<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended JUNE 30, 1998
--------------------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
---------------------- -----------------------
Commission file number 33-69768
----------------------------------------------------------
PRT FUNDING CORP.
PRATT CASINO CORPORATION
- --------------------------------------------------------------------------------
(Exact name of each Registrant as specified in its charter)
DELAWARE 75-2502289
DELAWARE 75-2502292
- ---------------------------------------- --------------------------------------
(States or other jurisdictions of (I.R.S. Employer
incorporation or organization) Identification No.'s)
C/O SANDS HOTEL & CASINO, INC.
INDIANA AVENUE & BRIGHTON PARK, 9TH FLOOR
ATLANTIC CITY, NEW JERSEY 08401
- ---------------------------------------- --------------------------------------
(Address of principal executive offices) (Zip Code)
(Registrants' telephone number, including area code): (609) 441-0704
---------------------------
(NOT APPLICABLE)
- --------------------------------------------------------------------------------
(Former name, former address, and former fiscal year, if changed
since last report.)
Indicate by check mark whether each of the Registrants (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that 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
---- ----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
REGISTRANT CLASS OUTSTANDING AT AUGUST 17, 1998
- ------------------------- ----------------------------- ------------------------------
<S> <C> <C>
PRT Funding Corp. Common Stock, $1.00 par value 1,000 shares
Pratt Casino Corporation Common Stock, $1.00 par value 1,000 shares
</TABLE>
1
<PAGE>
PRT FUNDING CORP.
PRATT CASINO CORPORATION
PART 1: FINANCIAL INFORMATION
- -----------------------------
INTRODUCTORY NOTES TO FINANCIAL STATEMENTS
- ------------------------------------------
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 "GEAAQ"; 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 and 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").
Prior to July 7, 1998, the Sands was managed by New Jersey Management, Inc.
("NJMI"), which is also a subsidiary of PCC.
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 executive officers and directors remain in
office, subject to the jurisdiction of the Bankruptcy Court. On May 11, 1998,
the Bankruptcy Court extended the exclusive period of the debtors to file a plan
of reorganization for 90 days and, as such, the exclusivity period expired on
August 10, 1998. On August 10, 1998, the Bankruptcy Court granted an additional
90-day extension of the exclusivity period.
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, as
guarantor of the PRT Funding Notes, is currently involved in negotiations to
restructure the notes with three bondholders who control approximately 98% of
the $85,000,000 note issue. PRT Funding has deferred payment of interest due
April 15, 1998 pending the outcome of such negotiations.
PCC is a holding company that, through Holdings, owns 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., a wholly owned subsidiary of HCC, which
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. Historically, debt service on the PRT Funding
Notes has been funded primarily from management fees earned by NJMI from the
Sands, from distributions made to PCC by PML (resulting
2
<PAGE>
from fees generated from the management of the Aurora Casino) and from
consulting fees earned from the Tunica Casino, supplemented by dividends, if
any, received from GBHC.
As a result of the Chapter 11 filings discussed above, 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 sheets of PCC and, effective for periods
subsequent to December 31, 1997, the operations of Holdings and its subsidiaries
are accounted for by PCC under the equity method of accounting.
The financial statements of PRT Funding and the consolidated financial
statements of PCC as of June 30, 1998 and for the three and six month periods
ended June 30, 1998 and 1997 have been prepared without audit, pursuant to the
rules and regulations of the Securities and Exchange Commission. In the opinion
of management, their respective financial statements contain all adjustments
(consisting of only normal recurring adjustments) necessary to present fairly
their respective financial positions as of June 30, 1998, their results of
operations for the three and six month periods ended June 30, 1998 and 1997 and
their respective cash flows for the six month periods ended June 30, 1998 and
1997.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. These financial statements should be read in
conjunction with the financial statements and notes thereto included in PRT
Funding and PCC's 1997 Annual Report on Form 10-K.
3
<PAGE>
PRT FUNDING CORP.
(WHOLLY OWNED BY PRATT CASINO CORPORATION)
BALANCE SHEETS
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
------------ ------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 8,000 $ 13,000
Interest receivable from affiliates 8,734,000 3,428,000
Due from affiliate 1,117,000 1,130,000
Notes receivable from affiliates, net of valuation allowance 63,750,000 63,750,000
------------ ------------
Total current assets 73,609,000 68,321,000
------------ ------------
Due from affiliates, net of valuation allowance 5,000,000 5,000,000
------------ ------------
$ 78,609,000 $ 73,321,000
============ ============
LIABILITIES AND SHAREHOLDER'S DEFICIT
Current liabilities:
Current maturities of long-term debt $ 85,000,000 $ 85,000,000
Accrued interest payable 13,300,000 7,263,000
Due to affiliates - 18,000
------------ ------------
Total current liabilities 98,300,000 92,281,000
------------ ------------
Notes payable to affiliate 15,000,000 15,000,000
------------ ------------
Shareholder's deficit:
Common stock, $1.00 par value per
share, 1,000 shares authorized
and outstanding 1,000 1,000
Accumulated deficit (34,692,000) (33,961,000)
------------ ------------
Total shareholder's deficit (34,691,000) (33,960,000)
------------ ------------
$ 78,609,000 $ 73,321,000
============ ============
</TABLE>
The accompanying introductory notes and notes to financial
statements are an integral part of these balance sheets.
4
<PAGE>
PRT FUNDING CORP.
(WHOLLY OWNED BY PRATT CASINO CORPORATION)
STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED
JUNE 30,
-----------------------
1998 1997
----------- ----------
Revenues:
Interest income $2,653,000 $3,019,000
Expenses:
Interest expense 3,018,000 3,019,000
---------- ----------
Loss before income taxes (365,000) -
Income tax provision - -
---------- ----------
Net loss $ (365,000) $ -
========== ==========
The accompanying introductory notes and notes to financial
statements are an integral part of these financial statements.
5
<PAGE>
PRT FUNDING CORP.
(WHOLLY OWNED BY PRATT CASINO CORPORATION)
STATEMENTS OF OPERATIONS
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
------------------------
1998 1997
----------- -----------
Revenues:
Interest income $5,306,000 $6,041,000
Expenses:
Interest expense 6,037,000 6,038,000
---------- ----------
(Loss) income before income taxes (731,000) 3,000
Income tax provision - (1,000)
---------- ----------
Net (loss) income $ (731,000) $ 2,000
========== ==========
The accompanying introductory notes and notes to financial
statements are an integral part of these financial statements.
6
<PAGE>
PRT FUNDING CORP.
(WHOLLY OWNED BY PRATT CASINO CORPORATION)
STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
--------------------------
1998 1997
------------ ------------
OPERATING ACTIVITIES:
Net (loss) income $ (731,000) $ 2,000
Adjustments to reconcile net (loss) income
to net cash used in operating activities:
Increase in receivable from affiliates (5,306,000) (2,228,000)
Increase in accrued interest payable 6,037,000 1,098,000
Net change in other current assets
and liabilities (5,000) 1,000
----------- -----------
Net cash used in operating activities (5,000) (1,127,000)
Cash and cash equivalents at beginning of period 13,000 1,141,000
----------- -----------
Cash and cash equivalents at end of period $ 8,000 $ 14,000
=========== ===========
The accompanying introductory notes and notes to financial
statements are an integral part of these financial statements.
7
<PAGE>
PRT FUNDING CORP.
(WHOLLY OWNED BY PRATT CASINO CORPORATION)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(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"). Prior to July 7, 1998,
the Sands was 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 outstanding 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 executive officers and directors remain in
office, subject to the jurisdiction of the Bankruptcy Court. On May 11, 1998,
the Bankruptcy Court extended the exclusive period of the debtors to file a plan
of reorganization for 90 days and, as such, the exclusivity period expired on
August 10, 1998. On August 10, 1998, the Bankruptcy Court granted an additional
90-day extension of the exclusivity period.
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, as guarantor of the PRT Funding Notes, is
currently involved in negotiations to restructure the notes with three
bondholders who control approximately 98% of the $85,000,000 note issue. PRT
Funding has deferred payment of interest due April 15, 1998 pending the outcome
of such negotiations. 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
8
<PAGE>
PRT FUNDING CORP.
(WHOLLY OWNED BY PRATT CASINO CORPORATION)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
The Financial Accounting Standards Board has issued a new standard,
"Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 requires the
presentation and disclosure of comprehensive income, which is defined as the
change in a company's equity resulting from non-owner transactions and events.
SFAS 130 became effective December 15, 1997 and requires the restatement of all
prior periods presented. PRT Funding has adopted the provisions of SFAS 130;
however, the statement provides that an enterprise that has no items of other
comprehensive income for any period presented need only report net income. PRT
Funding has no such other comprehensive income items for any period presented;
accordingly, the presentation and disclosure requirements of SFAS 130 are not
applicable.
The financial statements as of June 30, 1998 and for the three and six
month periods ended June 30, 1998 and 1997 have been prepared by PRT Funding
without audit. In the opinion of management, the financial statements contain
all adjustments (consisting of only normal recurring adjustments) necessary to
present fairly the financial position of PRT Funding as of June 30, 1998 and the
results of its operations for the three and six month periods ended June 30,
1998 and 1997 and cash flows for the six month periods ended June 30, 1998 and
1997.
(2) LONG-TERM DEBT
On February 17, 1994, PRT Funding issued $85,000,000 of unsecured senior
notes due April 15, 2004 (the "PRT Funding Notes"). Interest on the PRT Funding
Notes accrues at the rate of 11 5/8% per annum, payable semiannually commencing
October 15, 1994. The PRT Funding Notes are redeemable at the option of the
issuer, in whole or in part, on or after April 15, 1999 at stated redemption
prices ranging up to 104.36% of par plus accrued interest. The indenture 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 sheets at June 30, 1998 and 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 sheets at June 30, 1998 and December 31, 1997.
Based on PRT Funding's evaluation of the realizability of the affiliate loans,
these notes are shown net of a valuation allowance in the amount of $21,250,000
on the accompanying balance sheets.
On February 17, 1994, PRT Funding issued $15,000,000 of junior subordinated
notes due in February 2005 (the "Junior Subordinated Notes") and loaned the
proceeds to various affiliates on the same terms. 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
9
<PAGE>
PRT FUNDING CORP.
(WHOLLY OWNED BY PRATT CASINO CORPORATION)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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 has been paid during 1998, 1997 or 1996. At June 30, 1998 and
December 31, 1997, accrued interest in the amount of $6,301,000 and $5,204,000
was payable to GBCC with respect to the Junior Subordinated Notes and is
included in interest payable on the accompanying balance sheets.
No interest was paid during the six month period ended June 30, 1998;
interest paid amounted to $4,941,000 during the six month period ended June 30,
1997.
(3) INCOME TAXES
Components of the provision for income taxes consisted of the following:
THREE MONTHS SIX MONTHS ENDED
ENDED JUNE 30, JUNE 30,
-------------------- --------------------
1998 1997 1998 1997
--------- --------- --------- ---------
Benefit in lieu of (provision for)
federal income taxes:
Current $ - $ - $ - $(1,000)
Deferred 113,000 - 227,000 -
State income tax benefit:
Deferred 33,000 - 66,000 -
Valuation allowance (146,000) - (293,000) -
--------- --------- --------- ---------
$ - $ - $ - $(1,000)
========= ========= ========= =========
PRT Funding's operations are included in the consolidated federal income
tax return of GBCC. 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. PRT Funding paid $5,000 under the tax allocation agreements during
the six month period ended June 30, 1998; no such payments were made during the
six month period ended June 30, 1997. At June 30, 1998, no liabilities were
outstanding under the tax allocation agreements. At December 31, 1997, $5,000 is
included in due to affiliates on the accompanying balance sheet representing
taxes currently payable under the agreements.
On July 27, 1998, GBHC filed an action with the Bankruptcy Court seeking,
among other things, to enjoin GBCC from using the tax net operating loss
carryforwards of GBHC. If an automatic stay or preliminary injunction is granted
by the Bankruptcy Court, GBCC and its subsidiaries could effectively be
precluded from filing a consolidated federal income tax return for 1997 and
subsequent years; however, the effect, if any, on PRT Funding's federal income
tax obligations would not be material.
Deferred income taxes result from differences in the timing of income
between tax and financial reporting from the use of valuation allowances on
certain receivables. At June 30, 1998 and December 31, 1997, the valuation
provision on affiliate receivables results in a deferred tax asset of
$13,867,000 and $13,574,000, respectively.
10
<PAGE>
PRT FUNDING CORP.
(WHOLLY OWNED BY PRATT CASINO CORPORATION)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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 June 30, 1998 and 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 totaling $3,469,000 and $2,738,000, has been
reserved on the accompanying balance sheets at June 30, 1998 and December 31,
1997, respectively. Interest income on the accompanying statements of operations
is shown net of valuation reserves of $366,000 and $731,000, respectively, for
the three and six month periods ended June 30, 1998.
(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 executive officers and directors remain in office, subject to
the jurisdiction of the Bankruptcy Court. On May 11, 1998, the Bankruptcy Court
extended the exclusive period of the debtors to file a plan of reorganization
for 90 days and, as such, the exclusivity period expired on August 10, 1998. On
August 10, 1998, the Bankruptcy Court granted an additional 90-day extension of
the exclusivity period.
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 PCC, as guarantor of the PRT Funding Notes, is currently
involved in negotiations to restructure the notes with three bondholders who
control approximately 98% of the note issue.
11
<PAGE>
PRATT CASINO CORPORATION AND SUBSIDIARIES
(WHOLLY OWNED BY PPI CORPORATION)
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
JUNE 30, DECEMBER 31,
1998 1997
----------- -------------
Current Assets:
Cash and cash equivalents $6,163,000 $2,231,000
Due from affiliates, net of valuation allowances 352,000 174,000
Refundable deposits and other
current assets 149,000 194,000
---------- ----------
Total current assets 6,664,000 2,599,000
---------- ----------
Investment in Limited Partnership 1,799,000 2,256,000
---------- ----------
Property and Equipment:
Operating equipment 3,000 3,000
Less - accumulated depreciation and
amortization (3,000) (3,000)
---------- ----------
Net property and equipment - -
---------- ----------
Other Assets:
Due from affiliates, net of valuation allowances 145,000 1,395,000
Other assets 9,000 8,000
---------- ----------
Total other assets 154,000 1,403,000
---------- ----------
$8,617,000 $6,258,000
========== ==========
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated balance sheets.
12
<PAGE>
PRATT CASINO CORPORATION AND SUBSIDIARIES
(WHOLLY OWNED BY PPI CORPORATION)
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDER'S DEFICIT
(UNAUDITED)
JUNE 30, DECEMBER 31,
1998 1997
------------- -------------
Current Liabilities:
Current maturities of long-term debt $ 85,000,000 $ 85,000,000
Accounts payable 323,000 -
Accrued liabilities -
Interest 13,300,000 7,263,000
Other 11,000 10,000
Due to affiliates 433,000 417,000
------------- -------------
Total current liabilities 99,067,000 92,690,000
------------- -------------
Investment in and Advances to GB Holdings, Inc. 36,864,000 40,142,000
------------- -------------
Long-Term Debt 15,000,000 15,000,000
------------- -------------
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 (142,315,000) (141,575,000)
------------- -------------
Total shareholder's deficit (142,314,000) (141,574,000)
------------- -------------
$ 8,617,000 $ 6,258,000
============= =============
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated balance sheets.
13
<PAGE>
PRATT CASINO CORPORATION AND SUBSIDIARIES
(WHOLLY OWNED BY PPI CORPORATION)
CONSOLIDATED STATEMENTS OF OPERATIONS (NOTE 1)
(UNAUDITED)
THREE MONTHS ENDED
JUNE 30,
--------------------------
1998 1997
------------ ------------
Revenues:
Casino $ - $61,823,000
Rooms - 2,455,000
Food and beverage - 8,457,000
Other 1,044,000 1,247,000
----------- -----------
1,044,000 73,982,000
Less - promotional allowances - (6,201,000)
----------- -----------
Net revenues 1,044,000 67,781,000
----------- -----------
Expenses:
Casino - 51,396,000
Rooms - 671,000
Food and beverage - 2,881,000
Other - 616,000
General and administrative 319,000 3,506,000
Depreciation and amortization - 3,749,000
----------- -----------
Total expenses 319,000 62,819,000
----------- -----------
Income from operations 725,000 4,962,000
----------- -----------
Non-operating income (expenses):
Interest income 76,000 472,000
Interest expense (3,018,000) (8,297,000)
Gain on disposal of assets - 17,000
Equity in earnings of Limited Partnership 712,000 781,000
Equity in earnings of GB Holdings, Inc. 619,000 -
Restructuring costs (984,000) -
----------- -----------
Total non-operating expense, net (2,595,000) (7,027,000)
----------- -----------
Loss before income taxes and extraordinary item (1,870,000) (2,065,000)
Income tax provision (3,000) (142,000)
----------- -----------
Loss before extraordinary item (1,873,000) (2,207,000)
Gain on early extinguishment of debt - 310,000
----------- -----------
Net loss $(1,873,000) $(1,897,000)
=========== ===========
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated statements.
14
<PAGE>
PRATT CASINO CORPORATION AND SUBSIDIARIES
(WHOLLY OWNED BY PPI CORPORATION)
CONSOLIDATED STATEMENTS OF OPERATIONS (NOTE 1)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTH ENDED
JUNE 30,
---------------------------
1998 1997
------------ -------------
<S> <C> <C>
Revenues:
Casino $ - $120,153,000
Rooms - 4,692,000
Food and beverage - 16,377,000
Other 2,510,000 2,512,000
----------- ------------
2,510,000 143,734,000
Less - promotional allowances - (12,456,000)
----------- ------------
Net revenues 2,510,000 131,278,000
----------- ------------
Expenses:
Casino - 100,405,000
Rooms - 1,267,000
Food and beverage - 5,220,000
Other - 1,145,000
General and administrative 800,000 7,177,000
Depreciation and amortization - 7,712,000
----------- ------------
Total expenses 800,000 122,926,000
----------- ------------
Income from operations 1,710,000 8,352,000
----------- ------------
Non-operating income (expenses):
Interest income 140,000 874,000
Interest expense (6,037,000) (16,622,000)
Gain on disposal of assets - 24,000
Equity in earnings of Limited Partnership 2,632,000 2,778,000
Equity in earnings of GB Holdings, Inc. 3,254,000 -
Restructuring costs (1,044,000) -
----------- ------------
Total non-operating expense, net (1,055,000) (12,946,000)
----------- ------------
Income (loss) before income taxes and extraordinary item 655,000 (4,594,000)
Income tax provision (1,395,000) (142,000)
----------- ------------
Loss before extraordinary item (740,000) (4,736,000)
Gain on early extinguishment of debt - 310,000
----------- ------------
Net loss $ (740,000) $ (4,426,000)
=========== ============
</TABLE>
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated statements.
15
<PAGE>
PRATT CASINO CORPORATION AND SUBSIDIARIES
(WHOLLY OWNED BY PPI CORPORATION)
CONSOLIDATED STATEMENTS OF CASH FLOWS (NOTE 1)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------------------------
1998 1997
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (740,000) $(4,426,000)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Extraordinary item - (310,000)
Depreciation and amortization - 7,712,000
Gain on disposal of assets - (24,000)
Provision for doubtful accounts 141,000 1,559,000
Equity in earnings of Limited Partnership (2,632,000) (2,778,000)
Distributions received from Limited Partnership 3,089,000 3,744,000
Equity in earnings of GB Holdings, Inc. (3,254,000) -
Increase in accounts receivable - (552,000)
Increase in accounts payable and other accrued liabilities 6,361,000 208,000
Net change in other current assets and liabilities (258,000) (1,307,000)
Net change in other noncurrent assets and liabilities 1,225,000 (480,000)
----------- -----------
Net cash provided by operating activities 3,932,000 3,346,000
----------- -----------
INVESTING ACTIVITIES:
Purchases of property and equipment - (1,279,000)
Obligatory investments - (1,333,000)
Proceeds from disposal of assets - 24,000
Short-term investment - 2,000,000
----------- -----------
Net cash used in investing activities - (588,000)
----------- -----------
FINANCING ACTIVITIES:
Repayments on short-term credit facilities - (2,000,000)
Repayments of long-term debt - (2,131,000)
Borrowings from affiliates - 1,500,000
----------- -----------
Net cash used in financing activities - (2,631,000)
----------- -----------
Net increase in cash and cash equivalents 3,932,000 127,000
Cash and cash equivalents at beginning of period 2,231,000 18,650,000
----------- -----------
Cash and cash equivalents at end of period $ 6,163,000 $18,777,000
=========== ===========
</TABLE>
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated statements.
16
<PAGE>
PRATT CASINO CORPORATION AND SUBSIDIARIES
(WHOLLY OWNED BY PPI CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(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"). Prior to July 7, 1998, the
Sands was 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 outstanding 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 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, GBHC and 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 executive officers and directors remain in office, subject to the
jurisdiction of the Bankruptcy Court. On May 11, 1998, the Bankruptcy Court
extended the exclusive period of the debtors to file a plan of reorganization
for 90 days and, as such, the exclusivity period expired on August 10, 1998. On
August 10, 1998, the Bankruptcy Court granted an additional 90-day extension of
the exclusivity period.
The accompanying consolidated financial statements include the operating
activities and cash flows of PCC and all of its wholly owned subsidiaries. As a
result of the Chapter 11 filings discussed above, 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 sheets and, effective for periods subsequent
to December 31, 1997, the operations of Holdings and its subsidiaries are
accounted for under the equity method of accounting (see Note 7). PCC's
negative investment in Holdings and its subsidiaries on the accompanying
consolidated balance sheets reflects PCC's investment under the equity method of
accounting. All significant intercompany balances and transactions have been
eliminated.
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
17
<PAGE>
PRATT CASINO CORPORATION AND SUBSIDIARIES
(WHOLLY OWNED BY PPI CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
has accelerated and is currently due and payable. As a result of the Chapter 11
filings, GBHC filed a motion seeking to reject the Sands' management contract
with NJMI. Although a substitute agreement was entered into by NJMI and GBHC,
the fees paid to NJMI have been significantly reduced (see Note 5). PCC, as
guarantor of the PRT Funding Notes, does not have sufficient assets to satisfy
the outstanding amounts applicable to the PRT Funding Notes and is currently
involved in negotiations to restructure the notes with three bondholders who
control approximately 98% of the $85,000,000 note issue. PRT Funding has
deferred payment of interest due April 15, 1998 pending the outcome of such
negotiations. 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.
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and 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.
The Financial Accounting Standards Board has issued a new standard,
"Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 requires the
presentation and disclosure of comprehensive income, which is defined as the
change in a company's equity resulting from non-owner transactions and events.
SFAS 130 became effective December 15, 1997 and requires the restatement of all
prior periods presented. PCC has adopted the provisions of SFAS 130; however,
the statement provides that an enterprise that has no items of other
comprehensive income for any period presented need only report net income. PCC
has no such other comprehensive income items for any period presented;
accordingly, the presentation and disclosure requirements of SFAS 130 are not
applicable.
The consolidated financial statements as of June 30, 1998 and for the three
and six month periods ended June 30, 1998 and 1997 have been prepared by PCC
without audit. In the opinion of management, these consolidated financial
statements contain all adjustments (consisting of only normal recurring
adjustments) necessary to present fairly the consolidated financial position of
PCC as of June 30, 1998 and the results of its operations for the three and six
month periods ended June 30, 1998 and 1997 and its cash flows for the six month
periods ended June 30, 1998 and 1997.
18
<PAGE>
PRATT CASINO CORPORATION AND SUBSIDIARIES
(WHOLLY OWNED BY PPI CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(2) 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. Each company continues to
operate in the ordinary course of business, as set forth in the Bankruptcy Code,
and each company's executive officers and directors remain in office, subject to
the jurisdiction of the Bankruptcy Court. On May 11, 1998, the Bankruptcy Court
extended the exclusive period of the debtors to file a plan of reorganization
for 90 days and, as such, the exclusivity period expired on August 10, 1998. On
August 10, 1998, the Bankruptcy Court granted an additional 90-day extension of
the exclusivity period. 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, is currently due and payable
and is classified as current on the accompanying consolidated balance sheets.
JUNE 30, DECEMBER 31,
1998 1997
------------- -------------
11 5/8% senior notes, due 2004 (a) $ 85,000,000 $ 85,000,000
14 5/8% junior subordinated notes, due 2005 (b) 15,000,000 15,000,000
------------ ------------
Total indebtedness 100,000,000 100,000,000
Less - current maturities (85,000,000) (85,000,000)
------------ ------------
Total long-term debt $ 15,000,000 $ 15,000,000
============ ============
- -----------------------------
(a) On February 17, 1994, PRT Funding issued $85,000,000 of unsecured senior
notes due April 15, 2004 (the "PRT Funding Notes"). Interest on the PRT
Funding Notes accrues at the rate of 11 5/8% per annum, payable
semiannually commencing October 15, 1994. The PRT Funding Notes are
redeemable at the option of the issuer, in whole or in part, on or after
April 15, 1999 at stated redemption prices ranging up to 104.36% of par
plus accrued interest. The indenture for the PRT Funding Notes contains
various provisions which, among other things, restrict the ability of
certain subsidiaries of PCC to pay dividends to GBCC, to merge, consolidate
or sell substantially all of their assets or to incur additional
indebtedness beyond certain limitations. The indenture also contains
certain cross default provisions with the indenture to the 10 7/8% First
Mortgage Notes.
19
<PAGE>
PRATT CASINO CORPORATION AND SUBSIDIARIES
(WHOLLY OWNED BY PPI CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(b) 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 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 has been paid during 1998, 1997
or 1996.
No interest was paid during the six month period ended June 30, 1998.
Interest paid amounted to $15,128,000 for the six month period ended June 30,
1997.
(4) INCOME TAXES
Components of the income tax provision consisted of the following:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- -------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Benefit in lieu of (provision) for
federal income taxes:
Current $ 1,009,000 $ 613,000 $ 822,000 $ 1,310,000
Deferred (27,000) (81,000) (12,000) (14,000)
State income tax benefit
(provision):
Current 76,000 50,000 482,000 249,000
Deferred (9,000) (23,000) (4,000) (4,000)
Valuation allowance (1,052,000) (701,000) (2,683,000) (1,683,000)
----------- ----------- ----------- -----------
$ (3,000) $ (142,000) $(1,395,000) $ (142,000)
=========== =========== =========== ===========
</TABLE>
PCC is included in the consolidated federal income tax return of GBCC.
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. PCC made federal tax payments under the tax
allocation agreements totalling $5,000 during the six month period ended June
30, 1998; no such payments were made during the six month period ended June 30,
1997. No state tax payments were made during either of the six month periods
ended June 30, 1998 or 1997.
20
<PAGE>
PRATT CASINO CORPORATION AND SUBSIDIARIES
(WHOLLY OWNED BY PPI CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
As described in Note 8, GBHC has filed an action to enjoin GBHC from using
the tax net operating loss carryforwards ("NOL's") of GBHC. If an automatic
stay or preliminary injunction is granted by the Bankruptcy Court, GBCC and its
subsidiaries could effectively be precluded from filing a consolidated federal
income tax return for 1997 and subsequent years. Accordingly, PCC and certain
of its subsidiaries may owe federal income taxes for such periods.
Federal and state income tax provisions or benefits are based upon
estimates of the results of operations for the current period and reflect the
nondeductibility for income tax purposes of certain items, including meal and
entertainment and other expenses.
Deferred income taxes result primarily from differences in the timing of
deductions taken between tax and financial reporting purposes for adjustments to
the carrying value of deferred financing costs and for other accruals.
The components of the net deferred tax asset as of June 30, 1998 and
December 31, 1997 were as follows:
JUNE 30, DECEMBER 31,
1998 1997
------------ ------------
Deferred tax assets:
Net operating loss carryforward $ 2,887,000 $ 188,000
Valuation allowance on affiliate receivables 56,000 -
Deferred financing costs 827,000 899,000
Other liabilities and accruals 3,000 3,000
----------- -----------
Total deferred tax assets 3,773,000 1,090,000
Valuation allowance (3,773,000) (1,090,000)
----------- -----------
$ - $ -
=========== ===========
At June 30, 1998, PCC and its subsidiaries have NOL's totaling
approximately $8 million, none of which expire before the year 2013 for federal
tax purposes and which begin to expire in 1998 for state tax purposes.
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" ("SFAS 109") requires that the tax benefit of NOL's and deferred tax
assets resulting from temporary differences be recorded as an asset and, to the
extent that management can not assess that the utilization of all or a portion
of such NOL's and deferred tax assets is more likely than not, a valuation
allowance should be recorded. Due to the continued availability of NOL's
originating in prior years for federal and state tax purposes and the book and
tax losses sustained in 1998 to date, 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 June 30, 1998.
21
<PAGE>
PCC's ultimate parent, GBCC, has been informed by its former parent, HCC,
that its NOL's may need to be adjusted due to possible revision of the tax
treatment of HCC's 1996 spin-off of the stock of GBCC. PCC had approximately
$672,000 of unused NOL's for federal income tax reporting purposes at December
31, 1996 which may be affected if a revision is necessary. PCC's subsidiaries
have insignificant NOL's for federal income tax reporting purposes.
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.
The Internal Revenue Service is currently examining the consolidated
federal income tax returns of HCC for the years 1993 and 1994 in which PCC was
included. Management believes that the results of such examination will not
have a material adverse effect on the consolidated financial position or results
of operations of PCC.
Receivables from and payables to affiliates in connection with the
aforementioned tax allocation agreements are as follows:
JUNE 30, DECEMBER 31,
1998 1997
------------ ------------
Due from affiliates - noncurrent $ - $ 1,394,000
Due to affiliate - current - (5,000)
(5) TRANSACTIONS WITH RELATED PARTIES
Prior to May 1, 1998, New Jersey Management, Inc. ("NJMI"), a wholly owned
subsidiary of PCC, was responsible for the operations of the Sands under a
management agreement with GBHC. Under such agreement, NJMI was 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 in excess of certain stated amounts should annual "gross
operating profits," as defined, exceed $5,000,000. On May 22, 1998, GBHC filed a
motion with the Bankruptcy Court seeking to reject the existing management
agreement with NJMI. A substitute agreement (the "Interim Agreement") was
entered into on June 27, 1998 and was approved by the Bankruptcy Court on July
7, 1998. Under the Interim Agreement, effective as of May 1, 1998 and
terminating on September 28, 1998 unless extended by mutual agreement, NJMI
continues to provide certain agreed upon services to GBHC at a monthly fee of
$165,000 of which $122,000 will be paid on a monthly basis in arrears and the
remaining $43,000 will be deferred and paid upon confirmation of GBHC's plan of
reorganization by the Bankruptcy Court.
Fees earned under the management agreement and Interim Agreement amounted
to $744,000 and $1,910,000, respectively, during the three and six month periods
ended June 30, 1998. Management fees
22
<PAGE>
PRATT CASINO CORPORATION AND SUBSIDIARIES
(WHOLLY OWNED BY PPI CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
receivable from the Sands at June 30, 1998 and December 31, 1997 amounted to
$497,000 and $34,000, respectively. Of the amount receivable at June 30, 1998,
$145,000 is included in noncurrent due from affiliates on the accompanying
consolidated balance sheet and is subject to terms of a reorganization plan
which requires confirmation by the Bankruptcy Court.
GBHC licenses the trade name "Sands" from 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 $73,000 and $140,000, respectively, for the three and six
month periods ended June 30, 1997.
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 $300,000 for each of the three month periods ended
June 30, 1998 and 1997 and $600,000 for each of the six month periods ended June
30, 1998 and 1997.
Interest expense incurred with respect to the Junior Subordinated Notes
(Note 3) amounted to $549,000 during each of the three month periods ended June
30, 1998 and 1997 and $1,097,000 during each of the six month periods ended June
30, 1998 and 1997. Interest due to GBCC on the Junior Subordinated Notes of
$6,301,000 and $5,204,000, respectively, is included in interest payable on the
accompanying consolidated balance sheets at June 30, 1998 and December 31, 1997.
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 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. 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 $3,482,000 and $3,458,000, respectively, have been
reflected as an adjustment to PCC's negative investment in Holdings on the
accompanying consolidated balance sheets at June 30, 1998 and December 31, 1997.
Interest income on the notes has not been recognized for periods subsequent to
GBHC's filing under Chapter 11 on January 5, 1998.
PCC and its subsidiaries (including Holdings and its subsidiaries for periods
prior to January 1, 1998) performed certain services for other subsidiaries of
GBCC and for HCC and its subsidiaries and invoiced those companies for PCC's
cost of providing those services. Similarly, PCC and its subsidiaries are
23
<PAGE>
PRATT CASINO CORPORATION AND SUBSIDIARIES
(WHOLLY OWNED BY PPI CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- -----------------------
1998 1997 1998 1997
---------- ---------- ---------- ------------
Billings to affiliates $ - $ 278,000 $ - $ 609,000
Charges from affiliates (237,000) (715,000) (502,000) (1,297,000)
(6) 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 $1,279,000 and $1,445,000, respectively, during the three month
periods ended June 30, 1998 and 1997 and $3,825,000 and $4,172,000,
respectively, during the six month periods ended June 30, 1998 and 1997. PML
also incurred operating and other expenses amounting to $309,000 and $407,000,
respectively, during the three month periods ended June 30, 1998 and 1997 and
$666,000 and $867,000, respectively, during the six month periods ended June 30,
1998 and 1997. 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.
(7) EQUITY IN EARNINGS OF GB HOLDINGS, INC.
As discussed in Note 1, the operations of Holdings and its subsidiaries are
accounted for under the equity method of accounting for periods subsequent to
December 31, 1997. Due to the significance of
24
<PAGE>
PRATT CASINO CORPORATION AND SUBSIDIARIES
(WHOLLY OWNED BY PPI CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
Holdings' operations, summarized consolidated results of operations of Holdings
and its subsidiaries are set forth below:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1998 JUNE 30, 1998
------------------ ----------------
Net revenues $58,453,000 $114,066,000
----------- ------------
Departmental expenses 50,214,000 95,499,000
General and administrative expenses 3,134,000 7,115,000
Depreciation and amortization 2,926,000 5,825,000
----------- ------------
Total operating expenses 56,274,000 108,439,000
----------- ------------
Income from operations 2,179,000 5,627,000
----------- ------------
Interest, net 170,000 430,000
Gain on disposal of assets - 28,000
----------- ------------
Total non-operating income 170,000 458,000
----------- ------------
Income before taxes and other item 2,349,000 6,085,000
Income tax provision - -
----------- ------------
Income before other items 2,349,000 6,085,000
Reorganization and other related costs (1,730,000) (2,831,000)
----------- ------------
Net income $ 619,000 $ 3,254,000
=========== ============
(8) 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 executive officers and directors remain in office, subject to
the jurisdiction of the Bankruptcy Court. On May 11, 1998, the Bankruptcy Court
extended the exclusive period of the debtors to file a plan of reorganization
for 90 days and, as such, the exclusivity period expired on August 10, 1998.
On August 10, 1998, the Bankruptcy Court granted an additional 90-day extension
of the exclusivity period.
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; however, no such
proceedings have been initiated. PCC, as guarantor of the PRT Funding
25
<PAGE>
PRATT CASINO CORPORATION AND SUBSIDIARIES
(WHOLLY OWNED BY PPI CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
Notes, is currently involved in negotiations to restructure the notes with three
bondholders who control approximately 98% of the note issue.
On May 22, 1998, GBHC filed a motion with the Bankruptcy Court seeking to
reject the management agreement with NJMI (see Note 5). The Interim Agreement
was entered into and approved by the Bankruptcy Court on July 7, 1998. The
motion to reject the management agreement is scheduled for hearing on September
28, 1998.
On July 27, 1998, GBHC filed an action in the Bankruptcy Court against GBCC
seeking, among other things, to enjoin GBCC from using the tax NOL's of GBHC
(see Note 4). The Bankruptcy Court has reserved August 24, 1998 to consider an
interim request for relief with respect to the NOL's unless sooner resolved by
the parties.
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
and its subsidiaries. The accompanying consolidated financial statements do not
include any adjustments that might result from the outcome of such
uncertainties.
(9) RECLASSIFICATIONS
Certain reclassifications have been made to the prior year consolidated
financial statements to conform to the 1998 consolidated financial presentation.
26
<PAGE>
PRATT CASINO CORPORATION AND SUBSIDIARIES
(WHOLLY OWNED BY PPI CORPORATION)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This Quarterly Report on Form 10-Q 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 Quarterly
Report on Form 10-Q, 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, together with accrued interest, accelerated and became
immediately due and payable. The bankruptcy filing of GBHC also permitted it to
reject the Sands Management Agreement, an important source of funds for debt
service on the PRT Funding Notes. Management of GBHC requested modification to
the fee arrangement under the Sands management agreement and has reserved its
right to reject the agreement. A modified agreement was entered into effective
May 1, 1998 and expiring on September 28, 1998 unless extended by mutual
agreement which reduces the monthly fee to $165,000 compared to an average
monthly fee of $532,000 during the same period in 1997. 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 currently involved
in negotiations to restructure the notes with three bondholders who control
approximately 98% of the $85 million note issue. PRT Funding has deferred
payment of interest due April 15, 1998 pending the outcome of such negotiations.
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.
During 1996 and 1997, declines in operating cash flow at the Sands resulted in
the need for periodic financial assistance from PCC and GBCC in order to meet
debt service obligations. Substantial additional financial assistance would have
been required to make the January 15, 1998 principal and interest payments due
on the 10 7/8% First Mortgage Notes.
27
<PAGE>
PRATT CASINO CORPORATION AND SUBSIDIARIES
(WHOLLY OWNED BY PPI CORPORATION)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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 seeks to develop a plan of reorganization for
submission to its creditors and the Bankruptcy Court. On May 11, 1998, the
Bankruptcy Court extended the exclusive period of the debtors to file a plan of
reorganization for 90 days and, as such, the exclusivity period expired on
August 10, 1998. On August 10, 1998, the Bankruptcy Court granted an additional
90-day extension of the exclusivity period. Capital expenditures, other than
normal recurring capital expenditures in the ordinary course of business, will
require prior approval of the Bankruptcy Court. The Bankruptcy Court has
approved a $13.6 million, two-year capital expenditure program including $7.1
million for rooms renovations and $6.5 million for the replacement of slot
machines. 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.
RESULTS OF OPERATIONS
GENERAL
On January 5, 1998, Holdings, GB Property Funding, and GBHC filed petitions
for relief under Chapter 11 of the Bankruptcy Code in the Bankruptcy Court. As
a result of these filings, PCC's control over the filing subsidiaries is subject
to the supervision of the Bankruptcy Court and PCC does not expect to be in
control of such subsidiaries after reorganization. Accordingly, the
accompanying consolidated statements of operations for the three and six month
periods ended June 30, 1998 reflect the operations of the filing subsidiaries
under the equity method of accounting. For the three and six month periods
ended June 30, 1997, however, the accompanying consolidated statements of
operations includes the operations of Holdings and its subsidiaries on a
consolidated basis.
28
<PAGE>
PRATT CASINO CORPORATION AND SUBSIDIARIES
(WHOLLY OWNED BY PPI CORPORATION)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
The following table sets forth PCC's proforma results of operations for the
three and six month periods ended June 30, 1997, exclusive of Holdings and its
subsidiaries (the "PCC Group"), on a basis comparable to the 1998 presentation.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------- ----------------------------
1998 PROFORMA 1997 1998 PROFORMA 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues $ 1,044,000 $ 1,797,000 $ 2,510,000 $ 3,402,000
------------- ------------- ------------- -------------
Expenses:
General and administrative 319,000 350,000 800,000 666,000
Amortization - 90,000 - 179,000
------------- ------------- ------------- -------------
Total expenses 319,000 440,000 800,000 845,000
------------- ------------- ------------- -------------
Income from operations 725,000 1,357,000 1,710,000 2,557,000
------------- ------------- ------------- -------------
Non-operating income (expenses):
Interest income 76,000 568,000 140,000 1,122,000
Interest expense (3,018,000) (3,020,000) (6,037,000) (6,039,000)
Equity in earnings of
Limited Partnership 712,000 781,000 2,632,000 2,778,000
Equity in earnings (losses) of
GB Holdings, Inc. 619,000 (1,441,000) 3,254,000 (4,702,000)
Restructuring costs (984,000) - (1,044,000) -
------------- ------------- ------------- -------------
Total non-operating expense, net (2,595,000) (3,112,000) (1,055,000) (6,841,000)
------------- ------------- ------------- -------------
(Loss) income before income
taxes (1,870,000) (1,755,000) 655,000 (4,284,000)
Income tax provision (3,000) (142,000) (1,395,000) (142,000)
------------- ------------- ------------- -------------
Net loss $ (1,873,000) $ (1,897,000) $ (740,000) $ (4,426,000)
============= ============= ============= =============
</TABLE>
REVENUES
Revenues of the PCC Group declined $753,000 (41.9%) and $892,000 (26.2%),
respectively, during the three and six month periods ended June 30, 1998
compared to the same periods of 1997. The decreases are due to declines in
management fees earned under the NJMI management contract with the Sands. As
discussed in Note 5 to the consolidated financial statements, a substitute
agreement became effective May 1, 1998. Management fees earned by NJMI under
the original management agreement were primarily dependent on the level of
revenues and gross operating profits at the Sands. The revised fee arrangement
29
<PAGE>
PRATT CASINO CORPORATION AND SUBSIDIARIES
(WHOLLY OWNED BY PPI CORPORATION)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
consists of a fixed fee of $165,000 per month. Accordingly, the second quarter
1998 decrease in the PCC Group's revenues is primarily attributable to the
reduced management fee. The remaining decreases for the three and six month
periods are due to declines in revenues and gross operating profits at the
Sands, which resulted in reduced management fees under the original agreement.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses for the PCC Group decreased $31,000
(8.9%) and increased $134,000 (20.1%), respectively, during the three and six
month periods ended June 30, 1998 compared to the 1997 periods. The three month
period decrease is not significant from a monetary standpoint. The six month
increase reflects the provision of a reserve for collectability with respect to
certain receivables from GBHC.
AMORTIZATION
As a result of the cross default under the indenture for the PRT Funding
Notes, all deferred financing costs were written off at December 31, 1997,
eliminating the PCC Group's amortization expense associated with such costs.
INTEREST
Interest income for the PCC Group decreased $492,000 (86.6%) and $982,000
(87.5%), respectively, during the three and six month periods ended June 30,
1998 compared with the same periods of 1997. All interest income earned by the
PCC Group on loans and advances to Holdings and its subsidiaries for periods
subsequent to the January 5, 1998 bankruptcy filings is being reserved.
Interest expense did not change significantly during the three or six month
periods ended June 30, 1998 compared to the same periods of the prior year.
EQUITY IN EARNINGS OF LIMITED PARTNERSHIP
Effective February 17, 1994, PCC acquired the limited partnership interest
in PML, a limited partnership which earns management fees from the operation of
the Aurora Casino. The Agreement of Limited Partnership of PML provides for
distributions to PCC of 1% of the first $84,000 of net income earned by PML each
month and 99% of any net income earned above such amount, with all remaining
income distributed to the general partner. PCC's equity in the earnings of PML
decreased slightly to $712,000 and $2.6 million during the three and six month
periods ended June 30, 1998 compared to $781,000 and $2.8 million, respectively,
earned in the same periods of 1997. Such decreases reflect reduced management
fees earned by PML due to a significant increase in gaming taxes imposed on the
Aurora Casino's operations. Management fees are based, in part, on the
operating results of the Aurora Casino.
30
<PAGE>
PRATT CASINO CORPORATION AND SUBSIDIARIES
(WHOLLY OWNED BY PPI CORPORATION)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
EQUITY IN EARNINGS OF GB HOLDINGS, INC.
Holdings' consolidated net income for the three and six month periods ended
June 30, 1998 amounted to $619,000 and $3.3 million, respectively, compared to
net losses of $1.4 million and $4.7 million, respectively, for the same periods
of 1997. The significant improvement in Holdings' net income over the prior
periods is primarily due to declines in interest expense which have more than
offset reductions in income from operations and costs associated with the
reorganization under Chapter 11.
The Sands experienced decreases in operating income of $1.4 million (39.6%)
and $168,000 (2.9%), respectively, during the 1998 periods compared to the 1997
periods. Such decreases reflect declines in net revenues of $9 million (13.4%)
and $16.6 million (12.7%), respectively, for the three and six month periods
partially offset by corresponding reductions in operating expenses of $7.6
million (11.9%) and $16.4 million (13.2%). The revenue decreases are a direct
result of significant declines in total gross wagering at the Sands due to
increased competition in the Atlantic City market, the reduction of promotional
marketing activities in an effort to control costs and the negative publicity
resulting from GBHC's filing under Chapter 11. The declines in operating
expenses are attributable to decreased patron volume as well as to management's
efforts to eliminate certain marginally effective marketing programs and create
operating efficiencies. Reorganization and other related costs attributable to
the Chapter 11 filing amounted to $1.7 million and $2.8 million, respectively,
during the three and six month periods ended June 30, 1998.
Holdings' interest expense decreased by $5.8 million and $11.4 million,
respectively, during the 1998 three and six month periods compared to the
corresponding 1997 periods. As a result of the filing, the accrual of interest
expense on Holdings' debt obligations has been suspended. Had the contractual
interest expense ($5.8 million and $11.6 million, respectively) been accrued,
Holdings' net losses for the three and six month periods ended June 30, 1998
would have amounted to $5.2 million and $8.1 million, respectively.
RESTRUCTURING COSTS
The three and six month period increases result from $984,000 and $1
million, respectively, in professional fees and other corporate overhead costs
associated with the default of the PRT Funding Notes and efforts to restructure
the obligations. Management believes that such reorganization costs will
continue in the near term pending the outcome of restructuring discussions.
INCOME TAX PROVISION
PCC's operations are included in GBCC's consolidated federal income tax
return and, for periods through December 31, 1996, were included in HCC's
consolidated federal income tax return. 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.
31
<PAGE>
PRATT CASINO CORPORATION AND SUBSIDIARIES
(WHOLLY OWNED BY PPI CORPORATION)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
As described in Note 8 in the accompanying Notes to Consolidated Financial
Statements, GBHC has filed an action to enjoin GBHC from using the tax net
operating loss carryforwards ("NOL's") of GBHC. If an automatic stay or
preliminary injunction is granted by the Bankruptcy Court, GBCC and its
subsidiaries could effectively be precluded from filing a consolidated federal
income tax return for 1997 and subsequent years. Accordingly, PCC and certain
of its subsidiaries may owe federal income taxes for such periods.
As of June 30, 1998, PCC and its subsidiaries have NOL's totaling
approximately $8 million, none of which expire before the year 2013 for federal
tax purposes and which begin to expire in 1998 for state tax purposes.
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" ("SFAS 109") requires that the tax benefit of NOL's and deferred tax
assets resulting from temporary differences be recorded as an asset and, to the
extent that management can not assess that the utilization of all or a portion
of such NOL's and deferred tax assets is more likely than not, a valuation
allowance should be recorded. Due to the continued availability of NOL's
originating in prior years for federal and state tax purposes and the book and
tax losses sustained in 1998 to date, 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 June 30, 1998.
PCC's ultimate parent, GBCC, has been informed by its former parent, HCC,
that its NOL's may need to be adjusted due to possible revision of the tax
treatment of HCC's 1996 spin-off of the stock of GBCC. PCC had approximately
$672,000 of unused NOL's for federal income tax reporting purposes at December
31, 1996 which may be affected if a revision is necessary. PCC's subsidiaries
have insignificant NOL's for federal income tax reporting purposes.
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 at the Sands.
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 revenues and
profitability.
32
<PAGE>
PART II: OTHER INFORMATION
- ---------------------------
ITEM 1. 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 executive officers and directors remain in office, subject to
the jurisdiction of the Bankruptcy Court. On May 11, 1998 the Bankruptcy Court
extended the exclusive period of the debtors to file a plan of reorganization
for 90 days and, as such, the exclusivity period expired on August 10, 1998.
On August 10, 1998, the Bankruptcy Court granted an additional 90-day extension
of the exclusivity period.
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; however, no such
proceedings have been initiated. PCC, as guarantor of the PRT Funding Notes, is
currently involved in negotiations to restructure the notes with three
bondholders who control approximately 98% of the note issue.
On May 22, 1998, GBHC filed a motion with the Bankruptcy Court seeking to
reject its existing management agreement with NJMI. A substitute agreement (the
"Interim Agreement") was entered into and approved by the Bankruptcy Court on
July 7, 1998. Under the Interim Agreement, effective May 1, 1998 and
terminating on September 28, 1998 unless extended by mutual agreement, NJMI
continues to provide certain agreed upon services to GBHC at a reduced monthly
fee. The motion to reject the management agreement is scheduled for hearing
September 28, 1998.
On July 27, 1998, GBHC filed a motion with the Bankruptcy Court against GBCC
seeking, among other things, to enjoin GBCC from using the tax net operating
loss carryovers ("NOL's") of GBHC. The Bankruptcy Court has reserved August 24,
1998 to consider an interim request for relief with respect to the NOL's unless
sooner resolved by the parties.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
As a result of the filings discussed in Item 1. above, $182,500,000
principal amount of 10 7/8% First Mortgage Notes issued by GB Property Funding
are in default. Principal payments of $2,500,000 each due on January 15, 1998
and July 15, 1998 were not made. The accrual of interest on the 10 7/8% First
Mortgage Notes for periods subsequent to the filings has been suspended; such
interest on a contractual basis amounts to $21,667,000 as of August 17, 1998.
The default on the 10 7/8% First Mortgage Notes also resulted in a default
under the indenture for the $85,000,000 11 5/8% Unsecured Senior Notes issued by
PRT Funding Corp. and guaranteed by Pratt Casino Corporation. Accordingly, the
maturity of the PRT Funding Notes has accelerated. Interest due on such notes
amounts to $8,289,000 as of August 17, 1998.
ITEM 6.(a) - EXHIBITS
10.1 Agreement by and among GBHC, Holdings, GB Property Funding and Advanced
Casino Systems International, Inc. ("ACSI"), on the one hand, and GBCC,
NJMI, PCC, PRT Funding Corp., PPI Corporation, ACSC and HCC, on the other,
dated June 27, 1998.
10.2 Software License Agreement by and between ACSC, ACSI, Computer Management
Systems International, Inc. and GBHC dated June 27, 1998.
ITEM 6.(b) - REPORTS ON FORM 8-K
The Registrants did not file any reports on Form 8-K during the quarter
ended June 30, 1998.
33
<PAGE>
SIGNATURES
- ----------
Pursuant to the requirements of the Securities Exchange Act of 1934, each of
the Registrants has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PRT FUNDING CORP.
PRATT CASINO CORPORATION
-------------------------------------
Registrants
Date: August 17, 1998 By: /s/ John C. Hull
--------------------- -------------------------------------
John C. Hull
President and Chief Executive Officer
34
<PAGE>
EXHIBIT 10.1
AGREEMENT
This Agreement (herein so called) is entered into this 27th day of June,
1998 by and among Greate Bay Hotel and Casino, Inc. ("GBHC"), GB Holdings, Inc.,
("GBH"), GB Property Funding Corp. ("GBPF") (collectively, the "Debtors"), and
Advanced Casino Systems International, Inc. ("ACSI"), on the one hand, and
Greate Bay Casino Corp., New Jersey Management, Inc., ("NJMI") Pratt Casino
Corporation ("PCC"), PRT Funding Corp. ("PRT"), PPI Corporation ("PPI"),
Advanced Casino Systems Corporation ("ACSC") (collectively, "GBCC"), and
Hollywood Casino Corporation ("HCC"), on the other.
R E C I T A L S
A. On January 5, 1998, the Debtors commenced proceedings under Chapter 11 of
Title 11 of the Unites States Code (the "Chapter 11 Proceedings") in the
United States Bankruptcy Court for the District of New Jersey, Camden
Vicinage.
B. On May 22, 1998, the Debtors filed a Motion (hereinafter so called) in the
Chapter 11 Proceedings seeking approval for the rejection of the Management
Services Agreement, dated August 19, 1987, as amended (the "NJMI
Agreement"), between GBHC and NJMI.
C. The parties desire to compromise and settle certain issues that have arisen
in connection with the Motion and as set forth in the Agreement.
NOW, THEREFORE, the Debtors, ACSI, GBCC, and where applicable, HCC
stipulate and agree as follows:
1. Except as provided in this paragraph one and in paragraph two below,
the management of the Debtors will be under the control of the existing Board of
Directors of the Debtors until the effective date of a plan of reorganization
for GBHC ("Plan Confirmation"). Until Plan Confirmation, GBCC, including any
newly created subsidiaries or affiliates, will not change the composition of the
Board of Directors of any of the Debtors except upon Order and subject to the
supervision and jurisdiction of the Bankruptcy Court.
2. Upon the effective date of this Agreement, Richard Knight will resign
his positions as Chairman, President and Chief Executive Officer of the Debtors
and their subsidiaries.
3. The second sentence of numbered paragraph 5 of that certain letter
agreement dated May 26, 1998 between GBCC and the Debtors will remain in effect,
and otherwise the letter agreement dated May 26, 1998 is superseded by this
Agreement upon the effective date of this Agreement.
4. Upon approval of this Agreement by the Bankruptcy Court, and, if
required, upon approval by the Casino Control Commission ("CCC") of the
provisions of this paragraph, the NJMI Agreement will be suspended from May 1,
1998 until entry of a Final Order deciding the Motion ("the Interim Period").
GBCC and HCC shall fully support an application to the Bankruptcy Court for
approval of this Agreement, and of any petition to the CCC. GBHC agrees to
adjourn the Motion until Monday September 28, 1998, or such earliest date
thereafter as may be accommodated by the Bankruptcy Court. GBHC and NJMI may
negotiate an agreement to adjourn the Motion to a later date, but any party
shall be free to terminate negotiations at any time, or to adopt any position in
the course of negotiation in its sole and unreviewable
<PAGE>
discretion, without incurring any liability whatsoever, and without breach of
this Agreement. During the Interim Period, NJMI shall have no other duties
except for those duties specified in this Agreement.
5. The Current and Deferred Fees (hereafter defined) that are applicable
during the Interim Period shall be in complete satisfaction of all claims
accruing in favor of NJMI under the NJMI Agreement during the Interim Period,
and shall not bind any of the parties hereto as to the reasonableness of the
fees contained in the NJMI Agreement. NJMI through HCC shall provide the
services set forth on Exhibit A (the "Services"), and the provision of such
Services or the payments therefor shall not be offered into evidence or used in
any manner in the hearing on the Motion or in any other proceeding except in
respect of proceeding(s) to enforce the payment thereof. Upon any granting of
the Motion and termination of the NJMI Agreement, NJMI and HCC agree to
cooperate reasonably with the Debtors in effecting a smooth transition of the
assumption of any Services by the Debtors and agree that such cooperation
includes providing access to or copying of any and all related records. During
the Interim Period, but in no event for any period after October 15, 1998, and
only for so long as GBHC requests such services, HCC agrees to make Knight
available as a consultant for (i) meetings at the Sands at mutually agreeable
times to equal six days on site a month provided that each on site trip shall be
a minimum of two days and (ii) at mutually agreeable times for reasonable
telephone conferences and consultations in the ordinary course of business at
the Sands ("Consulting Services"). During the Interim Period, GBHC agrees to
reimburse Hollywood Casino Aurora, Inc. ("HCA") for 30% of Knight's salary, and
to reimburse HCA for reasonable costs associated with the costs of performance
of the Consulting Services, e.g., telephone and telecopier expense,
transportation, meals, lodging, and similar expenses. To the extent that GBHC
requests, but Knight does not provide, six days' on-site services in any
calendar month, then GBHC's obligation to reimburse HCA for 30% of Knight's
salary shall be proportionately reduced. In consideration of providing the
Services and Consulting Services, and during the Interim Period, GBHC agrees to
pay NJMI a fee of $122,000 in arrears on the last business day of each month
(the "Current Fee") and a deferred fee in the amount of $43,000 per month (the
"Deferred Fee") at Plan Confirmation. Any Current Fee otherwise due upon the
effective date of this Agreement will be paid forthwith.
6. As requested by GBHC, ACSC agrees to continue to provide GBHC before
and after Plan Confirmation with support, maintenance, and upgrades of all of
the software or related hardware components presently supported, maintained, or
provided by or through ACSC for GBHC (such software or hardware, collectively,
the "Software") in accordance with the terms set forth on the agreement attached
hereto as Exhibit B, which is incorporated herein as if fully set forth. ACSC
will provide mailing services under the same terms and conditions as currently
in effect for so long as (a) ACSC provides such services to other customers, (b)
GBHC shall continue to request such services, and (c) GBHC has paid all fees and
expenses then due and owing to ACSC for services rendered after GBHC's initial
filing of a petition in the Chapter 11 Proceedings ("Post Petition") within 45
days of receipt of an invoice therefor and less any sums owed to GBHC by ACSC
for services provided or expenses incurred Post Petition on behalf of ACSC. For
the purpose of the preceding sentence, a customer includes HCA or HWCC - Tunica,
Inc.
7. With respect to that certain Trademark License Agreement between HCC
and GBHC with an Effective Date of July 8, 1997 (the "TLA"), HCC and GBHC
acknowledge that HCC has provided notice to GBHC of its rejection of GBHC's
notice of renewal in accordance with the TLA. Except as set forth in
subsections (d) and (e) of this paragraph 7, GBHC will phase out the use of the
Licensed Marks, and the Licensed Goods and Services, as such terms are defined
in the TLA, and the name "Hollywood" in connection with the use of the Licensed
Marks or in any signage under the TLA, within the six month period provided
under Article 8.1 of the TLA. Notwithstanding any other provision of the TLA to
the contrary, (a) GBHC shall be under no obligation to offer to sell to HCC any
memorabilia owned by GBHC, (b) based on its prior use, GBHC shall be free to
display memorabilia and the like within or on the
<PAGE>
premises of GBHC, except that nothing herein shall be deemed to have granted
GBHC any rights to operate in a manner or style which conflicts with proprietary
rights of HCC in any portion of GBHC's property provided that the "Epic Buffet",
the "Studio Store", and the "Studio Cafe" can be maintained as provided in
subsection (e) of this paragraph 7, (c) HCC shall, upon request of GBHC, deliver
at the transportation cost of GBHC any memorabilia owned by GBHC and stored by
HCC or its affiliates, (d) GBHC shall be free to use the Licensed Marks and
Licensed Goods and Services limited to the slot club for a phase out period
ending at the earlier to occur of June 30, 1999 or six months after Plan
Confirmation, and (e) for an additional two year phase out period beyond the six
month period otherwise provided, shall be free to continue to use the names
"Epic Buffet," "Studio Store" and/or "Studio Cafe" in connection with
restaurants or facilities bearing those names at GBHC, or in connection with
advertising or promotions related thereto provided that GBHC adheres to the
standards of quality control otherwise provided for in Article 2 of the TLA, and
complies with Articles 3, 4, and 5 of the TLA (except that a change of control
of the Sands resulting from either a sale or Plan Confirmation shall not require
the prior approval of HCC in respect of the continuation of operations at the
premises of the Sands otherwise provided herein), and GBHC may, at the
expiration of the extended phase out period, continue to operate such
restaurants and facilities by discontinuing the use of the words "Epic" and/or
"Studio" from such restaurants and facilities.
8. With respect to that certain License Agreement originally between
Hughes Properties, Inc. and Pratt Hotel Corporation dated May 19, 1987, relating
to the use of the Trademark as defined therein (the "LA"), neither GBCC nor
anyone acting in concert or on behalf of GBCC shall take any action seeking to
terminate the LA or the rights of GBHC under the LA or otherwise at anytime
before the earliest of December 15, 1998, Plan Confirmation, or 15 days prior to
opening by the Venetian (formerly known as the Sands Hotel & Casino in Las
Vegas, Nevada) of a hotel tower or casino for business. GBHC agrees that it
will not assert that, by agreeing to the foregoing, GBCC has waived whatever
right it may have to terminate the LA.
9. During the remaining or any renewal terms of their employment
contracts, neither HCC, nor GBCC, nor any of their affiliates, nor any of their
officers or directors, shall solicit Gary Luderitz, or Jack Przybylski to leave
their employment with GBHC or to provide services as employees, consultants or
otherwise, and none of the parties in this paragraph will object to a two year
extension of the employment contract of Gary Luderitz.
10. This Agreement is without prejudice to any party's rights with respect
to the NJMI Agreement or the Motion except as expressly set forth herein, may
not be amended or modified in any respect except with the written consent of the
parties hereto, is binding upon the successors and assigns of the parties and
their successors in interest, and shall be interpreted in accordance with New
Jersey law without regard to the conflicts of laws principles of New Jersey law.
11. This Agreement will be effective when executed by all of the parties
hereto and when approved by the Bankruptcy Court and by the CCC, if required, as
provided in paragraph 4 above. This Agreement may be executed in counterparts
by the parties and a
THE REMAINDER OF THIS PAGE LEFT INTENTIONALLY BLANK
<PAGE>
telecopied signature is as effective as an original.
ACCEPTED AND AGREED:
Greate Bay Casino Corporation PPI Corporation
BY: /s/ Edward T. Pratt III BY: /s/ Edward T. Pratt III
----------------------- -----------------------
Advanced Casino Systems Corp. Pratt Casino Corporation
BY: /s/ Edward T. Pratt III BY: /s/ Edward T. Pratt III
----------------------- -----------------------
PRT Funding Corp. New Jersey Management, Inc.
BY: /s/ Edward T. Pratt III BY: /s/ Edward T. Pratt III
----------------------- -----------------------
Hollywood Casino Corporation
BY: /s/ Edward T. Pratt III
-----------------------
Greate Bay Hotel and Casino, Inc GB Holdings, Inc.
BY: /s/ Timothy A. Ebling BY: /s/ Timothy A. Ebling
----------------------- -----------------------
Advanced Casino Systems
GB Property Funding Corp. International, Inc.
BY: /s/ Timothy A. Ebling BY: /s/ Timothy A. Ebling
----------------------- -----------------------
<PAGE>
EXHIBIT A - SERVICES
--------------------
A) Regular Quarterly and Annual SEC Reporting and Compliance
B) Chart of Accounts Maintenance
C) Federal and State Tax Return Review Services
D) Insurance Procurement Services - NJMI through HCC, shall procure and
maintain the following insurance for GBHC, at GBHC's sole cost and expense:
General Liability Property (including Business Interruption)
Tail Flood
Auto Liability Directors & Officers
Umbrella Liability Pension Trust Liability
Excess Liability Crime
Workers Compensation Media/Memorabilia
Non-owned Aviation Business Travel
E) Surveillance Consultation Services
F) 401K Services - Inclusion in the HCC and Subsidiaries Retirement Savings
Plan on the same basis as currently exists, recognizing that a transition
to a stand alone plan for GBHC must begin prior to September 30, 1998.
<PAGE>
EXHIBIT 10.2
--------------------------
SOFTWARE LICENSE AGREEMENT
--------------------------
This SOFTWARE LICENSE AGREEMENT ("Agreement") is entered into as of the
27th day of June, 1998, by and between ADVANCED CASINO SYSTEMS CORPORATION
("ACSC"), ADVANCED CASINO SYSTEMS INTERNATIONAL, INC. ("ACSI"), COMPUTERIZED
MANAGEMENT SYSTEMS INTERNATIONAL, INC. ("CMSI"), and GREATE BAY HOTEL AND
CASINO, INC., t/a "Sands Hotel & Casino" ("Greate Bay").
W I T N E S S E T H:
WHEREAS, ACSC is a corporation duly organized and existing under the laws
of the State of Delaware and maintains its principal place of business at 200
Decadon Drive, Egg Harbor Township, New Jersey 08234-3899; and,
WHEREAS, Greate Bay is a corporation duly organized and existing under the
laws of the State of New Jersey and maintains its principal place of business at
Indiana Avenue and Brighton Park, Atlantic City, New Jersey 08401; and
WHEREAS, ACSI and CMSI are wholly owned subsidiaries of Greate Bay; and
WHEREAS, ACSC presently licenses and Greate Bay presently utilizes a number
of custom software systems and interfaces including but not limited to the
following casino management systems: (i) an IBM AS/400 Casino Accounting and
Management Application ("the Casino Accounting & Management System"), (ii) an
IBM AS/400 Slot Accounting & Management Application (the "Slot Accounting
System"), (iii) a Casino Player Tracking System, (iv) a Casino Sales and
Marketing System, (v) a Table Marketing System, and (vi) a Slot Marketing System
consisting of certain software programs (the "SMS Software") and certain
proprietary hardware components ("the SMS Hardware") and intellectual property
rights in the configuration of the SMS Software with and into the SMS Hardware
and other commercially available hardware components ("the Configuration") (the
SMS Software and the SMS Hardware and the Configuration are collectively
referred to as the "the SMS"); and
WHEREAS, both ACSC and Greate Bay desire to formalize the licensing of the
systems as set forth below;
NOW, THEREFORE, in consideration of the foregoing recitals and the
promises, representations, warranties, and undertakings set forth in this
Agreement, and intending to be legally bound thereby, ACSC, ACSI, CMSI and
Greate Bay do hereby promise and agree as follows:
<PAGE>
1. DEFINITION OF THE SOFTWARE AND THE SMS. For purposes of this
Agreement, the "Software" shall consist of (i) the Casino Accounting &
Management System as generally described on Exhibit "A"; (ii) the Slot
Accounting System as generally described on Exhibit "B"; (iii) the Casino Player
Tracking System as generally described on Exhibit "C"; (iv) the Casino Sales and
Marketing System as generally described on Exhibit "D"; (v) the Table Marketing
System as generally described on Exhibit "E", (vi) all other software systems
and interfaces owned by ACSC and utilized by Greate Bay on its IBM AS/400 or on
other hardware platforms as of the date of this Agreement, including by way of
example and not limitation the Security Incident Reporting System, MIS Resource
Request System, Cross System Backup, Data Acquisition, Employee Time and
Attendance and Casino Analysis as generally described on Exhibit "F", and (vii)
any trade secret or confidential information in relation to the Software. For
purposes of this Agreement, "the SMS" shall consist of the SMS Software and the
SMS Hardware as generally described on Exhibit "G" and the Configuration, and
any and all communication protocol(s) now or hereafter developed by or on behalf
of or used by ACSC to enable, facilitate or improve communications between the
SMS and the slot machines of any and all slot machine manufacturers that are in
ACSC's possession or control and for which ACSC has the legal right to provide
to third parties ("the SMS Protocol"), and any trade secret or confidential
information in relation to the SMS. Any and all intellectual property rights in
the Software and the SMS, including any derivative modifications and extensions,
shall hereafter be collectively referred to as "the Intellectual Property
Rights". The Intellectual Property Rights expressly do not include Greate Bay's
rights in any internal controls developed or hereafter developed by Greate Bay
relating to the electronic drop feature of the SMS.
2. QUITCLAIM ASSIGNMENT/RELEASE. Greate Bay, CMSI and ACSI, on behalf of
themselves, their predecessors, successors and assigns (collectively, the
"Releasing Parties"), do hereby quitclaim and assign to ACSC any and all
ownership rights the Releasing Parties may have in the Intellectual Property
Rights, if any, without any warranty or covenants of title, and release ACSC and
all of its affiliates from any claims any of the Releasing Parties may have
related to the transfer by the Releasing Parties, or the assumption by ACSC, of
the Intellectual Property Rights. Further, the Releasing Parties will cooperate
with ACSC by communicating to ACSC any facts known to them regarding any such
rights in the Intellectual Property Rights and by executing additional documents
to evidence this assignment. The assignment and release in this Paragraph 2
shall survive the termination or breach of this Agreement.
- 2 -
<PAGE>
3. LICENSE GRANT.
(a) License Rights Granted. Subject to the terms and conditions of
this Agreement, ACSC hereby grants to Greate Bay and Greate Bay hereby accepts a
perpetual, non-exclusive and transferable license under the Intellectual
Property Rights owned or otherwise licensable by ACSC to use the Software and
the SMS.
(b) Geographical Restriction. Except as set forth in this Paragraph
3(b), Greate Bay may only use the Software and the SMS on machines, gaming
equipment and computer equipment located and to be located, without limitation
as to number, at Greate Bay's casino/hotel and Greate Bay's associated
administrative properties in Atlantic City, New Jersey, as existing and
configured as of the date of this Agreement and/or as may be reconfigured,
added, expanded, constructed and/or reconstructed provided the same require not
more than one casino license to operate (without regard to any management
company) (collectively "the Licensed Facilities") from time to time during the
term of this Agreement, or, for backup and disaster recovery purposes, at either
a third party's location or a location controlled by Greate Bay, which location
may be outside of Atlantic City. Nothing in this Agreement shall prohibit
Greate Bay from using the Software and the SMS with alternate computer equipment
at alternate computer installations in the event of processing failure or for
the purpose of testing of such alternative computer equipment and installations
regardless of location. In addition, nothing in this Agreement shall preclude
Greate Bay from making a copy of the Software or the SMS Software and operating
it on alternative processors for program development and testing purposes.
(c) Responsibility of the Parties. Greate Bay shall be exclusively
responsible for the supervision, management and control of the use of the
Software and the SMS and any equipment in connection with which Greate Bay uses
the Software or the SMS.
4. TERM OF LICENSE/AGREEMENT. The license granted under this Agreement
is effective Nunc Pro Tunc from the first date ACSC or any predecessor in
interest to ACSC claimed to acquire any ownership or other interest in the
Intellectual Property Rights and shall remain in force in perpetuity. This
license is non-cancelable, in whole or in part, by ACSC or any successor, in
whole or in part, of the interest or business of ACSC, and any such successor
must, as a condition of succession, expressly assume the obligations of this
Agreement and, in the absence of an express assumption, any such successor will
be deemed to have made such an assumption. Greate Bay may terminate the license
granted under this Agreement and discontinue the use of the Software and/or the
SMS, in whole or in part, or may discontinue the use of the Software and/or the
SMS, or may elect not to use the services of ACSC, in whole or in part, as
described in Paragraphs 6(c) and 6(d) without obligation to ACSC.
- 3 -
<PAGE>
5. OPERATING PROVISIONS. All use of the Software and the SMS (other
than by or on behalf of any gaming authority) will be solely by Greate Bay's
personnel or its agents or contractors, shall be subject to the obligations of
confidentiality as set forth in Paragraph 10 of this Agreement, and distribution
of the Software or the SMS, or any part thereof, or reference materials,
including derivative modifications or extensions of them, is expressly
prohibited, except for the Licensed Facilities and except as respects a gaming
authority or persons acting on behalf of a gaming authority. Greate Bay shall
not make or permit or otherwise allow others to print, copy, or divulge, in
whole or in part, the Software or the SMS Software or the Configuration, in any
form without the prior express written consent of ACSC.
6. PROVISION OF MATERIALS, UPDATES, HARDWARE, MAINTENANCE AND SUPPORT
SERVICES AND SUPPLIER LISTS/EQUITABLE REMEDIES.
(a) Terms for the period through Plan Confirmation/Sale. From the
date of the signing of this Agreement until the date of the Confirmation of a
Plan of Reorganization or a sale by Greate Bay of substantially all of its
assets in Greate Bay's currently pending Chapter 11 proceeding, Case No. B98-
10001 ("the Chapter 11 Proceeding"), ACSC agrees to continue to provide the
materials and updates as provided in paragraph 6(c), and hardware, and
maintenance and Support Services, as hereinafter defined in Paragraph 6(d), for
the Software and the SMS and such other requested services as are currently
being provided by or through ACSC under the same economic terms and conditions
as presently exist between ACSC and Greate Bay, so long as Greate Bay has paid
all fees and expenses then due and owing to ACSC for services rendered after
Greate Bay's initial filing of a petition in the Chapter 11 Proceeding ("Post
Petition") within 45 days of receipt of an invoice therefor and less any sums
owed to Greate Bay by ACSC for services provided or expenses incurred Post
Petition on behalf of ACSC.
(b) Terms for the period commencing with Plan Confirmation/Sale.
Commencing with the date a Plan of Reorganization in the Chapter 11 Proceeding
is confirmed by the Bankruptcy Court or an order is entered in the Chapter 11
Proceeding approving a sale by Greate Bay of substantially all its assets, ACSC
agrees, for so long as ACSC provides such services to third parties or any of
its affiliates, to provide the materials and updates, as hereinafter described
in Paragraph 6(c), and the hardware, maintenance and Support Services as
hereafter defined in paragraph 6(d), and the supplier lists described in
Paragraph 6(e) and such other services as may now or hereafter be provided by
ACSC to Greate Bay or affiliates or third parties as may be requested by Greate
Bay under economic terms the same as, and other terms and conditions no less
favorable than extended, in that certain Supplemental Agreement dated July 16,
1997 by and between Logical Solutions International, Inc. and Caesars World,
Inc. (the "Caesars Agreement") without regard to quantity and volume discounts
and without discrimination as to Greate Bay,
- 4 -
<PAGE>
and, if such services are not provided for in the Caesars Agreement, then on
terms no less favorable than would be offered by or through ACSC to ACSC's most
favored customer and without discrimination as to Greate Bay.
(c) Provision of Materials and Updates. Greate Bay may retain and,
upon the signing of this Agreement to the extent Greate Bay is not in
possession, ACSC shall provide Greate Bay with all basic materials,
documentation manuals in printed and magnetic format, source codes, including
but not limited to the source code for all systems and application programs
running on the AS/400 and in the "HASS" file servers, the "Gearbox" PC's, the
"Collector" Logic Board, and any other processor utilized in the SMS and the
Software, and other documentation integral to the SMS Protocol or to the source
codes or otherwise delineating and explaining the structure, organization,
sequencing and operation of the source codes relating to the Software and the
SMS (collectively the "Source Code") that are in ACSC's possession or control
and for which ACSC has the legal right to provide copies to third parties. All
Source Code will be provided in the highest form that allows modification.
Notwithstanding the foregoing, the Source Code for the Operating System of the
"Collector" Logic Board shall be placed in Escrow as provided in Paragraph 7 of
this Agreement. During the term of this Agreement, ACSC shall make available to
Greate Bay upon their completion copies of all modifications, improvements, or
updates ("Updates") to the Software and/or the SMS at the same time or prior to
the date on which ACSC makes such updates available to other customers of ACSC,
and shall further provide Greate Bay no later than 10 days after request by
Greate Bay, with copies of the Source Code for such Updates and revised copies
of the Source Code for the entire Software and SMS which includes the Source
Code for such Updates. Greate Bay shall have the right within the Licensed
Facilities or at other locations authorized under this Agreement to full and
unfettered use of the Source Code and may permanently install and maintain the
Source Code in its computer system for its own internal use.
(d) Provision of Hardware and Maintenance and Support Services.
During the term of this Agreement and as may be requested by Greate Bay from
time to time, ACSC shall provide Greate Bay, with SMS Hardware Components and
Support Services for Software and SMS. Support Services means providing Updates,
Required Additions and/or Changes (as defined below), providing Error
Corrections (as hereinafter defined) in the Software and/or SMS and/or in the
communication between the Software and/or SMS and other systems covered by this
Agreement or as may be mutually agreed upon the parties, providing telephone
support and providing programming and project management services and such other
services as may be required via telephone and at Licensed Facilities to install,
integrate, maintain and support the Software and SMS. The term Required
Additions and/or Changes means all changes and additions that must be made to
Software and/or SMS to keep it in compliance with statutory,
- 5 -
<PAGE>
regulatory, and accounting practices changes. The term Error Correction means a
modification, change or improvement to the Software or SMS that corrects an
Error (as defined below). The term Error means a defect, deficiency or other
problem with the Software or SMS that causes the Software or SMS to fail to
operate in accordance with the documentation for the Software or SMS, to produce
incorrect results, to damage data, to incorrectly store, retrieve, sort, present
or calculate data, or to have a commercially unacceptable response time (i.e.
time from input to producing a response). ACSC agrees that when Greate Bay
reports an Error, ACSC will immediately commence work on an Error Correction and
provide an Error Correction (i) as soon as reasonably possible if no
commercially acceptable workaround is available to Great Bay or (ii) within a
reasonable period of time if a commercially acceptable workaround is available
or (iii) with the next Update or release of the Software or SMS if the Error is
cosmetic or not material to the use of the Software or the SMS. ACSC agrees to
provide Required Additions and/or Changes no later than two weeks prior to the
effective date of such statutory, regulatory and/or accounting practices
changes.
(e) Provision of Supplier Lists. Upon the signing of this Agreement,
ACSC shall provide Greate Bay with a list of SMS Hardware component suppliers
and shall, upon any addition or change to such supplier list, provide Greate Bay
with an updated list. In consideration of being provided with a list of SMS
Hardware component suppliers, Greate Bay promises not to purchase SMS Hardware
components directly from such suppliers absent a default by ACSC of its
obligations under this Paragraph 6.
(f) Equitable Remedies. The obligations of ACSC in this Paragraph 6
shall be specifically enforceable and ACSC agrees that (i) any breach of ACSC's
obligations under this Paragraph 6 would cause irreparable injury to Greate Bay;
(ii) Greate Bay would have an inadequate remedy at law for any such breach;
(iii) the balance of interests and hardships would favor an injunction in favor
of Greate Bay; (iv) the public interest would favor an injunction in favor of
Greate Bay, and (v) ACSC will make no legal arguments that equitable relief is
not an appropriate remedy in favor of Greate Bay in the event of a breach of
ACSC's obligations under this Paragraph.
7. ESCROW OF THE "COLLECTOR" LOGIC BOARD SOURCE CODE. The Escrow Agent
for the Source Code for the operating system of the "Collector" Logic Board
shall be Greate Bay's General Counsel. ACSC shall cause the Source Code for the
operating system of the "Collector" Logic Board to be deposited with the Escrow
Agent within seven (7) days of signing this Agreement. The Escrow Agent shall
acknowledge receipt of the Source Code and shall keep same in a safe secure
location. Except as set forth below, the Escrow Agent shall not allow or permit
any party or third party to have access to, copies of or information concerning
the Source Code held in escrow. Upon receipt of written certification
- 6 -
<PAGE>
from Greate Bay's Vice President-MIS that ACSC has either ceased doing business
and there is no successor in interest that has assumed the obligations of ACSC
or that ACSC is in default of its obligations under this Agreement, the Escrow
Agent shall release the escrowed material to Greate Bay solely for the purpose
of allowing Greate Bay to provide itself with support services and to effect the
repair, replacement, maintenance and/or debugging of the "Collector" Logic Board
as determined by Greate Bay.
8. INTELLECTUAL PROPERTY WARRANTIES. INDEMNIFICATION. ACSC represents
and warrants that ACSC knows of no fact, circumstance or claim that the exercise
of rights pursuant to this Agreement would infringe any valid and subsisting
intellectual property right owned by any other persons. Greate Bay acknowledges
and understands that Greate Bay must obtain licenses for the serial or other
protocols from the respective game manufacturers necessary to interface the
Software and the SMS with the games of each manufacturer. ACSC will defend at
its expense or settle at its option, any action brought against Greate Bay to
the extent that it is based on a claim that the Software, the SMS Hardware or
the SMS Software or the Configuration, as used within the scope of this
Agreement, infringes any copyright or United States patent. ACSC will pay any
attorneys' fees, costs and damages awarded against or incurred by Greate Bay in
such actions which are attributable to such claim provided that Greate Bay
notifies ACSC in writing of the claim within five (5) calendar days of the
service or other notification of such claim upon Greate Bay and ACSC fully
controls the defense and settlement of such claims. Should the Software or the
SMS or the SMS Software or the Configuration become, or, in ACSC's opinion, be
likely to become the subject of a claim of infringement of a copyright or
patent, ACSC may procure for Greate Bay the right to continue using the
Software, the SMS or the SMS Software or the Configuration or replace or modify
the Software, the SMS or the SMS Software or the Configuration to make it non-
infringing, provided that no such replacement or modification shall decrease or
adversely change the performance of the Software or SMS or the Configuration and
further provided that no such replacement or modification shall cause Error.
ACSC shall have no liability for any claim of copyright or patent infringement
based on the use or combination of the Software, the SMS, SMS Software or the
Configuration with programs or data not supplied by ACSC. Any indemnity
provided herein shall not exceed and shall expressly be limited to Five Hundred
Thousand Dollars ($500,000.00).
9. WARRANTY AND LIMITATIONS.
(a) Warranty. ACSC warrants in favor of Greate Bay, SUBJECT TO THE
REMEDY LIMITATIONS AND WARRANTY LIMITATIONS SET FORTH BELOW, that the Software
or SMS
- 7 -
<PAGE>
Software, for a period of one (1) year from the execution of this Agreement,
will conform to ACSC's published specifications and warrants that ACSC has no
knowledge that the Software or SMS Software has any programming errors or is
unfit or unsuitable for use by Greate Bay. Such warranty is referred to herein
as the "As-Documented Warranty." Greate Bay's sole remedies for any breach of
the As-Documented Warranty, TO THE EXCLUSION OF ALL OTHER REMEDIES THEREFOR, IN
CONTRACT, TORT, OR OTHERWISE, will be ACSC's obligation to modify the Software
or SMS Software for Greate Bay, at no charge, so that it conforms to the
published specifications.
(b) Warranty Limitations. ACSC's warranties are limited and apply as
follows:
- ACSC's warranties do not extend to operation of the Software or
the SMS on any hardware configuration, other than as supplied by
or on behalf of ACSC and other than AS/400 hardware and model
upgrades, provided the same are compatible with the AS/400 and
industrial personal computers and all hardware specifications of
ACSC for the SMS.
- ACSC's warranties do not extend to operation of the Software or
the SMS in conjunction with any computer program (e.g "terminate
and stay resident" utility programs) other than as supplied by
ACSC.
- Except as may be expressly agreed in writing by ACSC, ACSC's
warranties do not apply to any copy of the Software or the SMS
that is modified by any person other than ACSC; to use of the
Software or the SMS other than in accordance with the most
current operating instructions provided by ACSC; to inoperability
or bugs, in whole or in part, caused by defects, problems, or
failures of software or hardware not meeting the hardware
specifications of ACSC for the SMS or Software; or to bugs caused
by negligence of any person except ACSC or its contractors.
(c) Warranty Exclusions. Without limiting the generality of the
limitations set forth above, ACSC's warranties do not include any warranty:
- that the functions performed either by the Software or the SMS
will operate in the combinations that may be selected for use by
Greate Bay.
- that the operation of the Software and the SMS will be error free
in all circumstances.
- that all defects in the Software and the SMS that are not
material (as determined in the exercise of the good faith
business judgment of Greate Bay after
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<PAGE>
consultation with ACSC) with respect to the functionality thereof
will be corrected.
- that the operation of the Software and the SMS will not be
interrupted for short periods of time that do not exceed twenty-
four (24) consecutive hours by reason of defects therein or by
reason of default on the part of ACSC.
- of any of the Software or the SMS or any part thereof as to which
any person other than ACSC has made any modifications, without
the express and specific written permission of ACSC.
(d) Greate Bay Responsibilities. Without limiting the generality of
the foregoing exclusions and limitations, Greate Bay will be exclusively
responsible as between the parties for, AND ACSC MAKES NO WARRANTY OR
REPRESENTATION WITH RESPECT TO:
- determining whether the Software or the SMS will achieve the
results desired by Greate Bay, notwithstanding such ACSC
represents and warrants that it has no knowledge that the
Software or the SMS when delivered to Greate Bay had or has any
programming errors or is unfit or unsuitable for use by Greate
Bay.
- selecting, procuring, installing, operating, and maintaining
computer hardware to run the Software.
- ensuring the accuracy of any input data used with the Software or
the SMS.
- establishing adequate data backup provisions for backing up
Greate Bay's data.
- establishing adequate operational backup provisions (e.g.,
alternate manual operation plans) in the event of a defect or
malfunction that impedes the anticipated operation of the
Software or the SMS.
(e) Disclaimer of All Other Warranties and Representations. The
express warranties and express representations set forth in this Agreement are
in lieu of, and ACSC DISCLAIMS, ANY AND ALL OTHER WARRANTIES, CONDITIONS, OR
REPRESENTATIONS, EXPRESS OR IMPLIED, ORAL OR WRITTEN, WITH RESPECT TO THE
SOFTWARE OR THE SMS OR ANY PART THEREOF, INCLUDING ANY AND ALL IMPLIED
WARRANTIES OR CONDITIONS OF TITLE, NON-INFRINGEMENT, MERCHANTABILITY, OR FITNESS
OR SUITABILITY FOR ANY PURPOSE (WHETHER OR NOT ACSC KNOWS, HAS REASON TO KNOW,
HAS BEEN ADVISED, OR IS OTHERWISE IN FACT AWARE OF ANY SUCH PURPOSE), WHETHER
ALLEGED TO ARISE BY LAW, BY REASON OF CUSTOM OR USAGE IN THE TRADE, OR BY COURSE
OF
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<PAGE>
DEALING. IN ADDITION, ACSC EXPRESSLY DISCLAIMS ANY WARRANTY OR REPRESENTATION TO
ANY PERSON OTHER THAN GREATE BAY WITH RESPECT TO THE SOFTWARE OR THE SMS.
(f) Legal Compliance. ACSC agrees that it is responsible for
submitting the SMS Hardware and SMS Software to the applicable gaming
authorities in New Jersey having jurisdiction over the SMS for the approval of
the logic of all or any portion of the SMS Software or the logic of any SMS
Hardware components that are required prior to the installation of SMS or
derivative modifications or extensions at the Licensed Facilities, except as
provided in the next sentence. With respect to the Electronic Drop feature of
the SMS ("EDrop"), ACSC will submit the EDropcode for approval, provided the
applicable gaming authority has authorized implementation of EDrop on a
conceptual basis either by established policy or published regulation. If
approval of EDrop has been so authorized by the applicable gaming authority,
ACSC will conform the logic of the EDrop code to any applicable and generally
applied specifications of the gaming authority. Greate Bay agrees that it is
solely responsible for all testing and internal control compliance with respect
to the SMS, including, but not limited to, security of the computer system
external to the SMS; provided, however, that ACSC agrees to provide any
reasonable assistance requested of it by Greate Bay with respect to testing and
internal control compliance.
10. CONFIDENTIAL/PROPRIETARY INFORMATION.
(a) Confidential/Propriety Information. The parties acknowledge that
the Software, the SMS, the Source Code and all other information supplied by
ACSC in connection with this Agreement, including but not limited to any know-
how or expertise, (collectively, the "Confidential Information"), will be deemed
confidential/proprietary information of ACSC. Greate Bay agrees that it shall
maintain the Confidential Information under secure conditions, using reasonable
security measures and in any event not less than the same security procedures
used by Greate Bay for the protection of its own confidential/proprietary
information.
(b) Non-disclosure Obligation. Except as may be requested or
required by or on behalf of any gaming authority, Greate Bay shall not disclose
any Confidential Information to any third party without the prior written
consent of ACSC. Notwithstanding the foregoing, Greate Bay may make the Software
or the SMS Software available, without ACSC's prior express consent, to any
independent consultant or consulting group retained by Greate Bay solely for
purposes specifically related to Greate Bay's permitted use, operation and
application of the Software or the SMS, but only after such independent
consultant or consulting group has executed a written confidentiality agreement
pursuant to which it covenants to not use the Confidential Information except
for Greate Bay as permitted herein and to not
- 10 -
<PAGE>
disclose the Confidential Information under the same conditions of
confidentiality contained herein. Notwithstanding the foregoing, Greate Bay may
disclose appropriate portions of Confidential Information to those of its
personnel who have a need to know the specific information in question in
connection with Greate Bay's rights or the performance of obligations under this
Agreement. All such personnel will be instructed by Greate Bay that the
Confidential Information is subject to the obligation of confidentiality set
forth by this Agreement. Notwithstanding the foregoing, Greate Bay may disclose
Confidential Information to an entity that is not a competitor of ACSC and is
offering (i) a Plan of Reorganization in the Chapter 11 Proceeding or (ii) to
purchase control of Greate Bay, provided however, that any such entity shall
enter into a non-disclosure agreement that requires such entity to protect such
information in the same manner as is required by this Paragraph 10.
(c) Equitable Remedies. The obligations of Greate Bay in this
Paragraph 10 shall be specifically enforceable and Greate Bay agrees that (i)
any breach of Greate Bay's obligations under this Paragraph 10 would cause
irreparable injury to ACSC; (ii) ACSC would have an inadequate remedy at law for
any such breach; (iii) the balance of interests and hardships would favor an
injunction in favor of ACSC; (iv) the public interest would favor an injunction
in favor of ACSC, and (v) Greate Bay will make no legal arguments that equitable
relief is not an appropriate remedy in favor of ACSC in the event of a breach of
Greate Bay's obligations under this Paragraph.
11. EXCLUSION OF INCIDENTAL AND CONSEQUENTIAL DAMAGES. NEITHER PARTY WILL
BE LIABLE TO THE OTHER PARTY (NOR TO ANY PERSON CLAIMING RIGHTS DERIVED FROM THE
OTHER PARTY'S RIGHTS) FOR INCIDENTAL, CONSEQUENTIAL, SPECIAL, PUNITIVE, OR
EXEMPLARY DAMAGES OF ANY KIND, including lost profits or revenue, loss of
business, or other economic damage, and further including injury to property, AS
A RESULT OF BREACH OF ANY WARRANTY OR OTHER TERM OF THIS AGREEMENT, REGARDLESS
OF WHETHER THE PARTY LIABLE OR ALLEGEDLY LIABLE WAS ADVISED OR HAD OTHER REASON
TO KNOW OR IN FACT KNEW OF THE POSSIBILITY THEREOF. Independent of, severable
from, and to be enforced independently of any other enforceable or unenforceable
provision of this Agreement, IN NO EVENT SHALL ACSC's AGGREGATE LIABILITY TO
GREATE BAY (INCLUDING TO ANY PERSON OR PERSONS WHOSE CLAIM OR CLAIMS ARE BASED
ON OR DERIVED FROM A RIGHT OR RIGHT CLAIMED BY GREATE BAY), WITH RESPECT TO ANY
AND ALL CLAIMS AT ANY AND ALL TIMES ARISING FROM OR RELATED TO THE SUBJECT
MATTER OF THIS AGREEMENT, IN CONTRACT, TORT OR OTHERWISE, EXCEED ONE MILLION
DOLLARS ($1,000,000.00).
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<PAGE>
12. SPECIFIC PERFORMANCE. The obligations of Greate Bay in this Agreement
shall be specifically enforceable by ACSC and Greate Bay agrees that (i) any
breach of Greate Bay's obligations under this Agreement would cause irreparable
injury to ACSC; (ii) ACSC would have an inadequate remedy at law for any such
breach; (iii) the balance of interests and hardships would favor an injunction
in favor of ACSC; (iv) the public interest would favor an injunction in favor of
ACSC, and (v) Greate Bay will make no legal arguments that equitable relief is
not an appropriate remedy in favor of ACSC in the event of a breach of Greate
Bay's obligations under this Agreement.
13. ASSIGNMENT. Greate Bay may not assign any right under this Agreement
and any purported assignment will be null and void and a breach of this
Agreement. Notwithstanding the preceding sentence, a change of control of
Greate Bay shall not constitute an assignment, and Greate Bay shall have the
right to assign its rights under this Agreement to any person or entity
acquiring substantially all of the assets of Greate Bay or at least 51 percent
of the equity of Greate Bay through purchase, merger, or reorganization and any
such person shall in turn have the right to assign to any other person coming
within the exception provided in this sentence. ACSC shall have the right to
assign its rights under this Agreement provided that any such assignee shall
expressly assume ACSC's obligations to Greate Bay pursuant to this Agreement and
that the assignment shall include sufficient Intellectual Property, personnel
and other know how such that ACSC can reasonably expect the Assignee to be able
to fulfill the obligations to Greate Bay under this Agreement.
14. AUTHORITY. Each party represents and warrants to the other that each
party respectively has full right, power and authority to enter into this
Agreement and the person executing this Agreement on its behalf has actual
authority to do so.
15. PARTIAL INVALIDITY. If any one or more of the provisions of this
Agreement should be ruled wholly or partly invalid or unenforceable by a court
or other government body of competent jurisdiction, the validity and
enforceability of all provisions of this Agreement not ruled to be invalid or
unenforceable will be unaffected.
16. NOTICES. Notices hereunder will be delivered and effective as
follows: Every notice required or contemplated by this Agreement to be given by
either party may be delivered in person or may be sent by a nationally
recognized overnight delivery courier, or by telecopier, or by express mail, or
by
- 12 -
<PAGE>
postage prepaid, certified or registered mail, addressed to the party whom it
is intended at the following address:
To Greate Bay, ACSI or CMSI: Greate Bay Hotel and Casino, Inc.
Indiana Avenue and Brighton Park
Atlantic City, New Jersey 08401
Attn: President
Telecopier: 609-441-4624
With copy to: Greate Bay Hotel and Casino, Inc.
Indiana Avenue and Brighton Park
Atlantic City, New Jersey 08401
Attn: Executive Vice President - General Counsel
Telecopier: 609-441-4937
To ACSC: Advanced Casino Systems Corporation
200 Decadon Drive
Egg Harbor Township, New Jersey 08234-3899
Attn: President
Telecopier:609-407-2473
With copy to: Greate Bay Casino Corporation
Two Galleria Tower, Suite 2200
Dallas, Texas 75240
Attn: President
Telecopier: 972-386-7411
Either party may change its address for notice by giving notice to the other
party of the change. Any notice under this Agreement shall be deemed delivered
when personally delivered, the date telecopied, if electronic confirmation of
delivery is obtained and retained, the next business day after delivery to a
nationally recognized courier service or express mail for overnight delivery, or
three (3) days after any such notice is deposited with the United States Postal
Service.
17. CHOICE OF LAW/FORUM SELECTION. This Agreement will be interpreted and
enforced in accordance with the law of the State of New Jersey without regard to
the choice of law principles of the State of New Jersey. Any action arising
from this Agreement may only be instituted in the state or federal courts of the
State of New Jersey.
18. ATTORNEY'S FEES. Except as otherwise provided in Paragraph 8 of this
Agreement, in the event of any dispute arising out of or relating to this
Agreement, or the alleged
- 13 -
<PAGE>
breach thereof, each party will be responsible for and pay its own respective
attorney's fees and expenses.
19. WAIVER. None of the terms of this Agreement, including this Paragraph
19 or any term, right or remedy hereunder shall be deemed waived unless such
waiver is in writing and signed by party to be charged therewith and the parties
hereby waive any basis to assert waiver by reason of any delay in asserting any
such right or remedy or the benefit of any such term.
20. ENTIRE AGREEMENT/EFFECTIVE DATE. Except with respect to that certain
Agreement between Greate Bay Hotel and Casino, Inc., GB Holdings, Inc. GB
Property Funding Corp. and Advanced Casino Systems International, Inc., on one
hand, and Greate Bay Casino Corp., New Jersey Management, Inc., Pratt Casino
Corporation, PRT Funding Corp., PPI Corporation, Advanced Casino Systems
Corporation, and Hollywood Casino Corporation, on the other, to which a form of
this Agreement is an Exhibit ("the Settlement Agreement"), this Agreement
constitutes the entire agreement and understanding of the parties with respect
to the subject matter. No prior or contemporaneous representations,
inducements, promises or agreements, oral or otherwise, between the parties with
reference to the subject matter will be of any force or effect. No modification
or amendment to this Agreement, including this Paragraph 20, will be valid or
binding unless reduced to writing and duly executed by the party or parties to
be bound. This Agreement may be executed in counterparts and a telecopied
signature will be as effective as an original. This Agreement will be effective
only when signed by all of the parties hereto and only upon and after the
effective date of the Settlement Agreement, as set forth in Paragraph 11
thereof, and until such time all of the provisions of this Agreement will be
deemed part of settlement discussions and inadmissible against any of the
parties hereto.
[THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK]
- 14 -
<PAGE>
IN WITNESS WHEREOF AND INTENDING TO BE LEGALLY BOUND the parties have
executed this Agreement as of the date and year first above written.
Attest: ADVANCED CASINO SYSTEMS CORPORATION
/s/ Charles F. LaFrano III /s/ Lawrence C. Cole
- -------------------------- -------------------------
Secretary Lawrence C. Cole
President
Attest: GREATE BAY HOTEL AND CASINO, INC.
t/a "Sands Hotel & Casino"
/s/ Frederick H. Kraus /s/ Timothy A. Ebling
- ------------------------- -------------------------
Secretary
Attest: ADVANCED CASINO SYSTEMS INTERNATIONAL, INC.
/s/ Frederick H. Kraus /s/ Timothy A. Ebling
- ------------------------- -------------------------
Secretary
Attest: COMPUTERIZED MANAGEMENT SYSTEMS
INTERNATIONAL, INC.
/s/ Frederick H. Kraus /s/ Timothy A. Ebling
- ------------------------- -------------------------
Secretary
- 15 -
<PAGE>
EXHIBIT "A"
CASINO ACCOUNTING AND MANAGEMENT SYSTEM
CASINO MANAGEMENT
The casino management module provides both detailed and summarized
information to executive level, casino management and administration and
pit management. Through integration of the applications outlined as
follows, management has access to both real time and historical performance
information from a single source (or menu).
TABLE ACCOUNTING & CREDIT
This system integrates all aspects of table games and cage accounting in
addition to patron credit activity. Additional controls provide automated
and paper less casino credit account review via predefined "triggers" and
electronic communications with service providers of casino and credit
bureau information.
<PAGE>
EXHIBIT "B"
SLOT ACCOUNTING AND MANAGEMENT APPLICATION
SLOT ACCOUNTING & MANAGEMENT SYSTEM
The Slot system is comprised of three modules;
Slot Configuration - allows recording of individual game
specifications and is used to maintain the SMS slot network. Future
changes to floor configurations may be entered and activated as
required.
Slot Accounting - using the metered information received from SMS,
this module provides complete accounting for all coin, currency and
electronic fund transfers.
Slot Data - provides historical and analytical information regarding
game performance and may be accessed through numerous summary and
detailed selection criteria.
<PAGE>
EXHIBIT "C"
CASINO PLAYER TRACKING SYSTEM
SUB-SET-RATINGS & COMPLEMENTARIES
This application also performs as the primary information data bank of
information specific to individual patrons gaming activity and
profitability. Information from both table and slot activity is combined
with the ability to view this information and either combined or
independently. A complimentary decision process has been incorporated so
that improved customer service may result by removing the requirement for
executive decisions on all issuances.
<PAGE>
EXHIBIT "D"
CASINO SALES AND MARKETING SYSTEM
ACCOUNT MANAGEMENT
This module provides the "housekeeping" functions required to maintain an
accurate data bank of patron information for marketing purposes. It also
serves to reduce cost specifically for the direct mail marketing
application and purging of inactive patrons.
EXTRACT MANAGEMENT
This is a flexible and robust patron selection module used primarily to
target specific segments of patrons for various marketing and/or analysis
functions. The results of these extracts may be directed towards numerous
forms of processing.
GROUPS/INVITATION SYSTEM
The primary purpose of the group system is to enable the analysis of
profitability, both actual and potential, for up to twenty (20) user
defined groups or event types. Expenses and/or complementaries may be
charged direct to a patrons account or as a percentage of theoretical
across all players within the group. Groups may also include Branch
Offices and Junket Representatives with the ability to compute commissions.
Historical analysis by group type or monthly rep performance is provided.
The invitation module enables the booking of patrons responses to specific
events (i.e. Head liner shows). Blocking of an event enables analysis
based on invited segment(s).
SWEEPSTAKES SYSTEM
The sweepstakes system provided for the controlling and winner selection
electronically for various promotional sweepstakes. Entries earned by
patrons are automatically recorded with randomized winner selection based
on event, date and time of day. If required entries may require pre-
qualification. Linkage to the direct mail provides for notification of
entries.
<PAGE>
EXHIBIT "E"
TABLE MARKETING SYSTEM
TABLE MARKETING SYSTEM (TMS)
TMS was developed as an extension of the SMS for table games and utilizes
the same network and controller boards (with function keypads and mark
sense printers). The primary purposes of TMS consist of: a) control of
complementaries at the table games; b) access to patron information for
ratings, credit and tracking of cash transactions; and c) time and
attendance for pit personnel.
<PAGE>
EXHIBIT "F'
CASINO ANALYSIS
This system provides the analysis department with information on patrons
gaming history. Data extraction options allow flexibility in selecting
patron segments for analysis, and an interface to the Group system allows
group analysis. Data can be interpreted in report format, or downloaded to
a PC for analysis utilizing PC based software, i.e. Foxpro. Selections
from PC analysis can also be uploaded to the AS/400 to drive the Sales &
Marketing extract system.
MIS RESOURCE REQUEST SYSTEM
The MIS Resource Request system allows the entry and tracking of requests
for maintenance and new requests for Software, Hardware, and other services
provided by MIS. The system utilizes control files to allow flexibility in
establishing Application areas and allows tracking of the progress of a
request from initial request entry through completion. For Software
revisions, the system incorporates source and object movement to control
the development/testing cycle and movement to a production environment.
Tracking and reporting of man hours by request is also available.
SECURITY INCIDENT REPORTING SYSTEM
This system provides for the entry of Security Incident data to allow
tracking and reporting of various types of incidents. Incidents can be
tracked from initiation through closure, and some limited claim/settlement
tracking is provided.
CROSS SYSTEM BACKUP (CSB)
This application is used in a multiple CPU environment to provide a 'hot'
backup capability, for use in the event of a severe hardware failure. CSB
utilizes the Journaling feature of the AS/400 to capture changes to
designated application system files on a CPU, and transmits the changes to
another CPU, where the CSB application on this CPU applies the changes to
the application files residing on that CPU.
<PAGE>
EXHIBIT "G"
SMS/TM/
SMS/TM/ HARDWARE
1. NT SMS/TM/ slot Controller Board
256K Memory expandable to 1MB, 16TTL Inputs, 16 TTL Outputs
2. Card Reader
Capable of reading standard swipe tracks 1 & 2, with red LED lit throat.
Custom white exterior bezel.
3. Side Box (Optional)
Enclosure for: a) card reader, b) display, c) keypad and d) back lit custom
logo with tri-color LED. Additional mini fluorescent back lighting.
4. Keypad Overlay - Side Mount
Includes keys zero (0) through (9), Clear, $ (dollar sign), Service, Promo
(Promotion), and enter. Area for display and card reader precut. Area
under card reader for back lighting verbiage and arrows, area for logo with
back lighting, and additional area for verbiage with back lit miniature
fluorescent.
5. Keypad Overlay - Slant Top
Includes keys zero (0) through (9), Clear, $ (dollar sign), Service, Promo
(Promotion), and enter. Size 19 1/2" L x 7/8" H. Area for display and card
reader precut. Area above card reader for back lighting verbiage and
arrows, area for logo with back lighting.
6. Tri Color LED Board
1" x 1" square board with Red, Green, and Yellow LED's used for back
lighting logo.
7. Green LED Board
1/2" x 2 3/4" board controlled by card reader interface for back lighting
card insert verbiage.
8. Graphic Display
Overall dimensions 44.5mm H x 134.6 mm L, Dot matrix 64 x 256 pixels.
9. Base Top
Board containing two (2) six pin molex connectors and two (2) RJ
connections.
10. IBM Industrial Personal Computer(s) with arctic co-processor(s) -
"Gearbox(s)"
11. Optic Isolator(s) with RS232 to RS422 connectors
12. IBM Industrial Personal Computer(s) - "HAS(s)"
<PAGE>
SMS/TM/ SOFTWARE
1. SMS_NT - Controller logic board program which contains specific interface
logic based on game manufacturer specifications or ACSC proprietary bi-
directional serial communications logic. Additional logic includes: a) NT
Operating System, b) Security De-encryption, c) Peripheral device
interface, d) Personalization parameter storage and verification, e) User
diagnostics, f) Transaction recall, g) E-Drop, h) Marketing point
algorithms.
2. RIC_MAIN - Artic card logic which controls the polling and messaging of
transactions from and to slot machines and the IBM Industrial Personal
Computer(s).
3. SU_MAIN - Primary logic program which controls the messaging from the
network to the ARTIC ports. Additional logic includes: a) software
downloading, b) transaction backup, c) file servers for: 1) asset
configuration, 2) wiring configuration, and 3) transaction backup, d)
TCP/IP connectivity and recoverability, e) graphical monitor data source,
f) game metering, g) TCP/IP socket logic for sending and receiving
transactions.
4. HASTCPIP - File Server control program which is the primary "HUB" for
transactions within the network. Additional logic includes: a) network
status monitor display, b) Network protocol translator (if required in
LU6.2 environment), c) transaction backup file logic, d) in-house patron
memory mapping, e) network verification for critical transaction
processing, f) patron point transaction transfer logic.
5. PPS_SERV - File server logic which records and, as required computes points
and balance information. Receives and transfers transaction to the
HASTCPIP main server program. Performs time logic for patron being placed
into and removed from memory.
6. ENCRYPT.EXE - Stand alone routine which is applied for compiling and
encrypting SMS_NT programs which are subsequently downloaded to the NT
controller board. Employs M68000 C Compiler/Assembler languages. Embeds
encrypted passcode into the SMS_NT compiled program while simultaneously
communicating the AS/400 for NT program verification and security.
7. TCPMON - Graphical monitor program which provides the following levels: a)
Networked Gearboxes, b) Individual Gearbox and Artic ports, c) Individual
Artic port, d) Individual slot machines. Each level contains the
appropriate error conditions or interactive metered information.
8. AS/400 SMS/TM/ Application software for receiving, transmitting and
processing of transactions bi-directionally to gaming devices.
<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> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998
<PERIOD-START> APR-01-1998 JAN-01-1998
<PERIOD-END> JUN-30-1998 JUN-30-1998
<CASH> 8 8
<SECURITIES> 0 0
<RECEIVABLES> 8,734 8,734
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 73,609 73,609
<PP&E> 0 0
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 78,609 78,609
<CURRENT-LIABILITIES> 98,300 98,300
<BONDS> 15,000 15,000
0 0
0 0
<COMMON> 1 1
<OTHER-SE> (34,692) (34,692)
<TOTAL-LIABILITY-AND-EQUITY> 78,609 78,609
<SALES> 0 0
<TOTAL-REVENUES> 0 0
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 365 731
<INCOME-PRETAX> (365) (731)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (365) (731)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (365) (731)
<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> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998
<PERIOD-START> APR-01-1998 JAN-01-1998
<PERIOD-END> JUN-30-1998 JUN-30-1998
<CASH> 6,163 6,163
<SECURITIES> 0 0
<RECEIVABLES> 0 0
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 6,664 6,664
<PP&E> 3 3
<DEPRECIATION> 3 3
<TOTAL-ASSETS> 8,617 8,617
<CURRENT-LIABILITIES> 99,067 99,067
<BONDS> 15,000 15,000
0 0
0 0
<COMMON> 1 1
<OTHER-SE> (142,315) (142,315)
<TOTAL-LIABILITY-AND-EQUITY> 8,617 8,617
<SALES> 0 0
<TOTAL-REVENUES> 1,044 2,510
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> (28) (4,183)
<LOSS-PROVISION> 0 141
<INTEREST-EXPENSE> 2,942 5,897
<INCOME-PRETAX> (1,870) 655
<INCOME-TAX> 3 1,395
<INCOME-CONTINUING> (1,873) (740)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (1,873) (740)
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
</TABLE>
