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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, 1997
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 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)
C/O SANDS HOTEL & CASINO
INDIANA AVENUE & BRIGHTON PARK, 9TH FLOOR
ATLANTIC CITY, NEW JERSEY 08401
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(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code): (609) 441-0704
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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
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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 27, 1998, 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 27, 1998, 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
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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"). PRT Funding is wholly owned by Pratt Casino
Corporation ("PCC"), a Delaware corporation and an indirect, wholly owned
subsidiary of Greate Bay Casino Corporation ("GBCC"), also a Delaware
corporation. Prior to December 31, 1996, Hollywood Casino Corporation ("HCC")
owned approximately 80% of the common stock of GBCC; such stock was distributed
by HCC to its shareholders. GBCC's common stock is listed on the OTC Bulletin
Board Service under the trading symbol "GEAA"; GBCC is subject to the reporting
requirements of the Securities Act of 1934. PRT Funding's obligations are
unconditionally guaranteed as to the timely payment of principal, premium, if
any, and interest by PCC. PRT Funding and PCC have principal executive offices
at Indiana Avenue & Brighton Park, 9th Floor, Atlantic City, New Jersey 08401.
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 GB
Holdings, Inc. ("Holdings"), which is 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.
On January 5, 1998, GBHC, Holdings, and GB Property Funding Corp. ("GB
Property Funding"), a wholly owned subsidiary of Holdings, each filed petitions
for relief under Chapter 11 of the United States Bankruptcy Code (the
"Bankruptcy Code") in the United States Bankruptcy Court, for the District of
New Jersey (the "Bankruptcy Court"). Each company continues to operate in the
ordinary course of business, as set forth in the Bankruptcy Code, and each
company's officers and directors as of the date of the filing remain in office,
subject to the supervision of the Bankruptcy Court. The filings of such
petitions constitute a default under the indenture for the PRT Funding Notes;
accordingly, the outstanding principal amount of the PRT Funding Notes has
accelerated and is currently due and payable.
PCC is a holding company that, through its subsidiaries, owns and manages
the Sands. In addition to its ownership of Holdings, PCC is also the sole
limited partner of Pratt Management, L.P. ("PML"), a limited partnership which
manages a riverboat gaming and entertainment facility located in Aurora,
Illinois (the "Aurora Casino") owned by HCC. Effective April 1, 1997, HCC
acquired the general partnership interest in PML from another subsidiary of
GBCC. PCC also has a consulting agreement with HWCC-Tunica, Inc. ("HCT"), a
wholly owned subsidiary of HCC, which owns and operates a gaming and lodging
facility in Tunica County, Mississippi (the "Tunica Casino"). The contract,
which expires on December 31, 2003, provides for a monthly fee of $100,000.
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.
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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), 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. As a result of its bankruptcy filing, GBHC can elect to reject the Sands
Management Contract at any time subject to a damage claim by NJMI. The amount
of damages, if any, would ultimately require approval of the Bankruptcy Court.
THE SANDS
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For a description of the Sands' facilities, please refer to "Item 2. -
Properties."
Business Strategy. The Sands' marketing strategy in the highly competitive
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Atlantic City market has consisted of seeking higher-value repeat patrons
through 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.
In implementing the Sands' marketing and operating strategy, the Sands uses
proprietary casino information technology of 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 are
connected with, and information with respect to table games can be input into
its data base monitoring system. When patrons use the casino player's card at
slot machines or table games, the information is immediately available to
management and allows management to implement marketing programs to recognize
and reward patrons during their visits to the casino. Certain of these
marketing programs allow patrons to automatically credit themselves with
complimentaries based on their levels of play. 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
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to monitor, analyze and control the granting of gaming credit, promotional
expenses and other marketing costs.
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
directly market to these patrons in an attempt to convert them into repeat
patrons.
Competition. The Sands faces intense competition from the 11 other existing
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Atlantic City casinos. According to reports of the New Jersey Casino Control
Commission (the "Casino Commission"), the twelve Atlantic City casinos currently
offer over one million square feet of gaming space. Several companies have
announced plans to build and operate additional casino/hotels over the next few
years. For example, Mirage Resorts has announced plans for an approximately $1
billion resort complex consisting of a casino, a 4,000 room hotel, several
theaters and an upscale shopping concourse at a site located in the Marina
District. The State of New Jersey has announced a tunnel project connecting the
Atlantic City Expressway with the Marina District. Sun International acquired
an existing casino in Atlantic City and is proceeding with a significant
expansion and renovation including the addition of hotel rooms and gaming space.
Bally's Park Place is currently constructing a new parking and bus facility and
Caesars' Atlantic City is constructing a new entrance to their facility, both
located directly on Pacific Avenue. 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 expansions 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 spaces, hotel accommodations,
proximity to the Boardwalk, proximity to other casino/hotels, and access to the
main expressway entering into Atlantic City. GBHC believes that in prior years
its operating strategy enabled the Sands to compete against most other Atlantic
City casino/hotels. However, many of its competitors have greater sources of
funding for capital improvements and financial resources for marketing and
promotional budgets than GBHC and, as a result, the Sands' facilities and
amenities have fallen behind many of the other casinos. In addition, the lack
of access to Pacific Avenue has hampered the Sands' efforts to expand its
"drive-in" patron base.
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. Gaming on cruise ships
departing from New York City has recently begun and further expansion of such
activities is uncertain at this time. In addition, slot machines are now
allowed at race tracks in the State of Delaware.
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Industry Developments. A number of significant changes to the regulations
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governing the casino industry have been approved by New Jersey regulators in
recent years. Significant deregulation of the industry began in 1995 with the
enactment of legislation amending the New Jersey Casino Control Act (the "Casino
Act") and has continued with additional rule modifications to continue to
stimulate industry growth. Partly as a result of such regulatory changes,
revenues have shown small, but steady increases from $3.7 billion in 1995 to
$3.8 billion in 1996 to $3.9 billion in 1997.
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 1997 slot win accounted for nearly 70% of total Atlantic
City gaming win. Table games remain important, however, to a select segment of
gaming patrons as well as in adding to the gaming ambience and providing a
varied gaming experience.
Casino Credit. Casino operations are conducted on both a credit and a cash
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basis. Gaming debts arising in Atlantic City in accordance with applicable
regulations are enforceable under New Jersey law. For the year ended December
31, 1997, gaming credit extended to Sands' customers accounted for approximately
26.8% of overall table game wagering, while table game wagering accounted for
approximately 21.5% of overall casino wagering during the period. At December
31, 1997, gaming receivables amounted to $22 million before allowances for
uncollectible gaming receivables amounting to $14.9 million. Management of the
Sands believes that the allowances for uncollectible gaming receivables are
adequate.
License Agreement. GBCC entered into a 99-year license agreement (the "Sands
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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 $290,000,
$283,000 and $288,000 during the years ended December 31, 1997, 1996 and 1995,
respectively.
Employees and Labor Relations. In Atlantic City, all casino employees,
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except certain hotel employees, must be licensed under the Casino Act. Due to
the seasonality of the operations of the Sands, the number of employees varies
during the course of the year. At December 31, 1997, there were approximately
3,000 employees at the Sands. The Sands has collective bargaining agreements
with three 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
agreement with Local 54 expires in September 1999. Collective bargaining
agreement negotiations with a fourth union are currently underway. Management
considers its labor relations to be good.
Casino Regulation. Casino gaming is strictly regulated in Atlantic City
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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
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.
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.
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A license is not transferable and may be revoked or suspended under certain
circumstances by the Casino Commission. A plenary license authorizes the
operation of a casino with the games authorized in an operation certificate
issued by the Casino Commission, and the operation certificate may be issued
only on a finding that the casino conforms to the requirements of the Casino Act
and applicable regulations and that the casino is prepared to entertain the
public. Under such determination, GBHC and NJMI have been issued plenary casino
licenses, and GBCC has been approved as a holding company of a casino licensee.
The plenary licenses issued to GBHC and NJMI to own and operate the Sands
were renewed by the Casino Commission in September 1996 and extended through
September 30, 2000, subject to review of the Sands' financial stability during
1997. Such review took place and the Sands is scheduled for another review in
1998. 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, 1997, 1996 and 1995, the taxes assessed by, and the license and
other fees incurred by the Sands amounted to $22.4 million, $23.5 million and
$25 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, 1997, 1996 and 1995 totaling $147,000, $1.5 million and
$250,000, respectively, resulting in waivers granted by the CRDA during 1997 and
1995 totaling $75,000 and $128,000, respectively. No such waivers were granted
during 1996; however, the contributions were 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 by the New Jersey Division of Gaming Enforcement that the "Institutional
Investor" may be found unqualified, the Casino Commission shall grant a waiver
of this qualification requirement with respect to publicly traded debt or equity
securities if the investor will own (i) less than 10% of the common stock of the
company in question on a fully diluted basis, (ii) less than 20% of such
company's indebtedness or (iii) less than 50% of an outstanding issue of
indebtedness of such company; the Casino Commission, upon a showing of good
cause, may, in its sole discretion, grant a waiver of qualification to an
"Institutional Investor" not satisfying the above criteria. An Institutional
Investor must also purchase securities for investment and have no intent to
influence the management or operations of such company. The Casino Commission
may, in its sole discretion, grant a waiver of the qualification requirement to
investors not qualifying as "Institutional Investors" under the Casino Act if
such investor will own less than 5% of the publicly traded common stock of such
company on a fully diluted basis or less than 15% of the publicly traded
outstanding indebtedness of such company.
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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, 1997, distributions totaled $6.5 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).
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.
State Regulation - Supplier's License. PML is required to maintain a
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supplier's license with respect to the management services it provides to the
Aurora Casino. PML's supplier's license expired in December 1997 and was
renewed by the Illinois Gaming Board through December 1998. 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.
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 55 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, a gourmet
restaurant, a large
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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.
One parking garage is located directly across the street and is connected to
the Pavilion through a climate controlled tunnel. The 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 1995, the Company completed a 10,000 square foot expansion of one of the
Aurora Casino's riverboats. 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. The Company
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 Company's 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 affluent
-----------------
suburbs north and west of Chicago. Based on a sampling of its patrons, the
Company believes that the casino drew approximately 36% of its patrons from such
suburbs during 1997. 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 135,000 square feet of combined gaming space. No additional
casinos may be licensed in Illinois without the passage of new state
legislation; however, one existing license is currently available for reissue.
There are also five riverboat casino operations in northwestern Indiana which
compete within the Chicago-area market.
The Aurora Casino's riverboats currently depart from their landings for as
many as 14 daily cruises on weekdays and 17 cruises on weekends, commencing at
various times from 9:00 a.m. until 4:30 a.m. This schedule may be varied, based
on experience and seasonal factors. The use of a staggered cruise schedule with
two vessels significantly reduces the waiting time until the next gaming session
for patrons who miss a cruise departure. Once passengers board, they are
permitted to game during the half hour prior to the time the riverboat departs.
After the excursion, passengers are permitted to game for another half hour
before new passengers board, for a total of two to three hours of gaming per
cruise, depending on the cruising schedule. In addition, Illinois regulations
permit dockside gaming if the riverboat captain reasonably determines that it is
unsafe to cruise due to inclement weather, mechanical or structural problems or
river icing. During dockside gaming, the Aurora riverboats operate on their
normal schedules and passengers may leave the vessels at any time but may board
only during the half hour prior to the regularly scheduled start of the cruise.
The Aurora Casino employs a marketing strategy designed to take advantage of
its proximity to the affluent northern and western suburbs of Chicago and the
large population base of the Chicago metropolitan area. Management uses a
patron data base developed through ACSC's systems to focus its marketing efforts
on patrons who have been identified through the system as having the
characteristics of a higher value patron. Given the limited number of gaming
positions available on each daily casino excursion, management believes that
its process of identifying the premium patron, encouraging participation in its
various casino players' card programs and tailoring promotions and special
events to cater to this market segment will enhance profitability.
The Aurora Casino also markets to the "mass" casino patron market segment
through various forms of advertising media as well as through group and bus tour
packages. Once new patrons are introduced to the Company's gaming facility and
its casino players' card programs, management uses its data base capabilities to
direct market to these patrons in an attempt to convert them into higher value
patrons.
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Management believes that the Aurora Casino's facilities, in particular its
highly-themed dockside Pavilion and its close proximity to the Paramount
Theatre, an 1,800-seat art deco theatre in which the Company features headliner
entertainment, are appealing to both the premium and mass casino patron markets.
Entertainers who have appeared include Frank Sinatra, Tom Jones, Ann-Margaret,
the Temptations, Howie Mandel, Willie Nelson and the Bolshoi Ballet.
Competition. The gaming industry is highly fragmented and characterized by a
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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; however, one licensed site ceased gaming operations
in July 1997. 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 also competes directly with five riverboat
operations opened since 1996 in northwestern Indiana within 25 miles of downtown
Chicago. 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. Legislation could also
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, three groups have been chosen to operate casinos in the
Detroit, Michigan market; however, the establishment of a regulatory system and
subsequent licensing have yet to be accomplished. Accordingly, it is not
anticipated that any Detroit casino will be operational until 2001. Native
American Indian tribes are seeking to open casino facilities in northwestern
Indiana and Michigan under the Indian Gaming Regulatory Act. The opening of
additional casinos proximate to Chicago could have a material adverse impact on
the Aurora Casino.
Casino Credit. Casino operations are conducted on both a credit and a cash
-------------
basis. Gaming debts arising in Aurora in accordance with applicable regulations
are enforceable under Illinois law. For the year ended December 31, 1997,
gaming credit extended to customers accounted for approximately 14% of overall
table game wagering, while table game wagering accounted for approximately 13%
of overall casino wagering during the period. At December 31, 1997, gaming
receivables amounted to $2.1 million before allowances for uncollectible gaming
receivables which amounted to $483,000. Management of the Aurora Casino
believes that the allowances for uncollectible gaming receivables are adequate.
Employees and Labor Relations. In Aurora, all casino employees must be
-----------------------------
licensed by the Illinois Gaming Board. At December 31, 1997 there were
approximately 1,500 employees at the Aurora Casino, none of whom are
represented under collective bargaining agreements. Management considers its
labor relations to be good.
9
<PAGE>
Casino Regulation. 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.
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 $7.2 million,
$6.4 million and $5.4 million , respectively, during 1997, 1996 and 1995.
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. The wagering tax for the Aurora Casino amounted to $30.7
million, $31.3 million and $29.3 million, respectively, for the years 1997, 1996
and 1995. Effective January 1, 1998 the wagering tax rate was revised to a
graduated tax at rates ranging from 15% to 35% based on total adjusted gross
receipts. Had the new rates been in effect for the year ended December 31,
1997, the Aurora Casino's wagering tax would have increased to $41.3 million,
which in turn would have reduced PML's management fee by approximately $1
million.
The Illinois Gaming Board is authorized to conduct investigations into the
conduct of gaming employees 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.
10
<PAGE>
THE TUNICA CASINO CONSULTING AGREEMENT
- --------------------------------------
PCC, by virtue of its ownership and management of the Sands and its
management of the Aurora Casino, had certain casino management experience and
expertise which, at the time of its opening, the Tunica Casino 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.
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 2,025 slot machines and
approximately 105 table games; a hotel with 532 rooms (including 59 suites); six
restaurants; two cocktail lounges; 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 approximately 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 1,750 vehicles. In
addition, a nearby warehouse and a building in Atlantic City that houses an auto
shop facility also support the Sands' operations.
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 was payable during the first three years. Commencing
on July 15, 1997, semiannual principal payments of $2.5 million became due on
each interest payment date with the balance due at maturity. Such semiannual
payments may be made in cash or by tendering to the trustee 10 7/8% First
Mortgage Notes previously purchased or otherwise acquired by GB Property
Funding. During May 1997, GB Property Funding acquired $2,500,000 face amount
of 10 7/8% First Mortgage Notes which were used on June 4, 1997 to make the July
15, 1997 required principal payment.
On January 5, 1998, GB Property Funding, Holdings, and GBHC filed petitions
for relief under Chapter 11 of the Bankruptcy Code in the United States
Bankruptcy Court for the District of New Jersey. Each company continues to
operate in the ordinary course of business, as set forth in the Bankruptcy Code,
and each company's officers and directors as of the date of the filing remain in
office, subject to the supervision of the Bankruptcy Court. As a consequence of
the filing, the principal and interest payment due on January 15, 1998 was not
made and the accrual of additional interest on the 10 7/8% First Mortgage Notes
has been suspended.
On February 17, 1994, PRT Funding issued the PRT Funding Notes. Interest
on the PRT Funding Notes accrues at the rate of 11 5/8% per annum, payable
semiannually commencing October 15, 1994. The PRT Funding Notes are redeemable
at the option of the issuer, in whole or in part, on or after April 15, 1999 at
stated redemption prices ranging up to 104.36% of par plus accrued interest.
The indenture for the PRT Funding Notes contains various provisions which, among
other things, restrict the ability of certain subsidiaries of PCC to pay
dividends to GBCC, to merge, consolidate or sell substantially all of their
assets or to incur additional indebtedness beyond certain limitations. The
indenture also contains certain cross default provisions with the indenture to
the 10 7/8% First Mortgage Notes described above. As a result of the Chapter 11
filings discussed in the previous paragraph, a default under the Indenture for
the PRT Funding Notes has occurred. As a consequence, the outstanding principal
balance of the PRT Funding Notes has accelerated and is currently due and
payable.
11
<PAGE>
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
On January 5, 1998, Holdings, GB Property Funding and GBHC filed petitions
for relief under Chapter 11 of the Bankruptcy Code. Each company continues to
operate in the ordinary course of business, as set forth in the Bankruptcy Code,
and each company's officers and directors as of the date of the filing remain in
office, subject to the supervision of the Bankruptcy Court.
As a result of the default and automatic acceleration under the indenture
for the PRT Funding Notes, the holders of the PRT Funding Notes could initiate
judicial proceedings to enforce their claims for payment. No such proceedings
have been initiated and negotiations with PRT Funding's creditors are currently
underway for a possible restructuring of the debt obligations.
GBHC 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of 1997, no matter was submitted to a vote of
security holders through the solicitation of proxies or otherwise.
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.
12
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
PRT FUNDING CORPORATION AND PRATT CASINO CORPORATION
The following tables set forth selected financial information for PRT Funding
and PCC and are qualified in their entirety by, and should be read in
conjunction with, PRT Funding's and PCC's Financial Statements and notes thereto
contained elsewhere herein. The data as of December 31, 1997 and 1996, and for
the years ended December 31, 1997, 1996 and 1995, have been derived from the
audited financial statements of PRT Funding and PCC contained elsewhere in Item
8.
PRT FUNDING CORP.
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS DATA:
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1997 1996 1995 1994 1993(1)
--------- --------- --------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Interest income............................... $ 12,077 $ 12,102 $ 12,093 $ 10,505 $ -
Interest expense.............................. (12,075) (12,075) (12,075) (10,505) -
General and administrative expenses........... - - (2) (11) -
-------- -------- -------- -------- -----
Operating income.............................. 2 27 16 (11) -
Valuation provision on affiliate receivables.. (33,988) - - - -
-------- -------- -------- -------- -----
(Loss) income before income taxes............. (33,986) 27 16 (11) -
Income tax provision.......................... - (6) (1) - -
-------- -------- -------- -------- -----
Net (loss) income............................. $(33,986) $ 21 $ 15 $ (11) $ -
======== ======== ======== ======== =====
</TABLE>
<TABLE>
<CAPTION>
BALANCE SHEET DATA:
DECEMBER 31,
----------------------------------------------------
1997 1996 1995 1994 1993(1)
--------- --------- --------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Total assets.................................. $ 73,321 $105,113 $102,893 $103,975 $ 1
Total debt.................................... 100,000 100,000 100,000 100,000 -
Shareholder's (deficit) equity................ (33,960) 26 5 (10) 1
</TABLE>
- ----------------------------------------------
(1) PRT Funding was incorporated on September 29, 1993.
13
<PAGE>
PRATT CASINO CORPORATION
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS DATA:
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------
1997 1996 1995 1994 1993(1)
------------ ---------- --------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net revenues.................................... $ 257,455 $ 265,961 $285,150 $276,189 $262,440
--------- --------- -------- -------- --------
Expenses:
Departmental................................. 215,907 235,285 223,631 215,081 201,911
General and administrative................... 13,420 15,492 18,387 19,575 19,241
Depreciation and amortization................ 14,420 19,669 20,296 19,179 19,829
--------- --------- -------- -------- --------
Total expenses.............................. 243,747 270,446 262,314 253,835 240,981
--------- --------- -------- -------- --------
Income (loss) from operations................ 13,708 (4,485) 22,836 22,354 21,459
--------- --------- -------- -------- --------
Non-operating income (expense):
Interest income.............................. 1,801 1,799 1,945 2,186 1,831
Interest expense............................. (33,167) (32,836) (32,295) (30,563) (25,067)
Gain on disposal of assets................... 59 13 56 73 -
Equity in earnings of limited partnership.... 7,008 6,162 6,429 6,264 -
--------- --------- -------- -------- --------
Total non-operating expenses, net........... (24,299) (24,862) (23,865) (22,040) (23,236)
--------- --------- -------- -------- --------
(Loss) income before income taxes, cumulative
effect of accounting change, extraordinary
and other items.............................. (10,591) (29,347) (1,029) 314 (1,777)
Valuation provision on affiliate receivables.... (9,650) - - - -
Write off deferred financing costs.............. (6,515) - - - -
Reorganization costs............................ (505) - - - -
--------- --------- -------- -------- --------
Loss before income taxes, cumulative effect of
accounting change and extraordinary item..... (27,261) (29,347) (1,029) 314 (1,777)
Income tax provision............................ (9,518) (4,347) (529) (1,490) (649)
--------- --------- -------- -------- --------
Loss before cumulative effect of accounting
change and extraordinary items............... (36,779) (33,694) (1,558) (1,176) (2,426)
Extraordinary item:
Cost of early retirement of debt, net of
related tax benefit........................... 310 - - - (5,667)
Cumulative effect of accounting change.......... - - - - 2,000
--------- --------- -------- -------- --------
Net loss........................................ $ (36,469) $ (33,694) $ (1,558) $ (1,176) $ (6,093)
========= ========= ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
BALANCE SHEET DATA:
DECEMBER 31,
-----------------------------------------------------------
1997(2) 1996 1995 1994 1993(1)
------------ ---------- --------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Total assets.................................... $ 6,258 $ 234,286 $256,940 $255,778 $225,905
Total debt...................................... 100,000 285,442 285,453 285,463 183,094
Shareholder's deficit........................... (141,574) (105,105) (71,411) (69,853) (19,393)
</TABLE>
- ----------------------------------------------
(1) PCC was incorporated in September 1993 and acquired GBHC and NJMI through
capital contributions from its parent. The combination was accounted for as
a combination of entities under common control, a method of accounting
similar to a pooling of interests; accordingly, the financial data for PCC
is presented as if the accounts of PCC and its subsidiaries had always been
combined.
(2) As a result of the Chapter 11 filings by Holdings, GB Property Funding and
GBHC, PCC's control over these subsidiaries is subject to supervision of the
Bankruptcy Court and PCC does not expect to be in control of such
subsidiaries after reorganization. Accordingly, these subsidiaries are
excluded from the consolidated balance sheet of PCC at December 31, 1997.
14
<PAGE>
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.
LIQUIDITY AND CAPITAL RESOURCES
PCC and its subsidiaries conduct two major business activities.
PCC and NJMI provide management and consulting services or invest in entities
which provide such services to affiliates which own hotel and casino properties.
Cash flow from such activities, specifically the PML limited partnership
interest held by PCC, the Tunica Consulting Contract and the Sands Management
Contract have historically been sufficient to meet debt service obligations on
the PRT Funding Notes ($9.9 million annually) and, when permitted by the PRT
Funding Note indenture, on the Junior Subordinated Notes.
As a consequence of the Chapter 11 filing by Holdings, GB Property Funding
and GBHC, PRT Funding is in default on the $85 million principal amount of PRT
Funding Notes which accelerated and became immediately due and payable together
with accrued interest. The bankruptcy filing of GBHC also permits it to reject
the Sands Management Contract which is an important source of funds for debt
service on the PRT Funding Notes. PCC does not have the financial resources or
the capacity to borrow sufficient cash to satisfy the $85 million principal
amount of the PRT Funding Notes which have accelerated. Consequently, PCC, as
guarantor of the PRT Funding Notes, is presently in negotiations with the PRT
Funding noteholders seeking to restructure its obligations. There can be no
assurance at this time that such negotiations will result in restructuring of
its obligations. Accordingly, there is substantial doubt about the ability of
PCC to continue as a going concern.
Holdings and GBHC own the Sands Hotel and Casino in Atlantic City. Prior to
1996, the Sands' cash flow was sufficient to meet debt service obligations and
fund a substantial portion of annual capital expenditures. The Sands also used
short-term borrowings to fund seasonal cash needs for certain capital projects.
Beginning in early 1996 and continuing through 1997, due to declines in
operating cash flow discussed in "Results of Operations," the Sands required
periodic financial assistance from PCC and GBCC in order to meet debt service
obligations and would have required substantial additional financial assistance
to make the January 15, 1998 principal and interest payments due on the 10 7/8%
First Mortgage Notes.
GBHC was unable to obtain additional borrowings from affiliates or other
sources and, accordingly, on January 5, 1998, Holdings, GB Property Funding and
GBHC filed petitions seeking protection under Chapter 11 of the Bankruptcy Code.
As a result of the filings, the Sands has sufficient cash flow to continue
normal operations while it develops a plan of reorganization for submission to
its creditors and the Bankruptcy Court. Capital expenditures, other than normal
recurring capital expenditures in the ordinary course of business, will require
prior approval of the Bankruptcy Court. There can be no assurance at this time
that GBHC's plan of reorganization, when submitted, will be accepted by its
creditors or the Bankruptcy Court. In any event, it is not anticipated that PCC
will retain a substantial equity position in Holdings as a result of a
reorganization and, accordingly, it is not anticipated that the Holdings group
will contribute significantly to the future cash flows of PCC.
15
<PAGE>
RESULTS OF OPERATIONS
GENERAL
PCC earned income from operations of $13.7 million for the year ended
December 31, 1997 as compared to a loss from operations of $4.5 million during
1996 and income from operations of $22.8 million in 1995. PCC's operating
results by activity are set forth below.
The Sands earned income from operations, exclusive of management fees paid
to NJMI, of $14.3 million for the year ended December 31, 1997 compared to a
loss from operations of $3.7 million sustained during 1996 and income from
operations earned of $24.2 million in 1995. Operating results during the first
nine months of 1997 were favorably impacted by operating efficiencies and by
management's decision to discontinue certain aggressive marketing programs.
Operating results were adversely affected in 1996 by the advent of unprecedented
and highly aggressive marketing programs instituted by certain other Atlantic
City casinos seeking to increase their market share and to a lesser degree by
severe winter snowstorms in January and February. Although net revenues at the
Sands declined to $256.3 million in 1997 from $264.8 million in 1996 and $284
million in 1995, operating expenses decreased significantly in 1997 by $25.7
million (9.4%) from 1996. This decrease is due to reductions in marketing and
advertising costs of $11.1 million (15.1%) and salaries and related benefits
costs of $5.9 million (6%) as a result of management's efforts to control costs
while maintaining positive gross operating profit. Operating expenses increased
by $6.5 million (2.4%) during 1996 compared to 1995 primarily due to a $10.9
million (17.3%) increase in advertising and marketing costs due to the
aggressive marketing programs discussed above.
Distributions received from PML amounted to $6.5 million during 1997,
approximating PCC's equity in PML's earnings of $7 million; distributions from
PML are paid in arrears. This compares favorably to distributions from PML of
$6.4 million in each of the years ended December 31, 1996 and 1995 and equity in
PML's income of $6.2 million and $6.4 million, respectively, in 1996 and 1995.
Management fees earned by PML during 1997 did not change significantly from
those earned during 1996 or 1995. Operating expenses of PML decreased $605,000
(28.3%) during 1997 compared to 1996 reflecting management efficiencies
resulting from an increasingly mature operation. In addition, PCC received $1.2
million with respect to its consulting agreement with the Tunica Casino for each
of the years ended December 31, 1997, 1996 and 1995.
16
<PAGE>
GAMING OPERATIONS
The following table sets forth certain unaudited financial and operating
data relating to the Sands' operations:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1997 1996 1995
----------- ----------- -----------
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C>
REVENUES:
Table games $ 74,083 $ 79,127 $ 95,835
Slot machines 157,312 159,972 163,821
Other (1) 3,082 3,790 4,392
---------- ---------- ----------
Total $ 234,477 $ 242,889 $ 264,048
========== ========== ==========
TABLE GAMES:
Gross Wagering
(Drop) (2) $ 524,040 $ 576,577 $ 606,283
========== ========== ==========
Hold Percentages: (3, 4)
Sands 14.1% 13.7% 15.8%
Atlantic City 15.0% 15.5% 15.9%
SLOT MACHINES:
Gross Wagering
(Handle) (2) $1,916,350 $1,954,612 $1,892,159
========== ========== ==========
Hold Percentages: (3, 4)
Sands 8.2% 8.2% 8.7%
Atlantic City 8.4% 8.3% 8.5%
</TABLE>
____________________________
(1) Consists of revenues from poker and simulcast horse racing wagering.
(2) Gross wagering consists of the total value of chips purchased for table
games (excluding poker) and keno wagering (collectively, the "drop") and
coins wagered in slot machines ("handle").
(3) Casino revenues consist of the portion of gross wagering that a casino
retains and, as a percentage of gross wagering, is referred to as the "hold
percentage".
(4) The Sands' hold percentages are reflected on an accrual basis. Comparable
data for the Atlantic City gaming industry is not available; consequently,
industry percentages have been calculated based on information available
from the New Jersey Casino Control Commission.
Table games drop at the Sands declined $52.5 million (9.1%) during 1997
compared with 1996 and $29.7 million (4.9%) during 1996 compared with 1995. The
Sands' decreases compare with increases of 4% and 5%, respectively, in table
drop for all other Atlantic City casinos during the same periods. As a result,
the Sands' table game market share (expressed as a percentage of the Atlantic
City industry aggregate table game drop) decreased to 6.8% during 1997 from 7.7%
during 1996 and from 8.5% during 1995. The Sands' 1997 table game drop decrease
is attributable to declines in patron volume from both the rated and unrated
segments. Expansions of other Atlantic City casinos resulted in an increase of
approximately 92,000 square feet of gaming space and 73 tables at December 31,
1997 compared to December 31, 1996. Such expansions typically result in intense
marketing campaigns which lure the "mass" segment to the new facility. Gaming
space at the Sands has remained virtually unchanged since
17
<PAGE>
mid-1996 and the number of table games has decreased by 3.1%. The decline in
table game drop during 1997 also reflects management's decision to discontinue
certain promotional activities, including the use of "special odds" offered at
table games, which has caused a decline in the rated table market segment. Table
game drop throughout 1996 was adversely impacted by the increase in competitive
pressures in the rated table market segment, of which a significant portion was
in the "high end" and 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 decreased $38.3 million (2%) during 1997 compared with
1996 after increasing $62.5 million (3.3%) during 1996 compared with 1995. The
Sands' changes compare with increases in slot machine handle of 2.2% and 4.9%
for all other Atlantic City casinos during the same periods. As a result, the
Sands' market share of slot machine play declined to 5.9% in 1997 from 6.1% in
1996 and 6.2% in 1995. The Sands' average number of slot machines remained
virtually unchanged during 1997 compared to an increase of 7.8% for all other
Atlantic City casinos. The below industry-wide performance in handle
experienced by the Sands during 1997 is a result of the same competitive
pressures resulting from casino expansions and related marketing campaigns at
other properties as discussed above with respect to table games. The 1996
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 $8.4 million (3.5%) during 1997
compared with 1996 and by $21.2 million (8%) during 1996 compared with 1995.
Decreases in both slot machine and table game wagering during 1997 were
partially offset by improvements in the table game hold percentage. Most of the
decline in casino revenues during 1996 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 1997 compared with 1996 or
during 1996 compared with 1995. Food and beverage revenues decreased $1.7
million (4.8%) during 1997 compared with 1996 after increasing $1.6 million
(4.9%) during 1996 compared with 1995. The 1997 decrease reflects the decline
in patron volume while the 1996 increase reflects the opening of the Epic Buffet
during the third quarter of 1995. Other revenues decreased $1.6 million (23%)
during 1997 compared to 1996 as a result of replacing ongoing "review show" type
entertainment with less frequent "star show" entertainment. Other revenues
increased $1.4 million (24.5%) during 1996 compared with 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 53.4% during 1997 from 56.1% during 1996 and 57.6%
during 1995. Such decreases are primarily attributable to reductions in certain
marketing programs and other promotional activities.
DEPARTMENTAL EXPENSES
Casino expenses at the Sands decreased $19.2 million (8.8%) during 1997
compared to 1996 after having increased by $9.7 million (4.6%) during 1996
compared to 1995. During 1996, an unprecedented
18
<PAGE>
and highly aggressive industry-wide attempt to increase market share resulted in
significantly higher costs with respect to coin incentive packages. The
abatement of these competitive pressures during 1997 together with management's
ongoing efforts to create operating efficiencies, have significantly reduced
expenses. Such factors have also resulted in a reduction in the allocation of
rooms, food and beverage and other expenses to casino expense. The 1996 increase
was primarily due to the expansion of various marketing programs in response to
competitive pressures. The additional costs of marketing programs in 1996
resulted in greater allocation of rooms, food and beverage and other expenses to
casino expense. Such increases were partially offset by a $1.6 million reduction
in gaming taxes during 1996 compared with 1995.
Rooms expense increased $171,000 (7.1%) during 1997 compared to 1996
following a decrease of $186,000 (7.1%) during 1996 compared to 1995. The 1997
increase results from a lesser percentage of rooms being sold on a complimentary
basis which has reduced the allocation of room costs to the casino department.
The 1996 decrease reflects the increased allocation of rooms expense to the
casino department resulting from increases in casino marketing activities
relating to rooms. Food and beverage expense did not change significantly
during 1997 compared to 1996 following an increase of $867,000 (8.9%) during
1996 compared to 1995. The 1996 increase reflects increased costs associated
with the opening of the Epic Buffet partially offset by increases in marketing
programs, the costs of which are allocated to the casino department. Other
expenses decreased $502,000 (15.4%) in 1997 from 1996 after increasing $1.3
million (63.5%) in 1996 from 1995. The 1997 decrease is primarily due to cost
savings with respect to theater entertainment whereas the 1996 increase results
from higher theater entertainment costs partially offset by increased
allocations to the casino department.
GENERAL AND ADMINISTRATIVE
General and administrative expenses decreased by approximately $2.1 million
(13.4%) during 1997 compared to 1996 following a $2.9 million decrease (15.7%)
during 1996 as compared to 1995. Cost containment measures implemented by
management during the second half of 1996 have continued to reduce
administrative costs through 1997. In addition, the 1996 decrease is due to
reductions in equipment rentals at the Sands and, to a lesser extent, reductions
in payroll costs associated with NJMI's management of the Sands.
DEPRECIATION AND AMORTIZATION
As a result of revising the estimated useful life of the Sands' buildings
effective October 1, 1996 and the completion of amortization with respect to
certain long lived assets, depreciation and amortization expense during 1997
decreased by $5.2 million (26.7%) compared to 1996. The decrease in
depreciation and amortization expense during 1996 compared to 1995 was $627,000
(3.1%).
INTEREST
Interest income did not change significantly during 1997 compared to 1996.
Interest income decreased $146,000 (7.5%) during 1997 compared with 1996 due to
a decrease in the amount of cash available for temporary cash investments.
Interest expense did not change significantly during 1997 compared to 1996 or
during 1996 compared to 1995.
EQUITY IN EARNINGS OF LIMITED PARTNERSHIP
Effective February 17, 1994, PCC acquired the limited partnership interest
in PML, a limited partnership in which a subsidiary of HCC is the general
partner and PCC is the limited partner; PML earns management fees from the
operation of the Aurora Casino. Prior to April 1, 1997, PPI Corporation, PCC's
parent, held the general partnership interest. 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 the general partner.
PCC's equity in the earnings of PML increased $846,000 (13.7%) in 1997 compared
to 1996 due to a slight increase in management fees earned by PML coupled with
an 28.3% decline in operating and
19
<PAGE>
other expenses. PCCs equity in PML's earnings declined slightly (4.2%) to $6.2
million in 1996 from $6.4 million in 1995.
NONRECURRING ITEMS
At December 31, 1997, GBHC reserved the balance of an advance to an
affiliated company in the amount of $5.7 million together with interest
amounting to $4 million as collection of the receivables is uncertain.
At December 31, 1997, remaining deferred financing costs associated with the
10 7/8% First Mortgage Notes ($4.3 million) and the PRT Funding Notes ($2.2
million) were written off. In addition, professional fees with respect to
GBHC's Chapter 11 Filing ($505,000) were expensed during 1997.
INCOME TAX PROVISION
PCC is included in the consolidated federal income tax return of GBCC, and,
for periods prior to December 31, 1996, was included in the consolidated federal
income tax return of HCC, GBCC's parent prior to that date. Pursuant to
agreements between PCC and GBCC, 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") for
state tax purposes totaling approximately $2 million, none of which expire
before the year 2001. 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. As a result of book
and tax losses incurred in 1997, 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, 1997.
EXTRAORDINARY ITEM
A subsidiary of Holdings acquired $2.5 million of 10 7/8% First Mortgage
notes at a discount of $375,000 with which to make its scheduled July 1997
principal payment (see "Liquidity and Capital Resources - Financing
Activities"). Such gain was partially offset by the write off of associated
financing costs, resulting in a net gain from early extinguishment of debt
amounting to $310,000.
YEAR 2000 COMPLIANCE
Management believes that its information systems are Year 2000 compliant.
INFLATION
Management believes that in the near term, modest inflation, together with
increasing competition within the gaming industry for qualified and experienced
personnel, will continue to cause increases in operating expenses, particularly
labor and employee benefits costs.
SEASONALITY
Historically, the Sands' operations have been highly seasonal in nature,
with the peak activity occurring from May to September. Consequently, the
results of 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.
20
<PAGE>
ITEM 8. INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
PRT FUNDING CORP.
Report of Independent Public Accountants to PRT Funding Corp............ 22
Balance Sheets of PRT Funding Corp. as of December 31, 1997 and 1996.... 23
Statements of Operations of PRT Funding Corp. for the Years Ended
December 31, 1997, 1996 and 1995....................................... 24
Statements of Cash Flows of PRT Funding Corp. for the Years Ended
December 31, 1997, 1996 and 1995....................................... 25
Notes to Financial Statements of PRT Funding Corp....................... 26
PRATT CASINO CORPORATION AND SUBSIDIARIES
Report of Independent Public Accountants to Pratt Casino
Corporation and Subsidiaries........................................... 30
Consolidated Balance Sheets of Pratt Casino Corporation and
Subsidiaries as of December 31, 1997 and 1996.......................... 31
Consolidated Statements of Operations of Pratt Casino Corporation
and Subsidiaries for the Years Ended December 31, 1997, 1996 and 1995.. 33
Consolidated Statement of Changes in Shareholder's Deficit of
Pratt Casino Corporation and Subsidiaries for
the Three Years Ended December 31, 1997................................ 34
Consolidated Statements of Cash Flows of Pratt Casino Corporation
and Subsidiaries for the Years Ended December 31, 1997, 1996 and 1995.. 35
Notes to Consolidated Financial Statements of Pratt Casino
Corporation and Subsidiaries........................................... 36
</TABLE>
21
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
----------------------------------------
To PRT Funding Corp.:
We have audited the accompanying balance sheets of PRT Funding Corp. (the
Company and a Delaware corporation) as of December 31, 1997 and 1996, and the
related statements of operations and cash flows for each of the three years in
the period ended December 31, 1997. 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, 1997 and 1996, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1997 in conformity
with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed more fully in Note 1 to
the financial statements, the Company is in violation of certain indenture
covenants, which has resulted in the acceleration of the due date of the
Company's debt obligations. The default under the indenture for the Company's
debt obligations raises substantial doubt about the Company's ability to
continue as a going concern. Management's plans in regard to these matters are
also described in Note 1 to the financial statements. The accompanying
financial statements do not include any adjustments that might result from the
outcome of these uncertainties.
ARTHUR ANDERSEN LLP
Roseland, New Jersey
March 23, 1998
22
<PAGE>
PRT FUNDING CORP.
(WHOLLY OWNED BY PRATT CASINO CORPORATION)
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1997 1996
----------- ------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 13,000 $ 1,141,000
Interest receivable from affiliates 3,428,000 3,972,000
Due from affiliate 1,130,000 -
Notes receivable from affiliates, net of valuation
allowance 63,750,000 -
----------- ------------
Total current assets 68,321,000 5,113,000
----------- ------------
Due from affiliates, net of valuation
allowance 5,000,000 100,000,000
----------- ------------
$73,321,000 $105,113,000
=========== ============
LIABILITIES AND SHAREHOLDER'S (DEFICIT) EQUITY
Current liabilities:
Current maturities of long-term debt $85,000,000 $ -
Accrued interest payable 7,263,000 5,068,000
Other current liabilities - 2,000
Due to affiliates 18,000 17,000
----------- ------------
Total current liabilities 92,281,000 5,087,000
----------- ------------
Long-term debt - 85,000,000
----------- ------------
Notes payable to affiliates 15,000,000 15,000,000
----------- ------------
Shareholder's (deficit) equity (Note 1):
Common stock, $1.00 par value per
share, 1,000 shares authorized
and outstanding 1,000 1,000
(Accumulated deficit) retained earnings (33,961,000) 25,000
----------- ------------
Total shareholder's (deficit) equity (33,960,000) 26,000
----------- ------------
$73,321,000 $105,113,000
=========== ============
</TABLE>
The accompanying notes to financial statements
are an integral part of these balance sheets.
23
<PAGE>
PRT FUNDING CORP.
(WHOLLY OWNED BY PRATT CASINO CORPORATION)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1997 1996 1995
------------- ------------ ------------
<S> <C> <C> <C>
Revenues:
Interest income $ 12,077,000 $12,102,000 $12,093,000
------------ ----------- -----------
Expenses:
Interest expense 12,075,000 12,075,000 12,075,000
General and administrative expenses - - 2,000
------------ ----------- -----------
Total expenses 12,075,000 12,075,000 12,077,000
------------ ----------- -----------
Operating income 2,000 27,000 16,000
Valuation provision on affiliate receivables (33,988,000) - -
------------ ----------- -----------
(Loss) income before income taxes (33,986,000) 27,000 16,000
Income tax provision - (6,000) (1,000)
------------ ----------- -----------
Net (loss) income $(33,986,000) $ 21,000 $ 15,000
============ =========== ===========
</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)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1997 1996 1995
------------- ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net (loss) income $(33,986,000) $ 21,000 $ 15,000
Adjustments to reconcile net (loss) income
to net cash (used in) provided by operating activities:
Valuation provision on affiliate receivables 33,988,000 - -
(Increase) decrease in receivables from affiliates (3,324,000) (1,097,000) 1,097,000
Increase (decrease) in accrued interest
payable 2,195,000 2,193,000 (1,097,000)
Net change in other current assets
and liabilities (1,000) 6,000 2,000
------------ ----------- -----------
Net cash (used in) provided by operating activities (1,128,000) 1,123,000 17,000
Cash and cash equivalents at beginning of year 1,141,000 18,000 1,000
------------ ----------- -----------
Cash and cash equivalents at end of year $ 13,000 $ 1,141,000 $ 18,000
============ =========== ===========
</TABLE>
The accompanying notes to financial statements
are an integral part of these financial statements.
25
<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"). Both PCC and GBCC are also Delaware corporations.
PCC also owns all of the common stock of GB Holdings, Inc. ("Holdings"), the
parent 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. 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.
On January 5, 1998, Holdings, GBHC and GB Property Funding Corp. ("GB
Property Funding") filed petitions for relief under Chapter 11 of the United
States Bankruptcy Code (the "Bankruptcy Code") in the United States Bankruptcy
Court for the District of New Jersey (the "Bankruptcy Court"). Each company
continues to operate in the ordinary course of business, as set forth in the
Bankruptcy Code, and each company's officers and directors as of the date of the
filing remain in office, subject to the supervision of the Bankruptcy Court.
The accompanying financial statements have been prepared assuming that PRT
Funding will continue as a going concern. As discussed above, certain
affiliates of PRT Funding filed for Chapter 11 bankruptcy protection on January
5, 1998. PRT Funding is also dependent on these affiliates to provide cash to
repay its debt obligations. The affiliate filings under Chapter 11 have created
a default under the indenture for PRT Funding's debt obligations; accordingly,
the outstanding principal amount of the PRT Funding Notes has accelerated and is
currently due and payable. PCC, which is liable as guarantor under the PRT
Funding Notes, does not have sufficient assets to satisfy the outstanding
amounts and has entered into negotiations with the PRT Funding bondholders to
restructure the obligations. No assurance can be given that PRT Funding will be
able to restructure its obligations. The default under the indenture for PRT
Funding's debt obligations raises substantial doubt about PRT Funding's ability
to continue as a going concern. The financial statements do not include any
adjustments that might result from the outcome of these uncertainties.
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
26
<PAGE>
PRT FUNDING CORP.
(WHOLLY OWNED BY PRATT CASINO CORPORATION)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 debt of other PCC subsidiaries. As a
result of the Chapter 11 filings discussed in Note 1, a default under the
indenture for the PRT Funding Notes occurred; the notes accelerated by the terms
of the indenture and are currently due and payable. Accordingly, the
outstanding principal amount of the PRT Funding Notes has been classified as
current on the accompanying balance sheet at December 31, 1997. Proceeds of the
PRT Funding Notes were loaned to various affiliates of PRT Funding on the same
terms. The events of default under the PRT Funding Notes also resulted in the
classification of such affiliate loans as currently due on the accompanying
balance sheet at December 31, 1997. Based on PRT Funding's evaluation of the
realizability of the affiliate loans, a valuation allowance in the amount of
$21,250,000 has been provided for on the accompanying statement of operations
for the year ended December 31, 1997.
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 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 1997 or 1996. At December 31, 1997 and 1996, accrued interest of
$5,204,000 and $3,010,000 was payable to GBCC with respect to the Junior
Subordinated Notes and is included in interest payable on the accompanying
balance sheets.
Interest paid amounted to $9,880,000, $9,882,000 and $13,172,000,
respectively, during each of the years ended December 31, 1997, 1996 and 1995.
(3) INCOME TAXES
Components of the provision for income taxes consisted of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1997 1996 1995
------------- -------- --------
<S> <C> <C> <C>
Benefit in lieu of (provision for) federal
income taxes:
Current $ - $(4,000) $(1,000)
Deferred 10,516,000 - -
State income tax benefit (provision):
Current - - -
Deferred 3,058,000 (2,000) -
Valuation allowance (13,574,000) - -
------------ ------- -------
$ - $(6,000) $(1,000)
============ ======= =======
</TABLE>
27
<PAGE>
PRT FUNDING CORP.
(WHOLLY OWNED BY PRATT CASINO CORPORATION)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
PRT Funding's operations are included in the consolidated federal income tax
return of GBCC and, for periods prior to December 31, 1996, were included in the
consolidated federal income tax returns of HCC, GBCC's parent prior to that
date. Pursuant to agreements between PCC and GBCC, PRT Funding's provision for
federal income taxes is calculated as if a separate federal return were filed.
No payments have been made under the tax allocation agreements for the years
ended December 31, 1997, 1996 and 1995. At both December 31, 1997 and 1996,
$5,000 is included in due to affiliates on the accompanying balance sheets
representing taxes currently payable under the agreements.
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,
-------------------------------
1997 1996 1995
------------- ------ --------
<S> <C> <C> <C>
Calculated income tax benefit at statutory rate $ 11,555,000 $4,000 $ 2,000
State income taxes 2,019,000 2,000 -
Valuation allowance change (13,574,000) - -
Utilization of net operating losses - - (1,000)
------------ ------ -------
Tax provision as shown on statements of
operations $ - $6,000 $ 1,000
============ ====== =======
</TABLE>
For the year ended December 31, 1997, the valuation provision on affiliate
receivables results in a deferred tax asset of $13,574,000. There were no
temporary differences resulting in deferred income taxes for either of the years
ended December 31, 1996 or 1995.
Statement of Financial Accounting Standards No. 109 ("SFAS 109") requires
that the tax benefit of deferred tax assets resulting from temporary differences
be recorded as an asset and, to the extent that management can not assess that
the utilization of all or a portion of such deferred tax assets is more likely
than not, a valuation allowance should be recorded. Due to the limited
operations of PRT Funding and questions regarding its ability to continue as a
going concern, 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, 1997.
(4) NOTES RECEIVABLE
GBHC issued a promissory note in the amount of $10,000,000 to PRT Funding on
February 17, 1994 in exchange for $10,000,000 of the proceeds PRT Funding
received with respect to the Junior Subordinated Notes. The promissory note
accrues interest at the rate of 14 5/8% per annum payable semiannually
commencing on August 17, 1994 with the principal due on February 17, 2005. As a
result of PRT Funding's evaluation of its net realizable value, the note,
together with accrued interest totalling $2,738,000, has been reserved on the
accompanying consolidated statement of operations for the year ended December
31, 1997.
28
<PAGE>
PRT FUNDING CORP.
(WHOLLY OWNED BY PRATT CASINO CORPORATION)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(5) LITIGATION
On January 5, 1998, Holdings, GB Property Funding and GBHC filed petitions
for relief under Chapter 11 of the Bankruptcy Code. Each company continues to
operate in the ordinary course of business, as set forth in the Bankruptcy Code,
and each company's officers and directors as of the date of the filing remain in
office, subject to the supervision of the Bankruptcy Court.
As a result of the default and automatic acceleration under the indenture for
the PRT Funding Notes, the holders of the PRT Funding Notes could initiate
judicial proceedings to enforce their claims for payment. No such proceedings
have been initiated and negotiations with PRT Funding's creditors are currently
underway for a possible restructuring of the debt obligations.
(6) 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 values of PRT
--------------------------------------------------
Funding's notes receivable from affiliates are based on management's estimate of
realization (see Note 2). The fair value of PRT Funding's long-term debt is
based on the quoted market price of the underlying debt issue for recent trades
prior to year end. Financial instruments due to or from affiliates are valued
at the carrying amount.
The estimated carrying amounts and fair values of PRT Funding's financial
instruments are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996
------------------------ -------------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
----------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Financial Assets
Cash $ 13,000 $ 13,000 $ 1,141,000 $ 1,141,000
Interest receivable 3,428,000 3,428,000 3,972,000 3,972,000
Notes receivable 68,750,000 68,750,000 100,000,000 84,700,000
Financial Liabilities
Interest payable 7,263,000 7,263,000 5,068,000 5,068,000
Long-term debt 85,000,000 64,600,000 85,000,000 69,700,000
Note payable 15,000,000 15,000,000 15,000,000 15,000,000
</TABLE>
29
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
----------------------------------------
To Pratt Casino Corporation:
We have audited the accompanying consolidated balance sheets of Pratt Casino
Corporation (the Company and a New Jersey Corporation) and subsidiaries as of
December 31, 1997 and 1996, 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, 1997. 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, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997 in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed more
fully in Note 1 to the consolidated financial statements, the Company is in
violation of certain indenture covenants, which has resulted in the acceleration
of the due date of the Company's debt obligations. The default under the
indenture for the Company's debt obligations raises substantial doubt about the
Company's ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 1 to the consolidated financial
statements. The accompanying consolidated financial statements do not include
any adjustments that might result from the outcome of these uncertainties.
ARTHUR ANDERSEN LLP
Roseland, New Jersey
March 23, 1998
30
<PAGE>
PRATT CASINO CORPORATION AND SUBSIDIARIES
(WHOLLY OWNED BY PPI CORPORATION)
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1997 1996
----------- --------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $2,231,000 $ 18,650,000
Short-term investments - 2,000,000
Accounts receivable, net of allowance
of $15,524,000 in 1996 - 10,114,000
Inventories - 3,873,000
Due from affiliates 174,000 2,541,000
Refundable deposits and other
current assets 194,000 3,197,000
---------- -------------
Total current assets 2,599,000 40,375,000
---------- -------------
Investment in Limited Partnership 2,256,000 1,746,000
---------- -------------
Property and Equipment:
Land - 38,093,000
Buildings and improvements - 185,508,000
Operating equipment 3,000 91,868,000
Construction in progress - 1,535,000
---------- -------------
3,000 317,004,000
Less - accumulated depreciation and
amortization (3,000) (160,989,000)
---------- -------------
Net property and equipment - 156,015,000
---------- -------------
Other Assets:
Obligatory investments - 6,382,000
Due from affiliates 1,395,000 17,895,000
Deferred financing costs - 7,653,000
Other assets 8,000 4,220,000
---------- -------------
Total other assets 1,403,000 36,150,000
---------- -------------
$6,258,000 $ 234,286,000
========== =============
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated balance sheets.
31
<PAGE>
PRATT CASINO CORPORATION AND SUBSIDIARIES
(WHOLLY OWNED BY PPI CORPORATION)
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDER'S DEFICIT
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1997 1996
-------------- --------------
<S> <C> <C>
Current Liabilities:
Current maturities of long-term debt $ 85,000,000 $ 2,512,000
Short-term credit facilities - 2,000,000
Short-term borrowings from affiliate - 6,500,000
Accounts payable - 7,906,000
Accrued liabilities -
Salaries and wages 6,000 4,986,000
Interest 7,263,000 14,758,000
Insurance - 3,117,000
Other 4,000 6,684,000
Due to affiliates 417,000 1,195,000
Other - 5,431,000
------------- -------------
Total current liabilities 92,690,000 55,089,000
------------- -------------
Investment in and Advances to GB Holdings, Inc. 40,142,000 -
------------- -------------
Long-Term Debt 15,000,000 282,930,000
------------- -------------
Other Noncurrent Liabilities - 1,372,000
------------- -------------
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 (141,575,000) (105,106,000)
------------- -------------
Total shareholder's deficit (141,574,000) (105,105,000)
------------- -------------
$ 6,258,000 $ 234,286,000
============= =============
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated balance sheets.
32
<PAGE>
PRATT CASINO CORPORATION AND SUBSIDIARIES
(WHOLLY OWNED BY PPI CORPORATION)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Revenues:
Casino $234,477,000 $242,889,000 $264,048,000
Rooms 9,691,000 9,446,000 9,602,000
Food and beverage 32,968,000 34,638,000 33,029,000
Other 5,323,000 6,917,000 5,554,000
------------ ------------ ------------
282,459,000 293,890,000 312,233,000
Less - Promotional allowances (25,004,000) (27,929,000) (27,083,000)
------------ ------------ ------------
Net revenues 257,455,000 265,961,000 285,150,000
------------ ------------ ------------
Expenses:
Casino 199,746,000 218,990,000 209,282,000
Rooms 2,590,000 2,419,000 2,605,000
Food and beverage 10,815,000 10,618,000 9,751,000
Other 2,756,000 3,258,000 1,993,000
General and administrative 13,420,000 15,492,000 18,387,000
Depreciation and amortization 14,420,000 19,669,000 20,296,000
------------ ------------ ------------
Total expenses 243,747,000 270,446,000 262,314,000
------------ ------------ ------------
Income (loss) from operations 13,708,000 (4,485,000) 22,836,000
------------ ------------ ------------
Non-operating income (expense):
Interest income 1,801,000 1,799,000 1,945,000
Interest expense (33,167,000) (32,836,000) (32,295,000)
Gain on disposal of assets 59,000 13,000 56,000
Equity in earnings of limited
partnership 7,008,000 6,162,000 6,429,000
------------ ------------ ------------
Total non-operating expense, net (24,299,000) (24,862,000) (23,865,000)
------------ ------------ ------------
Loss before income taxes, extraordinary
and other items (10,591,000) (29,347,000) (1,029,000)
Valuation provision on affiliate receivables (9,650,000) - -
Write off deferred financing costs (6,515,000) - -
Reorganization costs (505,000) - -
------------ ------------ ------------
Loss before income taxes and extraordinary
item (27,261,000) (29,347,000) (1,029,000)
Income tax provision (9,518,000) (4,347,000) (529,000)
------------ ------------ ------------
Loss before extraordinary item (36,779,000) (33,694,000) (1,558,000)
Extraordinary item:
Gain on early extinguishment of debt 310,000 - -
------------ ------------ ------------
Net loss $(36,469,000) $(33,694,000) $ (1,558,000)
============ ============ ============
</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)
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDER'S DEFICIT
FOR THE THREE YEARS ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
ADDITIONAL
COMMON STOCK ACCUMULATED
------------
SHARES AMOUNT DEFICIT
------------ ------ --------------
<S> <C> <C> <C>
BALANCE, JANUARY 1, 1995 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)
Net loss - - (36,469,000)
----- ------ -------------
BALANCE, DECEMBER 31, 1997 1,000 $1,000 $(141,575,000)
===== ====== =============
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of this consolidated statement.
34
<PAGE>
PRATT CASINO CORPORATION AND SUBSIDIARIES
(WHOLLY OWNED BY PPI CORPORATION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss $(36,469,000) $(33,694,000) $ (1,558,000)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Extraordinary item (310,000) - -
Valuation provision on affiliate receivables 9,650,000 - -
Write off deferred financing costs 6,515,000 - -
Depreciation and amortization 14,420,000 19,669,000 20,296,000
Gain on disposal of assets (59,000) (13,000) (56,000)
Provision for doubtful accounts 3,195,000 2,167,000 2,988,000
Equity in earnings of limited partnership (7,008,000) (6,162,000) (6,429,000)
Dividends received from limited partnership 6,498,000 6,433,000 6,421,000
Deferred income tax provision (benefit) 10,902,000 4,538,000 (2,405,000)
Increase in accounts receivable (875,000) (1,075,000) (1,404,000)
Increase in accounts payable and other
accrued liabilities 4,647,000 3,022,000 2,665,000
Net change in other current assets and liabilities (1,866,000) 1,419,000 3,661,000
Net change in other noncurrent assets and liabilities 198,000 (1,185,000) (1,921,000)
------------ ------------ ------------
Net cash provided by (used in) operating activities 9,438,000 (4,881,000) 22,258,000
------------ ------------ ------------
INVESTING ACTIVITIES:
Purchases of property and equipment (3,534,000) (5,505,000) (19,156,000)
Deconsolidation of GB Holdings, Inc. (13,871,000) - -
Obligatory investments (2,876,000) (3,062,000) (2,967,000)
Proceeds from disposition of assets 59,000 13,000 56,000
Short-term investment 2,000,000 (2,000,000) -
------------ ------------ ------------
Net cash used in investing activities (18,222,000) (10,554,000) (22,067,000)
------------ ------------ ------------
FINANCING ACTIVITIES:
(Repayments) borrowings on short-term credit facility (2,000,000) 2,000,000 -
Deferred financing costs - (10,000) (32,000)
Repayments of long-term debt (2,135,000) (11,000) (10,000)
Advance to unconsolidated affiliate (5,000,000) - -
Net borrowings from affiliates 1,500,000 6,500,000 -
------------ ------------ ------------
Net cash (used in) provided by financing activities (7,635,000) 8,479,000 (42,000)
------------ ------------ ------------
Net (decrease) increase in cash and cash equivalents (16,419,000) (6,956,000) 149,000
Cash and cash equivalents at beginning of year 18,650,000 25,606,000 25,457,000
------------ ------------ ------------
Cash and cash equivalents at end of year $ 2,231,000 $ 18,650,000 $ 25,606,000
============ ============ ============
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
35
<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 which is wholly owned by
Greate Bay Casino Corporation ("GBCC"). PCC also owns all of the common stock
of GB Holdings, Inc. ("Holdings"), the parent 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"), also a wholly owned subsidiary of PCC. 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 Holdings, 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 (the "10 7/8% 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 (the "PRT Funding 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.
On January 5, 1998, Holdings, GB Property Funding and GBHC filed petitions
for relief under Chapter 11 of the United States Bankruptcy Code (the
"Bankruptcy Code") in the United States Bankruptcy Court for the District of New
Jersey (the "Bankruptcy Court"). Each company continues to operate in the
ordinary course of business, as set forth in the Bankruptcy Code, and each
company's officers and directors as of the date of the filing remain in office,
subject to the supervision of the Bankruptcy Court.
The accompanying consolidated financial statements have been prepared
assuming that PCC will continue as a going concern. As discussed above, certain
affiliates of PCC filed for Chapter 11 bankruptcy protection on January 5, 1998.
The affiliate filings under Chapter 11 created a default under the indenture for
the PRT Funding Notes; accordingly, the outstanding principal amount of the PRT
Funding Notes has accelerated and is currently due and payable. As a result of
the Chapter 11 filings, GBHC can reject the Sands' Management Contract with
NJMI, which would eliminate this source of cash to PCC. PCC, which is liable as
guarantor under the PRT Funding Notes, does not have sufficient assets to
satisfy the outstanding amounts and has entered into negotiations with the PRT
Funding bondholders to restructure the obligations. No assurance can be given
that PCC will be able to restructure its obligations. The default under the
indenture for the PRT Funding Notes raises substantial doubt about PCC's ability
to continue as a going concern. The consolidated financial statements do not
include any adjustments that might result from the outcome of these
uncertainties.
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.
36
<PAGE>
PRATT CASINO CORPORATION AND SUBSIDIARIES
(WHOLLY OWNED BY PPI CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(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.
PRINCIPLES OF CONSOLIDATION -
The consolidated financial statements include the accounts and operating
activities of PCC and all of its wholly owned subsidiaries prior to December 31,
1997. As a result of the Chapter 11 filings discussed in Note 1, PCC's control
over the filing subsidiaries is subject to supervision of the Bankruptcy Court
and PCC does not expect to be in control of such subsidiaries after
reorganization. Accordingly, Holdings, GB Property Funding and GBHC are no
longer included on the accompanying consolidated balance sheet at December 31,
1997 (see Note 11). PCC's negative investment in Holdings and its subsidiaries
on the accompanying consolidated balance sheet as of December 31, 1997 reflects
PCC's investment under the equity method of accounting. The accompanying
consolidated financial statements include Holdings and its subsidiaries'
operations and cash flows through December 31, 1997. All significant
intercompany balances and transactions have been eliminated.
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 on the accompanying
consolidated balance sheet at December 31, 1996.
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 on 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, 1997, 1996 and 1995 are as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Rooms $ 5,617,000 $ 6,170,000 $ 6,023,000
Food and Beverage 28,144,000 29,357,000 28,259,000
Other 2,991,000 4,435,000 3,631,000
----------- ----------- -----------
$36,752,000 $39,962,000 $37,913,000
=========== =========== ===========
</TABLE>
37
<PAGE>
PRATT CASINO CORPORATION AND SUBSIDIARIES
(WHOLLY OWNED BY PPI CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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 $3,195,000, $2,167,000 and $2,988,000 were made during the
years ended December 31, 1997, 1996 and 1995, respectively.
INVENTORIES -
Inventories at December 31, 1996 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. The effect of this change reduced depreciation and
amortization expense and net loss by approximately $2,880,000 and $761,000, for
the years ended December 31, 1997 and 1996, respectively.
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 were being amortized over the term of
the related debt issue. As a result of the filings under Chapter 11 on January
5, 1998, the remaining deferred financing costs in the amount of $6,515,000 were
determined to be unrealizable and were written off on the accompanying
consolidated statement of operations for the year ended December 31, 1997. The
unamortized balance of deferred financing costs amounted to $7,653,000 at
December 31, 1996. Amortization of such costs was $1,072,000, $1,087,000 and
$1,113,000 for the years ended December 31, 1997, 1996 and 1995, respectively.
38
<PAGE>
PRATT CASINO CORPORATION AND SUBSIDIARIES
(WHOLLY OWNED BY PPI CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
LONG-LIVED ASSETS -
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"
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 such changes have
occurred.
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 is included in the consolidated federal income tax return of GBCC, and
for periods prior to December 31, 1996, was included in the consolidated federal
income tax return of HCC, GBCC's parent prior to that date. 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.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior years' financial
statements to conform to the 1997 consolidated financial statement presentation.
(3) SHORT-TERM CREDIT FACILITIES
As of December 31, 1996, GBHC had $2,000,000 outstanding under a bank line of
credit. Borrowings under the line of credit were guaranteed to the extent of
$2,000,000 by PCC, which pledged a certificate of deposit in the face amount of
$2,000,000 as collateral for the line of credit. The line of credit was repaid
upon maturity of the certificate of deposit during January 1997 with proceeds
from affiliate borrowings (see Note 6) and the line of credit was cancelled.
(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. On January 5, 1998, Holdings, GB Property
Funding and GBHC filed petitions for relief under Chapter 11 of the Bankruptcy
Code in the United States Bankruptcy Court for the District of New Jersey. Each
company continues to operate in the ordinary course of business, as set forth in
the Bankruptcy Code, and each company's officers and directors as of the date of
the filing remain in office, subject to the supervision of the Bankruptcy Court.
The filings of such petitions constitute a default under the indenture for the
PRT Funding Notes; accordingly, the outstanding principal amount of the PRT
39
<PAGE>
PRATT CASINO CORPORATION AND SUBSIDIARIES
(WHOLLY OWNED BY PPI CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Funding Notes has accelerated, is currently due and payable and has been
classified as current on the accompanying consolidated balance sheet at December
31, 1997.
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1997 1996
------------- -------------
<S> <C> <C>
10 7/8% first mortgage notes, due 2004 (a) $ - $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
------------ ------------
Total indebtedness 100,000,000 285,442,000
Less - current maturities (85,000,000) (2,512,000)
------------ ------------
Total long-term debt $ 15,000,000 $282,930,000
============ ============
</TABLE>
- ----------------------------------------------
(a) On February 17, 1994, GB Property Funding issued the 10 7/8% First Mortgage
Notes which are due January 15, 2004 and which are collateralized by a first
mortgage on the Sands. Interest on the notes accrues at the rate of 10 7/8%
per annum, payable semiannually commencing July 15, 1994. Interest only was
payable during the first three years. Commencing on July 15, 1997,
semiannual principal payments of $2,500,000 are due on each interest payment
date with the balance due at maturity. Such semiannual payments may be made
in cash or by tendering 10 7/8% First Mortgage Notes previously purchased or
otherwise acquired by Holdings. Holdings acquired $2,500,000 face amount of
10 7/8% First Mortgage Notes at a discount during May 1997 which it used
during June to make its July 15, 1997 required principal payment.
As a result of the aforementioned filings of petitions under Chapter 11 of
the Bankruptcy Code, the 10 7/8% First Mortgage Notes are in default.
(b) On February 17, 1994, PRT Funding issued the PRT Funding Notes which are due
April 15, 2004. 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.
40
<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 1997 or 1996.
Interest paid, net of amounts capitalized, amounted to $30,011,000,
$30,236,000 and $33,391,000, respectively, for the years ended December 31,
1997, 1996 and 1995.
(5) INCOME TAXES
Components of the provision for income taxes consist of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1997 1996 1995
------------- ------------- ------------
<S> <C> <C> <C>
(Provision for) benefit in lieu of federal
income taxes:
Current $(10,399,000) $ 7,582,000 $(2,583,000)
Deferred (11,640,000) 593,000 1,925,000
State income tax (provision) benefit:
Current (2,270,000) 3,106,000 (351,000)
Deferred 80,000 173,000 480,000
Valuation allowance 14,711,000 (15,801,000) -
------------ ------------ -----------
$ (9,518,000) $ (4,347,000) $ (529,000)
============ ============ ===========
</TABLE>
No federal or state tax payments were made during the years ended December
31, 1997, 1996, or 1995. The payment of GBHC's taxes in accordance with the
tax allocation agreements is subject to the approval of the New Jersey Casino
Control Commission (the "Casino Commission").
41
<PAGE>
PRATT CASINO CORPORATION AND SUBSIDIARIES
(WHOLLY OWNED BY PPI CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A reconciliation between the calculated tax benefit based on the statutory
rates in effect and the effective tax rates follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1997 1996 1995
------------- ------------- ----------
<S> <C> <C> <C>
Calculated income tax benefit at 34% $ 9,163,000 $ 9,978,000 $ 350,000
Amortization of excess purchase price - (601,000) (803,000)
Disallowance of meals and entertainment (145,000) (338,000) (354,000)
State income taxes 1,698,000 1,570,000 85,000
Utilization of tax credit - 99,000 98,000
Valuation allowance change 14,711,000 (15,801,000) -
Deconsolidation of Holdings (34,242,000) - -
Other (703,000) 746,000 95,000
------------ ------------ ---------
Tax provision as shown on consolidated
statements of operations $ (9,518,000) $ (4,347,000) $(529,000)
============ ============ =========
</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,
the provision of a valuation allowance on affiliate receivables, the write off
of deferred financing costs 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.
The components of the net deferred tax asset as of December 31, 1997 and 1996
were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1997 1996
------------ -------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforward $ 188,000 $ 13,720,000
Allowance for doubtful accounts - 6,429,000
Write off deferred financing costs 899,000 -
Other liabilities and accruals 3,000 2,732,000
Other - 3,822,000
----------- ------------
Total deferred tax assets 1,090,000 26,703,000
Valuation allowance (1,090,000) (15,801,000)
----------- ------------
$ - $ 10,902,000
=========== ============
</TABLE>
42
<PAGE>
PRATT CASINO CORPORATION AND SUBSIDIARIES
(WHOLLY OWNED BY PPI CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
At December 31, 1997, PCC and its subsidiaries have net operating loss
carryforwards ("NOL's") for state tax purposes totaling approximately
$2,000,000, none of which expire before the year 2001. 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. At December 31, 1996, deferred tax assets amounting to $10,902,000
were anticipated to be recoverable. As a result of book and tax losses incurred
in 1997, 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, 1997.
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.
Receivables from and payables to affiliates in connection with the
aforementioned tax allocation agreements were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1997 1996
----------- -----------
<S> <C> <C>
Due from affiliates - current $ - $1,728,000
Due from affiliates - noncurrent 1,394,000 9,174,000
Due to affiliate - current (5,000) (129,000)
</TABLE>
All amounts set forth above at December 31, 1997 represent current federal
taxes. At December 31, 1996, the amounts set forth as due from affiliate
represent deferred federal taxes and the amount set forth as due to affiliate
represents current taxes.
(6) TRANSACTIONS WITH RELATED PARTIES
As a result of the Chapter 11 filings discussed in Notes 1 and 2, the assets
and liabilities of Holdings and its subsidiaries are not included on the
accompanying consolidated balance sheet at December 31, 1997. Accordingly,
intercompany receivables and payables which previously eliminated in
consolidation are now considered balances outstanding with affiliates.
New Jersey Management, Inc. ("NJMI"), a wholly owned subsidiary of PCC, is
responsible for the supervision, direction and control of the day-to-day
operations of the Sands under a management agreement. NJMI is entitled to
receive annually (i) a basic consulting fee of 1.5% of "adjusted gross
revenues," as defined, and (ii) incentive compensation of between 5% and 7.5% of
gross operating profits
43
<PAGE>
PRATT CASINO CORPORATION AND SUBSIDIARIES
(WHOLLY OWNED BY PPI CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
in excess of certain stated amounts should annual "gross operating profits," as
defined, exceed $5,000,000. Management fees receivable from the Sands at
December 31, 1997 amounted to $34,000.
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 $290,000, $283,000, and $288,000 for the
years ended December 31, 1997, 1996 and 1995, respectively.
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, 1997, 1996 and 1995.
An advance to a GBCC subsidiary in the amount of $5,672,000 was outstanding
as of December 31, 1996 and accrued interest at the rate of 16.5% per annum.
Interest receivable with respect to this advance was $3,042,000 at December 31,
1996. At December 31, 1997, the advance, together with accrued interest
amounting to $3,978,000, was reserved by GBHC as collection of the receivables
is uncertain. The advance and related interest receivable are both included in
noncurrent amounts due from affiliates on the accompanying consolidated balance
sheet at December 31, 1996.
During the third quarter of 1996, GBHC borrowed a total of $6,500,000 from
GBCC for working capital purposes. Such borrowings, which are included in
short-term borrowings from affiliate on the accompanying consolidated balance
sheet at December 31, 1996, accrue interest at the rate of 13 3/4% per annum,
payable quarterly commencing October 1, 1996. Interest accrued on the
affiliate loans in the amount of $398,000 is included in interest payable on the
accompanying consolidated balance sheet at December 31, 1996. An additional
$1,500,000 was borrowed during the first quarter of 1997 on the same terms.
Repayment of such borrowings from GBCC and the payment of the related interest
are subject to approval by the Bankruptcy Court and the Casino Commission.
Interest (expense) income incurred with respect to affiliate advances and
borrowings is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Net advances $ (163,000) $ 525,000 $ 936,000
Junior Subordinated Notes (Note 4) (2,194,000) (2,193,000) (2,194,000)
</TABLE>
Interest due to GBCC on the Junior Subordinated Notes of $5,204,000 and
$3,010,000 is included in interest payable on the accompanying consolidated
balance sheets at December 31, 1997 and December 31, 1996, respectively.
GBHC issued a promissory note in the amount of $10,000,000 on February 17,
1994 to PRT Funding. Such note accrues interest at the rate of 14 5/8% per
annum and is payable semiannually
44
<PAGE>
PRATT CASINO CORPORATION AND SUBSIDIARIES
(WHOLLY OWNED BY PPI CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
commencing on August 17, 1994. The principal amount of the note is due on
February 17, 2005. During the first quarter of 1997, GBHC also borrowed
$5,000,000 from PCC for working capital purposes. Such borrowing accrues
interest at the rate of 14 5/8% per annum payable semiannually commencing July
15, 1997. Prior to December 31, 1997, such notes and related interest were
eliminated in consolidation. As a result of (i) GBHC no longer being included as
a consolidated subsidiary and (ii) GBHC's filing under Chapter 11 making
prospects for ultimate collection doubtful, the notes, together with accrued
interest receivable aggregating $3,458,000, have been reflected as an adjustment
to PCC's negative investment in Holdings on the accompanying consolidated
balance sheet at December 31, 1997.
PCC and its subsidiaries perform certain services for other subsidiaries of
GBCC and for HCC 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 HCC and
their respective subsidiaries that relate to PCC's business. Such affiliate
transactions are summarized below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Billings to affiliates $ 981,000 $3,067,000 $2,756,000
Charges from affiliates 2,123,000 3,917,000 2,773,000
</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. The review of the Sands' financial stability took
place and another review is scheduled in 1998. 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 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
45
<PAGE>
PRATT CASINO CORPORATION AND SUBSIDIARIES
(WHOLLY OWNED BY PPI CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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, the Sands had purchased bonds totaling $5,237,000.
The Sands had remaining funds on deposit and held in escrow by the CRDA at
December 31, 1996 of $5,546,000. The bonds purchased and the amounts on deposit
and held in escrow are collectively referred to as "obligatory investments" on
the accompanying consolidated financial statements.
Obligatory investments at December 31, 1996 are net of an accumulated
valuation allowance of $4,401,000 based upon the estimated realizable value of
the investments. Provisions for valuation allowances during the years ended
December 31, 1997, 1996 and 1995 amounted to $1,241,000, $1,344,000 and
$1,457,000, 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, 1997,
1996 and 1995 totaling $147,000, $1,500,000 and $250,000, respectively,
resulting in waivers granted by the CRDA during 1997 and 1995 totaling $75,000
and $128,000, respectively. No such waivers were granted during 1996; however,
the contributions were designated for projects expected to benefit the community
and the Sands facility. Accordingly, intangible assets aggregating $2,433,000
are included in other assets on the accompanying consolidated balance sheet at
December 31, 1996. Amortization of waivers granted totaled $200,000 and $128,000
during the years ended December 31, 1997 and 1995, respectively.
(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 $9,609,000, $9,360,000 and $9,432,000, respectively, during the
years ended December 31, 1997, 1996 and 1995, respectively. PML also incurred
operating and other expenses amounting to $1,530,000, $2,135,000 and $1,939,000,
respectively, during the years ended December 31, 1997, 1996 and 1995. 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 the general partner.
(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 1997 and expires in December 1998. 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 1998. If it were
determined that gaming laws were violated by a licensee,
46
<PAGE>
PRATT CASINO CORPORATION AND SUBSIDIARIES
(WHOLLY OWNED BY PPI CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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
On January 5, 1998, Holdings, GB Property Funding and GBHC filed petitions
for relief under Chapter 11 of the Bankruptcy Code. Each company continues to
operate in the ordinary course of business, as set forth in the Bankruptcy Code,
and each company's officers and directors as of the date of the filing remain in
office, subject to the supervision of the Bankruptcy Court.
As a result of the default and automatic acceleration under the indenture for
the PRT Funding Notes, the holders of the PRT Funding Notes could initiate
judicial proceedings to enforce their claims for payment. No such proceedings
have been initiated and negotiations with PRT Funding's creditors are currently
underway for a possible restructuring of the debt obligations.
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
As a result of Holdings, GB Property Funding and GBHC filing for protection
under Chapter 11 of the Bankruptcy Code, Holdings and its subsidiaries are no
longer included on the consolidated balance sheet of PCC at December 31, 1997.
PCC now reflects its investment in Holdings under the equity method of
accounting. As a result of this change, the following non-cash assets and
liabilities were eliminated from PCC's consolidated balance sheet at December
31, 1997:
<TABLE>
<CAPTION>
<S> <C>
Accounts receivable, net $ 7,794,000
Other current assets 6,423,000
Net property and equipment 147,716,000
Other noncurrent assets 11,924,000
Long-term debt, including current
maturities (192,932,000)
Other current liabilities (25,103,000)
Other noncurrent liabilities (28,293,000)
-----------
Net non-cash liabilities $ (72,471,000)
===========
</TABLE>
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
47
<PAGE>
PRATT CASINO CORPORATION AND SUBSIDIARIES
(WHOLLY OWNED BY PPI CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
federal tax obligations under the tax allocation agreements. The effects of this
elimination have been excluded from the accompanying consolidated statements of
cash flows as a non-cash transaction.
(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 amount approximates fair value
-------------------------
because of the short maturity of these instruments.
SHORT-TERM INVESTMENTS - The carrying amount approximates fair value because
----------------------
of the short maturity of these instruments.
OBLIGATORY INVESTMENTS - The carrying amount of obligatory investments
----------------------
approximates 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
--------------
the quoted market price of the underlying debt issue for recent trades. Debt
obligations with affiliates are valued at the carrying amount.
The estimated carrying amounts and fair values of PCC's financial instruments
at December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,1997 DECEMBER 31, 1996
------------------------- -------------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Financial Assets
Cash and cash equivalents $ 2,231,000 $ 2,231,000 $ 18,650,000 $ 18,650,000
Short-term investments - - 2,000,000 2,000,000
Obligatory investments - - 6,382,000 6,382,000
Financial Liabilities
Interest payable $ 7,263,000 $ 7,263,000 $ 14,758,000 $ 14,758,000
10 7/8% First Mortgage Notes - - 185,000,000 154,475,000
11 5/8% PRT Funding Notes 85,000,000 64,600,000 85,000,000 69,700,000
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
</TABLE>
48
<PAGE>
(13) SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
QUARTER
-------------------------------------------------------
FIRST SECOND THIRD FOURTH
------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1997:
Net revenues $63,497,000 $ 67,781,000 $69,541,000 $ 56,636,000
=========== ============ =========== ============
Net loss $(2,529,000) $ (1,897,000) $ (223,000) $(31,820,000)
=========== ============ =========== ============
YEAR ENDED DECEMBER 31, 1996:
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)
=========== ============ =========== ===========
</TABLE>
49
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
PCC and PRT Funding 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 21.
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 PRT Funding, as
Issuer, PCC, as Guarantor, and Shawmut Bank Connecticut, N.A., as
Trustee (Exhibit 10.54)
@4.2 -- Indenture dated as of February 15, 1994 among GB Property Funding,
as Issuer, GB Holdings, Inc. and GBHC, as Guarantors, and Shawmut
Bank Connecticut, N.A., as Trustee. (Exhibit 10.50)
@4.3 -- Mortgage, Fixture Filing and Security Agreement dated February 17,
1994, by GBHC in favor of Shawmut Bank Connecticut, National
Association, as Mortgagee. (Exhibit 10.51)
@4.4 -- Security Agreement dated February 17, 1994 made by GB Property
Funding Corp., GBHC, GB Holdings, Inc., Advanced Casino Systems
International, Inc., Computerized Management Systems International,
Inc. and any Additional Collateral Grantor to Shawmut Bank
Connecticut, National Association, as Trustee. (Exhibit 10.52)
50
<PAGE>
@4.5 -- Collateral Assignment of Leases dated as of February 17, 1994, by
GBHC, in favor of Shawmut Bank Connecticut, National Association, as
Assignee. (Exhibit 10.53)
++10.1 -- Management Services Agreement dated as of August 19, 1987, between
Pratt Hotel Management, Inc. ("PHMI"), the predecessor of NJMI, and
GBHC. (Exhibit 10.1)
*10.2 -- Management Services Agreement dated as of June 21, 1991, between HCA
and Greate Bay Casino Corporation, the predecessor in interest of
PML. (Exhibit 10.34)
++10.3 -- Tax Allocation Agreement by and among Pratt Casino Properties, Inc.,
PHMI, PCPI Funding Corp., GBHC and certain other parties effective
as of January 1, 1987. (Exhibit 10.18)
++10.4 -- Amended License Agreement by and between Hughes Properties, Inc. and
Pratt Hotel Corporation (now known as GBCC) dated May 19, 1987.
(Exhibit 10.3)
###10.5 -- Sixth Amendment to Employment Agreement dated January 1, 1998,
between HCC and Edward T. Pratt, Jr. (Exhibit 10.6)
+++10.6 -- Employment Agreement dated May 1, 1996 by and between HCC and Edward
T. Pratt III. (Exhibit 10.4)
##10.7 -- First and Second Amendments to Employment Agreement dated as of
January 1, 1998 between GBHC and Frederick H. Kraus. (Exhibit 10.4)
##10.8 -- First and Second Amendments to Employment Agreement dated as of
January 1, 1998 between GBHC and Timothy A. Ebling. (Exhibit 10.5)
@10.9 -- Agreement of Limited Partnership of Pratt Management, L.P. (Exhibit
10.55)
**10.10 -- Deed dated November 27, 1978 from Colony Associates, L.P. to GBHC.
(Exhibit 10.13)
@@10.11 -- Consulting Agreement dated as of January 1, 1994 between PCC, as the
Consultant, and HWCC - Tunica, Inc. (Exhibit 10.8)
###10.12 -- Employment Agreement dated as of January 1, 1998 between GBCC and
John C. Hull. (Exhibit 10.18)
21.1 -- Subsidiaries of Pratt Casino Corporation.
#99.1 -- Voluntary petition for bankruptcy pursuant to Chapter 11 of the
Bankruptcy Code for Greate Bay Hotel and Casino, Inc. dated January
5, 1998. (Exhibit 99.2)
#99.2 -- Voluntary petition for bankruptcy pursuant to Chapter 11 of the
Bankruptcy Code for GB Holdings, Inc. dated January 5, 1998 (Exhibit
99.3)
#99.3 -- Voluntary petition for bankruptcy pursuant to Chapter 11 of the
Bankruptcy Code for GB Property Funding Corp. dated January 5, 1998
(Exhibit 99.4)
- ----------------------------------------------
+ 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
Form S-1 Registration Statement (Registration No. 33-77502) for
Hollywood Casino Corporation as filed with the SEC on April 8, 1994.
51
<PAGE>
@@ 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
Form 8-K for GB Property Funding Corp., GB Holdings, Inc. and Greate
Bay Hotel and Casino, Inc. as filed with the SEC on January 9, 1998.
## Incorporated by reference from the exhibit shown in parenthesis to
GB Property Funding Corp.'s Annual Report on Form 10-K for the year
ended December 31, 1997.
### Incorporated by reference from the exhibit shown in parenthesis to
GBCC's Annual Report on Form 10-K for the year ended December 31,
1997.
(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, 1997.
52
<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
Atlantic City, State of New Jersey on March 27, 1998.
PRT FUNDING CORP.
By: /s/ John C. Hull
---------------------------------
John C. Hull
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:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ John C. Hull Chief Executive Officer, March 27, 1998
- -------------------------- President and Director ----------------------
John C. Hull
/s/ Edward T. Pratt, Jr. Chief Financial Officer, March 27, 1998
- -------------------------- Principal Accounting Officer ----------------------
Edward T. Pratt, Jr. and Director
/s/ Edward T. Pratt III Executive Vice President and March 27, 1998
- -------------------------- Secretary ----------------------
Edward T. Pratt III
/s/ Bernard A. Capaldi Director March 27, 1998
- -------------------------- ----------------------
Bernard A. Capaldi
/s/ Michael J. Chesser Director March 27, 1998
- -------------------------- ----------------------
Michael J. Chesser
</TABLE>
53
<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
Atlantic City, State of New Jersey on March 27, 1998.
PRATT CASINO CORPORATION
By: /s/ John C. Hull
---------------------------------
John C. Hull
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:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ John C. Hull Chief Executive Officer, March 27, 1998
- -------------------------- President and Director ----------------------
John C. Hull
/s/ Edward T. Pratt, Jr. Chief Financial Officer, March 27, 1998
- -------------------------- Principal Accounting Officer ----------------------
Edward T. Pratt, Jr. and Director
/s/ Edward T. Pratt III Executive Vice President and March 27, 1998
- -------------------------- Secretary ----------------------
Edward T. Pratt III
/s/ Bernard A. Capaldi Director March 27, 1998
- -------------------------- ----------------------
Bernard A. Capaldi
/s/ Michael J. Chesser Director March 27, 1998
- -------------------------- ----------------------
Michael J. Chesser
</TABLE>
54
<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
55
<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 23,
1998. 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 23, 1998
56
<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,
-----------------------------
1997 1996
------------- -------------
<S> <C> <C>
Cash $ 397,000 $ 607,000
Short-term investments - 2,000,000
Due from affiliates, net of valuation allowance 155,000 169,000
Other current assets 56,000 804,000
------------- -------------
Total current assets 608,000 3,580,000
------------- -------------
Investment in limited partnership 2,256,000 1,746,000
Deferred financing costs - 2,608,000
------------- -------------
Total other assets 2,256,000 4,354,000
------------- -------------
$ 2,864,000 $ 7,934,000
============= =============
LIABILITIES AND SHAREHOLDER'S DEFICIT
Current maturity of long-term debt $ 62,900,000 $ -
Due to affiliate 6,205,000 3,700,000
Accrued interest payable 2,892,000 2,161,000
------------- -------------
Total current liabilities 71,997,000 5,861,000
------------- -------------
Long-term debt 5,000,000 67,900,000
------------- -------------
Investment in and advances to subsidiaries 67,441,000 39,278,000
------------- -------------
Shareholder's deficit:
Common stock, $1.00 par value per share,
1,000 shares authorized and outstanding 1,000 1,000
Accumulated deficit (141,575,000) (105,106,000)
------------- -------------
Total shareholder's deficit (141,574,000) (105,105,000)
------------- -------------
$ 2,864,000 $ 7,934,000
============= =============
</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,
-----------------------------------------
1997 1996 1995
------------ ------------ -----------
<S> <C> <C> <C>
Revenues:
Consulting fees $ 1,200,000 $ 1,200,000 $ 1,200,000
------------ ------------ -----------
Expenses:
Amortization 358,000 358,000 358,000
General and administrative 104,000 93,000 83,000
------------ ------------ -----------
Total expenses 462,000 451,000 441,000
------------ ------------ -----------
Income from operations 738,000 749,000 759,000
------------ ------------ -----------
Non-operating income (expense):
Interest income 761,000 80,000 7,000
Interest expense (8,045,000) (8,044,000) (8,045,000)
Equity in earnings of limited partnership 7,008,000 6,162,000 6,429,000
------------ ------------ -----------
Total non-operating expense, net (276,000) (1,802,000) (1,609,000)
------------ ------------ -----------
Income (loss) before income taxes and other items 462,000 (1,053,000) (850,000)
Income tax (provision) benefit (798,000) 358,000 292,000
------------ ------------ -----------
Loss before non-recurring and other items (336,000) (695,000) (558,000)
Write off deferred financing costs (2,250,000) - -
------------ ------------ -----------
Loss before other items (2,586,000) (695,000) (558,000)
Equity in income (losses) of
consolidated subsidiaries 3,773,000 (32,999,000) (1,000,000)
Equity in losses of GB Holdings, Inc. (37,656,000) - -
------------ ------------ -----------
Net loss $(36,469,000) $(33,694,000) $(1,558,000)
============ ============ ===========
</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,
---------------------------------------
1997 1996 1995
------------ ------------ -----------
<S> <C> <C> <C>
Net cash provided by (used in) operating activities $ 285,000 $ (52,000) $ (733,000)
----------- ----------- ----------
Investing activities:
Short-term investment 2,000,000 (2,000,000) -
----------- ----------- ----------
Net cash provided by (used in)
investing activities 2,000,000 (2,000,000) -
----------- ----------- ----------
Financing activities:
Borrowings from affiliate 2,505,000 2,150,000 -
Advance to affiliate (5,000,000) - -
----------- ----------- ----------
Net cash (used in) provided by financing
activities (2,495,000) 2,150,000 -
----------- ----------- ----------
Net (decrease) increase in cash (210,000) 98,000 (733,000)
Cash at beginning of year 607,000 509,000 1,242,000
----------- ----------- ----------
Cash at end of year $ 397,000 $ 607,000 $ 509,000
=========== =========== ==========
</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) BASIS OF PRESENTATION AND GUARANTEES OF REGISTRANT
The accompanying condensed parent company financial statements have been
prepared assuming that Pratt Casino Corporation ("PCC") will continue as a
going concern. Certain affiliates of PCC filed for Chapter 11 bankruptcy
protection on January 5, 1998. The affiliate filings under Chapter 11 have
created a default under the indenture for the $85,000,000 Senior Note
obligations (the "PRT Funding Notes") of PRT Funding Corp., a wholly owned
subsidiary of PCC. Accordingly, the outstanding principal amount of the PRT
Funding Notes has accelerated and is currently due and payable. PCC, which
is liable as guarantor under the PRT Funding Notes, does not have
sufficient assets to satisfy the outstanding amounts and has entered into
negotiations with the PRT Funding bondholders to restructure the
obligations. No assurance can be given that PCC will be able to restructure
its obligations. The default under the indenture for the PRT Funding Notes
raises substantial doubt about PCC's ability to continue as a going
concern. The condensed parent company financial statements do not include
any adjustments that might result from the outcome of these uncertainties.
PCC also guaranteed the outstanding borrowings under a $2,000,000 bank line
of credit agreement entered into by Greate Bay Hotel and Casino, Inc., an
indirect wholly owned subsidiary of PCC. At December 31, 1996, $2,000,000
was outstanding under the line of credit. The line of credit was repaid
upon maturity of a pledged certificate of deposit in January 1997 and the
line of credit was cancelled.
(2) SCHEDULED PAYMENTS OF LONG-TERM DEBT
PCC's long-term indebtedness includes a $62,900,000 promissory note to PRT
Funding Corp. Under the terms of the loan agreement, should a default occur
under the indenture for the PRT Funding Notes which accelerates the
maturity of such notes, the maturity of the promissory note from PCC is to
be accelerated as well. Such a default occurred under the Indenture for the
PRT Funding Notes in January 1998 when certain subsidiaries of PCC filed
petitions for relief under Chapter 11 of the United States Bankruptcy Code.
Accordingly, the accompanying parent company balance sheet of PCC at
December 31, 1997 reflects the promissory note balance as currently due.
PCC's other long-term debt outstanding of $5,000,000 at December 31, 1997
matures during 2004. Interest paid during the years ended December 31,
1997, 1996 and 1995 amounted to $7,314,000, $7,679,000 and $8,410,000,
respectively.
(3) DIVIDENDS RECEIVED
PCC received dividends from Pratt Management, L.P. amounting to $6,498,000,
$6,433,000 and $6,421,000, respectively, during the years ended December
31, 1997, 1996 and 1995.
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 OTHER AT END
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS CHARGES OF PERIOD
----------- ----------- --------------- ---------------- ------------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1997:
Allowance for doubtful
accounts receivable $15,524,000 $ 3,195,000 $(3,764,000)(1) $(14,955,000)(3) $ -
Valuation allowance on
affiliate receivables - 9,650,000 - (9,650,000)(3) -
Allowance for obligatory
investments 4,401,000 1,241,000 (71,000)(2) (5,571,000)(3) -
----------- ----------- --------------- ---------------- -----------
$19,925,000 $14,086,000 $ (3,835,000) $ (30,176,000) $ -
=========== =========== =============== ================ ===========
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
=========== =========== =============== ================ ===========
</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.
(3) Represents write-off of allowances resulting from GB Holdings, Inc. and its
subsidiaries no longer being included on the consolidated financial
statements of Pratt Casino Corporation.
The accompanying notes to consolidated financial statements
are an integral part of this schedule.
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER PAGE
- ------ ------------
<S> <C> <C>
+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 PRT Funding, as
Issuer, PCC, as Guarantor, and Shawmut Bank Connecticut, N.A., as
Trustee (Exhibit 10.54)
@4.2 -- Indenture dated as of February 15, 1994 among GB Property Funding,
as Issuer, GB Holdings, Inc. and GBHC, as Guarantors, and Shawmut
Bank Connecticut, N.A., as Trustee. (Exhibit 10.50)
@4.3 -- Mortgage, Fixture Filing and Security Agreement dated February 17,
1994, by GBHC in favor of Shawmut Bank Connecticut, National
Association, as Mortgagee. (Exhibit 10.51)
@4.4 -- Security Agreement dated February 17, 1994 made by GB Property
Funding Corp., GBHC, GB Holdings, Inc., Advanced Casino Systems
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 February 17, 1994, by
GBHC, in favor of Shawmut Bank Connecticut, National Association, as
Assignee. (Exhibit 10.53)
++10.1 -- Management Services Agreement dated as of August 19, 1987, between
Pratt Hotel Management, Inc. ("PHMI"), the predecessor of NJMI, and
GBHC. (Exhibit 10.1)
*10.2 -- Management Services Agreement dated as of June 21, 1991, between HCA
and Greate Bay Casino Corporation, the predecessor in interest of
PML. (Exhibit 10.34)
++10.3 -- Tax Allocation Agreement by and among Pratt Casino Properties, Inc.,
PHMI, PCPI Funding Corp., GBHC and certain other parties effective
as of January 1, 1987. (Exhibit 10.18)
++10.4 -- Amended License Agreement by and between Hughes Properties, Inc. and
Pratt Hotel Corporation (now known as GBCC) dated May 19, 1987.
(Exhibit 10.3)
###10.5 -- Sixth Amendment to Employment Agreement dated January 1, 1998,
between HCC and Edward T. Pratt, Jr. (Exhibit 10.6)
+++10.6 -- Employment Agreement dated May 1, 1996 by and between HCC and Edward
T. Pratt III. (Exhibit 10.4)
##10.7 -- First and Second Amendments to Employment Agreement dated as of
January 1, 1998 between GBHC and Frederick H. Kraus. (Exhibit 10.4)
##10.8 -- First and Second Amendments to Employment Agreement dated as of
January 1, 1998 between GBHC and Timothy A. Ebling. (Exhibit 10.5)
@10.9 -- Agreement of Limited Partnership of Pratt Management, L.P. (Exhibit
10.55)
**10.10 -- Deed dated November 27, 1978 from Colony Associates, L.P. to GBHC.
(Exhibit 10.13)
@@10.11 -- Consulting Agreement dated as of January 1, 1994 between PCC, as the
Consultant, and HWCC - Tunica, Inc. (Exhibit 10.8)
###10.12 -- Employment Agreement dated as of January 1, 1998 between GBCC and
John C. Hull. (Exhibit 10.18)
21.1 -- Subsidiaries of Pratt Casino Corporation.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER PAGE
- ------ ------------
<S> <C> <C>
#99.1 -- Voluntary petition for bankruptcy pursuant to Chapter 11 of the
Bankruptcy Code for Greate Bay Hotel and Casino, Inc. dated January
5, 1998. (Exhibit 99.2)
#99.2 -- Voluntary petition for bankruptcy pursuant to Chapter 11 of the
Bankruptcy Code for GB Holdings, Inc. dated January 5, 1998 (Exhibit
99.3)
#99.3 -- Voluntary petition for bankruptcy pursuant to Chapter 11 of the
Bankruptcy Code for GB Property Funding Corp. dated January 5, 1998
(Exhibit 99.4)
- ----------------------------------------------
+ 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
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
Form 8-K for GB Property Funding Corp., GB Holdings, Inc. and Greate
Bay Hotel and Casino, Inc. as filed with the SEC on January 9, 1998.
## Incorporated by reference from the exhibit shown in parenthesis to
GB Property Funding Corp.'s Annual Report on Form 10-K for the year
ended December 31, 1997.
### Incorporated by reference from the exhibit shown in parenthesis to
GBCC's Annual Report on Form 10-K for the year ended December 31,
1997.
</TABLE>
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF PRATT CASINO CORPORATION
<TABLE>
<CAPTION>
STATE
NAME ADDRESS ORGANIZED
---- ------- ---------
<S> <C> <C>
GB Holdings, Inc. Indiana Avenue & Brighton Park Delaware
9th Floor
Atlantic City, New Jersey 08401
Greate Bay Hotel and Casino, Inc. 136 South Kentucky Avenue New Jersey
Atlantic City, New Jersey 08401
GB Property Funding Corp. Indiana Avenue & Brighton Park New Jersey
9th Floor
Atlantic City, New Jersey 08401
PRT Funding Corp. Indiana Avenue & Brighton Park Delaware
9th Floor
Atlantic City, New Jersey 08401
New Jersey Management, Inc. Indiana Avenue & Brighton Park New Jersey
9th Floor
Atlantic City, New Jersey 08401
</TABLE>
<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> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996
<PERIOD-START> JAN-01-1997 JAN-01-1996
<PERIOD-END> DEC-31-1997 DEC-31-1996
<CASH> 13 1,141
<SECURITIES> 0 0
<RECEIVABLES> 3,428 3,972
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 68,321 5,113
<PP&E> 0 0
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 73,321 105,113
<CURRENT-LIABILITIES> 92,281 5,087
<BONDS> 15,000 100,000
0 0
0 0
<COMMON> 1 1
<OTHER-SE> (33,961) 25
<TOTAL-LIABILITY-AND-EQUITY> 73,321 105,113
<SALES> 0 0
<TOTAL-REVENUES> 0 0
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 33,988 0
<INTEREST-EXPENSE> (2) (27)
<INCOME-PRETAX> (33,986) 27
<INCOME-TAX> 0 6
<INCOME-CONTINUING> (33,986) 21
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (33,986) 21
<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> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996
<PERIOD-START> JAN-01-1997 JAN-01-1996
<PERIOD-END> DEC-31-1997 DEC-31-1996
<CASH> 2,231 18,650
<SECURITIES> 0 0
<RECEIVABLES> 0 25,638
<ALLOWANCES> 0 15,524
<INVENTORY> 0 3,873
<CURRENT-ASSETS> 2,599 40,375
<PP&E> 3 317,004
<DEPRECIATION> 3 160,989
<TOTAL-ASSETS> 6,258 234,286
<CURRENT-LIABILITIES> 92,690 55,089
<BONDS> 15,000 282,930
0 0
0 0
<COMMON> 1 1
<OTHER-SE> (141,575) (105,106)
<TOTAL-LIABILITY-AND-EQUITY> 6,258 234,286
<SALES> 0 0
<TOTAL-REVENUES> 257,455 265,961
<CGS> 0 0
<TOTAL-COSTS> 212,712 233,118
<OTHER-EXPENSES> 27,793 28,986
<LOSS-PROVISION> 12,845 2,167
<INTEREST-EXPENSE> 31,366 31,037
<INCOME-PRETAX> (27,261) (29,347)
<INCOME-TAX> 9,518 4,347
<INCOME-CONTINUING> (36,779) (33,694)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 310 0
<CHANGES> 0 0
<NET-INCOME> (36,469) (33,694)
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
</TABLE>
