and $453.4 million (22.7%),
respectively, during the third quarter and first nine months of 2000 compared to
the like periods during 1999. Table game wagering did not change significantly
during the third quarter, but increased 8.6% during the nine month period. Slot
machine wagering increased by 11.1% and 24.2%, respectively, during the 2000
three and nine month periods compared to the 1999 periods. As previously noted,
the increases in gross wagering are primarily attributable to the advent of
dockside gaming on June 26, 1999, the barge expansion, aggressive marketing
campaigns and new slot product at the Aurora Casino.
Revenues
Casino revenues consist of the portion of gross wagering that a casino
retains and, as a percentage of gross wagering, is referred to as the "hold
percentage". Casino revenues increased $4.9 million (9.4%) and $25.9 million
(18.6%), respectively, during the three and nine months periods ended September
30, 2000 compared to the same periods in 1999 due primarily to the increases in
gross wagering previously discussed. Table game revenues increased $259,000
(2.3%) and $1.6 million (4.8%), respectively, during the three and nine month
periods ended September 30, 2000 compared to the same periods in 1999. Table
game hold percentages increased during the third quarter compared to the prior
year period; however the hold percentage continued to show a decrease for the
nine month period ended September 30, 2000 compared to the same period in 1999.
Slot machine revenues increased by $4.5 million (11.4%) and $23.8 million
(22.7%), respectively, for the three and nine month periods ended September 30,
2000 compared to the corresponding periods in 1999 despite a slight decline in
the slot machine hold percentage for the 2000 nine month period. Poker revenues
increased $124,000 (17%) and $560,000 (29.5%), respectively, for the three and
nine month periods compared to the same periods in 1999 primarily due to the
expansion of the poker room's operating hours beginning in the fourth quarter of
1999. As a result of the closing of a competitor's poker room in August 2000,
the Aurora Casino is now the sole provider of poker in Illinois casinos in the
Chicago area.
45
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Food and beverage revenues increased $256,000 (6.7%) and $1.1 million
(10.6%), respectively, during the third quarter and first nine months of 2000
compared to the prior year periods reflecting increased patron volume and the
opening of a new food outlet in April 2000. Most of the additional revenue
reflects complimentary meals and beverages and has resulted in a corresponding
increase in promotional allowances (see below). Other revenues decreased
$76,000 (7.4%) for the three month period bringing the nine month revenues in
line with the preceding year period.
Promotional allowances represent the estimated value of goods and services
provided free of charge to casino customers under various marketing programs.
These allowances, as a percentage of food and beverage and other revenues at the
Aurora Casino, were 66.2% and 65.3%, respectively, during the three and nine
month periods ended September 30, 2000 compared to 64.2% and 62.4%,
respectively, during the like periods in 1999. The increases over the prior
year periods reflect increases in promotional activities, primarily in food and
beverage complimentaries, as part of the Aurora Casino's marketing efforts.
Departmental Expenses
Casino expenses increased $3.6 million (10.5%) and $15.1 million (15.6%),
respectively, during the third quarter and first nine months of 2000 compared to
the same periods in 1999. Such increases resulted from additional gaming taxes
associated with the increase in casino revenues ($1.7 million and $9.1 million,
respectively) as well as to increased marketing expenses ($1.3 million and $4.8
million, respectively).
Food and beverage expenses increased $124,000 (11.2%) and $114,000 (3.2%)
for the three and nine month periods ended September 30, 2000 compared to the
same periods in 1999. Increases in food and beverage costs result from increased
volume and higher food costs. A portion of food and beverage expenses are
allocated to casino expenses as part of various marketing programs. Other
expenses decreased during the 2000 three and nine month periods primarily due to
reductions in marine department expenses due to the advent of dockside gaming.
Tunica Casino
-------------
General
Income from operations at the Tunica Casino increased $657,000 (20.1%) and
$616,000 (6.1%) to $3.9 million and $10.7 million, respectively, for the three
and nine month periods ended September 30, 2000 compared to $3.3 million and
$10.1 million, respectively, during the same periods of 1999.
46
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Gaming Operations
The following table sets forth certain unaudited financial and operating
data relating to the operations of the Tunica facility for the three and nine
month periods ended September 30, 2000 and 1999.
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- ------------------------------
2000 1999 2000 1999
------------ ------------ -------------- --------------
Casino Revenues:
Table games $ 3,286,000 $ 3,255,000 $ 10,772,000 $ 10,816,000
Slot machines 25,168,000 24,033,000 70,682,000 66,767,000
Poker revenues 258,000 250,000 768,000 712,000
------------ ------------ -------------- --------------
Total $ 28,712,000 $ 27,538,000 $ 82,222,000 $ 78,295,000
============ ============ ============== ==============
Gross Wagering (1) $503,802,000 $464,372,000 $1,428,715,000 $1,314,320,000
--------------------
(1) See corresponding note to the table at "Aurora Casino - Gaming Operations"
above.
Total gross wagering at the Tunica Casino increased $39.4 million (8.5%)
and $114.4 million (8.7%), respectively, during the three and nine month periods
ended September 30, 2000 compared to the same periods of 1999. Slot machine
handle increased by 8.6% during both the third quarter and first nine months of
2000 compared to the prior year periods. Table game drop increased by 5.8% and
10%, respectively, during the 2000 three and nine month periods compared to the
1999 periods. Management believes the increases are attributable to the
implementation of a new, more aggressive marketing campaign designed to
reposition the Tunica Casino within the Tunica gaming market. Such marketing
efforts have included new marketing programs designed to reward existing high
value customers as well as attract new customers to the facility. Although
patron volume declined slightly during the three and nine month periods ended
September 30, 2000 compared to the same periods in 1999, gross wagering
continued to increase, indicating that the Tunica Casino has been successful in
attracting higher value patrons.
Revenues
Casino revenues increased $1.2 million (4.3%) and $3.9 million (5%),
respectively, during the three and nine month periods ended September 30, 2000
compared to the 1999 periods. Table games did not contribute significantly to
these revenue increases as increases in wagering were offset by decreases in the
table game hold percentages to 14% and 15.8%, respectively, during the current
year three and nine month periods compared to 14.6% and 17.4%, respectively,
during the corresponding periods in 1999. Slot machine revenues increased $1.1
million (4.7%) and $3.9 million (5.9%), respectively, during the third quarter
and first nine months of 2000 compared to the 1999 periods reflecting the
increase in gross wagering discussed above partially offset by decreases in the
slot machine hold percentages. Poker revenues increased 3.2% and 7.9%,
respectively, during the three and nine month periods ended September 30, 2000
primarily due to new patrons obtained as a result of remodeling disruptions at a
competitor's poker room.
47
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Rooms revenues did not change significantly during the three and nine month
periods ended September 30, 2000 compared to the same periods of 1999. Food and
beverage revenues increased $181,000 (4.4%) and $1.1 million (9.9%),
respectively, during the three and nine month periods ended September 30, 2000
compared to the same periods in 1999. The increases are the result of increased
marketing efforts and increased food and beverage prices. Other revenues did
not change significantly during either of the 2000 periods compared to the same
periods in 1999.
Promotional allowances represent the estimated value of goods and services
provided free of charge to casino customers under various marketing programs.
Such allowances, as a percentage of rooms, food and beverage and other revenues,
decreased to 73% from 73.3% during the three month period ended September 30,
2000 compared to the prior year period. For the 2000 nine month period, such
allowances increased to 72.4% from 71.2% during the comparable 1999 period. The
changes primarily reflect the more targeted use of food and beverage
complimentaries as part of the Tunica Casino's marketing efforts.
Departmental Expenses
Casino expenses increased $1.2 million (5.5%) and $5.6 million (9.4%),
respectively, during the three and nine month periods ended September 30, 2000
compared to the 1999 periods primarily as a result of increased marketing
efforts. Rooms expense for the third quarter did not change significantly
compared to the 1999 third quarter period. Room expense for the nine month
period ended September 30, 2000 decreased 7.3% to $889,000 from $959,000 in
1999. The year to date decrease reflects additional allocations of hotel costs
associated with marketing programs to the casino department. Food and beverage
expenses increased $122,000 (13.2%) during the third quarter of 2000 resulting
in a nine month increase of $236,000 (8.4%) compared to the same period in 1999.
Increases in patron volume and higher food and beverage costs during the first
quarter were partially offset by increased allocations to the casino department
during the second quarter as a result of the Tunica Casino's marketing efforts.
Other departmental expenses decreased $47,000 (16%) and $268,000 (31.6%),
respectively, during the three and nine month periods in 2000 due to increased
allocations to the casino department.
Other Consolidated Items
------------------------
General and Administrative
General and administrative expenses decreased by $839,000 (15.5%) and
$227,000 (1.5%), respectively, during the third quarter and first nine months of
2000 compared to the corresponding periods in 1999. Such expenses at the Aurora
Casino (net of management fees during 1999) increased by 6.6% and 9.7%,
respectively, during the 2000 three and nine month periods primarily as a result
of additional overhead costs now charged to the Aurora Casino which, prior to
October 1999, were charged to its management company. General and
administrative expenses at the Tunica Casino (net of consulting fees during
1999) did not change significantly during either of the 2000 three or nine month
periods compared to the prior year periods. Corporate general and
administrative expenses decreased $629,000 (23.7%) during the third quarter,
reducing the nine month increase to $239,000 (3.4%). The third quarter decrease
primarily results from decreases in legal fees and personnel costs.
48
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Depreciation and Amortization
Depreciation and amortization expense decreased $319,000 (8.9%) and $1.1
million (10.5%) during the three and nine month periods ended September 30, 2000
compared to the 1999 periods primarily due to certain operating equipment at
Tunica Casino becoming fully depreciated during the latter part of 1999.
Development Expenses
Development expenses represent costs incurred in connection with HCC's
pursuit of potential gaming opportunities in jurisdictions where gaming has not
been legalized. Such costs increased by $89,000 (43.6%) and $27,000 (3.9%),
respectively, during the three and nine month periods ended September 30, 2000
compared to the 1999 periods as a result of exploring potential new gaming
venues.
Preopening Costs
Preopening costs are the start up costs associated with the development of
the Shreveport Casino which, in accordance with existing accounting
pronouncements, are required to be expensed as incurred. Such costs include,
among other things, organizational costs, marketing and promotional costs,
hiring and training of new employees and other operating costs incurred prior to
the opening of the project. Preopening costs amounted to $3.2 million and $4.6
million, respectively, during the three and nine month periods ended September
30, 2000 compared to a modest $285,000 incurred during the third quarter of
1999. Management expects that these costs will increase substantially during
the fourth quarter prior to the opening of the Shreveport Casino.
Interest Income
Interest income for the 2000 nine month period increased $4.5 million
(98.6%) compared to the same period in 1999 reflecting interest on the
unexpended cash proceeds of HCC's issue of Senior Secured Notes on May 19, 1999
and Hollywood Casino Shreveport's debt issue on August 10, 1999 (see "Liquidity
and Capital Resources - Financing Activities"). For the third quarter of 2000,
interest income decreased by $315,000 (10.2%) compared to the 1999 period as
expenditures for the construction of the Shreveport Casino have significantly
reduced the unexpected cash balance with respect to the August 1999 debt issue.
Interest Expense
Interest expense decreased by $590,000 (4.3%) during the 2000 third quarter
compared to the like period in 1999 bringing the 2000 year to date increase to
$11.6 million (38.1%). The overall nine month increase is primarily due to the
increase in HCC's long-term indebtedness from the May 1999 issuance of the
Senior Secured Notes and the August 1999 issuance of $150 million of 13%
Shreveport First Mortgage Notes. Although the issuance of the Senior Secured
Notes increased HCC's indebtedness to a face value of $360 million from a face
value of $204.7 million, the initial effective interest rate fell to 11.27% from
13.75%. The interest rate on $50 million of the Senior Secured Notes is equal to
the six-month LIBOR rate plus 6.28% and is reset semiannually. On May 1, 2000,
the interest rate on the $50 million notes increased to 12.89% from 12.41%
resulting in an increase in interest expense for the semiannual period of
$120,000. On November 1, 2000, the interest rate on such notes increased to 13%
from 12.89%, effectively increasing the Company's annual interest expense by
$56,000. As the cumulative expenditures with respect to the Shreveport Casino's
construction continue to grow, the amount of interest on the Shreveport First
Mortgage Notes being capitalized has also grown ($3.7 million and $7.5 million,
respectively, during the three and nine month periods ended September 30, 2000).
The increase in capitalized interest has resulted in the net
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HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
decrease in interest expense during the third quarter despite an overall
increase in the weighted average debt outstanding.
Gain on Settlement of Litigation
On October 8, 1998, the Company filed a complaint against its former
accountants and tax advisors in the District Court of Dallas County, Texas. On
September 8, 2000, a mutually acceptable agreement was reached concluding the
dispute and resulting in the dismissal of the lawsuit. Terms of the settlement
are confidential; however, the Company recognized a pretax gain on the
settlement, net of related legal fees and other expenses, amounting to $7.3
million.
Income Taxes
Management believes that it is more likely than not that future
consolidated taxable income of HCC (primarily from the Aurora Casino and the
Tunica Casino) will be sufficient to utilize at least a portion of the NOL's,
tax credits and other deferred tax assets resulting from temporary differences.
Current federal income taxes for the nine month period ended September 30, 2000
were offset through the use of such NOL's. Accordingly, under the provisions of
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes", the consolidated balance sheet reflects a net deferred tax asset of $5.5
million as of September 30, 2000.
Sales by HCC or existing stockholders of common stock, or securities
convertible into common stock, can cause a "change of control", as defined in
Section 382 of the Internal Revenue Code of 1986, as amended, which would limit
the ability of HCC or its subsidiaries to utilize these loss carryforwards in
later tax periods. Should such a change of control occur, the amount of loss
carryforwards available for use in any one year would most likely be
substantially reduced. Future treasury regulations, administrative rulings or
court decisions may also effect HCC's future utilization of its loss
carryforwards.
Minority Interest in Earnings of Limited Partnership
The minority interest in the earnings of the limited partnership which held
the management contract for the Aurora Casino amounted to $1.6 million and $3.6
million, respectively, during the three and nine month periods ended September
30, 1999. As a result of the acquisition and termination of the management
contract, such minority interest has not been incurred subsequent to October 13,
1999 (see "Liquidity and Capital Resources - Pratt Casino Corporation
Acquisition" below). The acquisition of the minority interest resulted in a
charge during the fourth quarter of 1999 of $37 million.
Year 2000 Compliance
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. Such an 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.
In preparation for the Year 2000, management conducted a program to prepare
the Company's computer systems and applications as well as its non-information
technology (embedded microchip) systems. The two major information technology
systems identified as not Year 2000-compliant were replaced. The cost of
acquiring, testing and converting HCC's systems was less than $1 million. The
majority of these costs were included in capital expenditures during 1999.
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HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
As a result of its planning and implementation efforts, HCC 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. The Company also encountered no
significant Year 2000 problems with its vendors or suppliers. Management is
continuing to monitor the Company's systems and communicate with its suppliers
and vendors to ensure that any latent Year 2000 problems that might arise are
promptly addressed.
Inflation
Management believes that in the near term, modest inflation, together with
increased competition within the gaming industry for qualified and experienced
personnel, will continue to cause increases in operating expenses, particularly
labor and employee benefits costs.
Market Risk
The Company has $50 million of floating rate Senior Secured Notes
outstanding (see "Liquidity and Capital Resources - Financing Activities"
below). Interest on the floating rate notes is at the LIBOR rate plus 6.28% and
is reset semiannually. Accordingly, an increase in the LIBOR rate of 1% would
increase interest expense by $500,000 per year. Management also has a financing
arrangement for the lease of furniture, fixtures and equipment for the
Shreveport Casino. The $30 million financing includes variable interest to be
reset quarterly. Accordingly, an increase in the underlying base rate of 1%
could increase interest expense by as much as $300,000 per annum when the
financing is fully drawn.
The floating rate loan and the furniture, fixture and equipment financing
were entered into for non-trading purposes as sources of funding for the Company
and management believes that these financings have no other material market
risks other than interest rate risk. Such interest rate risk is beyond
management's control; however, the resulting obligations could be prepaid should
increases in the underlying interest rate result in an excessive financing cost;
however, prepayment of the floating rate notes would require a premium in the
amount of 4% as of May 1, 2000, decreasing by 1% each subsequent May 1.
The Shreveport First Mortgage Notes issued to finance construction of the
Shreveport Casino include interest at the rate of 13% payable semiannually as
well as contingent interest once the Shreveport Casino opens. The contingent
interest will be equal to 5% of consolidated cash flow for the applicable period
subject to a maximum contingent interest of $5 million for any four consecutive
fiscal quarters. Accordingly, the maximum potential interest with respect to
the Shreveport First Mortgage Notes for a fiscal year could be $24.5 million,
resulting in an effective annual interest rate of 16.33%. This maximum would
assume that the consolidated cash flow of the Shreveport Casino was at least
$100 million. The contingent component of interest under the Shreveport First
Mortgage Notes was negotiated with the Shreveport Partnership's lenders as part
of determining the fixed rate component of interest. Management believes that
because the contingent interest component is determined by cash flows and can
only be paid if certain coverage ratios are met, liquidity and capital resources
of the Shreveport Partnership will not be compromised by the payment, if any, of
contingent interest.
Changes in the market interest rate would also impact the fair market value
of the Company's outstanding fixed rate debt instruments. Management estimates
that an increase of 1% in the market interest rate would result in a decrease in
the fair market value of HCC's debt securities of approximately $21.1 million.
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HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Seasonality and Other Fluctuations
Historically, the Aurora Casino's operations have experienced some
seasonality due to severe winter weather. Consequently, the results of HCC's
operations for the first and fourth quarters have traditionally been less
profitable than the other quarters of the fiscal year. Furthermore, management
believes that seasonality may also cause fluctuations in reported results at the
Tunica Casino. In addition, the operations of the Aurora Casino and the Tunica
Casino may fluctuate significantly due to a number of factors, including chance.
Such seasonality and fluctuations may materially affect HCC's casino revenues
and overall profitability.
LIQUIDITY AND CAPITAL RESOURCES
Operating Activities
The operations of the Aurora Casino and Tunica Casino continue to be HCC's
primary sources of liquidity and capital resources. The Aurora Casino
contributed approximately $37.3 million of cash flow from operations during the
first nine months of 2000. The Tunica Casino provided $8 million of cash from
operations during the first nine months of 2000. HCC's other ongoing source of
funds consists of interest income earned on temporary investments. The
settlement of litigation discussed previously also contributed operating cash
during the third quarter of 2000. In addition to operating expenses at the
Aurora Casino and the Tunica Casino, uses of operating cash by HCC during the
first nine months of 2000 included costs to pursue development opportunities
($715,000), corporate overhead costs ($7.4 million) and preopening and other
costs with respect to the Shreveport Casino ($4.6 million).
Pratt Casino Corporation Acquisition
In October 1999, HCC acquired all of the capital stock of Pratt Casino
Corporation ("PCC") from Greate Bay Casino Corporation ("GBCC"). PCC owned the
limited partnership interest in Pratt Management, L.P. ("PML"), which held a
management contract for the Aurora Casino and a consulting agreement with the
Tunica Casino. When acquired by HCC, PCC's assets consisted of its management
contract for the Aurora Casino and its consulting agreement with the Tunica
Casino and its liabilities consisted of a $40.3 million obligation payable in
satisfaction of certain notes issued by a subsidiary of PCC and guaranteed by
PCC. The payment of the $40.3 million obligation by HCC in October 1999
resulted in the termination of the management contract and consulting agreement
and was reflected as a charge to expense by the affected entities during 1999.
Financing Activities
During May 1999, HCC completed the refinancing of its outstanding 12.75%
senior indebtedness through a debt offering of $310 million of 11.25% Senior
Secured Notes due May 1, 2007 and $50 million of floating rate Senior Secured
Notes due May 1, 2006 (collectively, the "Senior Secured Notes"). Interest on
the floating rate notes is equal to the six-month LIBOR rate plus 6.28% and is
reset semiannually. Interest on the floating rate notes has been adjusted from
an initial rate of 11.36% to 12.41% per annum effective November 1, 1999, to
12.89% effective May 1, 2000 and to 13% effective November 1, 2000. In addition
to refinancing existing debt, the Company used proceeds from the debt offering
to fund a portion of its equity investment in the Shreveport Casino and during
October 1999, to acquire the management and consulting contracts on the Aurora
Casino and Tunica Casino. The Company also plans to use proceeds from the debt
offering to finance construction of a new, dockside gaming facility at the
Aurora Casino and, to the extent available, for working capital purposes.
Interest on the Senior Secured Notes is payable each May 1 and
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HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
November 1. The Senior Secured Notes are unconditionally guaranteed on a senior
secured basis by HCT and Shreveport Management and may be guaranteed by certain
future subsidiaries of HCC. Neither HCA nor HCL are guarantors. The Senior
Secured Notes and related guarantees are secured by, among other things, (1)
substantially all of the assets of HCT and future guarantors, (2) a lien not to
exceed approximately $108 million on substantially all of the assets of HCA, (3)
a pledge of the capital stock of certain subsidiaries of HCC and (4) the
collateral assignment of the management contract for the Shreveport Casino. The
lien described in (2) above is currently limited to approximately $66 million.
The fixed rate Senior Secured Notes are redeemable at the option of HCC any
time on or after May 1, 2003 at 107% of the then outstanding principal amount,
decreasing to 104.666%, 102.333% and 100%, respectively, on May 1, 2004, 2005
and 2006. The Company may also redeem up to 35% of the fixed rate Senior
Secured Notes at a redemption price of 111.25% plus accrued interest at any time
prior to May 1, 2002 with the proceeds from an offering of the HCC's common
stock if net proceeds to the Company from any such offering are at least $20
million.
The floating rate Senior Secured Notes may be redeemed at the option of HCC
at any time at an initial redemption price of 105% plus accrued interest with
the redemption premium decreasing by 1% on May 1 of each year beginning May 1,
2000.
The indenture for the Senior Secured Notes contains various provisions
limiting the ability of HCC and certain defined subsidiaries to, among other
things, pay dividends or make other restricted payments; incur additional
indebtedness or issue preferred stock, create liens, create dividend or other
payment restrictions affecting certain defined subsidiaries; enter into mergers
or consolidations or make sales of all or substantially all assets of HCC, HCT,
Shreveport Management or any future guarantor; or enter into certain
transactions with affiliates.
During August 1999, the Shreveport Partnership issued $150 million of 13%
First Mortgage Notes, with contingent interest, due August 1, 2006 (the
"Shreveport First Mortgage Notes"), which are non-recourse to HCC. Fixed
interest on the Shreveport First Mortgage Notes is payable semiannually on each
February 1 and August 1. In addition, contingent interest will accrue and be
payable on each interest payment date after the Shreveport Casino begins
operations. The amount of the contingent interest will be equal to 5% of the
Shreveport Casino's cash flow, as defined, for the prior two fiscal quarters up
to a maximum of $5 million for any four consecutive fiscal quarters. The notes
are collateralized by a first priority security interest in substantially all of
the Shreveport Partnership's existing and future assets other than furniture,
fixtures and equipment for which up to $35 million of financing has been or will
be obtained as well as by a pledge of the common stock of the HCC subsidiaries
which hold the partnership interests.
The Shreveport First Mortgage Notes are redeemable at the option of the
Shreveport Partnership any time on or after August 1, 2003 at 106.5% of the then
outstanding principal amount, decreasing to 103.25% on August 1, 2004 and 100%
on or after August 1, 2005. Up to 35% of the original aggregate amount of the
Shreveport First Mortgage Notes may also be redeemed at any time or prior to
August 1, 2002 with proceeds of contributions to the Shreveport Partnership made
by HCC from certain offerings of equity securities by HCC.
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HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The indenture for the Shreveport First Mortgage Notes contains various
provisions limiting the ability the Shreveport Partnership 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. The indenture
also limits the ability of certain HCC subsidiaries which guarantee the debt to
acquire additional assets, become liable for additional obligations or engage in
any business activities other than holding the partnership interests or acting
as managing general partner of the Shreveport Partnership.
HCS entered into a lease agreement with a third party lessor for up to $30
million 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 million and accrue interest at the rate of LIBOR plus 4%. No more
than two advances may be requested monthly and no more than ten advances may be
requested during the construction period. During the construction period, HCS
only pays interest on outstanding borrowings as well as a fee of .5% per annum
on the undrawn portion of the $30 million. When the Shreveport Casino opens,
the outstanding borrowings will become payable in equal quarterly installment
plus interest over a three year period to fully amortize the obligation. The
lease is treated as a capital lease for financial reporting purposes.
Borrowings under the financing arrangement are collateralized by the furniture,
fixtures and equipment purchased. The lease agreement contains certain
covenants substantially similar to those included in the indenture for the
Shreveport First Mortgage Notes. As of September 30, 2000, borrowings
outstanding under the lease agreement amounted to $19 million.
During September 1998, HCA entered into a bank loan agreement to borrow up
to $2 million on an unsecured basis. Borrowings under the agreement are payable
in 36 monthly installments including interest at the rate of 7.5% per annum.
HCA borrowed $2 million under the agreement during October 1998. During May
1999, HCA borrowed an additional $750,000 from the bank on an unsecured basis to
be repaid over 60 months. Interest on such loan is at 7.5% per annum.
HCT had a $1.3 million bank credit facility available to borrow against
through September 30, 1998. Outstanding borrowings on the line of credit
($150,000 at September 30, 2000) are being repaid in monthly installments over
36 months and accrue interest at the rate of 8.875% per annum.
Prior to October 14, 1999, HCC was the general partner in the limited
partnership which held the Aurora management agreement, having acquired such
interest in April 1997. HCC's original acquisition price for the general
partnership interest included a note in the amount of $3.8 million and the
assignment of $13.8 million undiscounted principal amount of PPI Funding Notes
and $350,000 accrued interest due from GBCC to PPI Corporation. Annual
principal and interest payments by HCC on the $3.8 million note approximated the
general partner's share of partnership distributions which were made to HCC
prior to the liquidation of the general partnership in October 1999. Effective
November 1, 1999, HCC began making monthly payments of principal and interest
totaling $83,000 which, together with additional quarterly principal payments of
$21,000 beginning in January 2000, approximate HCC's payment obligations while
the management contract was in effect.
HCC and PPI Corporation have entered into agreements to defer all payments
of principal and interest on the note otherwise due during the period from March
1, 2000 through December 1, 2000 while negotiations continue between GBCC and
HCC to restructure certain indebtedness owed by GBCC to HCC. These deferrals do
not extend the final maturity of the note or represent a forgiveness of either
principal or interest as all past due amounts, if not otherwise restructured,
will become due and payable on the extended payment due date of January 1, 2001.
The indebtedness owed by GBCC to HCC had an outstanding principal balance of
$6.7 million at September 30, 2000. During October 2000, GBCC paid $900,000 of
the
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HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
outstanding principal balance and agreed to offset an additional $146,0000 of
principal against other receivables due from HCC while negotiations to
restructure the debt continue.
As of September 30, 2000, HCC's scheduled maturities of long-term debt and
payments under capital leases during the remainder of 2000 are approximately
$723,000 and $1.6 million, respectively.
Capital Expenditures and Other Investing Activities
Aurora Casino
Capital expenditures at the Aurora Casino during the first nine months of
2000 (exclusive of barge costs - see below) were $2.4 million; management
anticipates spending $1 million during the remainder of 2000 toward its ongoing
capital improvements program. Significant projects planned for the fourth
quarter of 2000 include new slot machines, renovations to restaurants and other
departmental expenditures. In addition, the Company has finalized its plans to
replace the Aurora Casino's two riverboats with a newly constructed, permanently
moored dockside casino. As currently planned, the new facility will
significantly increase passenger capacity and provide a premier gaming and
entertainment facility for the Aurora Casino's patrons. The new facility is
projected to cost approximately $65 million and will require a construction
period of 14 months. The Company received regulatory approval for its planned
dockside casino from the Illinois Gaming Board in April 2000 and construction
is expected to begin as soon as possible following the resolution of certain
litigation as described below. Upon the resolution of this litigation, the
Aurora Casino will amortize the remaining net book value of its existing
riverboats (approximately $29.5 million at September 30, 2000) over the
estimated 14-month construction period prior to the boats being removed from
service. As a result, depreciation expense would increase significantly.
Approximately $40 million of the estimated $65 million in project costs for the
proposed dockside facility were obtained from HCC's debt offering completed in
May 1999 with the remainder to come from operating cash flow.
The Company intends to build its new dockside casino in two halves, which
would be connected to form a single dockside casino. The Company is considering
proceeding with the construction of the first half of the dockside casino prior
to the final resolution of the litigation described below. If the Company
proceeds with this approach, it would attempt to place all of its gaming
positions on the first half of the dockside casino and would not develop the
second half of the facility until the litigation is resolved.
A complaint was filed in late 1999 in an Illinois state court concerning
the constitutionality of a portion of the legislation that enabled dockside
gaming in Illinois. Although the constitutional challenge centers on the
relocation of one of the existing gaming licenses, a finding that such portion
of the legislation is unconstitutional could result in a finding that all or a
portion of the legislation, including dockside gaming, is invalid. Pending the
resolution of this litigation, the Company's planned dockside expansion of the
Aurora Casino has been delayed. If the state court rules that all or a portion
of the legislation is invalid, management believes that it may be able to
continue to operate its existing riverboats on a dockside basis pending a final
resolution of the litigation. If the provisions in question are found to be
unconstitutional after all appeals, and the entire legislation is invalidated
and it appears that the Illinois legislature will not pass new legislation
enabling dockside gaming, then the Company will likely modify its expansion
plans for the Aurora Casino. Under this scenario, the Company would proceed with
the development of a new, larger riverboat to replace the smaller of its two
existing riverboats.
Pending resolution of the litigation, management recently completed
construction of a barge to connect its two existing riverboats. Costs incurred
through September 30, 2000 amounted to approximately $4.5 million. Of the total
project cost, approximately $1.6 million in docking facilities can be used by
the
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HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
new dockside barge casino should it be built. The new barge allows patrons to
move freely between the two existing boats and enabled management to reconfigure
the casino space for increased patron comfort. Management believes that the
reconfigured facility will significantly enhance the Aurora Casino's operations
until the Company is able to replace the existing riverboats with a new dockside
facility.
Tunica Casino
Capital expenditures at the Tunica Casino during the first nine months of
2000 amounted to $2.6 million; management anticipates spending an additional
$1.8 million during the remainder of 2000. Projects planned for 2000 include
updating slot machines, upgrades to marketing systems, renovations to hotel
suites and other departmental expenditures.
HCT entered into an agreement with two other casino operators during 1996
providing for the joint construction and ownership of a golf course.
Contributions by HCT to the limited liability corporation formed to develop and
operate the golf course, which opened in November 1998, have totaled
approximately $2.1 million.
Shreveport Casino
In September 1998, the Shreveport Partnership received approval to develop,
own and operate a Hollywood-themed hotel and casino complex on the Red River in
Shreveport, Louisiana. HCL originally planned to develop the Shreveport Casino
with two partners in a joint venture in which HCL would have had an interest of
approximately 50%. On March 31, 1999, HCL entered into a definitive agreement
with one of the joint venture partners to acquire its interest in the Shreveport
Partnership for $2.5 million (the amount the joint venture partner contributed
to the project), $1,000 of which was paid at closing with the remainder to be
paid six months after the opening of the Shreveport Casino. The revised
structure of the joint venture received approval by the Louisiana Gaming Control
Board on April 20, 1999. Consequently, effective as of April 23, 1999, HCL has
an effective 100% ownership interest in the Shreveport Casino with the remaining
joint venture partner holding a residual interest after the commencement of
operations and in the event that the project is ever sold amounting to 10% plus
any capital contributions made by the joint venture partner to the Shreveport
Partnership or otherwise credited to their account.
The total estimated cost of the Shreveport Casino is approximately $230
million, of which approximately $160 million has been spent as of September 30,
2000, including approximately $125 million during the nine month period of 2000.
HCL contributed approximately $49 million as an equity investment in the project
with the other joint venture partner contributing $1 million to the project with
the proceeds of a loan from HCL. The loan accrues interest at the rate of prime
commencing with the opening of the Shreveport Casino and will be payable
monthly. Principal on the loan is payable on the tenth anniversary of the
opening of the Shreveport Casino. The joint venture partner was also given
credit for an additional $1 million capital contribution upon the closing of the
Shreveport First Mortgage Notes and payment of the $5 million obligation
discussed below. The credit was in recognition of guarantees provided by an
affiliate of the partner which were necessary for the Shreveport Partnership to
obtain approval of its license. The $2 million equity interest of the partner
is reflected as minority interest on the consolidated financial statements of
HCC.
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HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
In addition to the capital contributions, funding for the remaining
construction and preopening costs has been provided by the Shreveport First
Mortgage Notes which are non-recourse to HCC (see "Liquidity and Capital
Resources - Financing Activities") and by $30 million of furniture, fixture and
equipment financing. In addition, HCC has agreed to contribute up to an
additional $5 million in equity to the Shreveport Casino under certain
circumstances which include cost overruns or delays. On April 23, 2000, the
construction site for the Shreveport Casino suffered tornado damage estimated to
be less than $3 million. Management believes that HCS's insurance policies will
cover these losses. In addition, management of HCS will seek to recover lost
profits under its business interruption insurance coverage for any delays in
opening attributable to the tornado. The Shreveport Casino is currently
scheduled to open in December 2000.
In September 1998, HCL and its partners acquired their interests in the
Shreveport Partnership from its former partners who, prior to October 1997,
conducted riverboat gaming operations in New Orleans. In connection with moving
the license to Shreveport, the current and former partners negotiated a
settlement with the City of New Orleans which among other things, required that
one of the former partners pay $5 million to the City. The current partners
agreed that the Shreveport Casino would pay the City of New Orleans $5 million
upon securing financing for construction of their project (the Shreveport
Casino); such payment was made in August 1999. In addition, the current
partners agreed that the Shreveport Casino would reimburse the former partner $2
million of the amount it paid to the City; 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 million liability, net of a discount in the
original amount of $308,000, and the related adjustments to the recorded value
of project costs were recorded upon issuance of the Shreveport First Mortgage
Notes in August 1999.
Other
HCC continues to pursue several additional potential gaming opportunities.
HCC intends to finance any future ventures with cash flow from operations,
together with third party financing, including non-recourse project financing.
Conclusion
Management anticipates that HCC's funding requirements for its operating
activities will continue to be satisfied by existing cash and cash generated by
the Aurora Casino and Tunica Casino. Unexpended proceeds from the Senior
Secured Notes are expected to be used for the planned expansion of the Aurora
Casino. Construction financing for the planned Shreveport Casino has been
provided from the August 1999 issuance of the Shreveport First Mortgage Notes,
together with capital contributions and equipment financing. In the absence of
construction overruns, management believes that, once the Shreveport Casino
opens, cash flow from operations will be sufficient to meet its liquidity and
capital resource needs for the next 24 months.
57
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PART II: OTHER INFORMATION
---------------------------
Item 6. Exhibits and Reports on Form 8-K
The Registrants filed a report on Form 8-K on September 8, 2000 to announce
the settlement of a lawsuit against their former independent accountants and tax
advisors.
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, each
of the Registrants has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HOLLYWOOD CASINO CORPORATION
Date: November 9, 2000 By: /s/ Paul C. Yates
--------------------------- -------------------------------
Paul C. Yates
Executive Vice President and
Chief Financial Officer
HWCC - TUNICA, INC.
Date: November 9, 2000 By: /s/ Paul C. Yates
--------------------------- -------------------------------
Paul C. Yates
Executive Vice President and
Chief Financial Officer
58
