<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 JUNE 30, 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. Employe
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 August 10, 1994
- - ----------------------------------- ---------------------------------------
COMMON STOCK, $.10 PAR VALUE 5,186,627 SHARES
1 of 31
<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 45% 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 consolidated financial statements as of June 30, 1994 and for the
three and six month periods ended June 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 June 30, 1994, and the results of its consolidated
operations for the three and six month periods ended June 30, 1994 and 1993,
and its consolidated cash flows for the six month periods ended June 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 six month periods ended June 30,
1994 are not necessarily indicative of the operating results for the full
year.
2 of 31
<PAGE>
PRATT HOTEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1994 1993
-------------- --------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 24,392,000 $ 15,466,000
Accounts receivable, net of allowances
of $14,688,000 and $14,814,000,
respectively 15,442,000 14,179,000
Inventories 4,176,000 3,845,000
Due from affiliates 949,000 4,356,000
Deferred income taxes 1,367,000 2,904,000
Refundable deposits and other
current assets 5,410,000 5,046,000
------------- -------------
Total current assets 51,736,000 45,796,000
------------- -------------
Property and Equipment:
Land 37,807,000 37,554,000
Buildings and improvements 169,340,000 169,340,000
Operating equipment 75,737,000 74,256,000
Construction in progress 15,840,000 6,829,000
------------- -------------
298,724,000 287,979,000
Less - accumulated depreciation
and amortization (132,127,000) (124,877,000)
------------- -------------
Net property and equipment 166,597,000 163,102,000
------------- -------------
Other Assets:
Obligatory investments 4,690,000 4,497,000
Deferred financing costs 10,324,000 562,000
Notes receivable 16,974,000 7,860,000
Other assets 1,584,000 2,106,000
------------- -------------
Total other assets 33,572,000 15,025,000
------------- -------------
$ 251,905,000 $ 223,923,000
============= =============
</TABLE>
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated balance sheets.
3 of 31
<PAGE>
PRATT HOTEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
LIABILITIES AND SHAREHOLDERS' DEFICIT
<TABLE>
<CAPTION>
JUNE 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 7,068,000 7,862,000
Accounts payable 11,790,000 8,138,000
Accrued liabilities -
Salaries and wages 4,769,000 3,543,000
Progressive jackpot 340,000 1,327,000
Interest 12,108,000 6,437,000
Costs related to extinguishment of debt 216,000 10,498,000
Other 9,432,000 8,276,000
Other current liabilities 2,515,000 5,245,000
------------- -------------
Total current liabilities 53,238,000 67,459,000
------------- -------------
Long-Term Debt 331,158,000 280,260,000
------------- -------------
Other Noncurrent Liabilities 12,986,000 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 (161,603,000) (153,934,000)
------------- -------------
Total shareholders' deficit (145,477,000) (137,835,000)
------------- -------------
$ 251,905,000 $ 223,923,000
============= =============
</TABLE>
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated balance sheets.
4 of 31
<PAGE>
PRATT HOTEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
----------------------------
1994 1993
------------- -------------
<S> <C> <C>
Revenues:
Casino $61,441,000 $63,416,000
Rooms 3,690,000 3,604,000
Food and beverage 8,816,000 8,487,000
Other 3,669,000 1,417,000
----------- -----------
77,616,000 76,924,000
Less - Promotional allowances (7,248,000) (7,401,000)
----------- -----------
Net revenues 70,368,000 69,523,000
----------- -----------
Expenses:
Casino 48,392,000 47,054,000
Rooms 1,071,000 1,021,000
Food and beverage 2,560,000 2,660,000
Other 1,304,000 1,191,000
General and administrative 6,996,000 6,232,000
Depreciation and amortization 4,566,000 5,007,000
----------- -----------
Total expenses 64,889,000 63,165,000
----------- -----------
Income from operations 5,479,000 6,358,000
----------- -----------
Non-operating income (expense):
Interest income 775,000 368,000
Interest expense, net of
capitalized interest of $762,000
in 1994 (9,208,000) (9,759,000)
----------- -----------
Total non-operating expense, net (8,433,000) (9,391,000)
----------- -----------
Loss before income taxes (2,954,000) (3,033,000)
Income tax provision (106,000) (196,000)
----------- -----------
Net loss $(3,060,000) $(3,229,000)
=========== ===========
Net loss per common share $ (.59) $ (.62)
=========== ===========
</TABLE>
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated statements.
5 of 31
<PAGE>
PRATT HOTEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
------------------------------
1994 1993
-------------- --------------
<S> <C> <C>
Revenues:
Casino $115,577,000 $116,584,000
Rooms 6,898,000 6,969,000
Food and beverage 16,329,000 15,885,000
Other 7,916,000 4,612,000
------------ ------------
146,720,000 144,050,000
Less - Promotional allowances (13,680,000) (13,634,000)
------------ ------------
Net revenues 133,040,000 130,416,000
------------ ------------
Expenses:
Casino 90,789,000 86,968,000
Rooms 2,036,000 2,079,000
Food and beverage 5,159,000 5,241,000
Other 2,290,000 2,429,000
General and administrative 13,678,000 13,070,000
Depreciation and amortization 8,980,000 9,903,000
------------ ------------
Total expenses 122,932,000 119,690,000
------------ ------------
Income from operations 10,108,000 10,726,000
------------ ------------
Non-operating income (expense):
Interest income 1,218,000 758,000
Interest expense, net of
capitalized interest of $762,000
in 1994 (19,062,000) (19,178,000)
------------ ------------
Total non-operating expense, net (17,844,000) (18,420,000)
------------ ------------
Loss before income taxes (7,736,000) (7,694,000)
Income tax benefit (provision) 67,000 (92,000)
------------ ------------
Net loss $ (7,669,000) $ (7,786,000)
============ ============
Net loss per common share $(1.48) $(1.51)
============ ============
</TABLE>
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated statements.
6 of 31
<PAGE>
PRATT HOTEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------------------------------
1994 1993
----------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (7,669,000) $ (7,786,000)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization, including
accretion of debt discount 11,220,000 10,084,000
Provision for doubtful accounts 1,390,000 1,614,000
Deferred income taxes 477,000 (266,000)
Increase in accounts receivable (2,586,000) (4,000,000)
Increase in accounts payable and accrued expenses 1,423,000 4,734,000
Decrease in progressive jackpot accrual (987,000) (237,000)
Net change in other current assets and liabilities 533,000 (3,032,000)
Net change in other noncurrent assets and liabilities (448,000) 6,000
------------- ------------
Net cash provided by operating activities 3,353,000 1,117,000
------------- ------------
INVESTING ACTIVITIES:
Net property and equipment additions (10,745,000) (2,250,000)
Obligatory investments (219,000) (1,304,000)
Purchase of mortgage note (5,750,000) -
------------- ------------
Net cash used in investing activities (16,714,000) (3,554,000)
------------- ------------
FINANCING ACTIVITIES:
(Repayment) issuance of short-term debt (21,000,000) 21,000,000
Net repayments to affiliate (11,133,000) -
Deferred financing costs (10,155,000) (1,629,000)
Issuance of long-term debt 285,000,000 -
Repayments of long-term debt (220,452,000) (14,097,000)
Issuance of common stock 27,000 80,000
------------- ------------
Net cash provided by financing activities 22,287,000 5,354,000
------------- ------------
Net increase in cash and cash equivalents 8,926,000 2,917,000
Cash and cash equivalents at beginning
of period 15,466,000 13,459,000
------------- ------------
Cash and cash equivalents at end of period $ 24,392,000 $ 16,376,000
============= ============
</TABLE>
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated statements.
7 of 31
<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 55% 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 June 30, 1994 and for the
three and six month periods ended June 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 June 30, 1994, the results of its consolidated operations for the
three and six month periods ended June 30, 1994 and 1993 and its consolidated
cash flows for the six month periods ended June 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 on which no borrowings were
outstanding as of June 30, 1994. During July, $1,500,000 was drawn on the
line of credit. Interest on borrowings accrues 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.
8 of 31
<PAGE>
PRATT HOTEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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. The
indenture to the Series Notes also provided for additional increases of 1/4%
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 June 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 loaned, $1,000,000 is classified as noncurrent in the
accompanying balance sheets at June 30, 1994 and December 31, 1993, in
accordance with certain indenture requirements that such $1,000,000 remain
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 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 purposes. Such loans 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).
9 of 31
<PAGE>
PRATT HOTEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(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>
JUNE 30, 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 $67,918,000(f) 42,718,000 -
Second lien wrap-around mortgage note,
due 1994(g) 6,429,000 6,663,000
Series Notes, refinanced in 1994 (Note 2) - 21,000,000
Other 4,079,000 1,693,000
------------ ------------
338,226,000 288,122,000
Less - current maturities (7,068,000) (7,862,000)
------------ ------------
Total long-term debt $331,158,000 $280,260,000
============ ============
</TABLE>
_______________________
(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.
10 of 31
<PAGE>
PRATT HOTEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(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") 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.
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
requires the maintenance of certain cash balances and, commencing in
1994, 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 (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, 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 (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.
11 of 31
<PAGE>
PRATT HOTEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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 1/2%), payable
monthly based on a 15-year amortization schedule. PHC is not an obligor
on the first lien portion of this note ($2,667,000 at June 30, 1994),
which also matures on October 1, 1994.
Scheduled payments of long-term debt as of June 30, 1994 are set forth
below:
<TABLE>
<S> <C>
1994 (6 months) $ 6,814,000
1995 523,000
1996 569,000
1997 3,482,000
1998 5,457,000
Thereafter 389,299,000
------------
Total $406,144,000
============
</TABLE>
Interest paid, net of amounts capitalized during 1994, amounted to
$11,563,000 and $18,503,000, respectively, during the six month periods ended
June 30, 1994 and 1993.
12 of 31
<PAGE>
PRATT HOTEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(4) INCOME TAXES
Components of PHC's (provision) benefit for income taxes consisted of the
following:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- ----------------------
1994 1993 1994 1993
--------- -------- ---------- ---------
<S> <C> <C> <C> <C>
Federal $ - $ - $ - $ -
State:
Current................ 120,000 (373,000) 544,000 (339,000)
Deferred............... (226,000) 177,000 (477,000) 247,000
--------- --------- --------- ---------
$(106,000) $(196,000) $ 67,000 $ (92,000)
========= ========= ========= =========
</TABLE>
PHC is included in HCC's consolidated federal income tax return.
Pursuant to agreements between HCC and PHC, PHC's (provision) benefit 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 six month periods ended June 30, 1994 or
1993. Total state income taxes paid by PHC amounted to $234,000 and
$1,127,000, respectively, for the six month periods ended June 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 $75,000,000, of which approximately
$55,000,000 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
13 of 31
<PAGE>
PRATT HOTEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
its subsidiaries through the second 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 June 30, 1994 and December
31, 1993 were as follows:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1994 1993
-------------- --------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 25,686,000 $ 18,181,000
Allowance for doubtful accounts 4,511,000 4,724,000
Investment and jobs tax credits 4,075,000 4,075,000
Early extinguishment of debt 1,393,000 5,037,000
Equity losses of unconsolidated
subsidiaries and joint ventures 3,563,000 3,616,000
Other liabilities and reserves 1,660,000 1,890,000
Benefit accrual 1,320,000 1,298,000
Write-off of deferred pre-acquisition
costs - 4,449,000
Other 244,000 332,000
------------ ------------
Total deferred tax assets 42,452,000 43,602,000
------------ ------------
Deferred tax liabilities:
Depreciation and amortization (6,820,000) (7,018,000)
Other (393,000) (539,000)
------------ ------------
Total deferred tax liabilities (7,213,000) (7,557,000)
------------ ------------
Net deferred tax asset 35,239,000 36,045,000
Valuation allowance (35,239,000) (36,045,000)
------------ ------------
$ - $ -
============= =============
</TABLE>
14 of 31
<PAGE>
PRATT HOTEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
Receivables and payables in connection with the aforementioned tax
allocation agreements are as follows:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1994 1993
------------ ------------
<S> <C> <C>
Deferred income taxes - current $ 1,367,000 $ 2,016,000
Other noncurrent liabilities (1,367,000) (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 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 eliminated any contingent liability at the May 1994 maturity date of 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 $133,000 and $410,000, respectively, during the
three and six month periods ended June 30, 1994 and $350,000 and $700,000,
respectively, during the three and six month periods ended June 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
15 of 31
<PAGE>
PRATT HOTEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
depreciation, interest, amortization and taxes). Such fees totaled $1,693,000
and $4,378,000, respectively, during the three and six month periods ended
June 30, 1994 and $194,000 during both the three and six month periods ended
June 30, 1993. Unpaid base services and incentive fees in the aggregate
amount of $807,000 and $3,931,000 at June 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 consulting agreement effective January 1, 1994 and expiring
December 31, 2003, a subsidiary of PHC began earning a consulting fee from
HWCC-T in the amount of $100,000 per month. Outstanding consulting fees
totaling $600,000 were received during June 1994.
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
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 to HCC
amounted to $166,000 and $145,000, respectively, during the three and six
month periods ended June 30, 1994 and $66,000 and $128,000, respectively,
during the three and six month periods ended June 30, 1993.
Total interest incurred with respect to the PPI Funding Notes and the
PCPI Notes held by HCC (see Note 3) amounted to $1,507,000 and $1,502,000,
respectively for the three month periods ended June 30, 1994 and 1993 and
$2,962,000 and $3,005,000, respectively, for the six months ended June 30,
1994 and 1993. Interest incurred on the Junior Subordinated Notes to HCC (see
Note 3) for the three and six month periods ended June 30, 1994 amounted to
$549,000 and $817,000, respectively. Interest payable to HCC of $817,000 is
included in the accompanying consolidated financial statements at June 30,
1994.
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 $340,000 and $248,000, respectively, for the three month periods
ended June 30, 1994 and 1993, and $816,000 and $493,000, respectively, for the
six months ended June 30, 1994 and 1993. Interest payable to HCC in
connection with such borrowings amounted to $23,000 and $193,000,
respectively, at June 30, 1994 and December 31, 1993.
16 of 31
<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.
17 of 31
<PAGE>
PRATT HOTEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
As a result of the determination reached in the parallel state court
proceedings, this action was similarly dismissed.
PHC is currently considering other actions with respect to this
litigation.
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 July 22, 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
18 of 31
<PAGE>
PRATT HOTEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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 the quarters ended June
30, 1994 and 1993, GBHC removed certain progressive jackpots from 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.
19 of 31
<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, 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
PHC's principal assets and sources of revenues are the Sands and a
management contract on Hollywood - Aurora, a riverboat gaming facility in
Aurora, Illinois owned by HCC. During the first six months of 1994, PHC's net
cash provided by operating activities amounted to $3.4 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 ($10.7 million)
and to purchase a mortgage note ($5.75 million) underlying a hotel which it
operates for an affiliate (see "Other" below).
20 of 31
<PAGE>
PRATT HOTEL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
During the first six months of 1994, PHC repaid third party indebtedness
of approximately $241.5 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 $6.8 million, including $6.4 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.
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 operations commenced through the second quarter of 1994 have
amounted to $5.7 million and $4.3 million, respectively, of which $7.5 million
was received by PHC in the first half of 1994. The base fee is payable
quarterly, subject to approval by the Board of Directors of HCC, and was paid
by Hollywood - Aurora during 1994 in January and April. Management
anticipates receipt of the next scheduled base fee payment upon approval at
the August meeting of HCC's Board of Directors. Initial payment of the
incentive fee, which is subject to certain cumulative earnings requirements,
was made during April 1994 and has been made monthly thereafter.
In January 1994, HCC acquired a dockside gaming site and improvements
located in Tunica County, Mississippi which it completed and opened during
August 1994 as Hollywood - Tunica. HCC has entered into a consulting
agreement with a PHC subsidiary with respect to Hollywood - Tunica which
results in the payment of $1.2 million annually by Hollywood - Tunica 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
utilized short-term borrowings to fund seasonal cash needs and has used long-
term borrowings for certain capital projects.
21 of 31
<PAGE>
PRATT HOTEL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Capital expenditures at the Sands during the six months ended June 30,
1994 amounted to approximately $10.7 million. Approximately $7.2 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 with the
Grand Reopening on July 1, 1994. Additional vendor payments with respect to
this construction are estimated to be $4.4 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 $7.5 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
currently in use at other locations operated by HCC.
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 on which $1.5 million was drawn during July 1994. Borrowings
on this line of credit will be used for working capital purposes.
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 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; PHC borrowed
the $6.75 million for the acquisition from HCC. As a result of such purchase
by PHC, PHC has eliminated any contingent 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.
22 of 31
<PAGE>
PRATT HOTEL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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; consequently, PHC anticipates limited
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 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
-------
Virtually 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, which more than offset
decreases in net revenues at the Sands, PHC's consolidated net revenues
increased to $70.4 million and $133 million, respectively, for the three and
six month periods ended June 30, 1994, compared to $69.5 million and $130.4
million, respectively, for the three and six month periods ended June 30,
1993.
As explained below, income from operations at the Sands decreased to $2.4
million and $3.5 million, respectively from $5.1 million and $7.8 million,
respectively, during the second quarter and first six 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 hotel
properties and the termination of management contracts on certain managed
hotel 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.
23 of 31
<PAGE>
PRATT HOTEL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
PHC made interest payments of $11.6 million during the first half of 1994
compared to $18.5 million during the same period in 1993. This decrease is
primarily due to the payment of approximately four and one-half months of
accrued interest to holders of the PCPI Notes, which amounted to $5.6 million
(including $2.3 million paid to HCC) during the 1994 period compared to a
semiannual interest payment of $7.9 million during 1993, and to monthly
payments including interest being made during 1993 on the Sands' then
outstanding first mortgage notes. Semiannual interest payments on the debt
issued as part of the PHC Recapitalization are not due until July and August
1994.
24 of 31
<PAGE>
PRATT HOTEL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
GAMING OPERATIONS
-----------------
The following table sets forth certain unaudited financial and operating
data relating to the Sands' operations:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- ----------------------
1994 1993 1994 1993
---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C>
REVENUES:
Table games $ 21,622 $ 24,039 $ 43,786 $ 46,196
Slot machines 38,839 39,295 69,967 70,306
-------- -------- -------- --------
Total(1) $ 60,461 $ 63,334 $113,753 $116,502
======== ======== ======== ========
TABLE GAMES:
Gross Wagering
(Drop)(2) $148,470 $162,570 $270,599 $300,558
======== ======== ======== ========
Hold Percentages:(3)
Sands 14.6% 14.8% 16.2% 15.4%
Atlantic City Casino
Gaming Industry 15.3% 15.5% 15.7% 15.8%
SLOT MACHINES:
Gross Wagering
(Handle)(2) $427,878 $421,975 $779,853 $766,233
======== ======== ======== ========
Hold Percentage:(3)
Sands(4) 8.8% 9.2% 8.8% 9.1%
</TABLE>
____________________________
(1) Does not include revenues from poker ($644,000 and $1,254,000,
respectively, for the three and six month periods ended June 30, 1994 and
$62,000 for both the three and six month periods ended June 30, 1993) or
simulcast horse racing wagering ($336,000 and $570,000, respectively, for
the three and six month periods ended June 30, 1994; and $20,000 for both
the three and six month periods ended June 30, 1993).
25 of 31
<PAGE>
PRATT HOTEL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
(2) Gross wagering consists of the total value of chips purchased for table
games excluding poker tables (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". 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. 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 decreased $14.1 million (8.7%) and $30 million (10%),
respectively, for the three and six month periods ended June 30, 1994 compared
with the same periods during 1993. These decreases compare with decreases of
1.4% and 3%, 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) declined to 8.5% during the first six months of 1994 from 9.1%
during the first six months of 1993. A number of factors adversely affected
1994 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.
The Sands' average number of table games, excluding poker, on the casino
floor increased 5.3% during the six month period ended June 30, 1994 compared
with the same period during 1993. By comparison, the overall Atlantic City
industry increase in the average number of table games, excluding poker, for
the comparable period was .5%. The increase in the number of table games,
excluding poker, at the Sands resulted from the opening of a temporary gaming
facility on the fourth floor of the Sands which added approximately 10,000
square feet of additional gaming space. This increase in the number of table
26 of 31
<PAGE>
PRATT HOTEL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
games has not resulted in a corresponding increase in table game performance
due to a net decrease in the number of more highly utilized tables on the main
casino floor which has not been overcome by the addition of tables in the less
accessible temporary gaming facility. Upon completion of the Sands'
expansion, and the reconfiguration of table games in the expanded casino
space, management anticipates that overall table utilization will show
improvement during the third quarter.
Slot machine handle increased $5.9 million (1.4%) and $13.6 million
(1.8%), respectively, for the three and six month periods ended June 30, 1994
compared with the previous year periods. The Sands' slot machine handle
increases for the second quarter and first six months of 1994 were less than
the increases of 6.9% and 4.7%, respectively, in slot machine handle for the
Atlantic City industry during the same periods. The increase in the average
number of slot machines at the Sands during the first six months of 1994
compared with 1993 was 4.7% compared to the Atlantic City industry increase of
6.8%. The Sands' slot handle increases lagged both its own capacity increase
and the average handle increases for the industry 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 Sands did experience an
overall increase in slot handle due, in part, to 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, decreased by $2 million (3.1%) and $1.0 million (.9%),
respectively, during the second quarter and first six months of 1994 compared
with the corresponding periods during 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 revenue declines resulting from decreases in casino volume and lower slot
hold percentages were partially offset by poker and simulcast revenues, which
contributed $1 million and $1.8 million, respectively, during the second
quarter and first half of 1994 compared with $82,000 earned during the second
quarter of 1993 commencing with the opening of the temporary poker and
simulcast facility on June 25, 1993. 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.
27 of 31
<PAGE>
PRATT HOTEL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Rooms revenues did not change significantly for the three and six month
periods ended June 30, 1994 compared with the same periods in 1993 as improved
revenues at noncasino hotel properties offset the decreases in room revenues
at the Sands resulting from inclement weather during the first quarter of
1994. Food and beverage revenues increased $329,000 (3.9%) and $444,000
(2.8%), respectively, for the three and six month periods ended June 30, 1994
compared with 1993. Increased food and beverage revenues have resulted from
additional dining outlets at the Sands partially offset by the decreases in
casino volume as noted above. Other revenues increased $2.3 million (158.9%)
and $3.3 million (71.6%), respectively, during the second quarter and first
six months of 1994 compared to 1993. Fees earned from the management of
Hollywood - Aurora amounting to $1.7 million and $4.4 million, respectively,
during the second quarter and first half of 1994 together with consulting fee
revenues earned from Hollywood - Tunica were partially offset by decreases in
other revenues at the Sands resulting from reductions in headliner
entertainment (two major events during 1994 compared with four during 1993).
During 1993, management fees earned from Hollywood - Aurora were only
$194,000; however, PHC also recorded a $1.5 million termination fee in
connection with the termination of a management contract on a noncasino hotel
during the first quarter of 1993.
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 slightly to 63% for the three months
ended June 30, 1994 from 64.5% for the corresponding period during 1993,
reflecting the reduced utilization of rooms, food and beverage and
entertainment complimentaries during the construction period for the casino
floor space expansion. Promotional allowances increased, however, to 64.9%
for the six month period ended June 30, 1994 from 62.8% during 1993,
reflecting an overall increase in the utilization of such complimentaries
during the first quarter to attract and retain high frequency slot patrons.
DEPARTMENTAL EXPENSES
---------------------
Casino expenses at the Sands increased $1.3 million (2.8%) and $3.8
million (4.4%), respectively, during the second quarter and first six months
of 1994 compared with 1993. These increases were primarily due to second
quarter increases in marketing costs related to the Grand Reopening on July 1,
1994, and to increased complimentaries charged to the casino department during
the first quarter of 1994 as the Sands continued to emphasize attracting and
retaining high frequency slot patrons.
28 of 31
<PAGE>
PRATT HOTEL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Rooms and food and beverage expenses did not change significantly during
the three and six month periods ended June 30, 1994 compared with the same
periods during 1993. Other expenses increased $113,000 (9.5%) for the second
quarter of 1994 compared with 1993 and decreased $139,000 (5.7%) for the first
six months of 1994 compared with 1993. Reductions in headliner entertainment
at the Sands during the first quarter of 1994 were partially offset by higher
payroll costs during the second quarter.
DEPRECIATION AND AMORTIZATION
-----------------------------
Depreciation and amortization expense decreased $441,000 (8.8%) and
$923,000 (9.3%) during the three and six month periods ended June 30, 1994 as
compared with the 1993 periods primarily due to the write off of deferred
finance costs during the fourth quarter of 1993, which has reduced current
year amortization expense.
INTEREST
--------
Interest income increased $407,000 (110.6%) and $460,000 (60.7%),
respectively, during the second quarter and first six months of 1994 compared
to the same periods during 1993 primarily as a result of interest earned on
the underlying indebtedness of a noncasino hotel operated by PHC which was
purchased during February 1994 (see Note 5 of Notes to Consolidated Financial
Statements).
Interest expense increased $551,000 (5.6%) and $116,000 (.6%),
respectively, during the three and six month periods ended June 30, 1994
compared to the corresponding periods during 1993. The additional interest
incurred on the Senior Notes and Junior Subordinated Notes issued during the
first quarter of 1994 was partially offset by the capitalization of interest
related to construction at the Sands during the second quarter and the
reduction in interest rates on debt refinanced as a part of the PHC
Recapitalization.
BENEFIT (PROVISION) FOR INCOME TAXES
------------------------------------
PHC and its subsidiaries have tax net operating loss carryforwards
("NOL's") totaling approximately $75 million, of which approximately $55
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
29 of 31
<PAGE>
PRATT HOTEL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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 financial reporting
and tax losses of PHC and its subsidiaries through the second 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
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. 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.
30 of 31
<PAGE>
PART II:
OTHER INFORMATION
The registrant did not file any reports on Form 8-K during the quarter
ended June 30, 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
----------------------------------
Registrant
Date: August 12, 1994 By: /s/ Charles F. LaFrano, III
---------------------- -----------------------------------
Charles F. LaFrano, III
Vice President and
Principal Accounting Officer
31 of 31
