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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended DECEMBER 31, 1996
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-6339
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GREATE BAY CASINO CORPORATION
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(Exact name of registrant as specified in its charter)
DELAWARE 75-1295630
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(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
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(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code): (972) 386-9777
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Securities registered pursuant to Section 12(b) of the Act:
COMMON STOCK,
PAR VALUE $.10 PER SHARE AMERICAN STOCK EXCHANGE
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Title of each class Name of exchange on which registered
Securities registered pursuant to Section 12(g) of the Act: NONE
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
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the registrant, based on the closing price of such stock on March 24, 1997, was
$5,190,248. For the purposes of this computation, all officers, directors and 5%
beneficial owners of the registrant are deemed to be affiliates. Such
determination should not be deemed an admission that such officer, directors and
beneficial owners are, in fact, affiliates of the registrant. As of March 24,
1997, 5,186,627 shares of Common Stock, $.10 par value per share, were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents are incorporated by reference into the
indicated part or parts of this report.
(1) Definitive proxy statement filed pursuant to Regulation 14A in
connection with the Annual Meeting of Shareholders to be held on May
20, 1997 -- Part III.
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PART I
ITEM 1. BUSINESS
GENERAL
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Greate Bay Casino Corporation, a Delaware corporation, and its subsidiaries
("GBCC", formerly known as Pratt Hotel Corporation) are engaged primarily in the
ownership, operation and management of the Sands Hotel and Casino 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. HCC distributed such stock to its
shareholders; as a result, approximately 38% 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.
PPI Corporation ("PPI") is a wholly owned subsidiary of GBCC which owns
various entities related to GBCC's Atlantic City gaming operations. Included
herein as wholly owned subsidiaries of PPI are: GB Property Funding Corp., the
issuer of $185 million of 10 7/8% First Mortgage Notes, due 2004 (the "10 7/8%
First Mortgage Notes"), PRT Funding Corp., the issuer of $85 million of 11 5/8%
senior notes, due 2004 (the "PRT Funding Notes"); New Jersey Management, Inc.
("NJMI"), which manages the operations of the Sands; Pratt Management, L.P.
("PML"), which manages the operations of the Aurora Casino; Pratt Casino
Corporation ("PCC"), which earns consulting fees from the Tunica Casino; and
Greate Bay Hotel and Casino, Inc. ("GBHC"), which owns the Sands. The Sands is
not affiliated with the Sands Hotel and Casino in Las Vegas, Nevada. Subject to
regulatory approval and effective as of April 1, 1997, HCC will acquire the
general partnership interest in PML from PPI Corporation.
The principal executive offices of GBCC are located at Two Galleria Tower,
Suite 2200, 13455 Noel Road, Dallas, Texas 75240, telephone (972) 386-9777.
THE SANDS
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For a description of the Sands' facilities, please refer to "Item 2. -
Properties - The Sands." The Sands has begun a phased introduction of a motion
picture theme (the "Hollywood Theme") currently used by the Aurora Casino and
the Tunica Casino. The Hollywood Theme incorporates designs inspired by famous
movies, displays of motion picture memorabilia and movie themed gaming,
entertainment, retail and dining areas. Management believes the timelessness and
flexibility of the Hollywood Theme will have particular appeal to Atlantic City
casino patrons who tend to visit frequently. Implementation of the Hollywood
Theme, which will be accomplished as part of the ongoing capital improvements
program, began with the 1995 openings of the "Epic Buffet," a highly themed food
and beverage facility, and the Hollywood Casino(R) Studio Store, a highly themed
retail store. The conversion is expected to be completed in the near future.
Business Strategy. The Sands' marketing strategy in the highly competitive
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Atlantic City market has consisted of seeking higher-value repeat patrons though
its ongoing capital improvements program and its use of sophisticated casino
information technology to monitor and control certain casino operations and to
target marketing efforts toward frequent visitors. Traditionally, the Sands has
been successful in its
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marketing efforts toward the high end, frequent table game and slot patron
through its offering of private, limited-access facilities and related amenities
to premium patrons. While the Sands has strived to maintain its position in
this segment, the completion of the Sands' expansion in 1994 has allowed the
Sands to broaden its appeal to the mass drive-in patron for continued growth in
this market segment.
Generally, the Sands has three types of patrons: high-end patrons, drive-in
patrons, and bus patrons. High-end patrons have gaming budgets of $5,000 or more
per visit, drive-in patrons typically live within a 200 mile radius of the Sands
and utilize the Sands' parking garage and bus patrons are generally day-
travelers who purchase "ticket coin packages" which include bus transportation
to and from the casino and a specified amount of coins to use in the casino.
The marketing strategy of the Sands has been to attract higher-value,
repeat patrons who return frequently and typically have larger gaming budgets
than other patrons who do not gamble regularly. The Sands has implemented this
strategy through its focus of capital dollars in its high-end product and
conversion to the Hollywood Theme. The Sands' facilities and programs, including
the Plaza Club, the Island Club and hotel suites, have been designed to appeal
principally to these target patrons.
In implementing the Sands' marketing and operating strategy, the Sands uses
proprietary casino information technology developed by Advanced Casino Systems
Corporation ("ACSC"), an affiliate of GBHC. This technology includes ACSC's
table game and slot machine monitoring systems which enable the Sands to track
and rate patron play through the use of a casino player's card. These systems
provide management with the key characteristics of patron play as slot machines
and table games are connected with its data base monitoring system. When patrons
use the casino player's card at slot machines or table games, the information is
immediately available to management and allows management to implement marketing
programs to recognize and reward patrons during their visits to the casino. Such
promotions and complimentaries include free meals, hotel accommodations, retail
merchandise, parking and sweepstakes giveaways based on slot machine patrons'
gross wagering. Management believes that its ability to reward its customers on
a "same-visit" basis is valuable in developing a loyal base of higher value
patrons. ACSC's systems also allow the Sands to monitor, analyze and control the
granting of gaming credit, promotional expenses and other marketing costs. ACSC
also has developed a system that the Sands utilizes to capture and maintain
patron information necessary in implementing its casino players' card and other
data base marketing programs.
Management uses its data bases to focus its marketing efforts on patrons
who have been identified as higher value patrons. Management believes that its
process of identifying higher value patrons, encouraging participation in its
casino player's card program and tailoring promotions and special events to
cater to this market segment enhances the profitability of the Sands.
The Sands also markets to the "mass" casino patron market segment through
various forms of advertising media as well as through group and bus tour
packages. Once new patrons are introduced to the Sands' gaming facilities and
the casino player's card program, management uses its data base capabilities to
direct market to these patrons in an attempt to convert them into higher value
patrons.
Competition. The Sands faces intense competition from the 11 other existing
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Atlantic City casinos. According to reports of the New Jersey Casino Control
Commission (the "Casino Commission"), the twelve Atlantic City casinos currently
offer over one million square feet of gaming space. Several companies recently
announced plans to build and operate additional casino/hotels over the next few
years. For example, Mirage Resorts and Circus Circus have jointly submitted a
proposal to the city for an approximately $1 billion resort complex consisting
of two casinos, two 2,000 room hotels, several theaters and an upscale shopping
concourse. The State of New Jersey has committed funding to build a tunnel to
access this complex. Also, Sun International recently acquired an existing
casino in Atlantic City and has announced plans for a $500 million expansion and
renovation including the addition of 1,400 hotel rooms
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and a 22,000 square foot expansion of gaming space. Also during 1996, Hilton
Hotels Corporation ("Hilton") acquired Bally Entertainment Corporation which
operated two casino properties in Atlantic City. The acquisition immediately
established Hilton as a presence in the Sands' market and, given the strength of
the Hilton brand name, has resulted in a new and formidable competitor. Hilton
has also announced its intention to launch a tender offer for control of ITT
Corporation, owner and operator of Caesars Atlantic City, and is attempting to
acquire control of Claridge Hotel and Casino Corp. through the acquisition of a
significant portion of its outstanding debt. Other individuals have also
submitted applications and have been qualified in New Jersey to hold casino
licenses. Legislation enacted during 1996 and 1993 requires the allocation of
an aggregate of $175 million of Casino Reinvestment Development Authority
("CRDA") funds and credits to subsidize the construction of new hotel rooms by
casinos in Atlantic City. The CRDA is a governmental agency which administers
the statutorily mandated investments made by casino licensees. Competitors of
the Sands which have the financial resources and that can currently access such
funds and are capable of physically expanding their facilities so as to take
advantage of such subsidy may benefit disproportionately from such legislation.
Plans have been announced by other casino operators to complete in excess of
3,400 rooms within the required subsidy period. The expansion of existing
gaming facilities and the addition of new casinos could significantly increase
the competitiveness of the Atlantic City market.
In this highly competitive environment, each property's relative success is
affected by a great many factors that relate to its location and facilities.
These include availability and number of parking facilities, hotel
accommodations, proximity to the Boardwalk, proximity to other casino/hotels,
and access to the main expressway entering into Atlantic City. GBHC believes its
operating strategy and facilities will enable it to compete against most other
Atlantic City casino/hotels, many of which have greater sources of funding for
capital improvements and financial resources for marketing and promotional
budgets than GBHC.
Management estimates that a significant amount of the Sands' revenues is
derived from patrons living within a 120 mile radius of Atlantic City, New
Jersey, particularly from southeastern Pennsylvania, northern New Jersey and
metropolitan New York City. Proposals to allow casino gaming in certain areas of
Pennsylvania and New York have been defeated within the past two years. If
casino gaming were to be legalized in those areas or in other venues that are
more convenient to those areas, it could have a material adverse effect on the
Sands. Gaming is currently conducted on Indian lands in nearby states, including
the Foxwoods and Mohegan Sun Casinos in Connecticut and the Turning Stone Casino
in Oneida, New York near Syracuse. In addition, slot machines are now allowed at
race tracks in the State of Delaware.
Industry Developments. A number of significant changes to the regulations
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governing the casino industry have been approved by New Jersey regulators in
recent years. Additional deregulation of the industry occurred in 1995 with the
enactment of legislation amending the New Jersey Casino Control Act (the "Casino
Act"). Among other things, the amendments allow an increase from 50,000 to
60,000 square feet of casino space for the minimum required 500 hotel rooms,
eliminate any licensing requirements for certain hotel employees, provide for
temporary licensing for all casino employees, increase the maximum renewal
period of casino licenses for up to four years, permit the square footage of
simulcast space to be considered in determining the permissible density of slot
machines, and eliminate business and experience requirements for employee
licensing. The legislation also removes the ownership limit of three casino
licenses per person.
Partly as a result of such regulatory changes, the Atlantic City gaming
industry has continued to grow. Revenues have increased from $3.4 billion in
1994 to $3.7 billion in 1995 (an increase from the previous year of 9.5%) and to
$3.8 billion in 1996 (an increase from the previous year of 1.8%). The 1996
increase resulted primarily from an overall expansion of gaming space to
approximately one million square feet at the end of 1996 from approximately
950,000 square feet at the end of 1995, an increase in
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the number of hotel rooms available in the Atlantic City market and an intense
marketing campaign undertaken by the industry during most of 1996.
Casino/hotel operators have also benefited in recent years from a trend
toward increased slot play as slot machines have increasingly become more
popular than table games with loyal and frequent patrons, as well as with
recreational and other casual visitors. Casino operators have been catering
increasingly to slot patrons through new forms of promotions and incentives such
as slot machines which are linked between the various casinos to pay out a
pooled jackpot and more attractive gaming machines. Slot machines generally
produce higher margins and profitability than table games because they require
less labor and have lower operating costs. As a result, slot machine revenue
growth has significantly outpaced table game revenue growth in recent years to
the point where for 1996 slot win accounted for approximately 68.9% of total
Atlantic City gaming win. Table games remain important, however, in catering to
the higher-end segment of gaming patrons as well as in adding to the gaming
ambience and providing a varied gaming experience.
Casino Credit. Casino operations are conducted on both a credit and a cash
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basis. Gaming debts arising in Atlantic City in accordance with applicable
regulations are enforceable under New Jersey law. For the year ended December
31, 1996, gaming credit extended to Sands' customers accounted for approximately
26.1% of overall table game wagering, while table game wagering accounted for
approximately 22.8% of overall casino wagering during the period. At December
31, 1996, gaming receivables amounted to $24.4 million before allowances for
uncollectible gaming receivables amounting to $15.5 million. Management of the
Sands believes that the allowances for uncollectible gaming receivables are
adequate.
License Agreement. GBCC entered into a 99-year license agreement (the
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"Sands License Agreement") during 1987 to use the trade name "Sands" in Atlantic
City, New Jersey . GBHC pays an annual royalty of 3% of gross room charges, as
defined in the Sands License Agreement. Such charges amounted to $283,000 during
the year ended December 31, 1996 and $288,000 during each of the years ended
December 31, 1995 and 1994.
Employees and Labor Relations. In Atlantic City, all casino employees,
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except certain hotel employees, must be licensed under the Casino Act. Due to
the seasonality of the operations of the Sands, the number of employees varies
during the course of the year. At December 31, 1996, there were approximately
3,200 employees at the Sands. The Sands has collective bargaining agreements
with two unions that represent approximately 1,000 hotel employees,
substantially all of whom are represented by the Hotel, Restaurant Employees and
Bartenders International Union, AFL-CIO, Local 54. The collective bargaining
agreements expire in September 1999. Management considers its labor relations to
be good.
PRATT MANAGEMENT, L.P.
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Pursuant to the Agreement of Limited Partnership, PML makes distributions
to PCC as limited partner in an amount equal to 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 the balance distributed to PPI as general partner. PML's income
comes from management fees received from the management of the Aurora Casino
pursuant to the Aurora Casino Management Contract. Subject to regulatory
approval and effective as of April 1, 1997, HCC will acquire the general
partnership interest in PML from PPI.
The Aurora Management Contract. PML manages the Aurora Casino pursuant to
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the Aurora Casino Management Contract, which was executed in June 1991 and has
an initial term of 99 years. PML acts as the sole and exclusive agent in the
supervision, direction and control of the management of the Aurora Casino and
any additions or expansions thereof.
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PML receives a quarterly base management fee generally equal to 5% of
operating revenues (as defined in the agreement). However, for so long as
certain indebtedness of HCC remains outstanding, payment of the base services
fee is (i) subject to a maximum of $5.5 million in any consecutive 12 month
period; (ii) subordinate to payment of interest on the HCC indebtedness and
certain other indebtedness; and (iii) conditioned upon compliance with
indentures governing such indebtedness.
PML also receives an incentive fee equal to 10% of gross operating profit
(as defined in the agreement). However, for as long as certain HCC indebtedness
remains outstanding, the incentive fee may not be paid until Gross Operating
Cash Flow (as defined in the agreement) is at least $25 million for any
consecutive 12 month period.
The Aurora Casino Management Contract can be terminated by either party
upon 45 days prior written notice in the event of the other party's material
breach of the agreement, inability to pay debts generally as they become due,
bankruptcy or other similar proceedings, action to suspend normal business
operations, or imposition of any materially adverse levy or judgment.
Furthermore, PML has the right to terminate if the HCC subsidiary which owns the
Aurora Casino fails to furnish funds required for PML to manage the Aurora
Casino or fails to compensate or reimburse PML. In such case, PML is entitled to
liquidated damages in an amount equal to 10 times the aggregate base services
fee and incentive fee earned by PML in the preceding fiscal year.
THE AURORA CASINO
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The Aurora Casino commenced operations on June 17, 1993 and is one of only
four casinos in Illinois now operating within 50 miles of downtown Chicago. The
Aurora Casino currently consists of two multi-level riverboat casinos containing
an aggregate of approximately 32,100 square feet of gaming space with
approximately 975 slot machines and approximately 56 table games. The Aurora
Casino also includes an approximately 64,000 square foot land-based Pavilion
through which patrons board the facility's two riverboat casinos via enclosed
passenger loading ramps. The highly themed Pavilion features a glass-domed,
four-story atrium with two grand staircases, two upscale lounges, two gourmet
restaurants, a large buffet and a diner. Patrons of the Aurora Casino are
offered valet and self-parking in two multi-level parking garages that
accommodate approximately 1,340 cars, as well as other available surface
parking.
Since a majority of the facility's patrons arrive by car, HCC completed
construction during 1996 of a new five-story, approximately 500-space parking
garage directly across the street from the Pavilion designed to enhance access
to the Aurora Casino. The parking garage is connected to the Pavilion through a
climate controlled tunnel. The new structure also contains approximately 1,500
square feet of retail space, the "Hollywood Casino(R) Studio Store," a highly
themed store selling logo items licensed from motion picture studios as well as
first-run movies on videocassette. See "Properties - The Aurora Casino".
In order to enhance the operating performance of the Aurora Casino, HCC
completed a major expansion and renovation of the Aurora facility in 1995. The
first phase of this project was completed on May 10, 1995 with the opening of a
10,000 square foot expansion of one of the Aurora Casino's riverboats.
Management believes that prior to the expansion, the Aurora Casino's gaming
facilities were capacity constrained during peak periods, which limited the
property's operating performance. The casino expansion increased the Aurora
Casino's gaming space by approximately 45% to the current 32,100 square feet,
allowed the facility to offer patrons the maximum number of gaming positions
permitted by Illinois gaming regulations in a spacious, highly-themed setting.
HCC also completed a renovation of the Aurora Casino's second riverboat casino
in September 1995 which included the installation of new interior decor more
extensively utilizing the Hollywood Theme and the reconfiguration of gaming
areas to provide a more spacious and comfortable setting.
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Business Strategy. The Aurora facility's primary market is the affluent
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suburbs north and west of Chicago. Based on a sampling of its patrons, the
Company believes that the casino drew approximately 40% of its patrons from such
suburbs during 1996. Approximately 7.1 million people live within a 40-mile
radius and approximately 11.6 million people live within a 100-mile radius of
the Aurora Casino. The facility is easily accessible from major highways, can be
reached from downtown Chicago in approximately 50 minutes by trains which
average 20 trips a day, and is approximately 30 miles from O'Hare International
Airport. The four operating Chicago-area casinos, including the Aurora Casino,
have approximately 132,000 square feet of combined gaming space. No additional
casinos may be licensed in Illinois without the passage of new state
legislation.
The Aurora Casino's riverboats currently depart from their landings for as
many as 18 cruises daily, commencing at various times from 8:30 a.m. until 4:30
a.m. This schedule may be varied, based on experience and seasonal factors. The
use of a staggered cruise schedule with two vessels significantly reduces the
waiting time until the next gaming session for patrons who miss a cruise
departure. Once passengers board, they are permitted to game during the half
hour prior to the time the riverboat departs. After the excursion, passengers
are permitted to game for another half hour before new passengers board, for a
total of two to three hours of gaming per cruise, depending on the cruising
schedule. In addition, Illinois regulations permit dockside gaming if the
riverboat captain reasonably determines that it is unsafe to cruise due to
inclement weather, mechanical or structural problems or river icing. During
dockside gaming, the Aurora riverboats operate on their normal schedules and
passengers may leave the vessels at any time but may board only during the half
hour prior to the regularly scheduled start of the cruise.
The Aurora Casino employs a marketing strategy designed to take advantage
of its proximity to the affluent northern and western suburbs of Chicago and the
large population base of the Chicago metropolitan area. Management uses a patron
data base developed through ACSC's systems to focus its marketing efforts on
patrons who have been identified through the system as having the
characteristics of a higher value patron. Given the limited number of gaming
positions available on each daily casino excursion, management believes that its
process of identifying the premium patron, encouraging participation in its
various casino players' card programs and tailoring promotions and special
events to cater to this market segment will enhance profitability.
The Aurora Casino also markets to the "mass" casino patron market segment
through various forms of advertising media as well as through group and bus tour
packages. Once new patrons are introduced to the Company's gaming facility and
its casino players' card programs, management uses its data base capabilities to
direct market to these patrons in an attempt to convert them into higher value
patrons.
Management believes that the Aurora Casino's facilities, in particular its
highly themed dockside Pavilion and its close proximity to the Paramount
Theatre, an 1,800-seat art deco theatre in which the Company features headliner
entertainment, are appealing to both the premium and mass casino patron markets.
Entertainers who have appeared include Frank Sinatra, Tom Jones, Ann-Margaret,
the Temptations, Howie Mandel, Willie Nelson and the Bolshoi Ballet.
Competition. The gaming industry is highly fragmented and characterized by
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a high degree of competition among a large number of participants, some of which
have greater financial and other resources than HCC. Competitive gaming
activities include land-based casinos, dockside casinos, riverboat casinos,
video lottery terminals, Indian gaming and other forms of legalized gaming in
the United States and other jurisdictions. Casino gaming is currently permitted
in a number of states, including Colorado, Illinois, Indiana, Iowa, Louisiana,
Michigan, Mississippi, Missouri, Montana, Nevada, New Jersey and South Dakota,
and in Windsor, Ontario, Canada, as well as on Native American Indian lands in
certain states. Other jurisdictions may legalize gaming in the near future
through the introduction of proposals to legalize gaming in their state
legislatures. In addition, established gaming jurisdictions could award
additional gaming licenses or permit the expansion of existing gaming
operations. New or expanded
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operations by other persons can be expected to increase competition and could
have a material adverse impact on the Aurora Casino.
The Illinois Riverboat Gambling Act and the rules promulgated by the
Illinois Gaming Board thereunder (the "Riverboat Act") authorizes only ten
owner's licenses for riverboat gaming operations in Illinois and permits a
maximum of 1,200 gaming positions (as defined by the Illinois Gaming Board) at
any time for each of the ten licensed sites. All authorized owner's licenses
have been granted and no additional licenses or gaming positions can be
permitted without further state legislation. Four riverboat sites, including the
Aurora Casino, are currently licensed in Illinois within 50 miles of downtown
Chicago. Two of these riverboat sites are in Joliet, approximately 42 miles
southwest of downtown Chicago, and a third is in Elgin, Illinois, approximately
20 miles from Aurora, 45 miles from downtown Chicago and amid the affluent
northern and western suburbs. The Aurora Casino has also experienced increased
competition from three riverboat operations opened during 1996 in northwestern
Indiana within 25 miles of downtown Chicago. An additional riverboat operation
with approximately 50,000 square feet of gaming space is anticipated to open in
East Chicago, Indiana in May 1997. Increased competition from casinos in Indiana
has resulted in greater competition for patrons from the downtown Chicago market
and from the suburban Chicago market. The next closest operating casinos are in
Milwaukee, Wisconsin, approximately 90 miles from downtown Chicago, and in
Peoria, and Rock Island, Illinois, approximately 160 miles from downtown
Chicago. Management understands that legislation may be introduced in the
Illinois legislature to authorize one or more land-based and/or riverboat
casinos in downtown Chicago and/or the granting of additional casino licenses
elsewhere in Illinois including within the Company's principal market. In
addition, the authorization for up to three casinos in Detroit, Michigan was
approved in late 1996. Several major competitors have expressed an interest in
the Detroit market; however, the establishment of a regulatory system and
subsequent licensing have yet to be accomplished. Accordingly, it is not
anticipated that any casino will be operational until late 1997 or 1998. Native
American Indian tribes are seeking to open casino facilities in northwestern
Indiana and Michigan under the Indian Gaming Regulatory Act. The opening of
additional casinos proximate to Chicago could have a material adverse impact on
the Aurora Casino.
Casino Credit. Casino operations are conducted on both a credit and a cash
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basis. Gaming debts arising in Aurora in accordance with applicable regulations
are enforceable under Illinois law. For the year ended December 31, 1996, gaming
credit extended to customers accounted for approximately 13.9% of overall table
game wagering, while table game wagering accounted for approximately 13.8% of
overall casino wagering during the period. At December 31, 1996, gaming
receivables amounted to $2.1 million before allowances for uncollectible gaming
receivables which amounted to $690,000. Management of the Aurora Casino believes
that the allowances for uncollectible gaming receivables are adequate.
Employees and Labor Relations. In Aurora, all casino employees must be
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licensed by the Illinois Gaming Board. At December 31, 1996 there were
approximately 1,650 employees at the Aurora Casino, none of whom are represented
under collective bargaining agreements. Management considers its labor relations
to be good.
THE TUNICA CASINO CONSULTING AGREEMENT
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PCC, through its ownership and management of the Sands and through its
management of the Aurora Casino, has certain casino management experience and
expertise which the Tunica Casino as a newly established business did not have.
In order to utilize PCC's experience and expertise, the Tunica Casino entered
into a consulting agreement with PCC as of January 1, 1994. The agreement has a
term of 10 years and provides, among other things, for PCC to advise and consult
the Tunica Casino on any matters relating to business and for monthly payments
of $100,000 to PCC for its performance thereunder. The Tunica Casino is also
obligated to reimburse PCC for its direct costs and expenses incurred under the
agreement.
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CASINO REGULATION
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NEW JERSEY
Casino gaming is strictly regulated in Atlantic City under the Casino Act
and the rules and regulations of the Casino Commission, which affect virtually
all aspects of the operations of the Sands. The laws, rules and regulations
affecting Atlantic City gaming operations concern primarily the financial
stability, integrity and character of casino operators, their employees, their
debt and equity security holders and others financially interested in casino
operations; the nature of casino/hotel facilities; the operation methods
(including rules of games and credit granting procedures); and financial and
accounting practices used in connection with casino operations. A number of
these regulations require practices that are different from those in many
casinos in Nevada and elsewhere, and some of these regulations result in casino
operating costs greater than those in comparable facilities in Nevada and
elsewhere.
Casino Licenses. The Casino Act requires that all casino operations be
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licensed by the Casino Commission and that all employees (except for certain
non-casino job positions), major shareholders and other persons or entities
financially interested in the casino operation be either licensed or approved by
the Casino Commission. A license is not transferable and may be revoked or
suspended under certain circumstances by the Casino Commission. A plenary
license authorizes the operation of a casino with the games authorized in an
operation certificate issued by the Casino Commission, and the operation
certificate may be issued only on a finding that the casino conforms to the
requirements of the Casino Act and applicable regulations and that the casino is
prepared to entertain the public. Under such determination, GBHC and NJMI have
been issued plenary casino licenses, and GBCC has been approved as a holding
company of a casino licensee.
The plenary licenses issued to GBHC and NJMI to own and operate the Sands
were renewed by the Casino Commission in September 1996 and extended through
September 30, 2000, subject to review of the Sands' financial stability during
1997. Terms of the current license require GBHC to comply with periodic
financial reporting requirements and to obtain prior Casino Commission approval
of certain cash transactions with affiliates.
The Casino Act provides for a casino license fee of not less than $200,000
based upon the cost of the investigation and consideration of the license
application, and a renewal fee of not less than $100,000 or $200,000 for a one
year or four year renewal, respectively, based upon the cost of maintaining
control and regulatory activities. In addition, a licensee must pay annual taxes
of 8% of casino win (as defined in the Casino Act), net of a provision for
uncollectible accounts of up to 4% of casino win. During the years ended
December 31, 1996, 1995 and 1994, the taxes assessed by, and the license and
other fees paid by the Sands to the Casino Commission amounted to $23.5 million,
$25 million and $24.5 million, respectively.
The Casino Act also requires a casino licensee to make certain approved
investments (including CRDA bonds) in New Jersey of at least 1.25% of its gross
casino revenues (as defined in the Casino Act) or pay an investment alternative
tax of 2.5% of its gross casino revenues.
GBHC has, from time to time, contributed certain amounts held in escrow to
the CRDA. In return, the CRDA granted GBHC waivers of certain of its investment
obligations in future periods. GBHC made such contributions during the years
ended December 31, 1996, 1995 and 1994 totaling $1.5 million, $250,000 and $2.5
million, respectively, resulting in waivers granted by the CRDA during 1995
totaling $128,000. No such waivers were granted during 1996 and 1994; however,
the contributions have been designated for projects expected to benefit the
community and the Sands facility.
9
<PAGE>
The Casino Act also imposes certain restrictions upon the ownership of
securities issued by a corporation that holds a casino license or is a holding
company of a corporate licensee. Among other restrictions, the sale, assignment,
transfer, pledge or other disposition of any security issued by a corporate
licensee or holding company is subject to the regulation of the Casino
Commission. In the case of corporate holding companies whose stock is publicly
traded, the Casino Commission may require divestiture of the security held by a
disqualified holder such as an officer, director or controlling stockholder who
is required to be qualified under the Casino Act.
Note holders are also subject to the qualification provisions of the Casino
Act and may, in the sole discretion of the Casino Commission, be required to
make filings, submit to regulatory proceedings and qualify under the Casino Act.
If an investor is an "Institutional Investor" such as a retirement fund for
governmental employees, a registered investment company or adviser, a collective
investment trust, or an insurance company, then, in the absence of a prima facie
showing to the New Jersey Division of Gaming Enforcement that the "Institutional
Investor" may be found unqualified, the Casino Commission shall grant a waiver
of this qualification requirement with respect to publicly traded debt or equity
securities if the investor will own (i) less than 10% of the common stock of the
company in question on a fully diluted basis, (ii) less than 20% of such
company's indebtedness or (iii) less than 50% of an outstanding issue of
indebtedness of such company; the Casino Commission, upon a showing of good
cause, may, in its sole discretion, grant a waiver of qualification to an
"Institutional Investor" not satisfying the above criteria. An Institutional
Investor must also purchase securities for investment and have no intent to
influence the management or operations of such company. The Casino Commission
may, in its sole discretion, grant a waiver of the qualification requirement to
investors not qualifying as "Institutional Investors" under the Casino Act if
such investor will own less than 5% of the publicly traded common stock of such
company on a fully diluted basis or less than 15% of the publicly traded
outstanding indebtedness of such company.
ILLINOIS
The Riverboat Act authorizes riverboat gaming on navigable streams within
or forming a boundary of the State of Illinois except for Lake Michigan and any
waterway in Cook County, which includes Chicago. The Riverboat Act strictly
regulates the facilities, persons, associations and practices related to gaming
operations pursuant to the police powers of the State of Illinois, including
comprehensive law enforcement supervision. The Riverboat Act grants the Illinois
Gaming Board specific powers and duties, and all other powers necessary and
proper to fully and effectively execute the Riverboat Act for the purpose of
administering, regulating and enforcing the system of riverboat gaming. The
Illinois Gaming Board's jurisdiction extends to every person, association,
corporation, partnership and trust involved in riverboat gaming operations in
the State of Illinois.
Supplier's License. PML is required to maintain a supplier's license with
------------------
respect to the management services it provides to the Aurora Casino. PML's
supplier's license expired in December 1996 and was renewed by the Illinois
Gaming Board through December 1997. A supplier's license is eligible for renewal
upon payment of the applicable fee and a determination by the Illinois Gaming
Board that the licensee continues to meet all of the requirements of the
Riverboat Act. The Illinois Gaming Board also requires that officers, directors
and employees of suppliers be licensed. Licenses issued by the Illinois Gaming
Board may not be transferred to another person or entity. All licenses must
maintain their suitability for licensure and have a continuing duty to disclose
any material changes in information provided to the Illinois Gaming Board.
A holder of any license is subject to imposition of penalties and fines,
suspension or revocation of such license, or other action for any act or failure
to act by such holder or his or her agents or employees, that is injurious to
the public health, safety, morals, good order and general welfare of the people
of the State of Illinois, or that would discredit or tend to discredit the
Illinois gaming industry or the State of
10
<PAGE>
Illinois. The Illinois Gaming Board may revoke or suspend licenses, as the
Board may see fit and in compliance with applicable laws of Illinois regarding
administrative procedures.
Regulation of Gaming Operations. The Riverboat Act does not limit the
-------------------------------
maximum bet or per patron loss and licensees may set any maximum or minimum
limits on wagering. Vessels must have the capacity to hold a minimum of 500
persons if operating on the Mississippi River or the Illinois River south of
Marshall County, and a minimum of 400 persons on any other waterway. The number
of gaming positions is limited to a maximum of 1,200 per license. Gaming
sessions are limited to a four hour duration; however, special event extended
cruises may be authorized by the Illinois Gaming Board.
If a riverboat captain reasonably determines for reasons of safety that
although seaworthy, the riverboat should not leave the dock or should return
immediately thereto, due to inclement weather, river icing, or mechanical or
structural difficulties, a gaming excursion may commence or continue while the
gangplank or its equivalent is raised and remains raised, in which event the
riverboat is not considered docked. Recently, the Illinois Gaming Board amended
its rules to clarify the circumstances under which dockside gaming will be
permitted and to require the imposition of a fine for violations of the cruising
requirements.
A $2 per person admission tax is imposed on the owner of a riverboat
operation. Such admission tax for the Aurora Casino amounted to $6.4 million,
$5.4 million and $4.7 million , respectively, during 1996, 1995 and 1994.
Additionally, a wagering tax is imposed on the adjusted gross receipts, as
defined in the Riverboat Act, of a riverboat operation at the rate of 20%. Such
wagering taxes amounted to $31.3 million, $29.3 million and $27.9 million,
respectively, for the years ended December 31, 1996, 1995 and 1994. The licensee
is required to wire transfer all such gaming tax payments to the Illinois Gaming
Board.
The Illinois Gaming Board is authorized to conduct investigations into the
conduct of gaming and into alleged violations of the Riverboat Act and to take
such disciplinary and enforcement action as it may deem necessary and proper.
Employees and agents of the Illinois Gaming Board have access to and may inspect
any facilities relating to the riverboat gaming operations at all times .
Any riverboat operation not conducted in compliance with the Riverboat Act
may constitute an illegal gaming place and consequently may be subject to
criminal penalties, which penalties include possible seizure, confiscation and
destruction of illegal gaming devices and seizure and sale of riverboats and
dock facilities to pay any unsatisfied judgment that may be recovered and any
unsatisfied fine that may be levied. The Riverboat Act also provides for civil
penalties equal to the amount of gross receipts derived from wagering on the
gaming, whether unauthorized or authorized, conducted on the day of any
violation.
The Illinois Gaming Board may waive any licensing requirement or procedure
provided by rule if it determines that such waiver is in the best interests of
the public and the gaming industry.
OTHER OPERATIONS
----------------
During 1996 and early 1997, GBCC disposed of its remaining non-casino hotel
operations. GBCC managed and had an ownership interest (but no obligation to
fund future losses) in the hotel operations of the Sands Hotel and Casino in San
Juan, Puerto Rico. GBCC also managed two non-casino hotels and had an ownership
interest in one of the hotels. For the year ended December 31, 1996, earnings
before interest, taxes, depreciation and amortization attributable to such
operations amounted to $1.2 million. As of December 31, 1996, all of GBCC's non-
casino hotel related indebtedness was extinguished.
11
<PAGE>
ITEM 2. PROPERTIES
THE SANDS
- ---------
The Sands is located in Atlantic City, New Jersey on approximately 4.8
acres of land one-half block from the boardwalk at Brighton Park between Indiana
Avenue and Dr. Martin Luther King, Jr. Boulevard. The Sands facility currently
consists of a casino and simulcasting facility with approximately 76,000 square
feet of gaming space containing approximately 2,000 slot machines and
approximately 125 table games; a hotel with 532 rooms (including 58 suites); six
restaurants; a cocktail lounge; two private lounges for invited guests (the
Plaza Club and the Island Club); an 800-seat cabaret theater; retail space; an
adjacent nine-story executive office building with 77,000 square feet of office
space for its executive, financial and administrative personnel; the "People
Mover", an elevated, enclosed, one-way moving sidewalk connecting the Sands to
the Boardwalk; and parking for approximately 1,900 vehicles. In addition, a
warehouse near Atlantic City and a building located in Atlantic City that houses
a print shop and auto shop support the operations of the Sands.
On February 17, 1994, GB Property Funding issued the 10 7/8% First Mortgage
Notes 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 is payable during the first three years. Commencing on
July 15, 1997, semiannual principal payments of $2.5 million will become due on
each interest payment date with the balance due at maturity. 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 to the 10 7/8% First Mortgage 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. In addition, the indenture provides for 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.
On February 17, 1994, PRT Funding issued 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 PCC 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 the indenture to
the 10 7/8% First Mortgage Notes described above.
THE AURORA CASINO
- -----------------
Although it has no ownership interest in the Aurora Casino, GBCC, through
its subsidiaries, manages the facility under the Aurora Casino Management
Contract. For a description of the facility, see "Business - The Aurora Casino"
above.
OTHER OPERATIONS
- ----------------
Prior to sale of the property in November 1996, GBCC had a 50% partnership
interest with an unrelated third party in the Sheraton Plaza, a 496-room hotel
located in Orlando, Florida. GBCC agreed to contribute up to $3.9 million as an
additional investment in the Sheraton Plaza hotel partnership to
12
<PAGE>
refurbish the hotel facility. GBCC contributed $2.5 million toward such
commitment through 1996. Such contributions are in recognition of GBCC's partner
having agreed to make $5 million in principal reductions on the underlying
mortgage note on the facility of which $4 million were made through 1996. GBCC
was required to pay approximately $2.9 million to retire its share of the
underlying indebtedness on the property in connection with the sale.
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 1996 or 1995, GBCC
made capital expenditures under the hotel operating agreement totaling
approximately $2.6 million toward property improvements. 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 $13.8 million
from third parties at a cost of $6.8 million and subject to third party
indebtedness amounting to $2.7 million. The required minimum rental payments
(net of debt service receipts since the February 1994 note acquisition date)
amounted to $397,000, $530,000 and $678,000, respectively, during the years
ended December 31, 1996, 1995 and 1994 . GBCC recorded the note receivable from
Metroplex, which accrued interest at the rate of 9 1/2% per annum, at
acquisition cost. Upon the sale of the hotel by Metroplex, GBCC received
proceeds sufficient to repay the third party indebtedness of $1.9 million,
recover its $6.8 million acquisition cost of the underlying indebtedness,
recover $2.6 million of its total investment in property improvements and
receive additional cash of approximately $770,000.
GBCC also had a 46% interest in Southmark San Juan, Inc. ("Southmark San
Juan"), a subsidiary of Southmark Corporation ("Southmark") which owned the 420-
room Sands Hotel and Casino located in San Juan, Puerto Rico (the "Sands San
Juan") prior to its sale in February 1997. GBCC operated this facility under a
management agreement with Southmark San Juan and earned management fees of
$504,000, $513,000 and $488,000 during the years ended December 31, 1996, 1995
and 1994, respectively. GBCC received a termination fee of approximately $1.5
million in connection with the sale and has agreed to continue to provide
management services on a month to month basis through October 1997 subject to
cancellation by the new owners. GBCC had not recognized losses incurred by
Southmark San Juan since 1990 as its investment was eliminated through the
recognition of prior years' losses.
ITEM 3. LEGAL PROCEEDINGS
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, Hollywood Casino -
Aurora, Inc. ("HCA"), the wholly owned subsidiary of HCC which owns and operates
the Aurora Casino, 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 HWCC-Tunica, Inc. ("HCT"),
the HCC subsidiary which owns and operates the Tunica Casino (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.
13
<PAGE>
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 also parties in various other 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 on the consolidated financial position
or results of operations of GBCC and its subsidiaries.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of 1996, no matter was submitted to a vote of
security holders through the solicitation of proxies or otherwise.
14
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY
HOLDER MATTERS
GBCC's common stock is traded on the American Stock Exchange under the
symbol GBCC. The prices set forth in the following table represent actual
transactions.
<TABLE>
<CAPTION>
Period High Low
------ ----- -----
<S> <C> <C>
1996
First Quarter $ 2.69 $ 1.94
Second Quarter 9.63 2.88
Third Quarter 8.94 3.25
Fourth Quarter 6.38 1.56
1995
First Quarter $ 5.33 $ 3.63
Second Quarter 4.63 3.88
Third Quarter 4.94 3.81
Fourth Quarter 5.13 2.13
</TABLE>
At March 24, 1997, there were approximately 3,550 holders of record of
GBCC's common stock.
No dividends have been paid on GBCC's common stock in the past and GBCC has
no plans to pay dividends in the foreseeable future. See Note 4 of "Notes to
Consolidated Financial Statements" for a description of certain agreements that
impose certain restrictions upon the ability of certain subsidiaries to transfer
funds to GBCC.
15
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following tables present selected financial data for GBCC and are
qualified in their entirety by the consolidated financial statements, including
the notes thereto, appearing elsewhere herein. The data as of December 31, 1996
and 1995, and for the years ended December 31, 1996, 1995 and 1994, have been
derived from the audited consolidated financial statements of GBCC contained
elsewhere in Item 8.
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS DATA: YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Net revenues..................................... $ 283,640 $ 304,337 $ 295,917 $ 277,338 $ 275,584
---------- ---------- ---------- ---------- ----------
Expenses:
Departmental.................................... 240,021 229,666 220,752 207,391 209,167
General and administrative...................... 19,363 21,983 22,916 21,810 30,297
Depreciation and amortization................... 19,868 20,553 19,547 20,837 19,437
---------- ---------- ---------- ---------- ----------
Total expenses................................. 279,252 272,202 263,215 250,038 258,901
---------- ---------- ---------- ---------- ----------
Income from operations........................... 4,388 32,135 32,702 27,300 16,683
---------- ---------- ---------- ---------- ----------
Nonoperating income (expenses):
Interest income................................. 1,852 2,397 3,101 1,450 2,814
Interest expense................................ (39,851) (38,975) (39,292) (39,304) (38,159)
Write-off deferred pre-acquisition costs........ - - - - (13,086)
(Loss) gain on disposal of assets............... (1,795) 56 73 - -
---------- ---------- ---------- ---------- ----------
Total nonoperating expenses, net............... (39,794) (36,522) (36,118) (37,854) (48,431)
---------- ---------- ---------- ---------- ----------
Loss before income taxes and extraordinary item.. (35,406) (4,387) (3,416) (10,554) (31,748)
Income tax (provision) benefit................... (160) 100 (1,080) (754) (642)
---------- ---------- ---------- ---------- ----------
Loss before extraordinary item................... (35,566) (4,287) (4,496) (11,308) (32,390)
Extraordinary item:
Early extinguishment of debt, net of related
tax benefit.................................... - - - (14,814) -
---------- ---------- ---------- ---------- ----------
Net loss....................................... $ (35,566) $ (4,287) $ (4,496) $ (26,122) $ (32,390)
========== ========== ========== ========== ==========
Per common share(1):
Loss before extraordinary item.................. $ (6.86) $ (.83) $ (.87) $ (2.19) $ (6.38)
Extraordinary item.............................. - - - (2.87) -
---------- ---------- ---------- ---------- ----------
Net loss....................................... $ (6.86) $ (.83) $ (.87) $ (5.06) $ (6.38
========== ========== ========== ========== ==========
BALANCE SHEET DATA: DEECEMBER 31,
--------------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
Total assets..................................... $ 221,345 $ 250,116 $ 249,673 $ 223,898 $ 222,061
Total debt....................................... $ 326,024 $ 329,123 $ 328,400 $ 288,122 $ 285,199
Shareholders' deficit............................ $ (159,207) $ (138,415) $ (134,073) $ (137,835) $ (111,796)
</TABLE>
________________________
(1) Fully diluted per share data are not presented for any year because the
inclusion of such securities would be antidilutive.
16
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
This Annual Report on Form 10-K 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 Annual Report
on Form 10-K, 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 declined to $283.6 million during 1996
from $304.3 million for 1995 which, combined with higher operating costs at the
Sands, resulted in a decline in income from operations to $4.4 million in 1996
from $32.1 million in 1995. Operating results have been adversely affected in
1996 by the advent of unprecedented and highly aggressive marketing programs
instituted by certain other Atlantic City casinos seeking to increase their
market share and to a lesser degree by severe winter snowstorms in January and
February. These factors, as well as declines in both the table games and slot
machine hold percentages, resulted in a decline in net revenues at the Sands of
6.8% (to $264.8 million in 1996 from $284 million in 1995). In addition,
marketing and advertising costs increased by $10.9 million (17.3%) during 1996
compared to 1995 in response to competitive pressures.
17
<PAGE>
GAMING OPERATIONS
The following table sets forth certain unaudited financial and operating
data relating to the Sands' operations:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1996 1995 1994
----------- ----------- -----------
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C>
REVENUES:
Table games $ 79,127 $ 95,835 $ 96,485
Slot machines 159,972 163,821 155,381
Other (1) 3,790 4,392 4,341
---------- ---------- ----------
Total $ 242,889 $ 264,048 $ 256,207
========== ========== ==========
TABLE GAMES:
Gross Wagering
(Drop) (2) $ 576,577 $ 606,283 $ 605,854
========== ========== ==========
Hold Percentages: (3)
Sands 13.7% 15.8% 15.9%
Atlantic City Casino
Gaming Industry 15.5% 15.9% 15.8%
SLOT MACHINES:
Gross Wagering
(Handle) (2) $1,954,612 $1,892,159 $1,760,279
========== ========== ==========
Hold Percentage:(3)
Sands (4) 8.2% 8.7% 8.8%
</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 percentage with respect to slot machines is reflected on an
accrual basis. Comparable data for the Atlantic City gaming industry is not
available. The 1994 hold percentage calculations for the Sands have been
adjusted to exclude the recognition of approximately $1 million, in slot
machine revenues resulting from the reversal of certain progressive jackpot
liabilities (see "Revenues" below).
Table games drop at the Sands declined $29.7 million (4.9%) during 1996
compared with 1995 and did not change significantly during 1995 compared with
1994. The Sands' 1996 decrease in table drop compares with an increase of 5% in
table drop for all other Atlantic City casinos during the same period. As a
result, the Sands' 1996 table game market share (expressed as a percentage of
the Atlantic City
18
<PAGE>
industry aggregate table game drop) declined to 7.7% from 8.5% during 1995.
Table game drop throughout 1996 was adversely impacted by the increase in
competitive pressures in the rated table market segment, of which a significant
portion was in the "high end" and midmarket segments. The second half of 1996
also saw a decline in the unrated table market segment as expansions at
competing properties, construction on roadways into the city and other factors
all served to reduce unrated table play at the Sands. The Sands' slight decrease
in drop during 1995 compares with an increase of 4.7% in table drop for all
other Atlantic City casinos during the same period. As a result, the Sands'
table game market share decreased to 8.5% during 1995 from 8.8% in 1994. The
Sands' table game drop decrease was again largely attributable to competitive
pressures in the rated table market segment; however, such decreases were
partially offset by increases in the unrated table segment. As a result of the
Grand Opening on July 1, 1994, the number of table games, excluding poker,
increased significantly and table games were made more accessible to casino
patrons boosting table drop during the second half of 1994. However, a number
of factors adversely affected the 1994 first six months' table games performance
including: (i) the relocation of many blackjack tables to a less accessible
temporary gaming space during construction and the periodic closing of selected
tables on the main casino floor as construction neared completion; (ii) the
severe winter weather during the first quarter, particularly on weekend periods
which generally affect the Sands to a greater degree than its competitors since
the Sands caters to premium table players who concentrate their visits over
weekend periods; (iii) the overall trend in the Atlantic City marketplace
towards slot machine play and (iv) competitive pressures, particularly in the
high-end table patron segment.
Slot machine handle increased $62.5 million (3.3%) and $131.9 million
(7.5%) for the years ended December 31, 1996 and 1995, respectively, compared
with the previous years. The Sands' slot machine handle increases compare with
4.9% and 15.7% increases, respectively, in slot machine handle for all other
Atlantic City casinos during the same periods. As a result, the Sands' market
share decreased to 6.1% in 1996 from 6.2% during 1995 and 6.7% during 1994. The
increases in slot machine handle are largely attributable to increases in
marketing programs, such as coin incentive and direct marketing programs, which
resulted in significant increases in the number of bus patrons for 1996 compared
to 1995. The Sands' average number of slot machines increased by less than 1%
during 1996 compared to an increase of 11.3% for all other Atlantic City
casinos. The greater percentage increase in the number of slot machines for
other Atlantic City casinos reflects, in part, expansions of certain facilities
during 1996 which resulted in an overall increase of approximately 121,000
square feet of casino space and further contributed to the Sands' decline in
market share. Although the Sands' increase in the average number of slot
machines during 1995 was comparable to the overall Atlantic City industry
increase, the Sands' increase in slot machine handle lagged the 15.7% increase
in handle for all other Atlantic City casinos. During the second quarter of
1995, the Sands discontinued certain marketing programs and promotions
(particularly slot promotions which included cash giveaways) which management
deemed to be only marginally profitable. This strategy worked well during the
1995 second quarter; however, entering the peak summer season, many of the
Sands' competitors increased such spending programs and the Sands lost market
share in the highly profitable mass market segment.
REVENUES
Casino revenues at the Sands decreased by $21.2 million (8%) during 1996
compared with 1995. Most of the decline in casino revenues is attributable to
table games which were impacted by both a decline in gross wagering as discussed
previously and by a significant and unusual decrease in table games hold
percentage at the Sands to 13.7% during 1996 compared to 15.8% during 1995. The
3.3% increase in slot machine wagering at the Sands during 1996 compared to 1995
was more than offset by a decline in the slot machine hold percentage to 8.2%
from 8.7%.
During 1995, casino revenues at the Sands increased by $7.8 million (3.1%)
compared with 1994. Casino revenues during the second quarter of 1994 included
the recognition of approximately $1 million resulting from the reversal of
certain progressive jackpot liabilities; the exclusion of such amount from
19
<PAGE>
1994 revenues results in a 1995 increase in casino revenues of 3.5%. Casino
revenues were also negatively impacted by decreases in both the table games and
slot machine hold percentages at the Sands during 1995 compared to 1994.
Rooms revenues decreased $1.3 million (8.5%) during 1996 compared with
1995, but did not change significantly during 1995 compared with 1994. The 1996
decrease reflects the sale in September 1996 of a hotel property operated by
GBCC under a joint operating agreement. Room revenues for such property were
$1.4 million during the fourth quarter of 1995. Food and beverage revenues
increased by $1 million (2.9%) and by $3.3 million (10.6%), respectively, during
1996 and 1995 compared with the prior years. These increases were primarily the
result of the opening of the Epic Buffet during the third quarter of 1995,
partially offset in 1996 by the aforementioned sale of a hotel property. Other
revenues increased $1.6 million (8.8%) during 1996 compared to 1995 primarily
due to increases in theater entertainment revenue at the Sands. Other revenues
decreased $1.1 million (5.8%) during 1995 compared to 1994 primarily due to
decreased revenues from GBCC's computer services subsidiary.
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 56.1% in 1996 from 57.6% in 1995 and 56.9% in 1994. The
1996 decrease is primarily attributable to increases in other types of marketing
programs in lieu of promotional allowances. The 1995 increase is primarily
attributable to promotional activity associated with the 1995 opening of the
Epic Buffet.
DEPARTMENTAL EXPENSES
Casino expenses at the Sands increased $9.7 million (4.6%) during 1996 and
$11 million (5.6%) during 1995 compared with the prior years. The 1996 increase
is primarily due to the expansion of various marketing programs in response to
competitive pressures. During much of 1996, an unprecedented and highly
aggressive industry wide attempt to increase market share resulted in
significantly higher costs with respect to coin incentive packages offered to
bus patrons. The additional costs of such programs result in greater allocation
of rooms, food and beverage and other expenses to casino expense. The 1995
increase results from higher operating costs during the first half of 1995 due
to increased casino patronage at the expanded Sands facility. The increased
costs were most apparent during the first quarter of 1995, which saw a $7.4
million increase (17.1%) compared to the first quarter of 1994. Higher operating
costs were substantially offset during the remainder of 1995 by decreases in
marketing programs as previously discussed and by other cost containment
measures implemented by management.
Rooms expense decreased $529,000 (10.6%) during 1996 compared to 1995, but
did not change significantly during 1995 compared with the prior year. The 1996
decrease reflects the sale of a hotel property in September 1996 and is
comparable to the decline in associated rooms revenues.
Food and beverage expense did not change significantly during 1996 compared
with 1995 or during 1995 compared with 1994. Increased costs associated with the
1995 third quarter opening of the Epic Buffet were offset by increases in food
and beverage complimentaries allocated to the casino department.
Other expenses increased $808,000 (21.6%) during 1996 compared with 1995 as
increases in theater entertainment costs at the Sands were partially offset by
increased allocations to the casino department. Other expenses decreased $1.5
million (29.3%) during 1995 compared with 1994 primarily due to reductions in
entertainment costs associated with headliner entertainment at the Sands.
20
<PAGE>
GENERAL AND ADMINISTRATIVE
General and administrative expenses decreased $2.6 million (11.9%) during
1996 as compared to 1995. This decrease is primarily due to decreases in
equipment rental at the Sands and, to a lesser extent, reductions in payroll
costs associated with NJMI's management of the Sands. In addition, cost
containment measures implemented by management contributed to a reduction in
administrative costs at the Sands during the second half of 1996. General and
administrative expenses decreased by $933,000 (4.1%) during 1995 compared with
1994 primarily due to reductions in legal and professional fees.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense did not change significantly in 1996
as compared to 1995 and increased $1 million (5.1%) during 1995 compared to
1994. Increases in depreciation during 1995 and the second half of 1994
attributable to the expansion of gaming space at the Sands were partially offset
by reduced amortization of investment credits on obligatory investments.
INTEREST
Interest income decreased $545,000 (22.7%) during 1996 compared to 1995 and
$704,000 (22.7%) during 1995 compared to 1994. The 1996 decrease is attributable
to a decline in the amount of cash available for temporary cash investments. The
1995 decrease results from comparison to an unusually high level of interest
income in 1994. Interest expense did not change significantly during either 1996
or 1995 from prior years.
LOSS (GAIN) ON DISPOSAL OF ASSETS
GBCC experienced a loss on disposal of assets amounting to $1.8 million
during 1996 resulting from the write off of deferred option costs with respect
to the planned purchase of a site for future expansion.
INCOME TAX BENEFIT (PROVISION)
GBCC and its subsidiaries have tax net operating loss carryforwards
("NOL's") totaling approximately $77 million, of which approximately $60 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, many of which expire by the year 2007. Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" requires that the
tax benefit of such NOL's and credit carryforwards 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 losses
sustained for both financial and tax reporting by GBCC and its subsidiaries
through 1996, management was unable to determine that realization of that asset
was more likely than not and, thus, provided valuation allowances for the entire
deferred tax asset for all periods presented.
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.
21
<PAGE>
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. A GBCC subsidiary receives 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 1996 amounted to $9.4 million. 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 expenditures.
Historically, the Sands has also utilized short-term borrowings to fund seasonal
cash needs and for certain capital projects.
During 1996, GBCC's net cash used in operating activities (after net
interest expense and income taxes) amounted to $3 million as compared with cash
provided by operating activities of $29.2 million during 1995. The change in net
cash from operating activities compared to 1995 resulted primarily from a
substantial decline in operating cash flow generated by the Sands. The Sands
sustained an operating cash flow deficit of $6.1 million for 1996 compared to
net cash generated from operations of $20.7 million during 1995, resulting in an
aggregate decline in operating cash flow of $26.8 million and a decline in
working capital of $28.2 million compared to December 31, 1995. GBCC utilized
existing cash together with proceeds from the repayment of an outstanding note
receivable, borrowings on GBHC's short-term credit facility and net borrowings
from HCC during 1996 to meet its operating needs, to fund capital additions
($8.1 million), to retire its share of the underlying indebtedness of an
unconsolidated partnership in connection with the sale of a Florida hotel
property ($2.9 million) and to make obligatory investments at the Sands ($3.1
million).
In prior years, GBCC's hotel operations required substantial infusions of
operating funds; however, the disposition of its hotel properties has eliminated
the cash required to fund hotel operations (see "Capital Expenditures and Other
Investments" below).
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
22
<PAGE>
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 other publicly held indebtedness and
to provide partial funding for an expansion of gaming space at the Sands.
During 1996, GBCC repaid long-term indebtedness of $2.4 million. Commencing in
July 1997, semiannual principal payments of $2.5 million will become due with
respect to the 10 7/8% First Mortgage Notes. Total scheduled maturities of
long-term debt during 1997 are $3.1 million.
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"); payment of principle and interest on this
loan is subject to certain subsidiaries of GBCC meeting certain financial
coverage and other payment restriction tests. 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. Subject to regulatory approval and
effective as of April 1, 1997, HCC will acquire from a GBCC subsidiary the
general partnership interest in the limited partnership which holds the Aurora
Management contract. The acquisition price for the general partnership interest
will include a note in the amount of $3.8 million and the assignment of $7.6
million of PPI Funding Notes to the GBCC subsidiary. Annual principal and
interest payments by HCC on the $3.8 million note will approximate the general
partner's share of annual partnership distributions which will now be made to
HCC. With respect to the $7.6 million of PPI Funding Notes to be received, GBCC
will reduce both the amount of its future debt obligation to HCC and its annual
non-cash interest expense.
As of April 30, 1996, GBHC extended $2 million of its bank line of credit
until April 30, 1997. As of December 31, 1996, $2 million was outstanding under
the line of credit; the outstanding balance was repaid in January 1997 and the
line of credit was cancelled.
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. Also during
the third quarter of 1996, GBCC repaid $4.8 million it previously borrowed from
HCC with respect to the purchase of the underlying indebtedness of a non-casino
hotel property it operated (see below).
CAPITAL EXPENDITURES AND OTHER INVESTMENTS
Property and equipment additions during 1996 totaled $8.1 million, of which
capital expenditures at the Sands amounted to approximately $5.5 million.
Expenditures by GBCC during 1996 of approximately $2.6 million for property
improvements at a non-casino hotel property it operated under an agreement with
Metroplex Hotel Limited (see Note 7 of Notes to Consolidated Financial
Statements) were repaid in September 1996 upon the sale of the hotel. Management
anticipates capital expenditures during 1997 will be approximately $4.6 million
at the Sands. Projects currently planned during 1997 include additional upgrades
and improvements to rooms at the Sands, including its higher-end suite product,
and other departmental expenditures.
23
<PAGE>
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 1996 totaled $3.1 million and are
anticipated to be approximately $3.1 million during 1997 as well.
GBCC agreed to contribute up to $3.9 million (approximately $2.5 million of
which was paid) as an additional investment in an unconsolidated hotel
partnership to refurbish the hotel facility in Orlando, Florida. No such
contributions were required during 1996. Such contributions were in recognition
of GBCC's partner having agreed to make $5 million in principal reductions on
the underlying mortgage note on the facility of which $4 million was made.
During November 1996, the Partnership sold the hotel facility; GBCC was required
to pay approximately $2.9 million to retire its share of the underlying
indebtedness of the property.
Also during the fourth quarter of 1996, another unconsolidated partnership
in which a GBCC subsidiary holds a 46% interest entered into a contract for the
sale of a casino/hotel in San Juan, Puerto Rico owned by the partnership and
managed by the GBCC subsidiary. The sale was completed in February 1997; the
GBCC subsidiary received a fee of approximately $1.5 million with respect to the
termination of its management agreement and agreed to provide management
services on a month to month basis through October 1997 subject to cancellation
by the new owners.
SUMMARY
GBHC, which is GBCC's most significant operating subsidiary, incurred a net
loss exclusive of management fees of $26.7 million in 1996 which in turn
generated an operating cash flow deficit of $6.1 million. As a consequence, GBHC
has had to rely on borrowings from affiliates 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 1997 is limited. HCC, which has loaned $6.5 million
to GBCC 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.
GBHC's remaining principal and interest requirements during 1997, exclusive
of interest of $10.1 million paid in January, amount to $12.6 million. Due to
mild winter weather conditions compared to a year ago and an abatement of the
intense marketing competition for bus customers, operating results for the first
two months of 1997 reflect a substantial improvement over 1996. In the absence
of a resumption of the marketing wars which plagued Atlantic City casinos in
1996 or other unforeseen events, management believes that its operating plan for
1997 is attainable and will provide sufficient funds from operating cash flow
which, together with funds available from affiliates, if required, will enable
GBHC to satisfy its debt service requirements for 1997.
24
<PAGE>
ITEM 8. INDEX TO FINANCIAL STATEMENTS
PAGE
----
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES:
Report of Independent Public Accountants................. 26
Consolidated Balance Sheets as of December 31, 1996
and 1995................................................ 27
Consolidated Statements of Operations for the Years
Ended December 31, 1996, 1995 and 1994.................. 29
Consolidated Statement of Changes in Shareholders'
Deficit for the Three Years Ended December 31, 1996..... 30
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1996, 1995 and 1994.................. 31
Notes to Consolidated Financial Statements............... 32
25
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
----------------------------------------
To Greate Bay Casino Corporation:
We have audited the accompanying consolidated balance sheets of Greate Bay
Casino Corporation (the Company and a Delaware corporation, formerly Pratt Hotel
Corporation) and subsidiaries as of December 31, 1996 and 1995, and the related
consolidated statements of operations, changes in shareholders' deficit and cash
flows for each of the three years in the period ended December 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Greate Bay Casino
Corporation and subsidiaries as of December 31, 1996 and 1995, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1996, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Roseland, New Jersey
March 21, 1997
26
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
(FORMERLY PRATT HOTEL CORPORATION AND SUBSIDIARIES)
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1996 1995
-------------- --------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 22,991,000 $ 28,067,000
Short-term investment 2,000,000 -
Accounts receivable, net of allowances
of $15,524,000 and $16,496,000,
respectively 10,656,000 12,293,000
Inventories 4,016,000 4,462,000
Due from affiliates 2,525,000 2,435,000
Deferred income taxes 1,627,000 4,055,000
Refundable deposits and other
current assets 2,388,000 2,597,000
------------- -------------
Total current assets 46,203,000 53,909,000
------------- -------------
Property and Equipment:
Land 38,957,000 37,807,000
Buildings and improvements 185,508,000 185,077,000
Operating equipment 92,769,000 92,474,000
Construction in progress 1,535,000 2,450,000
------------- -------------
318,769,000 317,808,000
Less - accumulated depreciation
and amortization (161,882,000) (148,531,000)
------------- -------------
Net property and equipment 156,887,000 169,277,000
------------- -------------
Other Assets:
Obligatory investments 6,382,000 5,521,000
Deferred financing costs 7,653,000 8,730,000
Notes receivable - 9,222,000
Other assets 4,220,000 3,457,000
------------- -------------
Total other assets 18,255,000 26,930,000
------------- -------------
$ 221,345,000 $ 250,116,000
============= =============
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated balance sheets.
27
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
(FORMERLY PRATT HOTEL CORPORATION AND SUBSIDIARIES)
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' DEFICIT
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1996 1995
-------------- --------------
<S> <C> <C>
Current Liabilities:
Borrowings from affiliate $ 6,750,000 $ 5,000,000
Short-term credit facilities 2,000,000 -
Current maturities of long-term debt 3,127,000 553,000
Accounts payable 8,981,000 9,432,000
Accrued liabilities -
Salaries and wages 5,090,000 5,454,000
Interest 11,673,000 11,856,000
Insurance 3,138,000 2,339,000
Other 6,777,000 6,442,000
Other current liabilities 5,527,000 4,855,000
------------- -------------
Total current liabilities 53,063,000 45,931,000
------------- -------------
Long-Term Debt 322,897,000 328,570,000
------------- -------------
Other Noncurrent Liabilities 3,592,000 8,747,000
------------- -------------
Due to Affiliate 1,000,000 5,283,000
------------- -------------
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 38,557,000 23,783,000
Accumulated deficit (198,283,000) (162,717,000)
------------- -------------
Total shareholders' deficit (159,207,000) (138,415,000)
------------- -------------
$ 221,345,000 $ 250,116,000
============= =============
</TABLE>
The accompanying notes to consolidated financial
statements are an integral part of these consolidated balance sheets.
28
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
(FORMERLY PRATT HOTEL CORPORATION AND SUBSIDIARIES)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1996 1995 1994
-------------- -------------- --------------
<S> <C> <C> <C>
Revenues:
Casino $ 242,889,000 $ 264,048,000 $ 256,207,000
Rooms 13,505,000 14,763,000 14,287,000
Food and beverage 35,853,000 34,856,000 31,518,000
Other 19,322,000 17,753,000 18,848,000
-------------- -------------- --------------
311,569,000 331,420,000 320,860,000
Less - Promotional allowances (27,929,000) (27,083,000) (24,943,000)
-------------- -------------- --------------
Net revenues 283,640,000 304,337,000 295,917,000
-------------- -------------- --------------
Expenses:
Casino 218,990,000 209,282,000 198,270,000
Rooms 4,456,000 4,985,000 5,148,000
Food and beverage 12,030,000 11,662,000 12,049,000
Other 4,545,000 3,737,000 5,285,000
General and administrative 19,363,000 21,983,000 22,916,000
Depreciation and amortization 19,868,000 20,553,000 19,547,000
-------------- -------------- --------------
Total expenses 279,252,000 272,202,000 263,215,000
-------------- -------------- --------------
Income from operations 4,388,000 32,135,000 32,702,000
-------------- -------------- --------------
Non-operating income (expense):
Interest income 1,852,000 2,397,000 3,101,000
Interest expense, net of capitalized interest
of $762,000 in 1994 (39,851,000) (38,975,000) (39,292,000)
(Loss) gain on disposal of assets (1,795,000) 56,000 73,000
-------------- -------------- --------------
Total non-operating expense, net (39,794,000) (36,522,000) (36,118,000)
-------------- -------------- --------------
Loss before income taxes (35,406,000) (4,387,000) (3,416,000)
Income tax (provision) benefit (160,000) 100,000 (1,080,000)
-------------- -------------- --------------
Net loss $ (35,566,000) $ (4,287,000) $ (4,496,000)
============== ============== ==============
Net loss per common share $ (6.86) $ (.83) $ (.87)
============== ============== ==============
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
29
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
(FORMERLY PRATT HOTEL CORPORATION AND SUBSIDIARIES)
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' DEFICIT
FOR THE THREE YEARS ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
--------------------- PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT
--------- --------- ------------ --------------
<S> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1994 5,175,977 $ 518,000 $ 15,581,000 $(153,934,000)
Issuance of common stock 10,650 1,000 26,000 -
Capital contribution - - 8,231,000 -
Net loss - - - (4,496,000)
--------- -------- ------------ -------------
BALANCE, DECEMBER 31, 1994 5,186,627 519,000 23,838,000 (158,430,000)
Adjustment to prior year capital
contribution - - (55,000) -
Net loss - - - (4,287,000)
--------- -------- ------------ -------------
BALANCE, DECEMBER 31, 1995 5,186,627 519,000 23,783,000 (162,717,000)
Capital contribution - - 14,774,000 -
Net loss - - - (35,566,000)
--------- -------- ------------ -------------
BALANCE, DECEMBER 31, 1996 5,186,627 $ 519,000 $ 38,557,000 $(198,283,000)
========= ========== ============ =============
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of this consolidated statement.
30
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
(FORMERLY PRATT HOTEL CORPORATION AND SUBSIDIARIES)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1996 1995 1994
------------ ------------- --------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss $(35,566,000) $ (4,287,000) $ (4,496,000)
Adjustments to reconcile net loss to net cash (used in)
provided by operating activities:
Depreciation and amortization, including
accretion of debt discount 27,163,000 27,219,000 24,945,000
Loss (gain) on disposal of assets 1,795,000 (56,000) (73,000)
Provision for doubtful accounts 2,167,000 2,988,000 3,283,000
Deferred income tax (benefit) provision 51,000 (480,000) 1,580,000
Increase in accounts receivable (972,000) (744,000) (3,111,000)
Increase (decrease) in accounts payable and
other accrued liabilities 2,108,000 3,967,000 (3,541,000)
Net change in other current assets and liabilities 388,000 1,050,000 410,000
Net change in other noncurrent assets and liabilities (161,000) (468,000) (654,000)
------------ ------------ ------------
Net cash (used in) provided by operating activities (3,027,000) 29,189,000 18,343,000
------------ ------------ ------------
INVESTING ACTIVITIES:
Net property and equipment additions (8,085,000) (19,911,000) (20,140,000)
Collections on notes receivable 9,361,000 103,000 7,614,000
Proceeds from disposition of assets 2,594,000 56,000 73,000
Obligatory investments (3,062,000) (2,967,000) (826,000)
Purchase of mortgage note - - (5,750,000)
Short-term investments (2,000,000) - -
Investments in and advances to unconsolidated affiliates (2,946,000) (1,675,000) (660,000)
------------ ------------ ------------
Net cash used in investing activities (4,138,000) (24,394,000) (19,689,000)
------------ ------------ ------------
FINANCING ACTIVITIES:
Repayments of short-term debt - - (21,000,000)
Issuance of long-term debt 700,000 - 285,000,000
Net borrowings on short-term credit facilities 2,000,000 - -
Net (repayments) borrowings from affiliate 1,750,000 - (11,133,000)
Deferred financing costs (10,000) (32,000) (10,458,000)
Repayments of long-term debt (2,351,000) (5,998,000) (227,254,000)
Issuance of common stock - - 27,000
------------ ------------ ------------
Net cash provided by (used in) financing activities 2,089,000 (6,030,000) 15,182,000
------------ ------------ ------------
Net (decrease) increase in cash and cash equivalents (5,076,000) (1,235,000) 13,836,000
Cash and cash equivalents at beginning of year 28,067,000 29,302,000 15,466,000
------------ ------------ ------------
Cash and cash equivalents at end of year $ 22,991,000 $ 28,067,000 $ 29,302,000
============ ============ ============
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
31
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
(FORMERLY PRATT HOTEL CORPORATION AND SUBSIDIARIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) ORGANIZATION, BUSINESS AND BASIS OF PRESENTATION
Greate Bay Casino Corporation, a Delaware corporation, and its subsidiaries
("GBCC", formerly known as Pratt Hotel Corporation), are engaged in the
operation and 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 7). 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.
HCC distributed such stock to its shareholders; as a result, approximately 38%
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.
GBCC estimates that a significant amount of the Sands' revenues is 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 accompanying consolidated financial statements have been prepared
assuming GBCC and its subsidiaries will continue as going concerns. GBHC, which
is GBCC's most significant operating subsidiary, incurred a net loss exclusive
of management fees of $26,726,000 in 1996 which in turn generated an operating
cash flow deficit of $6,070,000. As a consequence, GBHC has had to rely on
borrowings from affiliates 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 1997 is limited. HCC, which has loaned $6,500,000 to GBCC for use by the
Sands (see Note 3), is subject to certain indenture provisions which restrict
its ability to provide ongoing financial support to an additional $3,500,000.
GBHC's remaining principal and interest requirements during 1997, exclusive
of interest of $10,078,000 paid in January, amount to $12,610,000. Due to mild
winter weather conditions compared to a year ago and an abatement of the intense
marketing competition for bus customers, operating results for the first two
months of 1997 reflect a substantial improvement over 1996. In the absence of a
resumption of the marketing wars which plagued Atlantic City casinos in 1996 or
other unforseen events, management believes its operating plan for 1997 is
attainable and will provide sufficient funds from operating cash flow which,
together with funds available from affiliates, if required, will enable GBHC to
satisfy its debt service requirements for 1997.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies followed in the preparation of the
accompanying consolidated financial statements are discussed below. The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
32
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
(FORMERLY PRATT HOTEL CORPORATION AND SUBSIDIARIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
PRINCIPLES OF CONSOLIDATION -
The consolidated financial statements include the accounts of GBCC and its
wholly owned subsidiaries. All significant intercompany balances and
transactions have been eliminated. Investments in unconsolidated affiliates,
including joint ventures, that are 50% or less owned are accounted for by the
equity method.
CASINO REVENUES, PROMOTIONAL ALLOWANCES AND DEPARTMENTAL EXPENSES -
The Sands recognizes the net win from gaming activities (the difference
between gaming wins and losses) as casino revenues. Casino revenues are net of
accruals for anticipated payouts of progressive and certain other slot machine
jackpots and certain progressive table game payouts. Such anticipated jackpots
and payouts are reflected as current liabilities in the accompanying
consolidated balance sheets. During the year ended December 31, 1994, the Sands
removed certain progressive jackpots from the gaming floor in accordance with
regulations of the New Jersey Casino Control Commission (the "Casino
Commission") resulting in the reduction of $1,035,000 of progressive jackpot
liabilities and the corresponding recognition of an equal amount of slot machine
revenues.
The estimated value of rooms, food and beverage and other items which were
provided to customers without charge has been included in revenues and a
corresponding amount has been deducted as promotional allowances. The costs of
such complimentaries have been included as casino expenses in the accompanying
consolidated statements of operations. Costs of complimentaries allocated from
the rooms, food and beverage and other operating departments to the casino
department during the years ended December 31, 1996, 1995 and 1994 are as
follows:
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Rooms $ 6,170,000 $ 6,023,000 $ 6,080,000
Food and beverage 29,357,000 28,259,000 24,611,000
Other 4,435,000 3,631,000 3,393,000
------------ ------------ ------------
$ 39,962,000 $ 37,913,000 $ 34,084,000
============ ============ ============
</TABLE>
CASH AND CASH EQUIVALENTS -
Cash and cash equivalents are generally comprised of cash and investments
with original maturities of three months or less, such as commercial paper,
certificates of deposit and fixed repurchase agreements.
33
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
(FORMERLY PRATT HOTEL CORPORATION AND SUBSIDIARIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
ALLOWANCE FOR DOUBTFUL ACCOUNTS -
The allowance for doubtful accounts is maintained at a level considered
adequate to provide for possible future losses. Provisions for doubtful accounts
amounting to $2,167,000, $2,988,000 and $3,283,000 were made during the years
ended December 31, 1996, 1995 and 1994, respectively.
INVENTORIES -
Inventories are stated at the lower of cost (on a first-in, first-out
basis) or market.
PROPERTY AND EQUIPMENT -
Property and equipment have been recorded at cost and are being depreciated
utilizing the straight-line method over their estimated useful lives as follows:
Buildings and improvements 10-40 years
Operating equipment 3-15 years
On October 1, 1996, GBCC revised the estimated useful life of its buildings
from 25 years to 40 years. Management believes the change in estimated life more
appropriately reflects the timing of the economic benefit to be received from
these assets. For the year ended December 31, 1996, the effect of this change
reduced depreciation and amortization expense and net loss by $761,000.
Interest costs related to property and equipment acquisitions were
capitalized during the acquisition period and are being amortized over the
useful lives of the related assets.
DEFERRED FINANCING COSTS -
The costs of issuing long-term debt, including all underwriting, licensing,
legal and accounting fees, have been capitalized and are being amortized over
the term of the related debt issue. Amortization of such costs was $1,087,000,
$1,113,000 and $964,000 for the years ended December 31, 1996, 1995 and 1994,
respectively.
LONG-LIVED ASSETS -
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.
34
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
(FORMERLY PRATT HOTEL CORPORATION AND SUBSIDIARIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
ACCRUED INSURANCE -
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.
EMPLOYEE STOCK OPTIONS -
During 1996, GBCC adopted the provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123"). SFAS 123 requires that an entity account for employee stock compensation
under a fair value based method. However, SFAS 123 also allows an entity to
continue to measure compensation cost for employee stock-based compensation
plans using the intrinsic value based method of accounting prescribed by
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("Opinion 25"). Entities electing to remain with the accounting under
Opinion 25 are required to make pro forma disclosures of net income and earnings
per share as if the fair value based method of accounting under SFAS 123 had
been applied. GBCC has elected to continue to account for employee stock-based
compensation under Opinion 25. As there were no grants of options during either
1996 or 1995 (see Note 6), no additional disclosures are required.
INCOME TAXES -
From May 1992 through December 31, 1996, GBCC's results of operations have
been included in HCC's consolidated federal income tax return. Pursuant to
agreements between HCC and GBCC, GBCC's provision for federal income taxes has
been based on the amount of tax which would have been provided if a separate
federal income tax return had been filed.
INTEREST EXPENSE -
Interest expense includes the accretion of debt discount amounting to
$7,295,000, $6,666,000 and $5,398,000, respectively, during the years ended
December 31, 1996, 1995 and 1994.
NET LOSS PER COMMON SHARE -
Net loss per common share is based on the weighted average number of shares
of common stock and common stock equivalents outstanding. The weighted average
number of common stock equivalents outstanding was 5,187,000 for each of the
years ended December 31, 1996 and 1995 and 5,183,000 for the year ended December
31, 1994. Shares issuable upon the exercise of stock options were not considered
in the computation of net loss per common share as the result would have been
antidilutive.
The Financial Accounting Standards Board has issued a new standard,
"Earnings per Share" ("SFAS 128"). SFAS 128 provides for revisions to the
current method of calculating earnings per share and for the disclosure of
certain information about the capital structure of the reporting entity. SFAS
128
35
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
(FORMERLY PRATT HOTEL CORPORATION AND SUBSIDIARIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
will become effective on December 15, 1997; early adoption is not permitted.
GBCC does not believe the new pronouncement will impact its present calculation
of earnings per share.
RECLASSIFICATIONS -
Certain reclassifications have been made to the prior years' consolidated
financial statements to conform to the 1996 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 of departmental
allocations. Management believes that such reclassifications better reflect the
matching of costs with the associated revenues.
(3) SHORT-TERM CREDIT FACILITIES AND BORROWINGS FROM AFFILIATES
During June 1994, a subsidiary of GBCC entered into an agreement for a bank
line of credit in the amount of $5,000,000. The agreement, which was renewed in
April 1995, provided for interest on borrowings at the bank's prime lending rate
plus 3/4% per annum. Borrowings under the line of credit were guaranteed to the
extent of $2,000,000 by another subsidiary of GBCC. As of April 30, 1996, the
subsidiary extended $2,000,000 of the line of credit until April 30, 1997.
Additionally, the guarantor pledged a certificate of deposit in the face amount
of $2,000,000 as collateral for the line of credit. As of December 31, 1996,
$2,000,000 was outstanding under the line of credit; no such borrowings were
outstanding under the line of credit at December 31, 1995. The line of credit
was repaid upon maturity of the pledged certificate of deposit during January
1997 and the line of credit was cancelled.
GBCC and its subsidiaries had outstanding affiliate borrowings from HCC of
$7,750,000 and $6,000,000, respectively, as of December 31, 1996 and 1995. Of
the amounts borrowed, $1,000,000, which is not due until April 1, 1998, is
classified as noncurrent in the accompanying consolidated balance sheets at
December 31, 1996 and 1995. In addition, $250,000 is due on demand, or if no
demand is made, on April 8, 1998. Such borrowings from HCC bear interest at the
rate of 14% per annum, payable semiannually. During the third quarter of 1996,
GBCC borrowed an additional $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 for working capital purposes on the same
terms. Noncurrent borrowings from HCC at December 31, 1995 also included
$4,750,000 due in May 1997 and secured by a pledge of certain notes receivable
from a partnership owned by certain members of the Pratt family. Such borrowing
was repaid in September 1996 with a portion of the proceeds from the sale of the
underlying hotel property (see Note 7).
36
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
(FORMERLY PRATT HOTEL CORPORATION AND SUBSIDIARIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(4) LONG-TERM DEBT AND PLEDGE OF ASSETS
Substantially all of GBCC's assets are pledged in connection with GBCC's
long-term indebtedness. 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>
DECEMBER 31,
--------------------------------
1996 1995
--------------- ---------------
<S> <C> <C>
10 7/8% first mortgage notes, due 2004 (a) $ 185,000,000 $ 185,000,000
11 5/8% senior notes, due 2004 (b) 85,000,000 85,000,000
14 5/8% junior subordinated notes, due 2005 (c) - 8,738,000
14 7/8% secured promissory note, due 2006, net of
discount of $44,015,000 and $51,310,000, respectively (d) 54,338,000 47,043,000
Other 1,686,000 3,342,000
-------------- --------------
Total indebtedness 326,024,000 329,123,000
Less - current maturities (3,127,000) (553,000)
-------------- --------------
Total long-term debt $ 322,897,000 $ 328,570,000
============== ==============
</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 is payable during the
first three years. Commencing on July 15, 1997, semiannual principal
payments of $2,500,000 will become due on each interest payment date with
the balance due at maturity. 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 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. 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.
(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
37
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
(FORMERLY PRATT HOTEL CORPORATION AND SUBSIDIARIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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, PRT Funding Corp., a subsidiary of GBCC, issued
$15,000,000 of 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 (see Notes 5 and 12). The
remaining $8,738,000 of the Junior Subordinated Notes, together with
accrued interest thereon, was assigned to GBCC by HCC in connection with
the distribution by HCC of its stock in GBCC to HCC's shareholders on
December 31, 1996 (see Note 12).
(d) 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 a face value of $110,636,000. Subsequent principal payment by PPI
Funding Corp. have reduced the maturity value of the notes to $98,353,000.
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 December 31, 1996 are set forth
below:
<TABLE>
<CAPTION>
<S> <C>
1997 $ 3,127,000
1998 5,068,000
1999 5,074,000
2000 5,079,000
2001 5,467,000
Thereafter 346,224,000
-------------
Total $ 370,039,000
=============
</TABLE>
Interest paid, net of amounts capitalized, amounted to $31,206,000,
$32,058,000 and $27,253,000, respectively, during the years ended December 31,
1996, 1995 and 1994.
38
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
(FORMERLY PRATT HOTEL CORPORATION AND SUBSIDIARIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(5) INCOME TAXES
Components of GBCC's (provision) benefit for income taxes consist of the
following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1996 1995 1994
------------ ------------ -------------
<S> <C> <C> <C>
Federal income tax benefit $ - $ - $ -
State income tax benefit (provision):
Current (109,000) (380,000) 500,000
Deferred (51,000) 480,000 (1,580,000)
------------ ------------ -------------
$ (160,000) $ 100,000 $ (1,080,000)
============ ============ =============
</TABLE>
GBCC's operations have been included in HCC's consolidated federal income
tax return for periods through December 31, 1996. Pursuant to agreements between
HCC and GBCC, GBCC's provision for federal income taxes are based on the amount
of tax which would have been provided if a separate federal income tax return
were filed. In addition, HCC has 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"). There was no such utilization of
GBCC's NOL's for the years ended December 31, 1996 and 1995; for the year ended
December 31, 1994, such payment was effected through the assignment of principal
and interest on the Junior Subordinated Notes (see Note 12). Total state income
taxes paid by GBCC for the years ended December 31, 1996, 1995 and 1994 amounted
to $123,000, $171,000 and $412,000, respectively.
A reconciliation between the calculated tax (provision) benefit based on
the statutory rates in effect and the effective tax rates follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1996 1995 1994
------------- ------------ -------------
<S> <C> <C> <C>
Calculated income tax benefit
at 34% $ 12,038,000 $ 1,492,000 $ 1,161,000
Tax benefit of operating
losses not recognized (11,098,000) (297,000) (361,000)
Amortization of excess
purchase price (601,000) (803,000 (803,000)
Disallowance of meals and
entertainment (338,000) (354,000) (336,000)
State income taxes (106,000) 66,000 (713,000)
Other (55,000) (4,000) (28,000)
------------- ------------ ------------
Tax benefit (provision) as shown on
consolidated statements of
operations $ (160,000) $ 100,000 $ (1,080,000)
============= ============ ============
</TABLE>
39
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
(FORMERLY PRATT HOTEL CORPORATION AND SUBSIDIARIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
As a result of the distribution of GBCC's stock by HCC to its shareholders,
GBCC will no longer be included in HCC's consolidated federal income tax return.
As of December 31, 1996 (after completion of the distribution of stock), GBCC
and its subsidiaries have NOL's totaling approximately $77,000,000 for federal
income tax purposes of which approximately $60,000,000 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 and
credit carryforwards 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 is more
likely than not, a valuation allowance should be recorded. Due to losses
sustained for both financial and tax reporting by GBCC and its subsidiaries
through 1996, management was unable to determine that realization of such asset
was more likely than not and, thus, has provided valuation allowances 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 future utilization of its loss carryforwards.
40
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
(FORMERLY PRATT HOTEL CORPORATION AND SUBSIDIARIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The components of the net deferred tax asset were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1996 1995
------------- -------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 26,335,000 $ 20,668,000
Allowance for doubtful accounts 6,428,000 6,830,000
Investment and jobs tax credits 3,223,000 4,417,000
Equity losses of unconsolidated
subsidiaries and joint ventures 3,293,000 3,165,000
Other liabilities and accruals 3,034,000 2,455,000
Other 2,037,000 1,377,000
------------ ------------
Total deferred tax assets 44,350,000 38,912,000
------------ ------------
Deferred tax liabilities:
Depreciation and amortization (8,334,000) (8,555,000)
Other (597,000) (695,000)
------------ ------------
Total deferred tax liabilities (8,931,000) (9,250,000)
------------ ------------
Net deferred tax asset 35,419,000 29,662,000
Valuation allowance (35,419,000) (29,662,000)
------------ ------------
$ - $ -
============ ============
</TABLE>
Receivables in connection with the aforementioned tax allocation agreements
were $1,950,000 at December 31, 1995 and were included in current deferred
income taxes in the accompanying consolidated balance sheet. Payables under such
agreements amounting to $1,950,000 at December 31, 1995 were included in other
noncurrent liabilities in the accompanying consolidated balance sheet.
(6) STOCK OPTIONS AND COMPENSATION PLANS
INCENTIVE STOCK OPTION PLAN
- ---------------------------
During 1990, GBCC adopted the 1990 Incentive Stock Option Plan (the
"Plan"). The 1990 Plan provides for the granting of incentive stock options
intended to qualify for special tax treatment under the Internal Revenue Code,
as amended (the "Code"). The shares offered under the 1990 Plan consist of
shares of GBCC common stock. Options for no more than 102,092 shares of common
stock may be granted under the 1990 Plan.
41
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
(FORMERLY PRATT HOTEL CORPORATION AND SUBSIDIARIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The 1990 Plan is administered by the Board of Directors of GBCC through its
compensation committee. Options granted under the 1990 Plan are exercisable for
a term ending five years from the date of grant and are subject to limitations
on the quantity exercised in a calendar year and to certain repurchase
provisions. No options to purchase shares were outstanding at any time during
the year ended December 31, 1996. Outstanding options for the issue of 8,030
shares at an exercise price of $2.50 per share were available at January 1, 1995
and expired during 1995 without exercise. No additional options were granted
during 1995. As of December 31, 1996 options to purchase 57,772 shares are
available for grant.
COMPENSATION PLAN
- -----------------
During October 1995, HCC assumed the outstanding unfunded obligations of
GBCC under existing agreements with certain of GBCC's principal shareholders and
key executive officers providing for (1) lifetime pension benefits upon the
expiration of existing employment contracts and subsequent consulting agreements
and (2) death benefits to be paid for a period of ten years. The obligation
assumed by HCC was based on the net present value of the obligation at that date
of $4,283,000. GBCC issued a non-interest bearing note payable to HCC for a like
amount in exchange for the assumption, which is included in noncurrent due to
affiliate on the accompanying consolidated balance sheet at December 31, 1995.
Such note was contributed to GBCC on December 31, 1996 (see Note 12). Amounts
charged to expense by GBCC under the compensation agreements for the years ended
December 31, 1996, 1995 and 1994 were approximately $330,000, $158,000 and
$109,000, respectively.
(7) TRANSACTIONS WITH RELATED PARTIES
Prior to sale of the property, 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 1996 and 1995, GBCC made capital
expenditures under the hotel operating agreement totaling approximately
$2,581,000 toward property improvements. 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 since the February 1994 note acquisition date) amounted to
$397,000, $530,000 and $678,000, respectively, during the years ended December
31, 1996, 1995 and 1994. GBCC recorded the note receivable from Metroplex, which
accrued interest at the rate of 9 1/2% per annum, at acquisition cost; such note
was included in notes receivable in the accompanying consolidated balance sheets
at December 31, 1995. 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 $2,581,000
of its total investment in property improvements and receive additional cash of
approximately $770,000.
42
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
(FORMERLY PRATT HOTEL CORPORATION AND SUBSIDIARIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Pursuant to a management agreement, Pratt Management, L.P. ("PML"), a
limited partnership wholly owned by GBCC, earns a base management fee from
Hollywood Casino - Aurora, Inc. ("HCA"), an HCC subsidiary, 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). Such
fees totaled approximately $9,360,000, $9,432,000 and $10,009,000, respectively,
during the years ended December 31, 1996, 1995 and 1994. Unpaid fees amounting
to $2,096,000 and $2,177,000, respectively, are included in due from affiliates
in the accompanying consolidated balance sheets at December 31, 1996 and 1995.
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 for each of the years ended December 31, 1996, 1995 and 1994 amounted to
$1,200,000.
HCC was obligated under the terms of an administrative services agreement
to pay GBCC $50,000 per month through December 31, 1996. In addition, 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
$2,496,000 and $5,000 for the years ended December 31, 1996 and 1995. Such net
costs and fees charged by GBCC to HCC totaled $315,000 during the year ended
December 31, 1994. In connection with such allocated costs and fees, payables in
the amount of $203,000 and $210,000 are included in due to affiliates in the
accompanying consolidated balance sheets at December 31, 1996 and 1995,
respectively.
HCT and Advanced Casino Systems Corporation ("ACSC"), a GBCC subsidiary,
entered into a Computer Services Agreement dated as of January 1, 1994. The term
of the agreement was three years with an automatic renewal for an additional
three years becoming effective on January 1, 1997. 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 $30,000 a month ($33,600 effective 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 $511,000, $532,000 and
$763,000, respectively, for the years ended December 31, 1996, 1995 and 1994.
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 $229,000, $602,000,
and $288,000, respectively, during the years ended December 31, 1996, 1995 and
1994.
Greate Bay Hotel and Casino, Inc. ("GBHC"), the GBCC subsidiary which owns
and operates the Sands, performs certain administrative and marketing services
on behalf of HCT and HCA. During the years ended December 31, 1996, 1995 and
1994, fees charged by GBHC for such services totaled $1,344,000, $729,000 and
$211,000, respectively.
43
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
(FORMERLY PRATT HOTEL CORPORATION AND SUBSIDIARIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
HCT and HCA are charged for certain legal, accounting, and other expenses
incurred by GBCC that relate to their business. For the years ended December 31,
1996, 1995 and 1994, such charges amounted to $383,000, $423,000 and $257,000,
respectively.
Interest expense with respect to borrowings from HCC is set forth below:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
PPI Funding Notes and PCPI
Notes held by HCC (Note 4) $ 7,295,000 $ 6,666,000 $ 6,121,000
Junior Subordinated Notes (Note 4) 1,277,000 1,278,000 1,914,000
Short-term borrowings (Note 3) 1,050,000 853,000 1,246,000
</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
4). Accretion of interest on the PPI Funding Notes is included in the
outstanding note payable balance at December 31, 1996 and 1995.
Interest accrued on short-term borrowings at December 31, 1996 and 1995,
which amounted to $94,000 and $23,000, respectively, is also included in
interest payable on the accompanying consolidated balance sheets together with
interest on the Junior Subordinated Notes amounting to $476,000 at December 31,
1995.
(8) NEW JERSEY REGULATIONS AND OBLIGATORY INVESTMENTS
Certain of GBCC's wholly owned subsidiaries conduct gaming operations in
Atlantic City, New Jersey and operate a related hotel, several restaurants, and
related support facilities. The operation of an Atlantic City casino/hotel is
subject to significant regulatory control. Under the New Jersey Casino Control
Act (the "Casino Act"), such GBCC subsidiaries were required to obtain and are
required to periodically renew their operating licenses. A casino license is not
transferable and, after the initial licensing and two one-year renewal periods,
is issued for a term of up to four years. However, the Casino Commission still
has the authority to reopen license hearings at any time. During September 1996,
the Casino Commission renewed GBHC's license to operate the Sands and found GBCC
qualified as a holding company of a casino license through September 30, 2000
(subject to review of the Sands' financial stability in 1997) and renewed NJMI's
license to manage the Sands through September 30, 2000. Terms of the current
license require the Sands to comply with periodic financial reporting
requirements as well as obtain prior Casino Commission approval of certain cash
transactions with affiliates. If it were determined that gaming laws were
violated by a licensee, the gaming license held by each licensee could be
conditioned, suspended or revoked. In addition, the licensees and other persons
involved could be subject to substantial fines.
The Casino Act requires casino licensees to make certain approved
investments in New Jersey or to pay an investment alternative tax. Casino
licensees may obtain investment credits, which amount to 1.25% of casino
revenues, by purchasing bonds at below-market interest rates from the Casino
Reinvestment
44
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
(FORMERLY PRATT HOTEL CORPORATION AND SUBSIDIARIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Development Authority (the "CRDA") or by making qualified investments approved
by the CRDA. This governmental agency administers the statutorily mandated
investments made by casino licensees and is required to expend the monies
received by it for eligible projects defined in the statute. The investment
alternative tax amounts to 2.5% of casino revenues. Payments of the investment
obligations must be made quarterly. The Sands has elected to comply with the
requirements by obtaining investment credits or by making qualified investments.
As of December 31, 1996 and 1995, the Sands had purchased bonds totaling
$5,237,000 and $4,630,000, respectively. In addition, the Sands had remaining
funds on deposit and held in escrow by the CRDA at December 31, 1996 and 1995 of
$5,546,000 and $4,683,000, respectively. The bonds purchased and the amounts on
deposit and held in escrow are collectively referred to as "obligatory
investments" in the accompanying consolidated financial statements.
Obligatory investments at December 31, 1996 and 1995 are net of accumulated
valuation allowances of $4,401,000 and $3,792,000, respectively, based upon the
estimated realizable values of the investments. Provisions for valuation
allowances during the years ended December 31, 1996, 1995 and 1994 amounted to
$1,344,000, $1,457,000 and $617,000, respectively.
Through 1996, the Sands has, from time to time, contributed certain amounts
held in escrow to the CRDA. In consideration thereof, the CRDA granted the Sands
waivers of certain of its investment obligations in future periods. The amount
of the obligatory investments contributed during the years ended December 31,
1996, 1995 and 1994 was $1,500,000, $250,000 and $2,500,000, respectively,
resulting in waivers granted by the CRDA during 1995 totaling $128,000. No such
waivers were granted during 1996 or 1994; however, the contributions have been
designated for projects expected to benefit the community and the Sands
facility. Accordingly, intangible assets aggregating $2,040,000 and $1,275,000,
respectively, have been included in other assets on the accompanying
consolidated balance sheets at December 31, 1996 and 1995, and will be amortized
over a period of ten years effective with the completion of the projects.
Amortization of waivers granted totaled $128,000 and $1,727,000, respectively,
during the years ended December 31, 1995 and 1994. At December 31, 1995, all
waivers were fully amortized.
(9) ILLINOIS REGULATORY MATTERS
Riverboat gaming operations in Illinois are subject to regulatory control
by the Illinois Gaming Board. Under the provisions of the Illinois gaming
regulations, PML is required to maintain its supplier's license, which expires
in December 1997. Management intends to file for renewal of PML's supplier's
license and anticipates that such renewal will be approved by the Illinois
Gaming Board during 1997. If it were determined that gaming laws were violated
by a licensee, the license held could be limited, conditioned, suspended or
revoked. In addition, the licensee and other persons involved could be subject
to substantial fines.
45
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
(FORMERLY PRATT HOTEL CORPORATION AND SUBSIDIARIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(10) SUMMARIZED COMBINED FINANCIAL INFORMATION OF AND TRANSACTIONS WITH
UNCONSOLIDATED AFFILIATES
Certain summarized combined financial information of GBCC's unconsolidated
affiliates, which include joint ventures, is presented below.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1996 1995 1994
------------ ------------ ------------
<S> <C> <C>
Net revenues $ 39,314,000 $ 40,005,000 $ 38,897,000
Expenses (41,524,000) (43,144,000) (42,154,000)
------------ ------------ ------------
Net loss $ (2,210,000) $ (3,139,000) $ (3,257,000)
============ ============ ============
DECEMBER 31,
---------------------------
1996 1995
------------ ------------
Current assets $ 4,549,000 $ 5,410,000
============ ============
Noncurrent assets $ 29,104,000 $ 58,011,000
============ ============
Current liabilities $ 5,385,000 $ 7,398,000
============ ============
Noncurrent liabilities $ 38,808,000 $ 77,877,000
============ ============
</TABLE>
Income and losses of GBCC's unconsolidated affiliates have not been
reflected in the accompanying consolidated statements of operations for the
years ended December 31, 1996, 1995 and 1994 as GBCC's investments in such
affiliates were previously eliminated through the recognition of prior years'
losses.
Prior to sale of the property in November 1996, GBCC had an ongoing
commitment to fund its proportionate share of operating cash deficits with
respect to its 50% ownership interest in the Sheraton Plaza located in Orlando,
Florida; GBCC was not required to make any such payments during 1996, 1995 and
1994. GBCC also agreed to contribute up to $3,900,000 as an additional
investment in the Sheraton Plaza hotel partnership to refurbish the hotel
facility. No such commitments were required during 1996; GBCC contributed
$1,675,000 and $660,000 during 1995 and 1994, respectively, toward such
commitment. Such contributions are in recognition of GBCC's partner having
agreed to make $5,000,000 in principal reductions on the underlying mortgage
note on the facility. GBCC was required to pay approximately $2,946,000 to
retire its share of the underlying indebtedness on the property in connection
with the sale.
46
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
(FORMERLY PRATT HOTEL CORPORATION AND SUBSIDIARIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
GBCC earned management and project fees from unconsolidated affiliates for
the management and project supervision of certain hotel facilities. During the
years ended December 31, 1996, 1995 and 1994, such fees amounted to $1,167,000,
$1,139,000 and $977,000, respectively.
During the fourth quarter of 1996, an unconsolidated partnership in which a
GBCC subsidiary holds a 46% interest entered into an agreement for the sale of a
casino/hotel in San Juan, Puerto Rico owned by the partnership and managed by
the GBCC subsidiary. The sale was completed in February 1997 and GBCC received a
fee of $1,475,000 with respect to the termination of its management agreement.
(11) 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.
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 also 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
47
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
(FORMERLY PRATT HOTEL CORPORATION AND SUBSIDIARIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
(12) SUPPLEMENTAL CASH FLOW INFORMATION
At December 31, 1996, HCC contributed certain receivables from GBCC and its
subsidiaries to GBCC. Notes receivable amounting to $8,738,000 together with
accrued interest thereon totaling $1,753,000 (see Note 4) and other receivables
of $4,283,000 with respect to pension obligations assumed during 1995 (see Note
6) were contributed to GBCC.
At December 31, 1994, HCC assigned to GBCC $6,317,000 principal amount of
the Junior Subordinated Notes (see Note 4) together with $1,914,000 of accrued
interest thereon in recognition of the utilization by HCC of a portion of GBCC's
available tax net operating losses to reduce HCC's separate tax liability. The
assignment resulted in the recording of $8,231,000 of additional paid-in capital
on the accompanying consolidated balance sheet at December 31, 1994. This amount
was adjusted by a charge to paid-in capital in the amount of $55,000 during 1995
upon filing the 1994 HCC consolidated federal income tax return.
During 1994, GBCC acquired the underlying indebtedness of the DFW North
Holiday Inn subject to third party indebtedness totaling $2,706,000 (see Note
7).
(13) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value:
CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS - The carrying amounts
approximate fair value because of the short maturity of these instruments.
OBLIGATORY INVESTMENTS - The carrying amount of obligatory investments
approximates its fair value as a result of an allowance reflecting the below
market interest rate associated with such investments.
NOTES RECEIVABLE - The fair value of notes receivable is estimated based on
the discounting of net cash flows at current market rates for notes of similar
remaining maturities and collateral.
INTEREST PAYABLE - The carrying amount of interest payable approximates
fair value because of the short maturity of the obligation.
LONG-TERM DEBT - The fair value of GBCC's long-term debt is estimated based
on either the quoted market prices of the issue or on the discounted cash flow
of future payments utilizing current rates available to GBCC for debt of similar
remaining maturities. Debt obligations with a short remaining maturity and
borrowings from affiliates are valued at the carrying amount.
48
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
(FORMERLY PRATT HOTEL CORPORATION AND SUBSIDIARIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The estimated carrying amounts and fair values of GBCC's financial
instruments are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
---------------------------- ------------------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
Financial Assets
Cash and cash equivalents $ 22,991,000 $ 22,991,000 $ 28,067,000 $ 28,067,000
Short-term investment 2,000,000 2,000,000 - -
Notes receivable - - 9,222,000 9,222,000
Obligatory investments 6,382,000 6,382,000 5,521,000 5,521,000
Financial Liabilities
Interest payable $ 11,673,000 $ 11,673,000 $ 11,856,000 $ 11,856,000
Borrowings from affiliates 7,750,000 7,750,000 6,000,000 6,000,000
10 7/8% First Mortgage Notes 185,000,000 154,475,000 185,000,000 160,950,000
11 5/8% PRT Funding Notes 85,000,000 69,700,000 85,000,000 62,900,000
14 7/8% PPI Funding Notes 54,338,000 54,338,000 47,043,000 47,043,000
14 5/8% Junior Subordinated
Notes - - 8,738,000 8,738,000
Other notes payable 1,686,000 1,590,000 3,342,000 3,194,000
</TABLE>
(14) SUBSEQUENT EVENT
Subject to regulatory approval and effective as of April 1, 1997, HCC will
acquire the general partnership interest in PML (see Note 7) owned by a
subsidiary of GBCC. 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. The GBCC
subsidiary will receive a five-year note in the original amount of $3,800,000
and $7,597,000 principal amount of PPI Funding Notes (see Note 4) from HCC in
exchange for the general partnership interest.
49
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
(FORMERLY PRATT HOTEL CORPORATION AND SUBSIDIARIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(15) SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
QUARTER
---------------------------------------------------------
FIRST SECOND THIRD FOURTH
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
YEAR ENDED
DECEMBER 31, 1996:
Net revenues, as
previously reported $ 68,423,000 $ 75,065,000 $ 76,397,000 $ 63,468,000
Reclassifications 135,000 152,000 - -
------------ ------------ ------------ ------------
Net revenues $ 68,558,000 $ 75,217,000 $ 76,397,000 $ 63,468,000
============ ============ ============ ============
Net loss $ (9,796,000) $ (8,327,000) $ (7,671,000) $ (9,772,000)
============ ============ ============ ============
Net loss per
common share $ (1.89) $ (1.60) $ (1.48) $ (1.89)
============ ============ ============ ============
YEAR ENDED
DECEMBER 31, 1995:
Net revenues, as
previously reported $ 73,221,000 $ 74,757,000 $ 83,344,000 $ 72,471,000
Reclassifications 150,000 150,000 94,000 150,000
------------ ------------ ------------ ------------
Net revenues $ 73,371,000 $ 74,907,000 $ 83,438,000 $ 72,621,000
============ ============ ============ ============
Net (loss) income $ (2,990,000) $ 318,000 $ 2,343,000 $ (3,958,000)
============ ============ ============ ============
Net (loss) income per
common share $ (.58) $ .06 $ .45 $ (.76)
============ ============ ============ ============
</TABLE>
50
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
GBCC had no disagreements with its independent accountants to report under
this item.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information called for by this item is incorporated herein by reference
from GBCC's definitive proxy statement relating to its Annual Meeting of
Shareholders to be held on May 20, 1997 (the "Definitive Proxy Statement"),
filed with the Securities and Exchange Commission under the captions "Election
of Directors" and "Management."
ITEM 11. EXECUTIVE COMPENSATION
The information called for by this item is incorporated herein by reference
from GBCC's Definitive Proxy Statement, under the caption "Remuneration of
Directors and Executive Officers."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information called for by this item is incorporated herein by reference
from GBCC's Definitive Proxy Statement, under the caption "Voting Rights and
Principal Stockholders."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information called for by this item is incorporated herein by reference
from GBCC's Definitive Proxy Statement, under the caption "Transactions with
Management."
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this report:
1. FINANCIAL STATEMENTS
The financial statements filed as part of this report are listed on the
Index to Financial Statements on page 25.
2. FINANCIAL STATEMENT SCHEDULES
-- Report of Independent Public Accountants
-- Schedule I; Condensed Financial Information of Registrant, Greate Bay
Casino Corporation (Parent Company):
-- Balance Sheets
-- Statements of Operations
-- Statements of Cash Flows
-- Note to Parent Company Financial Statements
-- Schedule II; Valuation and Qualifying Accounts
51
<PAGE>
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable and therefore
have been omitted.
3. EXHIBITS
@3.1 -- Certificate of Incorporation of Pratt Hotel Corporation
("PHC", now known as GBCC) as amended. (Exhibit 3.1)
3.2 -- Amendment to Certificate of Incorporation of PHC.
@3.3 -- Amended Bylaws of PHC. (Exhibit 3.2)
+4.1 -- Form of Indenture among PCPI Funding Corp., Pratt Casino
Properties and PHC and First Interstate Bank of Dallas as
Trustee (including form of Security). (Exhibit 10.4)
+4.2 -- First Supplemental Indenture, dated as of February 27,
1989, among PCPI Funding Corp., First Interstate Bank of
Texas, N.A., PHC and Pratt Casino Properties. (Exhibit
10.11)
**4.3 -- Indenture dated as of February 15, 1994 between GB Property
Funding Corp. as Issuer, GB Holdings, Inc. and GBHC as
Guarantors, and Shawmut Bank Connecticut, N.A. as Trustee.
(Exhibit 10.5)
**4.4 -- Mortgage, Fixture Filing and Security Agreement dated
February 17, 1994, by GBHC in favor of Shawmut Bank
Connecticut, National Association, as Mortgagee. (Exhibit
10.51).
**4.5 -- Security Agreement dated February 17, 1994 made by GB
Property Funding Corp., GBHC, GB Holdings, Inc., Advanced
Casino Systems International, Inc. Computerized Management
System International, Inc. and any Additional Collateral
Grantor to Shawmut Bank Connecticut, National Association,
as Trustee. (Exhibit 10.52)
**4.6 -- Collateral Assignment of Leases dated as of February 17,
1994, by GBHC, in favor of Shawmut Bank Connecticut,
National Association, as Assignee. (Exhibit 10.53)
**4.7 -- Indenture dated as of February 15, 1994 between PRT Funding
Corp. as Issuer, Pratt Casino Corporation as Guarantor and
Shawmut Bank, N.A. as Trustee. (Exhibit 10.54)
++9.1 -- Voting Trust Agreement dated as of May 31, 1990 by and
between Crystal A. Pratt and Jack E. Pratt. (Exhibit 9.1)
++9.2 -- Voting Interest Trust Agreement dated as of November 9,
1987 between the partners of J.E. Pratt Co. I and William
D. Pratt. (Exhibit 9.2)
+10.1 -- Management Services Agreement dated August 19, 1987,
between Pratt Hotel Management, Inc. ("PHMI") and GBHC.
(Exhibit 10.1)
+10.2 -- Overhead Allocation Agreement, effective as of January 1,
1988, between PHC and PHMI. (Exhibit 10.2)
+10.3 -- Amended License Agreement by and between Hughes Properties,
Inc. and PHC dated May 19, 1987. (Exhibit 10.3)
+10.4 -- Management Agreement by and between Southmark San Juan,
Inc., owner, and SJPR Inc., operator, dated September 15,
1987, as amended. (Exhibit 10.16)
+10.5 -- Tax Allocation Agreement by and among PHC, PPI Corporation,
Greate Bay Hotel Corporation, Pratt Casino Properties,
Pacsa No. 2, Inc., Pacsa No. 3, Inc., Pratt Hotel Funding,
Inc. and Greate Bay Property Funding Corp., effective as of
January 1, 1987. (Exhibit 10.17)
+10.6 -- Tax Allocation Agreement by and among Pratt Casino
Properties, BPHC Acquisition, Inc., PHMI, Greate Bay Casino
Corporation, PCPI Funding Corp. and GBHC effective as of
January 1, 1987. (Exhibit 10.18)
52
<PAGE>
@@@10.7 -- Fifth Amendment to Employment Agreement dated January 1,
1997, between HCC and Jack E. Pratt. (Exhibit 10.1)
@@@10.8 -- Fifth Amendment to Employment Agreement dated January 1,
1997, between HCC and Edward T. Pratt, Jr. (Exhibit 10.2)
@@@10.9 -- Fifth Amendment to Employment Agreement dated January 1,
1997, between HCC and William D. Pratt. (Exhibit 10.3)
@@@10.10 -- Employment Agreement dated May 1, 1996 by and between HCC
and Edward T. Pratt III. (Exhibit 10.4)
@@10.11 -- Employment Agreement, as amended, dated November 17, 1995
between GBHC and Leonard M. DeAngelo. (Exhibit 10.15)
@@10.12 -- Employment Agreement dated January 1, 1996, between ACSC
and Lawrance C. Cole. (Exhibit 10.16)
10.13 -- Employment Agreement dated December 1, 1995, as amended,
between GBHC and Robert J. DeSalvio.
*10.14 -- Management Services Agreement dated as of June 21, 1991,
between HCA and Greate Bay Casino Corporation (the
"Management Services Agreement"). (Exhibit 10.34)
*10.15 -- First Amendment to the Management Services Agreement dated
as of May 14, 1992. (Exhibit 10.35)
*10.16 -- Technical Services Agreement dated February 21, 1992,
between HCA and PHC (the "Technical Services Agreement").
(Exhibit 10.42)
*10.17 -- First Amendment to the Technical Services Agreement dated
May 14, 1992. (Exhibit 10.43)
**10.18 -- Agreement of Limited Partnership of Pratt Management, L.P.
(Exhibit 10.55)
***10.19 -- Consulting Agreement dated as of January 1, 1994 between
PCC, as the Consultant, and HWCC - Tunica, Inc.
***10.20 -- Computer Services Agreement dated as of January 1, 1994
between Summit Tunica Partnership and Advanced Casino
Systems Corporation.
10.21 -- Consent to sale between Metroplex Limited and PHC dated
November 30, 1995.
21.1 -- Subsidiaries of GBCC.
23.1 -- Consent of Arthur Andersen LLP
27.1 -- Financial Disclosure Schedule
_______________________
@ Incorporated by reference from the exhibit shown in parenthesis
to GBCC's Annual Report on Form 10-K for the fiscal year ended
December 31, 1992.
@@ Incorporated by reference from the exhibit shown in parenthesis
to Hollywood Casino Corporation's Annual Report on Form 10-K for
the fiscal year ended December 31, 1995.
@@@ Incorporated by reference from the exhibit shown in parenthesis
to Hollywood Casino Corporation's Annual Report on Form 10-K for
the fiscal year ended December 31, 1996.
+ Incorporated by reference from the exhibit shown in parenthesis
to Form S-1 Registration Statement (Registration No. 33-58732)
for Hollywood Casino Corporation as filed with the SEC on May 27,
1993.
++ Incorporated by reference from the exhibit shown in parenthesis
filed in GBCC's Annual Report on Form 10-K for the fiscal year
ended December 31, 1990.
53
<PAGE>
* Incorporated by reference from the exhibit shown in parenthesis
to that Registration Statement on Form 10 filed with the SEC on
May 28, 1992 by PRT Corporation (now known as HCC).
** Incorporated by reference from the exhibit shown in parenthesis
to Form S-1 Registration Statement (Registration No. 33-77502)
for Hollywood Casino Corporation as filed with the SEC on April
8, 1994.
*** Incorporated by reference from the exhibit shown in parenthesis
to Form S-1 Registration Statement (Registration No. 33-82182)
for HWCC - Tunica, Inc. as filed with the SEC on September 29,
1994.
(b) REPORTS ON FORM 8-K.
GBCC did not file any reports on Form 8-K during the quarter ended December
31, 1996.
54
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, in the City of Dallas,
State of Texas on March 27, 1997.
GREATE BAY CASINO CORPORATION
By: /s/ Jack E. Pratt
--------------------------------------------
Jack E. Pratt
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant in
the capacities and on the dates indicated:
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Jack E. Pratt Chairman of the Board, March 27, 1997
- ----------------------------- Chief Executive
Jack E. Pratt Officer and Director
/s/ Edward T. Pratt, Jr. Vice Chairman of the March 27, 1997
- ----------------------------- Board, Treasurer and
Edward T. Pratt, Jr. Director
/s/ Edward T. Pratt III President and Chief March 27, 1997
- ----------------------------- Operating Officer
Edward T. Pratt III
/s/ William D. Pratt Executive Vice March 27, 1997
- ----------------------------- President, General
William D. Pratt Counsel, Secretary
and Director
/s/ John C. Hull Corporate Controller March 27, 1997
- -----------------------------
John C. Hull
/s/ Bernard A. Capaldi Director March 27, 1997
- -----------------------------
Bernard A. Capaldi
/s/ Edward D. Muir Director March 27, 1997
- -----------------------------
Edward D. Muir
55
<PAGE>
INDEX TO FINANCIAL STATEMENT SCHEDULES
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
-- Report of Independent Public Accountants
-- Schedule I; Condensed Financial Information of Registrant:
-- Balance Sheets
-- Statements of Operations
-- Statements of Cash Flows
-- Note to Parent Company Financial Statements
-- Schedule II; Valuation and Qualifying Accounts
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
----------------------------------------
To Greate Bay Casino Corporation:
We have audited in accordance with generally accepted auditing standards, the
consolidated financial statements of Greate Bay Casino Corporation and
subsidiaries (formerly Pratt Hotel Corporation) included in this Form 10-K and
have issued our report thereon dated March 21, 1997. Our audit was made for the
purpose of forming an opinion on the basic financial statements taken as a
whole. The schedules listed in the index to financial statement schedules are
the responsibility of the Company's management and are presented for purposes of
complying with the Securities and Exchange Commission's rules and are not part
of the basic financial statements. These schedules have been subjected to the
auditing procedures applied in the audit of the basic financial statements and,
in our opinion, fairly state in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.
ARTHUR ANDERSEN LLP
Roseland, New Jersey
March 21, 1997
<PAGE>
SCHEDULE I
PAGE 1
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
(FORMERLY PRATT HOTEL CORPORATION AND SUBSIDIARIES)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
GREATE BAY CASINO CORPORATION (PARENT COMPANY)
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1996 1995
------------- -----------
<S> <C> <C>
Cash and cash equivalents $ 2,246,000 $ 319,000
Accounts receivable - 108,000
Due from affiliates 4,233,000 1,169,000
Other current assets 13,000 13,000
------------- -----------
Total current assets 6,492,000 1,609,000
------------- -----------
Notes receivable - 9,222,000
Due from affiliate 15,000,000 6,262,000
------------- -----------
$ 21,492,000 $17,093,000
============= ===========
</TABLE>
LIABILITIES AND SHAREHOLDERS' DEFICIT
<TABLE>
<CAPTION>
<S> <C> <C>
Current maturities of long-term debt $ - $ 358,000
Accounts payable and accrued liabilities 460,000 445,000
Due to affiliates 10,252,000 6,530,000
------------- -----------
Total current liabilities 10,712,000 7,333,000
------------- -----------
Long-term debt 34,016,000 36,150,000
------------- -----------
Other noncurrent liabilities 894,000 3,820,000
------------- -----------
Due to affiliates 10,505,000 8,773,000
------------- -----------
Investment in and advances to affiliates 124,572,000 99,432,000
------------- -----------
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 38,557,000 23,783,000
Accumulated deficit (198,283,000) (162,717,000)
------------- -----------
(159,207,000) (138,415,000)
------------- -----------
$ 21,492,000 $17,093,000
============= ===========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of this schedule.
<PAGE>
SCHEDULE I
PAGE 2
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
(FORMERLY PRATT HOTEL CORPORATION AND SUBSIDIARIES)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
GREATE BAY CASINO CORPORATION (PARENT COMPANY)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1996 1995 1994
------------- ------------ ------------
<S> <C> <C> <C>
REVENUES
Overhead allocation fees $ 600,000 $ 600,000 $ 600,000
Other - - 424,000
------------ ----------- -----------
600,000 600,000 1,024,000
------------ ----------- -----------
EXPENSES
General and administrative
expense 415,000 291,000 300,000
------------ ----------- -----------
Income from operations 185,000 309,000 724,000
------------ ----------- -----------
Non-operating income (expense):
Interest income 2,281,000 2,239,000 1,786,000
Interest expense (6,674,000) (6,621,000) (7,584,000)
Loss on sale of assets (625,000) - -
------------ ----------- -----------
Total non-operating expense, net (5,018,000) (4,382,000) (5,798,000)
------------ ----------- -----------
Loss before income tax benefit
and other item (4,833,000) (4,073,000) (5,074,000)
Income tax benefit - - -
------------ ----------- -----------
Loss before other item (4,833,000) (4,073,000) (5,074,000)
Equity in (losses) earnings of
consolidated subsidiaries (30,733,000) (214,000) 578,000
------------ ----------- -----------
Net loss $(35,566,000) $(4,287,000) $(4,496,000)
============ =========== ===========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of this schedule.
<PAGE>
SCHEDULE I
PAGE 3
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
(FORMERLY PRATT HOTEL CORPORATION AND SUBSIDIARIES)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
GREATE BAY CASINO CORPORATION (PARENT COMPANY)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1996 1995 1994
------------ ------------ -------------
<S> <C> <C> <C>
NET CASH (USED IN) PROVIDED BY OPERATING
ACTIVITIES $(1,577,000) $(2,023,000) $ 12,142,000
----------- ----------- ------------
INVESTING ACTIVITIES:
Collections on notes receivable 9,361,000 103,000 7,614,000
Proceeds from disposition of assets 2,581,000 - -
Purchase of mortgage note - - (5,750,000)
Investments in and advances to unconsolidated affiliates (2,946,000) (1,675,000) (660,000)
Investments in consolidated subsidiaries (3,000) - -
Net (advances to) repayments from consolidated affiliates (9,366,000) 1,158,000 (152,000)
----------- ----------- ------------
Net cash (used in) provided by investing activities (373,000) (414,000) 1,052,000
----------- ----------- ------------
FINANCING ACTIVITIES:
Net borrowings from affiliates 6,015,000 2,050,000 5,360,000
Repayments of long-term debt (2,138,000) (317,000) (17,802,000)
Issuance of common stock - - 27,000
----------- ----------- ------------
Net cash provided by (used in) financing activities 3,877,000 1,733,000 (12,415,000)
----------- ----------- ------------
Net increase (decrease) in cash and cash equivalents 1,927,000 (704,000) 779,000
Cash and cash equivalents at beginning of year 319,000 1,023,000 244,000
----------- ----------- ------------
Cash and cash equivalents at end of year $ 2,246,000 $ 319,000 $ 1,023,000
=========== =========== ============
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of this schedule.
<PAGE>
SCHEDULE I
PAGE 4
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
(FORMERLY PRATT HOTEL CORPORATION AND SUBSIDIARIES)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
GREATE BAY CASINO CORPORATION (PARENT COMPANY)
NOTE TO PARENT COMPANY FINANCIAL STATEMENTS
(1) SCHEDULED PAYMENT OF LONG-TERM DEBT
All of Greate Bay Casino Corporation's ("GBCC") long-term debt is due in
April 1998.
GBCC paid interest of $6,476,000, $6,635,000 and $39,255,000, respectively,
during the years ended December 31, 1996, 1995 and 1994.
The accompanying notes to consolidated financial statements
are an integral part of this schedule.
<PAGE>
SCHEDULE II
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
(FORMERLY PRATT HOTEL CORPORATION AND SUBSIDIARIES)
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
AMOUNTS
BALANCE AT CHARGED TO BALANCE
BEGINNING COSTS AND AT END
OF PERIOD EXPENSES DEDUCTIONS OF PERIOD
----------- ----------- ------------------- -----------
<S> <C> <C> <C> <C>
DESCRIPTION
- -----------
YEAR ENDED DECEMBER 31, 1996:
Allowance for doubtful
accounts receivable $16,496,000 $2,167,000 $ (3,139,000) (1) $15,524,000
Allowance for obligatory
investments 3,792,000 1,344,000 (735,000) (2) 4,401,000
----------- ---------- --------------- -----------
$20,288,000 $3,511,000 $ (3,874,000) $19,925,000
=========== ========== =============== ===========
YEAR ENDED DECEMBER 31, 1995:
Allowance for doubtful
accounts receivable $15,297,000 $2,988,000 $ (1,789,000) (1) $16,496,000
Allowance for obligatory
investments 2,458,000 1,457,000 (123,000) (2) 3,792,000
----------- ---------- --------------- -----------
$17,755,000 $4,445,000 $ (1,912,000) $20,288,000
=========== ========== =============== ===========
YEAR ENDED DECEMBER 31, 1994:
Allowance for doubtful
accounts receivable $14,814,000 $3,283,000 $ (2,800,000) (1) $15,297,000
Allowance for obligatory
investments 3,065,000 617,000 (1,224,000) (2) 2,458,000
----------- ---------- --------------- -----------
$17,879,000 $3,900,000 $ (4,024,000) $17,755,000
=========== ========== =============== ===========
</TABLE>
______________________________
(1) Represents net write-offs of uncollectible accounts.
(2) Represents write-offs of obligatory investments in connection with the
contribution of certain obligatory investments to the Casino Reinvestment
Development Authority.
The accompanying notes to consolidated financial statements
are an integral part of this schedule.
<PAGE>
EXHIBIT 3.2
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
PRATT HOTEL CORPORATION
Pursuant to Section 242 of the Delaware General Corporation Law (the "DGCL"),
Pratt Hotel Corporation, a Delaware corporation (the "Corporation"), for
purposes of amending its Certificate of Incorporation, DOES HEREBY CERTIFY AS
FOLLOWS:
FIRST, that the Corporation's Certificate of Incorporation is amended by
deleting in its entirety existing ARTICLE FIRST and inserting in lieu thereof a
new ARTICLE FIRST, reading as follows:
"FIRST: The name of the Corporation is GREATE BAY CASINO CORPORATION."
SECOND, that this Certificate of Amendment of the Corporation's Certificate of
Incorporation has been duly adopted by the Board of Directors of the Corporation
in accordance with the provisions of Section 242 of the DGCL and has been
approved by the written consent of the holders of a majority of the
Corporation's outstanding common stock, par value $0.10 (the "Common Stock"), in
accordance with the provisions of Section 228 of the DGCL, and written notice of
such approval of this Certificate of Amendment of the Corporation's Certificate
of Incorporation has been given in accordance with the provisions of Section 228
of the DGCL to those holders of Common Stock who have not so approved this
Certificate of Amendment.
IN WITNESS WHEREOF, the Corporation has caused this Certificate of Amendment
to be signed by William D. Pratt, its Executive Vice President, General Counsel
and Secretary, to be effective as of the 31st day of December, 1996.
PRATT HOTEL CORPORATION
(to be renamed herewith
GREATE BAY CASINO CORPORATION)
By: /s/ William D. Pratt
-------------------------------
William D. Pratt
Executive Vice President, General
Counsel and Secretary
<PAGE>
EXHIBIT 10.13
--------------------
EMPLOYMENT AGREEMENT
--------------------
THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered into as of the
first (1st) day of December, 1995, by and between GREATE BAY HOTEL AND CASINO,
INC. ("Employer") and ROBERT J. DESALVIO ("Employee").
W I T N E S S E T H:
-------------------
WHEREAS, Employer is a corporation duly organized and existing under the
laws of the State of New Jersey, maintains its principal place of business at
Indiana Avenue & Brighton Park, Atlantic City, New Jersey 08401, and is engaged
in the business of owning and operating a casino/hotel complex in Atlantic City,
New Jersey; and,
WHEREAS, in furtherance of its business, Employer has need of qualified,
and experienced personnel; and,
WHEREAS, Employee is an adult individual presently residing at 14 Fischer
Road, Linwood, New Jersey 08221; and,
WHEREAS, Employee has represented and warranted to Employer that Employee
possesses sufficient qualifications and expertise in order to fulfill the terms
of employment stated in this Agreement; and,
<PAGE>
WHEREAS, Employer is willing to employ Employee, and Employee is desirous
of accepting employment from Employer under the terms and pursuant to the
conditions set forth herein; and
NOW, THEREFORE, for and in consideration of the foregoing recitals, and in
consideration of the mutual agreements, understandings, undertakings,
representations, warranties and promises hereinafter set forth, and intending to
be legally bound thereby, Employer and Employee do hereby agree as follows:
1. DEFINITIONS. As used in this Agreement, the words and terms
-----------
hereinafter defined have the respective meanings ascribed to them herein, unless
a different meaning clearly appears from the context:
(a) "Cause" - means
-----
(i) the conviction of Employee of a felony by a court of competent
jurisdiction,
(ii) the indictment of Employee by a state or federal grand jury of
competent jurisdiction for embezzlement or misappropriation of
Employer's funds or for any act of dishonesty or lack of fidelity
towards Employer,
(iii) a decree of a court of competent jurisdiction that Employee is
not mentally competent or is unable to handle his own affairs;
(iv) the written confession by Employee of any act of dishonesty
towards Employer or any embezzlement or misappropriation of Employer's
funds,
(v) the payment (or, by the operation solely of the effect of a
deductible, the failure of payment) by a surety or insurer of a claim
under a fidelity bond issued to the benefit of Employer reimbursing
Employer for a loss due to the wrongful act or wrongful omission to
act of Employee (the occurrence of which shall cause Employee to be
indebted to Employer for the greater of either (A) the
-2-
<PAGE>
loss incurred by Employer or (B) the sums paid by Employer to Employee
pursuant to this Agreement),
(vi) Employee's breach of the restrictive covenant set forth in
Paragraph 11 of this Agreement, or
(vii) Employee's failure to maintain in force and in good standing any
and all licenses, permits and/or approvals required of Employee by any
relevant governmental authorities for the discharge of Employee's
obligations under this Agreement, provided, however, that Employee's
-----------------
disability due to illness or accident or any other mental or physical
incapacity shall not constitute "Cause" as defined herein.
(b) "Complete Disability" - means the inability of Employee, due to
-------------------
illness or accident or other mental or physical incapacity, to perform
his obligations under this Agreement for a period of one hundred
eighty (180) calendar days in the aggregate over a period of five
hundred (500) consecutive calendar days, such "Complete Disability" to
become effective upon the expiration of such one hundred eightieth
(180th) day.
(c) "Effective Date" - means the date first above written.
--------------
(d) "Employee" - means Employee, as earlier defined in this Agreement.
--------
(e) "Employer" - means Employer, as earlier defined in this Agreement.
--------
(f) "Employer's Affiliates" - means any parent, subsidiary or
---------------------
affiliated corporation or other legal entity of Employer.
(g) "Prior Relationship" - means any prior employment, consulting or
------------------
other relationship Employee may have had with either Employer or
Employer's Affiliates.
2. PRIOR RELATIONSHIP. This Agreement supersedes and replaces any and
------------------
all prior agreements, whether written or oral, by and between Employee, on the
one side, and Employer or
-3-
<PAGE>
Employer's Affiliates, on the other side. From and after the Effective Date,
Employee shall provide exclusive services to Employer under the terms and
pursuant to the conditions set forth in this Agreement.
3. BASIC EMPLOYMENT AGREEMENT. Subject to the terms and pursuant to the
--------------------------
conditions hereinafter set forth, Employer hereby employs Employee during the
Term of this Agreement (as hereinafter defined) to serve in a managerial or
executive capacity, under a title, subject to the Employee's election by the
Board of Directors of Employer, and with such duties not inconsistent with those
set forth in Paragraph 4 of this Agreement, as the same may be modified and/or
assigned to Employee by Employer from time to time. Notwithstanding the
foregoing, Employer and Employee hereby agree that, in the absence of mutual
consent of both Employer and Employee, Employee shall not be assigned duties by
Employer which would require that Employee maintain his principal place of
residence or primary place of employment outside the greater metropolitan area
of Atlantic City, New Jersey.
4. DUTIES OF EMPLOYEE. Employee shall perform such duties assigned to
------------------
Employee by Employer as are generally associated with the duties of Executive
Vice President Marketing, including, but not limited to (i) the efficient and
continuous operation of Employer, (ii) the preparation of relevant budgets and
allocation of relevant funds, (iii) the selection and delegation of duties of
subordinates, (iv) the direction, review and oversight of all programs under
Employee's supervision, and (v) such other and
-4-
<PAGE>
further duties specifically related to such duties as assigned by Employer to
Employee. The foregoing notwithstanding, Employee shall devote such time to
Employer's Affiliates as required by Employer, provided such duties are not
inconsistent with Employee's primary duties to Employer hereunder.
5. ACCEPTANCE OF EMPLOYMENT. Employee hereby unconditionally accepts the
------------------------
employment set forth hereunder under the terms and pursuant to the conditions
set forth in this Agreement. Employee hereby covenants and agrees that, during
the Term of this Agreement, Employee will devote the whole of his working time
and best efforts solely to the performance of Employee's duties under this
Agreement.
6. TERM. The Term of this Agreement shall commence as of the Effective
----
Date of this Agreement and shall expire on November 30, 1998, unless sooner
terminated as provided in this Agreement. The Initial Term of this Agreement
shall be automatically extended for additional terms of one (1) year ("Renewal
Term") commencing as of the expiration of the Initial Term or the Renewal Term,
as the case may be, unless either (i) sooner terminated as provided in this
Agreement or (ii) terminated by Employee upon prior written notice to Employer
at least ninety (90) days prior to the expiration of the then current Term, or
(iii) terminated by Employer upon prior written notice to Employee at least
ninety (90) days prior to the expiration of the then current Term. For purpose
of this Agreement, both the Initial Term and the Renewal Term(s), if any, shall
be deemed the "Term" of this Agreement.
-5-
<PAGE>
7. SPECIAL TERMINATION PROVISIONS. Notwithstanding the provisions of
------------------------------
Paragraph 6 of this Agreement, this Agreement shall terminate upon the
occurrence of any of the following events:
(a) the death of Employee;
(b) the giving of written notice from Employer to Employee of the
termination of this Agreement upon the Complete Disability of
Employee;
(c) the giving of written notice by Employer to Employee of the
termination of this Agreement upon the discharge of Employee for
Cause;
(d) the giving of written notice by Employee to Employer upon a
material breach of this Agreement by Employer, which material breach
remains uncured for a period of thirty (30) days after the giving of
such notice;
(e) the giving of written notice by Employer to Employee upon a
material breach of this Agreement by Employee, which material breach,
if curable, remains uncured for ten (10) days after the giving of such
notice (For purposes of this subparagraph, "material breach" shall
mean an act or omission, not specified in the definition of "Cause"
set forth in Paragraph 1(a) above, the occurrence of which would lead
a reasonably prudent employer to terminate the employment of the
offending party, were the offending party to possess a comparable
position, service record and experience as Employee); and/or
(f) the giving of written notice by Employer to Employee of the
termination of this Agreement without Cause, provided that
compensation shall continue as specified in Paragraph 8(d) below.
8. COMPENSATION TO EMPLOYEE. For and in complete consideration of
------------------------
Employee's full and faithful performance of his duties under this Agreement,
Employer hereby covenants and agrees
-6-
<PAGE>
to pay to Employee, and Employee hereby covenants and agrees to accept from
Employer, the following items of compensation:
(a) Base Compensation. A Base Salary of Three Hundred Twenty Five
-----------------
Thousand Dollars ($325,000.00) per annum, payable in such installments as shall
be convenient to Employer ("the Base Salary"). Such Base Salary shall be
subject to adjustment as provided in Paragraph 8(b) below. Such Base Salary
shall be exclusive of and in addition to any other benefits which Employer, in
it sole discretion, may make available to Employee.
(b) Base Salary Adjustment. The Base Salary, shall be subject to
----------------------
annual reviews by Employer, commencing as of the first anniversary date of the
Effective Date of this Agreement, and on the basis of such reviews, may be
increased, but not decreased, by Employer in Employer's sole discretion.
(c) Employee Benefit Plans. Employer hereby covenants and agrees that
----------------------
it shall include Employee, if otherwise eligible, in any company life insurance
and long term disability plans ("Life and Disability Plans"), and shall include
Employee and Employee's immediate family, if otherwise eligible, in any vision,
dental, medical and hospitalization plans (collectively "Medical Plans") and
shall include Employee in any retirement savings plans or other such plans
("Retirement Plans") upon such terms and pursuant to such conditions as Employer
provides Life and Disability Plans, Medical Plans, and Retirement Plans to its
remaining employees.
(d) Termination Pursuant to Paragraph 7(f). If the employment of
--------------------------------------
Employee is terminated pursuant to Paragraph 7(f)
-7-
<PAGE>
above, Employee shall be entitled to receive all Base Salary, as adjusted, until
the expiration of the Term of this Agreement, as and when Employee would have
received such amounts ("the Paragraph 8(d) Amounts") if this Agreement had not
been terminated pursuant to Paragraph 7(f).
(e) Transportation Allowance. Employer shall furnish to Employee a
------------------------
transportation allowance in the amount of One Thousand Two Hundred Dollars
($1,200.00) per month during the Term of this Agreement, so as to cover
Employee's automobile transportation expenses incurred in performing Employee's
duties under this Agreement.
(f) Expense Reimbursement. During the term of this Agreement,
---------------------
Employer shall either pay directly or reimburse Employee for Employee's
reasonable expenses incurred for the benefit of Employer in accordance with
Employer's general policy regarding reimbursement, as the same may be amended,
modified or changed from time to time by Employer in Employer's sole and
exclusive discretion. Such reimbursable expenses shall include, but are not
limited to, reasonable entertainment and promotional expenses, travel expenses,
dues and expenses of membership in clubs, professional societies and fraternal
organizations, and the like. Prior to reimbursement, Employee shall provide
Employer with sufficient detailed invoices of such expenses in accordance with
the then applicable guidelines of the Internal Revenue Service so as to permit
Employer to claim a deduction for such expenses.
-8-
<PAGE>
(g) Licensing Expenses. Employer hereby covenants and agrees that
------------------
Employer shall pay all licensing fees and expenses, but not including attorney's
fees and expenses, incurred by Employee in securing and maintaining such
licenses and permits required of Employee in order to perform his duties under
this Agreement.
(h) Annual and sick leave and holidays. Employee shall be entitled to
----------------------------------
accrue, earn and take such annual and sick leave and to take such days as paid
holidays as are consistent with Employer's standard policy for Employer's
remaining employees of like tenure except that Employer may require Employee to
take alternative days as holidays.
(i) Sign-on Bonus. As a further inducement to enter into this
-------------
Agreement, Employer promises to pay Employee a bonus in the amount of Fifty
Thousand Dollars ($50,000.00) on the next regular payday following the complete
execution of this Agreement.
9. LICENSING REQUIREMENTS.
----------------------
(a) Employer and Employee hereby covenant and agree that this Agreement may
be subject to the approval of the New Jersey Casino Control Commission ("the
Commission") pursuant to the provisions of the New Jersey Casino Control Act
("the Act") and the regulations promulgated thereunder ("the Regulations"). In
the event this Agreement is required to be so approved by the Commission and is
not so approved by the Commission, this Agreement shall immediately terminate
and shall be null and void and of no further force or effect. However, in the
event of any
-9-
<PAGE>
such disapproval, Employer and Employee hereby agree that, with the exception of
the provisions of Paragraph 8 of this Agreement, this Agreement shall be deemed
modified and amended so as to receive the appropriate approval from the
Commission.
(b) Employer and Employee hereby agree that, in order for Employee to
discharge the duties required under this Agreement, Employee must continue to
hold a casino key employee license ("the License") as issued by the Commission
pursuant to the terms of the Act. In the event that the New Jersey Division of
Gaming Enforcement ("the Division") objects to the renewal of Employee's License
or the Commission refuses to renew the Employee's License, Employee, at
Employee's sole cost and expense, shall promptly defend such action and shall
take such reasonable steps as may be required to remove the Division's
objections or to secure the Commission's approval.
(c) Employer and Employee hereby agree that the provisions of this
Paragraph 9 shall apply with equal force in the event Employee's duties require
that Employee also be licensed by such relevant governmental agencies other than
the Commission.
10. CONFIDENTIALITY. Employee hereby warrants, covenants and agrees that,
---------------
without the prior express written approval of Employer, which approval may be
unreasonably withheld or unduly delayed, Employee shall hold in the strictest
confidence, and shall not disclose to any person, firm, corporation or other
entity, any and all of Employer's confidential data, including but not limited
to (i) information or other documents concerning Employer or Employer's
Affiliates' business, customers or
-10-
<PAGE>
suppliers, (ii) Employer's marketing methods, files, and credit and collection
techniques and files, or (iii) Employer's trade secrets and other "know-how" or
information not of a public nature, regardless of how such information came to
the custody of Employee. The warranty, covenant and agreement set forth in this
Paragraph 10 shall not expire, shall survive this Agreement and shall be binding
upon Employee without regard to the passage of time or other events.
11. RESTRICTIVE COVENANT. Employee hereby covenants and agrees that,
--------------------
during the Term of this Agreement (or until November 30, 1998, if Employer
terminates Employee pursuant to Paragraph 7(f) above and is paying to Employee
the Paragraph 8(d) Amounts), Employee shall not directly or indirectly, either
as a principal, agent, employee, employer, consultant, partner, shareholder of a
closely held corporation or shareholder in excess of five (5%) per cent of a
publicly traded corporation, corporate officer or director, or in any other
individual or representative capacity, engage or otherwise participate in any
manner or fashion in any business that is in competition in any manner
whatsoever with the principal business activity of Employer or Employer's
Affiliates within a one hundred fifty (150) mile radius of any point on the city
limits of Atlantic City, New Jersey, Aurora, Illinois, or Tunica, Mississippi.
Employee further covenants and agrees that this restrictive covenant is
reasonable as to duration, terms and geographical area and that the same
protects the legitimate interests of Employer, imposes no undue hardship on
Employee, is not injurious to the public, and that any violation of this
-11-
<PAGE>
restrictive covenant shall be specifically enforceable in any court of competent
jurisdiction upon short notice.
12. BEST EVIDENCE. This Agreement shall be executed in original and
-------------
"Xerox" or photostatic copies and each copy bearing original signatures in ink
shall be deemed an original.
13. SUCCESSION. This Agreement shall be binding upon and inure to the
----------
benefit of Employer and its successors and assigns.
14. ASSIGNMENT. Employee has no right to assign this Agreement or
----------
delegate his duties hereunder. Any purported assignment or delegation of duties
by Employee in violation of this Paragraph 14 shall be null and void and of no
force or effect. Employer shall have the right to assign this Agreement freely;
provided, however, that, in the event of such an assignment by Employer and the
assignee subsequently defaults under the terms of this Agreement, Employer shall
remain liable for compliance with the terms of Paragraph 8(a) of this Agreement.
15. AMENDMENT OR MODIFICATION. This Agreement may not be amended,
-------------------------
modified, changed or altered except by a writing signed by both Employer and
Employee.
16. GOVERNING LAW. This Agreement shall be governed by and construed in
-------------
accordance with the laws of the State of New Jersey in effect on the Effective
Date of this Agreement.
-12-
<PAGE>
17. NOTICES. Any and all notices required under this Agreement shall be
-------
in writing and shall be either hand-delivered, mailed, certified mail, return
receipt requested, or sent via telecopier addressed to:
TO EMPLOYER: President
----------- Greate Bay Hotel and Casino, Inc.
Indiana Ave. & Brighton Park
Atlantic City, NJ 08401
Telecopier No. 609-441-4624
WITH COPY TO: Corporate Counsel
------------ Greate Bay Hotel and Casino, Inc.
Indiana Ave. & Brighton Park
Atlantic City, NJ 08401
Telecopier No. 609-441-4937
TO EMPLOYEE: Robert J. DeSalvio
----------- 14 Fischer Road
Linwood, New Jersey 08221
All notices hand-delivered shall be deemed delivered as of the date actually
delivered. All notices mailed shall be deemed delivered as of three (3)
business days after the date postmarked. All notices sent via telecopier shall
be deemed delivered as of the next business day following the date of the
electronic confirmation of delivery. Any changes in any of the addresses listed
herein shall be made by notice as provided in this Paragraph 17.
18. INTERPRETATION. The preamble recitals to this Agreement are
--------------
incorporated into and made a part of this Agreement; titles of paragraphs are
for convenience only and are not to be considered a part of this Agreement.
19. SEVERABILITY. In the event any one or more provisions of this
------------
Agreement is declared judicially void or otherwise unenforceable, the remainder
of this Agreement shall survive and
-13-
<PAGE>
such provision(s) shall be deemed modified or amended so as to fulfill the
intent of the parties hereto.
20. DISPUTE RESOLUTION. Any action by Employee against Employer may be
------------------
brought only in the Superior Court of New Jersey - Atlantic County. Any action
brought by Employer against Employee may be brought in any Court having
jurisdiction over Employee including, but not limited to, the Superior Court of
New Jersey - Atlantic County.
21. WAIVER. None of the terms of this Agreement, including this Paragraph
------
21, or any term, right or remedy hereunder shall be deemed waived unless such
waiver is in writing and signed by the party to be charged therewith and in no
event by reason of any failure to assert or delay in asserting any such term,
right or remedy or similar term, right or remedy hereunder.
22. PAROL. This Agreement constitutes the entire agreement between
-----
Employer and Employee with respect to the subject matter hereto and this
Agreement supersedes any prior understandings, agreements or undertakings by and
between Employer and Employee with respect to the subject matter hereof.
-14-
<PAGE>
IN WITNESS WHEREOF AND INTENDING TO BE LEGALLY BOUND THEREBY, the parties
hereto have executed and delivered this Agreement as of the year and date first
above written.
ATTEST: GREATE BAY HOTEL AND CASINO, INC.
/s/ Frederick H. Kraus BY: /s/ Leonard M. DeAngelo
- ---------------------- -------------------------
Frederick H. Kraus Leonard M. DeAngelo
Secretary President
WITNESS: EMPLOYEE
/s/ Robert J. DeSalvio
- ---------------------- -------------------------
ROBERT J. DESALVIO
-15-
<PAGE>
December 1, 1995
Robert J. DeSalvio
14 Fischer Road
Linwood, New Jersey 08221
RE: EMPLOYMENT AGREEMENT BETWEEN GREATE BAY HOTEL AND CASINO, INC. AND ROBERT
DESALVIO DATED DECEMBER 1, 1995 ("THE AGREEMENT")
Dear Bob:
This letter will supplement the terms of the Agreement that we have executed
effective this date. For the purpose of applying the integration clause of
Paragraph 22 of the Agreement, this letter shall be deemed an amendment to the
Agreement and will not be barred by the terms of Paragraph 22 of the Agreement
even though this letter is intended to act as a further inducement to cause you
to sign the Agreement.
As I advised you, Hollywood Casino Corporation ("HCC") and its subsidiaries
(collectively "the Company") are currently preparing qualified employee stock
option plans for participation by senior members of the management of the
Company ("the Stock Option Plan") as well as annual cash incentive compensation
plans for operating and corporate members of management of the Company ("the
Incentive Compensation Plan").
The Stock Option Plan is designed to reward management by creating long term
value for management. The Incentive Compensation Plan is designed to reward
management for achieving realistic one year targets.
As Executive Vice President for Marketing of the Sands, you are a key member
of management of the Company and as such will be included in the Stock Option
Plan and the Incentive Compensation Plan at a level commensurate with other
senior management participants.
<PAGE>
Robert J. Desalvio
Page Two
December 1,1995
- ------------------
We, of course, cannot precisely quantify the economic value of your
participation in Incentive Compensation Plan as of this date. However, we
anticipate that the maximum achievable under the Incentive Compensation Plan
would be an amount equal to 50% of the sum of your Base Salary and the Base
Salary increases during the Term of the Agreement. The Incentive Compensation
Plan will be subject to the approval of the Casino Control Commission.
With respect to the Stock Option Plan, the Stock Option Plan must be
formally adopted by the Board of Directors and its Compensation Committee, and,
if necessary, the shareholders of HCC. We expect that the Stock Option Plan will
be subject to the administration of the Board of Directors of HCC and its
Compensation Committee. We expect that the Stock Option Plan will be subject to
all applicable laws (including, without limitation, the gaming laws of the State
of New Jersey, Illinois, Mississippi, and any other jurisdiction where the
Company is or may be operating a casino in the future and any of the regulatory
bodies of such states.) We expect that the rights of each participant in the
Stock Option Plan will vest over a five year period (one-fifth each year). We
also expect that the Stock Option Plan will provide, in the event that
employment is terminated without cause, that your right will continue to vest
throughout the term of the Second Amendment. Likewise, we expect that the Stock
Option Plan will provide that, in the event of a termination for cause or a
material breach as described in the Agreement, you will forfeit all unvested
rights. Similarly, we expect that the Stock Option Plan will provide that the
benefits are not assignable and you will have no shareholder rights except upon
any exercise under the Stock Option Plan and, then, only as provided to other
shareholders. Finally, we anticipate that you would be offered stock options in
the range from 40,000 to 60,000 shares of HCC Common Stock .
<PAGE>
Robert J. DeSalvio
Page Three
December 1, 1995
- ------------------
If this letter accurately sets forth your understanding of the supplemental
understandings related to the Agreement, please indicate your agreement by
signing one of the two copies of this letter.
Very truly yours,
/s/ Edward T. Pratt, III
Edward T. Pratt, III
An Authorized Agent
ACCEPTED AND AGREED
/s/ Robert J. DeSalvio
- ----------------------
Robert J. DeSalvio
<PAGE>
EXHIBIT 10.21
CONSENT TO SALE
This Agreement is entered into as of November 30, 1995 between
-----------------
Metroplex Hotel Limited ("METROPLEX") and Pratt Hotel Corporation ("PHC").
RECITALS
1. Pursuant to a Loan Purchase and Sale Agreement dated as of December 20,
1993, PHC purchased and became the owner and holder of (i) that certain Renewal
Real Estate Lien Note (the "FIRST NOTE") in the stated principal amount of
$12,892,757.52, dated as of May 31, 1992, executed by Metroplex and payable to
the order of Resolution Trust Corporation, as Receiver for Southwest Federal
Savings (the "RTC"), as amended and extended by that certain FIRST MODIFICATION
AGREEMENT (herein so called) dated as of May 31, 1994, by and between PHC and
Metroplex, and that certain SECOND MODIFICATION AGREEMENT (herein so called)
dated as of May 31, 1995, by and between PHC and Metroplex and (ii) that certain
Real Estate Lien Note in the original principal amount of $1,000,000.00 (the
"SECOND NOTE") dated as of May 31, 1992, executed by Metroplex and payable to
the order of the RTC, as amended and extended by the First Modification
Agreement and as amended and extended by the Second Modification Agreement (the
First Note and Second Note being collectively referred to herein as the
"NOTES").
2. The Notes are secured by junior liens and security interests (the "PHC
LIENS") encumbering the Holiday Inn located at the North Entrance of the
Dallas/Fort Worth International Airport and related premises (the hotel and all
real and personal property related thereto being collectively the "PROPERTY").
3. PHC purchased the Notes to, among other things, correct certain
ambiguities in the related loan documents, eliminate certain potential
liabilities regarding PHC's payment of the Notes pursuant to the terms of the
operating agreement for the Property, and increase net cash flows from the
Property.
4. The Board of Directors of PHC has made a strategic decision to withdraw
from the hotel business and devote management time and resources to more
profitable operations.
5. Under the Joint Operating Agreement (the "MANAGEMENT AGREEMENT") dated as
of May 31, 1992 between PHC and Metroplex, PHC is obligated to operate the
Property until May 31, 2002, unless earlier terminated as provided in the
Management Agreement. For the reasons described in Recital 4, PHC desires to
terminate the Management Agreement and has requested Metroplex to sell the
Property on terms that, among other things, would allow PHC to recover its costs
in acquiring the Notes.
6. Metroplex will agree to sell the Property if its partners can be
reimbursed for their tax liabilities caused by the sale.
AGREEMENT
Based on the Recitals set forth above and the other terms and conditions set
forth below, the parties agree as follows:
1. Consent. Subject to the terms and conditions set forth below, PHC hereby
-------
consents to Metroplex's engaging in customary marketing activities to sell the
Property, and in connection with any such sale, the parties hereto hereby agree
that the proceeds from the sale of the Property, or any portion thereof, net of
normal and customary closing costs reasonably acceptable to PHC, shall be
applied in the following manner and order of priority:
<PAGE>
a. First, to payment in full of the indebtedness secured by liens
encumbering the Property senior in priority to the PHC Liens;
b. Second, to PHC in an amount equal to $6,750,000.00 plus all accrued and
unpaid interest on the Notes through the date of the closing of the sale
of the Property;
c. Third, to PHC in an amount necessary to reimburse PHC for funding
improvements to the Property from April, 1995 to the date the Property is
sold;
d. Fourth, to Metroplex in an amount equal to the total tax liability
incurred by the partners of Metroplex in connection with the sale of the
Property;
e. Fifth, to Metroplex in the amount of $1,500,000.00; and
f. Sixth, the balance, if any, to PHC to the extent permitted by usury laws;
any amounts not paid to PHC because of usury laws shall be paid to
Metroplex.
2. No Waiver. Nothing contained herein shall constitute, nor shall be deemed
---------
to be, a waiver of any event of default or waiver of any rights or remedies of
PHC in connection with payment of the Notes.
3. Releases. PHC acknowledges and agrees that it will, at the closing of the
--------
sale of the Property (the "Closing"), execute such documentation as may be
appropriate and necessary to release the PHC Liens provided that the net sales
proceeds of the Property equal or exceed $9,450,000.00. Metroplex agrees that,
at the Closing, it will execute such documentation as may be appropriate and
necessary to release PHC from any unfunded obligation it may have under the
Management Agreement for capital expenditures.
4. Termination of Management Agreement. At the Closing, PHC and Metroplex
-----------------------------------
agree that they will execute such documentation as may be appropriate and
necessary to terminate the Management Agreement.
5. Good Faith. Metroplex agrees and acknowledges that based upon the
----------
representation set forth herein, Metroplex shall exercise a good faith effort
to market and sell the Property for the minimum purchase price established
herein.
6. Choice of Law. This Agreement shall be governed by and construed in
-------------
accordance with the laws of the State of Texas.
<PAGE>
7. Successors: Binding Agreement. This Agreement shall be binding upon and
-----------------------------
shall inure to the benefit of the parties hereto and their respective successors
and assigns, including, without limitation, any successor to all or
substantially all of the business and/or assets of a party hereto.
PRATT HOTEL CORPORATION
By: /s/ Charles F. LaFrano III
---------------------------------
Charles F. LaFrano III,
Vice President
METROPLEX HOTEL LIMITED
By: /s/ Jack E. Pratt
---------------------------------
Jack E. Pratt,
General Partner
By: /s/ Edward T. Pratt, Jr.
---------------------------------
Edward T. Pratt, Jr.,
General Partner
By: /s/ William D. Pratt
---------------------------------
William D. Pratt,
General Partner
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF GREATE BAY CASINO CORPORATION
STATE
NAME ADDRESS ORGANIZED
<TABLE>
<CAPTION>
<S> <C> <C>
PPI Corporation 13455 Noel Road New Jersey
Suite 2200, LB48
Dallas, TX 75240
PPI Funding Corp. 13455 Noel Road Delaware
Suite 2200, LB48
Dallas, TX 75240
Pratt Casino Corporation 13455 Noel Road Delaware
Suite 2200, LB48
Dallas, TX 75240
PCPI Funding Corp. 13455 Noel Road Delaware
Suite 2200, LB48
Dallas, TX 75240
GB Holdings, Inc. 13455 Noel Road Delaware
Suite 2200, LB48
Dallas, TX 75240
Greate Bay Hotel and Casino, Inc. 136 S. Kentucky Avenue New Jersey
Atlantic City, NJ 08401
GB Property Funding Corp. 13455 Noel Road New Jersey
Suite 2200, LB48
Dallas, TX 75240
Pratt-Hollywood, Inc. 13455 Noel Road Delaware
Suite 2200, LB48
Dallas, TX 75240
BPHC Acquisition, Inc. 136 S. Kentucky Avenue New Jersey
Atlantic City, NJ 08401
Advanced Casino Systems 13455 Noel Road Delaware
Corporation Suite 2200, LB48
Dallas, TX 75240
BPHC Parking Corp. 136 S. Kentucky Avenue New Jersey
Atlantic City, NJ 08401
Pratt Hotel Management 13455 Noel Road Texas
Corporation Suite 2200, LB48
Dallas, TX 75240
</TABLE>
<PAGE>
SUBSIDIARIES OF GREATE BAY CASINO CORPORATION
STATE
NAME ADDRESS ORGANIZED
<TABLE>
<CAPTION>
<S> <C> <C>
Pratt Hotel Funding, Inc. 13455 Noel Road Delaware
Suite 2200, LB48
Dallas, TX 75240
PCVI, Inc. 13455 Noel Road Texas
Suite 2200, LB48
Dallas, TX 75240
SJPR Management, Inc. 13455 Noel Road Texas
Suite 2200, LB48
Dallas, TX 75240
SJPR, Inc. 13455 Noel Road Texas
Suite 2200, LB48
Dallas, TX 75240
PRT Funding Corp. 13455 Noel Road Delaware
Suite 2200, LB48
Dallas, TX 75240
New Jersey Management, Inc. 13455 Noel Road New Jersey
Suite 2200, LB48
Dallas, TX 75240
PHC Acquisition Corp. 13455 Noel Road Delaware
Suite 2200, LB48
Dallas, Texas 75240
PHC Holdings, Inc. 13455 Noel Road Delaware
Suite 2200, LB48
Dallas, Texas 75240
PHC Properties, Inc. 13455 Noel Road Delaware
Suite 2200, LB48
Dallas, Texas 75240
</TABLE>
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
-----------------------------------------
To Greate Bay Casino Corporation:
As independent public accountants, we hereby consent to the incorporation of our
report included in this Form 10-K, into the Company's previously filed
Registration Statement File No. 33-59624.
ARTHUR ANDERSEN LLP
Roseland, New Jersey
March 28, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLILDATED 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> <C>
<PERIOD-TYPE> 12-MOS 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1995 DEC-31-1994
<PERIOD-START> JAN-01-1996 JAN-01-1995 JAN-01-1994
<PERIOD-END> DEC-31-1996 DEC-31-1995 DEC-31-1994
<CASH> 22,991 28,067 29,302
<SECURITIES> 0 0 0
<RECEIVABLES> 26,180 28,789 29,279
<ALLOWANCES> 15,524 16,496 15,297
<INVENTORY> 4,016 4,462 4,389
<CURRENT-ASSETS> 46,203 53,909 56,723
<PP&E> 318,769 317,808 303,355
<DEPRECIATION> 161,882 148,531 136,138
<TOTAL-ASSETS> 221,345 250,116 249,673
<CURRENT-LIABILITIES> 53,063 45,931 36,961
<BONDS> 322,897 328,570 327,889
0 0 0
0 0 0
<COMMON> 519 519 519
<OTHER-SE> (159,726) (138,934) (134,592)
<TOTAL-LIABILITY-AND-EQUITY> 221,345 250,116 249,673
<SALES> 0 0 0
<TOTAL-REVENUES> 283,640 304,337 295,917
<CGS> 0 0 0
<TOTAL-COSTS> 237,854 226,678 217,469
<OTHER-EXPENSES> 41,026 42,480 42,390
<LOSS-PROVISION> 2,167 2,988 3,283
<INTEREST-EXPENSE> 37,999 36,578 36,191
<INCOME-PRETAX> (35,406) (4,387) (3,416)
<INCOME-TAX> 160 (100) 1,080
<INCOME-CONTINUING> (35,566) (4,287) (4,496)
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> (35,566) (4,287) (4,496)
<EPS-PRIMARY> (6.86) (.83) (.87)
<EPS-DILUTED> 0 0 0
</TABLE>
