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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended DECEMBER 31, 1998
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to _________________
Commission file number 33-69768
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PRT FUNDING CORP.
PRATT CASINO CORPORATION
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(Exact name of each Registrant as specified in its charter)
DELAWARE 75-2502289
DELAWARE 75-2502292
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(States or other jurisdictions of (I.R.S. Employer
incorporation or organization) Identification No.'s)
C/O ADVANCED CASINO SYSTEMS CORPORATION
200 DECADON DRIVE, SUITE 100
EGG HARBOR, NEW JERSEY 08234
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(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code): (609) 441-0704
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Securities registered pursuant to Section 12(b) of the Act:
$85,000,000 PRINCIPAL AMOUNT OF
11 5/8% SENIOR NOTES DUE APRIL 15, 2004
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Title of each class Name of exchange on which registered
Securities registered pursuant to Section 12(g) of the Act:
NONE
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(Title of Class)
Indicate by check mark whether each of the Registrants (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrants were required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. YES X NO______
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As of March 26, 1999, 1,000 shares of Common Stock of PRT Funding Corp.,
$1.00 par value, were outstanding, all of which were held by Pratt Casino
Corporation. As of March 26, 1999, 1,000 shares of Common Stock of Pratt Casino
Corporation, $1.00 par value, were outstanding, all of which were held by an
affiliate.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents are incorporated by reference into the
indicated part or parts of this report.
NONE
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PART I
ITEM 1. BUSINESS
GENERAL
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The registered securities consist of 11 5/8% Senior Notes (the "PRT Funding
Notes") in the principal amount of $85,000,000 due April 15, 2004 issued by PRT
Funding Corp. ("PRT Funding"). PRT Funding is wholly owned by Pratt Casino
Corporation ("PCC"), a Delaware corporation and an indirect, wholly owned
subsidiary of Greate Bay Casino Corporation ("GBCC"), also a Delaware
corporation. On December 31, 1996, Hollywood Casino Corporation ("HCC"), owner
of approximately 80% of the common stock of GBCC, distributed such stock 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 200 Decadon
Drive, Suite 100, Egg Harbor Township, New Jersey 08234.
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.
Prior to December 31, 1998, PCC owned all of the common stock of GB Holdings,
Inc. ("Holdings"); such ownership has since been reduced to 79%. Greate Bay
Hotel and Casino, Inc. ("GBHC"), a wholly owned subsidiary of Holdings, owns the
Sands Hotel and Casino located in Atlantic City, New Jersey (the "Sands").
Prior to July 7, 1998, New Jersey Management, Inc. ("NJMI"), a subsidiary of
PCC, was responsible for the operations of the Sands under a management
agreement with GBHC.
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. ("HCT"), a wholly owned subsidiary
of HCC, which owns and operates a gaming and lodging facility in Tunica County,
Mississippi (the "Tunica Casino"). The contract, which expires on December 31,
2003, provides for a monthly fee of $100,000. 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 from fees
generated under the Aurora Casino Management Contract - see "Pratt Management,
L.P." below) and from consulting fees earned from the Tunica Casino,
supplemented by dividends, if any, received from GBHC.
On January 5, 1998, GBHC, Holdings, and GB Property Funding Corp. ("GB
Property Funding"), a wholly owned subsidiary of Holdings, each filed petitions
for relief under Chapter 11 of the United States Bankruptcy Code (the
"Bankruptcy Code") in the United States Bankruptcy Court for the District of New
Jersey (the "Bankruptcy Court"). Each company continues to operate in the
ordinary course of business, as set forth in the Bankruptcy Code, and each
company's executive officers and directors remain in office, subject to the
supervision of the Bankruptcy Court. On January 11, 1999, the Bankruptcy Court
terminated the debtors' exclusive right to file a plan of reorganization. As of
March 26, 1999, no plan of reorganization has been formally presented by the
debtors or any other party.
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. PRT Funding
deferred payment of interest due on the April 15 and October 15, 1998 interest
payment dates. On October 22, 1998, PRT Funding paid to bondholders an amount
equal to a single semiannual interest payment ($4,941,000) while negotiations to
restructure the PRT Funding Notes continued.
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In March 1999, PCC, GBCC and the holders of the PRT Funding Notes reached an
agreement in principle with HCC for HCC to acquire the stock of PCC, the parent
of PRT Funding, from GBCC for nominal consideration as part of a debt
restructuring (the "Restructuring") of PRT Funding, PCC and other subsidiaries
of PCC. Following the Restructuring, PCC's assets will consist of its limited
partnership interest in a management contract for the Aurora Casino and a
consulting contract for the Tunica Casino. These assets will serve as collateral
for $39.25 million of 11 7/8% Senior Secured Notes due November 1, 2003 (the
"PCC Notes") which PCC will issue to the PRT Funding noteholders as part of the
Restructuring. For the year ended December 31, 1998, these assets generated
pre-tax earnings to PCC of approximately $7.7 million. The revenues and
resulting net earnings generated by these assets will be the sole source of
funds for PCC's payment obligations under the PCC Notes. Cash available from
the management contract and consulting agreement in excess of interest payment
requirements will be used to make mandatory redemptions of the PCC Notes.
As contemplated in the Restructuring, holders of the PRT Funding Notes would
also receive 100% of the interest in a liquidating trust which would hold the
remaining assets (except for the stock of Holdings) of PCC and its subsidiaries
not acquired by HCC. Such assets would consist primarily of claims against
Holdings, GB Property Funding and GBHC in the Chapter 11 proceedings.
The successful completion of the Restructuring is subject to the execution of
definitive documents and will require that PCC and PRT Funding file for
protection under Chapter 11 with the above transactions included as part of a
pre-negotiated plan of reorganization. Such plan will require approval by the
bankruptcy court as well as by the various gaming regulatory organizations
having jurisdiction over the management contract and consulting agreement.
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 have ownership or operating control of such subsidiaries
after reorganization. Furthermore, as a result of a settlement agreement
reached by GBCC and Holdings during September 1998, GBCC no longer participates
in the management of the Sands. Accordingly, Holdings, GB Property Funding and
GBHC are no longer included on the accompanying consolidated balance sheets of
PCC. As more fully explained in Note 1 of the Notes to Consolidated Financial
Statements of PCC, during the period from January 1, 1998 through June 30, 1998,
the operations of Holdings and its subsidiaries were accounted for by PCC under
the equity method of accounting. As a result of PCC no longer controlling the
operations of the Sands, the expectation that ownership control of Holdings will
only be temporary and the September 1998 settlement agreement which resolved
certain significant uncertainties, PCC's investment in Holdings and its
subsidiaries was revalued to a zero basis effective on July 1, 1998.
Accordingly, for periods subsequent to June 30, 1998, PCC is accounting for its
investment in Holdings under the cost method of accounting.
THE SANDS MANAGEMENT CONTRACT
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Prior to May 1, 1998, NJMI, was responsible for the operations of the Sands
under a management agreement with GBHC. Under such agreement, NJMI was entitled
to receive annually (1) a basic consulting fee of 1.5% of "adjusted gross
revenues," as defined, and (ii) incentive compensation 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. 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,
NJMI continued to provide certain agreed upon services to GBHC at a monthly fee
of $165,000 of which $122,000 was paid on a monthly basis in arrears and the
remaining $43,000 was deferred and is to be paid upon confirmation of GBHC's
plan of reorganization by the Bankruptcy Court. All management fees terminated
upon the granting of GBHC's motion to reject the management contract by the
Bankruptcy Court on September 28, 1998. As a consequence of a settlement
agreement entered into in September 1998, GBCC and GBHC may no longer assert
claims against each other with respect to the operation of the management
contract and, with the passage of time, the cancellation thereof.
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PRATT MANAGEMENT, L.P.
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PML manages the Aurora Casino pursuant to the Aurora Casino Management
Contract, which was executed in June 1991 and has an initial term of 99 years.
PML acts as the sole and exclusive agent in the supervision, direction and
control of the management of the Aurora Casino and any additions or expansions
thereof.
PML receives a quarterly base management fee equal to 5% of operating
revenues (as defined in the agreement). However, for so long as certain
indebtedness of HCC remains outstanding, payment of the base services fee is (i)
subject to a maximum of $5.5 million in any consecutive 12 month period; (ii)
subordinate to payment of interest on the HCC indebtedness; and (iii)
conditioned upon compliance with the indenture governing such indebtedness. PML
also receives an incentive fee equal to 10% of gross operating profit (as
defined in the agreement).
Pursuant to the Agreement of Limited Partnership, PML makes distributions to
PCC in an amount equal to 1% of the first $84,000 of net income earned by PML
each month and 99% of any net income earned above such amount, all of which
comes from management fees received from the management of the Aurora Casino
pursuant to the Aurora Casino Management Contract. For the year ended December
31, 1998, distributions totaled $5.6 million.
The Aurora Casino Management Contract can be terminated by either party upon
45 days prior written notice in the event of the other party's material breach
of the agreement, inability to pay debts generally as they become due,
bankruptcy or other similar proceedings, action to suspend normal business
operations, or imposition of any materially adverse levy or judgment.
Furthermore, PML has the right to terminate if the HCC subsidiary which owns the
Aurora Casino fails to furnish funds required for PML to manage the Aurora
Casino or fails to compensate or reimburse PML. In such case, PML is entitled
to liquidated damages in an amount equal to 10 times the aggregate base services
fee and incentive fee earned by PML in the preceding fiscal year.
State Regulation - Supplier's License. PML is required to maintain a
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supplier's license with respect to the management services it provides to the
Aurora Casino. PML's supplier's license expired in December 1998 and was
renewed by the Illinois Gaming Board (the "IGB") through December 1999 with the
condition that PML provide justification for future renewal. The IGB has
expressed its opposition to the licensing of holders of management services
contracts with percentage-based fees for Illinois riverboat gaming operations.
PML's existing management contract is currently the only percentage-based
management contract between a supplier and a riverboat gaming operation. PCC
believes that the successful completion of the Restructuring previously
described will enable PML to provide acceptable justification for renewal of the
PML supplier's license in December 1999. A supplier's license is eligible for
renewal upon payment of the applicable fee, a determination by the IGB that the
licensee continues to meet all of the requirements of the Illinois Riverboat
Gambling Act (the "Riverboat Act") and if any and all conditions placed on
prior license renewals have been met. The IGB also requires that officers,
directors and employees of suppliers be licensed. Licenses issued by the IGB
may not be transferred to another person or entity. All licenses must maintain
their suitability for licensure and have a continuing duty to disclose any
material changes in information provided to the IGB.
A holder of any license is subject to imposition of penalties and fines,
suspension or revocation of such license, or other action for any act or failure
to act by such holder or his or her agents or employees, that is injurious to
the public health, safety, morals, good order and general welfare of the people
of the State of Illinois, or that would discredit or tend to discredit the
Illinois gaming industry or the State of Illinois. The Illinois Gaming Board may
revoke or suspend licenses, as the Board may see fit and in compliance with
applicable laws of Illinois regarding administrative procedures.
THE AURORA CASINO
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The Aurora Casino commenced operations on June 17, 1993 and is one of only
four casinos in Illinois now operating within 50 miles of downtown Chicago. In
addition five riverboat casinos operate in
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northwestern Indiana and serve the Chicago-area market. The Aurora Casino
currently consists of two multi-level riverboat casinos containing an aggregate
of approximately 32,100 square feet of gaming space with approximately 975 slot
machines and approximately 55 table games. The Aurora Casino also includes an
approximately 64,000 square foot land-based Pavilion through which patrons board
the facility's two riverboat casinos via enclosed passenger loading ramps. The
highly-themed Pavilion features a glass-domed, four-story atrium with two grand
staircases, two upscale lounges, a gourmet restaurant, a large buffet and a
diner. Patrons of the Aurora Casino are offered valet and self-parking in two
multi-level parking garages that accommodate approximately 1,340 cars, as well
as surface parking.
One parking garage is located directly across the street and is connected to
the Pavilion through a climate controlled tunnel. The structure also houses the
"Hollywood Casino(R) Studio Store," 1,500 square feet of highly themed retail
space selling logo items licensed from motion picture studios as well as first-
run movies on videocassette.
In 1995, the Company completed a 10,000 square foot expansion of one of the
Aurora Casino's riverboats. The casino expansion increased the Aurora Casino's
gaming space by approximately 45% to the current 32,100 square feet, allowed the
facility to offer patrons the maximum number of gaming positions permitted by
Illinois gaming regulations in a spacious, highly-themed setting. The Company
also completed a renovation of the Aurora Casino's second riverboat casino in
September 1995 which included the installation of new interior decor more
extensively utilizing the Company's Hollywood Theme and the reconfiguration of
gaming areas to provide a more spacious and comfortable setting.
Business Strategy. The Aurora facility's primary market is the affluent
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suburbs north and west of Chicago. Based on a sampling of its patrons, the
Company believes that the casino drew approximately 50% of its patrons from such
suburbs during 1998. Approximately 7.1 million people live within a 40-mile
radius and approximately 11.6 million people live within a 100-mile radius of
the Aurora Casino. The facility is easily accessible from major highways, can
be reached from downtown Chicago in approximately 50 minutes by trains which
average 20 trips a day, and is approximately 30 miles from O'Hare International
Airport. The four operating Chicago-area casinos, including the Aurora Casino,
have approximately 135,000 square feet of combined gaming space. No additional
casinos may be licensed in Illinois without the passage of new state
legislation; however, one existing license is currently available for reissue.
There are also five riverboat casino operations in northwestern Indiana which
compete within the Chicago-area market.
The Aurora Casino's riverboats currently offer as many as 16 daily cruises on
weekdays and 17 daily cruises on weekends, commencing at various times from 9:00
a.m. until 4:30 a.m. This schedule may be varied, based on experience and
seasonal factors. The use of a staggered cruise schedule with two vessels
significantly reduces the waiting time until the next gaming session for patrons
who miss a cruise departure. Once passengers board, they are permitted to game
during the half hour prior to the time the riverboat departs. After the
excursion, passengers are permitted to game for another half hour before new
passengers board, for a total of two to three hours of gaming per cruise,
depending on the cruising schedule. In addition, Illinois regulations permit
dockside gaming if the riverboat captain reasonably determines that it is unsafe
to cruise due to inclement weather, mechanical or structural problems or river
icing. During dockside gaming, the Aurora riverboats operate on their normal
schedules and passengers may leave the vessels at any time but may board only
during the half hour prior to the regularly scheduled start of the cruise.
In implementing its marketing and operating strategy, the Aurora Casino uses
proprietary casino information technology of Advanced Casino Systems Corporation
("ACSC"), a subsidiary of GBCC. This technology includes ACSC's table game and
slot machine monitoring systems which enable the Aurora Casino to track and rate
patron play through the use of a casino player's card. These systems provide
management with the key characteristics of patron play as slot machines are
connected with, and information with respect to table games can be input into
its data base monitoring system. When patrons use the casino player's card at
slot machines or table games, the information is immediately available to
management and allows management to implement marketing programs to recognize
and reward patrons during their visits to the casino. Certain of these
marketing programs allow patrons to automatically credit
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themselves with complimentaries based on their levels of play. Such promotions
and complimentaries include free meals, hotel accommodations, retail
merchandise, parking and sweepstakes giveaways based on slot machine patrons'
gross wagering. Management believes that its ability to reward its customers on
a "same-visit" basis is valuable in developing a loyal base of higher value
patrons. ACSC's systems also allow the Aurora Casino to monitor, analyze and
control the granting of gaming credit, promotional expenses and other marketing
costs.
The Aurora Casino employs a marketing strategy designed to take advantage of
its proximity to the affluent northern and western suburbs of Chicago and the
large population base of the Chicago metropolitan area. Management uses a
patron data base developed through ACSC's systems to focus its marketing efforts
on patrons who have been identified through the system as having the
characteristics of a higher value patron. Given the limited number of gaming
positions available on each daily casino excursion, management believes that
its process of identifying the premium patron, encouraging participation in its
various casino players' card programs and tailoring promotions and special
events to cater to this market segment will enhance profitability.
The Aurora Casino also markets to the "mass" casino patron market segment
through various forms of advertising media as well as through group and bus tour
packages. Once new patrons are introduced to the Company's gaming facility and
its casino players' card programs, management uses its data base capabilities to
direct market to these patrons in an attempt to convert them into higher value
patrons.
Management believes that the Aurora Casino's facilities, in particular its
highly-themed dockside Pavilion and its close proximity to the Paramount
Theatre, an 1,800-seat art deco theatre in which the Company features headliner
entertainment, are appealing to both the premium and mass casino patron markets.
Entertainers who have appeared include Wayne Newton, Tom Jones, Paul Anka, the
Commodores, Frankie Valli, Englebert Humperdink and the Doobie Brothers.
Competition. The gaming industry is highly fragmented and characterized by a
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high degree of competition among a large number of participants, some of which
have greater financial and other resources than HCC. Competitive gaming
activities include land-based casinos, dockside casinos, riverboat casinos,
video lottery terminals, Indian gaming and other forms of legalized gaming in
the United States and other jurisdictions. Casino gaming is currently permitted
in a number of states, including Colorado, Illinois, Indiana, Iowa, Louisiana,
Michigan, Mississippi, Missouri, Montana, Nevada, New Jersey and South Dakota,
several Canadian providences, as well as on Native American Indian lands in
certain states. Other jurisdictions may legalize gaming in the near future
through the introduction of proposals to legalize gaming in their state
legislatures. In addition, established gaming jurisdictions could award
additional gaming licenses or permit the expansion of existing gaming
operations. New or expanded operations by other persons can be expected to
increase competition and could have a material adverse impact on the Aurora
Casino.
The Riverboat Act and the rules promulgated by the Illinois Gaming Board
thereunder authorize only ten owner's licenses for riverboat gaming operations
in Illinois and permits a maximum of 1,200 gaming positions (as defined by the
Illinois Gaming Board) at any time for each of the ten licensed sites. All
authorized owner's licenses have been granted and no additional licenses or
gaming positions can be permitted without further state legislation; however,
one licensed site ceased gaming operations in July 1997. Four riverboat sites,
including the Aurora Casino, are currently licensed in Illinois within 50 miles
of downtown Chicago. Two of these riverboat sites are in Joliet, approximately
42 miles southwest of downtown Chicago, and a third is in Elgin, Illinois,
approximately 20 miles from Aurora, 45 miles from downtown Chicago and amid the
affluent northern and western suburbs. The Aurora Casino also competes directly
with five riverboat operations opened since 1996 in northwestern Indiana within
25 miles of downtown Chicago. Increased competition from casinos in Indiana has
resulted in greater competition for patrons from the downtown Chicago market and
from the suburban Chicago market. The next closest operating casinos are in
Milwaukee, Wisconsin, approximately 90 miles from downtown Chicago, and in
Peoria, and Rock Island, Illinois, approximately 160 miles from downtown
Chicago. Legislation could also be introduced in the Illinois legislature to
authorize one or more land-based and/or riverboat casinos in downtown Chicago
and/or the granting of additional casino licenses elsewhere in Illinois
including within
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the Company's principal market. In addition, three groups have been chosen to
operate casinos in the Detroit, Michigan market; however, the establishment of a
regulatory system and subsequent licensing have yet to be accomplished.
Accordingly, it is not anticipated that any Detroit casino will be operational
until 2001. Native American Indian tribes are seeking to open casino facilities
in northwestern Indiana, Michigan and Wisconsin under the Indian Gaming
Regulatory Act. The opening of additional casinos proximate to Chicago could
have a material adverse impact on the Aurora Casino.
Casino Credit. Casino operations are conducted on both a credit and a cash
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basis. Gaming debts arising in Aurora in accordance with applicable regulations
are enforceable under Illinois law. For the year ended December 31, 1998,
gaming credit extended to customers accounted for less than 2% of overall
wagering. At December 31, 1998, gaming receivables amounted to $1.6 million
before allowances for uncollectible gaming receivables which amounted to
$655,000. Management of the Aurora Casino believes that the allowances for
uncollectible gaming receivables are adequate.
Employees and Labor Relations. In Aurora, all casino employees must be
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licensed by the Illinois Gaming Board. At December 31, 1998 there were
approximately 1,615 employees at the Aurora Casino, none of whom are represented
under collective bargaining agreements. Management considers its labor
relations to be good.
Casino Regulation. The Riverboat Act authorizes riverboat gaming on
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navigable streams within or forming a boundary of the State of Illinois except
for Lake Michigan and any waterway in Cook County, which includes Chicago. The
Riverboat Act strictly regulates the facilities, persons, associations and
practices related to gaming operations pursuant to the police powers of the
State of Illinois, including comprehensive law enforcement supervision. The
Riverboat Act grants the Illinois Gaming Board specific powers and duties, and
all other powers necessary and proper to fully and effectively execute the
Riverboat Act for the purpose of administering, regulating and enforcing the
system of riverboat gaming. The Illinois Gaming Board's jurisdiction extends to
every person, association, corporation, partnership and trust involved in
riverboat gaming operations in the State of Illinois.
The Riverboat Act does not limit the maximum bet or per patron loss and
licensees may set any maximum or minimum limits on wagering. Vessels must have
the capacity to hold a minimum of 500 persons if operating on the Mississippi
River or the Illinois River south of Marshall County, and a minimum of 400
persons on any other waterway. The number of gaming positions is limited to a
maximum of 1,200 per license. Gaming sessions are limited to a four hour
duration; however, special event extended cruises may be authorized by the
Illinois Gaming Board.
If a riverboat captain reasonably determines for reasons of safety that
although seaworthy, the riverboat should not leave the dock or should return
immediately thereto, due to inclement weather, river icing, or unforseeable
mechanical difficulties, a gaming excursion may commence or continue while the
gangplank or its equivalent is raised and remains raised, in which event the
riverboat is not considered docked. Recently, the Illinois Gaming Board amended
its rules to clarify the circumstances under which dockside gaming will be
permitted and to require the imposition of a fine for violations of the cruising
requirements.
A $2 per person admission tax is imposed on the owner of a riverboat
operation. Such admission tax for the Aurora Casino amounted to $6.6 million,
$7.2 million and $6.4 million , respectively, during 1998, 1997 and 1996.
Additionally, a wagering tax is imposed on the adjusted gross receipts, as
defined in the Riverboat Act, of a riverboat operation at graduated rates
ranging from 15% to 35%. The licensee is required to wire transfer all such
gaming tax payments to the Illinois Gaming Board. The wagering tax for the
Aurora Casino amounted to $42.4 million, $30.7 million and $31.3 million,
respectively, for the years 1998, 1997 and 1996. Prior to January 1, 1998 the
wagering tax rate was 20% on adjusted gross receipts.
The Illinois Gaming Board is authorized to conduct investigations into the
conduct of gaming employees and into alleged violations of the Riverboat Act and
to take such disciplinary and enforcement
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action as it may deem necessary and proper. Employees and agents of the Illinois
Gaming Board have access to and may inspect any facilities relating to the
riverboat gaming operations at all times.
Any riverboat operation not conducted in compliance with the Riverboat Act
may constitute an illegal gaming place and consequently may be subject to
criminal penalties, which penalties include possible seizure, confiscation and
destruction of illegal gaming devices and seizure and sale of riverboats and
dock facilities to pay any unsatisfied judgment that may be recovered and any
unsatisfied fine that may be levied. The Riverboat Act also provides for civil
penalties equal to the amount of gross receipts derived from wagering on the
gaming, whether unauthorized or authorized, conducted on the day of any
violation.
The Illinois Gaming Board may waive any licensing requirement or procedure
provided by rule if it determines that such waiver is in the best interests of
the public and the gaming industry.
THE TUNICA CASINO CONSULTING AGREEMENT
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PCC, by virtue of its ownership and past management of the Sands and its
management of the Aurora Casino, had certain casino management experience and
expertise which, at the time of its opening, the Tunica Casino did not have. In
order to utilize PCC's experience and expertise, the Tunica Casino entered into
a consulting agreement with PCC as of January 1, 1994. The agreement has a term
of 10 years and provides, among other things, for PCC to advise and consult the
Tunica Casino on any matters relating to business and for monthly payments of
$100,000 to PCC for its performance thereunder. The Tunica Casino is also
obligated to reimburse PCC for its direct costs and expenses incurred under the
agreement.
ITEM 2. PROPERTIES
The Sands Hotel and Casino in Atlantic City, New Jersey, which is owned by
GBHC, is the only property held by PCC or any of its subsidiaries. As a result
of the Chapter 11 filings previously described, PCC's control over the filing
subsidiaries, including GBHC, is subject to supervision of the Bankruptcy Court.
PCC does not expect to have operating control of or any significant equity
ownership in the filing subsidiaries after reorganization.
PCC has no other physical properties which it uses to conduct its business.
Although it has no ownership interest in the Aurora Casino, PCC manages the
facility under the Aurora Casino Management Contract. For a description of the
facility, see "Business - The Aurora Casino" above.
ITEM 3. LEGAL PROCEEDINGS
On January 5, 1998, Holdings, GB Property Funding and GBHC filed petitions
for relief under Chapter 11 of the Bankruptcy Code. Each company continues to
operate in the ordinary course of business, as set forth in the Bankruptcy Code,
and each company's executive officers and directors remain in office, subject to
the jurisdiction of the Bankruptcy Court. On January 11, 1999, the Bankruptcy
Court terminated the debtors' exclusive right to file a plan of reorganization.
As of March 26, 1999, no reorganization plan has been formally presented by the
debtors or any other party.
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. In March 1999, PCC, GBCC and the holders of
the PRT Funding Notes reached an agreement in principle with HCC for HCC to
acquire the stock of PCC, the parent of PRT Funding, from GBCC for nominal
consideration as part of the Restructuring of PRT Funding, PCC and other
subsidiaries of PCC. Following the Restructuring, PCC's assets will consist of
its limited partnership interest in a management contract for the Aurora Casino
and a consulting contract for the Tunica Casino. These assets will serve as
collateral for $39.25 million of 11 7/8% Senior Secured Notes due November 1,
2003 (the "PCC Notes") which PCC will issue to the PRT noteholders as part of
the Restructuring. For the year ended December 31, 1998, these assets generated
pre-tax earnings to PCC of approximately $7.7 million. The revenues and
resulting net earnings generated by these assets will be the sole source of
funds for PCC's payment obligations under the PCC Notes. Cash
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available from the management contract and consulting agreement in excess of
interest payment requirements will be used to make mandatory redemptions of the
PCC Notes.
As contemplated in the Restructuring, holders of the PRT Funding Notes
would also receive 100% of the interest in a liquidating trust which would hold
the remaining assets (except for the stock of Holdings) of PCC and its
subsidiaries not acquired by HCC. Such assets would consist primarily of claims
against Holdings, GB Property Funding and GBHC in the Chapter 11 proceedings.
The successful completion of the Restructuring is subject to the execution
of definitive documents and will require that PCC and PRT Funding file for
protection under Chapter 11 with the above transactions included as part of a
pre-negotiated plan of reorganization. Such plan will require approval by the
bankruptcy court as well as by the various gaming regulatory organizations
having jurisdiction over the management contract and consulting agreement.
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, NJMI continued to provide certain agreed upon
services to GBHC at a reduced monthly fee. The motion to reject the management
agreement was granted on September 28, 1998. As a consequence of the September
1998 settlement agreement described below, GBCC and GBHC may no longer assert
claims against each other with respect to the operation of the management
contract and, with the passage of time, the cancellation thereof.
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. On September 2, 1998, GBCC reached
a settlement with GBHC which was approved by the Bankruptcy Court. The terms of
the settlement agreement provided, among other things, that GBHC be included in
the consolidated federal income tax return of GBCC for 1997 and 1998 enabling
GBCC to utilize GBHC's tax NOL's. The agreement also provided that on or before
December 31, 1998, GBCC would cause Holdings and its subsidiaries to be
deconsolidated from GBCC for federal income tax purposes by means of
transferring 21% of the stock ownership of Holdings to an unconsolidated entity.
Such transfer was accomplished effective as of December 31, 1998.
On October 8, 1998, GBCC and HCC filed a complaint in the District Court of
Dallas County, Texas against Arthur Andersen LLP, PCC's former independent
accountants, and certain of its partners alleging negligent advice and breach of
contract with respect to the tax consequences resulting from the spin-off of
GBCC's stock to HCC's shareholders on December 31, 1996. The lawsuit is
currently in the initial stages of discovery.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of 1998, no matter was submitted to a vote of
security holders through the solicitation of proxies or otherwise.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND
RELATED SECURITY HOLDER MATTERS
PRT Funding's common stock, 1,000 shares with par value of $1.00 per share,
is its sole voting security; all of the 1,000 shares outstanding are owned by
Pratt Casino Corporation.
PCC's common stock, 1,000 shares with par value of $1.00 per share, is its
sole voting security; all of the 1,000 shares outstanding are owned by PPI
Corporation, a wholly owned subsidiary of GBCC.
9
<PAGE>
PRT Funding has not paid any dividends in the past and has no plans to pay
any dividends in the future. PCC paid dividends to its sole shareholder in 1994
as part of a financial restructuring; PCC has no plans to pay dividends on its
common stock in the foreseeable future. See Note 4 of "Notes to Consolidated
Financial Statements" for a description of certain agreements that impose
specified restrictions on the transfer of funds.
ITEM 6. SELECTED FINANCIAL DATA
PRT FUNDING CORPORATION AND PRATT CASINO CORPORATION
The following tables present selected financial information for PRT Funding
and PCC and are qualified in their entirety by, and should be read in
conjunction with, PRT Funding's and PCC's Financial Statements and notes thereto
contained elsewhere in this Form 10-K. The data as of December 31, 1998 and
1997, and for the years ended December 31, 1998, 1997 and 1996, have been
derived from the audited financial statements of PRT Funding and PCC presented
in Item 8.
PRT FUNDING CORP.
STATEMENT OF OPERATIONS DATA:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Interest income............................... $ 10,613 $ 12,077 $ 12,102 $ 12,093 $ 10,505
Interest expense.............................. (12,075) (12,075) (12,075) (12,075) (10,505)
General and administrative expenses........... - - - (2) (11)
-------- -------- -------- -------- --------
Operating (loss) income....................... (1,462) 2 27 16 (11)
Valuation provision on affiliate receivables.. (35,467) (33,988) - - -
-------- -------- -------- -------- --------
(Loss) income before income taxes............. (36,929) (33,986) 27 16 (11)
Income tax provision.......................... - - (6) (1) -
-------- -------- -------- -------- --------
Net (loss) income............................. $(36,929) $(33,986) $ 21 $ 15 $ (11)
======== ======== ======== ======== ========
<CAPTION>
BALANCE SHEET DATA:
DECEMBER 31,
------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Total assets.................................. $ 43,508 $ 73,321 $105,113 $102,893 $103,975
Total debt.................................... 100,000 100,000 100,000 100,000 100,000
Shareholder's (deficit) equity................ (70,889) (33,960) 26 5 (10)
</TABLE>
10
<PAGE>
PRATT CASINO CORPORATION
STATEMENT OF OPERATIONS DATA:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1998 (1) 1997 1996 1995 1994
---------- ---------- ---------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net revenues........................................... $ 3,604 $ 257,455 $ 265,961 $285,150 $276,189
--------- --------- --------- -------- --------
Expenses:
Departmental...................................... - 215,907 235,285 223,631 215,081
General and administrative........................ 1,489 13,420 15,492 18,387 19,575
Depreciation and amortization..................... - 14,420 19,669 20,296 19,179
--------- --------- --------- -------- --------
Total expenses.................................. 1,489 243,747 270,446 262,314 253,835
--------- --------- --------- -------- --------
Income (loss) from operations..................... 2,115 13,708 (4,485) 22,836 22,354
--------- --------- --------- -------- --------
Non-operating income (expense):
Interest income................................... 278 1,801 1,799 1,945 2,186
Interest expense.................................. (12,075) (33,167) (32,836) (32,295) (30,563)
Gain on disposal of assets........................ - 59 13 56 73
Equity in earnings of Limited Partnership......... 6,494 7,008 6,162 6,429 6,264
Equity in earnings of and gain on
elimination of investment in GB Holdings,
Inc............................................. 40,118 - - - -
Restructuring costs............................... (1,548) (505) - - -
--------- --------- --------- -------- --------
Total non-operating income (expense), net....... 33,267 (24,804) (24,862) (23,865) (22,040)
--------- --------- --------- -------- --------
Income (loss) before income taxes, extraordinary
and other items................................... 35,382 (11,096) (29,347) (1,029) 314
Valuation provision on affiliate receivables........... - (9,650) - - -
Write off deferred financing costs..................... - (6,515) - - -
--------- --------- --------- -------- --------
Income (loss) before income taxes, and
extraordinary item................................... 35,382 (27,261) (29,347) (1,029) 314
Income tax provision................................... (1,395) (9,518) (4,347) (529) (1,490)
--------- --------- --------- -------- --------
Income (loss) before extraordinary item................ 33,987 (36,779) (33,694) (1,558) (1,176)
Extraordinary item:
Gain on early extinguishment of debt................. - 310 - - -
--------- --------- --------- -------- --------
Net income (loss)...................................... $ 33,987 $ (36,469) $ (33,694) $ (1,558) $ (1,176)
========= ========= ========= ======== ========
<CAPTION>
BALANCE SHEET DATA:
DECEMBER 31,
--------------------------------------------------------
1998 (1) 1997 (1) 1996 1995 1994
--------- --------- --------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Total assets.......................................... $ 7,239 $ 6,258 $ 234,286 $256,940 $255,778
Total debt............................................ 100,000 100,000 285,442 285,453 285,463
Shareholder's deficit................................. (107,587) (141,574) (105,105) (71,411) (69,853)
</TABLE>
________________________
(1) As a result of the Chapter 11 filings by Holdings, GB Property Funding and
GBHC, PCC's control over these subsidiaries is subject to supervision of
the Bankruptcy Court and PCC does not expect to be in control of such
subsidiaries after reorganization. Furthermore, as a result of a settlement
agreement reached by GBCC and Holdings in September 1998, GBCC no longer
participates in the management of the Sands. Accordingly, these
subsidiaries are excluded from the consolidated balance sheets of PCC at
December 31, 1998 and 1997. As more fully explained in Note 1 of the Notes
to Consolidated Financial Statements of PCC, during the period from January
1, 1998 through June 30, 1998, the operations of Holdings and its
subsidiaries were accounted for by PCC under the equity method of
accounting. As a result of PCC no longer controlling the operations of the
Sands, the expectation that ownership control of Holdings will only be
temporary and the September 1998 settlement agreement which resolved
certain significant uncertainties, PCC's investment in Holdings and its
subsidiaries was revalued to a zero basis effective on July 1, 1998.
Accordingly, for periods subsequent to June 30, 1998, PCC is accounting for
its investment in Holdings under the cost method of accounting.
11
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This Annual Report on Form 10-K contains forward-looking statements about
the business, financial condition and prospects of PCC. The actual results
could differ materially from those indicated by the forward-looking statements
because of various risks and uncertainties including among other things, changes
in competition, economic conditions, tax regulations, state regulations
applicable to the gaming industry in general or PCC in particular, and other
risks indicated in PCC's filing with the Securities and Exchange Commission.
Such risks and uncertainties are beyond management's ability to control and, in
many cases, can not be predicted by management. When used in this Annual Report
on Form 10-K, the words "believes", "estimates", "anticipates" and similar
expressions as they relate to PCC or its management are intended to identify
forward-looking statements.
LIQUIDITY AND CAPITAL RESOURCES
PCC and its subsidiaries conduct two major business activities.
PCC and NJMI provide management and consulting services or invest in entities
which provide such services to affiliates which own hotel and casino properties.
Prior to 1998, cash flow from such activities, specifically the PML limited
partnership interest held by PCC, the Tunica Consulting Contract and the Sands
Management Contract were 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 reserved its right
to reject the agreement. A modified agreement was entered into effective May 1,
1998, and expired on September 28, 1998, which reduced the monthly fee to
$165,000 compared to an average monthly fee of $532,000 during the same period
in 1997. GBHC's motion to reject the management agreement was approved by the
Bankruptcy Court on September 28, 1998. As a consequence of the September 1998
settlement agreement (see Note 10 of Notes to Consolidated Financial Statements
of PCC), GBCC and GBHC may no longer assert claims against each other with
respect to the management agreement and, with the passage of time, the
cancellation thereof. 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. PRT Funding deferred payment of interest
due on the April 15 and October 15, 1998 interest payment dates. On October 22,
1998, PRT Funding paid to the bondholders an amount equal to a single semiannual
interest payment ($4.9 million) while negotiations to restructure the PRT
Funding Notes continued.
In March 1999, PCC, GBCC and the holders of the PRT Funding Notes reached an
agreement in principle with HCC for HCC to acquire the stock of PCC, the parent
of PRT Funding, from GBCC for nominal consideration as part of the Restructuring
of PRT Funding, PCC and other subsidiaries of PCC. Following the Restructuring,
PCC's assets will consist of its limited partnership interest in a management
contract for the Aurora Casino and a consulting contract for the Tunica Casino.
These assets will serve as collateral for $39.25 million of 11 7/8% Senior
Secured Notes due November 1, 2003 (the "PCC Notes") which PCC will issue to the
PRT noteholders as part of the Restructuring. For the year ended December 31,
1998, these assets generated pre-tax earnings to PCC of approximately $7.7
million. The revenues and resulting net earnings generated by these assets will
be the sole source of funds for PCC's payment obligations under the PCC Notes.
Cash available from the management contract and consulting agreement in excess
of interest payment requirements will be used to make mandatory redemptions of
the PCC Notes.
12
<PAGE>
As contemplated in the Restructuring, holders of the PRT Funding Notes would
also receive 100% of the interest in a liquidating trust which would hold the
remaining assets (except for the stock of Holdings) of PCC and its subsidiaries
not acquired by HCC. Such assets would consist primarily of claims against
Holdings, GB Property Funding and GBHC in the Chapter 11 proceedings.
The successful completion of the Restructuring is subject to the execution of
definitive documents and will require that PCC and PRT Funding file for
protection under Chapter 11 with the above transactions included as part of a
pre-negotiated plan of reorganization. Such plan will require approval by the
bankruptcy court as well as by the various gaming regulatory organizations
having jurisdiction over the management contract and consulting agreement.
There can be no assurance at this time that the Restructuring will be
successfully completed. Accordingly, there is substantial doubt about the
ability of PCC to continue as a going concern.
GBHC owns and operates 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.
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. 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. On January 11, 1999, the Bankruptcy Court
terminated the debtor's exclusive right to file a plan of reorganization. As of
March 26, 1999, no plan of reorganization has been formally presented by the
debtors or any other party. 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
As a result of the filings by Holdings, GB Property Funding and GBHC, PCC's
control over the filing subsidiaries is subject to the supervision of the
Bankruptcy Court. PCC does not expect to have ownership or operating control of
such subsidiaries after reorganization. Accordingly, the accompanying
consolidated statement of operations for the year ended December 31, 1998
reflects the operations of the filing subsidiaries for the period from January
1, 1998 through June 30, 1998 under the equity method of accounting and for the
period subsequent to June 30, 1998 under the cost method of accounting. For the
years ended December 31, 1997 and 1996, however, the accompanying consolidated
statements of operations include the operations of Holdings and its subsidiaries
on a consolidated basis.
Accordingly, management's discussion of the results of operations is
divided into three parts: (i) a comparison of income from operations of PCC
exclusive of Holdings and its subsidiaries (the "PCC Group"), (ii) a comparison
of income from operations of Holdings and its subsidiaries for the years 1997
and 1996 and (iii) a comparison of all other income and expense items on a
consolidated basis.
13
<PAGE>
PCC GROUP
- ---------
The following table presents the PCC Group's proforma income from
operations on a basis comparable to the 1998 presentation.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Revenues: $3,604,000 $6,630,000 $5,844,000
---------- ---------- ----------
Expenses:
General and administrative 1,489,000 1,440,000 1,650,000
Amortization - 358,000 359,000
---------- ---------- ----------
Total expenses 1,489,000 1,798,000 2,009,000
---------- ---------- ----------
Income from operations $2,115,000 $4,832,000 $3,835,000
========== ========== ==========
</TABLE>
REVENUES
Revenues of the PCC Group declined $3 million (45.6%) for the year ended
December 31, 1998 compared to 1997 and increased $786,000 (13.4%) for the year
ended December 31, 1997 compared to 1996. The 1998 decrease is due to declines
in management fees earned under the NJMI management contract with the Sands. As
discussed in Note 6 of the Notes to Consolidated Financial Statements of PCC, a
substitute agreement was effective from May 1, 1998 through September 28, 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 consisted of a fixed fee of $165,000 per
month. Accordingly, the 1998 decrease in the PCC Group's revenues is primarily
attributable to the reduced management fee and the rejection of the management
contract in September 1998. The 1997 increase reflects an improvement in
operating results at the Sands on which management fees were based.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses for the PCC Group did not change
significantly for the year ended December 31, 1998 compared to 1997 and
decreased $210,000 for the year ended December 31, 1997 compared to 1996. The
1998 change reflects a significant decline in overhead costs associated with
the management of the Sands as a result of the reductions in services and the
eventual elimination of the management agreement. Such decreases were offset,
however, by increases in administrative costs no longer shared with GBHC as well
as by the provision of reserves for collectability with respect to certain
receivables from GBHC. The 1997 decrease reflects a reduction in the allocation
of overhead costs from affiliates of PCC.
AMORTIZATION
As a result of the cross default and acceleration 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.
14
<PAGE>
HOLDINGS AND SUBSIDIARIES
- -------------------------
The following table presents the income from operations of Holdings and its
subsidiaries for the years ended December 31, 1997 and 1996 during which such
operations were consolidated with those of PCC.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1997 1996
------------ ------------
<S> <C> <C>
Revenues:
Casino $234,477,000 $242,889,000
Rooms 9,691,000 9,446,000
Food and beverage 32,968,000 34,638,000
Other 4,123,000 5,717,000
------------ ------------
281,259,000 292,690,000
Less - promotional allowances (25,004,000) (27,929,000)
------------ ------------
Net revenues 256,255,000 264,761,000
------------ ------------
Expenses:
Casino 199,746,000 218,990,000
Rooms 2,590,000 2,419,000
Food and beverage 10,815,000 10,618,000
Other 2,756,000 3,258,000
General and administrative 17,409,000 18,486,000
Depreciation and amortization 14,062,000 19,310,000
------------ ------------
Total expenses 247,378,000 273,081,000
------------ ------------
Income (loss) from operations $ 8,877,000 $ (8,320,000)
============ ============
</TABLE>
15
<PAGE>
GAMING OPERATIONS
The following table sets forth certain unaudited financial and operating data
relating to the Sands' operations:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1997 1996
-------------- -----------------
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C>
REVENUES:
Table games $ 74,083 $ 79,127
Slot machines 157,312 159,972
Other (1) 3,082 3,790
------------ ------------
Total $ 234,477 $ 242,889
============ ============
TABLE GAMES:
Gross Wagering
(Drop) (2) $ 524,040 $ 576,577
============ ============
Hold Percentages: (3, 4)
Sands 14.1% 13.7%
Atlantic City 15.0% 15.5%
SLOT MACHINES:
Gross Wagering
(Handle) (2) $ 1,916,350 $ 1,954,612
============ ============
Hold Percentages: (3, 4)
Sands 8.2% 8.2%
Atlantic City 8.4% 8.3%
</TABLE>
____________________________
(1) Consists of revenues from poker and simulcast horse racing wagering.
(2) Gross wagering consists of the total value of chips purchased for table
games (excluding poker) and keno wagering (collectively, the "drop") and
coins wagered in slot machines ("handle").
(3) Casino revenues consist of the portion of gross wagering that a casino
retains and, as a percentage of gross wagering, is referred to as the "hold
percentage".
(4) The Sands' hold percentages are reflected on an accrual basis. Comparable
data for the Atlantic City gaming industry is not available; consequently,
industry percentages have been calculated based on information available
from the New Jersey Casino Control Commission.
Table games drop at the Sands declined $52.5 million (9.1%) during 1997
compared with 1996. The Sands' decrease compares with an increases of 4% in
table drop for all other Atlantic City casinos during the same period. As a
result, the Sands' table game market share (expressed as a percentage of the
Atlantic City industry aggregate table game drop) decreased to 6.8% during 1997
from 7.7% during 1996. The Sands' 1997 table game drop decrease is attributable
to declines in patron volume from both the rated and unrated segments.
Expansions of other Atlantic City casinos resulted in an increase of
approximately 92,000 square feet of gaming space and 73 tables at December 31,
1997 compared to December 31, 1996. Such expansions typically result in intense
marketing campaigns which lure the "mass" segment to the new facility. Gaming
space at the Sands has remained virtually unchanged since mid-1996 and the
number of table games has decreased by 3.1%. The decline in table game drop
during 1997 also reflects management's decision to discontinue certain
promotional activities, including the use of "special odds" offered at table
games, which has caused a decline in the rated table market segment.
16
<PAGE>
Slot machine handle decreased $38.3 million (2%) during 1997 compared with
1996. The Sands' decrease compares with an increase in slot machine handle of
2.2% for all other Atlantic City casinos during the same period. As a result,
the Sands' market share of slot machine play declined to 5.9% in 1997 from 6.1%
in 1996. The Sands' average number of slot machines remained virtually
unchanged during 1997 compared to an increase of 7.8% for all other Atlantic
City casinos. The below industry-wide performance in handle experienced by the
Sands during 1997 is a result of the same competitive pressures resulting from
casino expansions and related marketing campaigns at other properties as
discussed above with respect to table games.
REVENUES
Casino revenues at the Sands decreased by $8.4 million (3.5%) during 1997
compared with 1996. Decreases in both slot machine and table game wagering
during 1997 were partially offset by improvements in the table game hold
percentage.
Rooms revenue did not change significantly during 1997 compared with 1996.
Food and beverage revenues decreased $1.7 million (4.8%) during 1997 compared to
1996 reflecting the decline in patron volume. Other revenues decreased $1.6
million (27.9%) during 1997 compared to 1996 as a result of replacing ongoing
"review show" type entertainment with less frequent "star show" entertainment.
Promotional allowances represent the estimated value of goods and services
provided free of charge to casino customers under various marketing programs.
As a percentage of rooms, food and beverage and other revenues at the Sands,
these allowances decreased to 53.4% during 1997 from 56.1% during 1996. Such
decrease was primarily attributable to reductions in certain marketing programs
and other promotional activities.
DEPARTMENTAL EXPENSES
Casino expenses at the Sands decreased $19.2 million (8.8%) during 1997
compared to 1996. During 1996, an unprecedented and highly aggressive industry-
wide attempt to increase market share resulted in significantly higher costs
with respect to coin incentive packages. The abatement of these competitive
pressures during 1997, together with management's ongoing efforts to create
operating efficiencies, significantly reduced expenses. Such factors also
resulted in a reduction in the allocation of rooms, food and beverage and other
expenses to casino expense.
Rooms expense increased $171,000 (7.1%) during 1997 compared to 1996 due to
a lesser percentage of rooms being sold on a complimentary basis which reduced
the allocation of room costs to the casino department. Food and beverage
expense did not change significantly during 1997 compared to 1996. Other
expenses decreased $502,000 (15.4%) in 1997 from 1996 primarily due to cost
savings with respect to theater entertainment.
GENERAL AND ADMINISTRATIVE
General and administrative expenses decreased by approximately $1.1 million
(5.8%) during 1997 compared to 1996 due to the success of cost containment
measures implemented by management.
DEPRECIATION AND AMORTIZATION
As a result of revising the estimated useful life of the Sands' buildings
effective October 1, 1996 and the completion of amortization with respect to
certain long lived assets, depreciation and amortization expense during 1997
decreased by $5.2 million (27.2%) compared to 1996.
17
<PAGE>
PCC CONSOLIDATED
----------------
INTEREST
Consolidated interest income for PCC decreased $1.5 million (84.6%) during
1998 compared with 1997 as less cash was available during 1998 for investment
purposes. Consolidated interest income did not change significantly during 1997
compared to 1996. Interest expense decreased by $21.1 million (63.6%) during
1998 compared to the prior year. Such decline reflects the absence of interest
with respect to Holdings' 10 7/8% First Mortgage Notes ($19.9 million during
1997). Interest expense did not change significantly during 1997 compared to
1996.
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 by $514,000 (7.3%) in 1998 compared to 1997 after increasing by
$846,000 (13.7%) in 1997 compared to 1996. The 1998 decrease reflects 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. The 1997 increase reflects a
slight increase in management fees earned by PML coupled with a 28.3% decline in
operating and other expenses.
EQUITY IN EARNINGS OF AND GAIN ON ELIMINATION OF INVESTMENT IN GB HOLDINGS,
INC.
PCC's equity in the earnings of Holdings for the year ended December 31,
1998 amounted to $3.3 million and represents equity in earnings for the period
from January 1, 1998 through June 30, 1998. Effective July 1, 1998, PCC
eliminated its investment in Holdings and is no longer recognizing equity in the
earnings of Holdings and its subsidiaries. For the year ended December 31,
1997, the results of operations of Holdings and its subsidiaries were
consolidated with those of PCC. Had such operating results been accounted for
under the equity method of accounting, PCC would have reflected equity in losses
of $4.7 million during the comparable six month period in 1997. The significant
improvement in earnings compared to the prior year is primarily due to
suspension of interest expense as a result of Holdings' bankruptcy status which
have more than offset costs associated with the reorganization under Chapter
11.
Generally, the Sands experienced only a slight decrease in operating income
during the first six months of 1998 compared to the same period in 1997 despite
a 12.7% decline in net revenues. The revenue decreases were 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. Operating costs decreased due to declines
in 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 $2.8 million during the period from January 1, 1998 through June 30,
1998.
The most significant change in PCC's equity in the earnings of Holdings has
been the reduction in interest expense. As a result of the filing, the accrual
of interest expense on Holdings' debt obligations has been suspended. Had the
contractual interest expense been accrued, PCC's equity in the losses of
Holdings for the 1998 period would have been $8.1 million.
As a result of PCC no longer controlling the operations of the Sands, the
continued expectation that ownership control of Holdings will only be temporary
and the September 1998 settlement agreement which resolved certain significant
uncertainties, PCC's investment in Holdings and its subsidiaries was revalued to
a zero basis effective on July 1, 1998. The elimination of the investment in
Holdings resulted in a gain amounting to $36.9 million for the year ended
December 31, 1998.
18
<PAGE>
RESTRUCTURING COSTS
The 1998 increase results from 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 the Restructuring.
NONRECURRING ITEMS
At December 31, 1997, GBHC reserved the balance of an advance to an
affiliated company in the amount of $5.7 million together with accrued interest
amounting to $4 million as collection of the receivables was deemed uncertain.
At December 31, 1997, unamortized deferred financing costs associated with
the 10 7/8% First Mortgage Notes ($4.3 million) and the PRT Funding Notes ($2.2
million) were written off.
INCOME TAX PROVISION
As previously disclosed in PCC's quarterly report on Form 10-Q for the
period ended September 30, 1998, and subsequent to the issuance of its 1997
consolidated financial statements, PCC was advised by HCC, GBCC's former parent,
that a revised tax treatment with respect to the distribution of GBCC stock
owned by HCC to HCC's shareholders on December 31, 1996 might be necessary. HCC
subsequently revised its tax treatment of the distribution which resulted in a
reduction of the net operating loss carryforwards ("NOL's") available to PCC for
federal income tax purposes. The revised tax treatment had no effect on PCC's
assets, liabilities or operating results as reflected in its consolidated
financial statements for any period presented as PCC had provided valuation
allowances to fully reserve its net deferred tax assets, including NOL's, for
all such reporting periods. The effects on deferred taxes and the related
valuation allowance resulting from the revised tax treatment have been included
in the accompanying consolidated financial statements as adjustments during the
year ended December 31, 1998.
In connection with the revised tax treatment, GBCC has commenced litigation
against its former independent accountants and tax advisors alleging negligent
advice and breach of contract. GBCC and PCC continue to work with their new
outside tax advisors and consultants to review these tax issues.
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.
As of December 31, 1998, PCC and its subsidiaries have NOL's for federal and
state tax purposes totaling approximately $348,000 and $7 million, respectively,
for federal and state income tax purposes. The federal tax NOL's do not begin to
expire until 2009 and most of the state tax NOL's expire by 2003. 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 (i) the continued availability of NOL's originating in prior
years for federal and state tax purposes, (ii) the limited operations of PCC
following the December 31, 1998 deconsolidation for federal income tax purposes
of Holdings, PCC's most significant operating subsidiary, and (iii) questions
regarding PCC's ability to continue as a going concern, management is unable to
determine that the realization of such asset is more likely than not and, thus,
has provided a valuation allowance for the entire deferred tax asset at December
31, 1998.
EXTRAORDINARY ITEM
A subsidiary of Holdings acquired $2.5 million of 10 7/8% First Mortgage
notes at a discount of $375,000 with which to make its scheduled July 1997
principal payment (see "Liquidity and Capital
19
<PAGE>
Resources - Financing Activities"). Such gain was partially offset by the write
off of associated financing costs, resulting in a net gain from early
extinguishment of debt amounting to $310,000.
YEAR 2000 COMPLIANCE
In the year 2000, computer programs that have date sensitive software may
recognize a date using "00" as the year 1900 rather than 2000. Such an error
could result in a system failure or miscalculations causing disruptions of
operations including, among other things, a temporary inability to process
transactions or engage in similar normal business activities.
Management has initiated a program to prepare the Company's computer
systems and applications for the year 2000. Such program includes the use of
both internal and external resources to test and, if necessary, modify or
replace software applications. The costs of acquiring, testing and converting
such systems are expected to be minimal. Management expects its Year 2000 date
conversion projects to be completed on a timely basis. The company has also
initiated formal communication with its suppliers to determine the extent to
which its information systems are vulnerable to those third parties' failure to
resolve their Year 2000 issues. While there can be no assurance that the Company
will fully resolve the Year 2000 issues, neither the estimated cost nor the
outcome of the Year 2000 problem is expected to have a material impact on the
Company's operations, liquidity or financial position.
SEASONALITY
Historically, the Sands' operations were 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 were historically less
profitable than the other quarters of the fiscal year. The Aurora Casino also
experiences some 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 Aurora Casino's operations may fluctuate significantly due to a
number of other factors, including chance. Such seasonality and fluctuations may
materially affect PCC's profitability.
20
<PAGE>
ITEM 8. INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
PRT FUNDING CORP.
Report of Independent Auditors to PRT Funding Corp...................... 22
Balance Sheets of PRT Funding Corp. as of December 31, 1998 and 1997.... 23
Statements of Operations of PRT Funding Corp. for the Years Ended
December 31, 1998, 1997 and 1996....................................... 24
Statements of Cash Flows of PRT Funding Corp. for the Years Ended
December 31, 1998, 1997 and 1996....................................... 25
Notes to Financial Statements of PRT Funding Corp....................... 26
PRATT CASINO CORPORATION AND SUBSIDIARIES
Report of Independent Auditors to Pratt Casino
Corporation and Subsidiaries........................................... 31
Report of Predecessor Independent Public Accountants.................... 32
Consolidated Balance Sheets of Pratt Casino Corporation and
Subsidiaries as of December 31, 1998 and 1997.......................... 33
Consolidated Statements of Operations of Pratt Casino Corporation
and Subsidiaries for the Years Ended December 31, 1998, 1997 and 1996.. 35
Consolidated Statement of Changes in Shareholder's Deficit of
Pratt Casino Corporation and Subsidiaries for
the Three Years Ended December 31, 1998................................ 36
Consolidated Statements of Cash Flows of Pratt Casino Corporation
and Subsidiaries for the Years Ended December 31, 1998, 1997 and 1996.. 37
Notes to Consolidated Financial Statements of Pratt Casino
Corporation and Subsidiaries........................................... 38
</TABLE>
21
<PAGE>
REPORT OF INDEPENDENT AUDITORS
------------------------------
To PRT Funding Corp.:
We have audited the accompanying balance sheets of PRT Funding Corp. (the
Company and a Delaware corporation) as of December 31, 1998 and 1997, and the
related statements of operations and cash flows for each of the three years in
the period ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of PRT Funding Corp. as of December 31, 1998
and 1997, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 1998 in conformity with generally
accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company is in violation of certain indenture
covenants, which has resulted in the acceleration of the due date of the
Company's debt obligations. The default under the indenture for the Company's
debt obligations raises substantial doubt about the Company's ability to
continue as a going concern. Management's plans concerning these matters are
also described in Note 1. The financial statements do not include any
adjustments that might result from the outcome of these uncertainties.
Deloitte & Touche LLP
Dallas, Texas
March 19, 1999
22
<PAGE>
PRT FUNDING CORP.
(WHOLLY OWNED BY PRATT CASINO CORPORATION)
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1998 1997
------------ ------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 8,000 $ 13,000
Interest receivable from affiliates, net of valuation
allowance in 1998 - 3,428,000
Due from affiliate, net of valuation allowance in 1998 - 1,130,000
Notes receivable from affiliates, net of valuation
allowances 43,500,000 63,750,000
------------ ------------
Total current assets 43,508,000 68,321,000
------------ ------------
Due from affiliates, net of valuation
allowances - 5,000,000
------------ ------------
$ 43,508,000 $ 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 14,397,000 7,263,000
Due to affiliates - 18,000
------------ ------------
Total current liabilities 99,397,000 92,281,000
------------ ------------
Notes payable to affiliates 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 (70,890,000) (33,961,000)
------------ ------------
Total shareholder's deficit (70,889,000) (33,960,000)
------------ ------------
$ 43,508,000 $ 73,321,000
============ ============
</TABLE>
The accompanying notes to financial statements
are an integral part of these balance sheets.
23
<PAGE>
PRT FUNDING CORP.
(WHOLLY OWNED BY PRATT CASINO CORPORATION)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1998 1997 1996
------------- ------------- ------------
<S> <C> <C> <C>
Revenues:
Interest income $ 10,613,000 $ 12,077,000 $12,102,000
Expenses:
Interest expense 12,075,000 12,075,000 12,075,000
------------ ------------ -----------
Operating (loss) income (1,462,000) 2,000 27,000
Valuation provision on affiliate receivables (35,467,000) (33,988,000) -
------------ ------------ -----------
(Loss) income before income taxes (36,929,000) (33,986,000) 27,000
Income tax provision - - (6,000)
------------ ------------ -----------
Net (loss) income $(36,929,000) $(33,986,000) $ 21,000
============ ============ ===========
</TABLE>
The accompanying notes to financial statements
are an integral part of these financial statements.
24
<PAGE>
PRT FUNDING CORP.
(WHOLLY OWNED BY PRATT CASINO CORPORATION)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1998 1997 1996
------------ ------------ -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net (loss) income $(36,929,000) $(33,986,000) $ 21,000
Adjustments to reconcile net (loss) income
to net cash (used in) provided by operating activities:
Valuation provision on affiliate receivables 35,467,000 33,988,000 -
Increase in receivables from affiliates (5,659,000) (3,324,000) (1,097,000)
Increase in accrued interest payable 7,134,000 2,195,000 2,193,000
Net change in other current assets
and liabilities (18,000) (1,000) 6,000
------------ ------------ -----------
Net cash (used in) provided by operating activities (5,000) (1,128,000) 1,123,000
Cash and cash equivalents at beginning of year 13,000 1,141,000 18,000
------------ ------------ -----------
Cash and cash equivalents at end of year $ 8,000 $ 13,000 $ 1,141,000
============ ============ ===========
</TABLE>
The accompanying notes to financial statements
are an integral part of these financial statements.
25
<PAGE>
PRT FUNDING CORP.
(WHOLLY OWNED BY PRATT CASINO CORPORATION)
NOTES TO FINANCIAL STATEMENTS
(1) ORGANIZATION AND OPERATIONS
PRT Funding Corp. ("PRT Funding"), a Delaware corporation, was incorporated
on September 29, 1993. PRT Funding is a wholly owned subsidiary of Pratt Casino
Corporation ("PCC"), which is an indirect, wholly owned subsidiary of Greate Bay
Casino Corporation ("GBCC"). Both PCC and GBCC are also Delaware corporations.
Prior to December 31, 1998, PCC also owned 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"). Effective on December 31, 1998, PCC transferred 21% of its
ownership in Holdings to an entity owned by certain of GBCC's officers and
directors in order to comply with the terms of a legal settlement agreement.
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 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 supervision of the Bankruptcy Court. On January 11,
1999, the Bankruptcy Court terminated the debtors' exclusive right to file a
plan of reorganization. No plan of reorganization has been formally presented
by the debtors or any other party.
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. PRT Funding deferred payment of interest due on the
April 15 and October 15, 1998 interest payment dates. On October 22, 1998, PRT
Funding paid to the bondholders an amount equal to a single semiannual interest
payment ($4,941,000) while negotiations to restructure the PRT Funding Notes
continued. In March 1999, PCC, GBCC and the holders of the PRT Funding Notes
reached an agreement in principle with HCC for HCC to acquire the stock of PCC,
the parent of PRT Funding, from GBCC for nominal consideration as part of a debt
restructuring (the "Restructuring") of PRT Funding, PCC and other subsidiaries
of PCC. Following the Restructuring, PCC's assets will consist of its limited
partnership interest in a management contract for HCC's Aurora, Illinois gaming
operation and a consulting contract for HCC's Tunica, Mississippi gaming
operation. These assets will serve as collateral for $39,250,000 of 11 7/8%
Senior Secured Notes due November 1, 2003 (the "PCC Notes") which PCC will issue
to the PRT Funding noteholders as part of the Restructuring. For the year ended
December 31, 1998, these assets generated pre-tax earnings to PCC of $7,694,000.
The revenues and resulting net earnings generated by these assets will be the
sole source of funds for PCC's payment obligations under the PCC Notes. Cash
available from the management contract and consulting agreement in excess of
interest payment requirements will be used to make mandatory redemptions of the
PCC Notes.
26
<PAGE>
PRT FUNDING CORP.
(WHOLLY OWNED BY PRATT CASINO CORPORATION)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
As contemplated in the Restructuring, holders of the PRT Funding Notes
would also receive 100% of the interest in a liquidating trust which would hold
the remaining assets (except for the stock of Holdings) of PCC and its
subsidiaries not acquired by HCC. Such assets would consist primarily of claims
against Holdings, GB Property Funding and GBHC in the Chapter 11 proceedings.
The successful completion of the Restructuring is subject to the execution
of definitive documents and will require that PCC and PRT Funding file for
protection under Chapter 11 with the above transactions included as part of a
pre-negotiated plan of reorganization. Such plan will require approval by the
bankruptcy court as well as by the various gaming regulatory organizations
having jurisdiction over the management contract and consulting agreement. There
can be no assurance at this time that the Restructuring will be successfully
completed. The default under the indenture for PRT Funding's debt obligations
raises substantial doubt about PRT Funding's ability to continue as a going
concern. The financial statements do not include any adjustments that might
result from the outcome of these uncertainties.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(2) RECENT ACCOUNTING PRONOUNCEMENT -
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 reclassification 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.
(3) 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 December 31, 1998 and 1997.
Proceeds of the PRT Funding Notes were loaned to various affiliates of PRT
Funding on the same terms.
27
<PAGE>
PRT FUNDING CORP.
(WHOLLY OWNED BY PRATT CASINO CORPORATION)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 December 31, 1998 and 1997. Based on PRT Funding's evaluations
of the realizability of the affiliate loans, valuation allowances in the amounts
of $41,500,000 and $21,250,000, respectively, were provided for and the notes
receivable are shown net of such valuation allowances on the accompanying
balance sheets at December 31, 1998 and 1997. In addition, a valuation allowance
on the interest receivable from affiliates with respect to such notes amounting
to $6,999,000 was provided for at December 31, 1998.
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 financial coverage and other payment restriction
tests required by the indenture for the PRT Funding Notes. Because PCC has not
met the financial coverage tests, no interest was paid during 1998, 1997 or
1996. At December 31, 1998 and 1997, accrued interest of $7,398,000 and
$5,204,000, respectively, was payable to GBCC with respect to the Junior
Subordinated Notes and is included in interest payable on the accompanying
balance sheets. At December 31, 1998 and 1997, valuation provisions of
$15,000,000 and $10,000,000, respectively, have been provided to reduce the
carrying amount of the affiliate notes receivable to their estimated realizable
value. Valuation allowances with respect to interest receivable on such notes
in the amounts of $6,300,000 and $2,738,000, respectively, have also been
provided for at December 31, 1998 and 1997.
Interest paid amounted to $4,941,000, $9,880,000 and $9,882,000,
respectively, during each of the years ended December 31, 1998, 1997 and 1996.
(4) INCOME TAXES
Components of the provision for income taxes consisted of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1998 1997 1996
------------ ------------- --------
<S> <C> <C> <C>
Benefit in lieu of (provision for) federal
income taxes:
Current $ - $ - $(4,000)
Deferred 7,033,000 10,516,000 -
State income tax benefit (provision):
Current - - -
Deferred 2,046,000 3,058,000 (2,000)
Change in valuation allowance (9,079,000) (13,574,000) -
----------- ------------ -------
$ - $ - $(6,000)
=========== ============ =======
</TABLE>
PRT Funding's operations are included in the consolidated federal income
tax return of GBCC and, for periods prior to December 31, 1996, were included in
the consolidated federal income tax returns of HCC, GBCC's parent prior to that
date. Pursuant to agreements between PCC and GBCC, PRT Funding's provision for
federal income taxes is calculated as if a separate federal return were filed.
No payments have been made under the tax allocation agreements for the years
ended December 31, 1998, 1997 and
28
<PAGE>
PRT FUNDING CORP.
(WHOLLY OWNED BY PRATT CASINO CORPORATION)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1996. At December 31, 1997, $5,000 is included in due to affiliates on the
accompanying balance sheets representing taxes currently payable under the
agreements.
A reconciliation between the calculated tax provision based on the
statutory rates in effect and the effective tax rates follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1998 1997 1996
------------ ------------- --------
<S> <C> <C> <C>
Calculated income tax benefit (provision)
at statutory rate $12,556,000 $ 11,555,000 $(4,000)
State income taxes, net of federal benefit 1,350,000 2,019,000 (2,000)
Utilization of losses by affiliates (4,827,000) - -
Valuation allowance change (9,079,000) (13,574,000) -
----------- ------------ -------
Tax provision as shown on statements of
operations $ - $ - $(6,000)
=========== ============ =======
</TABLE>
At December 31, 1998, PRT Funding has a tax net operating loss carryforward
of $1,000 which expires in 2009. In addition, at December 31, 1998 and 1997,
valuation provisions on affiliate receivables (see Notes 3 and 5) result in
deferred tax assets of $22,652,000 and $13,574,000, respectively. There were no
temporary differences resulting in deferred income taxes for the year ended
December 31, 1996.
Statement of Financial Accounting Standards No. 109 ("SFAS 109") requires
that the tax benefit of net operating loss carryforwards and other deferred tax
assets resulting from temporary differences be recorded as an asset and, to the
extent that management can not assess that the utilization of all or a portion
of such deferred tax assets is more likely than not, a valuation allowance
should be recorded. Due to the limited operations of PRT Funding and questions
regarding its ability to continue as a going concern, management is unable to
determine that realization of such asset is more likely than not and, thus, has
provided a valuation allowance for the entire deferred tax asset at December 31,
1998 and 1997.
(5) 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.
Interest income on the accompanying statement of operations for the year ended
December 31, 1998 is shown net of a valuation reserve of $1,462,000. As a result
of the Chapter 11 filings, PRT Funding has evaluated the collectability of such
note and, as previously described in Note 3, has established valuation
allowances to fully reserve the $10,000,000 note together with the related
interest due from GBHC of $4,200,000 and $2,738,000, respectively, at December
31, 1998 and 1997. On September 2, 1998, various subsidiaries of GBCC and HCC
entered into an agreement (the "Settlement Agreement") with Holdings, GB
Property Funding and GBHC. Although PRT Funding was not a direct party to the
Settlement Agreement, the Settlement Agreement provides, among other things,
that GBHC preserves whatever rights of offset, if any, it might have with
respect to the $10,000,000 notes and related interest against certain other
obligations owed to GBHC by another GBCC subsidiary.
29
<PAGE>
PRT FUNDING CORP.
(WHOLLY OWNED BY PRATT CASINO CORPORATION)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(6) 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 supervision of the Bankruptcy Court. On January 11, 1999, the Bankruptcy
Court terminated the debtors' exclusive right to file a plan of reorganization.
No plan of reorganization has been formally presented by the debtors or any
other party.
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 the Restructuring (see Note 1).
(7) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value:
CASH AND CASH EQUIVALENTS - The carrying amount approximates fair value.
-------------------------
INTEREST RECEIVABLE- The fair value of interest receivable from affiliates
-------------------
is stated at zero at December 31, 1998 (see Notes 3 and 5).
INTEREST PAYABLE - The fair value is based on the amount anticipated to be
----------------
paid upon settlement of claims against PRT Funding.
NOTES RECEIVABLE, LONG-TERM DEBT AND NOTE PAYABLE - The fair values of PRT
--------------------------------------------------
Funding's notes receivable from affiliates are based on management's estimate of
realization (see Notes 3 and 5). The fair value of PRT Funding's long-term debt
is based on the quoted market price of the underlying debt issue for recent
trades prior to year end. Financial instruments due to affiliates are valued at
zero due to the subordination of such obligations.
The estimated carrying amounts and fair values of PRT Funding's financial
instruments are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1997
------------------------- -----------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
----------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Financial Assets
Cash $ 8,000 $ 8,000 $ 13,000 $ 13,000
Interest receivable - - 3,428,000 3,428,000
Due from affiliate - - 1,130,000 1,130,000
Notes receivable 43,500,000 43,500,000 68,750,000 68,750,000
Financial Liabilities
Interest payable 14,397,000 1,000,000 7,263,000 7,263,000
Long-term debt 85,000,000 42,500,000 85,000,000 64,600,000
Note payable 15,000,000 - 15,000,000 -
</TABLE>
30
<PAGE>
REPORT OF INDEPENDENT AUDITORS
------------------------------
To Pratt Casino Corporation:
We have audited the accompanying consolidated balance sheet of Pratt Casino
Corporation (the Company and a New Jersey Corporation) and subsidiaries as of
December 31, 1998, and the related consolidated statements of operations,
changes in shareholder's deficit and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Pratt Casino Corporation and
subsidiaries as of December 31, 1998, and the results of their operations and
their cash flows for the year then ended in conformity with generally accepted
accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in
Note 1 to the consolidated financial statements, the Company is in violation of
certain indenture covenants, which has resulted in the acceleration of the due
date of the Company's debt obligations. The default under the indenture for the
Company's debt obligations raises substantial doubt about the Company's ability
to continue as a going concern. Management's plans concerning these matters are
also described in Note 1. The consolidated financial statements do not include
any adjustments that might result from the outcome of these uncertainties.
Deloitte & Touche LLP
Dallas, Texas
March 19, 1999
31
<PAGE>
REPORT OF PREDECESSOR INDEPENDENT PUBLIC ACCOUNTANTS
FOR THE TWO YEARS ENDED DECEMBER 31, 1997 AND 1996
--------------------------------------------------
The financial statements of Pratt Casino Corporation ("PCC") for the two
years ended December 31, 1997 and 1996 were examined by Arthur Andersen LLP,
independent public accountants, whose report thereon dated March 23, 1998 was
included in the Company's Annual Report on Form 10-K for the year ended December
31, 1997. Such report was qualified with respect to the Company's ability to
continue as a going concern due to acceleration of the due date of the Company's
debt obligations.
In October 1998, Greate Bay Casino Corporation ("GBCC"), the Company's
parent, filed a complaint against Arthur Andersen LLP and others alleging
negligent advice with respect to certain tax consequences resulting from the
spin off of GBCC's stock held by Hollywood Casino Corporation to its
shareholders on December 31, 1996. The Company subsequently engaged Deloitte &
Touche LLP as its new certifying accountants.
Because of the foregoing litigation, Arthur Andersen LLP believes that it
is no longer independent with respect to PCC and consequently has informed the
Company that it is unable to reissue its report for the years ended December 31,
1997 and 1996. As a result, Arthur Andersen LLP's report for those two years is
not included in this Annual Report on Form 10-K.
Even if Arthur Andersen LLP were to reissue its report for the years 1997
and 1996, there can be no assurance that such report would be identical to the
report dated March 23, 1998, or that such reissued report would not include
additional qualifications. However, PCC is not aware of any subsequent events,
transactions or other matters that would affect Arthur Andersen LLP's report.
32
<PAGE>
PRATT CASINO CORPORATION AND SUBSIDIARIES
(WHOLLY OWNED BY PPI CORPORATION)
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1998 1997
----------- -----------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $3,746,000 $2,231,000
Due from affiliates 237,000 174,000
Refundable deposits and other
current assets 114,000 194,000
---------- ----------
Total current assets 4,097,000 2,599,000
---------- ----------
Investment in Limited Partnership 3,104,000 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 30,000 1,395,000
Other assets 8,000 8,000
---------- ----------
Total other assets 38,000 1,403,000
---------- ----------
$7,239,000 $6,258,000
========== ==========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated balance sheets.
33
<PAGE>
PRATT CASINO CORPORATION AND SUBSIDIARIES
(WHOLLY OWNED BY PPI CORPORATION)
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDER'S DEFICIT
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1998 1997
-------------- --------------
<S> <C> <C>
Current Liabilities:
Current maturities of long-term debt $ 85,000,000 $ 85,000,000
Accounts payable 83,000 -
Accrued liabilities -
Interest 14,397,000 7,263,000
Other 4,000 10,000
Due to affiliates 342,000 417,000
------------- -------------
Total current liabilities 99,826,000 92,690,000
------------- -------------
Investment in and Advances to GB Holdings, Inc. - 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 (107,588,000) (141,575,000)
------------- -------------
Total shareholder's deficit (107,587,000) (141,574,000)
------------- -------------
$ 7,239,000 $ 6,258,000
============= =============
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated balance sheets.
34
<PAGE>
PRATT CASINO CORPORATION AND SUBSIDIARIES
(WHOLLY OWNED BY PPI CORPORATION)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Revenues:
Casino $ - $234,477,000 $242,889,000
Rooms - 9,691,000 9,446,000
Food and beverage - 32,968,000 34,638,000
Other 3,604,000 5,323,000 6,917,000
------------ ------------ ------------
3,604,000 282,459,000 293,890,000
Less - Promotional allowances - (25,004,000) (27,929,000)
------------ ------------ ------------
Net revenues 3,604,000 257,455,000 265,961,000
------------ ------------ ------------
Expenses:
Casino - 199,746,000 218,990,000
Rooms - 2,590,000 2,419,000
Food and beverage - 10,815,000 10,618,000
Other - 2,756,000 3,258,000
General and administrative 1,489,000 13,420,000 15,492,000
Depreciation and amortization - 14,420,000 19,669,000
------------ ------------ ------------
Total expenses 1,489,000 243,747,000 270,446,000
------------ ------------ ------------
Income (loss) from operations 2,115,000 13,708,000 (4,485,000)
------------ ------------ ------------
Non-operating income (expense):
Interest income 278,000 1,801,000 1,799,000
Interest expense (12,075,000) (33,167,000) (32,836,000)
Gain on disposal of assets - 59,000 13,000
Equity in earnings of Limited
Partnership 6,494,000 7,008,000 6,162,000
Equity in earnings of and gain on
elimination of investment in
GB Holdings, Inc. 40,118,000 - -
Restructuring costs (1,548,000) (505,000) -
------------ ------------ ------------
Total non-operating income (expense),
net 33,267,000 (24,804,000) (24,862,000)
------------ ------------ ------------
Income (loss) before income taxes,
extraordinary and other items 35,382,000 (11,096,000) (29,347,000)
Valuation provision on affiliate receivables - (9,650,000) -
Write off deferred financing costs - (6,515,000) -
------------ ------------ ------------
Income (loss) before income taxes and
extraordinary item 35,382,000 (27,261,000) (29,347,000
Income tax provision (1,395,000) (9,518,000) (4,347,000)
------------ ------------ ------------
Income (loss) before extraordinary item 33,987,000 (36,779,000) (33,694,000)
Extraordinary item:
Gain on early extinguishment of debt - 310,000 -
------------ ------------ ------------
Net income (loss) $ 33,987,000 $(36,469,000) $(33,694,000)
============ ============ ============
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
35
<PAGE>
PRATT CASINO CORPORATION AND SUBSIDIARIES
(WHOLLY OWNED BY PPI CORPORATION)
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDER'S DEFICIT
FOR THE THREE YEARS ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
ADDITIONAL
COMMON STOCK ACCUMULATED
--------------------
SHARES AMOUNT DEFICIT
---------- --------- --------------
<S> <C> <C> <C>
BALANCE, JANUARY 1, 1996 1,000 $1,000 $ (71,412,000)
Net loss - - (33,694,000)
-------- -------- -------------
BALANCE, DECEMBER 31, 1996 1,000 1,000 (105,106,000)
Net loss - - (36,469,000)
-------- -------- -------------
BALANCE, DECEMBER 31, 1997 1,000 1,000 (141,575,000)
Net income - - 33,987,000
-------- -------- -------------
BALANCE, DECEMBER 31, 1998 1,000 $ 1,000 $(107,588,000)
======== ======== =============
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of this consolidated statement.
36
<PAGE>
PRATT CASINO CORPORATION AND SUBSIDIARIES
(WHOLLY OWNED BY PPI CORPORATION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ 33,987,000 $(36,469,000) $(33,694,000)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Extraordinary item - (310,000) -
Valuation provision on affiliate receivables - 9,650,000 -
Write off deferred financing costs - 6,515,000 -
Depreciation and amortization - 14,420,000 19,669,000
Gain on disposal of assets - (59,000) (13,000)
Provision for doubtful accounts 256,000 3,195,000 2,167,000
Equity in earnings of and gain on elimination of
investment in GB Holdings, Inc. (40,118,000) - -
Equity in earnings of Limited Partnership (6,494,000) (7,008,000) (6,162,000)
Distributions received from Limited Partnership 5,646,000 6,498,000 6,433,000
Deferred income tax provision - 9,518,000 4,347,000
Increase in accounts receivable - (875,000) (1,075,000)
Increase in accounts payable and other
accrued liabilities 7,211,000 4,647,000 3,022,000
Net change in other current assets and liabilities (232,000) (1,866,000) 1,419,000
Net change in other noncurrent assets and liabilities 1,259,000 1,582,000 (994,000)
------------ ------------ ------------
Net cash provided by (used in) operating activities 1,515,000 9,438,000 (4,881,000)
------------ ------------ ------------
INVESTING ACTIVITIES:
Purchases of property and equipment - (3,534,000) (5,505,000)
Deconsolidation of GB Holdings, Inc. - (13,871,000) -
Obligatory investments - (2,876,000) (3,062,000)
Proceeds from disposition of assets - 59,000 13,000
Short-term investment - 2,000,000 (2,000,000)
------------ ------------ ------------
Net cash used in investing activities - (18,222,000) (10,554,000)
------------ ------------ ------------
FINANCING ACTIVITIES:
(Repayments) borrowings on short-term credit facility - (2,000,000) 2,000,000
Deferred financing costs - - (10,000)
Repayments of long-term debt - (2,135,000) (11,000)
Advance to unconsolidated affiliate - (5,000,000) -
Net borrowings from affiliates - 1,500,000 6,500,000
------------ ------------ ------------
Net cash (used in) provided by financing activities - (7,635,000) 8,479,000
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents 1,515,000 (16,419,000) (6,956,000)
Cash and cash equivalents at beginning of year 2,231,000 18,650,000 25,606,000
------------ ------------ ------------
Cash and cash equivalents at end of year $ 3,746,000 $ 2,231,000 $ 18,650,000
============ ============ ============
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
37
<PAGE>
PRATT CASINO CORPORATION AND SUBSIDIARIES
(WHOLLY OWNED BY PPI CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) ORGANIZATION, BUSINESS AND BASIS OF PRESENTATION
Pratt Casino Corporation ("PCC") is a Delaware corporation and a wholly
owned subsidiary of PPI Corporation, a New Jersey corporation which is wholly
owned by Greate Bay Casino Corporation ("GBCC"). Prior to December 31, 1998, PCC
also owned 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").
Effective on December 31, 1998, PCC transferred 21% of its ownership in Holdings
to an entity owned by certain of GBCC's officers and directors in order to
comply with the terms of a legal settlement agreement (see Note 10). 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 common
stock of GBCC.
GB Property Funding Corp. ("GB Property Funding"), a Delaware corporation
and a wholly owned subsidiary of Holdings, was incorporated on September 29,
1993 for the purpose of borrowing funds through the issuance of $185,000,000 of
ten-year, nonrecourse first mortgage notes (the "10 7/8% First Mortgage Notes")
for the benefit of GBHC. PRT Funding Corp. ("PRT Funding"), also a Delaware
corporation and a wholly owned subsidiary of PCC, was incorporated on September
29, 1993 for the purpose of borrowing funds through the issuance of $85,000,000
of unsecured notes (the "PRT Funding Notes") for the benefit of PCC and its
affiliates. GB Property Funding and PRT Funding completed their respective debt
offerings on February 17, 1994 and the proceeds were loaned to various
affiliates.
On January 5, 1998, Holdings, GB Property Funding and GBHC filed petitions
for relief under Chapter 11 of the United States Bankruptcy Code (the
"Bankruptcy Code") in the United States Bankruptcy Court for the District of New
Jersey (the "Bankruptcy Court"). Each company continues to operate in the
ordinary course of business, as set forth in the Bankruptcy Code, and each
company's executive officers and directors remain in office, subject to the
supervision of the Bankruptcy Court. On January 11, 1999, the Bankruptcy Court
terminated the debtors' exclusive right to file a plan of reorganization. No
plan of reorganization has been formally presented by the debtors or any other
party.
The accompanying consolidated financial statements have been prepared
assuming that PCC will continue as a going concern. As discussed above, certain
affiliates of PCC filed for Chapter 11 bankruptcy protection on January 5, 1998.
PRT Funding is 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. As a result of the Chapter 11 filings, GBHC filed a motion seeking
to reject the Sands' management contract with NJMI. An interim agreement entered
into by NJMI and GBHC significantly reduced the fees paid to NJMI (see Note 6).
The motion to reject the management contract was granted by the Bankruptcy Court
on September 28, 1998. As a consequence of the September 1998 settlement
agreement (see Note 10), GBCC and GBHC may no longer assert claims against each
other with respect to the management agreement and, with the passage of time,
the cancellation thereof. PCC, as guarantor of the PRT Funding Notes, does not
have sufficient assets to satisfy the outstanding amounts applicable to the PRT
Funding Notes. PRT Funding deferred payment of interest due on the April 15 and
October 15, 1998 interest payment dates. On October 22, 1998, PRT Funding paid
to the bondholders an
38
<PAGE>
PRATT CASINO CORPORATION AND SUBSIDIARIES
(WHOLLY OWNED BY PPI CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
amount equal to a single semiannual interest payment ($4,941,000) while
negotiations to restructure the PRT Funding Notes continued.
In March 1999, PCC, GBCC and the holders of the PRT Funding Notes reached
an agreement in principle with HCC for HCC to acquire the stock of PCC, the
parent of PRT Funding, from GBCC for nominal consideration as part of a debt
restructuring (the "Restructuring") of PRT Funding, PCC and other subsidiaries
of PCC. Following the Restructuring, PCC's assets will consist of its limited
partnership interest in a management contract for HCC's Aurora, Illinois gaming
operation and a consulting contract for HCC's Tunica, Mississippi gaming
operation. These assets will serve as collateral for $39,250,000 of 11 7/8%
Senior Secured Notes due November 1, 2003 (the "PCC Notes") which PCC will issue
to the PRT Funding noteholders as part of the Restructuring. For the year ended
December 31, 1998, these assets generated pre-tax earnings to PCC of $7,694,000.
The revenues and resulting net earnings generated by these assets will be the
sole source of funds for PCC's payment obligations under the PCC Notes. Cash
available from the management contract and consulting agreement in excess of
interest payment requirements will be used to make mandatory redemptions of the
PCC Notes.
As contemplated in the Restructuring, holders of the PRT Funding Notes
would also receive 100% of the interest in a liquidating trust which would hold
the remaining assets (except for the stock of Holdings) of PCC and its
subsidiaries not acquired by HCC. Such assets would consist primarily of claims
against Holdings, GB Property Funding and GBHC in the Chapter 11 proceedings.
The successful completion of the Restructuring is subject to the execution
of definitive documents and will require that PCC and PRT Funding file for
protection under Chapter 11 with the above transactions included as part of a
pre-negotiated plan of reorganization. Such plan will require approval by the
bankruptcy court as well as by the various gaming regulatory organizations
having jurisdiction over the management contract and consulting agreement. There
can be no assurance at this time that the Restructuring will be successfully
completed. The default under the indenture for PRT Funding's debt obligations
raises substantial doubt about PCC's ability to continue as a going concern. The
consolidated financial statements do not include any adjustments that might
result from the outcome of these uncertainties.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies followed in the preparation of the
accompanying consolidated financial statements are discussed below. The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
39
<PAGE>
PRATT CASINO CORPORATION AND SUBSIDIARIES
(WHOLLY OWNED BY PPI CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PRINCIPLES OF CONSOLIDATION -
Except as noted in the following paragraph, the accompanying consolidated
financial statements include the operating activities and cash flows of PCC and
its wholly-owned subsidiaries. All significant intercompany transactions have
been eliminated.
As a result of the Chapter 11 filings discussed in Note 1, PCC's control
over the filing subsidiaries is subject to supervision of the Bankruptcy Court
and PCC does not expect to have ownership or operating control of such
subsidiaries after reorganization. Prior to July 7, 1998, NJMI was responsible
for the operations of the Sands under a management agreement with GBHC (see Note
6). 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 approved by the
Bankruptcy Court on July 7, 1998. Under the Interim Agreement, NJMI continued to
provide certain agreed upon services to GBHC until September 28, 1998.
Furthermore, as the result of a settlement agreement reached by GBCC and
Holdings during September 1998 (see Note 10), PCC no longer controls the
management of the Sands. Accordingly, Holdings, GB Property Funding and GBHC are
no longer included on the accompanying consolidated balance sheets. PCC's
negative investment in Holdings and its subsidiaries on the accompanying
consolidated balance sheet at December 31, 1997 reflects PCC's investment under
the equity method of accounting. During the period from January 1, 1998 through
June 30, 1998, the operations of Holdings and its subsidiaries were accounted
for under the equity method of accounting (see Note 9). As a result of PCC no
longer controlling the operations of the Sands, the expectation that ownership
control of Holdings will only be temporary and the September 1998 settlement
agreement which resolved certain significant uncertainties, PCC's investment in
Holdings and its subsidiaries was revalued to a zero basis effective on July 1,
1998. Accordingly, for periods subsequent to June 30, 1998, PCC is accounting
for its investment in Holdings under the cost method of accounting. The
elimination of the investment in Holdings has resulted in a gain of $36,864,000
which has been combined with equity in the earnings of Holdings on the
accompanying consolidated statement of operations for the year ended December
31, 1998.
CASINO REVENUES, PROMOTIONAL ALLOWANCES AND DEPARTMENTAL EXPENSES -
The Sands recognized the net win from gaming activities (the difference
between gaming wins and losses) as casino revenues. Casino revenues are net of
accruals for anticipated payouts of progressive and certain other slot machine
jackpots and certain progressive table game payouts.
The estimated value of rooms, food and beverage and other items which were
provided to customers without charge was included in revenues and a
corresponding amount was deducted as promotional allowances. The costs of such
complimentaries were included as casino expenses on the accompanying
consolidated statements of operations for the years ended December 31, 1997 and
1996. Costs of
40
<PAGE>
PRATT CASINO CORPORATION AND SUBSIDIARIES
(WHOLLY OWNED BY PPI CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
complimentaries allocated from the rooms, food and beverage and other operating
departments to the casino department during the years ended December 31, 1997
and 1996 were as follows:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Rooms $ 5,617,000 $ 6,170,000
Food and Beverage 28,144,000 29,357,000
Other 2,991,000 4,435,000
----------- -----------
$36,752,000 $39,962,000
=========== ===========
</TABLE>
CASH AND CASH EQUIVALENTS -
Cash and cash equivalents are generally comprised of cash and investments
with original maturities of three months or less, such as commercial paper,
certificates of deposit and fixed repurchase agreements.
ALLOWANCE FOR DOUBTFUL ACCOUNTS -
The allowance for doubtful accounts is maintained at a level considered
adequate to provide for possible future losses. Provisions for doubtful
accounts amounting to $256,000, $3,195,000 and $2,167,000 were made during the
years ended December 31, 1998, 1997 and 1996, respectively.
PROPERTY AND EQUIPMENT -
Operating equipment is recorded at cost and is being depreciated utilizing
the straight-line method over estimated useful lives of three to seven years.
On October 1, 1996, GBHC revised the estimated useful life of its buildings
from 25 years to 40 years. Management believes that the change in estimated
life more appropriately reflected the timing of the economic benefit to be
received from these assets. The effect of this change reduced depreciation and
amortization expense and net loss by approximately $761,000 for the year ended
December 31, 1996.
DEFERRED FINANCING COSTS -
The costs of issuing long-term debt, including all underwriting, legal and
accounting fees, were capitalized and were being amortized over the term of the
related debt issue. As a result of the filings under Chapter 11 on January 5,
1998, remaining deferred financing costs in the amount of $6,515,000 were
determined to be unrealizable and were written off on the accompanying
consolidated statement of operations for the year ended December 31, 1997.
Amortization of deferred financing costs was $1,072,000 and $1,087,000 for the
years ended December 31, 1997 and 1996, respectively.
41
<PAGE>
PRATT CASINO CORPORATION AND SUBSIDIARIES
(WHOLLY OWNED BY PPI CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
LONG-LIVED ASSETS -
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"
requires, among other things, that an entity review its long-lived assets and
certain related intangibles for impairment whenever changes in circumstances
indicate that the carrying amount of an asset may not be fully recoverable. As
a result of its review, PCC does not believe that any such changes have
occurred.
INCOME TAXES -
PCC is included in the consolidated federal income tax return of GBCC, and
for periods prior to December 31, 1996, was included in the consolidated federal
income tax return of HCC, GBCC's parent prior to that date. Pursuant to tax
allocation agreements, PCC's provision for federal income taxes is based on the
amount of tax which would be provided if a separate federal income tax return
were filed.
RECENT ACCOUNTING PRONOUNCEMENTS -
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 reclassification 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.
In June 1998, the FASB issued a new statement, "Accounting for Derivative
Instruments and Hedging Activities," ("SFAS 133"), effective for fiscal years
beginning after June 15, 1999. SFAS 133 requires, among other things, that
derivatives be recorded on the balance sheet at fair value. Changes in the fair
value of derivatives may, depending on circumstances, be recognized in earnings
or deferred as a component of shareholders' equity until a hedged transaction
occurs. PCC does not believe the adoption of SFAS 133 will have a significant
impact on its financial position or results of operations.
RECLASSIFICATIONS -
Certain reclassifications have been made to the prior years' financial
statements to conform to the 1998 consolidated financial statement presentation.
(3) SHORT-TERM CREDIT FACILITIES
As of December 31, 1996, GBHC had $2,000,000 outstanding under a bank line
of credit. Borrowings under the line of credit were guaranteed to the extent of
$2,000,000 by PCC, which pledged a certificate of deposit in the face amount of
$2,000,000 as collateral for the line of credit. The line of
42
<PAGE>
PRATT CASINO CORPORATION AND SUBSIDIARIES
(WHOLLY OWNED BY PPI CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
credit was repaid upon maturity of the certificate of deposit during January
1997 with proceeds from affiliate borrowings (see Note 6) and the line of credit
was cancelled.
(4) LONG-TERM DEBT AND PLEDGE OF ASSETS
Certain of the indentures to PCC's indebtedness contain cross-default
provisions with first mortgage notes issued by GB Property Funding. On January
5, 1998, Holdings, GB Property Funding and GBHC filed petitions for relief under
Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the
District of New Jersey. Each company continues to operate in the ordinary
course of business, as set forth in the Bankruptcy Code, and each company's
executive officers and directors as of the date of the filing remain in office,
subject to the supervision of the Bankruptcy Court. The filings of such
petitions constitute a default under the indenture for the PRT Funding Notes.
Accordingly, the outstanding principal amount of the PRT Funding Notes has
accelerated, is currently due and payable and has been classified as current on
the accompanying consolidated balance sheets.
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1998 1997
------------- -------------
<S> <C> <C>
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
============ ============
</TABLE>
____________________
(a) On February 17, 1994, PRT Funding issued the PRT Funding Notes which are
due April 15, 2004. Interest on the PRT Funding Notes accrues at the rate
of 11 5/8% per annum, payable semiannually commencing October 15, 1994. The
PRT Funding Notes are redeemable at the option of the issuer, in whole or
in part, on or after April 15, 1999 at stated redemption prices ranging up
to 104.36% of par plus accrued interest. The indenture for the PRT Funding
Notes contains various provisions which, among other things, restrict the
ability of certain subsidiaries of PCC to pay dividends to GBCC, to merge,
consolidate or sell substantially all of their assets or to incur
additional indebtedness beyond certain limitations.
(b) On February 17, 1994, PRT Funding issued $15,000,000 of junior subordinated
notes (the "Junior Subordinated Notes"). The Junior Subordinated Notes are
due in February 2005 and bear interest at the rate of 14 5/8% per annum
which, subject to PCC, the guarantor, meeting certain financial coverage
and other payment restriction tests required by the indenture for the PRT
Funding Notes, is payable semiannually commencing August 17, 1994. Because
PCC has not met the financial coverage tests, no interest was paid during
1998, 1997 or 1996.
Interest paid amounted to $4,941,000, $30,011,000 and $30,236,000,
respectively, for the years ended December 31, 1998, 1997 and 1996.
43
<PAGE>
PRATT CASINO CORPORATION AND SUBSIDIARIES
(WHOLLY OWNED BY PPI CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(5) INCOME TAXES
As previously disclosed in PCC's quarterly report on Form 10-Q for the
period ended September 30, 1998, and subsequent to the issuance of its 1997
consolidated financial statements, PCC was advised by HCC, GBCC's former parent,
that a revised tax treatment with respect to the distribution of GBCC stock
owned by HCC to HCC's shareholders on December 31, 1996 might be necessary. HCC
subsequently revised its tax treatment of the distribution which resulted in a
reduction of the net operating loss carryforwards ("NOL's") available to PCC for
federal income tax purposes. The revised tax treatment had no effect on PCC's
assets, liabilities or operating results as reflected in its consolidated
financial statements for any period presented as PCC had provided valuation
allowances to fully reserve its net deferred tax assets, including NOL's, for
all such reporting periods. The effects on deferred taxes and the related
valuation allowance resulting from the revised tax treatment have been included
in the accompanying consolidated financial statements as adjustments during the
year ended December 31, 1998.
In connection with the revised tax treatment, GBCC has commenced litigation
against its former independent accountants and tax advisors alleging negligent
advice and breach of contract.
Components of the provision for income taxes consist of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1998 1997 1996
------------ ------------- -------------
<S> <C> <C> <C>
(Provision for) benefit in lieu of federal
income taxes:
Current $(1,395,000) $ - $ -
Deferred 1,017,000 (22,039,000) 8,175,000
State income tax (provision) benefit:
Current - - -
Deferred 129,000 (2,190,000) 3,279,000
Change in valuation allowance (1,146,000) 14,711,000 (15,801,000)
----------- ------------ ------------
$(1,395,000) $ (9,518,000) $ (4,347,000)
=========== ============ ============
</TABLE>
No federal or state tax payments were made during the years ended December
31, 1998, 1997, or 1996. The payment of GBHC's taxes in accordance with the
tax allocation agreements is subject to the approval of the New Jersey Casino
Control Commission (the "Casino Commission").
44
<PAGE>
PRATT CASINO CORPORATION AND SUBSIDIARIES
(WHOLLY OWNED BY PPI CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A reconciliation between the calculated tax (provision) benefit based on
the statutory rates in effect and the effective tax rates follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Calculated income tax (provision) benefit $(12,030,000) $ 9,163,000 $ 9,978,000
Amortization of excess purchase price - - (601,000)
Disallowance of meals and entertainment - (145,000) (338,000)
State income taxes, net of federal benefit (85,000) 1,698,000 1,570,000
Utilization of tax credit - - 99,000
Elimination of investment in Holdings 12,534,000 - -
Valuation allowance change (1,146,000) 14,711,000 (15,801,000)
Deconsolidation of Holdings - (34,242,000) -
Other (668,000) (703,000) 746,000
------------ ------------ ------------
Tax provision as shown on consolidated
statements of operations $ (1,395,000) $ (9,518,000) $ (4,347,000)
============ ============ ============
</TABLE>
Deferred income taxes result primarily from the provision of a valuation
allowance on affiliate receivables, the write off of deferred financing costs
and differences in the timing of deductions taken between tax and financial
reporting purposes for certain restructuring costs.
At December 31, 1998, PCC and its subsidiaries have NOL's for federal and
state tax purposes totaling approximately $348,000 and $7,000,000, respectively.
The federal tax NOL's do not begin to expire until 2009 and most of the state
tax NOL's expire by 2003. 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 (i) the
continued availability of NOL's originating in prior years for federal and state
tax purposes, (ii) the limited operations of PCC following the December 31, 1998
deconsolidation for federal income tax purposes of Holdings, PCC's most
significant operating subsidiary, and (iii) questions regarding PCC's ability to
continue as a going concern, management is unable to determine that the
realization of such asset is more likely than not and, thus, has provided a
valuation allowance for the entire deferred tax asset at December 31, 1998.
45
<PAGE>
PRATT CASINO CORPORATION AND SUBSIDIARIES
(WHOLLY OWNED BY PPI CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The components of PCC's net deferred tax asset, exclusive of Holdings and
its subsidiaries' net deferred tax asset, as of December 31, 1998 and 1997 were
as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1998 1997
------------ ------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforward $ 760,000 $ 188,000
Allowance for doubtful accounts 102,000 -
Write off deferred financing costs 756,000 899,000
Restructuring costs 618,000 -
Other - 3,000
----------- -----------
Total deferred tax assets 2,236,000 1,090,000
Valuation allowance (2,236,000) (1,090,000)
----------- -----------
$ - $ -
=========== ===========
</TABLE>
At December 31, 1997, current federal taxes receivable under the
aforementioned tax allocation agreements were $1,395,000. Such receivable was
written off during the year ended December 31, 1998.
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 through 1996 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.
(6) TRANSACTIONS WITH RELATED PARTIES
As a result of the Chapter 11 filings discussed in Notes 1 and 2, the
assets and liabilities of Holdings and its subsidiaries are not included on the
accompanying consolidated balance sheets at December 31, 1998 and 1997.
Accordingly, intercompany receivables and payables with Holdings and its
subsidiaries are considered balances outstanding with affiliates. Transactions
with Holdings and its subsidiaries which eliminated in consolidation during 1997
and 1996 are considered transactions with affiliates during 1998.
Prior to May 1, 1998, NJMI 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
46
<PAGE>
PRATT CASINO CORPORATION AND SUBSIDIARIES
(WHOLLY OWNED BY PPI CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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, NJMI continued to provide
certain agreed upon services to GBHC at a monthly fee of $165,000 of which
$122,000 was paid on a monthly basis in arrears and the remaining $43,000 was
deferred and is to be paid upon confirmation of GBHC's plan of reorganization by
the Bankruptcy Court. All management fees terminated upon the granting of GBHC's
motion to reject the management contract by the Bankruptcy Court on September
28, 1998. As a consequence of the September 1998 settlement agreement (see Note
10), GBCC and GBHC may no longer assert claims against each other with respect
to the operation of the management contract and, with the passage of time, the
cancellation thereof.
Fees earned by NJMI under the management agreement and Interim Agreements
amounted to $2,405,000 during the year ended December 31, 1998. Management fees
receivable from the Sands at December 31, 1998 and 1997 amounted to $267,000 and
$34,000, respectively, net of a valuation allowance of $115,000 at December 31,
1998. Of the amount receivable at December 31, 1998, $30,000, net of the
aforementioned valuation allowance, which was earned prior to GBHC's bankruptcy
filing, 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 a subsidiary of GBCC, which
licenses the name from an unaffiliated third party. Amounts payable by the
Sands under this agreement are equal to the amounts paid to the unaffiliated
third party. Such charges amounted to $275,000, $290,000, and $283,000 for the
years ended December 31, 1998, 1997 and 1996, respectively.
HWCC - Tunica, Inc. ("HCT"), a wholly owned subsidiary of HCC, owns and
operates a gaming and lodging facility in Tunica County, Mississippi (the
"Tunica Casino") which commenced operations in August 1994. Pursuant to a ten-
year consulting agreement with HCT, PCC receives monthly consulting fees of
$100,000. Such fees amounted to $1,200,000 for each of the years ended December
31, 1998, 1997 and 1996.
Interest expense incurred with respect to the Junior Subordinated Notes
(Note 4) amounted to $2,194,000 for each of the years ended December 31, 1998,
1997 and 1996. Interest due to GBCC on the Junior Subordinated Notes of
$7,398,000 and $5,204,000, respectively, is included in interest payable on the
accompanying consolidated balance sheets at December 31, 1998 and 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. Prior to December 31, 1997, such notes and related
interest were eliminated in consolidation. As
47
<PAGE>
PRATT CASINO CORPORATION AND SUBSIDIARIES
(WHOLLY OWNED BY PPI CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
a result of (i) GBHC no longer being included as a consolidated subsidiary and
(ii) GBHC's filing under Chapter 11 making prospects for ultimate collection
doubtful, the notes, together with accrued interest receivable aggregating
$3,458,000, were reflected as an adjustment to PCC's negative investment in
Holdings on the accompanying consolidated balance sheet at 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. In accordance with certain
provisions of the September 1998 settlement agreement with GBCC (see Note 10),
GBHC preserves whatever rights of offset, if any, it might have with respect to
an advance made by GBHC to another GBCC subsidiary against the $10,000,000 and
$5,000,000 loans described above. The notes, together with accrued interest of
$5,652,000, are fully reserved on the accompanying consolidated balance sheet at
December 31, 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. PCC and its subsidiaries
have also provided services to GBHC for periods subsequent to January 1, 1998
and have billed GBHC for such services. Similarly, PCC and its subsidiaries are
charged for certain legal, accounting and other expenses incurred by GBCC and
HCC and their respective subsidiaries that relate to PCC's business. Such
affiliate transactions are summarized below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1998 1997 1996
-------- ---------- ----------
<S> <C> <C> <C>
Billings to affiliates $ - $ 981,000 $3,067,000
Billings to GBHC 63,000 - -
Charges from affiliates 740,000 2,123,000 3,917,000
</TABLE>
(7) 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 $8,872,000, $9,609,000 and $9,360,000, respectively, during the
years ended December 31, 1998, 1997 and 1996. PML also incurred operating and
other expenses amounting to $1,313,000, $1,530,000 and $2,135,000, respectively,
during the years ended December 31, 1998, 1997 and 1996. 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.
48
<PAGE>
PRATT CASINO CORPORATION AND SUBSIDIARIES
(WHOLLY OWNED BY PPI CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(8) REGULATORY MATTERS
ILLINOIS
Riverboat gaming operations in Illinois are subject to regulatory control
by the Illinois Gaming Board (the "IGB"). Under the provisions of the Illinois
gaming regulations, PML is required to maintain its supplier's license, which
was most recently renewed in 1998 and expires in December 1999 with the
condition that PML provide justification for future renewal. The IGB has
expressed its opposition to the licensing of holders of management services
contracts with percentage-based fees for Illinois riverboat gaming operations.
PML's existing management contract is currently the only percentage-based
management contract between a supplier and a riverboat gaming operation. PCC
believes that the successful completion of the Restructuring previously
described will enable PML to provide acceptable justification for renewal of the
PML supplier's license in December 1999. If it were determined that gaming laws
were violated by a licensee, the license held could be limited, conditioned,
suspended or revoked. In addition, the licensee and other persons involved could
be subject to substantial fines.
NEW JERSEY
GBHC and NJMI conducted gaming operations in Atlantic City, New Jersey and
operated a hotel and several restaurants, as well as related support facilities.
The operation of an Atlantic City casino/hotel is subject to significant
regulatory control. During 1996, the New Jersey Casino Control Commission (the
"Casino Commission") renewed GBHC's license to operate the Sands through
September 30, 2000 (subject to periodic review of the Sands' financial
stability) and renewed NJMI's license to manage the Sands through September 30,
2000. Terms of the current license require GBHC to comply with periodic
financial reporting requirements as well as obtain prior Casino Commission
approval of certain cash transactions with affiliates. If it were determined
that gaming laws were violated by a licensee, the gaming license held by each
licensee could be conditioned, suspended or revoked. In addition, the licensees
and other persons involved could be subject to substantial fines.
Casino licensees are required to make certain approved investments in New
Jersey or to pay an investment alternative tax. Casino licensees may obtain
investment credits by purchasing bonds at below-market interest rates from the
Casino Reinvestment Development Authority (the "CRDA") or by making qualified
investments ("obligatory investments") approved by the CRDA. This governmental
agency administers the statutorily mandated investments made by casino licensees
and is required to expend the monies received by it for eligible projects
defined in the statute. Provisions for valuation allowances on obligatory
investments during the years ended December 31, 1997 and 1996 amounted to
$1,241,000 and $1,344,000, respectively.
49
<PAGE>
PRATT CASINO CORPORATION AND SUBSIDIARIES
(WHOLLY OWNED BY PPI CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(9) EQUITY IN EARNINGS OF GB HOLDINGS, INC.
As discussed in Note 1, the operations of Holdings and its subsidiaries
were accounted for under the equity method of accounting for the six month
period from January 1, 1998 through June 30, 1998. Due to the significance of
Holdings' operations, summarized consolidated results of operations of Holdings
and its subsidiaries for such period are set forth below:
<TABLE>
<S> <C>
Net revenues $114,066,000
------------
Departmental expenses 95,499,000
General and administrative expenses 7,115,000
Depreciation and amortization 5,825,000
------------
Total operating expenses 108,439,000
------------
Income from operations 5,627,000
------------
Interest, net 430,000
Gain on disposal of assets 28,000
------------
Total non-operating income 458,000
------------
Income before taxes and other item 6,085,000
Income tax provision -
------------
Income before other items 6,085,000
Reorganization and other related costs (2,831,000)
------------
Net income $ 3,254,000
============
</TABLE>
(10) LITIGATION
On January 5, 1998, Holdings, GB Property Funding and GBHC filed petitions
for relief under Chapter 11 of the Bankruptcy Code. Each company continues to
operate in the ordinary course of business, as set forth in the Bankruptcy Code,
and each company's executive officers and directors remain in office, subject to
the supervision of the Bankruptcy Court. On January 11, 1999, the Bankruptcy
Court terminated the debtors' exclusive right to file a plan of reorganization.
No plan of reorganization has been formally presented by the debtors or any
other party.
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 the Restructuring (see Note 1).
On May 22, 1998, GBHC filed a motion with the Bankruptcy Court seeking to
reject the management agreement with NJMI (see Note 6). The Interim Agreement
was entered into and approved by the
50
<PAGE>
PRATT CASINO CORPORATION AND SUBSIDIARIES
(WHOLLY OWNED BY PPI CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Bankruptcy Court on July 7, 1998 and the motion to reject the management
agreement was approved by the Bankruptcy Court on September 28, 1998. As a
consequence of the September 1998 settlement agreement described below, GBCC and
GBHC may no longer assert claims against each other with respect to the
operation of the management contract and, with the passage of time, the
cancellation thereof.
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. On
September 2, 1998, GBCC reached a settlement with GBHC which was approved by the
Bankruptcy Court. The terms of the settlement agreement provided, among other
things, that GBHC be included in the consolidated federal income tax return of
GBCC for 1997 and 1998 enabling GBCC to utilize GBHC's tax NOL's. The agreement
also provided that on or before December 31, 1998, GBCC would cause Holdings and
its subsidiaries to be deconsolidated from GBCC for federal income tax purposes
by means of transferring 21% of the stock ownership of Holdings to an
unconsolidated entity. Such transfer was accomplished effective as of December
31, 1998.
On October 8, 1998, GBCC and HCC filed a complaint in the District Court of
Dallas County, Texas against Arthur Andersen LLP, PCC's former independent
accountants, and certain of its partners alleging negligent advice and breach of
contract with respect to the tax consequences resulting from the spin-off of
GBCC's stock to HCC's shareholders on December 31, 1996. The lawsuit is
currently in the initial stages of discovery.
(11) SUPPLEMENTAL CASH FLOW INFORMATION
As a result of Holdings, GB Property Funding and GBHC filing for protection
under Chapter 11 of the Bankruptcy Code, Holdings and its subsidiaries were no
longer included in the consolidated balance sheet of PCC as of December 31,
1997. As a result of this change, the following non-cash assets and liabilities
were eliminated from PCC's consolidated balance sheet at December 31, 1997:
<TABLE>
<S> <C>
Accounts receivable, net $ 7,794,000
Other current assets 6,423,000
Net property and equipment 147,716,000
Other noncurrent assets 11,924,000
Long-term debt, including current
maturities (192,932,000)
Other current liabilities (25,103,000)
Other noncurrent liabilities (28,293,000)
-------------
Net non-cash liabilities $ (72,471,000)
=============
</TABLE>
(12) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value:
51
<PAGE>
PRATT CASINO CORPORATION AND SUBSIDIARIES
(WHOLLY OWNED BY PPI CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CASH AND CASH EQUIVALENTS - The carrying amount approximates fair value
-------------------------
because of the short maturity of these instruments.
INTEREST PAYABLE - The fair value of interest payable is based on the
----------------
amount anticipated to be paid upon settlement of claims against PRT Funding.
LONG-TERM DEBT - The fair value of PCC's long-term debt is estimated based
--------------
on the quoted market price of the underlying debt issue for recent trades. Debt
obligations with affiliates are valued at zero due to the subordination of such
obligations.
The estimated carrying amounts and fair values of PCC's financial
instruments at December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1997
------------------------ -------------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Financial Assets
Cash and cash equivalents $ 3,746,000 $ 3,746,000 $ 2,231,000 $ 2,231,000
Financial Liabilities
Interest payable $14,397,000 $ 1,000,000 $ 7,263,000 $ 7,263,000
11 5/8% PRT Funding Notes 85,000,000 42,500,000 85,000,000 64,600,000
14 5/8% Junior Subordinated Notes 15,000,000 - 15,000,000 -
</TABLE>
(13) SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
QUARTER
-------------------------------------------------------
FIRST SECOND THIRD FOURTH
------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1998:
Net revenues $ 1,466,000 $ 1,044,000 $ 795,000 $ 299,000
=========== =========== =========== ============
Net income (loss) $ 1,133,000 $(1,873,000) $35,704,000 $ (977,000)
=========== =========== =========== ============
YEAR ENDED DECEMBER 31, 1997:
Net revenues $63,497,000 $67,781,000 $69,541,000 $ 56,636,000
=========== =========== =========== ============
Net loss $(2,529,000) $(1,897,000) $ (223,000) $(31,820,000)
=========== =========== =========== ============
</TABLE>
52
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Greate Bay Casino Corporation ("GBCC"), PCC's parent, filed a complaint on
October 8, 1998, in the District Court of Dallas County, Texas against Arthur
Andersen LLP ("Andersen"), PCC and PRT Funding's former certifying accountants,
and others alleging negligent advice and breach of contract with respect to the
tax consequences resulting from the spin off of the stock of GBCC by Hollywood
Casino Corporation to its shareholders on December 31, 1996.
In view of the pending litigation discussed above, the Audit Committee of
GBCC's Board of Directors voted on October 16, 1998 to terminate Andersen as PCC
and PRT Funding's independent accountants. There were no disagreements with
Andersen of the type which would require disclosure under Item 304 of Regulation
S-K. Andersen's report on the consolidated financial statements of PCC and the
financial statements of PRT Funding for the past two years included explanatory
paragraphs referring to PCC and PRT Funding's diclosures concerning substantial
doubt about their ability to continue as going concerns. Such uncertainties
resulted from the filing by PCC's most significant operating subsidiary on
January 5, 1998 of a petition for protection under Chapter 11 of the United
States Bankruptcy Code which resulted in the creation of a default under the
indenture to PRT Funding's outstanding third party indebtedness.
GBCC, with the consideration and approval of its Audit Committee, engaged the
firm of Deloitte & Touche LLP as the new certifying accountants for PCC and PRT
Funding.
PART III
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
1. FINANCIAL STATEMENTS
The financial statements filed as part of this report are listed on
the Index to Financial Statements on page 21.
2. FINANCIAL STATEMENT SCHEDULES
-- Report of Independent Auditors
-- Report of Predecessor Independent Public Accountants
-- Schedule I; Condensed Financial Information of Registrant, Pratt
Casino Corporation (Parent Company)
-- Balance Sheets
-- Statements of Operations
-- Statements of Cash Flows
-- Notes to Parent Company Financial Statements
-- Schedule II; Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not
required under the related instructions and are inapplicable and therefore
have been omitted.
53
<PAGE>
3. EXHIBITS
+3.1 -- Certificate of Incorporation of PRT Funding Corp. (Exhibit 3.1)
+3.2 -- Certificate of Incorporation of Pratt Casino Corporation.
(Exhibit 3.2)
+3.3 -- Bylaws of PRT Funding Corp. (Exhibit 3.3)
+3.4 -- Bylaws of Pratt Casino Corporation. (Exhibit 3.4)
@4.1 -- Indenture dated as of February 15, 1994, among PRT Funding, as
Issuer, PCC, as Guarantor, and Shawmut Bank Connecticut, N.A., as
Trustee (Exhibit 10.54)
@4.2 -- Indenture dated as of February 15, 1994 among GB Property
Funding, as Issuer, GB Holdings, Inc. and GBHC, as Guarantors,
and Shawmut Bank Connecticut, N.A., as Trustee. (Exhibit 10.50)
@4.3 -- Mortgage, Fixture Filing and Security Agreement dated February
17, 1994, by GBHC in favor of Shawmut Bank Connecticut, National
Association, as Mortgagee. (Exhibit 10.51)
@4.4 -- Security Agreement dated February 17, 1994 made by GB Property
Funding Corp., GBHC, GB Holdings, Inc., Advanced Casino Systems
International, Inc., Computerized Management Systems
International, Inc. and any Additional Collateral Grantor to
Shawmut Bank Connecticut, National Association, as Trustee.
(Exhibit 10.52)
@4.5 -- Collateral Assignment of Leases dated as of February 17, 1994, by
GBHC, in favor of Shawmut Bank Connecticut, National Association,
as Assignee. (Exhibit 10.53)
++10.1 -- Management Services Agreement dated as of August 19, 1987,
between Pratt Hotel Management, Inc. ("PHMI"), the predecessor of
NJMI, and GBHC. (Exhibit 10.1)
*10.2 -- Management Services Agreement dated as of June 21, 1991, between
HCA and Greate Bay Casino Corporation, the predecessor in
interest of PML. (Exhibit 10.34)
++10.3 -- Tax Allocation Agreement by and among Pratt Casino Properties,
Inc., PHMI, PCPI Funding Corp., GBHC and certain other parties
effective as of January 1, 1987. (Exhibit 10.18)
++10.4 -- Amended License Agreement by and between Hughes Properties, Inc.
and Pratt Hotel Corporation (now known as GBCC) dated May 19,
1987. (Exhibit 10.3)
###10.5 -- Sixth Amendment to Employment Agreement dated January 1, 1998,
between HCC and Edward T. Pratt, Jr. (Exhibit 10.6)
+++10.6 -- Employment Agreement dated May 1, 1996 by and between HCC and
Edward T. Pratt III. (Exhibit 10.4).
@10.7 -- Agreement of Limited Partnership of Pratt Management, L.P.
(Exhibit 10.55)
**10.8 -- Deed dated November 27, 1978 from Colony Associates, L.P. to
GBHC. (Exhibit 10.13)
b @@10.9 -- Consulting Agreement dated as of January 1, 1994 between PCC, as
the Consultant, and HWCC- Tunica, Inc. (Exhibit 10.8)
###10.10 -- Employment Agreement dated as of January 1, 1998 between GBCC and
John C. Hull. (Exhibit 10.18)
***10.11 - Software License Agreement by and between ACSC, ACSI, Computer
Management Systems International, Inc. and GBHC dated June 27,
1998 (Exhibit 10.2)
@@@10.12 -- Agreement dated as of September 2, 1998 by and among GBHC, GB
Holdings, Inc., and GB Property Funding Corp., on the one hand,
and GBCC, PHC Acquisition Corp., Lieber Check Cashing, LLC, Jack
E. Pratt, William D. Pratt, Edward T. Pratt, Jr. and HCC, on the
other. (Exhibit 10.1)
21.1 -- Subsidiaries of Pratt Casino Corporation.
27.1 -- Financial Data Schedule for PRT Funding Corp.
27.2 -- Financial Data Schedule for Pratt Casino Corporation.
#99.1 -- Voluntary petition for bankruptcy pursuant to Chapter 11 of the
Bankruptcy Code for Greate Bay Hotel and Casino, Inc. dated
January 5, 1998. (Exhibit 99.2)
#99.2 -- Voluntary petition for bankruptcy pursuant to Chapter 11 of the
Bankruptcy Code for GB Holdings, Inc. dated January 5, 1998
(Exhibit 99.3)
#99.3 -- Voluntary petition for bankruptcy pursuant to Chapter 11 of the
Bankruptcy Code for GB Property Funding Corp. dated January 5,
1998 (Exhibit 99.4)
##99.4 - Petition filed on October 8, 1998 in the District Court of Dallas
County, Texas by Hollywood Casino Corporation and Greate Bay
Casino Corporation ("Plaintiffs") against Arthur Andersen L.L.P.,
Richard L. Robbins, Michael E. Gamache, Daniel J. Meehan, and
Brent A. Railsback ("Defendants") (Exhibit 99.1)
54
<PAGE>
___________________________________
+ Incorporated by reference from the exhibit shown in parenthesis to Form
S-1 Registration Statement (Registration No. 33-69768) for PRT Funding
Corp. as filed with the SEC on February 2, 1994.
++ Incorporated by reference from the exhibit shown in parenthesis to Form
S-1 Registration Statement (Registration No. 33-58732) for Hollywood
Casino Corporation as filed with the SEC on February 26, 1993.
+++ Incorporated by reference from the exhibit shown in parenthesis to
Hollywood Casino Corporation's Annual Report on Form 10-K for the year
ended December 31, 1996.
* Incorporated by reference from the exhibit shown in parenthesis to the
registration statement on Form 10 filed with the Securities and Exchange
Commission on May 28, 1992 by PRT Corporation, the predecessor of HCC.
** Incorporated by reference from the exhibit shown in parenthesis to Form
S-1 Registration Statement (Registration No. 33-69716) for GB Property
Funding Corp. as filed with the SEC on February 2, 1994.
*** Incorporated by reference from the exhibit shown in parenthesis to
GBCC's Quarterly Report on Form 10-Q for the quarter ended June 30,
1998.
@ Incorporated by reference from the exhibit shown in parenthesis to Form
S-1 Registration Statement (Registration No. 33-77502) for Hollywood
Casino Corporation as filed with the SEC on April 8, 1994.
@@ Incorporated by reference from the exhibit shown in parenthesis to Form
S-1 Registration Statement (Registration No. 33-82182) for HWCC -Tunica,
Inc. as filed with the SEC on September 29, 1994.
@@@ Incorporated by reference from the exhibit shown in parenthesis to PRT
Funding and PCC's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1998.
# Incorporated by reference from the exhibit shown in parenthesis to Form
8-K for GB Property Funding Corp., GB Holdings, Inc. and Greate Bay
Hotel and Casino, Inc. as filed with the SEC on January 9, 1998.
## Incorporated by reference from the exhibit shown in parenthesis to the
Form 8-K for PRT Funding Corp. as filed with the SEC on October 22,
1998.
### Incorporated by reference from the exhibit shown in parenthesis to
GBCC's Annual Report on Form 10-K for the year ended December 31, 1997.
(B) REPORTS ON FORM 8-K
On October 22, 1998, the Registrants filed a Form 8-K to report a change in
certifying accountants. On October 13, 1998 the Registrants filed a Form 8-K/A
to include their former accountant's letter to the Securities and Exchange
Commission as an exhibit.
55
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of Egg
Harbor Township, State of New Jersey on March 30, 1999.
PRT FUNDING CORP.
By: /s/ John C. Hull
------------------------------------
John C. Hull
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant in
the capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ John C. Hull Chief Executive Officer, March 30,1999
- -------------------------- ----------------------
John C. Hull President and Director
/s/ Edward T. Pratt, Jr. Chief Financial Officer, March 30,1999
- -------------------------- ----------------------
Edward T. Pratt, Jr. Principal Accounting Officer
and Director
/s/ Edward T. Pratt III Executive Vice President and March 30,1999
- -------------------------- ----------------------
Edward T. Pratt III Secretary
/s/ Bernard A. Capaldi Director March 30,1999
- -------------------------- ----------------------
Bernard A. Capaldi
/s/ Michael J. Chesser Director March 30,1999
- -------------------------- ----------------------
Michael J. Chesser
</TABLE>
56
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of Egg
Harbor Township, State of New Jersey on March 30, 1999.
PRATT CASINO CORPORATION
By: /s/ John C. Hull
-----------------------------------
John C. Hull
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant in
the capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ John C. Hull Chief Executive Officer, March 30,1999
- -------------------------- ----------------------------
John C. Hull President and Director
/s/ Edward T. Pratt, Jr. Chief Financial Officer, March 30,1999
- -------------------------- ----------------------------
Edward T. Pratt, Jr. Principal Accounting Officer
and Director
/s/ Edward T. Pratt III Executive Vice President and March 30,1999
- -------------------------- ----------------------------
Edward T. Pratt III Secretary
/s/ Bernard A. Capaldi Director March 30,1999
- -------------------------- ----------------------------
Bernard A. Capaldi
/s/ Michael J. Chesser Director March 30,1999
- ---------------------- ----------------------------
Michael J. Chesser
</TABLE>
57
<PAGE>
INDEX TO FINANCIAL STATEMENT SCHEDULES
PRATT CASINO CORPORATION AND SUBSIDIARIES
-- Report of Independent Auditors
- Report of Predecessor Independent Public Accountants
- Schedule I; Condensed Financial Information of Registrant
-- Balance Sheets
-- Statements of Operations
-- Statements of Cash Flows
-- Notes to Parent Company Financial Statements
-- Schedule II; Valuation and Qualifying Accounts
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To Pratt Casino Corporation:
We have audited the consolidated financial statements of Pratt Casino
Corporation and subsidiaries as of and for the year ended December 31, 1998 and
have issued our report thereon dated March 19, 1999 (included elsewhere in this
Form 10-K). Our audit also includes the financial statement schedules listed in
the index to financial statement schedules. These financial statement schedules
are the responsibility of the Company's management. Our responsibility is to
express an opinion based on our audit. In our opinion, such financial statement
schedules, when considered in relation to the basic financial statements taken
as a whole, present fairly in all material respects the information set forth
therein.
Deloitte & Touche LLP
Dallas, Texas
March 19, 1999
<PAGE>
REPORT OF PREDECESSOR INDEPENDENT PUBLIC ACCOUNTANTS
FOR THE TWO YEARS ENDED DECEMBER 31, 1997 AND 1996
--------------------------------------------------
The financial statements of Pratt Casino Corporation ("PCC") for the two
years ended December 31, 1997 and 1996 were examined by Arthur Andersen LLP,
independent public accountants, whose report thereon dated March 23, 1998 was
included in the Company's Annual Report on Form 10-K for the year ended December
31, 1997. Arthur Andersen LLP also issued a report dated March 23, 1998 with
respect to the schedules listed in the index to financial statement schedules
for the two years ended December 31, 1997 and 1996. Such report was also
included in the Company's Annual Report on Form 10-K.
In October 1998, Greate Bay Casino Corporation ("GBCC"), the Company's
parent, filed a complaint against Arthur Andersen LLP and others alleging
negligent advice with respect to certain tax consequences resulting from the
spin off of GBCC's stock held by Hollywood Casino Corporation to its
shareholders on December 31, 1996. The Company subsequently engaged Deloitte &
Touche LLP as its new certifying accountants.
Because of the foregoing litigation, Arthur Andersen LLP believes that it
is no longer independent with respect to PCC and consequently has informed the
Company that it is unable to reissue its report on the financial statement
schedules for the years ended December 31, 1997 and 1996. As a result, Arthur
Andersen LLP's report for those two years is not included in this Annual Report
on Form 10-K.
Even if Arthur Andersen LLP were to reissue its report on the financial
statement schedules for the years 1997 and 1996, there can be no assurance that
such report would be identical to the report dated March 23, 1998, or that such
reissued report would not include additional qualifications. However, PCC is not
aware of any subsequent events, transactions or other matters that would affect
Arthur Andersen LLP's report.
<PAGE>
SCHEDULE I
PAGE 1
PRATT CASINO CORPORATION AND SUBSIDIARIES
(WHOLLY OWNED BY PPI CORPORATION)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
PRATT CASINO CORPORATION
(PARENT COMPANY)
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1998 1997
------------ -------------
<S> <C> <C>
Cash and cash equivalents $ 2,139,000 $ 397,000
Due from affiliates, net of valuation allowance - 155,000
Other current assets 26,000 56,000
------------- -------------
Total current assets 2,165,000 608,000
------------- -------------
Investment in limited partnership 3,104,000 2,256,000
------------- -------------
$ 5,269,000 $ 2,864,000
============= =============
LIABILITIES AND SHAREHOLDER'S DEFICIT
Current maturity of long-term debt $ 62,900,000 $ 62,900,000
Accounts payable 83,000 -
Due to affiliate 6,226,000 6,205,000
Accrued interest payable 7,280,000 2,892,000
------------- -------------
Total current liabilities 76,489,000 71,997,000
------------- -------------
Long-term debt 5,000,000 5,000,000
------------- -------------
Investment in and advances to subsidiaries 31,367,000 67,441,000
------------- -------------
Shareholder's deficit:
Common stock, $1.00 par value per share,
1,000 shares authorized and outstanding 1,000 1,000
Accumulated deficit (107,588,000) (141,575,000)
------------- -------------
Total shareholder's deficit (107,587,000) (141,574,000)
------------- -------------
$ 5,269,000 $ 2,864,000
============= =============
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of this schedule.
<PAGE>
SCHEDULE I
PAGE 2
PRATT CASINO CORPORATION AND SUBSIDIARIES
(WHOLLY OWNED BY PPI CORPORATION)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
PRATT CASINO CORPORATION
(PARENT COMPANY)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1998 1997 1996
------------ ------------- -------------
<S> <C> <C> <C>
Revenues:
Consulting fees $ 1,200,000 $ 1,200,000 $ 1,200,000
----------- ------------ ------------
Expenses:
Amortization - 358,000 358,000
General and administrative 325,000 104,000 93,000
----------- ------------ ------------
Total expenses 325,000 462,000 451,000
----------- ------------ ------------
Income from operations 875,000 738,000 749,000
----------- ------------ ------------
Non-operating income (expense):
Interest income 159,000 761,000 80,000
Interest expense (8,043,000) (8,045,000) (8,044,000)
Restructuring costs (1,548,000) - -
Equity in earnings of Limited Partnership 6,494,000 7,008,000 6,162,000
----------- ------------ ------------
Total non-operating expense, net (2,938,000) (276,000) (1,802,000)
----------- ------------ ------------
(Loss) income before income taxes and other items (2,063,000) 462,000 (1,053,000)
Income tax (provision) benefit - (798,000) 358,000
----------- ------------ ------------
Loss before non-recurring and other items (2,063,000) (336,000) (695,000)
Write off deferred financing costs - (2,250,000) -
----------- ------------ ------------
Loss before other items (2,063,000) (2,586,000) (695,000)
Equity in (losses) income of
consolidated subsidiaries (4,068,000) 3,773,000 (32,999,000)
Equity in earnings (losses) of and gain on
elimination of investment in
GB Holdings, Inc. 40,118,000 (37,656,000) -
----------- ------------ ------------
Net income (loss) $33,987,000 $(36,469,000) $(33,694,000)
=========== ============ ============
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of this schedule.
<PAGE>
SCHEDULE I
PAGE 3
PRATT CASINO CORPORATION AND SUBSIDIARIES
(WHOLLY OWNED BY PPI CORPORATION)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
PRATT CASINO CORPORATION
(PARENT COMPANY)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1998 1997 1996
---------- ------------ ------------
<S> <C> <C> <C>
Net cash provided by (used in) operating activities $1,742,000 $ 285,000 $ (52,000)
---------- ----------- -----------
Investing activities:
Short-term investment - 2,000,000 (2,000,000)
---------- ----------- -----------
Net cash provided by (used in)
investing activities - 2,000,000 (2,000,000)
---------- ----------- -----------
Financing activities:
Borrowings from affiliate - 2,505,000 2,150,000
Advance to affiliate - (5,000,000) -
---------- ----------- -----------
Net cash (used in) provided by financing
activities - (2,495,000) 2,150,000
---------- ----------- -----------
Net increase (decrease) in cash 1,742,000 (210,000) 98,000
Cash and cash equivalents at beginning of year 397,000 607,000 509,000
---------- ----------- -----------
Cash and cash equivalents at end of year $2,139,000 $ 397,000 $ 607,000
========== =========== ===========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of this schedule.
<PAGE>
SCHEDULE I
PAGE 4
PRATT CASINO CORPORATION AND SUBSIDIARIES
(WHOLLY OWNED BY PPI CORPORATION)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
PRATT CASINO CORPORATION
(PARENT COMPANY)
NOTES TO PARENT COMPANY FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION AND GUARANTEES OF REGISTRANT
The accompanying condensed parent company financial statements have been
prepared assuming that Pratt Casino Corporation ("PCC") will continue as a
going concern. On January 5, 1998, GB Holdings, Inc. ("Holdings") together
with its wholly owned subsidiaries, GB Property Funding Corp. and Greate
Bay Hotel and Casino, Inc. ("GBHC") filed for Chapter 11 bankruptcy
protection. The filings under Chapter 11 by these three PCC subsidiaries
have created a default under the indenture for the $85,000,000 Senior Note
obligations (the "PRT Funding Notes") of PRT Funding Corp. ("PRT Funding"),
a wholly owned subsidiary of PCC. Accordingly, the outstanding principal
amount of the PRT Funding Notes has accelerated and is currently due and
payable. PCC, as guarantor of the PRT Funding Notes, does not have
sufficient assets to satisfy the outstanding amounts applicable to the PRT
Funding Notes. In March 1999, PCC, Greate Bay Casino Corporation ("GBCC"),
PCC's parent, and the holders of the PRT Funding Notes reached an agreement
in principle with Hollywood Casino Corporation ("HCC") for HCC to acquire
the stock of PCC, the parent of PRT Funding, from GBCC for nominal
consideration as part of a debt restructuring (the "Restructuring") of PRT
Funding, PCC and other subsidiaries of PCC. Following the Restructuring,
PCC's assets will consist of its limited partnership interest in a
management contract for HCC's Aurora, Illinois gaming operation and a
consulting contract for HCC's Tunica, Mississippi gaming operation. These
assets will serve as collateral for $39,250,000 of 11 7/8% Senior Secured
Notes due November 1, 2003 (the "PCC Notes") which PCC will issue to the
PRT Funding noteholders as part of the Restructuring. For the year ended
December 31, 1998, these assets generated pre-tax earnings to PCC of
$7,694,000. The revenues and resulting net earnings generated by these
assets will be the sole source of funds for PCC's payment obligations under
the PCC Notes. Cash available from the management contract and consulting
agreement in excess of interest payment requirements will be used to make
mandatory redemptions of the PCC Notes.
As contemplated in the Restructuring, holders of the PRT Funding Notes
would also receive 100% of the interest in a liquidating trust which would
hold the remaining assets (except for the stock of Holdings) of PCC and its
subsidiaries not acquired by HCC. Such assets would consist primarily of
claims against Holdings, GB Property Funding Corp. and GBHC in the Chapter
11 proceedings.
The successful completion of the Restructuring is subject to the execution
of definitive documents and will require that PCC and PRT Funding file for
protection under Chapter 11 with the above transactions included as part of
a pre-negotiated plan of reorganization. Such plan will require approval by
the bankruptcy court as well as by the various gaming regulatory
organizations having jurisdiction over the management contract and
consulting agreement. There can be no assurance at this time that the
Restructuring will be successfully completed. The default under the
indenture for the PRT Funding Notes raises substantial doubt about PCC's
ability to continue as a going concern. The condensed parent company
financial statements do not include any adjustments that might result from
the outcome of these uncertainties.
The accompanying notes to consolidated financial statements
are an integral part of this schedule.
<PAGE>
SCHEDULE I
PAGE 5
PRATT CASINO CORPORATION AND SUBSIDIARIES
(WHOLLY OWNED BY PPI CORPORATION)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
PRATT CASINO CORPORATION
(PARENT COMPANY)
NOTES TO PARENT COMPANY FINANCIAL STATEMENTS
(2) SCHEDULED PAYMENTS OF LONG-TERM DEBT
PCC's long-term indebtedness includes a $62,900,000 promissory note to PRT
Funding Corp. Under the terms of the loan agreement, should a default occur
under the indenture for the PRT Funding Notes which accelerates the
maturity of such notes, the maturity of the promissory note from PCC is to
be accelerated as well. Such a default occurred under the Indenture for the
PRT Funding Notes in January 1998 when certain subsidiaries of PCC filed
petitions for relief under Chapter 11 of the United States Bankruptcy Code.
Accordingly, the accompanying parent company balance sheets of PCC at
December 31, 1998 and 1997 reflect the promissory note balance as currently
due.
PCC's other long-term debt outstanding of $5,000,000 at December 31, 1998
to PRT Funding Corp. matures during 2004. Interest on the note accrues at
the rate of 14 5/8% per annum.
Interest paid by PCC during the years ended December 31, 1998, 1997 and
1996 amounted to $3,655,000, $7,314,000 and $7,679,000, respectively.
(3) DISTRIBUTIONS RECEIVED
PCC received distributions from Pratt Management, L.P. amounting to
$5,646,000, $6,498,000 and $6,433,000, respectively, during the years ended
December 31, 1998, 1997 and 1996.
The accompanying notes to consolidated financial statements
are an integral part of this schedule.
<PAGE>
SCHEDULE II
PRATT CASINO CORPORATION AND SUBSIDIARIES
(WHOLLY OWNED BY PPI CORPORATION)
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
AMOUNTS
BALANCE AT CHARGED TO BALANCE
BEGINNING COSTS AND AT END
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS OTHER OF PERIOD
----------- ----------- ----------- --------------- --------------- -----------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1998:
Valuation allowance on affiliate
receivables $ - $ 2,450,000 $ - $ 18,458,000 (1) $20,908,000
=========== =========== =============== ================ ===========
YEAR ENDED DECEMBER 31, 1997:
Allowance for doubtful
accounts receivable $15,524,000 $ 3,195,000 $ (3,764,000) (2) $ (14,955,000) (4) $ -
Valuation allowance on
affiliate receivables - 9,650,000 - (9,650,000) (4) -
Allowance for obligatory
investments 4,401,000 1,241,000 (71,000) (3) (5,571,000) (4) -
----------- ----------- --------------- ---------------- -----------
$19,925,000 $14,086,000 $ (3,835,000) $ (30,176,000) $ -
=========== =========== =============== ================ ===========
YEAR ENDED DECEMBER 31, 1996:
Allowance for doubtful
accounts receivable $16,494,000 $ 2,167,000 $ (3,137,000) (2) $ - $15,524,000
Allowance for obligatory
investments 3,792,000 1,344,000 (735,000) (3) - 4,401,000
----------- ----------- --------------- ---------------- -----------
$20,286,000 $ 3,511,000 $ (3,872,000) $ - $19,925,000
=========== =========== =============== ================ ===========
</TABLE>
______________________
(1) Represents valuation allowances on notes and associated interest due from
Greate Bay Hotel and Casino, Inc., a wholly owned subsidiary of GB
Holdings, Inc. At December 31, 1997, such amounts were reflected as an
adjustment to PCC's negative investment in GB Holdings, Inc. During 1998,
the negative investment was written off and the outstanding receivables
were reclassified to due from affiliates. The December 31, 1997 adjustment
to the negative investment is reflected above under the caption "Other".
(2) Represents net write-offs of uncollectible accounts.
(3) Represents write-offs of obligatory investments in connection with the
contribution of certain obligatory investments to the Casino Reinvestment
Development Authority.
(4) Represents write-off of allowances resulting from GB Holdings, Inc. and its
subsidiaries no longer being included on the consolidated financial
statements of Pratt Casino Corporation.
The accompanying notes to consolidated financial statements
are an integral part of this schedule.
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF PRATT CASINO CORPORATION
<TABLE>
<CAPTION>
STATE
NAME ADDRESS ORGANIZED
<S> <C> <C>
GB Holdings, Inc. 136 South Kentucky Avenue Delaware
Atlantic City, New Jersey 08401
Greate Bay Hotel and Casino, Inc. 136 South Kentucky Avenue New Jersey
Atlantic City, New Jersey 08401
GB Property Funding Corp. 136 South Kentucky Avenue New Jersey
Atlantic City, New Jersey 08401
PRT Funding Corp. 200 Decadon Drive, Suite 100 Delaware
Egg Harbor Township, New Jersey 08234
New Jersey Management, Inc. 200 Decadon Drive, Suite 100 New Jersey
Egg Harbor Township, New Jersey 08234
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF PRT FUNDING CORP. AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000912897
<NAME> PRT FUNDING CORP.
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-START> JAN-01-1998 JAN-01-1997
<PERIOD-END> DEC-31-1998 DEC-31-1997
<CASH> 8 13
<SECURITIES> 0 0
<RECEIVABLES> 0 3,428
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 43,508 68,321
<PP&E> 0 0
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 43,508 73,321
<CURRENT-LIABILITIES> 99,397 92,281
<BONDS> 15,000 15,000
0 0
0 0
<COMMON> 1 1
<OTHER-SE> (70,890) (33,961)
<TOTAL-LIABILITY-AND-EQUITY> 43,508 73,321
<SALES> 0 0
<TOTAL-REVENUES> 0 0
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 34,467 33,988
<INTEREST-EXPENSE> 1,462 (2)
<INCOME-PRETAX> (36,929) (33,986)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (36,929) (33,986)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (36,929) (33,986)
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF PRATT CASINO CORPORATION AND SUBSIDIARIES
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000912928
<NAME> PRATT CASINO CORPORATION
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-START> JAN-01-1998 JAN-01-1997
<PERIOD-END> DEC-31-1998 DEC-31-1997
<CASH> 3,746 2,231
<SECURITIES> 0 0
<RECEIVABLES> 0 0
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 4,097 2,599
<PP&E> 3 3
<DEPRECIATION> 3 3
<TOTAL-ASSETS> 7,239 6,258
<CURRENT-LIABILITIES> 99,826 92,690
<BONDS> 15,000 15,000
0 0
0 0
<COMMON> 1 1
<OTHER-SE> (107,588) (141,575)
<TOTAL-LIABILITY-AND-EQUITY> 7,239 6,258
<SALES> 0 0
<TOTAL-REVENUES> 3,604 257,455
<CGS> 0 0
<TOTAL-COSTS> 0 212,712
<OTHER-EXPENSES> (43,831) 27,793
<LOSS-PROVISION> 256 12,845
<INTEREST-EXPENSE> 11,797 31,366
<INCOME-PRETAX> 35,382 (27,261)
<INCOME-TAX> 1,395 9,518
<INCOME-CONTINUING> 33,987 (36,779)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 310
<CHANGES> 0 0
<NET-INCOME> 33,987 (36,469)
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
</TABLE>
