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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 ______________________
Commission file number 33-69768
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PRT FUNDING CORP.
PRATT CASINO CORPORATION
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(Exact name of each Registrant as specified in its charter)
DELAWARE 75-2502289
DELAWARE 75-2502292
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(States or other jurisdictions of (I.R.S. Employer
incorporation or organization) Identification No.'s)
TWO GALLERIA TOWER, SUITE 2200
13455 NOEL ROAD, LB 48
DALLAS, TEXAS 75240
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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:
$85,000,000 PRINCIPAL AMOUNT OF
11 5/8% SENIOR NOTES DUE APRIL 15, 2004 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
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(Title of Class)
Indicate by check mark whether each of the Registrants (1) has filed
all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the Registrants were 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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As of March 25, 1997, 1,000 shares of Common Stock of PRT Funding
Corp., $1.00 par value, were outstanding, all of which were held by Pratt Casino
Corporation. As of March 25, 1997, 1,000 shares of Common Stock of Pratt Casino
Corporation, $1.00 par value, were outstanding, all of which were held by an
affiliate.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents are incorporated by reference into
the indicated part or parts of this report.
NONE
Each of the Registrants meet the conditions set forth in General
Instruction (J)(1)(a) and (b) of Form 10-K and is therefore filing this Form
with the reduced disclosure format.
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PART I
ITEM 1. BUSINESS
GENERAL
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The registered securities consist of 11 5/8% Senior Notes (the "PRT
Funding Notes") in the principal amount of $85,000,000 due April 15, 2004 issued
by PRT Funding Corp. ("PRT Funding") and listed on the American Stock Exchange.
PRT Funding's obligations are unconditionally guaranteed as to the timely
payment of principal, premium, if any, and interest by Pratt Casino Corporation
("PCC"), a Delaware corporation with principal executive offices at Two Galleria
Tower, Suite 2200, 13455 Noel Road, LB48, Dallas, TX 75240.
PRT Funding is wholly owned by PCC. PCC is an indirect wholly owned
subsidiary of Greate Bay Casino Corporation ("GBCC"), formerly known as Pratt
Hotel Corporation, a Delaware corporation which is an American Stock Exchange
listed company subject to the reporting requirements of the Securities Act of
1934.
PRT Funding was organized during September 1993 as a special purpose
subsidiary of PCC for the purpose of borrowing funds through the issuance of the
PRT Funding Notes for the benefit of PCC and certain of its subsidiaries.
Greate Bay Hotel and Casino, Inc. ("GBHC"), a wholly owned subsidiary
of PCC, owns the Sands Hotel and Casino located in Atlantic City, New Jersey
(the "Sands"). The Sands is managed by New Jersey Management, Inc. ("NJMI"),
which is also a subsidiary of PCC. The principal executive offices of GBHC are
located at the Sands Administrative and Employee Services Complex, 136 South
Kentucky Avenue, Atlantic City, New Jersey 08401, telephone (609) 441-4000.
PCC is a holding company that, through its subsidiaries, owns and
manages the Sands. PCC is also the sole limited partner of Pratt Management,
L.P. ("PML"), a limited partnership which, since February 17, 1994, manages a
riverboat gaming and entertainment facility located in Aurora, Illinois (the
"Aurora Casino") owned by Hollywood Casino Corporation ("HCC"), a Delaware
corporation affiliated through common ownership with GBCC. Prior to December
31, 1996, HCC owned approximately 80% of the common stock of GBCC; such stock
was distributed by HCC to its shareholders. PCC also receives, pursuant to a
ten-year consulting agreement, a monthly consulting fee of $100,000 from a
subsidiary of HCC which in August 1994 opened a gaming and lodging facility in
Tunica County, Mississippi (the "Tunica Casino"). Debt service on the PRT
Funding Notes is funded primarily from management fees earned through NJMI from
the Sands, from distributions made to PCC by PML (resulting from fees generated
under the Aurora Casino Management Contract - see "Pratt Management, L.P."
below) and from consulting fees earned from the Tunica Casino, supplemented by
dividends, if any, received from GBHC.
THE SANDS MANAGEMENT CONTRACT
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NJMI manages the Sands for GBHC pursuant to the Sands Management
Contract, which was executed in August 1987 and has an initial term of 99 years.
PCC acts as the sole and exclusive agent of GBHC in the supervision, direction
and control of the management of the Sands and any additions or expansions
thereof.
NJMI receives (i) a base services fee of 1.5% of gross revenues (as
defined), which approximates net revenue, and (ii) an incentive fee determined
as a varying percentage of gross operating profit (as defined),
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less the base service fee. The incentive fee equals 5% of gross operating
profit and increases in increments (up to 7.5%) for each $5 million increase in
gross operating profit. Both the base services and incentive fees are paid
monthly in arrears.
The Sands Management Contract can be terminated by either party upon
180 days 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, NJMI has
the right to terminate the Sands Management Contract if GBHC fails to furnish
funds required for NJMI to manage the Sands or fails to compensate or reimburse
NJMI, and NJMI is entitled to liquidated damages in an amount equal to twice the
base services fee and the incentive fee earned by NJMI in the preceding fiscal
year.
THE SANDS
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For a description of the Sands' facilities, please refer to "Item 2. -
Properties." The Sands has begun a phased introduction of a motion picture
theme (the "Hollywood Theme") currently used by other gaming facilities managed
by subsidiaries of GBCC on behalf of HCC. The Hollywood Theme incorporates
designs inspired by famous movies, displays of motion picture memorabilia and
movie themed gaming, entertainment 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
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competitive 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 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
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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
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existing 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 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
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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
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regulations 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 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
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cash 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.
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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
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employees, 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 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, all
of which comes from management fees received from the management of the Aurora
Casino pursuant to the Aurora Casino Management Contract. For the year ended
December 31, 1996, distributions totaled $6.4 million.
The Aurora Casino Management Contract. PML manages the Aurora Casino
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pursuant to 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.
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.
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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.
Business Strategy. The Aurora facility's primary market is the
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affluent 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.
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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
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characterized by 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 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
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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
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cash 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
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be 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.
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 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
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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.
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
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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 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%. The
licensee is required to wire transfer all such gaming tax payments to the
Illinois Gaming Board.
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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.
ITEM 2. PROPERTIES
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 $185 million of non-
recourse first mortgage notes due January 15, 2004 (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
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contains certain cross default provisions with the indenture to the 10 7/8%
First Mortgage Notes described above.
Although it has no ownership interest in the Aurora Casino, PCC manages
the facility under the Aurora Casino Management Contract. For a description of
the facility, see "Business - The Aurora Casino" above.
ITEM 3. LEGAL PROCEEDINGS
PCC is a party in various legal proceedings with respect to the conduct
of casino and hotel operations. Although a possible range of loss can not be
estimated, in the opinion of management, based upon the advice of counsel,
settlement or resolution of these proceedings should not have a material adverse
impact upon the consolidated financial position or results of operations of PCC.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
PRT Funding's common stock, 1,000 shares with par value of $1.00 per
share, is its sole voting security; all of the 1,000 shares outstanding are
owned by Pratt Casino Corporation.
PCC's common stock, 1,000 shares with par value of $1.00 per share, is
its sole voting security; all of the 1,000 shares outstanding are owned by PPI
Corporation, a wholly owned subsidiary of GBCC.
PRT Funding has not paid any dividends in the past and has no plans to
pay any dividends in the future. PCC paid dividends to its sole shareholder in
1994 as part of a financial restructuring; PCC has no plans to pay dividends on
its common stock in the foreseeable future. See Note 4 of "Notes to
Consolidated Financial Statements" for a description of certain agreements that
impose specified restrictions on the transfer of funds.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Annual Report on Form 10-K contains forward-looking statements about
the business, financial condition and prospects of PCC. 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 PCC in particular, and other risks
indicated in PCC'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 PCC or its management are intended to identify
forward-looking statements.
RESULTS OF OPERATIONS
GENERAL
The Sands sustained a loss from operations, exclusive of management fees
paid to NJMI, of $3.7 million for the year ended December 31, 1996 compared to
income from operations of $24.2 million for 1995. Operating results have been
adversely affected 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 during 1996 from $284 million during
1995). In addition, marketing and advertising costs increased by $10.9 million
(17.3%) during 1996 compared to 1995 in response to competitive pressures.
Distributions received from PML amounted to $6.4 million during 1996,
approximating PCC's equity in PML's earnings of $6.2 million; distributions from
PML are paid in arrears. Management fees earned by PML during 1996 did not
change significantly from those earned during 1995. Increased management fees
during the first half of 1996 were primarily due to improved operating results
subsequent to the 1995 expansion of one of the Aurora Casino's two riverboats.
Area flooding and the opening of three riverboat gaming operations in northern
Indiana during the second half of 1996 had a negative impact on management fees
earned by PML. In addition, PCC received $1.2 million with respect to its
consulting agreement with the Tunica Casino.
As a result of the foregoing, PCC experienced a loss from operations of
$4.5 million for the year ended December 31, 1996 as compared to income from
operations of $22.8 million during 1995.
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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. The Sands' decrease compares with an increase of 5% in table
drop for all other Atlantic City casinos during the same period. As a result,
the Sands' table game market share (expressed as a percentage of the Atlantic
City industry aggregate table game drop) decreased to 7.7% during 1996 from 8.5%
during 1995.
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Table game drop throughout the year 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 mid-market segments. The last six months 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.
Slot machine handle increased $62.5 million (3.3%) during 1996 compared with
1995. The Sands' increase compares with a 4.9% increase in slot machine handle
for all other Atlantic City casinos. As a result, the Sands' market share of
slot machine play declined slightly to 6.1% from 6.2% during 1995. The increase
in slot machine handle is 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.
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 the 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%.
Rooms revenue did not change significantly during 1996 compared with 1995.
Food and beverage revenues increased $1.6 million (4.9%) during 1996 compared
with 1995 primarily as a result of the opening of the Epic Buffet during the
third quarter of 1995. Other revenues increased $1.4 million (24.5%) during
1996 compared to 1995 as a result of an increase in theater entertainment
revenue.
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% during 1996 from 57.6% during 1995. Such
decrease is primarily attributable to increases in other types of marketing
programs in lieu of promotional allowances.
DEPARTMENTAL EXPENSES
Casino expenses at the Sands increased $9.7 million (4.6%) during 1996
compared to 1995. The 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. Such increases have been partially offset by a $1.6 million reduction
in gaming taxes during 1996 compared with 1995.
Rooms expense decreased $186,000 (7.1%) during 1996 as compared to 1995
primarily due to increased allocation of rooms expense to casino expense
resulting from increases in casino marketing activities relating to rooms.
Food and beverage expense increased $867,000 (8.9%) during 1996 compared to
1995. This increase reflects increased costs associated with the Epic Buffet
which were partially offset by increases in marketing programs, the costs of
which are allocated to the casino department. Other
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expenses increased $1.3 million (63.5%) during 1996 compared with 1995 as
increases in theater entertainment costs were partially offset by increased
allocations to the casino department.
GENERAL AND ADMINISTRATIVE
General and administrative expenses decreased by approximately $2.9 million
(15.7%) during 1996 compared to 1995 primarily due to decreases in equipment
rentals 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.
INTEREST
Interest income decreased $146,000 (7.5%) during 1996 compared with 1995 due
to a decrease in the amount of cash available for temporary cash investments.
Interest expense did not change significantly during 1996 compared to the prior
year.
EQUITY IN EARNINGS OF LIMITED PARTNERSHIP
Effective February 17, 1994, PCC acquired a limited partnership interest in
PML, a limited partnership in which PPI Corporation is the general partner and
PCC is the limited partner; PML earns management fees from the operation of the
Aurora Casino. The Agreement of Limited Partnership of PML provides for
distributions to PCC of 1% of the first $84,000 of net income earned by PML each
month and 99% of any net income earned above such amount, with all remaining
income distributed to PPI Corporation. PCC's equity in the earnings of PML
declined slightly (4.1%) to $6.2 million in 1996 from $6.4 million in 1995.
Subject to regulatory approval and effective as of April 1, 1997, HCC will
acquire the general partnership interest in PML from PPI Corporation.
INCOME TAX PROVISION
PCC's operations have been included in HCC's consolidated federal income tax
return for periods through December 31, 1996. Pursuant to agreements between
PCC, GBCC and HCC, PCC's provision for federal income taxes is based on the
amount of tax which would have been provided if a separate return were filed.
PCC and its subsidiaries have net operating loss carryforwards ("NOL's")
totaling approximately $27 million, none of which expire before the year 2005
for federal tax purposes and which begin to expire in 1997 for state tax
purposes. Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes" ("SFAS 109") requires that the tax benefit of NOL's and deferred
tax assets resulting from temporary differences be recorded as an asset and, to
the extent that management can not assess that the utilization of all or a
portion of such NOL's and deferred tax assets is more likely than not, a
valuation allowance should be recorded. Due to the continued availability of
NOL's originating in prior years for federal and state tax purposes and the
significant book and tax losses sustained in 1996, management is unable to
determine that realization of such asset is more likely than not and, thus, has
provided a valuation allowance for the entire deferred tax asset at December 31,
1996.
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.
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SEASONALITY
Historically, the Sands' operations have been highly seasonal in nature, with
the peak activity occurring from May to September. Consequently, the results of
PCC'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 PCC's casino revenues and
profitability.
LIQUIDITY AND CAPITAL RESOURCES
PCC's principal activities and resulting sources of liquidity and capital
resources include the operations of the Sands, management of the Aurora Casino
through PML, and consulting fees for services provided to the Tunica Casino.
Prior to 1996, the Sands' earnings before depreciation, interest, amortization,
taxes and intercompany management fees have been sufficient to meet debt service
obligations (other than certain maturities of principal that have been
refinanced) and to fund a substantial portion of its capital expenditures. The
Sands has also used short-term borrowings to fund seasonal cash needs and for
certain capital projects.
OPERATING ACTIVITIES
At December 31, 1996, PCC had consolidated cash and cash equivalents of $18.7
million. Dividends, tax sharing payments and certain other transfers of cash
from the Sands to PCC or other affiliates of the Sands are restricted by
provisions to the indenture for the 10 7/8% First Mortgage Notes or are subject
to the approval of the New Jersey Casino Control Commission. During the year
ended December 31, 1996, net cash used in operating activities was $4.9 million
compared with net cash provided by operating activities of $22.3 million during
1995. The change in net cash from operating activities compared to 1995
resulted primarily from a decline in operating cash flow generated by the Sands.
The Sands sustained an operating cash flow deficit of $6.1 million for the year
ended December 31, 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
1995. PCC utilized its existing cash and borrowings from affiliates during 1996
to meet its operating needs, to fund capital additions of $5.5 million and to
make obligatory investments of $3.1 million.
FINANCING ACTIVITIES
During February 1994, GBCC completed the refinancing of virtually all of its
casino-related outstanding debt (the "GBCC Recapitalization"). The refinancing
was completed through a public offering of $270 million of debt securities
consisting of $185 million of 10 7/8% First Mortgage Notes due January 15, 2004
and $85 million of 11 5/8% PRT Funding Notes due April 15, 2004. Proceeds from
the debt offerings were used, in part, to refinance the Sands' first mortgage
and other indebtedness scheduled to mature in 1994 and to provide partial
funding for an expansion of gaming space at the Sands. As part of the GBCC
Recapitalization, a subsidiary of PCC also issued $15 million of 14 5/8% junior
subordinated notes due in 2005 to HCC; the subsidiary loaned $10 million of such
proceeds to GBHC on the same terms. As of December 31, 1996, HCC had assigned
the entire principal amount of the junior subordinated notes to GBCC. Interest
on this subordinated affiliate debt is payable semiannually commencing August
17, 1994, with payment subject to meeting certain financial coverage and other
payment restriction tests required by the indenture for the PRT Funding Notes.
Because PCC has not met the financial coverage tests, no interest was paid
during 1996.
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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, GBHC borrowed $6.5 million from GBCC for
working capital purposes with interest at the rate of 13 3/4% per annum payable
quarterly commencing October 1, 1996. During the first quarter of 1997, GBHC
borrowed an additional $1.5 million from GBCC on similar terms. Repayment of
such borrowings and payment of the related accrued interest is subject to
regulatory approval.
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 $2.5 million.
CAPITAL EXPENDITURES AND OBLIGATORY INVESTMENTS
Capital expenditures at the Sands during 1996 amounted to approximately $5.5
million and management anticipates capital expenditures during 1997 will be
approximately $4.6 million. 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.
The Sands is required by the Casino 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.
SUMMARY
GBHC, which is PCC's most significant 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 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.
19
<PAGE>
ITEM 8. INDEX TO FINANCIAL STATEMENTS
Page
----
PRT FUNDING CORP.
Report of Independent Public Accountants to PRT Funding Corp............. 21
Balance Sheets of PRT Funding Corp. as of December 31, 1996 and 1995..... 22
Statements of Operations of PRT Funding Corp. for the Years Ended
December 31, 1996, 1995 and 1994........................................ 23
Statements of Cash Flows of PRT Funding Corp. for the Years Ended
December 31, 1996, 1995 and 1994........................................ 24
Notes to Financial Statements of PRT Funding Corp........................ 25
PRATT CASINO CORPORATION AND SUBSIDIARIES
Report of Independent Public Accountants to Pratt Casino
Corporation and Subsidiaries............................................ 28
Consolidated Balance Sheets of Pratt Casino Corporation and
Subsidiaries as of December 31, 1996 and 1995........................... 29
Consolidated Statements of Operations of Pratt Casino Corporation
and Subsidiaries for the Years Ended December 31, 1996, 1995 and 1994... 31
Consolidated Statement of Changes in Shareholder's Deficit of
Pratt Casino Corporation and Subsidiaries for
the Three Years Ended December 31, 1996................................. 32
Consolidated Statements of Cash Flows of Pratt Casino Corporation
and Subsidiaries for the Years Ended December 31, 1996, 1995 and 1994... 33
Notes to Consolidated Financial Statements of Pratt Casino
Corporation and Subsidiaries............................................ 34
20
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To PRT Funding Corp.:
We have audited the accompanying balance sheets of PRT Funding Corp.
(the Company, a Delaware corporation and wholly owned subsidiary of Pratt Casino
Corporation) as of December 31, 1996 and 1995, and the related statements of
operations 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 audit 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 PRT Funding Corp. as
of December 31, 1996 and 1995, and the results of its operations and its 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
21
<PAGE>
PRT FUNDING CORP.
(WHOLLY OWNED BY PRATT CASINO CORPORATION)
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1996 1995
------------ ------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 1,141,000 $ 18,000
Interest receivable from affiliates 3,972,000 2,875,000
------------ ------------
Total current assets 5,113,000 2,893,000
------------ ------------
Notes receivable from affiliates 100,000,000 100,000,000
------------ ------------
$105,113,000 $102,893,000
============ ============
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
<S> <C> <C>
Accrued interest payable $ 5,068,000 $ 2,875,000
Other current liabilities 2,000 -
Due to affiliates 17,000 13,000
------------ ------------
Total current liabilities 5,087,000 2,888,000
------------ ------------
Long-term debt 85,000,000 85,000,000
------------ ------------
Notes payable to affiliates 15,000,000 15,000,000
------------ ------------
Shareholder's equity (Note 1):
Common stock, $1.00 par value per
share, 1,000 shares authorized
and outstanding 1,000 1,000
Retained earnings 25,000 4,000
------------ ------------
Total shareholder's equity 26,000 5,000
------------ ------------
$105,113,000 $102,893,000
============ ============
</TABLE>
The accompanying notes to financial statements
are an integral part of these balance sheets.
22
<PAGE>
PRT FUNDING CORP.
(WHOLLY OWNED BY PRATT CASINO CORPORATION)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1996 1995 1994
------------ ----------- -----------
<S> <C> <C> <C>
Revenues:
Interest income $12,102,000 $12,093,000 $10,505,000
----------- ----------- -----------
Expenses:
Interest expense 12,075,000 12,075,000 10,505,000
General and administrative expenses - 2,000 11,000
----------- ----------- -----------
Total expenses 12,075,000 12,077,000 10,516,000
----------- ----------- -----------
Income (loss) before income taxes 27,000 16,000 (11,000)
Income tax provision (6,000) (1,000) -
----------- ----------- -----------
Net income (loss) $ 21,000 $ 15,000 $ (11,000)
=========== =========== ===========
</TABLE>
The accompanying notes to financial statements
are an integral part of these financial statements.
23
<PAGE>
PRT FUNDING CORP.
(WHOLLY OWNED BY PRATT CASINO CORPORATION)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1996 1995 1994
----------- ----------- -------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ 21,000 $ 15,000 $ (11,000)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
(Increase) decrease in receivable from
affiliates (1,097,000) 1,097,000 (3,972,000)
Increase (decrease) in accrued interest
payable 2,193,000 (1,097,000) 3,972,000
Net change in other current assets
and liabilities 6,000 2,000 11,000
----------- ----------- -------------
Net cash provided by operating activities 1,123,000 17,000 -
----------- ----------- -------------
FINANCING ACTIVITIES:
Issuance of long-term debt - - 85,000,000
Issuance of note payable to affiliate - - 15,000,000
Loans to affiliates - - (100,000,000)
----------- ----------- -------------
Net cash provided by financing activities - - -
----------- ----------- -------------
Net increase in cash and cash equivalents 1,123,000 17,000 -
Cash at beginning of year 18,000 1,000 1,000
----------- ----------- -------------
Cash and cash equivalents at end of year $ 1,141,000 $ 18,000 $ 1,000
=========== =========== =============
</TABLE>
The accompanying notes to financial statements
are an integral part of these financial statements.
24
<PAGE>
PRT FUNDING CORP.
(WHOLLY OWNED BY PRATT CASINO CORPORATION)
NOTES TO FINANCIAL STATEMENTS
(1) ORGANIZATION AND OPERATIONS
PRT Funding Corp. ("PRT Funding"), a Delaware corporation, was
incorporated on September 29, 1993. PRT Funding is a wholly owned subsidiary of
Pratt Casino Corporation ("PCC"), which is an indirect, wholly owned subsidiary
of Greate Bay Casino Corporation ("GBCC", formerly known as Pratt Hotel
Corporation). Both PCC and GBCC are also Delaware corporations. PCC was
incorporated in September 1993 and, on February 17, 1994, acquired through
capital contributions by its parent, all of the outstanding capital stock of
Greate Bay Hotel and Casino, Inc. ("GBHC"), which owns the Sands Hotel and
Casino in Atlantic City, New Jersey (the "Sands"). The Sands is managed by New
Jersey Management, Inc. ("NJMI"), a New Jersey corporation and also a subsidiary
of PCC. Substantially all of PCC's assets are attributable to the Sands. PCC
also earns management and consulting fees with respect to gaming facilities
owned by Hollywood Casino Corporation ("HCC"), a Delaware corporation which,
prior to December 31, 1996, owned approximately 80% of the common stock of GBCC.
PRT Funding was formed for the purpose of borrowing $85,000,000 for
the benefit of PCC and its affiliates. PRT Funding has no operations and is
dependent on the repayment of its notes due from various affiliates for
servicing its debt obligations. Administrative services for PRT Funding are
provided by other GBCC subsidiaries at no charge. The cost of such services is
not significant.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(2) LONG-TERM DEBT
On February 17, 1994, PRT Funding 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 to 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 outstanding debt
of other PCC subsidiaries. Proceeds of the PRT Funding Notes were loaned to
various affiliates of PRT Funding on the same terms.
On February 17, 1994, PRT Funding issued $15,000,000 of junior
subordinated notes due in February 2005 (the "Junior Subordinated Notes") to
HCC, and loaned the proceeds to various affiliates on the same terms. Principal
totaling $6,262,000 with respect to the Junior Subordinated Notes was
subsequently assigned to GBCC by HCC in recognition of tax net operating losses
of GBCC used by HCC. The remaining $8,738,000 of Junior Subordinated Notes,
together with interest accrued thereon, was assigned to GBCC by HCC in
connection with the distribution of its stock in GBCC to HCC's shareholders
25
<PAGE>
PRT FUNDING CORP.
(WHOLLY OWNED BY PRATT CASINO CORPORATION)
NOTES TO FINANCIAL STATEMENTS (Continued)
on December 31, 1996. Interest on the Junior Subordinated Notes accrues at the
rate of 14 5/8% per annum and is payable semiannually commencing August 17,
1994, with payment subject to PCC, the guarantor, meeting certain financial
coverage and other payment restriction tests required by the indenture for the
PRT Funding Notes. Because PCC has not met the financial coverage tests, no
interest was paid during 1996. At December 31, 1996, accrued interest of
$3,010,000 was payable to GBCC with respect to the Junior Subordinated Notes; at
December 31, 1995, accrued interest of $341,000 and $476,000, respectively, was
payable to GBCC and HCC. All such amounts are included in interest payable in
the accompanying balance sheets.
Interest paid amounted to $9,882,000, $13,172,000 and $6,533,000,
respectively, during the years ended December 31, 1996, 1995 and 1994.
(3) INCOME TAXES
PRT Funding's operations have been included in the consolidated
federal income tax return of HCC for periods through December 31, 1996.
Pursuant to agreements between PCC, GBCC and HCC, PRT Funding's provision for
federal income taxes is calculated as if a separate federal return were filed.
There are no timing differences resulting in deferred income taxes. During the
years ended December 31, 1996 and 1995, PRT Funding had current provisions for
state and federal income taxes of $6,000 and $1,000, respectively, after
utilizing all of its net operating loss carryforwards generated in prior years.
For the years ended December 31, 1996, 1995 and 1994, no payments have been made
under the tax allocation agreements. At December 31, 1996 and 1995, $5,000 and
$1,000, respectively, are included in due to affiliates on the accompanying
balance sheets representing taxes currently payable under the agreements.
(4) 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 AND CASH EQUIVALENTS - The carrying amount approximates fair
-------------------------
value.
INTEREST RECEIVABLE AND INTEREST PAYABLE - The carrying amount
----------------------------------------
approximates fair value because of the short maturity of the obligation.
NOTES RECEIVABLE, LONG-TERM DEBT AND NOTE PAYABLE - The fair value of
-------------------------------------------------
PRT Funding's notes receivable, long-term debt and note payable was estimated
based on either the quoted market prices for recent trades of the issue or on
the discounted cash flow of future payments utilizing current rates for debt of
similar remaining maturities.
26
<PAGE>
PRT FUNDING CORP.
(WHOLLY OWNED BY PRATT CASINO CORPORATION)
NOTES TO FINANCIAL STATEMENTS (Continued)
The estimated carrying amounts and fair values of PRT Funding'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 $ 1,141,000 $ 1,141,000 $ 18,000 $ 18,000
Interest receivable 3,972,000 3,972,000 2,875,000 2,875,000
Notes receivable 100,000,000 84,700,000 100,000,000 77,900,000
Financial Liabilities
Interest payable 5,068,000 5,068,000 2,875,000 2,875,000
Long-term debt 85,000,000 69,700,000 85,000,000 62,900,000
Note payable 15,000,000 15,000,000 15,000,000 15,000,000
</TABLE>
27
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Pratt Casino Corporation:
We have audited the accompanying consolidated balance sheets of Pratt Casino
Corporation (the Company, a New Jersey corporation, and a wholly owned
subsidiary of PPI Corporation) and subsidiaries as of December 31, 1996 and
1995, and the related consolidated statements of operations, changes in
shareholder's 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 audit 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 Pratt 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
28
<PAGE>
PRATT CASINO CORPORATION AND SUBSIDIARIES
(WHOLLY OWNED BY PPI CORPORATION)
CONSOLIDATED BALANCE SHEETS (NOTE 1)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1996 1995
-------------- --------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 18,650,000 $ 25,606,000
Short-term investments 2,000,000 -
Accounts receivable, net of allowances
of $15,524,000 and $16,494,000,
respectively 10,114,000 11,513,000
Inventories 3,873,000 4,268,000
Due from affiliates 2,541,000 10,009,000
Refundable deposits and other
current assets 3,197,000 4,764,000
------------- -------------
Total current assets 40,375,000 56,160,000
------------- -------------
Investment in Limited Partnership 1,746,000 2,017,000
------------- -------------
Property and Equipment:
Land 38,093,000 37,807,000
Buildings and improvements 185,508,000 185,077,000
Operating equipment 91,868,000 87,491,000
Construction in progress 1,535,000 2,310,000
------------- -------------
317,004,000 312,685,000
Less - accumulated depreciation and
amortization (160,989,000) (145,244,000)
------------- -------------
Net property and equipment 156,015,000 167,441,000
------------- -------------
Other Assets:
Obligatory investments 6,382,000 5,521,000
Due from affiliates 17,895,000 13,681,000
Deferred financing costs 7,653,000 8,730,000
Other assets 4,220,000 3,390,000
------------- -------------
Total other assets 36,150,000 31,322,000
------------- -------------
$ 234,286,000 $ 256,940,000
============= =============
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated balance sheets.
29
<PAGE>
PRATT CASINO CORPORATION AND SUBSIDIARIES
(WHOLLY OWNED BY PPI CORPORATION)
CONSOLIDATED BALANCE SHEETS (NOTE 1)
LIABILITIES AND SHAREHOLDER'S DEFICIT
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1996 1995
-------------- -------------
<S> <C> <C>
Current Liabilities:
Current maturities of long-term debt $ 2,512,000 $ 11,000
Short-term credit facilities 2,000,000 -
Short-term borrowings from affiliates 6,500,000 -
Accounts payable 7,906,000 8,454,000
Accrued liabilities -
Salaries and wages 4,986,000 5,292,000
Interest 14,758,000 12,159,000
Insurance 3,117,000 2,336,000
Other 6,684,000 6,388,000
Due to affiliates 1,195,000 979,000
Other 5,431,000 4,900,000
------------- ------------
Total current liabilities 55,089,000 40,519,000
------------- ------------
Long-Term Debt 282,930,000 285,442,000
------------- ------------
Other Noncurrent Liabilities 1,372,000 2,390,000
------------- ------------
Commitments and Contingencies
Shareholder's Deficit:
Common stock $1.00 par value per share,
1,000 shares authorized and outstanding 1,000 1,000
Accumulated deficit (105,106,000) (71,412,000)
------------- ------------
Total shareholder's deficit (105,105,000) (71,411,000)
------------- ------------
$ 234,286,000 $256,940,000
============= ============
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated balance sheets.
30
<PAGE>
PRATT CASINO CORPORATION AND SUBSIDIARIES
(WHOLLY OWNED BY PPI CORPORATION)
CONSOLIDATED STATEMENTS OF OPERATIONS (NOTE 1)
<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 9,446,000 9,602,000 9,611,000
Food and beverage 34,638,000 33,029,000 29,762,000
Other 6,917,000 5,554,000 5,552,000
------------ ------------ ------------
293,890,000 312,233,000 301,132,000
Less - Promotional allowances (27,929,000) (27,083,000) (24,943,000)
------------ ------------ ------------
Net revenues 265,961,000 285,150,000 276,189,000
------------ ------------ ------------
Expenses:
Casino 218,990,000 209,282,000 198,270,000
Rooms 2,419,000 2,605,000 3,005,000
Food and beverage 10,618,000 9,751,000 10,171,000
Other 3,258,000 1,993,000 3,635,000
General and administrative 15,492,000 18,387,000 19,575,000
Depreciation and amortization 19,669,000 20,296,000 19,179,000
------------ ------------ ------------
Total expenses 270,446,000 262,314,000 253,835,000
------------ ------------ ------------
(Loss) income from operations (4,485,000) 22,836,000 22,354,000
------------ ------------ ------------
Non-operating income (expense):
Interest income 1,799,000 1,945,000 2,186,000
Interest expense, net of capitalized
interest of $762,000 in 1994 (32,836,000) (32,295,000) (30,563,000)
Gain on sale of assets 13,000 56,000 73,000
Equity in earnings of limited
partnership 6,162,000 6,429,000 6,264,000
------------ ------------ ------------
Total non-operating expense, net (24,862,000) (23,865,000) (22,040,000)
------------ ------------ ------------
(Loss) income before income taxes (29,347,000) (1,029,000) 314,000
Income tax provision (4,347,000) (529,000) (1,490,000)
------------ ------------ ------------
Net loss $(33,694,000) $ (1,558,000) $ (1,176,000)
============ ============ ============
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
31
<PAGE>
PRATT CASINO CORPORATION AND SUBSIDIARIES
(WHOLLY OWNED BY PPI CORPORATION)
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDER'S DEFICIT (NOTE 1)
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 1,000 $1,000 $ 94,000 $ (19,488,000)
Dividends - - (94,000) (49,190,000)
Net loss - - - (1,176,000)
----- ------ ------------ -------------
BALANCE, DECEMBER 31, 1994 1,000 1,000 - (69,854,000)
Net loss - - - (1,558,000)
----- ------ ------------ -------------
BALANCE, DECEMBER 31, 1995 1,000 1,000 - (71,412,000)
Net loss - - - (33,694,000)
----- ------ ------------ -------------
BALANCE, DECEMBER 31, 1996 1,000 $1,000 $ - $(105,106,000)
===== ====== ============ =============
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of this consolidated statement.
32
<PAGE>
PRATT CASINO CORPORATION AND SUBSIDIARIES
(WHOLLY OWNED BY PPI CORPORATION)
CONSOLIDATED STATEMENTS OF CASH FLOWS (NOTE 1)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
1996 1995 1994
------------- ------------- --------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss $(33,694,000) $ (1,558,000) $ (1,176,000)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Depreciation and amortization, including
accretion of debt discount 19,669,000 20,296,000 19,224,000
Gain on sale of assets (13,000) (56,000) (73,000)
Provision for doubtful accounts 2,167,000 2,988,000 3,283,000
Equity in earnings of limited partnership (6,162,000) (6,429,000) (6,264,000)
Dividends received from limited partnership 6,433,000 6,421,000 4,256,000
Deferred income tax provision (benefit) 4,538,000 (2,405,000) 3,734,000
Increase in accounts receivable (1,075,000) (1,404,000) (3,092,000)
Increase (decrease) in accounts payable and other
accrued liabilities 3,022,000 2,665,000 (5,703,000)
Net change in other current assets and liabilities 1,419,000 3,661,000 (1,777,000)
Net change in other noncurrent assets and liabilities (1,185,000) (1,921,000) (2,031,000)
------------ ------------ -------------
Net cash (used in) provided by operating activities (4,881,000) 22,258,000 10,381,000
------------ ------------ -------------
INVESTING ACTIVITIES:
Net property and equipment additions (5,505,000) (19,156,000) (20,136,000)
Obligatory investments (3,062,000) (2,967,000) (826,000)
Proceeds from disposition of assets 13,000 56,000 73,000
Investment in limited partnership - - (1,000)
Short-term investment (2,000,000) - -
------------ ------------ -------------
Net cash used in investing activities (10,554,000) (22,067,000) (20,890,000)
------------ ------------ -------------
FINANCING ACTIVITIES:
Issuance of long-term debt - - 285,000,000
Borrowings on short-term credit facility 2,000,000 - -
Deferred financing costs (10,000) (32,000) (10,458,000)
Repayments of long-term debt (11,000) (10,000) (161,676,000)
Dividends - - (49,284,000)
Net borrowings (repayments) from affiliates 6,500,000 - (40,919,000)
------------ ------------ -------------
Net cash provided by (used in) financing activities 8,479,000 (42,000) 22,663,000
------------ ------------ -------------
Net (decrease) increase in cash and cash equivalents (6,956,000) 149,000 12,154,000
Cash and cash equivalents at beginning of year 25,606,000 25,457,000 13,303,000
------------ ------------ -------------
Cash and cash equivalents at end of year $ 18,650,000 $ 25,606,000 $ 25,457,000
============ ============ =============
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
33
<PAGE>
PRATT CASINO CORPORATION AND SUBSIDIARIES
(WHOLLY OWNED BY PPI CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) ORGANIZATION, BUSINESS AND BASIS OF PRESENTATION
Pratt Casino Corporation ("PCC") is a Delaware corporation and a wholly
owned subsidiary of PPI Corporation, a New Jersey corporation and a wholly owned
subsidiary of Greate Bay Casino Corporation ("GBCC", formerly known as Pratt
Hotel Corporation). On February 17, 1994, PCC acquired, through capital
contributions by its parent, all of the outstanding stock of Greate Bay Hotel
and Casino, Inc. ("GBHC"), a New Jersey corporation, which owns the Sands Hotel
and Casino in Atlantic City, New Jersey (the "Sands"). The Sands is managed by
New Jersey Management, Inc. ("NJMI") which also became a wholly owned subsidiary
of PCC through a capital contribution by its parent. Substantially all of PCC's
assets are attributable to the Sands. PCC also earns management and consulting
fees with respect to gaming facilities owned by Hollywood Casino Corporation
("HCC") which, prior to December 31, 1996, owned approximately 80% of the common
stock of GBCC.
GB Property Funding Corp. ("GB Property Funding"), a Delaware corporation
and a wholly owned subsidiary of PCC, was incorporated on September 29, 1993 for
the purpose of borrowing funds through the issuance of $185,000,000 of ten-year,
nonrecourse first mortgage notes for the benefit of GBHC. PRT Funding Corp.
("PRT Funding"), also a Delaware corporation and a wholly owned subsidiary of
PCC, was incorporated on September 29, 1993 for the purpose of borrowing funds
through the issuance of $85,000,000 of unsecured notes for the benefit of PCC
and its affiliates. GB Property Funding and PRT Funding completed their
respective debt offerings on February 17, 1994 and the proceeds were loaned to
various affiliates (see Note 4).
As the above entities were under common control, the business combination
was accounted for similar to a pooling of interests; accordingly, the
accompanying 1994 consolidated financial statements have been presented as if
the accounts and operations of PCC, NJMI and GBHC had always been combined. All
significant intercompany balances and transactions have been eliminated.
PCC estimates that a significant amount of the Sands' revenues are derived
from patrons living in southeastern Pennsylvania, northern New Jersey and
metropolitan New York City. Competition in the Atlantic City gaming market is
intense and management believes that this competition will continue or intensify
in the future.
The accompanying consolidated financial statements have been prepared
assuming PCC will continue as a going concern. GBHC, which is PCC's most
significant 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 6), 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
34
<PAGE>
PRATT CASINO CORPORATION AND SUBSIDIARIES
(WHOLLY OWNED BY PPI CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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
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.
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.
35
<PAGE>
PRATT CASINO CORPORATION AND SUBSIDIARIES
(WHOLLY OWNED BY PPI CORPORATION)
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, $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 25-40 years
Operating equipment 3-7 years
On October 1, 1996, PCC revised the estimated useful life of its buildings
from 25 years to 40 years. Management believes that 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, legal and
accounting fees, have been capitalized and are being amortized over the term of
the related debt issue. The unamortized balance of deferred financing costs
amounted to $7,653,000 and $8,730,000 at December 31, 1996, and 1995,
respectively. 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, PCC does not believe
that any material impairment currently exists related to its long-lived assets.
36
<PAGE>
PRATT CASINO CORPORATION AND SUBSIDIARIES
(WHOLLY OWNED BY PPI CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
ACCRUED INSURANCE -
PCC 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, PCC's ultimate liability
may differ from the amounts accrued.
INCOME TAXES -
PCC's operations have been included in HCC's consolidated federal
income tax return through December 31, 1996. Pursuant to tax allocation
agreements, PCC's provision for federal income taxes is based on the amount of
tax which would be provided if a separate federal income tax return were filed.
INTEREST EXPENSE -
Interest expense includes the accretion of debt discount amounting to
$45,000 for the year ended December 31, 1994.
RECLASSIFICATIONS -
Certain reclassifications have been made to 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
During June 1994, GBHC 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 PCC. As of April 30, 1996, GBHC extended $2,000,000 of
the bank line of credit until April 30, 1997. Additionally, PCC pledged a
certificate of deposit in the face amount of $2,000,000 as collateral for the
line of credit; such deposit is presented as a short-term investment in the
accompanying consolidated financial statements. 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.
37
<PAGE>
PRATT CASINO CORPORATION AND SUBSIDIARIES
(WHOLLY OWNED BY PPI CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(4) LONG-TERM DEBT AND PLEDGE OF ASSETS
Substantially all of PCC's assets are pledged in connection with its long-
term indebtedness. Additionally, certain of the indentures to PCC's indebtedness
contain 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) 15,000,000 15,000,000
Other 442,000 453,000
------------ ------------
Total indebtedness 285,442,000 285,453,000
Less - current maturities (2,512,000) (11,000)
------------ ------------
Total long-term debt $282,930,000 $285,442,000
============ ============
</TABLE>
__________________________
(a) On February 17, 1994, GB Property Funding 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, PRT Funding issued $85,000,000 of unsecured senior
notes due April 15, 2004 (the "PRT Funding Notes"). Interest on the PRT
Funding Notes accrues at the rate of 11 5/8% per annum, payable
semiannually commencing October 15, 1994. The PRT Funding Notes are
redeemable at the option of the issuer, in whole or in part, on or after
April 15, 1999 at stated redemption prices ranging up to 104.36% of par
plus accrued interest. The indenture for the PRT Funding Notes contains
various provisions which, among other things, restrict the ability of
certain subsidiaries of 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 in (a) above.
38
<PAGE>
PRATT CASINO CORPORATION AND SUBSIDIARIES
(WHOLLY OWNED BY PPI CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(c) On February 17, 1994, PRT Funding 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. The remaining $8,738,000 of the Junior Subordinated Notes,
together with interest accrued thereon, was assigned to GBCC by HCC in
connection with the distribution of its stock in GBCC to HCC's shareholders
on December 31, 1996. The Junior Subordinated Notes are due in February
2005 and bear interest at the rate of 14 5/8% per annum which, subject to
PCC, the guarantor, meeting certain financial coverage and other payment
restriction tests required by the indenture for the PRT Funding Notes, is
payable semiannually commencing August 17, 1994. Because PCC has not met
the financial coverage tests, no interest was paid during 1996.
Scheduled payments of long-term debt as of December 31, 1996 are set forth
below:
<TABLE>
<CAPTION>
<S> <C>
1997 $ 2,512,000
1998 5,013,000
1999 5,014,000
2000 5,016,000
2001 5,017,000
Thereafter 262,870,000
------------
Total $285,442,000
============
</TABLE>
Interest paid, net of amounts capitalized, amounted to $30,236,000,
$33,391,000 and $28,805,000, respectively, for the years ended December 31,
1996, 1995 and 1994.
(5) INCOME TAXES
Components of the provision for income taxes consisted of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1996 1995 1994
------------- ------------ ------------
<S> <C> <C> <C>
(Provision for) benefit in lieu of federal
income taxes:
Current $ 7,582,000 $(2,583,000) $ 1,699,000
Deferred 593,000 1,925,000 (2,845,000)
State income tax (provision) benefit:
Current 3,106,000 (351,000) 545,000
Deferred 173,000 480,000 (889,000)
Valuation allowance (15,801,000) - -
------------ ----------- -----------
$ (4,347,000) $ (529,000) $(1,490,000)
============ =========== ===========
</TABLE>
No federal or state tax payments were made during the years ended December
31, 1996 or 1995. PCC paid $256,000 in federal income taxes to an affiliate
during the year ended December 31, 1994 in connection with its aforementioned
tax allocation agreements with GBCC and HCC. The payment of
39
<PAGE>
PRATT CASINO CORPORATION AND SUBSIDIARIES
(WHOLLY OWNED BY PPI CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
GBHC's taxes in accordance with the tax allocation agreements is subject to the
approval of the Casino Commission. PCC also paid state income taxes of $75,000
for the year ended December 31, 1994. Additionally, $278,000 of current federal
taxes payable was offset against other intercompany obligations in 1995 (see
Note 11).
A reconciliation between the calculated tax provision 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 (provision) at 34% $ 9,978,000 $ 350,000 $ (107,000)
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 1,570,000 85,000 (227,000)
Utilization of tax credit 99,000 98,000 -
Adjustment to prior year taxes 766,000 96,000 -
Valuation allowance change (15,801,000) - -
Other (20,000) (1,000) (17,000)
------------ --------- -----------
Tax provision as shown on consolidated
statements of operations $ (4,347,000) $(529,000) $(1,490,000)
============ ========= ===========
</TABLE>
Deferred income taxes result primarily from the use of the allowance
method rather than the direct write-off method for doubtful accounts, the use of
accelerated methods of depreciation for federal and state income tax purposes
and differences in the timing of deductions taken between tax and financial
reporting purposes for contributions of and adjustments to the carrying value of
certain investment obligations and for vacation and other accruals.
40
<PAGE>
PRATT CASINO CORPORATION AND SUBSIDIARIES
(WHOLLY OWNED BY PPI CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The components of the net deferred tax asset as of December 31, 1996
and 1995 were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1996 1995
------------- ------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforward $ 13,720,000 $ 3,267,000
Allowance for doubtful accounts 6,429,000 6,829,000
Other liabilities and accruals 2,732,000 2,149,000
Other 2,037,000 1,377,000
------------ -----------
Total deferred tax assets 24,918,000 13,622,000
------------ -----------
Deferred tax liabilities:
Depreciation and amortization (8,520,000) (8,679,000)
Other (597,000) (596,000)
------------ -----------
Total deferred tax liabilities (9,117,000) (9,275,000)
------------ -----------
Net deferred tax asset 15,801,000 4,347,000
Valuation allowance (15,801,000) -
------------ -----------
$ - $ 4,347,000
============ ===========
</TABLE>
At December 31, 1996, PCC and its subsidiaries have net operating loss
carryforwards ("NOL's") totaling approximately $27,000,000, none of which expire
before the year 2005 for federal tax purposes and which begin to expire in 1997
for state tax purposes. Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" ("SFAS 109") requires that the tax benefit of
NOL's and deferred tax assets resulting from temporary differences be recorded
as an asset and, to the extent that management can not assess that the
utilization of all or a portion of such NOL's and deferred tax assets is more
likely than not, a valuation allowance should be recorded. Due to the continued
availability of NOL's originating in prior years for federal and state tax
purposes and the significant book and tax losses sustained in 1996, management
is unable to determine that the realization of such asset is more likely than
not and, thus, has provided a valuation allowance for the entire deferred tax
asset at December 31, 1996.
Sales or purchases of PCC's common stock could cause a "change of
control", as defined in Section 382 of the Internal Revenue Code of 1986, as
amended, which would limit the ability of PCC 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 PCC's future utilization of its loss
carryforwards.
41
<PAGE>
PRATT CASINO CORPORATION AND SUBSIDIARIES
(WHOLLY OWNED BY PPI CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Receivables from (net of valuation allowances in 1996) and payables to
affiliates in connection with the aforementioned tax allocation agreements were
as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1996 1995
----------- -----------
<S> <C> <C>
Due from affiliates - current $1,728,000 $9,310,000
Due from affiliates - noncurrent 9,174,000 5,903,000
Due to affiliate - current (129,000) (129,000)
</TABLE>
All amounts set forth above at December 31, 1996 represent deferred federal
taxes. Included in current due from affiliate at December 31, 1995 are net
current federal taxes receivable under the tax allocation agreements of
$3,229,000 with the balance representing current deferred federal taxes
receivable.
(6) TRANSACTIONS WITH RELATED PARTIES
GBHC licenses the trade name "Sands" from a subsidiary of GBCC, which
licenses the name from an unaffiliated third party. Amounts payable by the Sands
under this agreement are equal to the amounts paid to the unaffiliated third
party. Such charges amounted to $283,000 for the year ended December 31, 1996
and $288,000 for each of the years ended December 31, 1995 and 1994.
HWCC - Tunica, Inc. ("HCT"), a wholly owned subsidiary of HCC, owns
and operates a gaming and lodging facility in Tunica County, Mississippi (the
"Tunica Casino") which commenced operations in August 1994. Pursuant to a ten-
year consulting agreement with HCT, PCC receives monthly consulting fees of
$100,000. Such fees amounted to $1,200,000 for each of the years ended December
31, 1996 and 1995 and $1,050,000 for the year ended December 31, 1994.
PCC has, from time to time, advanced monies to GBCC or certain of its
subsidiaries and GBCC or certain of its subsidiaries have advanced monies to PCC
primarily for working capital purposes. An advance to a GBCC subsidiary in the
amount of $5,672,000 was outstanding as of December 31, 1996 and 1995, accrues
interest at the rate of 16.5% per annum and is included in noncurrent due from
affiliates on the accompanying consolidated balance sheets. During the third
quarter of 1996, GBHC borrowed a total of $6,500,000 from GBCC for working
capital purposes. Such borrowings accrue interest at the rate of 13 3/4% per
annum payable quarterly commencing October 1, 1996. During the first quarter of
1997, GBHC borrowed an additional $1,500,000 from GBCC on similar terms.
Repayment of such borrowings from GBCC and the payment of the related interest
are subject to approval by the Casino Commission. Interest income (expense)
incurred with respect to affiliate advances and borrowings is as follows:
42
<PAGE>
PRATT CASINO CORPORATION AND SUBSIDIARIES
(WHOLLY OWNED BY PPI CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Net advances $ 525,000 $ 936,000 $ 665,000
Junior Subordinated Notes (Note 4) (2,193,000) (2,194,000) (1,914,000)
Other affiliate loans (repaid in 1994) - - (525,000)
</TABLE>
Interest receivable on affiliate advances, included in amounts due from
affiliates in the accompanying consolidated balance sheets at December 31, 1996
and 1995 was $3,042,000 and $2,106,000, respectively. Interest accrued on the
Junior Subordinated Notes of $3,010,000 due to GBCC and $817,000 ($341,000 due
to GBCC and $476,000 due to HCC) is included in interest payable on the
accompanying consolidated balance sheets at December 31, 1996 and 1995,
respectively, together with interest payable of $411,000 at December 31, 1996
with respect to the $6,500,000 advance from GBCC.
With the proceeds of the 1994 refinancing of virtually all of PCC's
outstanding casino related indebtedness, PCC and its subsidiaries repaid
intercompany loans and advances of $20,836,000 along with the accrued interest
thereon totaling $9,552,000 during the first quarter of 1994. Additionally, PCC
paid a dividend in the amount of $49,284,000 to PPI Corporation.
From time to time, PCC and its subsidiaries perform certain services for
GBCC and its subsidiaries and invoice those companies for PCC's cost of
providing those services. Similarly, PCC and its subsidiaries are charged for
certain legal, accounting and other expenses incurred by GBCC and its
subsidiaries that relate to PCC's business. Such affiliate transactions are
summarized below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Billings to affiliates $3,067,000 $2,756,000 $1,950,000
Charges from affiliates 3,917,000 2,773,000 3,862,000
</TABLE>
(7) NEW JERSEY REGULATIONS AND OBLIGATORY INVESTMENTS
GBHC and NJMI conduct gaming operations in Atlantic City, New Jersey
and operate a hotel and several restaurants, as well as 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"), GBHC was required to obtain and is required to periodically renew
its operating license. 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 1996, the Casino Commission renewed GBHC's
license to operate the Sands through September 30, 2000 (subject to review of
the Sands' financial stability during 1997) and renewed NJMI's license to manage
the Sands through September 30, 2000. Terms of the current license require GBHC
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
43
<PAGE>
PRATT CASINO CORPORATION AND SUBSIDIARIES
(WHOLLY OWNED BY PPI CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 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.
The Sands has, from time to time, contributed certain amounts held in
escrow to the CRDA. In consideration thereof, the CRDA has granted the Sands
waivers of certain of its investment obligations in future periods. GBHC made
such contributions obligatory investments during the years ended December 31,
1996, 1995 and 1994 totaling $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 and 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.
(8) INVESTMENT IN LIMITED PARTNERSHIP
During February 1994, PCC acquired a limited partnership interest in
Pratt Management, L.P. ("PML"), a limited partnership which, since February 17,
1994, has managed a riverboat gaming and entertainment complex owned by HCC and
located in Aurora, Illinois (the "Aurora Casino"). PML earned management fees
amounting to $9,360,000, $9,432,000 and $8,733,000, respectively, during the
years ended December 31, 1996, 1995 and 1994. PML also incurred operating and
other expenses amounting
44
<PAGE>
PRATT CASINO CORPORATION AND SUBSIDIARIES
(WHOLLY OWNED BY PPI CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
to $2,135,000, $1,939,000 and $1,489,000, respectively, during the years ended
December 31, 1996, 1995 and 1994. PPI Corporation is the general partner of
PML. In accordance with certain terms of the Partnership Agreement, PCC, as
limited partner, receives 1% of the first $84,000 of net income earned by the
partnership each month and 99% of any net income earned above such amount, with
all remaining income distributed to PPI Corporation. Subject to regulatory
approval and effective as of April 1, 1997, HCC will acquire the general
partnership interest in PML.
(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
was most recently renewed in 1996 and 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.
(10) LITIGATION
PCC's subsidiaries are parties in various legal proceedings with respect to
the conduct of casino and hotel operations. Although a possible range of loss
can not be estimated, in the opinion of management, based upon the advice of
counsel, settlement or resolution of these proceedings should not have a
material adverse impact upon the consolidated financial position or results of
operations of PCC and its subsidiaries. The accompanying consolidated financial
statements do not include any adjustments that might result from the outcome of
such uncertainties.
(11) SUPPLEMENTAL CASH FLOW INFORMATION
During 1995, subsidiaries of PCC and GBCC settled certain intercompany
obligations on a non-cash basis. An intercompany receivable totaling $278,000
was eliminated against a portion of GBHC's current federal tax obligations under
the tax allocation agreements (see Note 5). The effects of this elimination
have been excluded from the accompanying consolidated statements of cash flows
as a non-cash transaction.
45
<PAGE>
PRATT CASINO CORPORATION AND SUBSIDIARIES
(WHOLLY OWNED BY PPI CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(12) 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 AND CASH EQUIVALENTS - The carrying amounts approximate fair
-------------------------
value because of the short maturity of these instruments.
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.
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 PCC'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 PCC for debt of
similar remaining maturities. Debt obligations with a short remaining maturity
and obligations with affiliates are valued at the carrying amount.
The estimated carrying amounts and fair values of PCC's financial
instruments at December 31, 1996 and 1995 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 $ 18,650,000 $ 18,650,000 $ 25,606,000 $ 25,606,000
Short-term investments 2,000,000 2,000,000 - -
Obligatory investments 6,382,000 6,382,000 5,521,000 5,521,000
Financial Liabilities
Interest payable $ 14,758,000 $ 14,758,000 $ 12,159,000 $ 12,159,000
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 5/8% Junior Subordinated Notes 15,000,000 15,000,000 15,000,000 15,000,000
Other notes payable 442,000 442,000 453,000 453,000
</TABLE>
46
<PAGE>
PRATT CASINO CORPORATION AND SUBSIDIARIES
(WHOLLY OWNED BY PPI CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(13) 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 $62,999,000 $ 70,772,000 $72,020,000 $59,883,000
Reclassifications 135,000 152,000 - -
----------- ------------ ----------- -----------
Net revenues $63,134,000 $ 70,924,000 $72,020,000 $59,883,000
=========== ============ =========== ===========
Net loss $(6,046,000) $(15,924,000) $(4,196,000) $(7,528,000)
=========== ============ =========== ===========
YEAR ENDED DECEMBER 31, 1995:
Net revenues, as previously reported $68,136,000 $ 71,064,000 $78,378,000 $67,028,000
Reclassifications 150,000 150,000 94,000 150,000
----------- ------------ ----------- -----------
Net revenues $68,286,000 $ 71,214,000 $78,472,000 $67,178,000
=========== ============ =========== ===========
Net (loss) income $(1,675,000) $ 473,000 $ 1,848,000 $(2,204,000)
=========== ============ =========== ===========
</TABLE>
47
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
PRT Funding and PCC had no disagreements with their independent accountants to
report under this item.
PART III
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as 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 20.
2. FINANCIAL STATEMENT SCHEDULES
-- Report of Independent Public Accountants
-- Schedule I; Condensed Financial Information of Registrant, Pratt Casino
Corporation (Parent Company)
-- Balance Sheets
-- Statements of Operations
-- Statements of Cash Flows
-- Notes to Parent Company Financial Statements
-- Schedule II; Valuation and Qualifying Accounts
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 and are inapplicable and therefore
have been omitted.
3. EXHIBITS
+3.1 -- Certificate of Incorporation of PRT Funding Corp. (Exhibit 3.1)
+3.2 -- Certificate of Incorporation of Pratt Casino Corporation. (Exhibit 3.2)
+3.3 -- Bylaws of PRT Funding Corp. (Exhibit 3.3)
+3.4 -- Bylaws of Pratt Casino Corporation. (Exhibit 3.4)
@4.1 -- Indenture dated as of February 15, 1994, among and Shawmut Bank
Connecticut, N.A., as Trustee PRT Funding, as Issuer, PCC, as
Guarantor, (Exhibit 10.54)
@4.2 -- Indenture dated as of February 15, 1994 among GB Inc. and GBHC, as
Guarantors, and Shawmut Bank Property Funding, as Issuer, GB Holdings,
Connecticut, N.A., as Trustee. (Exhibit 10.50)
@4.3 -- Mortgage, Fixture Filing and Security Agreement of Shawmut Bank
Connecticut, National dated February 17, 1994, by GBHC in favor
Association, as Mortgagee. (Exhibit 10.51)
@4.4 -- Security Agreement dated February 17, 1994 made Holdings, Inc.,
Advanced Casino Systems by GB Property Funding Corp., GBHC, GB
International, Inc., Computerized Management Systems International,
Inc. and any Additional Collateral Grantor to Shawmut Bank Connecticut,
National Association, as Trustee. (Exhibit 10.52)
@4.5 -- Collateral Assignment of Leases dated as of Bank Connecticut, National
Association, as February 17, 1994, by GBHC, in favor of Shawmut
Assignee. (Exhibit 10.53)
48
<PAGE>
++10.1 -- Management Services Agreement dated as of August Management, Inc.
("PHMI"), the predecessor of 19, 1987, between Pratt Hotel NJMI,
and GBHC. (Exhibit 10.1)
*10.2 -- Management Services Agreement dated as of June Casino Corporation,
the predecessor in interest of 21, 1991, between HCA and Greate
Bay PML. (Exhibit 10.34)
++10.3 -- Tax Allocation Agreement by and among Pratt Corp., GBHC and
certain other parties effective as Casino Properties, Inc., PHMI,
PCPI Funding of January 1, 1987. (Exhibit 10.18)
++10.4 -- Amended License Agreement by and between Hughes Corporation (now
known as GBCC) dated May 19, Properties, Inc. and Pratt Hotel
1987. (Exhibit 10.3)
***10.5 -- Employment Agreement, as amended, dated November 17, 1995, between
GBHC and Leonard M. DeAngelo. (Exhibit 10.15)
***10.6 -- Employment Agreement dated January 1, 1996, between ACSC and
Lawrence C. Cole. (Exhibit 10.16)
++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 -- Agreement of Limited Partnership of Pratt Management, L.P.
(Exhibit 10.55)
@@@10.12 -- Employment Agreement dated December 1, 1995, as amended, between
GBHC and Robert J. DeSalvio. (Exhibit 10.13)
**10.13 -- Deed dated November 27, 1978 from Colony Associates, L.P. to GBHC.
(Exhibit 10.13)
@@10.14 -- Consulting Agreement dated as of January 1, 1994 between PCC, as
the Consultant, and HWCC - Tunica, Inc. (Exhibit 10.8)
27.1 -- Financial Disclosure Schedule - PRT Funding Corp.
27.2 -- Financial Disclosure Schedule - Pratt Casino Corporation and
Subsidiaries
_________________________________
+ Incorporated by reference from the exhibit shown in parenthesis to
Form S-1 Registration Statement (Registration No. 33-69768) for
PRT Funding Corp. as filed with the SEC on February 2, 1994.
++ 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 February 26,
1993.
+++ Incorporated by reference from the exhibit shown in a parenthesis
to Hollywood Casino Corporation's Annual Report on Form 10-K for
the year ended December 31, 1996.
* Incorporated by reference from the exhibit shown in parenthesis to
the registration statement on Form 10 filed with the Securities
and Exchange Commission on May 28, 1992 by PRT Corporation, the
predecessor of HCC.
** Incorporated by reference from the exhibit shown in parenthesis to
Form S-1 Registration Statement (Registration No. 33-69716) for GB
Property Funding Corp. as filed with the SEC on February 2, 1994.
*** Incorporated by reference from the exhibit shown in parenthesis to
Hollywood Casino Corporation's Annual Report on Form 10-K for the
year ended December 31, 1995.
49
<PAGE>
@ 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.
@@@ Incorporated by reference from the exhibit shown in parenthesis to
GBCC's Annual Report on Form 10-K for the year ended December 31,
1996.
(B) REPORTS ON FORM 8-K
Neither PRT Funding Corp. nor Pratt Casino Corporation filed any
reports on Form 8-K during the quarter ended December 31, 1996.
50
<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.
PRT FUNDING CORP.
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, President and Director
/s/ Edward T. Pratt, Jr. Vice Chairman of the March 27, 1997
- --------------------------- Board and Director ----------------
Edward T. Pratt, Jr.
/s/ William D. Pratt Executive Vice March 27, 1997
- --------------------------- President, General ----------------
William D. Pratt Counsel, Secretary
and Director
/s/ Edward T. Pratt III Executive Vice President March 27, 1997
- --------------------------- and Director ----------------
Edward T. Pratt III
/s/ John C. Hull Principal Accounting Officer March 27, 1997
- --------------------------- ----------------
John C. Hull
51
<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.
PRATT 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 and Director ----------------
Edward T. Pratt, Jr.
/s/ William D. Pratt Executive Vice March 27, 1997
- --------------------------- President, General ----------------
William D. Pratt Counsel, Secretary
and Director
/s/ Edward T. Pratt III President, Chief Operating March 27, 1997
- --------------------------- Officer and Director ----------------
Edward T. Pratt III
/s/ John C. Hull Principal Accounting Officer March 27, 1997
- --------------------------- ----------------
John C. Hull
52
<PAGE>
INDEX TO FINANCIAL STATEMENT SCHEDULES
PRATT 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
-- Notes to Parent Company Financial Statements
-- Schedule II; Valuation and Qualifying Accounts
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
----------------------------------------
To Pratt Casino Corporation:
We have audited in accordance with generally accepted auditing standards, the
consolidated financial statements of Pratt Casino Corporation and subsidiaries
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
PRATT CASINO CORPORATION AND SUBSIDIARIES
(WHOLLY OWNED BY PPI CORPORATION)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
PRATT CASINO CORPORATION
(PARENT COMPANY)
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1996 1995
------------- ------------
<S> <C> <C>
Cash $ 607,000 $ 509,000
Short-term investments 2,000,000 -
Due from affiliates 169,000 594,000
Other current assets 804,000 28,000
------------- ------------
Total current assets 3,580,000 1,131,000
------------- ------------
Investment in limited partnership 1,746,000 2,017,000
Deferred financing costs 2,608,000 2,966,000
------------- ------------
Total other assets 4,354,000 4,983,000
------------- ------------
$ 7,934,000 $ 6,114,000
============= ============
</TABLE>
LIABILITIES AND SHAREHOLDER'S DEFICIT
<TABLE>
<CAPTION>
<S> <C> <C>
Due to affiliate $ 3,700,000 $ 1,550,000
Accrued interest payable 2,161,000 1,796,000
------------- ------------
Total current liabilities 5,861,000 3,346,000
------------- ------------
Long-term debt 67,900,000 67,900,000
------------- ------------
Investment in subsidiaries 39,278,000 6,279,000
------------- ------------
Shareholder's deficit:
Common stock, $1.00 par value per share,
1,000 shares authorized and outstanding 1,000 1,000
Accumulated deficit (105,106,000) (71,412,000)
------------- ------------
Total shareholder's deficit (105,105,000) (71,411,000)
------------- ------------
$ 7,934,000 $ 6,114,000
============= ============
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of this schedule.
<PAGE>
SCHEDULE I
PAGE 2
PRATT CASINO CORPORATION AND SUBSIDIARIES
(WHOLLY OWNED BY PPI CORPORATION)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
PRATT CASINO CORPORATION
(PARENT COMPANY)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1996 1995 1994
------------- ------------ ------------
<S> <C> <C> <C>
Revenues:
Consulting fees $ 1,200,000 $ 1,200,000 $ 1,050,000
------------ ----------- -----------
Expenses:
Amortization 358,000 358,000 307,000
General and administrative 93,000 83,000 439,000
------------ ----------- -----------
Total expenses 451,000 441,000 746,000
------------ ----------- -----------
Income from operations 749,000 759,000 304,000
------------ ----------- -----------
Non-operating income (expense):
Interest income 80,000 7,000 -
Interest expense (8,044,000) (8,045,000) (7,004,000)
Equity in earnings of limited partnership 6,162,000 6,429,000 6,264,000
------------ ----------- -----------
Total non-operating expense, net (1,802,000) (1,609,000) (740,000)
------------ ----------- -----------
Loss before income tax benefit and other item (1,053,000) (850,000) (436,000)
Income tax benefit 358,000 292,000 145,000
------------ ----------- -----------
Loss before other item (695,000) (558,000) (291,000)
Equity in losses of consolidated subsidiaries (32,999,000) (1,000,000) (885,000)
------------ ----------- -----------
Net loss $(33,694,000) $(1,558,000) $(1,176,000)
============ =========== ===========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of this schedule.
<PAGE>
SCHEDULE I
PAGE 3
PRATT CASINO CORPORATION AND SUBSIDIARIES
(WHOLLY OWNED BY PPI CORPORATION)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
PRATT 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 $ (52,000) $ (733,000) $ 1,257,000
----------- ---------- ------------
Investing activities:
Short-term investment (2,000,000) - -
Investments in consolidated subsidiaries - - (15,000,000)
Investment in limited partnership - - (1,000)
----------- ---------- ------------
Net cash used in investing activities (2,000,000) - (15,001,000)
----------- ---------- ------------
Financing activities:
Issuance of long-term debt - - 67,900,000
Borrowing from affiliates 2,150,000 - -
Deferred financing costs - - (3,631,000)
Dividends paid - - (49,284,000)
----------- ---------- ------------
Net cash provided by financing activities 2,150,000 - 14,985,000
----------- ---------- ------------
Net increase (decrease) in cash 98,000 (733,000) 1,241,000
Cash at beginning of year 509,000 1,242,000 1,000
----------- ---------- ------------
Cash at end of year $ 607,000 $ 509,000 $ 1,242,000
=========== ========== ============
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of this schedule.
<PAGE>
SCHEDULE I
PAGE 4
PRATT CASINO CORPORATION AND SUBSIDIARIES
(WHOLLY OWNED BY PPI CORPORATION)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
PRATT CASINO CORPORATION
(PARENT COMPANY)
NOTES TO PARENT COMPANY FINANCIAL STATEMENTS
(1) GUARANTEES OF REGISTRANT
Pratt Casino Corporation ("PCC") has unconditionally guaranteed the debt
obligations of PRT Funding Corp., a wholly owned subsidiary of PCC, as to
the timely payment of principal, premium, if any, and interest. PCC has
also guaranteed the outstanding borrowings under a $2,000,000 bank line of
credit agreement ($5,000,000 at December 31, 1995) entered into by Greate
Bay Hotel and Casino, Inc., an indirect wholly owned subsidiary of PCC.
During 1996, PCC pledged a certificate of deposit on the face amount of
$2,000,000 as collateral for the line of credit; such deposit is presented
as a short-term investment in the accompanying financial statements. At
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 certificate of
deposit in January 1997 and the line of credit was cancelled.
(2) SCHEDULED PAYMENTS OF LONG-TERM DEBT
All of PCC's long-term debt outstanding of $67,900,000 at December 31, 1996
matures during 2004. Interest paid during the years ended December 31,
1996, 1995 and 1994 amounted to $7,679,000, $8,410,000 and $4,843,000,
respectively.
(3) DIVIDENDS RECEIVED
PCC received dividends from Pratt Management, L.P. amounting to $6,433,000,
$6,421,000 and $4,256,000, 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
PRATT CASINO CORPORATION AND SUBSIDIARIES
(WHOLLY OWNED BY PPI CORPORATION)
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
AMOUNTS
BALANCE AT CHARGED TO BALANCE
BEGINNING COSTS AND AT END
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS OF PERIOD
------------- ----------- ---------- ---------------- -----------
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1996:
Allowance for doubtful
accounts receivable $16,494,000 $2,167,000 $ (3,137,000) (1) $15,524,000
Allowance for obligatory
investments 3,792,000 1,344,000 (735,000) (2) 4,401,000
----------- ---------- --------------- -----------
$20,286,000 $3,511,000 $ (3,872,000) $19,925,000
=========== ========== =============== ===========
YEAR ENDED DECEMBER 31, 1995:
Allowance for doubtful
accounts receivable $15,288,000 $2,988,000 $ (1,782,000) (1) $16,494,000
Allowance for obligatory
investments 2,458,000 1,457,000 (123,000) (2) 3,792,000
----------- ---------- --------------- -----------
$17,746,000 $4,445,000 $ (1,905,000) $20,286,000
=========== ========== =============== ===========
YEAR ENDED DECEMBER 31, 1994:
Allowance for doubtful
accounts receivable $14,805,000 $3,283,000 $ (2,800,000) (1) $15,288,000
Allowance for obligatory
investments 3,065,000 617,000 (1,224,000) (2) 2,458,000
----------- ---------- --------------- -----------
$17,870,000 $3,900,000 $ (4,024,000) $17,746,000
=========== ========== =============== ===========
</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.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF PRT FUNDING CORP. AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000912897
<NAME> PRT FUNDING CORP.
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1995
<PERIOD-START> JAN-01-1996 JAN-01-1995
<PERIOD-END> DEC-31-1996 DEC-31-1995
<CASH> 1,141 18
<SECURITIES> 0 0
<RECEIVABLES> 3,972 2,875
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 5,113 2,893
<PP&E> 0 0
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 105,113 102,893
<CURRENT-LIABILITIES> 5,087 2,888
<BONDS> 100,000 100,000
0 0
0 0
<COMMON> 1 1
<OTHER-SE> 25 4
<TOTAL-LIABILITY-AND-EQUITY> 105,113 102,893
<SALES> 0 0
<TOTAL-REVENUES> 0 0
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 0 2
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> (27) (18)
<INCOME-PRETAX> 27 16
<INCOME-TAX> 6 1
<INCOME-CONTINUING> 21 15
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 21 15
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF PRATT CASINO CORPORATION AND SUBSIDIARIES
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000912928
<NAME> PRATT CASINO CORPORATION
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1995
<PERIOD-START> JAN-01-1996 JAN-01-1995
<PERIOD-END> DEC-31-1996 DEC-31-1995
<CASH> 18,650 25,606
<SECURITIES> 0 0
<RECEIVABLES> 25,638 28,007
<ALLOWANCES> 15,524 16,494
<INVENTORY> 3,873 4,268
<CURRENT-ASSETS> 40,375 56,160
<PP&E> 317,004 312,685
<DEPRECIATION> 160,989 145,244
<TOTAL-ASSETS> 234,286 256,940
<CURRENT-LIABILITIES> 55,089 40,519
<BONDS> 282,930 285,442
0 0
0 0
<COMMON> 1 1
<OTHER-SE> (105,106) (71,412)
<TOTAL-LIABILITY-AND-EQUITY> 234,286 256,940
<SALES> 0 0
<TOTAL-REVENUES> 265,961 285,150
<CGS> 0 0
<TOTAL-COSTS> 233,118 220,643
<OTHER-EXPENSES> 28,986 32,198
<LOSS-PROVISION> 2,167 2,988
<INTEREST-EXPENSE> 31,037 30,350
<INCOME-PRETAX> (29,347) (1,029)
<INCOME-TAX> 4,347 529
<INCOME-CONTINUING> (33,694) (1,558)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (33,694) (1,558)
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
</TABLE>
