<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM-10Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2000
--------------------------------------------------
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from -------------------- to ------------------------
Commission file number 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 August 10, 2000
---------------------------- ------------------------------ ------------------------------
<S> <C> <C>
Hollywood Casino Corporation Common Stock, $.0001 par value 24,963,476 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").
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.
Prior to December 31, 1996, Greate Bay Casino Corporation ("GBCC") was an
approximately 80% owned subsidiary of HCC. On December 31, 1996, HCC distributed
the GBCC common stock it owned to its shareholders and GBCC ceased to be an HCC
subsidiary.
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
2
<PAGE>
management and consulting agreements on the Aurora Casino and Tunica Casino.
The remaining proceeds 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 June
30, 2000 and for the three and six month periods ended June 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 June 30, 2000, and the results of their
operations for the three and six month periods ended June 30, 2000 and 1999 and
their cash flows for the six month periods ended June 30, 2000 and 1999.
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 six month
period ended June 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 June 30, 2000, and the
related condensed consolidated statements of operations for the three and six
month periods ended June 30, 2000 and 1999 and their cash flows for the six
month periods ended June 30, 2000 and 1999. These financial statements are the
responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and of making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with auditing standards generally accepted in the United States of America, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to such condensed consolidated financial statements for them to be in
conformity with accounting principles generally accepted in the United States of
America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet of
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
August 4, 2000
4
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
June 30,
2000 December 31,
(Unaudited) 1999
------------ ------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $113,082,000 $115,351,000
Accounts receivable, net of allowances of
$1,997,000 and $1,826,000, respectively 4,379,000 4,010,000
Inventories 1,792,000 1,714,000
Deferred income taxes 2,050,000 1,776,000
Refundable deposits and other
current assets 3,508,000 4,096,000
Due from affiliates, net of valuation allowances 7,609,000 7,705,000
------------ ------------
Total current assets 132,420,000 134,652,000
------------ ------------
Investment in unconsolidated affiliates 1,957,000 1,957,000
------------ ------------
Property and Equipment:
Land 7,975,000 7,948,000
Buildings and improvements 122,221,000 122,122,000
Riverboats and barges 40,367,000 40,367,000
Operating equipment 88,166,000 85,728,000
Construction in progress 118,296,000 44,331,000
------------ ------------
377,025,000 300,496,000
Less - accumulated depreciation
and amortization (98,484,000) (92,958,000)
------------ ------------
Net property and equipment 278,541,000 207,538,000
------------ ------------
Cash restricted for construction projects 101,278,000 147,310,000
------------ ------------
Other Assets:
Deferred financing costs 15,996,000 15,256,000
Land rights 6,945,000 7,047,000
Land held for sale, net of a valuation allowance of
$3,084,000 in 1999 - 2,216,000
Other assets 9,666,000 9,841,000
------------ ------------
Total other assets 32,607,000 34,360,000
------------ ------------
$546,803,000 $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>
June 30,
2000 December 31,
(Unaudited) 1999
------------- -------------
<S> <C> <C>
Current Liabilities:
Current maturities of long-term debt
and capital lease obligations $ 6,369,000 $ 4,538,000
Note payable 2,499,000 -
Accounts payable 21,610,000 15,293,000
Accrued liabilities -
Salaries and wages 5,013,000 6,019,000
Interest 17,748,000 16,784,000
Gaming and other taxes 7,888,000 2,586,000
Insurance 2,610,000 2,890,000
Other 4,420,000 4,330,000
Federal income tax payable 3,199,000 3,234,000
Other current liabilities 2,232,000 2,749,000
------------- -------------
Total current liabilities 73,588,000 58,423,000
------------- -------------
Long-Term Debt 512,593,000 514,959,000
------------- -------------
Capital Lease Obligations 22,086,000 18,961,000
------------- -------------
Other Noncurrent Liabilities 5,635,000 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; 24,953,000 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 216,941,000 216,928,000
Accumulated deficit (286,042,000) (291,087,000)
------------- -------------
Total shareholders' deficit (69,099,000) (74,157,000)
------------- -------------
$ 546,803,000 $ 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
June 30,
----------------------------
2000 1999
-------------- ------------
<S> <C> <C>
Revenues:
Casino $ 82,094,000 $ 72,414,000
Rooms 2,653,000 2,631,000
Food and beverage 8,214,000 7,334,000
Other 1,194,000 1,173,000
------------ ------------
94,155,000 83,552,000
Less - promotional allowances (8,350,000) (7,401,000)
------------ ------------
Net revenues 85,805,000 76,151,000
------------ ------------
Expenses:
Casino 59,688,000 52,142,000
Rooms 366,000 343,000
Food and beverage 2,096,000 2,166,000
Other 455,000 583,000
General and administrative 5,158,000 5,115,000
Depreciation and amortization 3,246,000 3,577,000
Preopening 1,012,000 -
Development 192,000 269,000
------------ ------------
Total expenses 72,213,000 64,195,000
------------ ------------
Income from operations 13,592,000 11,956,000
------------ ------------
Non-operating income (expense):
Interest income 3,090,000 1,097,000
Interest expense, net of capitalized interest of $2,418,000 in 2000 (14,134,000) (9,359,000)
Gain (loss) on disposal of assets 191,000 (55,000)
------------ ------------
Total non-operating expense, net (10,853,000) (8,317,000)
------------ ------------
Income before income taxes, extraordinary and other items 2,739,000 3,639,000
Income tax provision (506,000) (349,000)
------------ ------------
Income before extraordinary and other items 2,233,000 3,290,000
Minority interest in earnings of Limited Partnership (Note 1) - (1,068,000)
------------ ------------
Income before extraordinary item 2,233,000 2,222,000
Extraordinary item - early extinguishment of debt - (30,353,000)
------------ ------------
Net income (loss) $ 2,233,000 $(28,131,000)
============ ============
Basic income (loss) per share:
Before extraordinary item $ .09 $ .09
Extraordinary item - (1.22)
------------ ------------
Net income (loss) $ .09 $ (1.13)
============ ============
Diluted income (loss) per share:
Before extraordinary item $ .08 $ .09
Extraordinary item - (1.21)
------------ ------------
Net income (loss) $ .08 $ (1.12)
============ ============
</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>
Six Months Ended
June 30,
------------------------------
2000 1999
------------- -------------
<S> <C> <C>
Revenues:
Casino $162,559,000 $ 138,759,000
Rooms 5,110,000 5,025,000
Food and beverage 16,152,000 14,318,000
Other 2,293,000 2,143,000
------------ -------------
186,114,000 160,245,000
Less - promotional allowances (16,294,000) (14,321,000)
------------ -------------
Net revenues 169,820,000 145,924,000
------------ -------------
Expenses:
Casino 116,164,000 100,276,000
Rooms 536,000 612,000
Food and beverage 4,457,000 4,353,000
Other 823,000 1,078,000
General and administrative 10,612,000 10,000,000
Depreciation and amortization 6,514,000 7,342,000
Preopening 1,408,000 -
Development 422,000 484,000
------------ -------------
Total expenses 140,936,000 124,145,000
------------ -------------
Income from operations 28,884,000 21,779,000
------------ -------------
Non-operating income (expense):
Interest income 6,259,000 1,456,000
Interest expense, net of capitalized interest of $3,818,000 in 2000 (29,214,000) (16,983,000)
Gain (loss) on disposal of assets 192,000 (56,000)
------------ -------------
Total non-operating expense, net (22,763,000) (15,583,000)
------------ -------------
Income before income taxes, extraordinary and other items 6,121,000 6,196,000
Income tax provision (1,076,000) (554,000)
------------ -------------
Income before extraordinary and other items 5,045,000 5,642,000
Minority interest in earnings of Limited Partnership (Note 1) - (3,090,000)
------------ -------------
Income before extraordinary item 5,045,000 2,552,000
Extraordinary item - early extinguishment of debt - (30,353,000)
------------ -------------
Net income (loss) $ 5,045,000 $ (27,801,000)
============ =============
Basic income (loss) per share:
Before extraordinary item $ .20 $ .10
Extraordinary item - (1.22)
------------ -------------
Net income (loss) $ .20 $ (1.12)
============ =============
Diluted income (loss) per share:
Before extraordinary item $ .19 $ .10
Extraordinary item - (1.21)
------------ -------------
Net income (loss) $ .19 $ (1.11)
============ =============
</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>
Six Months Ended
June 30,
------------------------------
2000 1999
------------- ---------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ 5,045,000 $ (27,801,000)
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 7,676,000 8,282,000
(Gain) loss on disposal of assets (192,000) 56,000
Minority interest in earnings of Limited Partnership - 3,090,000
Grant of stock options 9,000 -
Provision for doubtful accounts 528,000 324,000
Deferred income taxes 40,000 (2,000)
Increase in accounts receivable (897,000) (1,030,000)
Increase in accounts payable and accrued expenses 11,352,000 4,833,000
Net change in other current assets and liabilities 60,000 (170,000)
Net change in other noncurrent assets and liabilities (98,000) (504,000)
------------- -------------
Net cash provided by operating activities 23,523,000 17,431,000
------------- -------------
INVESTING ACTIVITIES:
Purchases of property and equipment (70,750,000) (7,085,000)
Short-term investments - 3,905,000
Restricted cash - (40,733,000)
Decrease in cash restricted for construction purposes 46,032,000 -
Increase in cash from acquisition - 1,524,000
Proceeds from disposal of assets 2,408,000 3,941,000
Investments in unconsolidated affiliates - (75,000)
------------- -------------
Net cash used in investing activities (22,310,000) (38,523,000)
------------- -------------
FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt 104,000 343,044,000
Deferred financing costs (1,849,000) (10,036,000)
Repayments of long-term debt (1,443,000) (208,456,000)
Payments on capital lease obligations (298,000) (279,000)
Issuance of common stock 4,000 -
Limited partnership distributions - (4,137,000)
------------- -------------
Net cash (used in) provided by financing activities (3,482,000) 120,136,000
------------- -------------
Net (decrease) increase in cash and cash equivalents (2,269,000) 99,044,000
Cash and cash equivalents at beginning of period 115,351,000 42,118,000
------------- -------------
Cash and cash equivalents at end of period $ 113,082,000 $ 141,162,000
============= =============
</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, and Edward T. Pratt III and by
certain general partnerships and trusts controlled by the Pratts and by other
family members (collectively, the "Pratt Family").
HCC owns all of the outstanding common stock of Hollywood Casino - Aurora,
Inc. ("HCA"), HWCC - Tunica, Inc. ("HCT"), HWCC-Louisiana, Inc. ("HCL") and
HWCC-Shreveport, Inc. ("Shreveport Management"). HCA is an Illinois corporation
organized 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, adjacent support 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 December 31, 1996, HCC also owned approximately 80% of the common
stock of Greate Bay Casino Corporation ("GBCC"), also a Delaware corporation. On
December 31, 1996, HCC distributed to its shareholders the common stock of GBCC
owned by HCC. As a result of the dividend, GBCC is no longer a subsidiary of
HCC. While owned by HCC, GBCC's principal asset was the Sands Hotel and Casino
in Atlantic City, New Jersey (the "Sands").
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.
10
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
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 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 10% residual interest in the event the project is ever sold. 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 1,409 slot
machines and 68 table games; a 405-room, all suite, art deco style hotel; and
approximately 42,000 square feet of restaurant and entertainment facilities. 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
11
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
merits of individual claims and historical claims experience; accordingly, HCC'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. 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 June 30, 2000 and for the three
and six month periods ended June 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 June 30, 2000 and the results of its operations for the three and six
month periods ended June 30, 2000 and 1999 and its cash flows for the six month
periods ended June 30, 2000 and 1999.
(2) 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 Six Months Ended
June 30, June 30,
----------------------------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Shares used in the calculation of:
Basic net income per share 24,951,218 24,949,976 24,951,127 24,949,976
Diluted net income per share 26,285,632 25,182,097 26,207,304 25,067,104
</TABLE>
The number of shares used in the calculation of diluted earnings per share
for the three and six month periods ended June 30, 2000 and 1999 has been
adjusted to include potential common shares arising from stock options held by
certain employees and directors. The calculation of diluted earnings per share
excludes
12
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
certain options to purchase common stock which would be antidilutive to the
diluted earnings per share calculation. The weighted average number of options
excluded was 20,000 and 1,132,500, respectively, for the three month periods
ended June 30, 2000 and 1999 and 20,000 and 1,132,500, respectively, for the six
month periods ended June 30, 2000 and 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>
June 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) 1,556,000 1,952,000
------------- -------------
Indebtedness of HCT:
Equipment loans (c) 1,778,000 2,488,000
Bank credit facility (d) 186,000 278,000
------------- -------------
1,964,000 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
Other, net of discount of $151,000
and $241,000, respectively (f) 1,849,000 1,759,000
------------- -------------
151,849,000 151,759,000
------------- -------------
Total indebtedness 517,262,000 518,510,000
Less - current maturities (4,669,000) (3,551,000)
------------- -------------
Total long-term debt $ 512,593,000 $ 514,959,000
============= =============
</TABLE>
_________________________________
(a) During May 1999, HCC completed the refinancing of its outstanding 12.75%
senior secured notes through a debt offering of $310,000,000 of 11.25%
Senior Secured Notes due May 1, 2007 and $50,000,000 of floating rate
Senior Secured Notes due May 1, 2006 (collectively, the "Senior Secured
Notes"). Interest on the floating rate notes is equal to the six-month
LIBOR rate plus 6.28% and is reset semiannually. Interest on the floating
rate notes was adjusted from an initial rate of 11.36% to 12.41% per annum
effective November 1, 1999 and was further adjusted to 12.89% effective May
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 Aurora Casino and
13
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
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, beginning November 1, 1999. 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 $52,000 and
$51,000 at June 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, beginning February 1, 2000. 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.
15
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The $2,000,000 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 the issuance of the Shreveport First Mortgage
Notes in August 1999.
Scheduled payments of long-term debt as of June 30, 2000 are set forth
below:
2000 (six months) $ 2,013,000
2001 4,561,000
2002 597,000
2003 168,000
2004 74,000
Thereafter 510,000,000
------------
Total $517,413,000
============
Interest paid, net of amounts capitalized, amounted to $30,832,000 and
$15,608,000, respectively, during the six month periods ended June 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 June 30, 2000, borrowings outstanding under the lease agreement
amounted to $4,137,000.
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:
June 30, December 31,
2000 1999
----------- ------------
Buildings $27,358,000 $27,358,000
Construction in progress 4,137,000 -
----------- ------------
31,495,000 27,358,000
Less - accumulated amortization (4,733,000) (4,279,000)
----------- ------------
$26,762,000 $23,079,000
=========== ============
Amortization expense with respect to these assets amounted to $227,000 and
$454,000, respectively, for the three and six month periods ended June 30, 2000
and 1999.
Based on the borrowings outstanding at June 30, 2000, the future minimum
lease payments under capital lease obligation are as follows:
2000 (six months) $ 1,616,000
2001 4,301,000
2002 4,263,000
2003 4,132,000
2004 2,677,000
Thereafter 18,739,000
------------
Total minimum lease payments 35,728,000
Less - amount representing interest (11,942,000)
------------
Present value of future minimum lease payments 23,786,000
Current capital lease obligation (1,700,000)
------------
Long-term capital lease obligation $ 22,086,000
============
(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
17
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
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.
Cash restricted for construction project is comprised of the following:
June 30, December 31,
2000 1999
----------- ------------
Construction reserve $ 77,394,000 $114,964,000
Interest reserve 18,761,000 27,275,000
Completion reserve 5,123,000 5,071,000
------------ ------------
$101,278,000 $147,310,000
============ ============
(6) Income Taxes
Components of HCC's provision for income taxes consist of the
following:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------------------------------
2000 1999 2000 1999
--------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Current:
Federal $ - $ - $ - $ -
State (505,000) (349,000) (1,061,000) (552,000)
Deferred:
Federal (773,000) 9,645,000 (1,744,000) 9,492,000
State (1,000) - (15,000) (2,000)
Change in valuation allowance 773,000 (9,645,000) 1,744,000 (9,492,000)
--------- ----------- ----------- ------------
$(506,000) $ (349,000) $(1,076,000) $ (554,000)
========= =========== =========== ============
</TABLE>
Federal income tax payments of $35,000 and $150,000, respectively, were
made during the six month periods ended June 30, 2000 and 1999. State income tax
payments of $1,241,000 and $250,000, respectively, were made during the six
month periods ended June 30, 2000 and 1999. Current federal income taxes for the
three and six month periods ended June 30, 2000 were offset through the use of
available tax net operating loss carryforwards ("NOL's").
At June 30, 2000, HCC and its subsidiaries continue to have NOL's available
totaling approximately $44,200,000, none of which begin to expire until the year
2019. Additionally, HCC and its subsidiaries have alternative minimum and other
tax credits available totaling $6,273,000 and $680,000, 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
18
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
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 allowances have been established which result
in net deferred tax assets of $5,207,000 and $5,246,000 at June 30, 2000 and
December 31, 1999, respectively.
The Internal Revenue Service recently 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 June 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
August 1, 2000 while negotiations continue between GBCC and HCC to restructure
certain indebtedness owned by GBCC to HCC. These deferrals do not extend the
maturities 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 September 1, 2000.
(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.; HWCC-Golf Course Partners, Inc.; and,
for periods prior to its liquidation in October 1999, PML. The following
presentation summarizes the financial position and results of operations of the
19
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
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
June 30, 2000
(amounts in thousands)
<TABLE>
<S> <C> <C> <C>
Current Assets: Current Liabilities:
Cash and cash items $108,295 Current maturities of long-
Accounts receivable, net of allowance term debt and capital leases $ 4,279
of $1,997 4,379 Accounts payable and accrued
Inventories 1,792 liabilities 36,339
Prepaid expenses and other current assets 3,863 Other current liabilities 2,232
---------
Due from affiliates 7,609 42,850
-------- ---------
125,938
--------
Investment in and advances to Long-term debt 362,144
---------
Unrestricted Subsidiaries 44,934
--------
Capital lease obligations 18,639
---------
Property and equipment, net of
accumulated depreciation and Other noncurrent liabilities 5,635
---------
amortization of $98,475 164,046
--------
Shareholders' deficit:
Other Assets: Common stock 2
Deferred finance costs 9,613 Additional paid-in capital 216,941
Other assets 15,638 Accumulated deficit (286,042)
-------- ---------
25,251 (69,099)
-------- ---------
$360,169 $ 360,169
======== =========
</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 Six Month Periods Ended June 30, 2000
(amounts in thousands)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, 2000 June 30, 2000
------------------ ----------------
<S> <C> <C>
Net revenues $ 85,805 $ 169,820
--------- ----------
Expenses:
Departmental expenses 62,627 121,980
General and administrative 5,082 10,461
Depreciation and amortization 3,243 6,507
Development 192 422
--------- ----------
Total expenses 71,144 139,370
--------- ----------
Income from operations 14,661 30,450
Non-operating expense, net (9,813) (20,067)
--------- ----------
Income before taxes and other item 4,848 10,383
Provision for taxes (506) (1,076)
--------- ----------
Income before other item 4,342 9,307
Equity in losses of unrestricted subsidiaries (2,109) (4,262)
--------- ----------
Net income $ 2,233 $ 5,045
========= ==========
</TABLE>
(9) Supplemental Cash Flow Information
During June 2000, HCS obtained proceeds under capital lease obligations
amounting to $4,137,000 used to purchase fixed assets during the construction
period (see Note 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 June 30, 2000.
(10) 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 June 30, 2000, and the related condensed statements of
operations for the three and six month periods ended June 30, 2000 and 1999 and
its cash flows for the periods ended June 30, 2000 and 1999. These financial
statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and of making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with auditing standards generally accepted in the United States of America, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to such condensed 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
August 4, 2000
23
<PAGE>
HOLLYWOOD CASINO - AURORA, INC.
(wholly owned by Hollywood Casino Corporation)
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
June 30,
2000 December 31,
(Unaudited) 1999
------------ ------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 29,595,000 $ 22,148,000
Accounts receivable, net of allowances
of $932,000 and $836,000, respectively 1,196,000 992,000
Inventories 1,016,000 845,000
Deferred income taxes 1,957,000 1,809,000
Due from affiliates 452,000 1,956,000
Prepaid expenses and other current assets 718,000 758,000
------------ ------------
Total current assets 34,934,000 28,508,000
------------ ------------
Property and Equipment:
Land improvements 3,167,000 3,167,000
Buildings and improvements 46,205,000 46,205,000
Riverboats 37,843,000 37,843,000
Operating equipment 41,355,000 39,898,000
Construction in progress 2,924,000 1,625,000
------------ ------------
131,494,000 128,738,000
Less - accumulated depreciation and amortization (51,209,000) (47,717,000)
------------ ------------
Net property and equipment 80,285,000 81,021,000
------------ ------------
Other Assets 2,275,000 2,230,000
------------ ------------
$117,494,000 $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>
June 30,
2000 December 31,
(Unaudited) 1999
------------ ------------
<S> <C> <C>
Current Liabilities:
Current maturities of long-term debt
and capital lease obligations $ 1,850,000 $ 1,794,000
Accounts payable 1,668,000 1,857,000
Accrued liabilities -
Salaries and wages 2,525,000 2,758,000
Interest 1,763,000 1,769,000
Gaming and other taxes 7,346,000 1,129,000
Insurance 849,000 1,051,000
Other 2,074,000 2,115,000
Due to affiliates 158,000 218,000
Other current liabilities 1,352,000 1,479,000
------------ ------------
Total current liabilities 19,585,000 14,170,000
------------ ------------
Long-Term Debt 66,724,000 67,152,000
------------ ------------
Capital Lease Obligations 18,639,000 18,961,000
------------ ------------
Deferred Income Taxes 5,748,000 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 (18,758,000) (19,509,000)
------------ ------------
Total shareholder's equity 6,798,000 6,047,000
------------ ------------
$117,494,000 $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
June 30,
--------------------------
2000 1999
----------- ------------
<S> <C> <C>
Revenues:
Casino $55,217,000 $46,193,000
Food and beverage 3,988,000 3,602,000
Other 838,000 832,000
----------- -----------
60,043,000 50,627,000
Less - promotional allowances (3,160,000) (2,763,000)
----------- -----------
Net revenues 56,883,000 47,864,000
----------- -----------
Expenses:
Casino 38,131,000 32,140,000
Food and beverage 1,235,000 1,198,000
Other 272,000 302,000
General and administrative 1,270,000 2,878,000
Depreciation and amortization 1,736,000 1,770,000
----------- -----------
Total expenses 42,644,000 38,288,000
----------- -----------
Income from operations 14,239,000 9,576,000
----------- -----------
Non-operating income (expense):
Interest income 374,000 89,000
Interest expense (2,263,000) (1,319,000)
----------- -----------
Total non-operating expense, net (1,889,000) (1,230,000)
----------- -----------
Income before income taxes 12,350,000 8,346,000
Income tax provision (4,554,000) (3,156,000)
----------- -----------
Net income $ 7,796,000 $ 5,190,000
=========== ===========
</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>
Six Months Ended
June 30,
---------------------------
2000 1999
------------ -----------
<S> <C> <C>
Revenues:
Casino $ 109,049,000 $ 88,002,000
Food and beverage 7,830,000 6,950,000
Other 1,589,000 1,486,000
------------ -----------
118,468,000 96,438,000
Less - promotional allowances (6,111,000) (5,181,000)
------------ -----------
Net revenues 112,357,000 91,257,000
------------ -----------
Expenses:
Casino 73,799,000 62,290,000
Food and beverage 2,470,000 2,480,000
Other 490,000 524,000
General and administrative 2,751,000 6,684,000
Depreciation and amortization 3,492,000 3,555,000
------------ ----------
Total expenses 83,002,000 75,533,000
------------ ----------
Income from operations 29,355,000 15,724,000
------------ ----------
Non-operating income (expense):
Interest income 596,000 153,000
Interest expense (4,531,000) (2,753,000)
Gain on disposal of assets 1,000 1,000
------------ ----------
Total non-operating expense, net (3,934,000) (2,599,000)
------------ ----------
Income before income taxes 25,421,000 13,125,000
Income tax provision (9,396,000) (4,979,000)
------------ -----------
Net income $ 16,025,000 $ 8,146,000
============ ===========
</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> Six Months Ended
June 30,
---------------------------
2000 1999
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 16,025,000 $ 8,146,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 3,492,000 3,555,000
Provision for doubtful accounts 105,000 150,000
Gain on disposal of assets (1,000) (1,000)
Deferred income tax provision 171,000 40,000
Increase in receivables (309,000) (133,000)
Increase in accounts payable and accrued liabilities 5,546,000 4,835,000
Net change in affiliate accounts 1,444,000 2,176,000
Net change in other current assets and liabilities (258,000) 354,000
Net change in other assets and liabilities (45,000) (336,000)
------------ ------------
Net cash provided by operating activities 26,170,000 18,786,000
------------ ------------
INVESTING ACTIVITIES:
Purchases of property and equipment (2,756,000) (1,370,000)
Proceeds from sale of assets 1,000 1,000
------------ ------------
Net cash used in investing activities (2,755,000) (1,369,000)
------------ ------------
FINANCING ACTIVITIES:
Proceeds from the issuance of long-term debt - 29,757,000
Repayments of debt (396,000) (31,823,000)
Payments on capital lease obligations (298,000) (279,000)
Dividends (15,274,000) (6,120,000)
------------ ------------
Net cash used in financing activities (15,968,000) (8,465,000)
------------ ------------
Net increase in cash and cash equivalents 7,447,000 8,952,000
Cash and cash equivalents at beginning of period 22,148,000 9,718,000
------------ ------------
Cash and cash equivalents at end of period $ 29,595,000 $ 18,670,000
============ ============
</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 June 30, 2000 and for the three and six month
periods ended June 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 June 30, 2000 and the results of its
operations for the three and six month periods ended June 30, 2000 and 1999 and
its cash flows for the six month periods ended June 30, 2000 and 1999.
(2) Long-Term Debt and Pledge of Assets
HCA's long-term indebtedness consists of the following:
June 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) 1,556,000 1,952,000
----------- -----------
Total indebtedness 67,563,000 67,959,000
Less - current maturities (839,000) (807,000)
----------- -----------
Total long-term debt $66,724,000 $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 June 30, 2000, future maturities of long-term debt are as follows:
2000 (six months) $ 411,000
2001 747,000
2002 156,000
2003 168,000
2004 74,000
Thereafter 66,007,000
-----------
$67,563,000
===========
Interest paid for the six month periods ended June 30, 2000 and 1999
amounted to $4,537,000 and $3,223,000, respectively.
(3) Income Taxes
HCA's provision for income taxes consists of the following:
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- -------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
Current:
Federal $(4,021,000) $(2,816,000) $(8,164,000) $(4,405,000)
State (505,000) (335,000) (1,061,000) (534,000)
Deferred:
Federal (27,000) (6,000) (156,000) (38,000)
State (1,000) 1,000 (15,000) (2,000)
----------- ----------- ----------- -----------
$(4,554,000) $(3,156,000) $(9,396,000) $(4,979,000)
=========== =========== =========== ===========
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>
HOLLYWOOD CASINO - AURORA, INC.
(wholly owned by Hollywood Casino Corporation)
NOTES TO FINANCIAL STATEMENTS (Continued)
(Unaudited)
be provided if a separate federal income tax return were filed. HCA paid federal
income taxes amounting to $6,664,000 and $956,000, respectively, during the six
month periods ended June 30, 2000 and 1999 and state income taxes of $1,241,000
and $231,000, respectively, during the six month periods ended June 30, 2000 and
1999.
The Internal Revenue Service recently 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 $1,612,000 during the
three month period ended June 30, 1999 and $4,212,000 during the six month
period ended June 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. The $37,000,000 payment by HCA was recorded by
HCA as the cost of terminating the management contract and was reflected as an
expense 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 June 30, 2000, and the related condensed
consolidated statements of operations for the three and six month periods ended
June 30, 2000 and 1999 and their cash flows for the six month periods ended June
30, 2000 and 1999. These financial statements are the responsibility of the
Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and of making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in
accordance with auditing standards generally accepted in the United States of
America, the objective of which is the expression of an opinion regarding the
financial statements taken as a whole. Accordingly, we do not express such an
opinion.
Based on our review, we are not aware of any material modifications that should
be made to such condensed consolidated financial statements for them to be in
conformity with accounting principles generally accepted in the United States of
America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet of
HWCC-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
August 4, 2000
33
<PAGE>
HWCC - TUNICA, INC. AND SUBSIDIARY
(wholly owned by Hollywood Casino Corporation)
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
June 30,
2000 December 31,
(Unaudited) 1999
------------ ------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 11,514,000 $ 10,339,000
Accounts receivable, net of allowances of
$1,065,000 and $990,000, respectively 3,001,000 2,722,000
Inventories 776,000 869,000
Deferred income taxes 1,476,000 1,346,000
Prepaid expenses and other current assets 975,000 1,190,000
Due from affiliates 185,000 503,000
------------ ------------
Total current assets 17,927,000 16,969,000
------------ ------------
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 45,065,000 44,731,000
Construction in progress 1,066,000 134,000
------------ ------------
129,572,000 128,181,000
Less - accumulated depreciation and amortization (46,672,000) (44,575,000)
------------ ------------
Net property and equipment 82,900,000 83,606,000
------------ ------------
Other Assets:
Land rights 6,945,000 7,047,000
Other assets 4,647,000 4,776,000
------------ ------------
Total other assets 11,592,000 11,823,000
------------ ------------
$112,419,000 $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>
June 30,
2000 December 31,
(Unaudited) 1999
------------ ------------
<S> <C> <C>
Current Liabilities:
Current maturities of long-term debt
and capital lease obligations $ 1,257,000 $ 1,491,000
Accounts payable 1,620,000 1,081,000
Accrued liabilities -
Salaries and wages 1,541,000 1,569,000
Interest 437,000 437,000
Gaming and other taxes 513,000 1,340,000
Insurance 1,764,000 1,839,000
Other 2,271,000 2,214,000
Other current liabilities 813,000 1,168,000
------------ ------------
Total current liabilities 10,216,000 11,139,000
------------ ------------
Long-Term Debt 88,081,000 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 (8,515,000) (10,027,000)
------------ ------------
Total shareholder's equity 14,122,000 12,610,000
------------ ------------
$112,419,000 $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
June 30,
--------------------------
2000 1999
----------- -----------
<S> <C> <C>
Revenues:
Casino $26,877,000 $26,221,000
Rooms 2,653,000 2,631,000
Food and beverage 4,226,000 3,732,000
Other 356,000 341,000
----------- -----------
34,112,000 32,925,000
Less - promotional allowances (5,190,000) (4,638,000)
----------- -----------
Net revenues 28,922,000 28,287,000
----------- -----------
Expenses:
Casino 21,557,000 20,002,000
Rooms 366,000 343,000
Food and beverage 861,000 968,000
Other 183,000 281,000
General and administrative 1,309,000 1,572,000
Depreciation and amortization 1,463,000 1,792,000
----------- -----------
Total expenses 25,739,000 24,958,000
----------- -----------
Income from operations 3,183,000 3,329,000
----------- -----------
Non-operating income (expenses):
Interest income 54,000 72,000
Interest expense (2,509,000) (2,613,000)
Loss on disposal of assets - (55,000)
----------- -----------
Total non-operating expenses, net (2,455,000) (2,596,000)
----------- -----------
Income before income taxes 728,000 733,000
Income tax provision (343,000) -
----------- -----------
Net income $ 385,000 $ 733,000
=========== ===========
</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>
Six Months Ended
June 30,
--------------------------
2000 1999
------------ -----------
<S> <C> <C>
Revenues:
Casino $ 53,510,000 $50,757,000
Rooms 5,110,000 5,025,000
Food and beverage 8,322,000 7,368,000
Other 704,000 652,000
------------ -----------
67,646,000 63,802,000
Less - promotional allowances (10,183,000) (9,140,000)
------------ -----------
Net revenues 57,463,000 54,662,000
------------ -----------
Expenses:
Casino 42,365,000 37,986,000
Rooms 536,000 612,000
Food and beverage 1,987,000 1,873,000
Other 333,000 554,000
General and administrative 2,516,000 3,051,000
Depreciation and amortization 2,939,000 3,758,000
------------ -----------
Total expenses 50,676,000 47,834,000
------------ -----------
Income from operations 6,787,000 6,828,000
------------ -----------
Non-operating income (expenses):
Interest income 97,000 207,000
Interest expense (5,029,000) (5,353,000)
Loss on disposal of assets - (57,000)
------------ -----------
Total non-operating expenses, net (4,932,000) (5,203,000)
------------ -----------
Income before income taxes 1,855,000 1,625,000
Income tax provision (343,000) -
------------ -----------
Net income $ 1,512,000 $ 1,625,000
============ ===========
</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>
Six Months Ended
June 30,
--------------------------
2000 1999
----------- ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 1,512,000 $ 1,625,000
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 2,939,000 3,758,000
Provision for doubtful accounts 423,000 174,000
Loss on disposal of assets - 57,000
Increase in accounts receivable (702,000) (958,000)
(Decrease) increase in accounts payable
and accrued expenses (343,000) 810,000
Net change in other current assets and liabilities 284,000 (62,000)
Net change in other noncurrent assets and liabilities (6,000) (46,000)
----------- ------------
Net cash provided by operating activities 4,107,000 5,358,000
----------- ------------
INVESTING ACTIVITIES:
Purchases of property and equipment (2,130,000) (4,367,000)
Short-term investments - 3,905,000
Investment in unconsolidated affiliate - (75,000)
Proceeds from sale of assets - 53,000
----------- ------------
Net cash used in investing activities (2,130,000) (484,000)
----------- ------------
FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt 104,000 85,921,000
Repayments of long-term debt (906,000) (84,621,000)
Dividends - (8,000,000)
----------- ------------
Net cash used in financing activities (802,000) (6,700,000)
----------- ------------
Net increase (decrease) in cash and cash equivalents 1,175,000 (1,826,000)
Cash and cash equivalents at beginning of period 10,339,000 16,325,000
----------- ------------
Cash and cash equivalents at end of period $11,514,000 $ 14,499,000
=========== ============
</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 June 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 June 30, 2000 and for the three
and six month periods ended June 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 June 30, 2000 and the results of its operations for the three and six
month periods ended June 30, 2000 and 1999 and its cash flows for the six month
periods ended June 30, 2000 and 1999.
(2) 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:
June 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) 1,778,000 2,488,000
Bank credit facility (c) 186,000 278,000
----------- -----------
Total indebtedness 89,338,000 90,140,000
Less - current maturities (1,257,000) (1,491,000)
----------- -----------
Total long-term debt $88,081,000 $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 $52,000 and $51,000 at June 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 June 30, 2000 are set forth
below:
2000 (six months) $ 689,000
2001 1,033,000
2002 242,000
2003 -
2004 -
Thereafter 87,374,000
-----------
Total $89,338,000
===========
Interest paid amounted to $5,029,000 and $5,407,000, respectively, during
the six month periods ended June 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:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- ---------------------
2000 1999 2000 1999
--------- -------- --------- ---------
<S> <C> <C> <C> <C>
Provision for current federal
income taxes $(343,000) $ - $(343,000) $ -
(Provision) benefit for deferred
federal income taxes (95,000) 87,000 294,000 (342,000)
Changes in valuation allowance 95,000 (87,000) (294,000) 342,000
--------- -------- --------- ---------
$(343,000) $ - $(343,000) $ -
========= ======== ========= =========
</TABLE>
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 during the six month period ended June 30, 2000; no
federal income taxes were paid during the six month period ended June 30, 1999.
HCT paid no state income taxes during either of the six month periods ended June
30, 2000 or 1999.
At June 30, 2000, HCT had net operating loss carryforwards ("NOL's")
totaling approximately $6,600,000, 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 June 30, 2000 and December 31, 1999.
The Internal Revenue Service recently 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. The $3,329,000 payment
by HCT was recorded by HCT as the cost of terminating the consulting agreement
and was reflected as an expense 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 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 six month periods ended June 30,
2000 of $85.8 million and $169.8 million, respectively, representing increases
of 12.7% and 16.4%, respectively, from the corresponding periods of 1999. The
increases are attributable to improved net revenues at the Aurora Casino of $9
million (18.8%) and $21.1 million (23.1%), respectively, and at the Tunica
Casino of $635,000 (2.2%) and $2.8 million (5.1%), respectively. Consolidated
operating expenses increased by $8 million (12.5%) and $16.8 million (13.5%) to
$72.2 million and $140.9 million, respectively, during the three and six month
periods ended June 30, 2000 from $64.2 million and $124.1 million, respectively,
during the same periods of 1999.
Consequently, HCC's income from operations increased by $1.6 million
(13.7%) and $7.1 million (32.6%), respectively, during the second quarter and
first half of 2000 compared to the same periods of 1999. Income from operations
at the Aurora Casino increased by $4.7 million (48.7%) to $14.2 million and by
$13.6 million (86.7%) to $29.4 million, respectively, during the three and six
month periods ended June 30, 2000 compared to the same periods of 1999 due to
increased patron volume. Income from operations at the Tunica Casino decreased
slightly to $3.2 million and to $6.8 million, respectively, during the 2000
three and six month periods due primarily to increased marketing efforts and
lower hold percentages.
Aurora Casino
-------------
General
Income from operations at the Aurora Casino amounted to $14.2 million and
$29.4 million, respectively, for the three and six month periods ended June 30,
2000 compared to $11.2 million and $19.9 million, respectively, during the same
periods in 1999 adjusted to exclude management fees. The 2000 increases result
from improvements in casino revenues, primarily from the commencement of
dockside gaming on June 26, 1999 as well as to increased marketing efforts.
Management fees were discontinued in October 1999 when the Aurora Casino
acquired and terminated its management contract.
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 six month periods
ended June 30, 2000 and 1999.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------- -------------------------------
2000 1999 2000 1999
------------- ------------- -------------- --------------
<S> <C> <C> <C> <C>
Revenues:
Table games $ 11,570,000 $ 11,089,000 $ 22,893,000 $ 21,554,000
Slot machines 42,852,000 34,501,000 84,549,000 65,277,000
Poker revenues 795,000 603,000 1,607,000 1,171,000
------------- ------------- -------------- --------------
Total $ 55,217,000 $ 46,193,000 $ 109,049,000 $ 88,002,000
============= ============= ============== ==============
Table games:
Gross wagering (drop) (1) $ 67,894,000 $ 60,229,000 $ 135,699,000 $ 119,637,000
Hold percentage (2) 17% 18.4% 16.9% 18%
Slot machines:
Gross wagering (handle) (1) $ 755,890,000 $ 590,848,000 $1,495,081,000 $1,133,245,000
Hold percentage (2) 5.7% 5.8% 5.7% 5.8%
</TABLE>
____________________________
(1) Gross wagering consists of the total value of chips purchased for table
games ("drop") and coins wagered in slot machines ("handle").
(2) 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".
Total gross wagering at the Aurora Casino, as measured by table drop and
slot machine handle, increased $172.7 million (26.5%) and $377.9 million
(30.2%), respectively, during the second quarter and first half of 2000 compared
to the like periods during 1999. Table game wagering accounted for $7.7 million
(12.7%) and $16.1 million (13.4%), respectively, of the overall increases in
wagering while slot machine wagering accounted for $165 million (27.9%) and
$361.8 million (31.9%), respectively, of the increases. The increases in gross
wagering are primarily attributable to the advent of dockside gaming on June 26,
1999 coupled with the implementation of aggressive marketing campaigns at the
Aurora Casino.
45
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Revenues
Casino revenues increased $9 million (19.5%) and $21 million (23.9%),
respectively, during the three and six month periods ended June 30, 2000
compared to the same periods in 1999 due primarily to the increases in gross
wagering previously discussed. Table game revenues increased $481,000 (4.3%) and
$1.3 million (6.2%), respectively, during the three and six month periods ended
June 30, 2000 compared to the same periods in 1999. The table game revenues
increases reflect the 12.7% and 13.4% increases in wagering previously discussed
offset by reductions in the hold percentages to 17% and 16.9%, respectively, in
the three and six month periods of 2000 compared to 18.4% and 18%, respectively,
during the 1999 periods. The 27.9% and 31.9% increases in slot machine handle
previously discussed were slightly offset by lower slot machine hold percentages
during 2000, resulting in increases in slot machine revenues of $8.4 million
(24.2%) and $19.3 million (29.5%), respectively, compared to the corresponding
periods in 1999. Poker revenues increased $192,000 (31.8%) and $436,000 (37.2%),
respectively, for the three and six 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.
Food and beverage revenues increased $386,000 (10.7%) and $880,000 (12.7%),
respectively, during the second quarter and first half of 2000 compared to the
prior year periods reflecting increased patron volume during 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 did not change significantly for the three month period and increased
$103,000 (6.9%) for the first half of 2000 compared to the same period of 1999
reflecting increases in parking fees earned as a result of patron volume
increases.
Promotional allowances represent the estimated value of goods and services
provided free of charge to casino customers under various marketing programs.
These allowances, as percentage of food and beverage and other revenues at the
Aurora Casino, were 65.5% and 64.9%, respectively, during the three and six
month periods ended June 30, 2000 compared to 62.3% and 61.4%, 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 $6 million (18.6%) and $11.5 million (18.5%),
respectively, during the second quarter and first half of 2000 compared to the
same periods in 1999. Such increases resulted from additional gaming taxes
associated with the increase in casino revenues ($3.5 million and $7.5 million,
respectively) as well as to increased marketing expenses ($2.1 million and $3.5
million, respectively).
Food and beverage and other expenses were virtually unchanged for the three
and six month periods ended June 30, 2000 compared to the same periods in 1999.
Increases in food and beverage costs resulting from increased volume were, for
the most part, allocated to casino expenses as part of various marketing
programs.
Tunica Casino
-------------
General
Income from operations at the Tunica Casino decreased slightly in an
extremely competitive gaming market to $3.2 million and $6.8 million,
respectively, for the three and six month periods ended June 30, 2000 compared
to $3.3 million and $6.8 million, respectively, during the same periods during
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 six
month periods ended June 30, 2000 and 1999.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- ----------------------------
2000 1999 2000 1999
------------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
Casino Revenues:
Table games $ 3,784,000 $ 3,758,000 $ 7,486,000 $ 7,561,000
Slot machines 22,825,000 22,243,000 45,514,000 42,734,000
Poker revenues 268,000 220,000 510,000 462,000
------------ ------------ ------------- ------------
Total $ 26,877,000 $ 26,221,000 $ 53,510,000 $ 50,757,000
============ ============ ============= ============
Table games:
Gross wagering (drop) (1) $ 23,308,000 $ 20,799,000 $ 44,834,000 $ 39,926,000
Hold percentage (2) 16.2% 18.1% 16.7% 18.9%
Slot machines:
Gross wagering (handle) (1) $447,905,000 $419,408,000 $ 880,079,000 $810,022,000
Hold percentage (2) 5.1% 5.3% 5.2% 5.3%
</TABLE>
___________________________
(1)(2) See corresponding notes to the table at "Aurora Casino - Gaming
Operations" above.
Total gross wagering at the Tunica Casino as measured by table game drop
and slot machine handle increased $31 million (7%) and $75 million (8.8%),
respectively, during the three and six month periods ended June 30, 2000
compared to the same periods of 1999. Slot machine handle increased $28.5
million (6.8%) and $70.1 million (8.6%), respectively, during the second quarter
and first half of 2000 compared to the prior year periods. Table game drop
increased $2.5 million (12.1%) and $4.9 million (12.3%), respectively, during
the 2000 periods compared to the 1999 periods. Management believes the increases
are attributable to the implementation during 1999 of a new, more aggressive
marketing campaign designed to reposition the Tunica Casino within the Tunica
gaming market. Such marketing efforts have been supplemented with increased use
of the Tunica Casino's jointly operated golf course and the addition of
headliner entertainment to attract higher value patrons. Although patron volume
declined slightly during the three and six month periods ended June 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.
47
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULT OF OPERATIONS
Revenues
Casino revenues increased $656,000 (2.5%) and $2.8 million (5.4%),
respectively, during the three and six month periods ended June 30, 2000
compared to the 1999 periods. Despite the increases in table game wagering
previously discussed, table game revenue did not change significantly during the
second quarter and first half of 2000 due to decreases in the table game hold
percentages to 16.2% and 16.7%, respectively, during the current year three and
six month periods compared to 18.1% and 18.9%, respectively, during the
corresponding periods in 1999. Slot machine revenues increased $582,000 (2.6%)
and $2.8 million (6.5%), respectively, during the second quarter and first half
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 to 5.1% and 5.2%, respectively, during the second quarter and first
half of 2000 compared to 5.3% for both periods in 1999. Poker revenues increased
21.8% and 10.4%, respectively, during the three and six month periods ended June
30, 2000 primarily due to scheduling changes implemented by the Tunica Casino
and to new patrons obtained as a result of remodeling disruptions at a
competitor's poker room.
Rooms revenues did not change significantly during the three and six
month periods ended June 30, 2000 compared to the same periods of 1999. Food and
beverage revenues increased $494,000 (13.2%) and $954,000 (12.9%), respectively,
during the three and six month periods ended June 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, increased to 71.7% and 72%, respectively, during the three and six
month periods ended June 30, 2000 from 69.2% and 70.1%, respectively, during
1999. The increases primarily reflect the increased use of food and beverage
complimentaries as part of the Tunica Casino's increased marketing efforts and
increased competition for overnight guests.
Departmental Expenses
Casino expenses increased $1.6 million (7.8%) and $4.4 million
(11.5%), respectively, during the three and six month periods ended June 30,
2000 compared to the 1999 periods primarily as a result of increased marketing
efforts. Rooms expense for the second quarter increased by $23,000 (6.7%)
compared to the 1999 second quarter period bringing the six month decrease to
$76,000 (12.4%) compared to the six month 1999 period. The year to date decrease
reflects additional allocations of hotel costs associated with marketing
programs to the casino department. Food and beverage expenses decreased $107,000
(11.1%) during the second quarter of 2000 resulting in a six month increase of
$114,000 (6.1%) 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 $98,000 (34.9%) and $221,000 (39.9%), respectively, during
the three and six month periods in 2000 due to increased allocations to the
casino department.
48
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULT OF OPERATIONS
Other Consolidated Items
------------------------
General and Administrative
General and administrative expenses increased by $43,000 (less than
1%) and $612,000 (6.1%), respectively, during the second quarter and first half
of 2000 compared to the corresponding periods in 1999. Such expenses at the
Aurora Casino (net of management fees during 1999) increased by less than 1% and
11.3%, respectively, during the 2000 three and six 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. The Tunica Casino
experienced increases in general and administrative expenses (net of consulting
fees during 1999) of 2.9% and 2.7%, respectively, during the 2000 three and six
month periods compared to the prior year periods primarily as a result of
increases in personnel costs. The remaining corporate general and administrative
expense increases of less than 1% and $268,000 (5.3%), respectively, during the
2000 periods result from increases in corporate overhead costs, primarily legal
fees, franchise taxes and personnel costs.
Depreciation and Amortization
Depreciation and amortization expense decreased $331,000 (9.3%) and
$828,000 (11.3%) during the three and six month periods ended June 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 decreased by $77,000 (28.6%) and $62,000 (12.8%),
respectively, during the three and six month periods ended June 30, 2000
compared to the 1999 periods as a result of fewer development opportunities.
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 $1 million and
$1.4 million, respectively, during the three and six month periods ended June
30, 2000. Management expects that these costs will increase substantially as the
opening of the Shreveport Casino approaches.
Interest Income
Interest income increased $2 million (181.7%) and $4.8 million
(329.9%) during the second quarter and first half of 2000 compared to the same
periods 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").
49
<PAGE>
HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULT OF OPERATIONS
Interest Expense
Interest expense increased by $4.8 million (51%) and $12.2 million
(72%), respectively, during the three and six month periods ended June 30, 2000
compared to the prior year periods due primarily 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 such notes
increased to 12.89% from 12.41%, effectively increasing the Company's annual
interest expense by $239,000. A portion of the interest on the Shreveport First
Mortgage Notes is being capitalized during the construction period ($2.4 million
and $3.8 million, respectively, during the three and six month periods ended
June 30, 2000).
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 six month period ended June 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 $5.2
million as of June 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 $1.1 million and
$3.1 million, respectively, during the three and six month periods ended June
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.
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HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULT OF OPERATIONS
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.
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
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HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULT OF OPERATIONS
rate would result in a decrease in the fair market value of HCC's debt
securities of approximately $21.3 million.
Seasonality and Other Fluctuations
Historically, the Aurora Casino's operations have experienced some
seasonality due to severe winter weather. Consequently, the results of HCC's
operations for the first and fourth quarters have traditionally been less
profitable than the other quarters of the fiscal year. Furthermore, management
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 $26.2 million of cash flow from operations during the
first half of 2000. The Tunica Casino provided $4.1 million of cash from
operations during the first half of 2000. HCC's other sources of funds include
interest income earned on temporary investments. In addition to operating
expenses at the Aurora Casino and the Tunica Casino, uses of operating cash by
HCC during the first half of 2000 included costs to pursue development
opportunities ($422,000), corporate overhead costs ($5.3 million) and preopening
and other costs with respect to the Shreveport Casino ($1.4 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 secured notes through a debt offering of $310 million of 11.25%
Senior Secured Notes due May 1, 2007 and $50 million of floating rate Senior
Secured Notes due May 1, 2006 (collectively, the "Senior Secured Notes").
Interest on the floating rate notes is equal to the six-month LIBOR rate plus
6.28% and is reset semiannually. Interest on the floating rate notes was
adjusted from an initial rate of 11.36% to 12.41% per annum effective November
1, 1999 and was further adjusted to 12.89% effective May 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
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HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULT OF OPERATIONS
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 beginning November 1,
1999. 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 beginning February 1, 2000. 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 RESULT 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 June 30, 2000, borrowings outstanding under the
lease agreement amounted to $4.1 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
($186,000 at June 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 August 1, 2000 while negotiations continue between
GBCC and HCC to restructure certain indebtedness owed by GBCC to HCC. These
deferrals do not extend the maturities 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 September 1,
2000.
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HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULT OF OPERATIONS
As of June 30, 2000, HCC's scheduled maturities of long-term debt and
payments under capital leases during the remainder of 2000 are approximately $2
million and $1.6 million, respectively.
Capital Expenditures and Other Investing Activities
Aurora Casino
Capital expenditures at the Aurora Casino during the first half of
2000 (exclusive of barge costs - see below) were $1.5 million; management
anticipates spending $2.3 million during the remainder of 2000 toward its
ongoing capital improvements program. Significant projects planned for 2000
include new slot machines, renovations to restaurants and other departmental
expenditures. In addition, the Company is currently finalizing 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 the required regulatory approvals for its planned dockside
casino 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 $30 million at June 30,
2000) over the estimated 14-month construction period prior to the boats being
removed from service. As a result, depreciation expense during 2000 could be
significantly greater than during 1999. 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 $4 million barge to connect its two existing riverboats. Costs
incurred through June 30, 2000 amounted to approximately $1.2 million. Of the
total $4 million project cost, approximately $1.4 million in docking facilities
can be used by the 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
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HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULT OF OPERATIONS
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 half of
2000 amounted to $2.1 million; management anticipates spending an additional
$2.1 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 10% residual interest in the event the
project is sold.
The total estimated cost of the Shreveport Casino is approximately
$230 million, of which approximately $108 million has been spent as of June 30,
2000, including approximately $73 million during the six 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.
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.
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HOLLYWOOD CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULT OF OPERATIONS
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.
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PART II: OTHER INFORMATION
---------------------------
Item 6. Exhibits and Reports on Form 8-K
The Registrants did not file any reports on Form 8-K during the quarter
ended June 30, 2000.
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: August 10, 2000 By: /s/ Paul C. Yates
-------------------------- ------------------------------
Paul C. Yates
Executive Vice President and
Chief Financial Officer
HWCC - TUNICA, INC.
Date: August 10, 2000 By: /s/ Paul C. Yates
-------------------------- -----------------------------
Paul C. Yates
Executive Vice President and
Chief Financial Officer
58
