<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 SEPTEMBER 30, 1994
-------------------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE COMMISSION 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 offices) (Zip Code)
(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 November 10, 1994
- - - ---------------------------------------- ------------------------------------
COMMON STOCK, $.10 PAR VALUE 5,186,627 SHARES
1 of 27
<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, the management of a riverboat gaming facility
located in Aurora, Illinois ("Hollywood - Aurora") and a dockside gaming
facility located in Tunica County, Mississippi ("Hollywood - Tunica").
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 47% 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 (collectively, the "Pratt Family").
The consolidated financial statements as of September 30, 1994 and for the
three and nine month periods ended September 30, 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 September 30, 1994, and the results of its
consolidated operations for the three and nine month periods ended September 30,
1994 and 1993, and its consolidated cash flows for the nine month periods ended
September 30, 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 consolidated 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. ("GBHC"), 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 and nine month periods ended September 30,
1994 are not necessarily indicative of the operating results for the full year.
2 of 27
<PAGE>
PRATT HOTEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1994 1993
------------- -------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 28,230,000 $ 15,466,000
Accounts receivable, net of allowances of
$14,868,000 and $14,814,000, respectively 14,481,000 14,179,000
Inventories 4,560,000 3,845,000
Due from affiliates 2,812,000 4,356,000
Deferred income taxes 1,103,000 2,904,000
Refundable deposits and other current assets 4,253,000 5,415,000
------------- -------------
Total current assets 55,439,000 46,165,000
------------- -------------
Property and Equipment:
Land 37,807,000 37,554,000
Buildings and improvements 172,918,000 169,340,000
Operating equipment 94,681,000 74,256,000
Construction in progress 1,099,000 6,829,000
------------- -------------
306,505,000 287,979,000
Less - accumulated depreciation and amortization (136,400,000) (124,877,000)
------------- -------------
Net property and equipment 170,105,000 163,102,000
------------- -------------
Other Assets:
Obligatory investments 3,643,000 4,497,000
Deferred financing costs 10,095,000 562,000
Notes receivable 9,203,000 7,860,000
Other assets 3,435,000 2,106,000
------------- -------------
Total other assets 26,376,000 15,025,000
------------- -------------
$ 251,920,000 $ 224,292,000
============= =============
</TABLE>
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated balance sheets.
3 of 27
<PAGE>
PRATT HOTEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
LIABILITIES AND SHAREHOLDERS' DEFICIT
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1994 1993
------------- -------------
<S> <C> <C>
Current Liabilities:
Borrowings from affiliate $ 5,000,000 $ 16,133,000
Current maturities of long-term debt 653,000 7,862,000
Accounts payable 10,071,000 8,138,000
Accrued liabilities -
Salaries and wages 3,780,000 3,543,000
Progressive jackpot 186,000 1,327,000
Interest 12,051,000 6,437,000
Costs related to extinguishment of debt 98,000 10,498,000
Other 9,347,000 8,276,000
Other current liabilities 3,344,000 5,614,000
------------- -------------
Total current liabilities 44,530,000 67,828,000
------------- -------------
Long-Term Debt 332,562,000 280,260,000
------------- -------------
Other Noncurrent Liabilities 12,424,000 14,039,000
------------- -------------
Commitments and Contingencies
Shareholders' Deficit:
Common stock, $.10 par value per share;
10,000,000 shares authorized; 5,186,627 and
5,175,977 shares issued and outstanding,
respectively 519,000 518,000
Additional paid-in capital 15,607,000 15,581,000
Accumulated deficit (153,722,000) (153,934,000)
------------- -------------
Total shareholders' deficit (137,596,000) (137,835,000)
------------- -------------
$ 251,920,000 $ 224,292,000
============= =============
</TABLE>
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated balance sheets.
4 of 27
<PAGE>
PRATT HOTEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
-------------------------
1994 1993
----------- -----------
<S> <C> <C>
Revenues:
Casino $79,023,000 $71,025,000
Rooms 3,869,000 3,794,000
Food and beverage 9,079,000 7,818,000
Other 5,593,000 4,600,000
----------- -----------
97,564,000 87,237,000
Less - Promotional allowances (7,190,000) (7,139,000)
----------- -----------
Net revenues 90,374,000 80,098,000
----------- -----------
Expenses:
Casino 54,118,000 50,419,000
Rooms 1,051,000 986,000
Food and beverage 3,373,000 3,076,000
Other 2,237,000 1,820,000
General and administrative 6,976,000 6,864,000
Depreciation and amortization 5,320,000 5,579,000
----------- -----------
Total expenses 73,075,000 68,744,000
----------- -----------
Income from operations 17,299,000 11,354,000
----------- -----------
Non-operating income (expense):
Interest income 1,324,000 381,000
Interest expense, net of capitalized
interest of $36,000 in 1993 (9,892,000) (9,651,000)
----------- -----------
Total non-operating expense, net (8,568,000) (9,270,000)
----------- -----------
Income before income taxes 8,731,000 2,084,000
Income tax provision (850,000) (625,000)
----------- -----------
Net income $ 7,881,000 $ 1,459,000
----------- -----------
Net income per common share $ 1.52 $ .28
=========== ===========
</TABLE>
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated statements.
5 of 27
<PAGE>
PRATT HOTEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------
1994 1993
------------ ------------
<S> <C> <C>
Revenues:
Casino $194,600,000 $187,609,000
Rooms 10,767,000 10,763,000
Food and beverage 23,349,000 21,372,000
Other 13,509,000 9,212,000
------------ ------------
242,225,000 228,956,000
Less - Promotional allowances (18,811,000) (18,442,000)
------------ ------------
Net revenues 223,414,000 210,514,000
------------ ------------
Expenses:
Casino 144,262,000 136,594,000
Rooms 3,087,000 3,065,000
Food and beverage 9,177,000 9,110,000
Other 4,527,000 4,249,000
General and administrative 20,654,000 19,934,000
Depreciation and amortization 14,300,000 15,482,000
------------ ------------
Total expenses 196,007,000 188,434,000
------------ ------------
Income from operations 27,407,000 22,080,000
------------ ------------
Non-operating income (expense):
Interest income 2,542,000 1,139,000
Interest expense, net of capitalized
interest of $762,000 and $36,000, respectively (28,954,000) (28,829,000)
------------ ------------
Total non-operating expense, net (26,412,000) (27,690,000)
------------ ------------
Income (loss) before income taxes 995,000 (5,610,000)
Income tax provision (783,000) (717,000)
------------ ------------
Net income (loss) $ 212,000 $ (6,327,000)
============ ============
Net income (loss) per common share $ 0.04 $ (1.23)
============ ============
</TABLE>
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated statements.
6 of 27
<PAGE>
PRATT HOTEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------------
1994 1993
------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ 212,000 $ (6,327,000)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization, including
accretion of debt discount 18,080,000 15,753,000
Provision for doubtful accounts 2,205,000 2,671,000
Deferred income taxes 794,000 (299,000)
Increase in accounts receivable (2,440,000) (4,565,000)
(Decrease) increase in accounts payable and
accrued expenses (1,528,000) 7,259,000
Decrease in progressive jackpot accrual (1,141,000) (182,000)
Net change in other current assets and liabilities (529,000) (2,253,000)
Net change in other noncurrent assets and liabilities (1,482,000) 13,000
------------- -------------
Net cash provided by operating activities 14,171,000 12,070,000
------------- -------------
INVESTING ACTIVITIES:
Net property and equipment additions (18,526,000) (5,290,000)
Collections on notes receivable 7,590,000 200,000
Obligatory investments (400,000) (1,455,000)
Purchase of mortgage note (5,750,000) -
------------- -------------
Net cash used in investing activities (17,086,000) (6,545,000)
------------- -------------
FINANCING ACTIVITIES:
(Repayment) issuance of short-term debt (21,000,000) 21,000,000
Net (repayments to) borrowings from affiliate (11,133,000) 2,139,000
Deferred financing costs (10,212,000) (1,948,000)
Issuance of long-term debt 285,000,000 -
Repayments of long-term debt (227,003,000) (15,857,000)
Issuance of common stock 27,000 80,000
------------- -------------
Net cash provided by financing activities 15,679,000 5,414,000
------------- -------------
Net increase in cash and cash equivalents 12,764,000 10,939,000
Cash and cash equivalents at beginning
of period 15,466,000 13,459,000
------------- -------------
Cash and cash equivalents at end of period $ 28,230,000 $ 24,398,000
============= =============
</TABLE>
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated statements.
7 of 27
<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 and 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")
(see 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 53% 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 September 30, 1994 and for
the three and nine month periods ended September 30, 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 September 30, 1994, the results of its consolidated
operations for the three and nine month periods ended September 30, 1994 and
1993 and its consolidated cash flows for the nine month periods ended September
30, 1994 and 1993.
(2) SHORT-TERM CREDIT FACILITIES
During June 1994, a subsidiary of PHC entered into an agreement for a
bank line of credit in the amount of $5,000,000. The agreement provides for
interest on borrowings at the bank's prime lending rate plus 3/4% per annum. In
addition to the maintenance of certain financial ratios, the line of credit
agreement contains numerous restrictive covenants, all of which are also
covenants under other debt as described in Note 3. The bank line of credit
agreement also contains certain cross-default provisions with other outstanding
debt of PHC and its subsidiaries. Borrowings under the line of credit are
guaranteed to the extent of $2,000,000 by another subsidiary of PHC. There are
no borrowings outstanding under the line of credit at September 30, 1994.
During February and March 1993, a subsidiary of PHC issued $21,000,000
of Series A and Series B 13 1/2% 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 with
additional increases of 1/4% 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 September 30, 1994 and December 31, 1993, PHC and its
subsidiaries had outstanding borrowings of $6,000,000 and $10,050,000,
respectively, from HCC. Of the amounts borrowed, $1,000,000, which is not due
until April 1, 1998, is classified as noncurrent in the accompanying balance
sheets at September 30, 1994 and December 31, 1993. The remaining amounts are
due on demand, or if no demand is made, on April 1, 1998. Such 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.
8 of 27
<PAGE>
PRATT HOTEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
In addition, HCC agreed to loan up to $8,000,000 to a subsidiary of
PHC, the proceeds of which were loaned to and 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 purpose. The loan accrued interest at the rate of 13
1/2% 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>
SEPTEMBER 30, DECEMBER 31,
1994 1993
-------------- -------------
<S> <C> <C>
10 7/8% first mortgage notes, due 2004 (a) $185,000,000 $ -
11 3/4% first mortgage notes,
refinanced in 1994, net of
discount of $45,000 (b) - 161,623,000
11 5/8% senior notes, due 2004 (c) 85,000,000 -
15 1/2% unsecured notes, refinanced in 1994 (d) - 97,143,000
14 5/8% junior subordinated notes, due 2005 (e) 15,000,000 -
14 7/8% secured promissory note, net of
discount of $66,378,000 (f) 44,258,000 -
Second lien wrap-around mortgage note,
repaid in September 1994 (g) - 6,663,000
Series Notes, refinanced in 1994 (Note 2) - 21,000,000
Other 3,957,000 1,693,000
------------ ------------
Total indebtedness 333,215,000 288,122,000
Less - current maturities (653,000) (7,862,000)
------------ ------------
Total long-term debt $332,562,000 $280,260,000
============ ============
</TABLE>
- - - -------------------
[FN]
(a) 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") and collateralized by a first mortgage on the Sands.
Interest on the notes accrues at the rate of 10 7/8% per annum, payable
semiannually commencing July 15, 1994. Interest only is payable during the
first three years. Commencing on July 15, 1997, semiannual principal
payments of $2,500,000 will become due on each interest payment date.
9 of 27
<PAGE>
PRATT HOTEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
The indenture for 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 requires the
maintenance of certain cash balances and, commencing in 1994, requires that
a minimum of $7,000,000 be expended for property and fixture renewals,
replacements and betterments, subject to increases of five percent per
annum thereafter. The indenture also contains certain cross-default
provisions with respect to the Senior Notes described in (c) below.
(b) 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.
(c) 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 for the Senior 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. The
indenture also contains certain cross default provisions with respect to
the 10 7/8% First Mortgage Notes described in (a) above.
(d) 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.
(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 coverage and other payment restriction tests required by the
indenture for the 10 7/8% First Mortgage Notes, is payable semiannually
commencing August 17, 1994. Interest was not paid on August 17, 1994 as a
result of losses experienced by a PHC subsidiary during the second quarter
(see Note 5).
(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 -
10 of 27
<PAGE>
PRATT HOTEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
see (d) 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 was repaid during September 1994. Interest accrued at prime plus
two percentage points (subject to a minimum of 11 1/2%) and was payable
monthly based on a 15-year amortization schedule.
Scheduled payments of long-term debt as of September 30, 1994 are set
forth below:
1994 (3 months) $ 263,000
1995 523,000
1996 569,000
1997 3,482,000
1998 5,457,000
Thereafter 389,299,000
------------
Total $399,593,000
============
Interest paid, net of amounts capitalized, amounted to $20,163,000 and
$25,421,000, respectively, during the nine month periods ended September 30,
1994 and 1993.
(4) INCOME TAXES
Components of PHC's provision for income taxes consisted of the following:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- -----------------------
1994 1993 1994 1993
--------- --------- --------- -----------
<S> <C> <C> <C> <C>
Federal income taxes $ - $ - $ - $ -
State income tax (provision) benefit:
Current (533,000) (677,000) 11,000 (1,016,000)
Deferred (317,000) 52,000 (794,000) 299,000
--------- --------- --------- -----------
$(850,000) $(625,000) $(783,000) $ (717,000)
========= ========= ========= ===========
</TABLE>
11 of 27
<PAGE>
PRATT HOTEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
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. No federal income taxes were paid by PHC during either
of the nine month periods ended September 30, 1994 or 1993. Total state income
taxes paid by PHC amounted to $255,000 and $1,393,000, respectively, for the
nine month periods ended September 30, 1994 and 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 $79,000,000, of which approximately $59,000,000
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 its subsidiaries through the third
quarter of 1994 for tax reporting purposes, 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 or purchases of PHC or HCC common stock by certain five percent
stockholders, 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 annual
loss carryforwards available for use 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.
12 of 27
<PAGE>
PRATT HOTEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
The components of the deferred tax asset as of September 30, 1994 and
December 31, 1993 were as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1994 1993
------------- ------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 26,771,000 $ 18,181,000
Allowance for doubtful accounts 5,687,000 4,724,000
Investment and jobs tax credits 4,075,000 4,075,000
Early extinguishment of debt - 5,037,000
Equity losses of unconsolidated subsidiaries
and joint ventures 3,569,000 3,616,000
Other liabilities and reserves 2,024,000 1,890,000
Benefit accrual 1,474,000 1,298,000
Write-off of deferred pre-acquisition costs - 4,449,000
Other 436,000 332,000
------------ ------------
Total deferred tax assets 44,036,000 43,602,000
------------ ------------
Deferred tax liabilities:
Depreciation and amortization (8,292,000) (7,018,000)
Other (394,000) (539,000)
------------ ------------
Total deferred tax liabilities (8,686,000) (7,557,000)
------------ ------------
Net deferred tax asset 35,350,000 36,045,000
Valuation allowance (35,350,000) (36,045,000)
------------ ------------
$ - $ -
============ ============
</TABLE>
Receivables and payables in connection with the aforementioned tax
allocation agreements are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1994 1993
------------- ------------
<S> <C> <C>
Deferred income taxes - current $ 1,103,000 $ 2,016,000
Other noncurrent liabilities (1,103,000) (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 through
1991. 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 consolidated financial position or results of operations
of PHC or its subsidiaries.
13 of 27
<PAGE>
PRATT HOTEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
(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 from third parties by PHC at a cost of
$6,750,000 ($1,000,000 of which was paid during 1993), which funds were borrowed
from HCC. As a result of such purchase, PHC eliminated any contingent liability
with respect to the underlying indebtedness so purchased. Payments under the
hotel operating agreement, net of debt service receipts since the February 1994
note acquisition date, amounted to $135,000 and $545,000, respectively, during
the three and nine month periods ended September 30, 1994 and $348,000 and
$1,048,000, respectively, during the three and nine month periods ended
September 30, 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 $2,901,000 and $7,279,000, respectively, during the
three and nine month periods ended September 30, 1994 and $2,539,000 and
$2,733,000, respectively, during the three and nine month periods ended
September 30, 1993. Unpaid base services and incentive fees in the aggregate
amount of $2,042,000 and $3,931,000 at September 30, 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,
completed construction of a dockside gaming facility in Tunica County,
Mississippi ("Hollywood - Tunica") which commenced operations in August 1994.
Pursuant to a ten-year consulting agreement with HWCC - T, a subsidiary of PHC
receives monthly consulting fees of $100,000.
HCC is obligated under the terms of an administrative services
agreement to pay PHC $50,000 per month during 1994 ($20,000 per month during
1993). In addition, during 1993, PHC and its subsidiaries began sharing certain
general and administrative costs with HCC. Costs allocated by HCC to PHC
exceeded the administrative services fees due to PHC by $4,000 during the three
month period ended September 30, 1994. Net allocated costs and fees charged to
HCC by PHC amounted to $141,000 during the nine month periods ended September
30, 1994 and $577,000 and $1,656,000, respectively, during the three and nine
month periods ended September 30, 1993.
14 of 27
<PAGE>
PRATT HOTEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
Interest expense with respect to borrowings from HCC is set forth
below:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- --------------------------------
1994 1993 1994 1993
---------- ---------- ------------- -----------------
<S> <C> <C> <C> <C>
PPI Funding Notes and the PCPI
Notes held by HCC (Note 3) $1,540,000 $1,503,000 $4,502,000 $4,508,000
Junior Subordinated Notes (Note 3) 548,000 - 1,365,000 -
Short-term borrowings (Note 2) 215,000 252,000 1,031,000 745,000
</TABLE>
Accretion of interest on the PPI Funding Notes is included in the
outstanding note payable balance at September 30, 1994. Interest due to HCC on
the PCPI Funding Notes at December 31, 1993 amounted to $1,503,000 and is
included in accrued interest payable on the accompanying consolidated balance
sheet. Interest accrued on the Junior Subordinated Notes, including interest
deferred from the August 17, 1994 scheduled payment date (see Note 3), of
$1,365,000 is included in interest payable on the accompanying consolidated
balance sheet at September 30, 1994. Interest accrued on short- term borrowings
which amounted to $238,000 and $193,000, respectively, at September 30, 1994 and
December 31, 1993, is also included in interest payable on the accompanying
consolidated balance sheets.
(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.
15 of 27
<PAGE>
PRATT HOTEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
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. An appeal is pending; nevertheless, settlement
negotiations are ongoing with Penthouse.
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.
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, Lars-Erik Magnusson, and HABV's United States representative, Richard
Bernstein, for fraud and negligent misrepresentation. Based upon its review, as
of September 7, 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
16 of 27
<PAGE>
PRATT HOTEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
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.
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.
(7) PROGRESSIVE JACKPOT
Regulations approved by the New Jersey Casino Control Commission allow
casino licensees to establish time limits for offering progressive slot machine
jackpots to customers. Upon the expiration of the stated time limits, and upon
providing proper notice to the casino customers, casino licensees are afforded
certain relief including the reduction or removal of the progressive jackpot
from the gaming floor. Accordingly, during May 1994 and June 1993, GBHC removed
certain progressive jackpots from HWCC - Tunica the gaming floor, resulting in
the reversal of $1,035,000 and $342,000 of progressive jackpot liabilities,
respectively, and the corresponding recognition of an equal amount of slot
machine revenues.
(8) RECLASSIFICATIONS
Certain reclassifications have been made to the 1993 consolidated financial
statements to conform to the 1994 consolidated financial statement presentation.
17 of 27
<PAGE>
PRATT HOTEL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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, 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, with payment subject to meeting
certain financial coverage and payment restriction tests required by the
indenture for the 10 7/8% First Mortgage Notes. Interest was not paid on August
17, 1994 as a result of losses experienced by a PHC subsidiary during the second
quarter.
Proceeds from the debt offerings were used to refinance outstanding 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 partial funding for 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 notes with deferred interest payments. 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
PHC's principal assets and sources of revenues are the Sands and a
management contract with Hollywood - Aurora, a riverboat gaming facility in
Aurora, Illinois owned by HCC. During the first nine months of 1994, PHC's net
cash provided by operating activities amounted to $3.9 million after payment of
approximately $10.3 million of costs accrued during 1993 in connection with the
PHC Recapitalization. PHC has utilized a portion of its operating cash flow and
net borrowings during 1994 to fund capital additions ($18.5 million) and to
purchase a mortgage note ($5.75 million) secured by a hotel which PHC operates
for an affiliate (see "Other" below).
During the first nine months of 1994, PHC repaid third party
indebtedness of approximately $248 million, including $240.1 million which was
refinanced, and affiliated indebtedness of $11.1 million. Scheduled maturities
of long-term debt during the remainder of 1994 amount to approximately $263,000.
Since June 1993, a PHC subsidiary has earned a base management fee
equal to 5% of operating revenues (as defined in the management 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 management agreement) from the
operation of Hollywood - Aurora. Base and incentive fees earned for the period
since June 1993 through the third quarter of 1994 amounted to $7.2 million and
$5.7 million, respectively, of which $9.2 million was received by PHC in the
first nine months of 1994. The base fee is payable quarterly, subject to
approval by the Board of Directors of HCC. Initial payment of the incentive
fee, which is
18 of 27
<PAGE>
PRATT HOTEL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
subject to certain cumulative earnings requirements, was made during April 1994
and has been made monthly thereafter.
A PHC subsidiary entered into a ten-year agreement with Hollywood -
Tunica which provides for monthly payments of $100,000 to the PHC subsidiary for
consulting services. The agreement also provides 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 used short-
term borrowings to fund seasonal cash needs and has used long-term borrowings
for certain capital projects.
Capital expenditures at the Sands during the nine months ended
September 30, 1994 amounted to approximately $18.5 million. Approximately $13.9
million of such expenditures were in connection with the addition of
approximately 25,000 square feet of gaming space. Construction activities on
this space, which commenced in June 1993, were completed at the end of the
second quarter and operations in the expanded and reconfigured gaming space
commenced on July 1, 1994 (the "Grand Opening"). Funding for the expansion was
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 $1.3 million during the
remainder of 1994 for general capital improvements.
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.
During June 1994, GBHC entered into an agreement for a $5 million bank
line of credit, all of which was available for working capital purposes at
September 30, 1994. Management does not presently anticipate borrowings on this
line of credit during the fourth quarter of 1994.
OTHER
In prior years PHC's hotel operations have required substantial
infusions of operating funds; however, the disposition of all but three of its
hotel properties has substantially reduced the cash required to fund hotel
operations. 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, which funds were
borrowed from HCC. As a result of such purchase, PHC eliminated any contingent
liability with respect to the underlying indebtedness so purchased.
19 of 27
<PAGE>
PRATT HOTEL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
PHC has agreed to contribute up to $3.9 million over the next three
years (including approximately $700,000 during the remainder of 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 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. PHC's other past sources of liquidity and capital resources
have been primarily limited to proceeds from asset sales. PHC has substantially
reduced its losses from non-casino hotel operations over the past several years
through the sale of certain hotel properties and the termination of management
contracts on certain managed hotel properties. Additionally, PHC's litigation
costs have been substantially reduced. The combination of reduced costs and the
introduction of management and consulting fees earned on non-owned gaming
facilities have substantially eliminated PHC's reliance on intercompany payments
as a source of liquidity.
Management anticipates that PHC and its subsidiaries' (including the
Sands) funding requirements for the next 12 months will be satisfied by (i)
existing cash, (ii) cash generated by the Sands' operations, (iii) the
management fee from Hollywood - Aurora, (iv) the consulting fee from Hollywood -
Tunica, and (v) management fees from remaining hotel operations.
RESULTS OF OPERATIONS
GENERAL
Substantially all of PHC's operating results prior to the opening of
Hollywood - Aurora in June 1993 were from the Sands. As a result of management
fees earned from Hollywood - Aurora and the recently completed expansion of
gaming space at the Sands, PHC's consolidated net revenues increased to $90.4
million and $223.4 million, respectively, for the three and nine month periods
ended September 30, 1994, compared to $80.1 million and $210.5 million,
respectively, for the three and nine month periods ended September 30, 1993.
PHC's income from operations increased to $17.3 million and $27.4 million,
respectively from $11.4 million and $22.1 million, respectively, during the
third quarter and first nine months of 1994 compared to 1993.
PHC made interest payments of $20.2 million during the first nine
months of 1994 compared to $25.4 million during the same period in 1993. This
decrease is due, in part, to the payment of only four and one-half months of
accrued interest to holders of the retired PCPI Notes, which amounted to $5.6
million during the 1994 period, compared to a semiannual interest payment of
$7.9 million during 1993. In addition, during the 1993 period the Sands' then
outstanding first mortgage notes required monthly payments including interest;
accordingly, nine months of interest was paid. Replacement debt issued as
20 of 27
<PAGE>
PRATT HOTEL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
part of the PHC Recapitalization requires semiannual interest payments beginning
in July 1994; consequently, only five months of accrued interest was paid during
the nine month period ended September 30, 1994.
GAMING OPERATIONS
The following table sets forth certain unaudited financial and
operating data relating to the Sands' operations:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- ------------------------
1994 1993 1994 1993
--------- --------- ----------- -----------
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C>
REVENUES:
Table games $ 30,114 $ 26,083 $ 73,900 $ 72,279
Slot machines 47,509 43,585 117,477 113,891
Other (1) 1,400 1,357 3,223 1,439
-------- -------- ---------- ----------
Total $ 79,023 $ 71,025 $ 194,600 $ 187,609
======== ======== ========== ==========
TABLE GAMES:
Gross Wagering
(Drop) (2) $182,609 $166,596 $ 453,207 $ 467,154
======== ======== ========== ==========
Hold Percentages: (3)
Sands 16.5% 15.7% 16.3% 15.5%
Atlantic City Casino
Gaming Industry 15.7% 15.5% 15.7% 15.7%
SLOT MACHINES:
Gross Wagering
(Handle) (2) $540,056 $478,538 $1,319,909 $1,244,771
======== ======== ========== ==========
Hold Percentage:(3)
Sands(4) 8.8% 9.1% 8.8% 9.1%
</TABLE>
____________________________
(1) Consists of revenues from poker ($947,000 and $2.2 million, respectively,
for the three and nine month periods ended September 30, 1994 and $988,000
and $1.1 million, respectively, for the three and nine month periods ended
September 30, 1993) and simulcast horse racing wagering
21 of 27
<PAGE>
PRATT HOTEL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
($453,000 and $1 million, respectively, for the three and nine month
periods ended September 30, 1994; and $369,000 and $389,000, respectively,
for the three and nine month periods ended September 30, 1993).
(2) Gross wagering consists of the total value of chips purchased for table
games (excluding poker) and keno wagering (collectively, the "drop") and
coins wagered in slot machines ("handle").
(3) Casino revenues consist of the portion of gross wagering that a casino
retains and, as a percentage of gross wagering, is referred to as the "hold
percentage".
(4) The Sands' hold percentage with respect to slot machines is reflected on an
accrual basis. Comparable data for the Atlantic City gaming industry is not
available. The 1994 and 1993 hold percentage calculations for the Sands
have been adjusted to exclude the recognition of approximately $1 million
and $340,000, respectively, in slot machine revenues during the second
quarter of both years resulting from the reversal of certain progressive
jackpot liabilities (see "Revenues" below).
Table games drop increased $16 million (9.6%) and decreased $13.9 million (3%)
for the three and nine month periods ended September 30, 1994 compared with the
same periods during 1993. These changes compare with an increase of 2.2% and a
decrease of 1.1%, respectively, in table drop for the overall Atlantic City
industry during the same periods. As a result, the Sands' table game market
share (expressed as a percentage of the Atlantic City industry aggregate table
game drop) increased to 9.3% during the third quarter of 1994 from 8.7% during
the third quarter of 1993, but declined to 8.8% during the first nine months of
1994 from 8.9% during the first nine months of 1993. The third quarter table
game drop increase is attributable to the opening of the Sands' expanded gaming
space on July 1. As a result of the expansion, the number of table games,
excluding poker, increased by 25% during the third quarter of 1994 as compared
with the corresponding period of 1993 and table games have been made more
accessible to casino patrons. The third quarter increase could not, however,
completely mitigate the $30 million decrease in table game drop experienced
prior to July 1. A number of factors adversely affected the 1994 first six
months' table games performance including: (i) the relocation of many blackjack
tables to a less accessible temporary gaming space during construction and the
periodic closing of selected tables on the main casino floor as construction
neared completion; (ii) 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; (iii) the overall trend in the
Atlantic City marketplace towards slot machine play and (iv) competitive
pressures, particularly in the high-end table patron segment.
Slot machine handle increased $61.5 million (12.9%) and $75.1 million (6%),
respectively, for the three and nine month periods ended September 30, 1994
compared with the previous year periods. Although the Sands' slot machine handle
increase during the third quarter of 1994 exceeded the increase
22 of 27
<PAGE>
PRATT HOTEL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
of 11.4% in slot machine handle for the Atlantic City industry during the same
period, the Sands' increase for the first nine months of 1994 was less than the
Atlantic City industry (7.2%). The increase in the average number of slot
machines at the Sands during the first nine months of 1994 compared with 1993
was 9.9% compared to the Atlantic City industry increase of 8%. The Sands' nine
month slot handle increase lagged both its own capacity increase and the average
industry handle increases due to the construction-related factors mentioned
above as well as to a decrease in the number of bus patrons during the first six
months of 1994. The third quarter increase in slot handle reflects increased
slot capacity (19.6%) resulting from the expansion of gaming space and the
introduction of new slot machines operated at a higher payback percentage, which
encourages extended patron play.
REVENUES
Casino revenues at the Sands, including poker and simulcast horse racing
wagering revenues, increased by $8 million (11.3%) and $7 million (3.7%)
respectively, during the third quarter and first nine months of 1994 compared
with the corresponding periods during 1993. The third quarter revenue increases
result from the expansion of gaming space as demonstrated by the third quarter
increases in slot machine and table games gross wagering. The impact on revenue
of such volume increases was enhanced by improved hold percentages on table
games, but diminished by the industry-wide decline in slot machine hold
percentages. Nine month increases in slot machine volume at the Sands due
primarily to the expansion of gaming space were partially offset by a slight
decrease in table game patronage 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. Table game revenues
benefitted from improved hold percentages and an increase in other casino
revenues of $1.8 million compared to 1993 as a result of a full nine months of
poker operations (poker commenced at the Sands during June 1993) and simulcast
revenues. In addition, the removal of certain progressive jackpots during the
second quarters of 1994 and 1993 resulted in the recognition of casino revenues
amounting to approximately $1 million and $340,000, respectively.
Rooms revenues did not change significantly for the three and nine month
periods ended September 30, 1994 compared with the same periods in 1993 as
improved revenues at non-casino properties offset the decreases in rooms
revenues at the Sands resulting from inclement weather during the first quarter
of 1994. Food and beverage revenues increased $1.3 million (16.1%) and $2
million (9.3%), respectively, for the three and nine month periods ended
September 30, 1994 compared with 1993 as a result of the opening of additional
dining outlets at the Sands and increases in casino patronage as noted above.
Other revenues increased $993,000 (21.6%) and $4.3 million (46.6%),
respectively, during the third quarter and first nine months of 1994 compared to
1993. These increases were primarily due to increased fees earned from the
management of Hollywood - Aurora ($2.9 million and $7.3 million, respectively,
during the third quarter and first nine months of 1994 compared to $2.5 million
and $2.7 million for the same periods in 1993) together with consulting fee
revenues earned in 1994 from Hollywood - Tunica. The 1994 nine month increase
was partially offset by the receipt of a $1.5 million
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<PAGE>
PRATT HOTEL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
termination fee during the first quarter of 1993 in connection with the
termination of a management agreement on a non-casino hotel.
Promotional allowances represent the retail value of goods and services
provided free of charge to casino customers under various marketing programs.
These allowances, as a percentage of rooms, food and beverage and other revenues
at the Sands, have decreased to 54.7% for the three months ended September 30,
1994 from 60.3% for the corresponding period during 1993, and 58.5% for the
nine month period ended September 30, 1994 from 59.1% during 1993. As a result
of the Sands' expansion, table drop and slot machine handle attributable to the
mass market segment (which generally does not require the same level of
complimentaries) has increased at a greater rate than overall wagering. In
addition, the Sands reduced utilization of rooms, food and beverage and
entertainment complimentaries during the casino construction period.
DEPARTMENTAL EXPENSES
Casino expenses at the Sands increased $3.7 million (7.3%) and $7.7 million
(5.6%), respectively, during the third quarter and first nine months of 1994
compared with the same periods during 1993. These increases were primarily due
to increases in marketing costs preparatory to the Grand Opening of the second
floor gaming space on July 1, 1994, including the implementation of an
aggressive mass marketing strategy and direct costs of nearly $1 million
associated with the Grand Opening. In addition, operating costs increased
during the third quarter as a result of increased casino patronage at the
expanded facility.
Rooms expense increased $65,000 (6.6%) during the three month period ended
September 30, 1994 compared with the same period of 1993 bringing nine month
totals in line with prior year balances. Increased operating costs at the Sands
during the third quarter due to patronage increases were offset by lower costs
earlier during the year, primarily as a result of inclement weather during the
first quarter of 1994. Food and beverage expense increased $297,000 (9.7%)
during the three month period ended September 30, 1994 compared with 1993 as a
result of increased patronage at the Sands, which again offset lower operating
costs earlier in the year, bringing such expenses for the nine month period
ended September 30, 1994 in line with those of 1993. Other expenses increased
$417,000 (22.9%) and $278,000 (6.5%) for the third quarter and first nine months
of 1994 compared with 1993 principally because of higher payroll and production
costs associated with theater entertainment.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense decreased $259,000 (4.6%) and $1.2
million (7.6%) during the three and nine month periods ended September 30, 1994
as compared with the 1993 periods primarily due to the write off of certain
deferred financing costs at December 31, 1993. Increases in depreciation
24 of 27
<PAGE>
PRATT HOTEL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
expense during the third quarter of 1994 attributable to the expansion of gaming
space were more than offset by reductions in the monthly amortization of
deferred financing costs resulting from the PHC Recapitalization.
INTEREST
Interest income increased $943,000 (247.5%) and $1.4 million (123.2%),
respectively, during the third quarter and first nine months of 1994. These
increases were primarily as a result of interest earned on the underlying
indebtedness of a non-casino hotel operated by PHC which was purchased during
February 1994 (see Note 5 of Notes to Consolidated Financial Statements)
together with the recognition of interest earned on funds escrowed for the
repayment of debt as part of the PHC Recapitalization.
Interest expense increased $241,000 (2.5%) during the three month period ended
September 30, 1994 compared to the same period during 1993. The additional
interest incurred on the Senior Notes and Junior Subordinated Notes issued
during the first quarter of 1994 was offset by (i) the capitalization of
interest related to construction at the Sands during the second quarter and (ii)
the reduction in interest rates on debt refinanced as part of the PHC
Recapitalization. As a result, interest expense for the nine month period ended
September 30, 1994 has not changed significantly from the corresponding period
in 1993.
INCOME TAX PROVISION
PHC and its subsidiaries have tax net operating loss carryforwards
("NOL's") totaling approximately $79 million, of which approximately $59 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 likely than not, a valuation allowance
should be recorded. Due to the tax losses of PHC and its subsidiaries through
the third 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 or HCC 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
25 of 27
<PAGE>
PRATT HOTEL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
change of control occur, the annual amount of loss carryforwards available for
use 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 increasing competition within the gaming industry for qualified and
experienced personnel, will continue to cause increases in operating expenses,
particularly labor and employee benefits costs.
SEASONALITY
Historically, the Sands' operations have been highly seasonal in
nature, with the peak activity occurring from May to September. Consequently,
the results of PHC's operations for the first and fourth quarters are
traditionally less profitable than the other quarters of the fiscal year.
Furthermore, Hollywood - Aurora has also experienced seasonality, but to a
lesser degree than the Sands, and, as a result, the management fees earned have
fluctuated with such seasonality. In addition, Hollywood -Aurora's and the
Sands' operations may fluctuate significantly due to a number of factors,
including chance. Such seasonality and fluctuations may materially affect PHC's
casino revenues, service fees and overall profitability.
26 of 27
<PAGE>
PART II: OTHER INFORMATION
The registrant did not file any reports on Form 8-K during the
quarter ended September 30, 1994.
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
-----------------------
Registrant
Date: November 11, 1994 By:/s/ John C. Hull
------------------- ---------------------------
John C. Hull
Corporate Controller and
Principal Accounting Officer
27 of 27
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