SHREVEPORT CAPITAL CORP - 10-Q Quarterly 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 ¨

Hollywood Casino Shreveport (“HCS”) is a general partnership registered in the state of Louisiana. The original partnership agreement was amended on September 22, 1998 to include as partners in what is now referred to as HCS the following companies: HWCC—Louisiana, Inc. (“HCL”), a Louisiana corporation wholly owned by Hollywood Casino Corporation (“HCC”); Sodak Louisiana, L.L.C. (“Sodak”), a Louisiana limited liability company; and Shreveport Paddlewheels, L.L.C. (“Paddlewheels”), a Louisiana limited liability company. The general partnership was originally formed in May 1992 for the purpose of developing and operating a riverboat casino in New Orleans, Louisiana. Originally named Queen of New Orleans at the Hilton Joint Venture (“QNOV”), the partnership was 50%-owned by Hilton New Orleans Corporation (“Hilton”) and 50%-owned by New Orleans Paddlewheels, Inc. (“NOP”). Hilton and NOP are collectively referred to herein as the “former partners”. QNOV’s riverboat operations in New Orleans commenced in February 1994 and were discontinued in October 1997.

During October 1996, QNOV received approval from state gaming authorities to relocate its license to operate to the City of Shreveport, Louisiana, approximately 180 miles east of Dallas, Texas. Subsequent to receiving approval to relocate, QNOV made the decision in 1997 not to conduct gaming operations in Shreveport. The former partners sought to transfer the license to operate in Shreveport to another interested party. Under Louisiana gaming regulations, the license to operate a riverboat gaming operation is not transferable; however, the ownership of an entity licensed to operate is transferable, subject to the approval of the Louisiana Gaming Control Board (the “LGCB”). Accordingly, the transfer of the license to operate in Shreveport was structured as the acquisition of the interests of the former partners in QNOV.

Upon admission of the new partners, HCS proceeded with entirely new plans to develop, own and operate a riverboat gaming complex to be constructed in Shreveport (the “Shreveport Casino”). The Shreveport Casino was completed and opened on December 20, 2000. Prior to opening, HCS had no operating activities other than development, financing and construction activities with respect to the Shreveport Casino. The Shreveport Casino consists of a three-level riverboat casino with approximately 1,422 slot machines, 60 table games and six poker stations and a 403-room, all suite, art deco style hotel. The project also includes approximately 45,000 square feet of restaurant and entertainment facilities being developed by a third party.

It was originally anticipated that HCS would develop the Shreveport Casino with each of HCL and Sodak having a 50% interest in the development and subsequent operations. Once operations commenced, Paddlewheels was to have a residual interest in the event that the project was ever sold amounting to 10% plus any capital contributions made by Paddlewheels to HCS or otherwise credited to their account. The joint venture partner also receives an amount equal to 1% of “complex net revenues”, as defined, of the Shreveport Casino. On March 31, 1999, HCL entered into a definitive agreement with Sodak’s parent to acquire Sodak for the $2,500,000 Sodak had contributed to HCS. The revised structure of the partnership was approved by the LGCB on April 20, 1999. As a result of the acquisition, HCL obtained an effective 100% ownership interest in HCS with Paddlewheels retaining their residual interest. During July 1999, Sodak was merged into HCL.

Also during July 1999, HCL formed two new, wholly owned subsidiaries, HCS I, Inc. and HCS II, Inc., both Louisiana corporations. HCL contributed $1,000 of capital to each entity, along with 99% of its interest in HCS to HCS I, Inc. and the remaining 1% to HCS II, Inc. In addition, the HCS joint venture agreement was amended and restated on July 21, 1999, to reflect, among other things, the admission of HCS I, Inc. and HCS II, Inc. as partners of HCS and the withdrawal of HCL as managing partner of HCS. As a result, HCS I, Inc. now has an effective 99% interest in HCS and has become its

Additionally, in July 1999, HCS formed a new, wholly owned subsidiary, Shreveport Capital Corporation (“Shreveport Capital”), a Louisiana corporation. HCS contributed $1,000 of capital to Shreveport Capital. Shreveport Capital was formed for the purpose of being a co-issuer with respect to $150,000,000 of 13% First Mortgage Notes with contingent interest (the “First Mortgage Notes”) due 2006 and the 13% Senior Secured Notes issued in June 2001. Shreveport Capital has not and is not expected to have any operating activities, acquire any assets or incur any other liabilities. Accordingly, separate financial statements of Shreveport Capital are not included herein because management has determined that such information is not material to investors.

Equity contributions from HCL and Paddlewheels provided the initial $50,000,000 of construction financing for the Shreveport Casino. During August 1999, HCS successfully completed the issuance of $150,000,000 of 13% First Mortgage Notes with contingent interest due 2006. These sources of funds, together with $30,000,000 of furniture, fixture and equipment financing, provided the initial funding for the project.

The principal executive offices of HCS and Shreveport Capital are located at 451 Clyde Fant Parkway, Shreveport, Louisiana 71101, telephone (318) 220-0711. The principal executive offices of HCL are located at Two Galleria Tower, Suite 2200, 13455 Noel Road, Dallas, Texas 75240, telephone (972) 392-7777.

The consolidated financial statements as of June 30, 2002 and for the three and six month periods ended June 30, 2002 and 2001 have been prepared by HCS and HCL without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of management, these consolidated financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the consolidated financial positions of HCS and HCL as of June 30, 2002, the results of their operations for the three and six month periods ended June 30, 2002 and 2001 and their cash flows for the six month periods ended June 30, 2002 and 2001.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. These financial statements should be read in conjunction with the financial statements and notes thereto included in HCS and Shreveport Capital’s 2001 Annual Report on Form 10-K.

Management anticipates that activity at the Shreveport Casino may be modestly seasonal, with stronger results expected during the first and third quarters. Consequently, the results of operations for the three month period ended June 30, 2002 are not necessarily indicative of the operating results to be reported for the full year.

HCC (the ultimate parent of HCS, HCL and Shreveport Capital), Penn National Gaming, Inc., a Pennsylvania corporation (“Penn National”), and P Acquisition Corp., a Delaware corporation and a wholly-owned subsidiary of Penn National, entered into an Agreement and Plan of Merger (the “Merger Agreement”), dated as of August 7, 2002, pursuant to which, and subject to the conditions thereof, HCC will become a wholly owned subsidiary of Penn National through the merger of P Acquisition Corp. with and into HCC. In connection with the Merger Agreement, Penn National, HCC and certain stockholders of HCC (who collectively control at least 50.3% of HCC’s outstanding shares) executed and delivered Stockholder Agreements, pursuant to which those stockholders have, among other things, covenanted to vote in favor of the adoption of and otherwise to support the Merger Agreement. Consequently, subject to the terms and conditions of the Merger Agreement and Stockholder Agreements, a majority of the issued and outstanding shares of common stock of HCC eligible to vote will vote in favor of the merger, assuring stockholder approval.

We have reviewed the accompanying condensed consolidated balance sheet of Hollywood Casino Shreveport and subsidiaries as of June 30, 2002, the related condensed consolidated statements of operations for the three and six month periods ended June 30, 2002 and 2001 and of cash flows for the six month periods ended June 30, 2002 and 2001. These financial statements are the responsibility of the Partnership’s management.

We conducted our reviews in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and of making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States of America, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our reviews, we are not aware of any material modifications that should be made to such condensed consolidated financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.

We have previously audited, in accordance with auditing standards generally accepted in the United States of America, the consolidated balance sheet of Hollywood Casino Shreveport and subsidiaries as of December 31, 2001, and the related consolidated statements of operations, partners’ capital and cash flows for the year then ended (not presented herein); and in our report dated March 19, 2002, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2001 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

	June 30,			December 31,
	2002			2001
	(Unaudited)
Current Assets:
Cash and cash equivalents	$	28,600,000		$	26,463,000
Accounts receivable, net of allowances of $668,000 and $534,000, respectively		2,042,000			2,110,000
Inventories		2,086,000			1,934,000
Prepaid expenses and other current assets		845,000			854,000

Total current assets		33,573,000			31,361,000

Property and Equipment:
Land improvements		1,665,000			1,665,000
Buildings and improvements		97,271,000			95,839,000
Riverboat		44,965,000			44,947,000
Furniture and equipment		47,673,000			46,891,000
Construction in progress		—			762,000

		191,574,000			190,104,000
Less—accumulated depreciation		(24,398,000	)		(16,365,000	)

		167,176,000			173,739,000

Other Assets:
Deferred financing costs, net		5,430,000			6,069,000
Other		552,000			865,000

Total other assets		5,982,000			6,934,000

	$	206,731,000		$	212,034,000

	June 30,			December 31,
	2002			2001
	(Unaudited)
Current Liabilities:
Current maturities of long-term debt	$	6,000		$	6,000
Accounts payable		7,977,000			6,654,000
Accrued liabilities—
Salaries and wages		2,529,000			2,469,000
Interest		11,456,000			10,702,000
Gaming and other taxes		3,525,000			998,000
Insurance		1,514,000			1,894,000
Other		2,660,000			2,624,000
Due to affiliates		5,859,000			3,859,000
Other current liabilities		989,000			1,273,000

Total current liabilities		36,515,000			30,479,000

Long-Term Debt		190,005,000			190,099,000

Other Noncurrent Liabilities		224,000			155,000

Commitments and Contingencies (Note 5)
Partners’ Deficiency		(20,013,000	)		(8,699,000	)

	$	206,731,000		$	212,034,000

	Three Months Ended June 30,
	2002			2001
Revenues:
Casino	$	36,280,000		$	37,927,000
Rooms		2,396,000			2,233,000
Food and beverage		6,242,000			6,748,000
Other		620,000			880,000

		45,538,000			47,788,000
Less—promotional allowances		(9,236,000	)		(11,796,000	)

Net revenues		36,302,000			35,992,000

Expenses:
Casino		26,500,000			32,089,000
Rooms		566,000			542,000
Food and beverage		1,733,000			2,231,000
Other		768,000			1,209,000
General and administrative		2,142,000			4,739,000
Depreciation and amortization		4,038,000			4,005,000
Loss on early extinguishment of debt		—			843,000

Total expenses		35,747,000			45,658,000

Income (loss) from operations		555,000			(9,666,000	)

Non-operating income (expense):
Interest income		55,000			107,000
Interest expense		(6,747,000	)		(6,078,000	)
Write off investment in unconsolidated affiliate		(313,000	)		—

Total non-operating expense		(7,005,000	)		(5,971,000	)

Net loss	$	(6,450,000	)	$	(15,637,000	)

	Six Months Ended June 30,
	2002			2001
Revenues:
Casino	$	74,219,000		$	74,646,000
Rooms		4,610,000			4,120,000
Food and beverage		12,342,000			13,456,000
Other		1,094,000			2,140,000

		92,265,000			94,362,000
Less—promotional allowances		(17,746,000	)		(20,623,000	)

Net revenues		74,519,000			73,739,000

Expenses:
Casino		52,424,000			66,865,000
Rooms		1,186,000			1,206,000
Food and beverage		3,471,000			5,408,000
Other		1,449,000			2,540,000
General and administrative		4,722,000			8,223,000
Depreciation and amortization		8,033,000			7,891,000
Loss on early extinguishment of debt		—			843,000

Louisiana		72-1225563
Louisiana		75-2830167
(States or other jurisdictions of		(I.R.S. Employer
incorporation or organization)		Identification No.’s)

451 Clyde Fant Parkway Shreveport, Louisiana		71101
(Address of principal executive offices)		(Zip Code)

Registrant	Class	Outstanding at August 15, 2002
Hollywood Casino Shreveport	None	None
Shreveport Capital Corporation	Common Stock, $.01 par value	1,000 Shares