<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(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, 1997
-----------------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE COMMISSION ACT OF 1934
For the transition period from ______________________ to _______________________
Commission file number 1-6339
--------
GREATE BAY CASINO CORPORATION
- --------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
DELAWARE 75-1295630
- ------------------------------------------------------ --------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
TWO GALLERIA TOWER, SUITE 2200
13455 NOEL ROAD, LB 48
DALLAS, TEXAS 75240
- ------------------------------------------------------ --------------------
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) (972) 386-9777
--------------------
(NOT APPLICABLE)
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether the Registrant (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 the
Registrant 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.
CLASS OUTSTANDING AT AUGUST 11, 1997
- ----------------------------- ------------------------------
Common Stock, $.10 par value 5,186,627 shares
1
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
PART I: FINANCIAL INFORMATION
- -----------------------------
INTRODUCTORY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------
Greate Bay Casino Corporation, a Delaware corporation, and its subsidiaries
("GBCC") are engaged primarily in the ownership, operation and management of the
Sands Hotel and Casino located in Atlantic City, New Jersey (the "Sands"); the
management of a riverboat gaming and entertainment facility located in Aurora,
Illinois (the "Aurora Casino") and providing consulting services to a gaming and
lodging facility in Tunica County, Mississippi (the "Tunica Casino"). GBCC has
also engaged in the casino gaming business in Puerto Rico and the management of
hotels in the United States. GBCC's outstanding common shares are listed and
traded on the American Stock Exchange under the symbol GBY. Prior to December
31, 1996, Hollywood Casino Corporation ("HCC", a Delaware corporation) owned
approximately 80% of the outstanding common stock of GBCC. Effective December
31, 1996, HCC distributed such stock to its shareholders; as a result,
approximately 37% of GBCC's outstanding stock is owned by certain general
partnerships and trusts controlled by Jack E. Pratt, Edward T. Pratt, Jr. and
William D. Pratt and by other family members (collectively, the "Pratt Family").
The Pratt Family also owns approximately 53% of HCC. HCC owns the Aurora Casino
and the Tunica Casino.
A significant portion of GBCC's assets relate to its wholly owned subsidiary,
Greate Bay Hotel and Casino, Inc. ("GBHC"), which owns the Sands. Historically,
the Sands' gaming operations have been highly seasonal in nature, with the peak
activity occurring from May to September; consequently, the results of
operations for the three and six month periods ended June 30, 1997 are not
necessarily indicative of the operating results for the full year.
The consolidated financial statements as of June 30, 1997 and for the three
and six month periods ended June 30, 1997 and 1996 have been prepared by GBCC
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission. In the opinion of management, these consolidated financial
statements contain all adjustments (consisting of only normal recurring
adjustments) necessary to present fairly the consolidated financial position of
GBCC as of June 30, 1997, and the results of its operations for the three and
six month periods ended June 30, 1997 and 1996 and cash flows for the six month
periods ended June 30, 1997 and 1996.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. These consolidated financial statements should
be read in conjunction with the consolidated financial statements and notes
thereto included in GBCC's 1996 Annual Report on Form 10-K.
2
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
-------------- --------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 23,966,000 $ 22,991,000
Short-term investment - 2,000,000
Accounts receivable, net of allowances
of $14,521,000 and $15,524,000,
respectively 9,239,000 10,656,000
Inventories 3,828,000 4,016,000
Due from affiliates 1,077,000 2,525,000
Deferred income taxes 1,506,000 1,627,000
Refundable deposits and other
current assets 3,168,000 2,388,000
------------- -------------
Total current assets 42,784,000 46,203,000
------------- -------------
Investment in Limited Partnership 780,000 -
------------- -------------
Property and Equipment:
Land 38,957,000 38,957,000
Buildings and improvements 185,508,000 185,508,000
Operating equipment 93,892,000 92,769,000
Construction in progress 1,755,000 1,535,000
------------- -------------
320,112,000 318,769,000
Less - accumulated depreciation
and amortization (168,368,000) (161,882,000)
------------- -------------
Net property and equipment 151,744,000 156,887,000
------------- -------------
Other Assets:
Obligatory investments 7,178,000 6,382,000
Deferred financing costs 7,048,000 7,653,000
Note receivable from affiliates 3,211,000 -
Other assets 4,119,000 4,220,000
------------- -------------
Total other assets 21,556,000 18.255,000
------------- -------------
$ 216,864,000 $ 221,345,000
============= =============
</TABLE>
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated balance sheets.
3
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
LIABILITIES AND SHAREHOLDERS' DEFICIT
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
------------- ------------
<S> <C> <C>
Current Liabilities:
Borrowings from affiliate $ 6,750,000 $ 6,750,000
Short-term credit facilities - 2,000,000
Current maturities of long-term debt 3,043,000 3,127,000
Accounts payable 6,614,000 8,981,000
Accrued liabilities -
Salaries and wages 5,240,000 5,090,000
Interest 11,575,000 11,673,000
Insurance 3,398,000 3,276,000
Other 7,203,000 6,687,000
Other current liabilities 4,518,000 5,479,000
------------- -------------
Total current liabilities 48,341,000 53,063,000
------------- -------------
Long-Term Debt 316,243,000 322,897,000
------------- -------------
Other Noncurrent Liabilities 3,938,000 3,592,000
------------- -------------
Due to Affiliate - 1,000,000
------------- -------------
Commitments and Contingencies
Shareholders' Deficit:
Common stock, $.10 par value per
share; 10,000,000 shares authorized;
5,186,627 shares issued and outstanding 519,000 519,000
Additional paid-in capital 51,581,000 38,557,000
Accumulated deficit (203,758,000) (198,283,000)
------------- -------------
Total shareholders' deficit (151,658,000) (159,207,000)
------------- -------------
$ 216,864,000 $ 221,345,000
============= =============
</TABLE>
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated balance sheets.
4
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
--------------------------
1997 1996
------------ ------------
<S> <C> <C>
Revenues:
Casino $61,823,000 $65,310,000
Rooms 2,455,000 3,766,000
Food and beverage 8,457,000 9,211,000
Other 1,563,000 3,965,000
----------- -----------
74,298,000 82,252,000
Less - promotional allowances (6,201,000) (7,035,000)
----------- -----------
Net revenues 68,097,000 75,217,000
----------- -----------
Expenses:
Casino 51,396,000 58,484,000
Rooms 671,000 1,422,000
Food and beverage 2,881,000 3,193,000
Other 619,000 1,074,000
General and administrative 3,885,000 5,180,000
Depreciation and amortization 3,752,000 5,346,000
----------- -----------
Total expenses 63,204,000 74,699,000
----------- -----------
Income from operations 4,893,000 518,000
----------- -----------
Non-operating income (expenses):
Interest income 427,000 529,000
Interest expense (9,445,000) (9,880,000)
Gain (loss) on disposal of assets 17,000 (2,000)
Equity in earnings of limited partnership 781,000 -
----------- -----------
Total non-operating expense, net (8,220,000) (9,353,000)
----------- -----------
Loss before income taxes and extraordinary item (3,327,000) (8,835,000)
Income tax (provision) benefit (35,000) 508,000
----------- -----------
Loss before extraordinary item (3,362,000) (8,327,000)
Gain on early extinguishment of debt 310,000 -
----------- -----------
Net loss $(3,052,000) $(8,327,000)
=========== ===========
Net loss per common share:
Loss before extraordinary item $ (.65) $ (1.60)
Extraordinary item .06 -
----------- -----------
Net loss $ (.59) $ (1.60)
=========== ===========
</TABLE>
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated statements.
5
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
----------------------------
1997 1996
------------ -------------
<S> <C> <C>
Revenues:
Casino $120,153,000 $122,915,000
Rooms 4,692,000 7,290,000
Food and beverage 16,377,000 18,161,000
Other 7,527,000 9,563,000
------------ ------------
148,749,000 157,929,000
Less - promotional allowances (12,456,000) (14,154,000)
------------ ------------
Net revenues 136,293,000 143,775,000
------------ ------------
Expenses:
Casino 100,405,000 112,978,000
Rooms 1,267,000 2,601,000
Food and beverage 5,220,000 6,144,000
Other 1,152,000 2,032,000
General and administrative 8,383,000 10,257,000
Depreciation and amortization 7,719,000 10,601,000
------------ ------------
Total expenses 124,146,000 144,613,000
------------ ------------
Income (loss) from operations 12,147,000 (838,000)
------------ ------------
Non-operating income (expenses):
Interest income 654,000 1,103,000
Interest expense (19,181,000) (19,740,000)
Gain on disposal of assets 24,000 13,000
Equity in earnings of limited partnership 781,000 -
------------ ------------
Total non-operating expense, net (17,722,000) (18,624,000)
------------ ------------
Loss before income taxes and extraordinary item (5,575,000) (19,462,000)
Income tax (provision) benefit (210,000) 1,339,000
------------ ------------
Loss before extraordinary item (5,785,000) (18,123,000)
Gain on early extinguishment of debt 310,000 -
------------ ------------
Net loss $ (5,475,000) $(18,123,000)
============ ============
Net loss per common share:
Loss before extraordinary item $(1.12) $(3.49)
Extraordinary item .06 -
------------ ------------
Net loss $(1.06) $(3.49)
============ ============
</TABLE>
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated statements.
6
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------------------------
1997 1996
----------- ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $(5,475,000) $(18,123,000)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Gain on early extinguishment of debt (310,000) -
Depreciation and amortization, including
accretion of debt discount 11,472,000 14,134,000
Gain on sale of assets (24,000) (13,000)
Provision for doubtful accounts 1,559,000 894,000
Equity in earnings of limited partnership (781,000) -
Dividends received from limited partnership 2,101,000 -
Deferred income tax benefit - (107,000)
(Increase) decrease in accounts receivable and
due from affiliate (292,000) 1,594,000
(Decrease) increase in accounts payable and
other accrued liabilities (931,000) 2,790,000
Net change in other current assets and liabilities (1,561,000) (1,690,000)
Net change in other noncurrent assets and liabilities (46,000) (207,000)
----------- ------------
Net cash provided by (used in) operating activities 5,712,000 (728,000)
----------- ------------
INVESTING ACTIVITIES:
Net property and equipment additions (1,312,000) (5,275,000)
Proceeds from disposal of assets 24,000 13,000
Decrease in cash from sale of limited partnership interest (451,000) -
Collections on notes receivable 78,000 54,000
Obligatory investments (1,333,000) (1,432,000)
Short-term investments 2,000,000 -
Distributions from unconsolidated affiliate 500,000 -
----------- ------------
Net cash used in investing activities (494,000) (6,640,000)
----------- ------------
FINANCING ACTIVITIES:
Net (repayments) borrowings on credit facilities (2,000,000) 2,000,000
Repayments of long-term debt (2,243,000) (273,000)
----------- ------------
Net cash (used in) provided by financing activities (4,243,000) 1,727,000
----------- ------------
Net increase (decrease) in cash and cash equivalents 975,000 (5,641,000)
Cash and cash equivalents at beginning of period 22,991,000 28,067,000
----------- ------------
Cash and cash equivalents at end of period $23,966,000 $ 22,426,000
=========== ============
</TABLE>
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated statements.
7
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) ORGANIZATION, BUSINESS AND BASIS OF PRESENTATION
Greate Bay Casino Corporation, a Delaware corporation, and its subsidiaries
("GBCC"), are engaged in the operation or management of casino properties.
GBCC's principal assets are the Sands Hotel and Casino located in Atlantic City,
New Jersey (the "Sands") and management and consulting contracts with gaming
facilities located in Aurora, Illinois (the "Aurora Casino") and Tunica,
Mississippi (the "Tunica Casino") (see Note 5). GBCC, through its subsidiaries
and various joint ventures, has also engaged to a lesser extent in other hotel
and casino operations in the United States and the Caribbean.
Prior to December 31, 1996, Hollywood Casino Corporation ("HCC", a Delaware
corporation) owned approximately 80% of the outstanding common stock of GBCC.
Effective December 31, 1996, HCC distributed such stock to its shareholders; as
a result, approximately 37% of GBCC's outstanding stock is owned by certain
general partnerships and trusts controlled by Jack E. Pratt, Edward T. Pratt,
Jr. and William D. Pratt and by other family members (collectively, the "Pratt
Family"). The Pratt Family also owns approximately 53% of HCC. HCC owns the
Aurora Casino and the Tunica Casino.
Effective as of April 1, 1997, HCC acquired the general partnership interest
in Pratt Management, L.P. ("PML"), the limited partnership which holds the
management contract on the Aurora Casino, from PPI Corporation, a wholly owned
subsidiary of GBCC. As a result, GBCC's investment in the limited partnership
is now being presented under the equity method of accounting (see Note 6). For
all periods through March 31, 1997, PML was wholly owned by subsidiaries of
GBCC; accordingly, the operating results of PML, together with its assets and
liabilities, were consolidated with GBCC for financial statement purposes.
GBCC estimates that a significant amount of the Sands' revenues are derived
from patrons living in southeastern Pennsylvania, northern New Jersey and
metropolitan New York City. Competition in the Atlantic City gaming market is
intense and management believes that this competition will continue or intensify
in the future.
The preparation of financial statements in conformity with generally accepted
accounting principles 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.
GBCC 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, GBCC's ultimate liability
may differ from the amounts accrued.
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets" requires, among other things, that an entity
review its long-lived assets and certain related intangibles for impairment
whenever changes in circumstances indicate that the carrying amount of an asset
may not be fully recoverable. As a result of its review, GBCC does not believe
that any material impairment currently exists related to its long-lived assets.
8
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
The consolidated financial statements as of June 30, 1997 and for the three
and six month periods ended June 30, 1997 and 1996 have been prepared by GBCC
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
GBCC as of June 30, 1997, and the results of its operations for the three and
six month periods ended June 30, 1997 and 1996 and cash flows for the six month
periods ended June 30, 1997 and 1996.
The accompanying consolidated financial statements have been prepared
assuming GBCC and its subsidiaries will continue as going concerns. Greate Bay
Hotel and Casino, Inc. ("GBHC"), which is GBCC's most significant operating
subsidiary, owns and operates the Sands and incurred an operating cash flow
deficit of $6,070,000 in 1996 and, as a consequence, had to rely on borrowings
from affiliates in early 1997 to meet its debt service requirements and to fund
working capital needs during its seasonal low operating periods. The
availability of additional borrowings from GBCC and other subsidiaries of GBCC
during the remainder of 1997 is limited. HCC, which loaned $6,500,000 to GBCC
in 1996 for use by the Sands (see Note 2), is subject to certain indenture
provisions which restrict its ability to provide ongoing financial support to an
additional $3,500,000. There is no assurance that HCC, which is no longer the
parent of GBCC, will agree to provide such additional financial support, if
needed.
Operating results for the first six months of 1997 reflected a substantial
improvement over 1996 and were on target with management's operating plan due to
mild winter weather conditions compared to a year ago, an abatement of the
intense marketing competition for bus customers and implementation of cost
containment measures. GBHC's operating results for July, although 34% above
July 1996 results, were significantly below expectations primarily due to
declines in both gross table games wagering and table games hold percentage and
reduced its cash reserves to minimum levels. Revenues for the first ten days of
August reflect significant improvement and have thus far enabled GBHC to
maintain acceptable working capital levels without additional borrowings from
affiliates. In order to meet its debt service requirements of approximately
$12,500,000 in January 1998, GBHC will need to achieve its operating plan for
the remainder of 1997. Although there can be no assurance that GBHC will
achieve projected operating results, management believes that its operating plan
for the remainder of 1997 is attainable in the absence of a resumption of
marketing wars or other unforeseen events.
(2) SHORT-TERM CREDIT FACILITIES AND BORROWINGS FROM AFFILIATES
As of December 31, 1996, GBHC had $2,000,000 outstanding under a bank line of
credit. Borrowings under the line of credit were guaranteed to the extent of
$2,000,000 by another subsidiary of GBCC, which pledged a certificate of deposit
in the face amount of $2,000,000 as collateral for the line of credit. The line
of credit was repaid upon maturity of the certificate of deposit during January
1997 and the line of credit was cancelled.
GBCC and its subsidiaries had outstanding affiliate borrowings from HCC of
$6,750,000 and $7,750,000 as of June 30, 1997 and December 31, 1996,
respectively. Included in the balance at December 31, 1996 was a $1,000,000,
14% note which was assumed by HCC in connection with its acquisition of the
general partnership interest in PML. During the third quarter of 1996, GBCC
borrowed
9
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
$6,500,000 from HCC on a demand basis with interest at the rate of 13 3/4% per
annum payable quarterly commencing October 1, 1996; such funds were loaned by
GBCC to GBHC at the same terms for working capital purposes. An additional
$250,000 is due on demand, or if no demand is made, on April 1, 1998 and bears
interest at the rate of 14% per annum, payable semiannually.
(3) LONG-TERM DEBT AND PLEDGE OF ASSETS
Substantially all of GBCC's assets are pledged in connection with GBCC's
long-term indebtedness. Additionally, the indentures with respect to the
February 1994 refinancing of substantially all of GBCC's casino related
outstanding debt contain certain cross-default provisions.
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
------------- -------------
<S> <C> <C>
10 7/8% first mortgage notes, due 2004 (a) $182,500,000 $185,000,000
11 5/8% senior notes, due 2004 (b) 85,000,000 85,000,000
14 7/8% secured promissory note, due 2006, net of
discount of $34,385,000 and $44,015,000,
respectively (c) 50,218,000 54,338,000
Other 1,568,000 1,686,000
------------ ------------
Total indebtedness 319,286,000 326,024,000
Less - current maturities (3,043,000) (3,127,000)
------------ ------------
Total long-term debt $316,243,000 $322,897,000
============ ============
</TABLE>
- ----------------
(a) On February 17, 1994, a subsidiary of GBCC issued $185,000,000 of non-
recourse first mortgage notes due January 15, 2004 (the "10 7/8% First
Mortgage Notes") and collateralized by a first mortgage on the Sands.
Interest on the notes accrues at the rate of 10 7/8% per annum, payable
semiannually commencing July 15, 1994. Interest only was payable during
the first three years. Commencing on July 15, 1997, semiannual principal
payments of $2,500,000 are due on each interest payment date with the
balance due at maturity. Such semiannual payments may be made in cash or
by tendering to the trustee 10 7/8% First Mortgage Notes previously
purchased or otherwise acquired by GB Property Funding. GB Property
Funding acquired $2,500,000 face amount of 10 7/8% First Mortgage Notes at
a discount during May 1997 which it used during June to make its July 15,
1997 required principal payment. The 10 7/8% First Mortgage Notes are
redeemable at the option of the issuer, in whole or in part, on or after
January 15, 1999 at stated redemption prices ranging up to 104.08% of par
plus accrued interest.
The indenture for the 10 7/8% First Mortgage Notes contains various
provisions which, among other things, restrict the ability of certain
subsidiaries to pay dividends to GBCC, to merge, consolidate or sell
substantially all of their assets or to incur additional indebtedness
beyond certain limitations. In addition, the indenture requires the
maintenance of certain cash balances and requires minimum expenditures, as
defined in the indenture, for property and fixture renewals, replacements
and betterments at the Sands.
10
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(b) On February 17, 1994, a subsidiary of GBCC issued $85,000,000 of unsecured
senior notes due April 15, 2004 (the "PRT Funding Notes"). Interest on the
PRT Funding Notes accrues at the rate of 11 5/8% per annum, payable
semiannually commencing October 15, 1994. The PRT Funding Notes are
redeemable at the option of the issuer, in whole or in part, on or after
April 15, 1999 at stated redemption prices ranging up to 104.36% of par
plus accrued interest. The indenture for the PRT Funding Notes contains
various provisions which, among other things, restrict the ability of
certain subsidiaries of GBCC to pay dividends to GBCC, to merge,
consolidate or sell substantially all of their assets or to incur
additional indebtedness beyond certain limitations. The indenture also
contains certain cross default provisions with respect to the 10 7/8% First
Mortgage Notes described in (a) above.
(c) On February 17, 1994, PPI Funding Corp., a newly formed subsidiary of GBCC,
issued $40,524,000 discounted principal amount of new deferred interest
notes (the "PPI Funding Notes") to HCC in exchange for the $38,779,000
principal amount of 15 1/2% unsecured notes held by HCC and issued by PCPI
Funding Corp., a subsidiary of GBCC (the "PCPI Notes"). The increased
principal amount of the new notes included a call premium on the exchange
($1,745,000) equal to 4 1/2% of the principal amount of PCPI Notes
exchanged; such premium was paid to all third party holders of $58,364,000
principal amount of PCPI Notes concurrently redeemed. The PPI Funding
Notes were discounted to yield interest at the rate of 14 7/8% per annum
and had an original face value of $110,636,000. Subsequent principal
payments by PPI Funding Corp. reduced the maturity value of the notes to
$98,353,000 at December 31, 1996. During the second quarter of 1997, HCC
assigned $13,750,000 undiscounted principal amount of the PPI Funding Notes
to PPI Corporation as consideration, in part, for HCC's acquisition of the
general partnership interest in PML (see Note 5). Such assignment reduced
the maturity value of the notes to $84,603,000. Payment of interest is
deferred through February 17, 2001 at which time interest will become
payable semiannually, with the unpaid principal balance due on February 17,
2006. The PPI Funding Notes are collateralized by a pledge of all of the
common stock of a subsidiary of GBCC.
Scheduled payments of long-term debt as of June 30, 1997 are set forth
below:
<TABLE>
<CAPTION>
<S> <C>
1997 (six months) $ 509,000
1998 5,068,000
1999 5,074,000
2000 5,079,000
2001 5,467,000
Thereafter 332,474,000
------------
Total $353,671,000
------------
</TABLE>
Interest paid amounted to $15,175,000 and $15,675,000, respectively, during
the six month periods ended June 30, 1997 and 1996.
11
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(4) INCOME TAXES
Components of GBCC's (provision) benefit for income taxes consist of the
following:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- ----------------------
1997 1996 1997 1996
--------- -------- ---------- ----------
<S> <C> <C> <C> <C>
Federal income tax benefit $ - $ - $ - $ -
State income tax (provision) benefit:
Current (35,000) 468,000 (210,000) 1,232,000
Deferred - 40,000 - 107,000
-------- -------- --------- ----------
$(35,000) $508,000 $(210,000) $1,339,000
======== ======== ========= ==========
</TABLE>
For periods prior to December 31, 1996, GBCC was included in the consolidated
federal income tax return of HCC, GBCC's parent prior to that date. Pursuant to
agreements between HCC and GBCC, GBCC's provision for federal income taxes was
based on the amount of tax which would have been provided if a separate federal
income tax return were filed. In addition, HCC compensated GBCC for the use by
HCC and its subsidiaries (exclusive of GBCC and its subsidiaries) of GBCC's
available tax net operating loss carryforwards ("NOL's"). GBCC paid no federal
income taxes for the six month periods ended June 30, 1997 and 1996. GBCC paid
state income taxes totaling $85,000 and $93,000 during the six month periods
ended June 30, 1997 and 1996, respectively.
Federal and state income tax provisions or benefits are based upon estimates
of the results of operations for the current period and reflect the
nondeductibility for income tax purposes of certain items, including certain
amortization, meals and entertainment and other expenses.
Deferred income taxes result primarily from the use of the allowance method
rather than the direct write-off method for doubtful accounts, the use of
accelerated methods of depreciation for federal and state income tax purposes
and differences in the timing of deductions taken between tax and financial
reporting purposes for contributions of and adjustments to the carrying value of
certain investment obligations and for vacation and other accruals.
As a result of the distribution of GBCC's stock by HCC to its shareholders,
GBCC is no longer included in HCC's consolidated Federal income tax return. At
June 30, 1997, GBCC and its subsidiaries have NOL's totaling approximately $83
million for Federal income tax purposes of which approximately $63 million do
not begin to expire until the year 2003. Additionally, GBCC and its
subsidiaries have various tax credits available totaling approximately
$3,200,000, most of which expire by the year 2004. Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109")
requires that the tax benefit of such NOL's, credit carryforwards and 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. Due to the continued availability of
NOL's originating in prior years and
12
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
the book and tax losses sustained in 1997 to date, management is unable to
determine that realization of such asset is more likely than not and, thus, has
provided a valuation allowance for the entire deferred tax asset for all periods
presented.
Sales or purchases of GBCC common stock by certain five percent stockholders,
as defined in the Internal Revenue Code of 1986, as amended (the "Code"), can
cause a "change of control", as defined in Section 382 of the Code, which would
limit the ability of GBCC to utilize these loss carryforwards in later tax
periods. Should such a change of control occur, the amount of annual loss
carryforwards available for use would most likely be substantially reduced.
Future treasury regulations, administrative rulings or court decisions may also
effect GBCC's utilization of its loss carryforwards.
The Internal Revenue Service is currently examining the consolidated Federal
income tax returns of HCC for the years 1993 and 1994 in which GBCC was
included. Management believes that the results of such examination will not
have a material adverse effect on the consolidated financial position of GBCC.
The components of the net deferred tax asset were as follows:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
------------- -------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 31,759,000 $ 26,335,000
Allowance for doubtful accounts 5,967,000 6,428,000
Investment and jobs tax credits 3,223,000 3,223,000
Equity in subsidiaries and joint ventures 3,204,000 3,293,000
Other liabilities and accruals 3,194,000 3,034,000
Other 2,472,000 2,037,000
------------ ------------
Total deferred tax assets 49,819,000 44,350,000
------------ ------------
Deferred tax liabilities:
Depreciation and amortization (8,471,000) (8,334,000)
Other (597,000) (597,000)
------------ ------------
Total deferred tax liabilities (9,068,000) (8,931,000)
------------ ------------
Net deferred tax asset 40,751,000 35,419,000
Valuation allowance (40,751,000) (35,419,000)
------------ ------------
$ - $ -
============ ============
</TABLE>
13
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(5) TRANSACTIONS WITH RELATED PARTIES
Prior to sale of the property in September 1996, GBCC operated the Holiday
Inn located at the north entrance of the Dallas/Fort Worth Airport ("DFW North")
which was owned by Metroplex Hotel Limited ("Metroplex"), a partnership
controlled by certain members of the Pratt Family. During the six month period
ended June 30, 1996, GBCC made capital expenditures under the hotel operating
agreement totaling $1,614,000. GBCC was also obligated by the hotel operating
agreement to make minimum rental payments equal to Metroplex's principal and
interest payments on the underlying indebtedness of this hotel. During February
1994, GBCC utilized funds borrowed from HCC to purchase such underlying
indebtedness with a principal balance of $13,756,000 from third parties at a
cost of $6,750,000 and subject to third party indebtedness amounting to
$2,706,000. The required minimum rental payments (net of debt service receipts)
amounted to $133,000 and $264,000, respectively, during the three and six month
periods ended June 30, 1996. Upon the sale of the hotel by Metroplex, GBCC
received proceeds sufficient to repay third party indebtedness of $1,873,000,
recover its $6,750,000 acquisition cost of the underlying indebtedness, recover
$2,851,000 of its total investment in property improvements and receive
additional cash of approximately $770,000.
PML, a limited partnership wholly owned through March 31, 1997 by GBCC, earns
management fees pursuant to a management agreement with Hollywood Casino -
Aurora, Inc. ("HCA"), an HCC subsidiary. Such fees include a base management
fee equal to 5% of the Aurora Casino's operating revenues (as defined in the
agreement) subject to a maximum of $5.5 million annually, and an incentive fee
equal to 10% of gross operating profit (as defined in the agreement to generally
include all revenues, less expenses other than depreciation, interest,
amortization and taxes). Effective as of April 1, 1997, HCC acquired the
general partnership interest in PML from PPI Corporation. Management fees
earned by GBCC prior to the sale of the general partnership interest amounted to
$2,727,000 during the six month period ended June 30, 1997. Such fees amounted
to $1,528,000 and $4,471,000, respectively, during the three and six month
periods ended June 30, 1996. Unpaid fees totaling $2,096,000 are included in
due from affiliates in the accompanying consolidated balance sheet at December
31, 1996.
PPI Corporation received a five-year note in the original amount of
$3,800,000 together with the assignment of $13,750,000 undiscounted principal
amount of PPI Funding Notes (see Note 4) and $350,000 of accrued interest due
from GBCC from HCC in exchange for the general partnership interest. The
$3,800,000 note is payable in monthly installments of $83,000, including
interest at the rate of 14% per annum, commencing on May 1, 1997, with
additional quarterly variable principal payments commencing on July 1, 1997 in
an amount equal to the general partner's share of quarterly cash distributions,
as defined, from PML. Interest income on the note from HCC amounted to $131,000
during the three month period ended June 30, 1997. Accrued interest receivable
of $43,000 is included in due from affiliates on the accompanying consolidated
balance sheet at June 30, 1997.
Pursuant to a ten-year consulting agreement with Hollywood Casino - Tunica,
Inc. ("HCT"), the HCC subsidiary which owns and operates the Tunica Casino, a
subsidiary of GBCC receives monthly consulting fees of $100,000. Total fees
earned amounted to $300,000 for each of the three month periods
14
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
ended June 30, 1997 and 1996 and $600,000 for each of the six month periods
ended June 30, 1997 and 1996.
GBCC and its subsidiaries share certain general and administrative costs with
HCC. Net allocated costs and fees charged to GBCC and its subsidiaries by HCC
amounted to $277,000 and $606,000, respectively, during the three month periods
ended June 30, 1997 and 1996 and $963,000 and $1,294,000, respectively, during
the six month periods ended June 30, 1997 and 1996. In connection with such
allocated costs and fees, payables in the amount of $122,000 and $203,000 are
included in accounts payable in the accompanying consolidated balance sheets at
June 30, 1997 and December 31, 1996, respectively.
HCT and Advanced Casino Systems Corporation ("ACSC"), a GBCC subsidiary,
entered into a Computer Services Agreement dated as of January 1, 1994 and
renewed through December 31, 1999. The agreement provides, among other things,
that ACSC will sell HCT computer hardware and information systems equipment and
will license or sublicense to HCT computer software necessary to operate HCT's
casino, hotel and related facilities and business operations. HCT pays ACSC for
such equipment and licenses such software at amounts and on terms and conditions
that ACSC provides to unrelated third parties as well as a fixed license fee of
$33,600 per month ($30,000 prior to January 1, 1997). HCT also reimburses ACSC
for its direct costs and expenses incurred under this agreement. Total charges
incurred under such agreement amounted to $133,000 and $191,000, respectively,
for the three month periods ended June 30, 1997 and 1996 and $244,000 and
$312,000, respectively, for the six month period ended June 30, 1997 and 1996.
HCA also receives certain computer-related services from GBCC subsidiaries
including hardware, software, and operator support. HCA reimburses GBCC for its
direct costs and any expenses incurred. Such costs totaled $12,000 and $31,000,
respectively, during the three month periods ended June 30, 1997 and 1996 and
$55,000 and $80,000, respectively, during the six month periods ended June 30,
1997 and 1996.
GBHC performs certain administrative and marketing services on behalf of HCA,
HCT and PML. During the three month periods ended June 30, 1997 and 1996, fees
charged by GBHC for such services totaled $253,000 and $245,000, respectively.
Such fees totaled $521,000 and $590,000, respectively, during the six month
periods ended June 30, 1997 and 1996. Unpaid fees amounting to $210,000 and
$128,000 are included in due from affiliates in the accompanying consolidated
balance sheets at June 30, 1997 and December 31, 1996, respectively.
On February 17, 1994, PRT Funding Corp., a subsidiary of GBCC, issued
$15,000,000 of 14 5/8% junior subordinated notes (the "Junior Subordinated
Notes") to HCC. Principal totaling $6,262,000 with respect to the Junior
Subordinated Notes was subsequently assigned to GBCC by HCC in recognition of
tax net operating losses of GBCC used by HCC. The remaining $8,738,000 of
Junior Subordinated Notes, together with interest accrued thereon, was assigned
to GBCC by HCC in connection with the distribution of its stock in GBCC to HCC's
shareholders on December 31, 1996.
15
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
Interest expense with respect to borrowings from HCC is set forth below:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- ----------------------
1997 1996 1997 1996
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
PPI Funding Notes held by
HCC (Note 3) $1,772,000 $1,784,000 $3,753,000 $3,533,000
Junior Subordinated Notes - 319,000 - 638,000
Short-term borrowings (Note 2) 235,000 214,000 502,000 426,000
</TABLE>
During 1994, a GBCC subsidiary issued $40,524,000 discounted principal amount
of PPI Funding Notes in exchange for the PCPI Notes held by HCC (see Note 3).
Accretion of interest on the PPI Funding Notes is included in the outstanding
note payable balances at June 30, 1997 and December 31, 1996.
Interest accrued on short-term borrowings at June 30, 1997 and December 31,
1996 amounting to $364,000 and $323,000, respectively, is included in interest
payable on the accompanying consolidated balance sheets at June 30, 1997 and
December 31, 1996.
(6) INVESTMENT IN PRATT MANAGEMENT, L.P.
Effective as of April 1, 1997, HCC acquired the general partnership interest
in PML (see Notes 1 and 5) from PPI Corporation. PML earns management fees from
the Aurora Casino and incurs operating and other expenses with respect to its
management thereof. The general partner receives 99% of the first $84,000 of
net income earned by the partnership each month and 1% of any income earned
above such amount. PML earned management fees of $1,445,000 and incurred
operating and other expenses of $407,000 during the three month period ended
June 30, 1997.
(7) LITIGATION
PLANET HOLLYWOOD LITIGATION
---------------------------
Planet Hollywood International, Inc., a Delaware corporation, and Planet
Hollywood (Region IV), Inc., a Minnesota corporation (collectively, "PHII"),
filed a complaint in the United States District Court for the Northern District
of Illinois, Eastern Division on July 29, 1996 against HCC, HCA and a member of
the Pratt Family (collectively, the "Original Hollywood Defendants"). The
Original Hollywood Defendants filed with the Court on September 18, 1996 an
answer to PHII's lawsuit, along with numerous counterclaims against PHII, Robert
Earl and Keith Barish (collectively, the "PHII Defendants"). PHII filed with
the Court on January 21, 1997, an amendment to their complaint which, among
other things, added HCT (together with the Original Hollywood Defendants, the
"Hollywood Defendants") and GBCC as defendants. The Original Hollywood
Defendants filed with the Court on February 4, 1997, and GBCC and HCT filed with
the Court on February 20, 1997, answers and counterclaims to such amended
complaint.
16
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
In its lawsuit, PHII alleges, among other things, that the Hollywood
Defendants and GBCC have, in opening and operating the Hollywood Casino concept,
infringed on PHII's trademark, service mark and trade dress and have engaged in
unfair competition and deceptive trade practices. In their counterclaims, the
Hollywood Defendants and GBCC allege, among other things, that the PHII
Defendants have, through their planned use of their mark in connection with
casino services, infringed on certain of HCC's service marks and trade dress and
have engaged in unfair competition.
Given the uncertainties inherent in litigation, no assurance can be given
that the Hollywood Defendants and GBCC will prevail in this litigation; however,
the Hollywood Defendants and GBCC believe that PHII's claims are without merit
and intend to defend their position and pursue their counterclaims vigorously.
The accompanying consolidated financial statements do not include any
adjustments that might result from the outcome of the uncertainties described
above.
OTHER LITIGATION
----------------
GBCC and its subsidiaries are parties in various legal proceedings with
respect to the conduct of casino and hotel operations. Although a possible
range of loss cannot be estimated, in the opinion of management, based upon the
advice of counsel, settlement or resolution of these proceedings should not have
a material adverse impact upon the consolidated financial position or results of
operations of GBCC and its subsidiaries. The accompanying consolidated
financial statements do not include any adjustments that might result from the
outcome of the uncertainties described above.
(8) SUPPLEMENTAL CASH FLOW INFORMATION
During the second quarter of 1997, HCC acquired the general partnership
interest in PML (see Notes 1 and 5). The purchase price included the assignment
of certain receivables from GBCC and the issuance of a note to PPI Corporation.
In connection with the acquisition, certain liabilities of PPI Corporation were
assumed as follows:
<TABLE>
<CAPTION>
<S> <C>
Assignment of PPI Funding Notes $(7,597,000)
Assignment of interest receivable (350,000)
Note issued (3,800,000)
Interest reserve on PPI Funding Notes (277,000)
Charge to paid-in capital 13,024,000
-----------
Liabilities assumed $ 1,000,000
===========
</TABLE>
17
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(9) RECLASSIFICATIONS
Certain reclassifications have been made to the prior year's consolidated
financial statements to conform to the 1997 consolidated financial statement
presentation. Such reclassifications include the reallocation of certain costs
among the various operating departments and general and administrative expenses
resulting from the completion of a comprehensive internal review during 1996 of
departmental allocations. Management believes that such reclassifications
better reflect the matching of costs with the associated revenues.
18
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
This Quarterly Report on Form 10-Q contains forward-looking statements about
the business, financial condition and prospects of GBCC. 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
applicable to the gaming industry in general or GBCC in particular, and other
risks indicated in GBCC's filing 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 GBCC or its management are intended to
identify forward-looking statements.
GENERAL
GBCC's consolidated net revenues decreased to $68.1 million and $136.3
million, respectively, during the second quarter and first six months of 1997
from $75.2 million and $143.8 million, respectively, for the second quarter and
first six months of 1996. There were also significant reductions in operating
expenses during these same periods. A portion of the revenue and operating
expense decreases is attributable to the April 1, 1997 acquisition by HCC of the
general partnership interest in PML. As a consequence of such acquisition,
PML's revenues and operating expenses are no longer consolidated with those of
GBCC and GBCC's remaining limited partnership interest in PML is accounted for
as an equity investment. Income from operations improved to $4.9 million and
$12.1 million, respectively, in 1997 compared to income from operations of
$518,000 and a loss from operations of $838,000, respectively, during the 1996
periods. The improvement in operating results is attributable to operations at
the Sands as discussed below.
The Sands earned income from operations of $3.6 million and $5.8 million,
respectively, during the three and six month periods ended June 30, 1997
compared to losses from operations of $2.1 million and $7 million, respectively,
reported for the three and six month periods ended June 30, 1996. Operating
results during the first six months of 1997 were favorably impacted by operating
efficiencies and by management's decision to discontinue certain aggressive
marketing programs. Operating results during the first six months of 1996 were
adversely affected by the advent of both unprecedented and highly aggressive
marketing programs instituted by certain other Atlantic City casinos seeking to
increase their market share together with record snowstorms in January and
weekend snowstorms in February. Although overall net revenues declined for the
periods (to $67.5 million and $130.7 million in 1997 from $70.6 million and
$133.5 million in 1996 for the three and six month periods, respectively),
operating expenses decreased significantly, specifically marketing and
advertising costs which decreased by $4.9 million and $7.6 million (23.1% and
19.5%), respectively, as a result of management's efforts to control costs while
maintaining positive gross operating profit.
19
<PAGE>
GREATE BAY 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 Sands' operations:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- -------------------
1997 1996 1997 1996
--------- --------- --------- --------
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C>
REVENUES:
Table games $ 19,665 $ 20,405 $ 39,156 $ 40,580
Slot machines 41,370 43,830 79,370 80,271
Other (1) 788 1,075 1,627 2,064
-------- -------- -------- --------
Total $ 61,823 $ 65,310 $120,153 $122,915
======== ======== ======== ========
TABLE GAMES:
Gross Wagering
(Drop) (2) $131,589 $148,995 $262,633 $283,383
======== ======== ======== ========
Hold Percentages: (3, 4)
Sands 14.9% 13.7% 14.9% 14.3%
Atlantic City 15.2% 15.6% 15.2% 15.8%
SLOT MACHINES:
Gross Wagering
(Handle) (2) $505,719 $536,139 $959,909 $975,519
======== ======== ======== ========
Hold Percentages: (3, 4)
Sands 8.2% 8.2% 8.3% 8.2%
Atlantic City 8.5% 8.3% 8.4% 8.3%
</TABLE>
- ----------------------------
(1) Consists of revenues from poker and simulcast horse racing wagering.
(2) Gross wagering consists of the total value of chips purchased for table
games (excluding poker) and keno wagering (collectively, the "drop") and
coins wagered in slot machines ("handle").
(3) 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".
(4) The Sands' hold percentages are reflected on an accrual basis. Comparable
data for the Atlantic City gaming industry is not available; consequently,
industry percentages have been calculated based on information available
from the New Jersey Casino Control Commission.
20
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Table game drop at the Sands declined $17.4 million (11.7%) and $20.8
million (7.3%), respectively, during the three and six month period ended June
30, 1997 compared with the same periods of 1996. The Sands' decreases compare
to increases of .1% and 5.7%, respectively, in table drop for all other Atlantic
City casinos during the same periods. As a result, the Sands' table game market
share (expressed as a percentage of the Atlantic City industry aggregate table
game drop) decreased to 7% and 7.1%, respectively, during the three and six
month periods ended June 30, 1997 from 7.9% and 8%, respectively, during the
same periods of 1996. The Sands' table game drop decreases are primarily
attributable to declines in patron volume from the unrated or "mass" segment.
Expansions of other Atlantic City casinos resulted in an increase of over 87,000
square feet of gaming space and 90 tables at June 30, 1997 compared to June 30,
1996. Such expansions typically result in intense marketing campaigns which
lure the "mass" segment to the new facility. Gaming space at the Sands has
remained virtually unchanged since mid-1996 and the number of table games has
decreased by 4%. The decline in table game drop during the second quarter of
1997 also reflects management's decision to discontinue certain promotional
activities, including the use of "special odds" offered at table games, which
has caused a decline in the rated table market segment.
Slot machine handle decreased $30.4 million (5.7%) and $15.6 million (1.6%),
respectively, during the three and six month periods ended June 30, 1997
compared with the same periods of 1996. The Sands' decreases in slot machine
handle compare with increases of .5% and 2.7%, respectively, in handle for all
other Atlantic City casinos. The Sands' average number of slot machines
remained virtually unchanged during 1997 compared to an increase of 8.7% for all
other Atlantic City casinos. The below industry-wide performance in handle
experienced by the Sands is a result of the same competitive pressures resulting
from casino expansions and related marketing campaigns at other properties as
discussed above with respect to table games.
REVENUES
Casino revenues at the Sands, including poker and simulcast horse racing
wagering revenues, decreased slightly by $3.5 million (5.3%) and $2.8 million
(2.2%), respectively, for the three and six month periods ended June 30, 1997
compared with the same periods of 1996. Decreases in both slot machine and
table game wagering were partially offset by improvements in the table game hold
percentage and, for the first quarter of 1997, in the slot machine hold
percentage.
Rooms revenue decreased $1.3 million (34.8%) and $2.6 million (35.6%),
respectively, during the three and six month periods ended June 30, 1997
compared with 1996. Such declines resulted from GBCC's sale of its last
remaining non-casino hotel property in September 1996 and were partially offset
by increases in rooms revenues at the Sands. Food and beverage revenues
decreased $754,000 (8.2%) and $1.8 million (9.8%), respectively, for the three
and six month periods ended June 30, 1997 compared with the prior year periods
as a result of the aforementioned hotel sale combined with reduced patron
volume, the rescheduling of unit operating hours to increase overall
profitability and the reduction of certain promotional activities at the Sands.
Other revenues decreased $2.4 million (60.6%) and $2 million (21.3%),
respectively, during the three and six month periods ended June 30, 1997
compared to the 1996
21
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
periods. Decreases resulting from the deconsolidation of PML's revenues ($1.5
million during the three month period ended June 30, 1996), from the hotel sale
and from reductions in theater entertainment at the Sands were partially offset
by the receipt of $1.5 million as a termination fee in connection with the first
quarter 1997 sale of a casino/hotel property managed by GBCC.
Promotional allowances represent the estimated value of goods and services
provided free of charge to casino customers under various marketing programs.
As a percentage of rooms, food and beverage and other revenues at the Sands,
these allowances decreased to 52.3% and 54.2%, respectively, during the three
and six month periods ended June 30, 1997 from 57% and 57.3%, respectively,
during the same periods of 1996. Such decreases are primarily attributable to
reductions in certain marketing programs and other promotional activities.
DEPARTMENTAL EXPENSES
Casino expenses at the Sands decreased $7.1 million (12.1%) and $12.6
million (11.1%), respectively, during the three and six month periods ended June
30, 1997 compared with 1996. During 1996, an unprecedented and highly
aggressive industry-wide attempt to increase market share resulted in
significantly higher costs with respect to coin incentive packages. The
abatement of these competitive pressures during 1997 together with management's
ongoing efforts to create operating efficiencies, have significantly reduced
expenses. Such factors have also resulted in a reduction in the allocation of
rooms, food and beverage and other expenses to casino expense.
Rooms expense decreased $751,000 (52.8%) and $1.3 million (51.3%),
respectively, during the second quarter and first six months of 1997 compared to
the same periods of 1996 primarily due to GBCC's sale of a noncasino hotel.
Food and beverage expense decreased by $312,000 (9.8%) and $924,000 (15%),
respectively, during the three and six month periods ended June 30, 1997
compared to the same periods in 1996 also as a result of the previously noted
hotel sale. Other expenses decreased $455,000 (42.4%) and $880,000 (43.3%),
respectively, during the three and six month periods ended June 30, 1997
compared with 1996 primarily due to the hotel sale.
GENERAL AND ADMINISTRATIVE
General and administrative expenses decreased by $1.3 million (25%) and $1.9
million (18.3%), respectively, during the three and six month periods ended June
30, 1997 compared to the 1996 period primarily due to the deconsolidation of
PML's operating expenses, the disposal of GBCC's remaining noncasino hotel
property and reduced overhead allocations from HCC.
DEPRECIATION AND AMORTIZATION
As a result of a revision in the estimated useful life of the Sands'
buildings effective October 1, 1996 and the completion of amortization with
respect to certain of its long lived assets, GBCC's depreciation and
22
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
amortization expense for the second quarter and first six months of 1997
decreased by $1.6 million (29.8%) and $2.9 million (27.2%), respectively,
compared to the same periods during 1996.
INTEREST
Interest income decreased $102,000 (19.3%) and $449,000 (40.7%),
respectively, during the second quarter and first six months of 1997 compared to
the same periods during 1996 as the hotel sale resulted in GBCC no longer
receiving interest income on an associated note receivable. Interest expense
did not change significantly during the 1997 period compared to the prior year.
EQUITY IN EARNINGS OF LIMITED PARTNERSHIP
Effective as of April 1, 1997, HCC acquired the general partnership interest
in PML from PPI Corporation. The Agreement of Limited Partnership of PML
provides for distributions to a GBCC subsidiary of 1% of the first $84,000 of
net income earned by PML each month and 99% of any net income earned above such
amount, with all remaining income distributed to the general partner. GBCC's
equity in the earnings of PML amounted to $781,000 during the three month period
ended June 30, 1997.
INCOME TAX BENEFIT
From May 1992 through December 31, 1996, GBCC's results of operations were
included in HCC's consolidated Federal income tax return. Pursuant to
agreements between HCC and GBCC, GBCC's provision for Federal income taxes was
based on the amount of tax which would have been provided if a separate Federal
income tax return had been filed. As a result of the distribution of GBCC's
common stock by HCC to its shareholders, GBCC is no longer included in HCC's
consolidated Federal income tax return.
As of June 30, 1997, GBCC and its subsidiaries have tax net operating loss
carryforwards ("NOL's") totaling approximately $83 million, of which
approximately $63 million do not begin to expire until the year 2003.
Additionally, GBCC and its subsidiaries have various tax credits available
totaling approximately $3.2 million, most of which expire by the year 2004.
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" requires that the tax benefit of such NOL's, credit carryforwards and
deferred tax assets resulting from temporary differences be recorded as an asset
and, to the extent that management can not assess that utilization of such NOL's
is more likely than not, a valuation allowance should be recorded. Due to the
continued availability of NOL's originating in prior years and the book and tax
losses sustained in 1997 to date, management is unable to determine that
realization of such asset is more likely than not and, thus, has provided a
valuation allowance for the entire deferred tax asset at June 30, 1997.
EXTRAORDINARY ITEM
GBHC acquired $2.5 million of its 10 7/8% First Mortgage Notes at a discount
of $375,000 with which to make its scheduled July 1997 principal payment (see
"Liquidity and Capital Resources - Financing
23
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Activities" below). Such gain was partially offset by the write off of
associated financing costs, resulting in a net gain from early extinguishment of
debt amounting to $310,000.
INFLATION
Management believes that in the near term, modest inflation, together with
increasing competition within the gaming industry for qualified and experienced
personnel, will continue to cause increases in operating expenses, particularly
labor and employee benefits costs.
SEASONALITY
Historically, the Sands' operations have been highly seasonal in nature,
with the peak activity occurring from May to September. Consequently, the
results of GBCC's operations for the first and fourth quarters are traditionally
less profitable than the other quarters of the fiscal year. Furthermore, the
Aurora Casino has also experienced seasonality, but to a lesser degree than the
Sands, and, as a result, the management fees earned have fluctuated with such
seasonality. In addition, the Sands' and the Aurora Casino's operations may
fluctuate significantly due to a number of factors, including chance. Such
seasonality and fluctuations may materially affect GBCC's casino revenues and
profitability.
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES
GBCC's principal assets and sources of revenues are the Sands and management
and consulting contracts with the Aurora Casino and the Tunica Casino. During
the first six months of 1997, GBCC's net cash provided by operating activities
(after net interest expense and income taxes) amounted to $5.7 million. Through
the first quarter of 1997, a GBCC subsidiary received a base management fee
equal to 5% of operating revenues (as defined in the management agreement)
subject to a maximum of $5.5 million annually, and an incentive fee equal to 10%
of gross operating profit (as defined in the management agreement) from the
operation of the Aurora Casino. Management fees received during the first
quarter of 1997 amounted to $2.7 million; costs associated with such revenues
totaled $460,000 during the first quarter of 1997. The GBCC subsidiary
continues to receive distributions from the limited partnership which manages
the Aurora Casino approximating GBCC's equity in the earnings of such
partnership (see "Results of Operations - Equity in Earnings of Limited
Partnership" above). During 1994, a subsidiary of GBCC entered into a
consulting agreement with HCT with respect to the Tunica Casino which provides
for the payment of $1.2 million annually by the Tunica Casino to the subsidiary
for consulting services and for reimbursement of direct costs and expenses
incurred.
Prior to 1996, the Sands' earnings before depreciation, interest,
amortization, taxes and intercompany management fees were sufficient to meet its
debt service obligations (other than certain maturities of principal that have
been refinanced) and to fund a substantial portion of its capital
24
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
expenditures. Historically, the Sands has also used short-term borrowings to
fund seasonal cash needs and has used long-term borrowings for certain capital
projects.
GBCC utilized cash from operations, $1.5 million received as a termination
fee in connection with the sale of a casino/hotel property managed by GBCC and
distributions from an unconsolidated affiliate during the six month period ended
June 30, 1997 to make its required principal payment with respect to the 10 7/8%
First Mortgage Notes, to repay its $2 million bank line of credit, to fund
capital additions totaling $1.3 million and to make obligatory investments at
the Sands of $1.3 million.
FINANCING ACTIVITIES
During February 1994, GBCC completed the refinancing of virtually all of its
casino-related outstanding debt. The refinancing was completed through a public
offering of $270 million of debt securities consisting of $185 million of 10
7/8% First Mortgage Notes due January 15, 2004 and $85 million of 11 5/8% PRT
Funding Notes due April 15, 2004. Proceeds from the debt offerings were used,
in part, to refinance outstanding mortgage notes on the Sands and other
indebtedness scheduled to mature in 1994, to repay $58.4 million of the other
publicly held indebtedness and to provide partial funding for an expansion of
gaming space at the Sands. During the first six months of 1997, GBCC repaid
long-term indebtedness of $2.2 million. Commencing in July 1997, semiannual
principal payments of $2.5 million are due with respect to the 10 7/8% First
Mortgage Notes. Such semiannual payments may be made in cash or by tendering to
the trustee 10 7/8% First Mortgage Notes previously purchased or otherwise
acquired by GB Property Funding. GB Property Funding acquired $2.5 million face
amount of 10 7/8% First Mortgage Notes at a discount during May 1997 which it
used during June to make its July 15, 1997 required principal payment. Total
scheduled maturities of long-term debt during the remainder of 1997 are
$509,000.
In connection with the refinancing discussed in the previous paragraph, HCC
loaned $15 million on a junior subordinated basis to GBCC at 14 5/8% interest
(the "Junior Subordinated Notes"). As of December 31, 1996, HCC had assigned
the entire principal amount of the Junior Subordinated Notes together with
accrued interest thereon to GBCC in consideration for tax net operating losses
of GBCC utilized by HCC in 1994 ($6.3 million principal and $1.9 million
interest) and as a capital contribution in connection with the distribution of
GBCC stock to HCC's shareholders ($8.7 million principal and $1.8 million
interest).
Also in connection with the refinancing, GBCC issued $40.5 million
discounted principal amount of deferred interest notes (the "PPI Funding Notes")
to HCC in exchange for $38.8 million principal amount of 15 1/2% notes issued by
another GBCC subsidiary and held by HCC. Effective as of April 1, 1997, HCC
acquired the general partnership interest in the limited partnership which holds
the Aurora management agreement from PPI Corporation. The 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 of accrued interest due from GBCC. Annual principal and
interest payments by HCC on the $3.8 million note will approximate the general
partner's share of annual
25
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
partnership distributions which will now be made to HCC. With respect to the
assignment of PPI Funding Notes, GBCC has reduced both the amount of its future
debt obligation to HCC and its annual non-cash interest expense.
During the third quarter of 1996, GBCC borrowed $6.5 million from HCC which
accrues interest at the rate of 13 3/4% per annum payable quarterly commencing
October 1, 1996. GBCC loaned such funds to GBHC on similar terms.
GBHC repaid its $2 million bank line of credit during January 1997 and the
line of credit was cancelled.
CAPITAL EXPENDITURES AND OTHER INVESTMENTS
Property and equipment additions during the first six moths of 1997 totaled
$1.3 million, virtually all of which were at the Sands. Management anticipates
capital expenditures during the remainder of 1997 will be approximately $3.2
million. Projects currently planned during the remainder of 1997 include
additional slot machines, upgrades and improvements to rooms at the Sands,
including its higher-end suite product, and other departmental expenditures.
The Sands is required by the New Jersey Casino Control Act to make certain
investments with the Casino Reinvestment Development Authority, a governmental
agency which administers the statutorily mandated investments made by casino
licensees. Deposit requirements for the six months ended June 30, 1997 totaled
$1.3 million and are anticipated to be approximately $1.7 million during the
remainder of 1997.
SUMMARY
GBHC, which is GBCC's most significant operating subsidiary, incurred an
operating cash flow deficit of $6.1 million in 1996 and, as a consequence, had
to rely on borrowings from affiliates in early 1997 to meet its debt service
requirements and to fund working capital needs during its seasonal low operating
periods. The availability of additional borrowings from GBCC and other
subsidiaries of GBCC during the remainder of 1997 is limited. HCC, which loaned
$6.5 million to GBCC in 1996 for use by the Sands, is subject to certain
indenture provisions which restrict its ability to provide ongoing financial
support to an additional $3.5 million. There is no assurance that HCC, which is
no longer the parent of GBCC, will agree to provide such additional financial
support, if needed.
Operating results for the first six months of 1997 reflected a substantial
improvement over 1996 and were on target with management's operating plan due to
mild winter weather conditions compared to a year ago, an abatement of the
intense marketing competition for bus customers and implementation of cost
containment measures. GBHC's operating results for July, although 34% above
July 1996 results, were significantly below expectations primarily due to
declines in both gross table games wagering and table games hold percentage and
reduced its cash reserves to minimum levels. Revenues for the first ten days
26
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
of August reflect significant improvement and have thus far enabled GBHC to
maintain acceptable working capital levels without additional borrowings from
affiliates. In order to meet its debt service requirements of approximately
$12.5 million in January 1998, GBHC will need to achieve its operating plan for
the remainder of 1997. Although there can be no assurance that GBHC will
achieve projected operating results, management believes that its operating plan
for the remainder of 1997 is attainable in the absence of a resumption of
marketing wars or other unforeseen events.
27
<PAGE>
PART II: OTHER INFORMATION
- ---------------------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBIT
10.22 General Partnership Interest Purchase Agreement dated as of April 1,
1997 by and between HWCC-Aurora Management, Inc. and PPI Corporation.
The Registrant did not file any reports on form 8-K during the quarter
ended June 30, 1997.
SIGNATURES
- ----------
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GREATE BAY CASINO CORPORATION
Date: August 12 , 1997 By: /s/ John C. Hull
----------------- ------------------------
John C. Hull
Corporate Controller
28
<PAGE>
INDEX TO EXHIBITS
-----------------
10.22 General Partnership Interest Purchase Agreement dated as of April 1, 1997
by and between HWCC-Aurora Management, Inc. and PPI Corporation.
<PAGE>
Exhibit 10.22
GENERAL PARTNERSHIP INTEREST PURCHASE AGREEMENT
THIS GENERAL PARTNERSHIP INTEREST PURCHASE AGREEMENT (this "AGREEMENT") is
made as of the first day of April, 1997, by and between HWCC-AURORA MANAGEMENT,
INC., an Illinois corporation (the "BUYER"), and PPI CORPORATION, a New Jersey
corporation (the "SELLER").
RECITALS
--------
1. The Seller desires to sell, assign and transfer to the Buyer, and
the Buyer desires to purchase and assume from the Seller, the general
partnership interest of the Seller (the "GP INTEREST") in Pratt Management,
L.P., a Delaware limited partnership (the "PARTNERSHIP").
2. The parties wish to set forth their agreement with respect to the
purchase and sale of the GP Interest and other matters.
AGREEMENT
---------
NOW THEREFORE, in consideration of the foregoing and the mutual covenants
and promises herein contained, the parties agree as follows:
1. PURCHASE, SALE, ASSIGNMENT AND ASSUMPTION OF THE GP INTEREST.
-------------------------------------------------------------
1.1 PURCHASE, SALE, ASSIGNMENT AND ASSUMPTION. Subject to the
-------------------------------------------
terms and conditions hereof, at the Closing (as defined in Section 1.3 hereof)
the Seller shall sell, assign, convey and otherwise transfer to the Buyer, and
the Buyer shall purchase and assume from the Seller, all right, title, interest
and obligations of Seller in, to and under the entire GP Interest, free and
clear of any and all security interests, liens, claims, agreements, obligations
and encumbrances of any nature whatsoever other than those specified in the
Agreement of Limited Partnership of the Partnership dated as of February 17,
1994 (the "PARTNERSHIP AGREEMENT"), and the Seller agrees to cause the
Partnership Agreement to be amended to admit the Buyer as a substituted general
partner of the Partnership.
1.2 PURCHASE PRICE. In consideration of the sale, assignment and
----------------
transfer of the GP Interest pursuant to Section 1.1 hereof, the Buyer will pay
to the Seller Eleven Million Seven Hundred Forty-Six Thousand Six-Hundred Sixty
Four Dollars ($11,746,664) (the "PURCHASE PRICE"), to be paid by the Buyer to
the Seller at the Closing (as defined below), as follows:
(A) the Buyer will issue to the Seller a promissory note in
the form of Exhibit 1 attached hereto (the "NOTE"), in the principal amount of
Three Million Eight Hundred Thousand Dollars ($3,800,000);
(B) the Buyer will assign to the Seller a portion of the
outstanding principal amount of that certain PPI Funding Corp. 14 7/8% Secured
Promissory Note due 2006 in the original principal amount of One Hundred Ten
Million Six Hundred Thirty-Five Thousand Seven Hundred Thirty-Nine Dollars and
Forty Cents ($110,635,739.40) the ("PPI FUNDING NOTE") equal to Thirteen Million
Seven Hundred Fifty Thousand Dollars ($13,750,000), which, for purposes of the
Agreement, will be deemed to have a discounted value of Seven Million Five
Hundred Ninety-Six Thousand Six Hundred Sixty-Four Dollars ($7,596,664) as of
December 31, 1996; and
-1-
<PAGE>
(C) the Buyer will assign to the Seller the right to receive
accrued interest in the amount of $350,000 on certain notes receivable in the
current aggregate unpaid principal amount of $6,750,000 (the "ACCRUED INTEREST
ON NOTES RECEIVABLE") from Greate Bay Casino Corporation (fka Pratt Hotel
Corporation), a Delaware corporation which directly owns 100% of the issued and
outstanding common stock of the Seller.
1.3 CLOSING. The closing of the transactions contemplated hereby
-------
(respectively, the "CLOSING" and the "TRANSACTIONS") shall be held
simultaneously with the execution and delivery of this Agreement.
2. REPRESENTATIONS AND WARRANTIES OF THE SELLER.
---------------------------------------------
The Seller, on its own behalf and on behalf of the Partnership, as
applicable, represents and warrants to the Buyer, as of the date hereof, as set
forth below. THE SELLER MAKES NO REPRESENTATIONS OR WARRANTIES OF ANY KIND OR
CHARACTER, EXPRESS OR IMPLIED, EXCEPT AS SET FORTH IN THIS SECTION 2.
2.1 AUTHORITY. The Seller possesses full corporate power and
---------
authority to execute and deliver this Agreement and to consummate the
Transactions. This Agreement has been duly and validly executed and delivered
by the Seller and constitutes the legal, valid and binding obligation of the
Seller, enforceable against it in accordance with its terms, except as such
enforceability may be limited by bankruptcy, insolvency or other similar laws
from time to time in effect which affect the enforcement of creditors' rights
generally and by general principles of equity.
2.2 NO VIOLATION. The execution and delivery of this Agreement by
------------
the Seller and the performance by it of the Transactions do not (A) violate any
provision of the Certificate of Incorporation or By-laws of the Seller, or the
Management Services Agreement, dated as of June 21, 1991, by and between
Hollywood Casino-Aurora, Inc. (formerly known as Aurora Riverboats, Inc.) and
the Partnership (assignee of the Seller, the successor by merger to Greate Bay
Casino Corporation), as amended by that certain First Amendment to Management
Services Agreement dated May 14, 1992 (as amended, the "AURORA MANAGEMENT
CONTRACT"), or, to the Seller's knowledge, (B) violate any law or regulation of
any United States federal, territorial, state or local governmental or
regulatory agency or authority (an "AUTHORITY"), (C) require the consent or
approval of any Authority which has not been obtained or (D) result in a breach
of any provision of, or require the consent or approval of any third party which
has not been obtained under, or result in the creation or imposition of any
security interest, lien, claim or other encumbrance upon any portion of the
assets of the Partnership pursuant to the terms of any contract or agreement to
which the Seller or the Partnership is a party, which violation, breach or
consent or approval (if not obtained), in the case of each of clause (B) and (C)
above, would have a material adverse effect on the business, operations or
financial condition of the Partnership or on the Transactions.
2.3 TITLE TO THE GP INTEREST.
-------------------------
(A) The Seller is the record and beneficial owner of and has
good and valid title to the GP Interest, free and clear of any and all security
interests, liens, claims, agreements, obligations and encumbrances of any nature
whatsoever other than those specified in the Partnership Agreement, and the
delivery by the Seller of the GP Interest to the Buyer conveys to the Buyer good
and valid title to the GP Interest free and clear of all, and does not
-2-
<PAGE>
result in the Buyer being subject to any, security interests, liens, claims,
agreements, obligations and encumbrances of any nature whatsoever, other than
those specified in the Partnership Agreement.
(B) Except as set forth in the Partnership Agreement, neither
the Seller has, nor shall the Buyer have immediately after the Closing, any
obligation to make any capital contribution, loan or other payment or any other
transfer of assets or services to the Partnership.
2.4 STRUCTURE OF THE PARTNERSHIP. The Partnership is comprised
----------------------------
solely of the following two (2) partners: (A) Pratt Casino Corporation, a
Delaware corporation ("PCC"), which is the sole limited partner of the
Partnership, and (B) the Seller, which is the sole general partner of the
Partnership. No other person or entity has, or possesses any rights to acquire,
any ownership or equity interest in the Partnership or its capital, profits or
distributions.
3. REPRESENTATIONS AND WARRANTIES OF THE BUYER. The Buyer represents
-------------------------------------------
and warrants to the Seller that the Buyer possesses full corporate power and
authority to execute and deliver this Agreement and to consummate the
Transactions. This Agreement has been duly and validly executed and delivered
by the Buyer and constitutes the legal, valid and binding obligation of the
Buyer, enforceable against it in accordance with its terms, except as such
enforceability may be limited by bankruptcy, insolvency or other similar laws
from time to time in effect which affect the enforcement of creditors' rights
generally and by general principles of equity. The execution and delivery of
this Agreement by the Buyer and the performance by it of the Transactions do not
violate the Articles of Incorporation or By-laws of the Buyer or, to the Buyer's
knowledge, (A) violate any law or regulation of any Authority, or (B) result in
a breach of any provision of, or require the consent or approval of any third
party which has not been obtained under, the terms of any contract or agreement
to which the Buyer is a party, or the consent or approval of any Authority,
which violation, breach or consent or approval (if not obtained) would have a
material adverse effect on the business, operations or financial condition of
the Buyer or on the Transactions. THE BUYER MAKES NO REPRESENTATIONS OR
WARRANTIES OF ANY KIND OR CHARACTER, EXPRESS OR IMPLIED, EXCEPT AS SET FORTH IN
THIS SECTION 3.
4. CERTAIN COVENANTS.
------------------
4.1 BOOKS AND RECORDS.
------------------
(A) On reasonable notice at any time after the Closing, the
Buyer shall permit representatives of the Seller full and free access at the
Seller's expense, during normal business hours, to all correspondence,
contracts, agreements and purchase and sale orders and other books and records
of the Partnership relating to the operation of the business of the Partnership
as the same may relate to the GP Interest on or prior to the Closing for
purposes of inspection or copying. The Buyer shall cause all such materials to
be preserved for at least six years after the Closing and shall not thereafter
destroy or otherwise dispose of any such materials unless it shall have notified
the Seller at least six months before such disposition and given the Seller the
opportunity to remove and retain such materials.
(B) Without limiting the foregoing, the Buyer agrees that, at
the Seller's expense, for a period of six years after the Closing, it will
assist and cooperate with the Seller in collecting and assembling information
relating to the operation of the business of the Partnership on or prior to the
Closing that customarily has been provided or used in connection with the
preparation of any and all tax returns, information returns or other reports
required to be filed by the Seller or any affiliate of the Seller with any
Authority and shall make available to the Seller the services of personnel
reasonably necessary to enable the Seller or any affiliate of the Seller to
prepare and file any and all tax returns, information returns or other reports
required to
-3-
<PAGE>
be filed by the Seller or other affiliate of the Seller with any Authority
and/or to respond to and conduct any and all tax audits or other tax
determinations or proceedings.
4.2 CERTAIN COVENANTS OF THE PARTIES.
(A) FILINGS. Each of the Buyer and the Seller, on its own
-------
behalf and on behalf of the Partnership, shall promptly take all such action as
may, under applicable law, be necessary or appropriate for, and will promptly
file and, if appropriate, use its best efforts to have declared effective or
approved all documents and notifications with or to any Authority that are
necessary or appropriate for the consummation of the Transactions, and each of
the Buyer and the Seller shall promptly give the other party information
requested by such other party pertaining to it and its affiliates that is
reasonably necessary to enable such other party to take such actions and file in
a timely manner all documents and notifications required to be so filed by
applicable law.
(B) OTHER ACTIONS. Each of the Buyer and the Seller, on its
-------------
own behalf and on behalf of the Partnership, shall use its reasonable best
efforts to consummate the Transactions and make them effective as promptly as
practicable, including, without limitation, (i) defending lawsuits or other
proceedings challenging this Agreement or the consummation of any of the
Transactions, (ii) using reasonable best efforts to lift any injunction or order
adversely affecting this Agreement or the consummation of the Transactions or
(iii) using reasonable best efforts to obtain any consents necessary for its
performance of the Transactions.
(C) PRORATIONS. All taxable items of the Partnership that
----------
arise prior to or on the date of the Closing and are allocable to the General
Partner of the Partnership pursuant to Section 4.2 of the Partnership Agreement
shall be allocated to the Seller and those that arise after the date of the
Closing and are so allocable to the General Partner shall be allocated to the
Buyer based upon a closing-of-the-books method of accounting.
5. CLOSING DOCUMENTS.
-----------------
5.1 THE SELLER'S DOCUMENTS. At the Closing, the Seller will
----------------------
deliver or cause to be delivered to the Buyer:
(A) CERTIFICATE. A Certificate of the Secretary of the Seller
-----------
certifying (i) copies of resolutions duly adopted by the Board of Directors of
the Seller authorizing and approving the execution, delivery and performance of
this Agreement and the other agreements and documents executed and delivered in
connection herewith, (ii) that all partnership action necessary to approve the
execution, delivery and performance of this Agreement, and the other agreements
and documents executed and delivered by the Partnership in connection herewith,
shall have been duly and validly taken and (iii) such other matters as the Buyer
may reasonably request;
(B) ASSIGNMENT AND ASSUMPTION AGREEMENT AND AMENDMENT TO
----------------------------------------------------
PARTNERSHIP AGREEMENT. An Assignment and Assumption Agreement and Amendment
- ---------------------
to Partnership Agreement, providing for the sale, assignment and assumption of
the GP Interest set forth in Section 1.1 above and the admission and
substitution of the Buyer as the general partner of the Partnership,
substantially in the form attached as Exhibit 2 hereto (the "ASSIGNMENT AND
ASSUMPTION AND AMENDMENT AGREEMENT") executed by each of PCC and the Seller and
such other
-4-
<PAGE>
documentation as shall be reasonably requested by the Buyer to evidence the
valid assignment of the GP Interest and the admission and substitution of the
Buyer as the general partner of the Partnership;
(C) AMENDMENTS TO PARTNERSHIP CERTIFICATE. A Certificate of
-------------------------------------
Amendment to the Certificate of Limited Partnership of the Partnership,
evidencing the substitution and admission of the Buyer as the general partner of
the Partnership, substantially in the form attached as Exhibit 3 hereto,
executed by each of PCC and the Seller; and
(D) REPLACEMENT NOTE. A new PPI Funding Note in the same
----------------
form as the PPI Funding Note and in an original principal amount equal to the
outstanding principal amount of the PPI Funding Note as of the Closing Date
minus Thirteen Million Seven Hundred Thousand Dollars ($13,750,000).
5.2 THE BUYER'S DOCUMENTS. At the Closing, the Buyer will deliver
---------------------
or cause to be delivered to the Seller:
(A) CERTIFICATE. A Certificate of the Secretary of the Buyer
-----------
certifying (i) copies of resolutions duly adopted by the Board of Directors of
the Buyer authorizing and approving the execution, delivery and performance of
this Agreement, the Note and the other agreements and documents executed and
delivered in connection herewith and (ii) such other matters as the Seller may
reasonably request;
(B) ASSIGNMENT AND ASSUMPTION OF AGREEMENT AND AMENDMENT TO
-------------------------------------------------------
PARTNERSHIP AGREEMENT. An Assignment and Assumption and Amendment Agreement,
- ---------------------
executed by the Buyer;
(C) THE NOTE. The Note, executed by the Buyer and payable to
--------
the order of the Seller;
(D) ASSIGNMENT OF PPI FUNDING NOTE. A partial assignment of
------------------------------
the PPI Funding Note, providing for the assignment of Thirteen Million Seven
Hundred Fifty Thousand Dollars ($13,750,000) in outstanding principal amount of
the PPI Funding Note;
(E) ASSIGNMENT OF ACCRUED INTEREST ON NOTES RECEIVABLE. An
--------------------------------------------------
assignment of the Accrued Interest on Notes Receivable;
(F) SECURITY AGREEMENT AND PLEDGE. A Security Agreement and
-----------------------------
Pledge (the "Security Agreement") providing for the pledge of the GP Interest to
the Seller as security for the payment of the Note, substantially in the form of
Exhibit 4 hereto, executed by the Buyer;
(G) HCA ESTOPPEL LETTER. An estoppel letter executed by
-------------------
Hollywood Casino-Aurora, Inc. ( "HCA") stating that the obligations of the
Partnership required to be performed under the terms of the Aurora Management
Contract prior to the Closing have been performed and that there is no existing
breach or default by or on the part of the Partnership thereunder and setting
forth the agreement of HCA respecting the giving of notices of default under the
Aurora Management Contract and related matters, which estoppel letter shall be
in form and substance reasonably satisfactory to the Seller; and
(H) HCC ESTOPPEL LETTER. An estoppel letter executed by
-------------------
Hollywood Casino Corporation ("HCC") stating that the obligations, if any, of
the Partnership
-5-
<PAGE>
required to be performed prior to the Closing under the terms of the Service
Agreement by and between HCC and the Partnership to be entered into at or before
the Closing have been performed and that there is no existing breach or default
by or on the part of the Partnership thereunder and setting forth the agreement
of HCC respecting the giving of notices of default under such Services Agreement
and related matters, which estoppel letter shall be in form and substance
reasonably satisfactory to the Seller.
6. SURVIVAL OF REPRESENTATIVES; INDEMNITIES.
----------------------------------------
(A) SURVIVAL. The representations and warranties contained
--------
in this Agreement shall survive the sale, assignment and transfer to the Buyer
of the GP Interest hereunder and shall continue in full force and effect. The
agreements and covenants contained in this Agreement shall survive in accordance
with their terms.
(B) NO EFFECT ON LIABILITY. None of (i) the consummation of
----------------------
the Transactions, (ii) the delay or omission of any party to exercise any of its
rights under this Agreement or (iii) any investigation or disclosure that any
party makes, any notice that any party gives, or any knowledge that any party
obtains as a result thereof, or otherwise, shall (x) affect the liability of the
parties to one another for breaches of their covenants contained in this
Agreement, (y) affect the liability of the parties to one another for
misrepresentation under this Agreement, or (z) prevent any party from relying on
the representations contained in this Agreement.
6.1 INDEMNITIES.
------------
(A) THE SELLER'S INDEMNITY.
----------------------
(1) The Seller agrees to indemnify and hold the Buyer
harmless from and against any and all liabilities, damages, obligations, claims
and expenses (including, without limitation, reasonable costs of investigation
and reasonable defense and attorney's fees) (collectively "LOSSES") that the
Buyer sustains or becomes subject to as a result of the breach of any of the
warranties, representations, covenants or agreements of the Seller made herein
less any amounts actually received by the Buyer or the Partnership in respect of
such Losses under insurance policies; provided, however, that the Seller's
-------- -------
indemnity obligations hereunder shall not exceed the amount of the Purchase
Price.
(2) The Buyer shall not have any right to offset against
the Note for Losses indemnified pursuant to Section 6.1(A)(1).
(B) THE BUYER'S INDEMNITY. The Buyer agrees to indemnify
---------------------
and hold the Seller harmless from and against all Losses that it sustains or
becomes subject to as a result of the breach of any of the warranties,
representations, covenants or agreements of the Buyer made herein, as well as
any claim made against the Seller arising out of the Aurora Management Agreement
and relating to actions taken after the date of this Agreement, less any amounts
actually received by the Seller in respect of such Loss under insurance
policies.
(C) THIRD PARTY CLAIM. Promptly after receipt by the Buyer
-----------------
or the Seller of notification of the assertion, or possible assertion, by a
third party of any claim, action, suit, proceeding or demand with respect to
which indemnification shall or may be claimed by the Buyer or the Seller
pursuant to this Section 6 (the "THIRD PARTY CLAIM") (such recipient being
referred to hereinafter as the "INDEMNITEE") the Indemnitee shall give written
notice describing the Third Party Claim in reasonable detail (an "INDEMNITY
NOTICE") to the other party (herein, the "INDEMNITOR"). Failure by the
Indemnitee to send the Indemnity Notice shall not release the Indemnitor from
its
-6-
<PAGE>
obligations hereunder except to the extent that the failure to send the
Indemnity Notice prejudices the rights of the Indemnitor. The Indemnitor shall,
at its option, have full authority to defend any such claim, action, suit,
proceeding or demand, in the name of such Indemnitee or otherwise as the
Indemnitor shall elect utilizing counsel reasonably acceptable to the
Indemnitee, unless (i) the Indemnitee reasonably objects to such assumption on
the ground that counsel for such Indemnitor cannot represent both the Indemnitee
and the Indemnitor because such representation would be reasonably likely to
result in a conflict of interest or because there may be defenses available to
the Indemnitee that are not available to such Indemnitor, (ii) the Indemnitor is
not capable (by reason of insufficient financial capacity, bankruptcy,
receivership, liquidation, managerial deadlock, managerial neglect or similar
events) of maintaining a reasonable defense of such action or proceeding, (iii)
the action or proceeding seeks injunctive or other equitable relief against the
Indemnitee, or (iv) the amount in controversy exceeds the amount for which the
Indemnitor is liable under this Section 6.1. Neither the Indemnitor nor the
Indemnitee shall adjust, compromise or settle any such claim, action, suit,
proceeding or demand without the written consent of the other, which consent
shall not be unreasonably withheld. As to any Third Party Claim the defense of
which has been assumed by the Indemnitor, (i) the Indemnitee shall cooperate
fully in such defense as and to the extent reasonably requested by the
Indemnitor (such cooperation shall include the retention and, upon the
Indemnitor's request, the provision to the Indemnitor of records and information
that are reasonably relevant to such claim or demand and making employees
available on a mutually convenient basis to provide additional information and
explanation of any material provided hereunder) and (ii) the Indemnitor shall
not, subsequent to such assumption, be liable for any legal expenses incurred by
the Indemnitee. In the event of any claim under this Section 6 for
indemnification (whether or not in connection with a Third Party Claim), the
Indemnitee shall promptly advise the Indemnitor in writing, in reasonable
detail, of the amount and circumstances surrounding said claim (which notice
shall also be deemed to be an Indemnity Notice).
(D) INDEMNITY EXCLUSIVE REMEDY. Other than with respect to
--------------------------
enforcement of its rights to receive payment of the Note and to enforce the
Security Agreement and Pledge, the indemnity in this Section 6 shall be the
exclusive remedy for any misrepresentation or breach of warranty or breach of
any covenant or agreement in this Agreement.
7. FURTHER ASSURANCES AND COOPERATION. Following the Closing, the
----------------------------------
Seller and the Buyer shall each promptly execute, deliver and/or file such
documents, and promptly take such other actions, as shall be reasonably
requested by the other party to effectuate the Transactions.
8. GENERAL PROVISIONS.
-------------------
8.1 NOTICES. All notices and other communications hereunder
-------
shall be in writing and shall be delivered personally (including express
courier) or sent by telecopy (and promptly confirmed by mail) or sent by prepaid
registered or certified mail (return receipt requested) to the parties at the
following addresses:
(A) if to the Buyer, to
HWCC-Aurora Management, Inc.
Two Galleria Tower, Suite 2200
13455 Noel Road, LB 48
Dallas, Texas 75240
Attention: William D. Pratt
Telecopier: (972) 386-7411
-7-
<PAGE>
with a copy to:
Haynes and Boone, LLP
3100 NationsBank Plaza
901 Main Street
Dallas, Texas 75202-3789
Attention: William R. Hays, III
Telecopier: (214) 651-5940
(B) if to the Seller, to
PPI Corporation
Two Galleria Tower, Suite 2200
13455 Noel Road, LB48
Dallas, Texas 75240
Attention: Jack E. Pratt
Telecopier: (972) 386-7411
with a copy to:
Cox & Smith Incorporated
112 East Pecan Street, Suite 1800
San Antonio, Texas 78205-1521
Attention: Daniel G. Webster, III
Telecopier: (210) 226-8395
and to:
PPI Corporation
136 South Kentucky Ave.
Atlantic City, NJ 08401
Attention: Frederick H. Kraus
Telecopier: (609) 441-4624
Notices sent as aforesaid shall be deemed given and effective upon receipt (or
the date delivery is refused). Any party (and any other person or entity
designated to receive notice) may change its address or telecopy number for
notice by delivery to all other parties of notice to such effect in the manner
set forth herein.
8.2 ENTIRE AGREEMENT. This Agreement (including the Exhibits,
----------------
Schedules, documents and instruments referred to or incorporated herein)
constitutes the entire agreement, and supersedes all other prior agreements and
undertakings, both written and oral, among the parties with respect to the
subject matter hereof and thereof.
8.3 THIRD PARTIES; ASSIGNMENT. This Agreement is not intended to
-------------------------
confer upon any person other than the parties hereto any rights or remedies
hereunder and shall not be assigned (either rights or obligations) by either
party without the prior written consent of the other party.
8.4 GOVERNING LAW. This Agreement shall be construed in
-------------
accordance with the laws of the State of Texas and of the United States of
America, except to the extent that the requirements of the New Jersey Casino
Control Commission, the Illinois Gaming Board, the
-8-
<PAGE>
Mississippi Gaming Commission and any other similar entity (collectively, the
"GAMING AUTHORITIES") and the New Jersey Casino Control Act, the Illinois
Riverboat Gambling Act, the Mississippi Gaming Control Act, all rules and
regulations promulgated thereunder and any and all other applicable gaming laws,
statutes, codes, ordinances, orders, judgments, decrees, injunctions, notices,
rules, regulations, restrictions and requirements (collectively, the "GAMING
LAWS") shall necessarily control, in which event the rights and obligations of
the parties hereto shall be subject and subordinate to the requirements of the
Gaming Authorities and the Gaming Laws.
8.5 COUNTERPARTS. This Agreement may be executed in counterparts
------------
which together shall constitute a single agreement.
8.6 JURISDICTION AND VENUE. Each party hereto irrevocably submits
----------------------
and consents to the exclusive jurisdiction of the United States District Court
for the Northern District of Texas and, if such court does not have
jurisdiction, of the courts of the State of Texas in Dallas County, in
connection with any action or proceeding arising out of or relating to this
Agreement and the transactions contemplated hereby, including the enforcement of
any arbitration award, and hereby waives any forum non conveniens objection to
----- --- ----------
any of such fora. In any such litigation, each party waives personal service of
the summons and complaint or other process and papers issued therein and agrees
that the service thereof may be made by certified or registered mail directed to
it at the address provided for in Section 8.1.
8.7 AMENDMENT. This Agreement may only be amended by an
---------
instrument in writing signed by the parties hereto.
8.8 WAIVER. Any term or provision of this Agreement may be waived
------
at any time by the party or parties entitled to the benefits thereof but (A) no
such waiver shall be effective unless in writing and signed by the party claimed
to have made such waiver, and (B) no waiver of any term, provision or breach of
this Agreement shall operate or be construed as a waiver of the same or any
other term or provision, or any other breach of this Agreement, on any other
occasion.
8.9 SEVERABILITY. In case any one or more of the provisions
------------
contained in this Agreement shall for any reason be held to be invalid, illegal
or unenforceable in any respect, such invalidity, illegality or unenforceability
shall not effect any other provision hereof, and this Agreement shall be
construed as if such invalid, illegal or unenforceable provision had never been
contained herein.
* * * * *
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
BUYER:
HWCC-AURORA MANAGEMENT, INC.
By: /s/ William D. Pratt
-------------------------------
Name: William D. Pratt
Title: Vice President
-9-
<PAGE>
SELLER:
PPI CORPORATION
By: /s/ Jack E. Pratt
-------------------------------
Name: Jack E. Pratt
Title: President
-10-
<PAGE>
Exhibit 1
---------
PROMISSORY NOTE
$3,800,000.00 Dallas, Texas April 1, 1997
FOR VALUE RECEIVED, the undersigned, HWCC-AURORA MANAGEMENT, INC., an
Illinois corporation (the "MAKER"), hereby unconditionally promises to pay to
the order of PPI CORPORATION, a New Jersey corporation ("PAYEE"), at Two
Galleria Tower, Suite 2200, 13455 Noel Road, LB 48, Dallas, Texas 75240, or such
other address in Dallas County, Texas, given to Maker by Payee, the principal
sum of Three Million Eight Hundred Thousand and 0/100 Dollars ($3,800,000.00) in
lawful money of the United States of America, together with interest (calculated
on the basis of a 365-day year or 366-day year, as appropriate), on the unpaid
principal balance, computed from the date hereof until maturity at the rate per
annum equal to the Interest Rate.
SECTION 1. DEFINITIONS. When used in this Note, the following terms shall
-----------------------
have the respective meanings specified herein or in the section referred to:
"Assignment and Assumption Agreement" shall mean the Assignment and
-----------------------------------
Assumption Agreement and Amendment to Agreement of Limited Partnership of PMLP
of even date herewith by and among Maker, Payee and Pratt Casino Corporation.
"Business Day" shall mean a day upon which business is transacted by
------------
national banks in Dallas, Texas.
"Event of Default" shall have the meaning ascribed to it in Section 5
----------------
hereof.
"Gaming Authorities" shall mean the New Jersey Casino Control Commission,
------------------
the Illinois Gaming Board, the Mississippi Gaming Commission and any other
similar entity.
"Gaming Laws" shall mean the New Jersey Casino Control Act, the Illinois
-----------
Riverboat Gambling Act, the Mississippi Gaming Control Act, all rules and
regulations promulgated thereunder and any and all other applicable gaming laws,
statutes, codes, ordinances, orders, judgments, decrees, injunctions, notices,
rules, regulations, restrictions and requirements.
"General Partnership Interest" shall mean Maker's general partnership
----------------------------
interest in PMLP.
"Interest Rate" shall mean fourteen percent (14%).
-------------
"Management Services Agreement" shall mean that certain Management Services
-----------------------------
Agreement made and entered into as of June 21, 1991, by and between Hollywood
Casino-Aurora, Inc., an Illinois corporation ("HCA"), and Greate Bay Casino
Corporation, a New Jersey corporation ("GBCC") (whose interest is now owned by
PMLP), as amended by that certain First Amendment to Management Services
Agreement made and entered into as of May 14, 1992, by and between HCA and GBCC
(whose interest is now owned by PMLP).
<PAGE>
"Maximum Rate" shall mean the highest nonusurious rate of interest (if any)
------------
permitted from day to day by applicable law. Payee hereby notifies and
discloses to Maker that, for purposes of Tex. Rev. Civ. Stat. Ann. art. 5069-
1.04, as it may from time to time be amended, the "applicable rate ceiling"
shall be the "indicated rate" ceiling from time to time in effect as limited by
article 5069-1.04(b); provided, however, that to the extent permitted by
applicable law, Payee reserves the right to change the "applicable rate ceiling"
from time to time by further notice and disclosure to Maker.
"Obligation" shall mean all of Maker's indebtedness, liabilities and
----------
obligations now or hereafter existing in favor of Payee, arising under this
Note, the Security Agreement, the Purchase Agreement or the Assignment and
Assumption Agreement, regardless of whether they are direct, indirect, primary,
secondary, joint, several, joint and several, liquidated, unliquidated, fixed or
contingent.
"PMLP" shall mean Pratt Management, L.P., a Delaware limited partnership.
----
"Purchase Agreement" shall mean the General Partnership Interest Purchase
------------------
Agreement of even date herewith by and between Maker and Payee.
"Security Agreement" shall mean that certain security agreement dated of
------------------
even date herewith from Maker to Payee covering the General Partnership
Interest.
"Services Agreement" shall mean that certain Services Agreement of even
------------------
date herewith, by and between Hollywood Casino Corporation, a Delaware
corporation, and PMLP.
SECTION 2. PAYMENT. The Note shall be due and payable in (i) equal
-------------------
monthly installments of principal and interest in the amount of $83,333.00,
commencing on May 1, 1997, and thereafter, on the first day of each succeeding
calendar month during the term of this Note; (ii) variable quarterly
installments of principal commencing on July 1, 1997, and thereafter, on each
succeeding October 1, January 1, April 1 and July 1, through January 1, 2002, in
the amount equal to the general partner's share of quarterly cash distributions
from PMLP pursuant to Section 4.3 of the Agreement of Limited Partnership of
PMLP dated as of February 17, 1994, as amended to date; and (iii) in one final
installment of principal on April 1, 2002 in the amount of the unpaid principal
balance, if any, on this Note as of such date together with all accrued and
unpaid interest, if any.
Should the principal of, or any installment of the principal of or interest
upon, this Note become due and payable on any day other than a Business Day, the
maturity thereof shall be extended to the next succeeding Business Day, and
interest shall be payable with respect to such extension. All payments of
principal and interest on this Note shall be made by Maker to Payee in federal
or other immediately available funds. Payments made to Payee by Maker hereunder
shall be applied first to accrued interest and then to principal.
All past due principal of and, to the extent permitted by applicable law,
interest upon this Note shall bear interest at the Maximum Rate.
SECTION 3. WAIVER. Except as otherwise provided herein, Maker and each
------------------
surety, endorser, guarantor and other party ever liable for payment of any sums
of money payable upon this Note, jointly and severally waive presentment,
demand, protest, notice of protest and non-payment or other notice of default,
notice of acceleration and intention to accelerate or other notice of any kind,
and agree that their liability under this Note shall not be affected by any
renewal or extension in the time of payment hereof, or in any indulgences, or by
any release or change in any security for the payment of this Note, and hereby
consent to any and all renewals, extensions, indulgences, releases or
-2-
<PAGE>
changes, regardless of the number of such renewals, extensions, indulgences,
releases or changes.
No waiver by Payee of any of its rights or remedies hereunder or under any
other document evidencing or securing this Note or otherwise, shall be
considered a waiver of any other subsequent right or remedy of Payee; no delay
or omission in the exercise or enforcement by Payee of any rights or remedies
shall ever be construed as a waiver of any right or remedy of Payee; and no
exercise or enforcement of any such rights or remedies shall ever be held to
exhaust any right or remedy of Payee.
SECTION 4. SECURITY. This Note is secured by the collateral described in
--------------------
the Security Agreement.
SECTION 5. EVENTS OF DEFAULT AND REMEDIES. An "Event of Default" shall
------------------------------------------
exist hereunder if any one or more of the following events shall occur and be
continuing: (a) Maker shall fail to pay when due any principal of, or interest
upon, this Note or any other Obligation and such failure shall continue for ten
(10) days following the date Payee notifies Maker of such failure; (b) any
representation or warranty made by Maker to Payee herein or in the Security
Agreement shall prove to be untrue or inaccurate in any material respect and
shall continue to be untrue or inaccurate thirty (30) days after the date Payee
notifies Maker of such event; (c) default shall occur in the performance of any
of the covenants or agreements of Maker contained herein or in the Security
Agreement and such default shall continue for thirty (30) days following the
date Payee notifies Maker of such default; (d) default shall occur in the
payment of any material indebtedness of Maker, or any such indebtedness shall
become due before its stated maturity by acceleration of the maturity thereof or
otherwise or shall become due by its terms and shall not be promptly paid or
extended; (e) the Security Agreement shall cease to be a legal, valid, binding
agreement enforceable against any party executing the same in accordance with
the respective terms thereof or shall in any way be terminated or become or be
declared ineffective or inoperative or shall in any way whatsoever cease to give
or provide the liens, security interests, rights, titles, interests, remedies,
powers or privileges intended to be created thereby; (f) Maker shall (1) apply
for or consent to the appointment of a receiver, trustee, intervenor, custodian
or liquidator of itself or of all or a substantial part of its assets, (2) be
adjudicated a bankrupt or insolvent or file a voluntary petition for bankruptcy
or admit in writing that it is unable to pay its debts as they become due, (3)
make a general assignment for the benefit of creditors, (4) file a petition or
answer seeking reorganization or an arrangement with creditors or to take
advantage of any bankruptcy or insolvency laws, or (5) file an answer admitting
the material allegations of, or consent to, or default in answering, a petition
filed against it in any bankruptcy, reorganization or insolvency proceeding, or
take corporate action for the purpose of effecting any of the foregoing; (g) an
order, judgment or decree shall be entered by any court of competent
jurisdiction or other competent authority approving a petition seeking
reorganization of Maker or appointing a receiver, trustee, intervenor or
liquidator of Maker, or of all or substantially all of its or their assets, and
such order, judgment or decree shall continue unstayed and in effect for a
period of sixty (60) days; (h) Payee's liens, mortgages or security interests in
any of the collateral for this Note should become unenforceable, or cease to be
first priority liens, mortgages or security interests; (i) the dissolution or
termination of Maker; (j) any final judgment(s) for the payment of money in
excess of the sum of $100,000 in the aggregate shall be rendered against Maker
and such judgment or judgments shall not be satisfied or discharged at least ten
(10) days prior to the date on which any of its assets could be lawfully sold to
satisfy such judgments; or (k) any default or event of default shall occur under
the Services Agreement or the Management Services Agreement.
Upon the occurrence of any Event of Default hereunder or under the Security
Agreement, then in any such event the holder hereof may, at its option, (i)
declare the entire unpaid balance of principal of and accrued interest upon this
Note and any other Obligation to be immediately due and payable without
presentment or notice of any kind which Maker waives pursuant to Section 3
---------
herein,
-3-
<PAGE>
(ii) reduce any claim to judgment; and/or (iii) pursue and enforce any of
Payee's rights and remedies available pursuant to any applicable law or
agreement including, without limitation, foreclosing all liens and security
interests securing payment of all or any part hereof or thereof.
The holder hereof agrees that, notwithstanding anything set forth herein to
the contrary, in the event of a default hereunder or in the performance of any
of the terms, covenants or conditions contained in any instrument or instruments
given as security for the payment of this Note, which defaults do not involve
the payment of money and for which the holder hereof elects to accelerate the
maturity of the indebtedness evidenced hereby, the holder hereof shall, prior to
such acceleration, give written notice of such default to Maker as and to the
extent hereinafter provided, which notice shall be the only notice required to
be given to Maker or others liable hereon. In the event that such default shall
not be cured within ten (10) days from the effective date of such notice, then
the holder hereof may, at such holder's option, without further or additional
notice, and, in any event, without demand or presentment, declare the
indebtedness evidenced by this Note at once due and payable. The foregoing is
not intended and shall not be deemed under any circumstances to require the
holder hereof to give notice of any type or nature to Maker in the event of
default in the payment of any installment of principal or interest hereon, which
notice, together with any demand or presentment hereof, are hereby expressly
waived by Maker.
SECTION 6. NOTICE. Whenever this Note requires or permits any notice,
------------------
approval, request or demand from one party to another, the notice, approval,
request or demand must be in writing and shall be deemed to have been given when
personally served (including by courier or overnight delivery service) or sent
by telecopy (with confirmation of receipt received) or when deposited in the
United States mails, registered or certified, return receipt requested,
addressed to the party to be notified at the following address (or at such other
address as may have been designated by written notice):
Payee: PPI Corporation
Two Galleria Tower, Suite 2200
13455 Noel Road, LB 48
Dallas, Texas 75240
Attention: Jack E. Pratt
Telecopier: (972) 386-7411
Maker: HWCC-Aurora Management, Inc.
Two Galleria Tower, Suite 2200
13455 Noel Road, LB 48
Dallas, Texas 75240
Attention: William D. Pratt
Telecopier: (972) 386-7411
SECTION 7. VOLUNTARY PREPAYMENT. Maker reserves the right to prepay the
--------------------------------
outstanding principal balance of this Note, in whole or in part, at any time and
from time to time, without premium or penalty. Any such prepayment shall be
made together with payment of interest accrued on the amount of principal being
prepaid through the date of such prepayment, and shall be applied to the
installments of principal due hereunder in the inverse order of maturity.
SECTION 8. USURY LAWS. Regardless of any provisions contained in this
----------------------
Note, the Payee shall never be deemed to have contracted for or be entitled to
receive, collect or apply as interest on this Note, any amount in excess of the
Maximum Rate, and, in the event Payee ever receives, collects or applies as
interest any such excess, such amount which would be excessive interest shall be
applied to the reduction of the unpaid principal balance of this Note, and, if
the principal balance of
-4-
<PAGE>
this Note is paid in full, any remaining excess shall forthwith be paid to
Maker. In determining whether or not the interest paid or payable under any
specific contingency exceeds the Maximum Rate, Maker and Payee shall, to the
maximum extent permitted under applicable law, (i) characterize any non-
principal payment (other than payments which are expressly designated as
interest payments hereunder) as an expense, fee, or premium, rather than as
interest; (ii) exclude voluntary prepayments and the effect thereof; and (iii)
spread the total amount of interest throughout the entire contemplated term of
this Note so that the interest rate is uniform throughout such term.
SECTION 9. COSTS. If this Note is placed in the hands of an attorney for
-----------------
collection, or if it is collected through any legal proceeding at law or in
equity, or in bankruptcy, receivership or other court proceedings, Maker agrees
to pay all costs of collection, including, but not limited to, court costs and
reasonable attorneys' fees, including all costs of appeal.
SECTION 10. APPLICABLE LAW. This Note is being executed and delivered and
---------------------------
is intended to be performed in the State of Texas. This Note shall be construed
in accordance with the laws of the State of Texas and of the United States of
America, except to the extent that the requirements of the Gaming Authorities
and Gaming Laws shall necessarily control, in which event the rights and
obligations of the parties hereto shall be subject and subordinate to the
requirements of the Gaming Authorities and the Gaming Laws. In the event of a
dispute involving this Note or any other instruments executed in connection
herewith, the undersigned irrevocably agrees that venue for such dispute shall
lie in any court of competent jurisdiction in Dallas County, Texas.
MAKER:
HWCC-AURORA MANAGEMENT, INC.
By:
--------------------------------
Name: William D. Pratt
Title: Vice President
-5-
<PAGE>
Exhibit 2
---------
ASSIGNMENT AND ASSUMPTION AGREEMENT
AND AMENDMENT TO AGREEMENT OF LIMITED
PARTNERSHIP OF
PRATT MANAGEMENT, L.P.
THIS ASSIGNMENT AND ASSUMPTION AGREEMENT AND AMENDMENT TO AGREEMENT OF
LIMITED PARTNERSHIP OF PRATT MANAGEMENT, L.P. (this "AGREEMENT"), is made as of
April 1, 1997 by and among PPI CORPORATION, a New Jersey corporation ("PPI"),
PRATT CASINO CORPORATION, a Delaware corporation ("PCC"), and HWCC-AURORA
MANAGEMENT, INC., an Illinois corporation ("HOLLYWOOD").
RECITALS
--------
1. Pratt Management, L.P. (the "PARTNERSHIP") has been formed as a
limited partnership under the Delaware Revised Uniform Limited Partnership Act
(the "ACT") pursuant to a Certificate of Limited Partnership of the Partnership,
as filed in the office of the Secretary of State of the State of Delaware (the
"SECRETARY OF STATE") on October 26, 1994 (the "CERTIFICATE"), and an Agreement
of Limited Partnership of the Partnership, dated February 17, 1994 (the
"PARTNERSHIP AGREEMENT").
2. PPI is the sole general partner of the Partnership and PCC is the sole
limited partner of the Partnership.
3. PPI desires to assign, transfer and convey all of its interest in the
Partnership as a general partner of the Partnership (the "GP INTEREST") to
Hollywood, and PPI desires to withdraw from the Partnership as a general partner
of the Partnership.
4. Hollywood desires to purchase the GP Interest, and Hollywood and PCC
desire that Hollywood be admitted to the Partnership as a substitute general
partner of the Partnership.
5. PPI and Hollywood are, contemporaneously herewith, entering into a
General Partnership Interest Purchase Agreement dated as of the date hereof (the
"PURCHASE AGREEMENT"), pursuant to which PPI has agreed to sell to Hollywood,
and Hollywood has agreed to purchase, the GP Interest.
6. The undersigned, being all of the partners of the Partnership, to
accomplish the foregoing, desire to amend the Partnership Agreement and provide
for the assignment and assumption of the General Partner Interest in the manner
set forth herein.
AGREEMENT
---------
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants
and promises contained herein and in the Purchase Agreement, and for other good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties agree as follows:
1. ASSIGNMENT. Notwithstanding any provision in the Partnership
----------
Agreement to the contrary, for value received, the receipt and sufficiency of
which are hereby acknowledged, upon the execution of this Agreement by the
parties hereto, PPI does hereby sell, assign, convey and otherwise transfer to
Hollywood all right, title, interest and obligations of PPI in, to and under the
GP Interest. Such assignment entitles Hollywood to become or to exercise all
rights and powers, including management rights, of a general partner under the
Act and the Partnership Agreement.
<PAGE>
2. ASSUMPTION AND RELEASE. Hollywood does hereby assume and agree to
----------------------
perform, pay or discharge those liabilities and obligations set forth in,
related to, or arising out of the GP Interest under the Partnership Agreement
and the Act, to the extent to be performed, paid or discharged after the date
hereof. PPI is hereby released from any and all liabilities and obligations to
the Partnership, whether known or unknown, liquidated or unliquidated, and,
subject to the provisions of Section 3 below, none of the Partnership, PCC or
Hollywood shall have any claim against PPI on account, by reason of or pursuant
to the Partnership Agreement or PPI having acted as a general partner of the
Partnership.
3. ADDITIONAL RIGHTS AND OBLIGATIONS. PPI and Hollywood agree and
---------------------------------
acknowledge that this Agreement is being entered into pursuant to and subject to
the terms and conditions set forth in the Purchase Agreement and that additional
rights of PPI and Hollywood are expressly provided for therein, and that the
execution and delivery of this Agreement shall not impair or diminish any of the
rights or obligations of any of the parties to the Purchase Agreement as set
forth therein.
4. ADMISSION. Notwithstanding any provision in the Partnership Agreement
----------
to the contrary, Hollywood is hereby admitted to the Partnership as a general
partner of the Partnership. The admission shall be effective upon the filing of
an amendment to the Certificate in the Office of the Secretary of State of
Delaware that reflects the fact that Hollywood is a general partner of the
Partnership, and shall occur, and for all purposes shall be deemed to have
occurred, immediately prior to the withdrawal of PPI from the Partnership as a
general partner of the Partnership.
5. WITHDRAWAL. Notwithstanding any provision in the Partnership
----------
Agreement to the contrary, PPI hereby withdraws from the Partnership as a
general partner of the Partnership. The withdrawal shall be effective upon the
filing of an amendment to the Certificate in the Office of the Secretary of
State of Delaware that reflects the fact that PPI is not a general partner of
the Partnership. Notwithstanding such withdrawal, PPI and its directors,
officers, employees and agents, and their respective assigns, shall nevertheless
continue to be "Covered Persons" for the purposes of Section 6.6 and 6.7 of the
Partnership Agreement and entitled to enforce the provisions thereof.
6. CONTINUATION. Following the withdrawal of PPI from the Partnership as
------------
a general partner of the Partnership, Hollywood is authorized to and hereby
agrees to continue the business of the Partnership without dissolution.
7. BOOKS AND RECORDS. PPI, as the withdrawing general partner of the
-----------------
Partnership, and Hollywood, as the substituted general partner of the
Partnership, shall take all actions necessary under the Act and the Partnership
Agreement to evidence the withdrawal of PPI from the Partnership as a general
partner of the Partnership and the admission of Hollywood to the Partnership as
a substituted general partner of the Partnership.
8. FUTURE COOPERATION. Each of the parties hereto agrees to cooperate at
------------------
all times from and after the date hereof with respect to all of the matters
described herein, and to execute such further assignments, releases,
assumptions, amendments of the Partnership Agreement, notifications and other
documents as may be reasonably requested for the purpose of giving effect to, or
evidencing or giving notice of, the transactions contemplated by this Agreement.
9. BINDING EFFECT. This Agreement, and all the terms and provisions
--------------
hereof, shall be binding upon, and shall inure to the benefit of, the parties
hereto and their respective successors and permitted assigns.
10. EXECUTION IN COUNTERPARTS. This Agreement may be executed in
-------------------------
counterparts, which shall constitute a single agreement.
-2-
<PAGE>
11. AGREEMENT IN EFFECT. Except as hereby amended, the Partnership
-------------------
Agreement shall remain in full force and effect.
12. GOVERNING LAW. The construction and validity of this Agreement and
-------------
the rights and obligations of the respective parties hereunder shall be governed
by and interpreted and enforced in accordance with the laws of the State of
Delaware except to the extent that applicable gaming laws necessarily control.
13. NOTICES. Any and all written notices to Hollywood required or
-------
permitted by this Agreement or the Partnership Agreement shall be addressed to:
HWCC-Aurora Management, Inc.
Two Galleria Tower, Suite 2200
13455 Noel Road, LB 48
Dallas, Texas 75240
Attn.: Mr. William D. Pratt,
General Counsel
Telephone Number: (972) 392-7777
Telecopy Number: (972) 386-7411
14. AMENDMENT. This Agreement may only be amended by an instrument in
---------
writing signed by the parties hereto.
* * * * *
-3-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
day and year first above written.
HWCC-AURORA MANAGEMENT, INC.,
as General Partner
By:
-----------------------------------
Name: William D. Pratt
Title: Vice President
PRATT CASINO CORPORATION,
as Limited Partner
By:
-----------------------------------
Name: Charles F. LaFrano III
Title: Vice President
PPI CORPORATION,
as Withdrawing General Partner
By:
-----------------------------------
Name: Jack E. Pratt
Title: President
-4-
<PAGE>
Exhibit 3
---------
CERTIFICATE OF AMENDMENT
TO THE
CERTIFICATE OF LIMITED PARTNERSHIP
OF
PRATT MANAGEMENT, L.P.
The undersigned, desiring to amend the Certificate of Limited Partnership
of Pratt Management, L.P. (the "PARTNERSHIP") pursuant to the provisions of
Section 17-202 of the Revised Uniform Limited Partnership Act of the State of
Delaware, does hereby certify as follows:
FIRST: The name of the Partnership is Pratt Management, L.P.
SECOND: Article 3 of the Certificate of Limited Partnership shall be
amended as follows:
The name and business address of the sole general partner of the
Partnership are as follows:
HWCC-Aurora Management, Inc.
Two Galleria Tower, Suite 2200
13455 Noel Road, LB 48
Dallas, Texas 75240
IN WITNESS WHEREOF, the undersigned executed this Amendment to the
Certificate of Limited Partnership as of this 1st day of April, 1997.
PRATT MANAGEMENT, L.P.
BY: PPI CORPORATION,
its Withdrawing General Partner
By:
-----------------------------------
William D. Pratt
Vice President
BY: HWCC-AURORA MANAGEMENT, INC.,
Its Substituted General Partner
By:
-----------------------------------
Charles F. LaFrano III
Vice President
<PAGE>
Exhibit 4
---------
SECURITY AGREEMENT AND PLEDGE
THIS SECURITY AGREEMENT is made and entered into as of April 1, 1997, by
and between HWCC-AURORA MANAGEMENT, INC., an Illinois corporation ("PLEDGOR"),
and PPI CORPORATION, a New Jersey corporation ("SECURED PARTY").
1. COLLATERAL AND OBLIGATIONS.
--------------------------
Pledgor is the legal and equitable owner of a general partnership interest
(the "GENERAL PARTNERSHIP INTEREST") in Pratt Management, L.P., a Delaware
limited partnership (the "PARTNERSHIP"), created and existing under that certain
Agreement of Limited Partnership dated February 17, 1994, as amended by that
certain Assignment and Assumption Agreement and Amendment to Agreement of
Limited Partnership (the "ASSIGNMENT AND ASSUMPTION AND AMENDMENT AGREEMENT"),
dated of even date herewith, (as amended, the "PARTNERSHIP AGREEMENT").
Pursuant to that certain General Partnership Interest Purchase Agreement of even
date herewith (the "PURCHASE AGREEMENT"), Pledgor has executed that one certain
promissory note payable to the order of Secured Party in the original principal
amount of Three Million Eight Hundred Thousand Dollars ($3,800,000) (the
"NOTE"), dated of even date herewith. Capitalized terms not otherwise defined
herein shall have the same meanings as in the Note, the terms and provisions of
which are incorporated by this reference. As used herein, the term
"OBLIGATIONS" shall mean: all indebtedness, liabilities and obligations of
Pledgor arising under the Note, this Security Agreement, the Purchase Agreement
and the Assignment and Assumption and Amendment Agreement, now or hereafter
existing in favor of Secured Party, regardless of whether they are direct,
indirect, primary, secondary, joint, several, joint and several, liquidated,
unliquidated, fixed or contingent, and any and all renewals, extensions,
modifications, rearrangements, or restatements of all or any part of the
indebtednesses, liabilities, and obligations arising under any of the
Obligations.
In order to secure the Obligations, Pledgor hereby pledges, transfers and
assigns to Secured Party and grants to Secured Party a security interest in and
to the following (the "COLLATERAL"):
All of Pledgor's right, title and interest in and to the General
Partnership Interest, whether now owned or hereafter acquired, including
(a) all distributions, proceeds, fees, preferences, payments or other
benefits which Pledgor now is or may hereafter become entitled to receive
with respect to or on account of the General Partnership Interest and (b)
all rights, powers and authority of Pledgor to serve as the sole general
partner of the Partnership to the fullest extent provided in the
Partnership Agreement.
2. WARRANTIES AND COVENANTS OF PLEDGOR.
-----------------------------------
The Pledgor hereby warrants to Secured Party and covenants and agrees with
Secured Party as follows:
(a) That Pledgor is the sole legal and equitable owner and holder of
the General Partnership Interest; that it has the authority to execute this
Security Agreement; and that this Security Agreement constitutes the legal,
valid and binding obligation of Pledgor;
(b) That, as of the date hereof, Pledgor has not transferred,
assigned, pledged, hypothecated or granted any security interest in all or any
portion of the Collateral; that it has full right and power to make the
transfer, pledge and assignment and grant the security interest granted hereby;
and that this instrument is effective to accomplish such transfer, pledge,
assignment and grant;
<PAGE>
(c) That Pledgor shall, at its sole cost and expense, execute and
deliver any financing statements or other documents which Secured Party
reasonably requests to protect or perfect the assignment, pledge, transfer and
grant of the security interest made herein;
(d) That Secured Party shall not be responsible in any way for any
depreciation in the value of the Collateral nor have any duty or responsibility
whatsoever to take any steps to preserve any rights of Pledgor in the
Collateral; and
(e) That Pledgor shall not sell, mortgage, hypothecate, assign or
otherwise transfer any portion of or interest in the Collateral without the
prior written consent of Secured Party.
3. EVENTS OF DEFAULT.
-----------------
A Default or Event of Default under the Note shall constitute an "Event of
Default" hereunder.
4. REMEDIES UPON DEFAULT.
---------------------
(a) Upon the occurrence of any Event of Default, Secured Party shall
have the following rights with respect to the Collateral:
(1) To sell the Collateral or any part thereof, upon giving at
least ten (10) days' prior notice to Pledgor of the time and place of sale
(which notice Pledgor and Secured Party agree is reasonable), for cash or
upon credit or for future delivery, Pledgor hereby waiving all rights, if
any, of marshalling the Collateral and any other security for the
Obligations, and at the option and in the complete discretion of Secured
Party, either:
(A) at public sale; or
(B) at private sale, in which event such notice shall also
contain the terms of the proposed sale, and Pledgor shall have until
the time of such proposed sale in which to redeem the Collateral or to
procure a purchaser willing, ready and able to purchase the Collateral
on terms more favorable to Pledgor, Secured Party and the holders of
the Note, and if such a purchaser is so procured, then Secured Party
shall sell the Collateral to the purchaser so procured; and
(2) To bid for and to acquire, unless prohibited by applicable
law, free from any redemption right, the Collateral, or any part thereof,
and, if Secured Party is then the holder of the Obligations or any
participation or other interest therein, in lieu of paying cash therefor,
Secured Party may make settlement for the selling price by crediting the
net selling price, if any, after deducting all costs and expenses of every
kind, upon the outstanding principal amount of the Obligations, in such
order and manner as Secured Party, in its discretion, may deem advisable.
The Secured Party, upon so acquiring the Collateral, or any part thereof,
shall be entitled to hold or otherwise deal with or dispose of the same in
any manner not prohibited by applicable law.
(3) To enforce any other remedy available to Secured Party at law
or in equity.
From time to time Secured Party may, but shall not be obligated to,
postpone the time and change the place of any proposed sale of any of the
Collateral for which notice has been given as provided above, upon giving at
least five (5) days' prior notice to Pledgor (which notice Pledgor and Secured
Party agree is reasonable) of the new time and place of such sale whenever, in
the judgment of Secured Party, such postponement or change is necessary or
appropriate in order that the
-2-
<PAGE>
provisions of this agreement applicable to such sale may be fulfilled or in
order to obtain more favorable conditions under which such sale may take place.
If, in the exercise of its remedies hereunder, Secured Party (but only if
Secured Party is PPI Corporation) elects to foreclose on the portion of the
Collateral described in clause (b) of the description of the Collateral
contained in the second paragraph of Section 1 hereof, and if Secured Party is
the successful bidder at any such public or private sale conducted hereunder
(the "foreclosure"), Secured Party shall have the right, but not the obligation,
to become and to be admitted as the sole general partner of the Partnership. In
order to exercise such right, Secured Party shall give written notice to Pledgor
and the Partnership any time after the foreclosure whereupon Pledgor shall
immediately execute and deliver to Purchaser an amendment to the Partnership
Agreement and to the Partnership's Certificate of Limited Partnership pursuant
to which the Pledgor withdraws as the general partner of the Partnership and
Secured Party is admitted as the new sole general partner of the Partnership.
Pledgor hereby irrevocably appoints Secured Party as its true and lawful
attorney-in-fact to execute and deliver the foregoing documents and any and all
other documents or instruments reasonably necessary to implement the rights
granted to Secured Party pursuant to this paragraph. This power of attorney is
coupled with an interest and shall thus be irrevocable by Pledgor. The rights
granted to Secured Party under this paragraph shall survive the foreclosure and
the exercise by Secured Party of any and all other rights and remedies available
to Secured Party.
(b) In case of any sale by Secured Party of any of the Collateral on
credit or for future delivery, which may be elected at the option and in the
complete discretion of Secured Party, the Collateral so sold may be retained by
Secured Party until the selling price is paid by the purchaser, but Secured
Party shall incur no liability in case of failure of the purchaser to take up
and pay for the Collateral so sold. In case of any such failure, such
Collateral so sold may be again similarly sold. After deducting all costs or
expenses of every kind (including, without limitation, the reasonable attorneys'
fees and legal expenses incurred by Secured Party), Secured Party shall apply
the residue of the proceeds of any sale or sales, if any, to pay the principal
of and interest upon the Obligation in such order and manner as Secured Party in
its discretion may deem advisable. The excess, if any, shall be paid to
Pledgor. Secured Party shall not incur any liability as a result of the sale of
the Collateral at any private sale or sales.
(c) Secured Party shall have all rights, remedies and recourses
granted in the Note and/or existing at common law or equity in connection with
the payment and performance of the Obligations (including specifically those
granted by the Texas Business and Commerce Code, and the right of offset), and
such rights and remedies (1) shall be cumulative and concurrent, (2) may be
pursued separately, successively or concurrently against Pledgor and any other
party obligated under the Obligations, or against the Collateral, at the sole
discretion of Secured Party, (3) may be exercised as often as occasion therefor
shall arise, it being agreed by Pledgor that the exercise or failure to exercise
any of same shall in no event be construed as a waiver or release thereof or of
any other right, remedy or recourse, and (4) are intended to be and shall be,
non-exclusive.
(d) Notwithstanding a foreclosure upon any of the Collateral or
exercise of any other remedy by Secured Party in connection with an Event of
Default, Pledgor shall not be subrogated thereby to any rights of Secured Party
against the Collateral or Pledgor or any property of Pledgor, nor shall Pledgor
be deemed to be the owner of any interest in any of the Obligations, nor shall
Pledgor exercise any rights or remedies with respect to Pledgor or the
Collateral or the property of Pledgor until all Obligations have been paid to
Secured Party and are fully performed and discharged.
(e) All recitals in any instrument of assignment or any other
instrument executed by Secured Party incident to the sale, transfer, assignment
or other disposition or utilization of the Collateral or any part thereof
hereunder shall be full proof of the matters stated therein and no other
-3-
<PAGE>
proof shall be required to establish full legal propriety of the sale or other
action taken by Secured Party or of any fact, condition or thing incident
thereto, and all prerequisites of such sale or other action shall be presumed
conclusively to have been performed or to have occurred.
5. NOTICES.
-------
All notices, consents and other communications hereunder shall be in
writing and shall be delivered personally (including express courier) or sent by
telecopy (and promptly confirmed by mail) or sent by prepared registered or
certified mail (return receipt requested) to the parties at the following
addresses:
Pledgor:
-------
HWCC-Aurora Management, Inc.
Two Galleria Tower, Suite 2200
13455 Noel Road, LB 48
Dallas, Texas 75240
Attention: William D. Pratt
Telecopier: (972) 386-7411
Secured Party:
-------------
PPI Corporation
Two Galleria Tower, Suite 2200
13455 Noel Road, LB 48
Dallas, Texas 75240
Attention: Jack E. Pratt
Telecopier: (972) 386-7411
Notices sent as aforesaid shall be deemed given and effective upon receipt
(or the date delivery is refused). Any party (and any other person or entity
designated to receive notice) may change its address or telecopy number for
notice by delivery to all after notice to such effect in the manner set forth
herein.
6. GOVERNING LAW.
-------------
This Security Agreement shall be construed in accordance with the laws of
the State of Texas and of the United States of America, except to the extent
that the requirements of the New Jersey Casino Control Commission, the Illinois
Gaming Board, the Mississippi Gaming Commission and any other similar entity
(collectively, the "GAMING AUTHORITIES") and the New Jersey Casino Control Act,
the Illinois Riverboat Gambling Act, the Mississippi Gaming Control Act, all
rules and regulations promulgated thereunder and any and all other applicable
gaming laws, statutes, codes, ordinances, orders, judgments, decrees,
injunctions, notices, rules, regulations, restrictions and requirements
(collectively, the "GAMING LAWS") shall necessarily control, in which event the
rights and obligations of the parties hereto shall be subject and subordinate to
the requirements of the Gaming Authorities and the Gaming Laws.
7. BINDING EFFECT; MISCELLANEOUS.
-----------------------------
(a) This Security Agreement shall be binding upon and inure to the
benefit of and be enforceable by the undersigned and their respective successors
and assigns.
(b) The headings to the various paragraphs of this Security Agreement
have been inserted for reference only and shall not modify, define, limit or
expand the expressed provisions of
-4-
<PAGE>
this agreement. This Security Agreement may be executed in counterparts, each of
which shall be an original, and such counterparts shall together constitute but
one and the same instrument.
(c) No delay or omission on the part of Secured Party in exercising
any right hereunder shall operate as a waiver of any such right or any other
right. A waiver on any one or more occasions shall not be construed as a bar to
or waiver of any right or remedy on any future occasion.
(d) All covenants, duties and obligations of Pledgor under this
Security Agreement shall be performed in Dallas, Dallas County, Texas.
(e) The remedies given to Secured Party hereunder are cumulative and
in addition to any and all other rights which Secured Party may have against
Pledgor or any other person or firm, at law or in equity, including exoneration
and subrogation, or by virtue of any other agreement.
(f) This Security Agreement and the provisions set forth herein, shall
continue until payment in full of the Obligations.
(g) Secured Party has not assumed, and nothing contained herein shall
be declared to have imposed upon Secured Party, any of Pledgor's duties or
obligations as a partner of the Partnership.
* * * * *
-5-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
HWCC-AURORA MANAGEMENT, INC.
By:
-----------------------------------
Name: William D. Pratt
Title: Vice President
PPI CORPORATION
By:
-----------------------------------
Name: Jack E. Pratt
Title: President
CONSENT
The undersigned, Pratt Casino Corporation, being the sole limited partner
of the Partnership, hereby consents to the foregoing Security Agreement and
Pledge and to the terms and provisions thereof, and, to the extent applicable,
agrees to be bound thereby.
PRATT CASINO CORPORATION
By:
-----------------------------------
Name: Charles F. LaFrano III
Title: Vice President
-6-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF GREATE BAY CASINO CORPORATION (FORMERLY
PRATT HOTEL CORPORATION) AND SUBSIDIARIES AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997
<PERIOD-START> APR-01-1997 JAN-01-1997
<PERIOD-END> JUN-30-1997 JUN-30-1997
<CASH> 23,966 23,966
<SECURITIES> 0 0
<RECEIVABLES> 23,760 23,760
<ALLOWANCES> 14,521 14,521
<INVENTORY> 3,828 3,828
<CURRENT-ASSETS> 42,784 42,784
<PP&E> 320,112 320,112
<DEPRECIATION> 168,368 168,368
<TOTAL-ASSETS> 216,864 216,864
<CURRENT-LIABILITIES> 48,341 48,341
<BONDS> 316,243 316,243
0 0
0 0
<COMMON> 519 519
<OTHER-SE> (152,177) (152,177)
<TOTAL-LIABILITY-AND-EQUITY> 216,864 216,864
<SALES> 0 0
<TOTAL-REVENUES> 68,097 136,293
<CGS> 0 0
<TOTAL-COSTS> 54,658 106,485
<OTHER-EXPENSES> 6,839 15,297
<LOSS-PROVISION> 909 1,559
<INTEREST-EXPENSE> 9,018 18,527
<INCOME-PRETAX> (3,327) (5,575)
<INCOME-TAX> 35 210
<INCOME-CONTINUING> (3,362) (5,785)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 310 310
<CHANGES> 0 0
<NET-INCOME> (3,052) (5,475)
<EPS-PRIMARY> (.59) (1.06)
<EPS-DILUTED> 0 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAIN SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF GREATE BAY CASINO CORPORATION (FORMERLY
PRATT HOTEL CORPORATION) AND SUBSIDIARIES AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996
<PERIOD-START> APR-01-1996 JAN-01-1996
<PERIOD-END> JUN-30-1996 JUN-30-1996
<CASH> 22,426 22,426
<SECURITIES> 0 0
<RECEIVABLES> 26,555 26,555
<ALLOWANCES> 15,758 15,758
<INVENTORY> 4,181 4,181
<CURRENT-ASSETS> 55,162 55,162
<PP&E> 321,897 321,897
<DEPRECIATION> 156,724 156,724
<TOTAL-ASSETS> 238,520 238,520
<CURRENT-LIABILITIES> 49,247 49,247
<BONDS> 331,818 331,818
0 0
0 0
<COMMON> 519 519
<OTHER-SE> (157,057) (157,057)
<TOTAL-LIABILITY-AND-EQUITY> 238,520 238,520
<SALES> 0 0
<TOTAL-REVENUES> 75,217 143,775
<CGS> 0 0
<TOTAL-COSTS> 63,846 122,861
<OTHER-EXPENSES> 10,528 20,845
<LOSS-PROVISION> 327 894
<INTEREST-EXPENSE> 9,351 18,637
<INCOME-PRETAX> (8,835) (19,462)
<INCOME-TAX> (508) (1,339)
<INCOME-CONTINUING> (8,327) (18,123)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (8,327) (18,123)
<EPS-PRIMARY> (1.60) (3.49)
<EPS-DILUTED> 0 0
</TABLE>
