<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM-10Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 1994
-------------------------------------------------
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 1-6339
----------------
PRATT HOTEL CORPORATION
- - --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 75-1295630
- - ------------------------------------- ------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Two Galleria Tower, Suite 2200
13455 Noel Road, LB 48
Dallas, Texas 75240
- - ------------------------------------- ------------------------------------------
(Address of principal executive (Zip Code)
offices)
(Registrant's telephone number, including area code) (214) 386-9777
---------------------------
(Not Applicable)
- - --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
------- -------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at May 10, 1994
- - ------------------------------------- ------------------------------------------
Common Stock, $.10 par value 5,176,627 Shares
1
<PAGE>
PRATT HOTEL CORPORATION AND SUBSIDIARIES
PART I: FINANCIAL INFORMATION
- - ------------------------------
INTRODUCTORY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - -------------------------------------------------------
Pratt Hotel Corporation and its subsidiaries ("PHC") are engaged primarily
in the ownership, operation and management of casino/hotels and hotels in the
United States and Puerto Rico and the management of a riverboat gaming facility
located in Aurora, Illinois ("Hollywood - Aurora"). Approximately 20% of PHC's
outstanding common shares are listed and traded on the American Stock Exchange
under the symbol PHC. The remaining 80% of the common shares of PHC are owned
by Hollywood Casino Corporation ("HCC"), a Delaware corporation with
approximately 43% of its outstanding common shares listed and traded on the
NASDAQ under the symbol HWCC. The remaining outstanding HCC common shares are
owned by certain general partnerships and trusts controlled by Jack E. Pratt,
Edward T. Pratt, Jr. and William D. Pratt and by certain family members related
to such individuals (collectively, the "Pratt Family").
The financial statements as of March 31, 1994 and for the three month
periods ended March 31, 1994 and 1993 have been prepared by PHC without audit,
pursuant to the rules and regulations of the Securities and Exchange Commission.
In the opinion of management, these consolidated financial statements contain
all adjustments (consisting of only normal recurring adjustments) necessary to
present fairly the consolidated financial position of PHC as of March 31, 1994,
and the results of its consolidated operations for the three month periods ended
March 31, 1994 and 1993, and its consolidated cash flows for the three month
periods ended March 31, 1994 and 1993.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. These consolidated financial statements should
be read in conjunction with the financial statements and notes thereto included
in PHC's 1993 Annual Report on Form 10-K.
A significant portion of PHC's assets relate to its wholly owned
subsidiary, Greate Bay Hotel and Casino, Inc. ("GBH&C"), which owns the Sands
Hotel and Casino located in Atlantic City, New Jersey (the "Sands").
Historically, the Sands' gaming operations have been highly seasonal in nature,
with the peak activity occurring from May to September; consequently, the
results of operations for the three month period ended March 31, 1994 are not
necessarily indicative of the operating results for the full year.
2
<PAGE>
PRATT HOTEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1994 1993
------------- -------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 21,973,000 $ 15,466,000
Accounts receivable, net of allowances
of $14,921,000 and $14,814,000,
respectively 14,693,000 14,179,000
Inventories 3,909,000 3,845,000
Due from affiliates - current 5,155,000 4,356,000
Deferred income taxes 1,589,000 2,904,000
Refundable deposits and other
current assets 5,658,000 5,046,000
------------- -------------
Total current assets 52,977,000 45,796,000
------------- -------------
Property and Equipment:
Land 37,807,000 37,554,000
Buildings and improvements 169,340,000 169,340,000
Operating equipment 74,748,000 74,256,000
Construction in progress 9,466,000 6,829,000
------------- -------------
291,361,000 287,979,000
Less - accumulated depreciation
and amortization (128,483,000) (124,877,000)
------------- -------------
Net property and equipment 162,878,000 163,102,000
------------- -------------
Other Assets:
Obligatory investments 4,569,000 4,497,000
Deferred financing costs 10,898,000 562,000
Notes receivable 17,050,000 7,860,000
Other assets 1,857,000 2,106,000
------------- -------------
Total other assets 34,374,000 15,025,000
------------- -------------
$ 250,229,000 $ 223,923,000
============= =============
</TABLE>
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated balance sheets.
3
<PAGE>
PRATT HOTEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
LIABILITIES AND SHAREHOLDERS' DEFICIT
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1994 1993
-------------- --------------
<S> <C> <C>
Current Liabilities:
Borrowings from affiliate $ 9,000,000 $ 16,133,000
Current maturities of long-term debt 7,175,000 7,862,000
Accounts payable 10,134,000 8,138,000
Accrued liabilities -
Salaries and wages 4,553,000 3,543,000
Progressive jackpot 1,323,000 1,327,000
Interest 4,311,000 6,437,000
Costs related to extinguishment of debt - 10,498,000
Other 9,789,000 8,276,000
Other current liabilities 3,312,000 5,245,000
------------- -------------
Total current liabilities 49,597,000 67,459,000
------------- -------------
Long-Term Debt 329,779,000 280,260,000
------------- -------------
Other Noncurrent Liabilities 13,295,000 14,039,000
------------- -------------
Commitments and Contingencies
Shareholders' Deficit:
Common stock, $.10 par value per
share; 10,000,000 shares authorized;
5,176,627 and 5,175,977 shares issued
and outstanding, respectively 518,000 518,000
Additional paid-in capital 15,583,000 15,581,000
Accumulated deficit (158,543,000) (153,934,000)
------------- -------------
Total shareholders' deficit (142,442,000) (137,835,000)
------------- -------------
$ 250,229,000 $ 223,923,000
============= =============
</TABLE>
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated balance sheets.
4
<PAGE>
PRATT HOTEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------------
1994 1993
----------- -----------
<S> <C> <C>
Revenues:
Casino $54,136,000 $53,168,000
Rooms 3,208,000 3,365,000
Food and beverage 7,513,000 7,398,000
Other 4,247,000 3,195,000
----------- -----------
69,104,000 67,126,000
Less - Promotional allowances (6,432,000) (6,233,000)
----------- -----------
Net revenues 62,672,000 60,893,000
----------- -----------
Expenses:
Casino 42,397,000 39,914,000
Rooms 965,000 1,058,000
Food and beverage 2,599,000 2,581,000
Other 986,000 1,238,000
General and administrative 6,682,000 6,838,000
Depreciation and amortization 4,414,000 4,896,000
----------- -----------
Total expenses 58,043,000 56,525,000
----------- -----------
Income from operations 4,629,000 4,368,000
----------- -----------
Non-operating income (expense):
Interest income 443,000 390,000
Interest expense (9,854,000) (9,419,000)
----------- -----------
Total non-operating expense, net (9,411,000) (9,029,000)
----------- -----------
Loss before income taxes (4,782,000) (4,661,000)
Income tax benefit 173,000 104,000
----------- -----------
Net loss $(4,609,000) $(4,557,000)
=========== ===========
Net loss per common share $ (.89) $ (.89)
=========== ===========
</TABLE>
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated statements.
5
<PAGE>
PRATT HOTEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------------------------
1994 1993
------------- ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (4,609,000) $ (4,557,000)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Depreciation and amortization, including
accretion of debt discount 5,146,000 4,985,000
Provision for doubtful accounts 644,000 655,000
Deferred income taxes 251,000 (70,000)
(Increase) decrease in accounts receivable (1,890,000) 1,212,000
(Decrease) increase in accounts payable and
accrued expenses (8,222,000) 4,884,000
(Decrease) increase in progressive jackpot accrual (4,000) 123,000
Net change in other current assets and liabilities (1,360,000) (1,456,000)
Net change in other noncurrent assets and liabilities (448,000) 53,000
------------- ------------
Net cash (used in) provided by operating activities (10,492,000) 5,829,000
------------- ------------
INVESTING ACTIVITIES:
Net property and equipment additions (3,384,000) (518,000)
Obligatory investments (55,000) (665,000)
Purchase of mortgage note (5,750,000) -
------------- ------------
Net cash used in investing activities (9,189,000) (1,183,000)
------------- ------------
FINANCING ACTIVITIES:
(Repayment) issuance of short-term debt (21,000,000) 21,000,000
Net repayments to affiliate (7,133,000) -
Deferred financing costs (10,465,000) (1,629,000)
Issuance of long-term debt 285,000,000 -
Repayments of long-term debt (220,216,000) (10,878,000)
Issuance of common stock 2,000 27,000
------------- ------------
Net cash provided by financing activities 26,188,000 8,520,000
------------- ------------
Net increase in cash and cash equivalents 6,507,000 13,166,000
Cash and cash equivalents at beginning
of period 15,466,000 13,459,000
------------- ------------
Cash and cash equivalents at end of period $ 21,973,000 $ 26,625,000
============= ============
</TABLE>
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated statements.
6
<PAGE>
PRATT HOTEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) ORGANIZATION, BUSINESS AND BASIS OF PRESENTATION
Pratt Hotel Corporation, a Delaware corporation, and its subsidiaries
("PHC"), are engaged in the operation or management of casino/hotels, a
riverboat gaming facility and non-casino/hotel properties. PHC's principal
assets are the Sands Hotel and Casino located in Atlantic City, New Jersey (the
"Sands"), and a management contract on a riverboat gaming facility located in
Aurora, Illinois ("Hollywood - Aurora")(Note 5). PHC's other operations in the
United States and the Caribbean, including various ventures in which PHC has an
interest, are managed by PHC or its subsidiaries. Hollywood Casino Corporation
("HCC"), a Delaware corporation which is approximately 57% owned by certain
general partnerships and trusts controlled by Jack E. Pratt, Edward T. Pratt,
Jr. and William D. Pratt and by certain family members related to such
individuals (collectively, the "Pratt Family"), owns approximately 80% of the
common stock of PHC.
The consolidated financial statements as of March 31, 1994 and for the
three month periods ended March 31, 1994 and 1993 have been prepared by PHC
without audit. In the opinion of management, these consolidated financial
statements contain all adjustments (consisting of only normal recurring
adjustments) necessary to present fairly the consolidated financial position of
PHC as of March 31, 1994, and the results of its consolidated operations and
cash flows for the three month periods ended March 31, 1994 and 1993.
(2) SHORT-TERM CREDIT FACILITIES
PHC had no unused short-term credit facilities at March 31, 1994 and
December 31, 1993. During February and March 1993 a subsidiary of PHC issued
$21,000,000 of Series A and Series B 13.5% Guaranteed First Mortgage Notes due
in 1994 (the "Series Notes"). The Series Notes were not registered under the
Securities Act and since no such registration became effective prior to August
18, 1993, the interest rate increased to 14% per annum effective at that date.
The indenture to the Series Notes also provided for additional increases of .25%
to become effective after each succeeding 90-day period. Refinancing of the
Series Notes was completed in February 1994 when a subsidiary of PHC issued
$185,000,000 of 10 7/8% First Mortgage Notes due in 2004 (see Note 3).
As of March 31, 1994 and December 31, 1993, PHC and its subsidiaries had
outstanding borrowings of $10,000,000 and $10,050,000, respectively, from HCC.
Of the amounts loaned, $1,000,000 is classified as noncurrent in the
accompanying balance sheet at March 31, 1994 and December 31, 1993, in
accordance with certain indenture requirements that such $1,000,000 remain
7
<PAGE>
PRATT HOTEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
outstanding until April 1998. The remaining amounts are due on demand, or if no
demand is made, on April 1, 1998. Borrowings from HCC bear interest at the rate
of 14% per annum, payable semiannually. It is anticipated that PHC and its
subsidiaries may, from time to time, obtain additional loans from HCC under
similar terms.
HCC agreed to loan up to $8,000,000 to a subsidiary of PHC, the proceeds of
which were to be used by the Sands in connection with an expansion of its gaming
space. During 1993, HCC loaned $7,083,000 to the subsidiary for such purposes.
Such loans accrued interest at the rate of 13.5% per annum payable semiannually,
and the outstanding balance of $8,000,000 was repaid during February 1994 in
connection with the refinancing of virtually all of PHC's casino-related
outstanding debt (see Note 3).
(3) LONG-TERM DEBT AND PLEDGE OF ASSETS
Substantially all of PHC's assets are pledged in connection with PHC's
long-term indebtedness. Additionally, the indentures with respect to PHC's
recently completed refinancing contain certain cross-default provisions.
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1994 1993
------------- -------------
<S> <C> <C>
11 3/4% first mortgage notes,
refinanced in 1994, net of
discount of $45,000(a) $ - $ 161,623,000
15 1/2% unsecured notes, refinanced in 1994(b) - 97,143,000
10 7/8% first mortgage notes, due 2004(c) 185,000,000 -
11 5/8% senior notes, due 2004(d) 85,000,000 -
14 5/8% junior subordinated notes, due 2005(e) 15,000,000 -
14 7/8% secured promissory note, net of
discount of $69,426,000(f) 41,210,000 -
Second lien wrap-around mortgage note,
due 1994(g) 6,546,000 6,663,000
Series Notes, refinanced in 1994(Note 2) - 21,000,000
Other 4,198,000 1,693,000
------------- -------------
336,954,000 288,122,000
Less - current maturities (7,175,000) (7,862,000)
------------- -------------
Total long-term debt $ 329,779,000 $ 280,260,000
============= =============
</TABLE>
_______________________
8
<PAGE>
PRATT HOTEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(a) On August 6, 1987, a subsidiary of PHC obtained $170,504,000 by issuing
$173,030,000 of seven-year, non-callable, nonrecourse first mortgage notes
bearing interest at 11 3/4% per annum, payable semiannually (the "11 3/4%
First Mortgage Notes"), net of a $2,526,000 discount. The 11 3/4% First
Mortgage Notes were repaid in February 1994.
(b) On February 23, 1988, PCPI Funding Corp., a subsidiary of PHC, issued
$115,000,000 of unsecured notes due April 1, 1998 bearing interest at
15 1/2% per annum, payable semiannually (the "PCPI Notes"). On November 3,
1989, PCPI Funding Corp. redeemed $17,857,000 of the PCPI Notes pursuant to
a one-time redemption right exercised by the noteholders, and during 1990
HCC purchased $38,779,000 principal amount of the PCPI Notes. The remaining
principal balance of $58,364,000 was publicly held and was redeemed during
February 1994. The PCPI Notes held by HCC were exchanged during February
1994 - see (f) below.
(c) On February 17, 1994, a subsidiary of PHC issued $185,000,000 of
non-recourse first mortgage notes due January 15, 2004 (the "10 7/8% First
Mortgage Notes"). Interest on the notes accrues at the rate of 10 7/8% per
annum, payable semiannually commencing July 15, 1994. Interest only is
payable during the first three years. Commencing on July 15, 1997,
semiannual principal payments of $2,500,000 will become due on each
interest payment date.
The indenture to the 10 7/8% First Mortgage Notes contains various
provisions which, among other things, restrict the ability of certain
subsidiaries of PHC to pay dividends to PHC, to merge, consolidate or sell
substantially all of their assets or to incur additional indebtedness
beyond certain limitations. In addition, the indenture also requires the
maintenance of certain cash balances and that, commencing in 1994, a
minimum of $7,000,000 be committed for property and fixture renewals,
replacements and betterments, subject to increases of five percent per
annum each year thereafter. The indenture also contains certain cross-
default provisions with respect to the senior notes described in (d) below.
(d) On February 17, 1994, a subsidiary of PHC issued $85,000,000 of unsecured
senior notes due April 15, 2004 (the "Senior Notes"). Interest on the
Senior Notes accrues at the rate of 11 5/8% per annum, payable semiannually
commencing October 15, 1994. The Senior Notes are redeemable at the option
of the issuer, in whole or in part, on or after April 15, 1999 at stated
redemption prices ranging up to 104.36% of par plus accrued interest. The
indenture to the Senior Notes contains various provisions which, among
other things, restricts the ability of certain subsidiaries of PHC to pay
dividends to PHC, to merge,
9
<PAGE>
PRATT HOTEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
consolidate or sell substantially all of their assets or to incur
additional indebtedness beyond certain limitations. The indenture also
contains certain cross default provisions with respect to the 10 7/8% First
Mortgage Notes described in (c) above.
(e) On February 17, 1994, PRT Funding Corp., a subsidiary of PHC, issued
$15,000,000 of junior subordinated notes (the "Junior Subordinated Notes")
to HCC. The Junior Subordinated Notes are due in February 2005 and bear
interest at the rate of 14 5/8% per annum which, subject to meeting certain
financial tests provided for in the indenture, is payable semiannually
commencing August 17, 1994.
(f) On February 17, 1994, PPI Funding Corp., a newly formed subsidiary of PHC,
issued $40,524,000 discounted principal amount of new deferred interest
notes (the "PPI Funding Notes") to HCC in exchange for the $38,779,000
principal amount of PCPI Notes held by HCC - see (b) above. The increased
principal amount of the new notes includes a call premium on the exchange
($1,745,000) equal to 4 1/2% of the principal amount of PCPI Notes
exchanged; such premium was paid to all third parties holding PCPI Notes.
The PPI Funding Notes are discounted to yield interest at the rate of
14 7/8% per annum and have a face value of $110,636,000. Payment of
interest is deferred through February 17, 2001 at which time interest will
become payable semiannually with the unpaid principal balance due on
February 17, 2006. The PPI Funding Notes are collateralized by a pledge of
all of the common stock of a subsidiary of PHC.
(g) The note matures on October 1, 1994 and bears annual interest at prime plus
two percentage points (subject to a minimum of 11.5%), payable monthly
based on a 15-year amortization schedule. PHC is not an obligor on the
first lien portion of this note ($2,702,000 and $2,736,000 at March 31,
1994 and December 31, 1993, respectively), which also matures on October 1,
1994.
Scheduled payments of long-term debt as of March 31, 1994 are set forth
below:
<TABLE>
<CAPTION>
<S> <C>
1994 (9 months) $ 7,049,000
1995 523,000
1996 569,000
1997 3,482,000
1998 5,457,000
Thereafter 389,300,000
-------------
Total $ 406,380,000
=============
</TABLE>
10
<PAGE>
PRATT HOTEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Interest paid for the three month periods ended March 31, 1994 and 1993
amounted to $11,454,000 and $5,316,000, respectively.
(4) INCOME TAXES
Components of PHC's benefit for income taxes consisted of the following:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------------------
1994 1993
------------ ------------
<S> <C> <C>
Current:
Federal......... $ - $ -
State........... 424,000 34,000
Deferred - State.. (251,000) 70,000
------------ ------------
$ 173,000 $ 104,000
============ ============
</TABLE>
PHC is included in HCC's consolidated federal income tax return. Pursuant
to agreements between HCC and PHC, PHC'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. PHC paid no state or federal income taxes for the three
months ended March 31, 1994 or 1993.
Both federal and state income tax provisions or benefits are based upon
estimates of the results of operations for the current annual period and reflect
the nondeductibility for income tax purposes of certain items, including certain
amortization, travel and entertainment and other expenses. Quarterly income tax
provisions or benefits are determined by applying the resulting effective income
tax rate to the results of operations for the quarter.
PHC and its subsidiaries have tax net operating loss carryforwards
("NOL's") totaling approximately $67,000,000, of which approximately $47,000,000
do not begin to expire until the year 2003. Additionally, PHC and its
subsidiaries have various tax credits available totaling approximately
$4,000,000, most of which expire by the year 2002. In the first quarter of
1993, PHC adopted the provisions of Statement of Financial Accounting Standards
No. 109, "Accounting for Income Taxes", ("SFAS 109"). SFAS 109 requires that
the tax benefit of such NOL's and credit carryforwards be recorded as an asset
and, to the extent that management can not assess that the utilization of all or
a portion of such NOL's is more likely than not, a valuation allowance should be
recorded. Due to the losses of PHC and
11
<PAGE>
PRATT HOTEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
its subsidiaries through the first quarter of 1994 for both financial and tax
reporting, management was unable to determine that realization of such asset was
more likely than not and thus has provided valuation allowances for the entire
deferred tax asset for all periods presented.
Sales by existing shareholders of common stock or purchases of shares of
publicly-held common stock of PHC by a five percent stockholder, as defined in
the Internal Revenue Code of 1986, as amended (the "Code"), can cause a "change
of control", as defined in Section 382 of the Code, which would limit the
ability of PHC to utilize these loss carryforwards in later tax periods. Should
such a change of control occur, the amount of loss carryforwards available for
use in any one year would most likely be substantially reduced. Future treasury
regulations, administrative rulings or court decisions may also effect PHC's
future utilization of its loss carryforwards.
The components of the deferred tax asset as of March 31, 1994 and December
31, 1993 were as follows:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1994 1993
------------- -------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 22,792,000 $ 18,181,000
Allowance for doubtful accounts 4,608,000 4,724,000
Investment and jobs tax credits 4,075,000 4,075,000
Early extinguishment of debt 2,086,000 5,037,000
Equity losses of unconsolidated
subsidiaries and joint ventures 3,633,000 3,616,000
Other liabilities and reserves 1,699,000 1,890,000
Benefit accrual 1,336,000 1,298,000
Write-off of deferred pre-acquisition
costs - 4,449,000
Other 288,000 332,000
------------- -------------
Total deferred tax assets 40,517,000 43,602,000
------------- -------------
Deferred tax liabilities:
Depreciation and amortization (6,870,000) (7,018,000)
Other (399,000) (539,000)
------------- -------------
Total deferred tax liabilities (7,269,000) (7,557,000)
------------- -------------
Net deferred tax asset 33,248,000 36,045,000
Valuation allowance (33,248,000) (36,045,000)
------------- -------------
$ - $ -
============= =============
</TABLE>
12
<PAGE>
PRATT HOTEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Receivables from and payables to HCC included in the accompanying
consolidated balance sheets in connection with the aforementioned tax allocation
agreements are as follows:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1994 1993
------------ -------------
<S> <C> <C>
Deferred income taxes - current $ 1,589,000 $ 2,016,000
Other noncurrent liabilities (1,589,000) (2,016,000)
</TABLE>
The New Jersey Division of Taxation is currently examining the state income
tax returns of certain of PHC's subsidiaries for the years 1987, 1988 and 1989.
Although a possible range of adjustment can not be estimated, in the opinion of
management, the results of such examination will not have a material adverse
effect on the financial position or results of operations of PHC or its
subsidiaries.
(5) TRANSACTIONS WITH RELATED PARTIES
PHC operates the Holiday Inn located at the north entrance of the
Dallas/Fort Worth Airport ("DFW North") which is owned by Metroplex Hotel
Limited ("Metroplex"), a partnership controlled by certain members of the Pratt
Family. PHC is obligated under the terms of the hotel operating agreement to
make minimum rental payments equal to Metroplex's principal and interest
payments on the underlying indebtedness of this hotel. During February 1994, a
portion of such underlying indebtedness with a principal balance of
approximately $11,200,000 was purchased by PHC at a cost of $6,750,000
($1,000,000 of which was paid during 1993); PHC borrowed the $6,750,000 for the
acquisition from HCC. As a result of such purchase by PHC, PHC has eliminated
any liability at the May 1994 maturity date of the underlying indebtedness so
purchased. Payments under the hotel operating agreement, net of receipts in
1994 since the February note acquisition date, amounted to $277,000 and
$350,000, respectively, during the three month periods ended March 31, 1994 and
1993.
Hollywood Casino - Aurora, Inc. ("HCA"), a wholly owned subsidiary of HCC,
was organized for the purpose of developing and owning Hollywood - Aurora.
Hollywood - Aurora commenced operations on June 17, 1993 and a subsidiary of PHC
began earning, pursuant to a services agreement, a base services fee equal to 5%
of Hollywood - Aurora's operating revenues (as defined in the agreement) subject
to a maximum of $5.5 million annually, and an incentive fee equal to 10% of
gross operating profit (as defined in the agreement to generally include all
revenues, less expenses other than depreciation, interest, amortization and
taxes). Such fees totaled
13
<PAGE>
PRATT HOTEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
approximately $2,685,000 during the three months ended March 31, 1994. Unpaid
base services and incentive fees in the aggregate amount of $4,728,000 and
$3,931,000 at March 31, 1994 and December 31, 1993, respectively, are included
in due from affiliates in the accompanying consolidated balance sheets.
HWCC - Tunica, Inc. ("HWCC-T"), a wholly owned subsidiary of HCC, is
currently developing a dockside gaming facility and hotel in Tunica County,
Mississippi ("Hollywood - Tunica") which is expected to commence operations in
mid-1994. Pursuant to a consulting agreement effective January 1, 1994 and
expiring December 31, 2003, a subsidiary of PHC will receive a consulting fee
from HWCC-T in the amount of $100,000 per month. At March 31, 1994, a
receivable in the amount of $300,000 is included in due from affiliates in the
accompanying consolidated balance sheet.
HCC is obligated under the terms of an administrative services agreement to
pay PHC $20,000 per month in connection with certain shared administrative
costs. In addition, during 1993, PHC and its subsidiaries began allocating to
HCC certain general and administrative costs incurred in connection with HCC's
development activities and its initial public offering. Commencing in 1994, HCC
assumed payment of additional administrative costs and began allocating a
portion of such costs to PHC and its subsidiaries. The net allocated costs and
fees charged (from) to HCC amounted to $(21,000) and $292,000, respectively,
during the three month periods ended March 31, 1994 and 1993. Net (payables to)
receivables from HCC in connection with such fees and allocated costs totaling
($61,000) and $363,000, respectively, are included in due from affiliates in the
accompanying consolidated balance sheets at March 31, 1994 and December 31,
1993.
Interest incurred with respect to the PCPI Notes and the PPI Funding Notes
held by HCC (see Note 3) for the three month periods ended March 31, 1994 and
1993 amounted to $1,454,000 and $1,503,000, respectively. Interest incurred on
the Junior Subordinated Notes to HCC (see Note 3) for the three month period
ended March 31, 1994 amounted to $268,000.
PHC and its subsidiaries have also incurred interest charges to HCC in
connection with various short-term borrowing arrangements between PHC and its
subsidiaries and HCC (see Note 2). Interest expense on such borrowings amounted
to $476,000 and $245,000, respectively, for the three month periods ended March
31, 1994 and 1993. Interest payable to HCC in connection with such borrowings
amounted to $277,000 and $193,000, respectively, at March 31, 1994 and December
31, 1993.
14
<PAGE>
PRATT HOTEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(6) LITIGATION
ATLANTIC CITY CASINO/HOTEL SITE
- - -------------------------------
Certain subsidiaries of PHC have been engaged in litigation arising out of
an agreement entered into with a subsidiary of Penthouse International, Ltd.
("Penthouse") by a subsidiary of PHC to acquire and complete the casino/hotel
site in Atlantic City, New Jersey and the purchase on March 19, 1989, by Donald
J. Trump ("Trump") of the site from the Penthouse subsidiary.
On March 20, 1989, Penthouse and its subsidiary filed suit in the Superior
Court of New Jersey in Atlantic City, New Jersey against PHC and certain of its
subsidiaries. PHC and certain of its subsidiaries subsequently filed a
counterclaim against Penthouse and its subsidiary, and a third-party complaint
against Robert C. Guccione, Trump and Trump Plaza Associates. PHC and its
subsidiaries sought a determination that the contract for the casino/hotel site
was valid and unlawfully breached, compensatory damages, treble damages,
punitive damages and other forms of injunctive relief.
A bifurcated trial on liability issues in the litigation has been
completed. On March 25, 1993, the Court rejected the claims pressed by PHC and
held in favor of some of Penthouse's claims. However, the Court refused to
pierce the corporate veil so as to permit any recovery against PHC, or its
subsidiary which owns the Sands. The PHC subsidiaries which pressed these
claims and which may be adversely affected by the Court's ruling are the special
purpose subsidiaries which were formed to acquire, develop and operate the
proposed hotel/casino project and ancillary parking facilities.
Because the Court's action only affects two separate subsidiaries of PHC,
there are no adverse effects to the operations of, or will there be damages
assessed against PHC, under the Court's ruling. However, as a result of the
Court ruling certain assets which had been capitalized in connection with the
attempted acquisition of the casino/hotel site amounting to $13,086,000 were
written off during 1992.
In January 1991, the PHC subsidiaries began a separate legal proceeding in
the United States District Court for the District of New Jersey alleging
essentially the same claims against Penthouse and Trump as in the various state
court actions, and adding claims under the Sherman and Clayton Antitrust Acts
not asserted in state court. Penthouse has filed a counterclaim and third-party
complaint against the PHC subsidiaries asserting virtually all of the same
claims in the state court actions.
As a result of the determination reached in the parallel state court
proceedings, this action was similarly dismissed; an appeal is pending.
15
<PAGE>
PRATT HOTEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
PARTICIPATION OPTIONS
- - ---------------------
Hotel Aquarius, B.V. ("HABV"), a corporation organized under the laws of
The Netherlands, filed a lawsuit in the United States District Court for the
Southern District of New York on June 19, 1992 against a predecessor of HCC,
PHC, certain members of the Pratt Family and their affiliates (collectively, the
"Pratt Parties") and Greate Bay Casino Corporation, formerly a subsidiary of PHC
("GBCC"). HABV alleges that the Pratt Parties breached certain contracts (the
"Participation Options") entered into with HABV by failing to afford HABV the
opportunity to participate as an investor in reconverting certain office space
at the Sands back into hotel rooms, to participate in an alleged expansion of
the Sands' slot machine capacity, to participate as an investor and in the
management of Hollywood - Aurora. HABV also alleges that the Pratt Parties and
GBCC have been unjustly enriched as a result of benefits conferred upon
Hollywood - Aurora by HABV. HABV's lawsuit seeks an order requiring that the
Pratt Parties perform under the Participation Options, including, but not
limited to, requiring the Pratt Parties to (a) allow HABV to receive 40% of the
profits derived from Hollywood - Aurora and the management thereof, and derived
from the aforementioned work at the Sands and from the alleged expansion of the
slot machine capacity at the Sands; (b) permit HABV to designate 50% of the
members of the boards of directors of HCA and GBCC; and (c) allow HABV to
participate in Hollywood - Aurora on the basis of HABV's alleged contribution to
the project. HABV is also seeking damages in excess of $20 million and
attorneys' fees. HABV also seeks a declaratory judgement that the Participation
Options are in full force and effect and that HABV continues to have the
exclusive right and option to participate in any project, as defined therein,
which may include various gaming related and other projects, until the
Participation Options are validly terminated. HCC and its co-defendants believe
that HABV's claims are without merit and continue to defend their position
vigorously. HCC and its co-defendants have filed counterclaims against HABV
for, among other things, fraudulent inducement, breach of contract and
declaratory relief that the Participation Options are terminated and of no
effect. HCC and its co-defendants have also filed counterclaims against HABV's
principal and its United States representative for fraud and negligent
misrepresentation. Based upon its review, as of May 2, 1994, litigation counsel
for HCC and its co-defendants, is of the view that this litigation will not have
a materially adverse effect on HCC and its co-defendants. However, because
discovery in the case is incomplete, and due to the uncertainties inherent in
litigation, no assurance can be given that HCC and its co-defendants will
prevail in this litigation. HCC's failure to prevail would likely have a
materially adverse effect on HCC's consolidated financial position and results
of operations or could result in interference with the ownership or operation of
the business of PHC.
16
<PAGE>
PRATT HOTEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
OTHER LITIGATION
- - ----------------
PHC and its subsidiaries are also parties in various other legal
proceedings with respect to the conduct of casino and hotel operations.
Although a possible range of loss cannot be estimated, in the opinion of
management, based upon the advice of counsel, settlement or resolution of these
proceedings should not have a material adverse impact upon the consolidated
financial position or results of operations of PHC and its subsidiaries.
The accompanying consolidated financial statements do not include any
adjustments that might result from the outcome of the uncertainties described
above.
(6) RECLASSIFICATIONS
Certain reclassifications have been made to the 1993 consolidated financial
statements to conform to the 1994 consolidated financial statement presentation.
17
<PAGE>
PRATT HOTEL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
LIQUIDITY AND CAPITAL RESOURCES
PHC RECAPITALIZATION
During February 1994, PHC completed the refinancing of virtually all of its
casino-related outstanding debt ("the PHC Recapitalization"). The refinancing
was completed through a public offering of $270 million of debt securities
consisting of $185 million of 10 7/8% First Mortgage Notes due January 15, 2004
and $85 million of 11 5/8% Senior Notes due April 15, 2004. As part of the PHC
Recapitalization, a subsidiary of PHC also issued $15 million of 14 5/8% junior
subordinated notes due in 2005 to HCC. Interest on such debt is payable
semiannually commencing August 17, 1994, subject to meeting certain financial
tests provided for in the indenture. Management of PHC anticipates making
scheduled payments of interest on this debt during 1994.
Proceeds from the debt offerings were used to refinance the existing
11 3/4% First Mortgage Notes and other debt maturing in 1994, to repay $58.4
million of publicly held 15 1/2% unsecured notes issued by a subsidiary of PHC
(the "PCPI Notes") and to provide additional funding for capital expenditures in
connection with an expansion of gaming space at the Sands (including the
repayment of an $8 million interim construction loan provided by HCC). The
remaining $38.8 million of PCPI Notes, which were held by HCC, were exchanged
for $40.5 million discounted principal amount of new deferred interest notes. As
a result of this exchange, PHC's cash interest payments will be reduced by
approximately $6 million per year. Neither HCC nor HCC's other subsidiaries are
obligated for the indebtedness of PHC and its subsidiaries.
GENERAL
During the first quarter of 1994, net cash used by operating activities
(after net interest expense and income taxes) for PHC (including the Sands) was
$10.5 million compared with cash provided by operating activities of $5.8
million for the same period of 1993. Costs accrued during the fourth quarter of
1993 of approximately $10.5 million in connection with the PHC Recapitalization
were paid during the first quarter of 1994. Additionally, during the first
quarter of 1994, PHC made interest payments totaling $5.6 million on the PCPI
Notes of which $2.3 million was paid to HCC on $38.8 million of PCPI Notes held
by HCC; such interest was not paid during 1993 until the second quarter. PHC
also utilized a portion of its operating cash flow and other short-term
borrowings during the first quarter of 1994 to fund capital additions ($3.4
million) and to purchase a mortgage note underlying a hotel which it operates
for an affiliate (see "Other" below).
18
<PAGE>
PRATT HOTEL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
Also during the first quarter of 1994, PHC repaid indebtedness outstanding
of approximately $241.2 million, $240.1 million of which was refinanced. After
completion of the PHC Recapitalization, scheduled maturities of long-term debt
during the remainder of 1994 amount to approximately $8.1 million, including
$6.5 million associated with a hotel that PHC had previously sold. In
connection with this sale, PHC obtained a note receivable which also becomes due
during 1994, in the amount of $7.7 million.
HCC owns a riverboat gaming facility located in Aurora, Illinois
("Hollywood - Aurora"). Since June 1993, a PHC subsidiary has received from
Hollywood - Aurora, pursuant to a services agreement, a base services fee equal
to 5% of operating revenues (as defined in the agreement) subject to a maximum
of $5.5 million annually, and an incentive fee equal to 10% of gross operating
profit (as defined in the agreement to generally include all revenues, less
expenses other than depreciation, interest, amortization and taxes). Base and
incentive fees earned for the period since operations commenced through the
first quarter of 1994 have amounted to $5.3 million and $3 million,
respectively. The base fee is payable quarterly and was paid by Hollywood -
Aurora during 1994 in January and April. Payment of the incentive fee, which is
subject to certain cumulative earnings requirements, was paid during April 1994
and will be paid monthly thereafter.
In January 1994, HCC acquired a dockside gaming site and improvements
located in Tunica County, Mississippi ("Hollywood - Tunica") which it plans to
complete and open in mid-1994. HCC has entered into a consulting agreement
with a PHC subsidiary with respect to Hollywood - Tunica; such agreement would
result in the payment of approximately $1.2 million annually by Hollywood -
Tunica to the PHC subsidiary for consulting services. Such agreement will also
provide for reimbursement of direct costs and expenses incurred.
THE SANDS
The Sands' earnings before depreciation, interest, amortization, taxes and
intercompany management fees of more than $43 million during each of the last
five years have been sufficient to meet its debt service obligations, other than
certain maturities of principal that have been refinanced, and to fund a
substantial portion of its capital expenditures. The Sands has also utilized
short-term borrowings to fund seasonal cash needs and has used long-term
borrowings for certain capital projects.
19
<PAGE>
PRATT HOTEL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
Capital expenditures at the Sands during the three months ended March 31,
1994 amounted to approximately $3.4 million. Approximately $2.3 million of the
first quarter expenditures were in connection with the addition of approximately
25,000 square feet of gaming space, the completion of which is expected in mid-
1994 at a remaining cost estimated to be $6.8 million. Funding for the
expansion has been provided by $15 million obtained from the PHC
Recapitalization and $3.5 million from a combination of equipment financing and
general corporate funds. In addition, the Sands plans to invest an additional
$8.8 million during the remainder of 1994 to improve and enhance certain suites
and rooms in its hotel tower and for a phased introduction of the Hollywood
theme.
Approximately $160 million of the Sands' First Mortgage Notes and other
short-term borrowings of approximately $21 million were refinanced as part of
the PHC Recapitalization.
OTHER
In prior years PHC's hotel operations have required substantial infusions
of operating funds, but the disposition of all but three of its hotel properties
has substantially reduced the demand on PHC's operating cash flow. In
connection with a certain hotel property which PHC operates pursuant to an
operating agreement with an affiliate, PHC is obligated to make minimum rental
payments equal to the principal and interest payments on the underlying
indebtedness attributable to the property; such underlying indebtedness
aggregated $13.8 million at January 31, 1994. During February 1994, a portion
of such underlying indebtedness with a principal balance of $11.2 million was
purchased by PHC at a cost of $6.75 million; PHC borrowed the $6.75 million for
the acquisition from HCC. As a result of such purchase by PHC, PHC has
eliminated any liability at the maturity date of the underlying indebtedness so
purchased.
PHC has agreed to contribute up to $3.9 million over the next three years
(including approximately $1.7 million during 1994) as an additional investment
in an unconsolidated hotel partnership to refurbish the hotel facility; such
commitment is in recognition of PHC's partner having made a $5 million principal
reduction on the underlying mortgage note on the facility.
The Sands operations, through tax allocation payments and the repayment of
intercompany loans, have historically been the primary source of liquidity for
PHC's other operations and activities, including the substantial litigation
costs associated with the attempted acquisition of a casino/hotel site in
Atlantic City, as well as PHC's debt service obligations; such
20
<PAGE>
PRATT HOTEL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
payments from the Sands to PHC are subject to the prior approval of the New
Jersey Casino Control Commission. In addition, certain loan indenture covenants
restrict payments to PHC; consequently, PHC does not anticipate receiving any
dividends from its subsidiaries during 1994. In the past, PHC's other sources of
liquidity and capital resources have been primarily limited to proceeds from
asset sales.
Management anticipates that PHC and its subsidiaries' (including the
Sands') funding requirements for the next 12 months will be substantially met by
(i) existing cash, (ii) cash generated by the Sands' operations, (iii) the
management fee from Hollywood - Aurora, and (iv) the consulting fee from
Hollywood - Tunica.
RESULTS OF OPERATIONS
General
- - -------
Virtually all of PHC's operating results prior to the opening of Hollywood
- - - Aurora in June 1993 were from the Sands. Primarily as a result of the
inclusion of fees earned from the management of Hollywood - Aurora, PHC's
consolidated net revenues increased to $62.7 million for the three months ended
March 31, 1994, compared to $60.9 million for the three months ended March 31,
1993.
As explained below, income from operations at the Sands decreased to $1.1
million from $2.7 million during the first three months of 1994 compared to
1993. PHC has substantially reduced its losses from noncasino hotel operations
over the past several years through the sale of certain owned properties and the
termination of management contracts on certain managed properties. A
termination fee of $1.5 million was recorded during the first quarter of 1993 as
a direct result of this reduced emphasis on noncasino hotels. Additionally,
litigation costs associated with the attempted acquisition of a casino/hotel
site in Atlantic City have been substantially reduced.
PHC made interest payments of $11.5 million during the first quarter of
1994 compared to $5.3 million in 1993. The increase is primarily due to the
payment of accrued interest to holders of the PCPI Notes which amounted to
approximately $5.6 million (including $2.3 million paid to HCC) during the 1994
period.
21
<PAGE>
PRATT HOTEL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
GAMING OPERATIONS
- - -----------------
Income from operations for the three months ended March 31, 1994 at the
Sands amounted to $1.1 million compared to $2.7 million for 1993. Net revenues
for the first quarter of 1994 were $57.3 million compared to $57.2 million for
1993. The decrease in income from operations was primarily attributable to
increased marketing costs and expenditures under coin incentive programs which,
because of adverse weather conditions, did not increase casino volume
proportionately.
The following table sets forth certain unaudited financial and operating
data relating to the Sands' operations:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------
1994 1993
--------- ---------
(IN THOUSANDS,
EXCEPT PERCENTAGES)
<S> <C> <C>
REVENUES:
Table games $ 22,164 $ 22,157
Slot machines 31,128 31,011
--------- ---------
Total(1) $ 53,292 $ 53,168
========= =========
TABLE GAMES:
Gross Wagering
(Drop)(2) $ 122,129 $ 137,988
========= =========
Hold Percentages:(3)
Sands 18.1% 16.1%
Atlantic City Casino
Gaming Industry 16.1% 16.1%
SLOT MACHINES:
Gross Wagering
(Handle)(2) $ 351,975 $ 344,258
========= =========
Hold Percentage:(3)
Sands(4) 8.8% 9.0%
</TABLE>
____________________________
22
<PAGE>
PRATT HOTEL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
(1) Does not include revenues from poker ($610,000) or simulcast horse racing
wagering ($234,000) in 1994.
(2) Gross wagering (drop) consists of the total value of chips purchased for
table games excluding poker tables and coins (handle) wagered in slot
machines.
(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". The hold percentage calculation excludes revenues from poker
tables.
(4) The Sands' hold percentage with respect to slot machines is reflected on an
accrual basis. Comparable data for the Atlantic City gaming industry is
not available.
Table games drop decreased $15.9 million (11.5%) for the three months ended
March 31, 1994 compared with 1993. This decrease compares with a decrease of
4.7% in table drop for the overall Atlantic City industry 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) declined to
8.1% during the first quarter of 1994 from 8.8% during the first quarter of
1993. A number of factors adversely affected 1994 table games performance
including the severe winter weather during the first quarter, particularly on
weekend periods which generally affect the Sands to a greater degree than its
competitors since the Sands caters to premium table players who concentrate
their visits over weekend periods, the overall trend in the Atlantic City
marketplace towards slot machine play and a planned reduction in table game
marketing expenditures.
The Sands' average number of table games, excluding poker, on the casino
floor increased 9.4% during 1994 compared with 1993. By comparison, the overall
Atlantic City industry decline in the average number of table games, excluding
poker, for the comparable period was 1.2%. The increase in the number of table
games, excluding poker, at the Sands has resulted from the opening of a
temporary gaming facility on the fourth floor of the Sands which has added
approximately 10,000 square feet of additional gaming space. This increase in
the number of table games has not resulted in a corresponding increase in table
game performance due to an overall numerical decrease in the more highly
utilized tables on the main casino floor which has not been overcome by the
addition of tables in the temporary gaming facility.
Slot machine handle increased $7.7 million (2.2%) for the three months
ended March 31, 1994 compared with the previous year. The Sands' slot machine
handle increase for the first quarter of 1994 was slightly more than
23
<PAGE>
PRATT HOTEL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
the 2.1% increase in slot machine handle for the Atlantic City industry during
the same period. The increase in the average number of slot machines at the
Sands during the first quarter of 1994 compared with 1993 was 6.2% compared to
the Atlantic City industry increase of 6.4%. The increased handle at the Sands
is also due, in part, to increased coin incentive marketing programs and to a
lower slot hold percentage, which encourages extended patron play.
REVENUES
- - --------
Casino revenues at the Sands, including poker and simulcast horse racing
wagering revenues, increased by $968,000 (1.8%) during the first quarter of 1994
compared with 1993. Increases in slot machine volume at the Sands were offset by
decreases in table game volume and lower slot hold percentages. The Sands'
decline in slot hold percentage is consistent with the competitive trend in
Atlantic City towards lower slot hold percentages.
The Sands opened its temporary simulcasting and poker facility on June 25,
1993. This temporary facility contains approximately 10,000 square feet of
gaming space and also includes approximately 15 blackjack tables. By adding
these additional table games in the simulcasting facility, the Sands was able to
add approximately 80 slot machines on its main casino floor. As noted
previously, a permanent facility is being constructed as part of the 25,000
square foot expansion of gaming space expected to be completed in mid-1994 and
will replace the 10,000 square foot temporary facility.
Rooms revenues decreased by $157,000 (4.7%) for the three months ended
March 31, 1994 compared with 1993. The decrease for 1994 primarily reflects
reduced casino volume at the Sands as a result of the inclement weather. Food
and beverage revenues did not change significantly for the three months ended
March 31, 1994 compared with 1993. Increased food and beverage revenues
resulting from additional dining outlets have been offset by the overall
decreases in casino volume as noted above. Other revenues increased $1.1
million (32.9%) during the first quarter of 1994 compared to 1993 as a result of
$2.7 million of fees from the management of Hollywood - Aurora during 1994
offset by $1.5 million of termination fees recorded during 1993 in connection
with the termination of a management contract on a noncasino hotel.
Promotional allowances represent the retail value of goods and services
provided free of charge to casino customers under various marketing programs.
Promotional allowances have increased slightly for the three months ended March
31, 1994, compared with the previous year. These allowances, as a percentage of
rooms, food and beverage and other revenues at the Sands, have
24
<PAGE>
PRATT HOTEL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
increased to 67.3% for the three months ended March 31, 1994 from 61% for 1993,
reflecting the increased utilization of rooms, food and beverage and
entertainment complimentaries to attract and retain high frequency slot patrons.
DEPARTMENTAL EXPENSES
- - ---------------------
Casino expenses at the Sands increased $2.5 million (6.2%) during the first
quarter of 1994 compared with 1993. This increase was primarily due to
increases in slot marketing costs and expenditures under coin incentive programs
as the Sands continues to emphasize attracting and retaining high frequency slot
patrons. Such increases have been partially offset by planned reductions in
table games marketing and patron transportation expenses.
Rooms expense declined $93,000 (8.8%) during the three months ended
March 31, 1994 compared with the same period during 1993. In addition to reduced
patron volume as a result of inclement weather during the first quarter of 1994
in Atlantic City, this decline was primarily due to increased room
complimentaries charged to the casino department at the Sands. Food and beverage
expense did not change significantly. Other expenses decreased $252,000 (20.4%)
for the first quarter of 1994 compared with 1993 primarily due to reductions in
headliner entertainment at the Sands during the first quarter of 1994.
INTEREST EXPENSE
- - ----------------
Interest expense increased $435,000 (4.6%) during the first quarter of
1994. This increase was due primarily to the additional debt resulting from the
PHC Recapitalization which was completed during February 1994.
BENEFIT (PROVISION) FOR INCOME TAXES
- - ------------------------------------
PHC and its subsidiaries have tax net operating loss carryforwards
("NOL's") totaling approximately $67 million, of which approximately $47 million
do not begin to expire until the year 2003. Additionally, PHC and its
subsidiaries have various tax credits available totaling approximately
$4 million, many of which expire by the year 2002. In the first quarter of 1993,
PHC and its subsidiaries adopted the provisions of Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes." The new standard
requires that the tax benefit of such NOL's and credit carryforwards be recorded
as an asset and to the extent that management cannot assess that utilization of
all or a portion of such NOL's is more
25
<PAGE>
PRATT HOTEL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
likely than not, a valuation allowance should be recorded. Due to the financial
reporting and tax losses of PHC and its subsidiaries through the first quarter
of 1994, management was unable to determine that realization of that asset was
more likely than not and thus has provided valuation allowances for the entire
deferred tax asset for all periods presented.
NET OPERATING LOSS CARRYFORWARDS
- - --------------------------------
Sales by existing stockholders of common stock or purchases of shares of
publicly-held common stock of PHC by a five percent stockholder, as defined in
the Internal Revenue Code of 1986, as amended (the "Code"), can cause a "change
of control", as defined in Section 382 of the Code, which would limit the
ability of PHC to utilize these loss carryforwards in later tax periods. Should
such a change of control occur, the amount of loss carryforwards available for
use in any one year would most likely be substantially reduced. Future treasury
regulations, administrative rulings or court decisions may also effect PHC's
future utilization of its loss carryforwards.
INFLATION
- - ---------
Management believes that in the near term, modest inflation, along with
continued competition within the gaming industry for qualified and experienced
personnel, will continue to cause increases in operating expenses, particularly
labor and employee benefits costs.
SEASONALITY
- - -----------
Historically, the Sands' operations have been highly seasonal in nature,
with the peak activity occurring from May to September. Consequently, the
results of PHC's operations for the first and fourth quarters are traditionally
less profitable than the other quarters of the fiscal year. In addition,
Hollywood - Aurora's and the Sands' operations may fluctuate significantly due
to a number of factors, including chance. Such fluctuations may materially
affect PHC's casino revenues, service fees and overall profitability.
26
<PAGE>
PART II:
OTHER INFORMATION
The registrant did not file any reports on Form 8-K during the quarter
ended March 31, 1994. The registrant filed Form 10-K with the Securities and
Exchange Commission on April 14, 1994, for the year ended December 31, 1993.
SIGNATURES
- - ----------
Pursuant to the requirements 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.
PRATT HOTEL CORPORATION
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Registrant
Date: May 13, 1994 By: /s/ Charles F. LaFrano, III
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Charles F. LaFrano, III
Vice President and
Principal Accounting Officer
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