<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, 1995
-------------------------------------------------
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 8, 1995
- --------------------------------------- --------------------------------------
COMMON STOCK, $.10 PAR VALUE 5,186,627 SHARES
1 of 25
<PAGE>
PRATT HOTEL CORPORATION AND SUBSIDIARIES
PART I: FINANCIAL INFORMATION
- -----------------------------
INTRODUCTORY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------
Pratt Hotel Corporation, a Delaware 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 (the "Aurora Casino")
and the provision of consulting services to a gaming facility in Tunica County,
Mississippi (the "Tunica Casino"). 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 other family members (collectively, the "Pratt Family").
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,
1995 are not necessarily indicative of the operating results for the full year.
The consolidated financial statements as of September 30, 1995 and for the
three and nine month periods ended September 30, 1995 and 1994 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, 1995, the results of its
operations for the three and nine month periods ended September 30, 1995 and
1994 and its cash flows for the nine month periods ended September 30, 1995 and
1994.
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 1994 Annual Report on Form 10-K.
2 of 25
<PAGE>
PRATT HOTEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
SEPTEMBER 30, DECEMBER 31,
1995 1994
-------------- --------------
Current Assets:
Cash and cash equivalents $ 27,535,000 $ 29,302,000
Accounts receivable, net of allowances
of $16,534,000 and $15,297,000,
respectively 12,749,000 13,982,000
Inventories 4,129,000 4,389,000
Due from affiliates 2,627,000 2,990,000
Deferred income taxes 3,776,000 3,242,000
Refundable deposits and other
current assets 3,377,000 3,889,000
------------- -------------
Total current assets 54,193,000 57,794,000
------------- -------------
Property and Equipment:
Land 37,807,000 37,807,000
Buildings and improvements 184,769,000 181,849,000
Operating equipment 94,330,000 83,373,000
Construction in progress 2,817,000 326,000
------------- -------------
319,723,000 303,355,000
Less - accumulated depreciation
and amortization (149,427,000) (136,138,000)
------------- -------------
Net property and equipment 170,296,000 167,217,000
------------- -------------
Other Assets:
Obligatory investments 5,091,000 4,027,000
Deferred financing costs 9,004,000 9,811,000
Notes receivable 9,248,000 9,325,000
Other assets 2,450,000 2,570,000
------------- -------------
Total other assets 25,793,000 25,733,000
------------- -------------
$ 250,282,000 $ 250,744,000
============= =============
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated balance sheets.
3 of 25
<PAGE>
PRATT HOTEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
LIABILITIES AND SHAREHOLDERS' DEFICIT
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1995 1994
-------------- --------------
<S> <C> <C>
Current Liabilities:
Borrowings from affiliate $ 5,000,000 $ 250,000
Current maturities of long-term debt 545,000 511,000
Accounts payable 8,598,000 8,584,000
Accrued liabilities -
Salaries and wages 4,059,000 4,065,000
Interest 9,994,000 11,385,000
Insurance 2,357,000 1,850,000
Other 8,711,000 7,742,000
Other current liabilities 4,130,000 3,645,000
------------- -------------
Total current liabilities 43,394,000 38,032,000
------------- -------------
Long-Term Debt 327,085,000 327,889,000
------------- -------------
Other Noncurrent Liabilities 13,260,000 13,146,000
------------- -------------
Due to Affiliate 1,000,000 5,750,000
------------- -------------
Commitments and Contingencies
Shareholders' Deficit:
Common stock, $.10 par value per
share; 10,000,000 shares authorized;
5,187,000 shares issued and outstanding 519,000 519,000
Additional paid-in capital 23,783,000 23,838,000
Accumulated deficit (158,759,000) (158,430,000)
------------- -------------
Total shareholders' deficit (134,457,000) (134,073,000)
------------- -------------
$ 250,282,000 $ 250,744,000
============= =============
</TABLE>
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated balance sheets.
4 of 25
<PAGE>
PRATT HOTEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
-------------------------
1995 1994
----------- -----------
<S> <C> <C>
Revenues:
Casino $72,235,000 $79,023,000
Rooms 3,938,000 3,869,000
Food and beverage 10,286,000 9,078,000
Other 4,798,000 5,593,000
----------- -----------
91,257,000 97,563,000
Less - Promotional allowances (7,913,000) (7,189,000)
----------- -----------
Net revenues 83,344,000 90,374,000
----------- -----------
Expenses:
Casino 54,582,000 54,118,000
Rooms 1,041,000 1,051,000
Food and beverage 3,482,000 3,373,000
Other 1,110,000 2,237,000
General and administrative 6,224,000 6,976,000
Depreciation and amortization 5,112,000 5,320,000
----------- -----------
Total expenses 71,551,000 73,075,000
----------- -----------
Income from operations 11,793,000 17,299,000
----------- -----------
Non-operating income (expense):
Interest income 623,000 1,324,000
Interest expense (9,608,000) (9,892,000)
----------- -----------
Total non-operating expense, net (8,985,000) (8,568,000)
----------- -----------
Income before income taxes 2,808,000 8,731,000
Income tax provision (465,000) (850,000)
----------- -----------
Net income $ 2,343,000 $ 7,881,000
=========== ===========
Net income per common share $ .45 $ 1.52
=========== ===========
</TABLE>
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated statements.
5 of 25
<PAGE>
PRATT HOTEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------
1995 1994
------------ ------------
<S> <C> <C>
Revenues:
Casino $202,571,000 $194,600,000
Rooms 11,149,000 10,767,000
Food and beverage 25,828,000 23,349,000
Other 12,041,000 13,509,000
------------ ------------
251,589,000 242,225,000
Less - Promotional allowances (20,267,000) (18,811,000)
------------ ------------
Net revenues 231,322,000 223,414,000
------------ ------------
Expenses:
Casino 152,823,000 144,262,000
Rooms 3,380,000 3,087,000
Food and beverage 8,485,000 9,177,000
Other 3,404,000 4,527,000
General and administrative 20,356,000 20,654,000
Depreciation and amortization 15,415,000 14,300,000
------------ ------------
Total expenses 203,863,000 196,007,000
------------ ------------
Income from operations 27,459,000 27,407,000
------------ ------------
Non-operating income (expense):
Interest income 1,794,000 2,542,000
Interest expense, net of capitalized interest
of $762,000 in 1994 (28,840,000) (28,954,000)
------------ ------------
Total non-operating expense, net (27,046,000) (26,412,000)
------------ ------------
Income before income taxes 413,000 995,000
Income tax provision (742,000) (783,000)
------------ ------------
Net (loss) income $ (329,000) $ 212,000
============ ============
Net (loss) income per common share $ (.06) $ .04
============ ============
</TABLE>
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated statements.
6 of 25
<PAGE>
PRATT HOTEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------
1995 1994
------------ -------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net (loss) income $ (329,000) $ 212,000
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Depreciation and amortization, including
accretion of debt discount 20,458,000 18,080,000
Provision for doubtful accounts 2,263,000 2,205,000
Deferred income tax (benefit) provision (501,000) 794,000
Increase in receivables (735,000) (2,440,000)
Increase (decrease) in accounts payable and accrued expenses 138,000 (2,669,000)
Net change in other current assets and liabilities 1,527,000 (529,000)
Net change in other noncurrent assets and liabilities 828,000 (1,482,000)
------------ -------------
Net cash provided by operating activities 23,649,000 14,171,000
------------ -------------
INVESTING ACTIVITIES:
Net property and equipment additions (16,367,000) (18,526,000)
Collections on notes receivable 77,000 7,590,000
Obligatory investments (2,102,000) (400,000)
Purchase of mortgage note - (5,750,000)
Investments in and advances to unconsolidated
affiliates (1,125,000) -
------------ -------------
Net cash used in investing activities (19,517,000) (17,086,000)
------------ -------------
FINANCING ACTIVITIES:
Repayment of short-term debt - (21,000,000)
Net repayments to affiliate - (11,133,000)
Deferred financing costs (32,000) (10,212,000)
Issuance of long-term debt - 285,000,000
Repayments of long-term debt (5,867,000) (227,003,000)
Issuance of common stock - 27,000
------------ -------------
Net cash (used in) provided by financing activities (5,899,000) 15,679,000
------------ -------------
Net (decrease) increase in cash and cash equivalents (1,767,000) 12,764,000
Cash and cash equivalents at beginning of period 29,302,000 15,466,000
------------ -------------
Cash and cash equivalents at end of period $ 27,535,000 $ 28,230,000
============ =============
</TABLE>
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated statements.
7 of 25
<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 management and consulting contracts
with gaming facilities located in Aurora, Illinois (the "Aurora Casino") and
Tunica, Mississippi (the "Tunica Casino") (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 other family members (collectively, the
"Pratt Family"), owns approximately 80% of the common stock of PHC.
The consolidated financial statements as of September 30, 1995 and for the
three and nine month periods ended September 30, 1995 and 1994 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, 1995, the results of its operations for the
three and nine month periods ended September 30, 1995 and 1994 and its cash
flows for the nine month periods ended September 30, 1995 and 1994. Operating
results for the three and nine month periods ended September 30, 1995 are not
necessarily indicative of the results that may be achieved for the year ended
December 31, 1995.
(2) SHORT-TERM CREDIT FACILITIES AND BORROWINGS FROM AFFILIATES
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, which was renewed in
April 1995, 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 were no borrowings outstanding under the line of credit at September 30,
1995 or December 31, 1994.
As of September 30, 1995 and December 31, 1994, PHC and its subsidiaries
had outstanding affiliate borrowings of $6,000,000 from HCC. Of the amounts
borrowed, $1,000,000, which is not due until April 1, 1998, is included in
noncurrent due to affiliate in the accompanying consolidated balance sheets at
September 30, 1995 and December 31, 1994. In addition, $4,750,000, which is due
on May 31, 1996 and is secured by a pledge of certain notes receivable acquired
by PHC during 1994 (see Note 5), is included in current borrowings from
affiliate at September 30, 1995 and in noncurrent due to affiliate at December
31, 1994 in the accompanying consolidated balance sheets. The remaining balance
of $250,000 is due on demand, or if no demand is made, on April 1, 1998. All
such borrowings from HCC bear interest at the rate of 14% per annum, payable
semiannually. Under certain conditions, PHC and its subsidiaries may obtain
additional loans from HCC under similar terms.
8 of 25
<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 the
February 1994 refinancing of substantially all of PHC's casino-related
outstanding debt contain certain cross-default provisions.
SEPTEMBER 30, DECEMBER 31,
1995 1994
------------- ------------
10 7/8% first mortgage notes, due 2004 (a) $185,000,000 $185,000,000
11 5/8% senior notes, due 2004 (b) 85,000,000 85,000,000
14 5/8% junior subordinated notes, due 2005 (c) 8,737,000 8,683,000
14 7/8% secured promissory note, due 2006, net
of discount of $52,656,000 and $64,759,000 (d) 45,420,000 45,877,000
Other 3,473,000 3,840,000
------------ ------------
Total indebtedness 327,630,000 328,400,000
Less - current maturities (545,000) (511,000)
------------ ------------
Total long-term debt $327,085,000 $327,889,000
============ ============
- -------------------
(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. The
10 7/8% First Mortgage Notes are redeemable at the option of the issuer, in
whole or in part, on or after January 15, 1999 at stated redemption prices
ranging up to 104.08% of par plus accrued interest.
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 at the Sands, subject to increases of five
percent per annum thereafter. The indenture also contains certain cross-
default provisions with respect to the PRT Funding Notes described in (b)
below.
(b) On February 17, 1994, a subsidiary of PHC issued $85,000,000 of unsecured
senior notes due April 15, 2004 (the "PRT Funding Notes"). Interest on the
PRT Funding Notes accrues at the rate of 11 5/8% per annum, payable
semiannually commencing October 15, 1994. The PRT Funding
9 of 25
<PAGE>
PRATT HOTEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
Notes are redeemable at the option of the issuer, in whole or in part, on
or after April 15, 1999 at stated redemption prices ranging up to 104.36%
of par plus accrued interest. The indenture for the PRT Funding Notes
contains various provisions which, among other things, restrict the ability
of certain subsidiaries of 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.
(c) 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. At December 31, 1994, $6,317,000 principal amount of the Junior
Subordinated Notes (subsequently adjusted to $6,262,000 during 1995)
together with $1,914,000 of accrued interest were assigned to PHC by HCC in
recognition of tax net operating losses of PHC used by HCC (see Note 4).
The Junior Subordinated Notes are due in February 2005 and bear interest at
the rate of 14 5/8% per annum which, subject to a PHC subsidiary meeting
certain financial coverage and other payment restriction tests required by
the indenture for the PRT Funding Notes, is payable semiannually commencing
August 17, 1994 (see Note 5).
(d) 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 $38,779,000
principal amount of 15 1/2% unsecured notes held by HCC and issued by PCPI
Funding Corp., a subsidiary of PHC (the "PCPI Notes"). The increased
principal amount of the new notes included 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 also paid to third party holders of $58,364,000
principal amount of PCPI Notes concurrently redeemed. The PPI Funding
Notes were discounted to yield interest at the rate of 14 7/8% per annum
and had an original face value of $110,636,000. During the second and third
quarters of 1995, PPI Funding Corp. repaid $5,500,000 of principal on the
PPI Funding Notes, reducing the maturity value of the notes to $98,076,000.
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.
Scheduled payments of long-term debt as of September 30, 1995 are set
forth below:
1995 (3 months) $ 133,000
1996 553,000
1997 3,465,000
1998 5,439,000
1999 5,479,000
Thereafter 365,217,000
------------
Total $380,286,000
============
Interest paid, net of amounts capitalized, amounted to $25,805,000 and
$20,163,000, respectively, during the nine month periods ended September 30,
1995 and 1994.
10 of 25
<PAGE>
PRATT HOTEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
(4) INCOME TAXES
Components of PHC's income tax (provision) benefit consisted of the
following:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- ---------------------------
1995 1994 1995 1994
--------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Federal income tax benefit $ - $ - $ - $ -
State income tax benefit (provision):
Current (675,000) (533,000) (1,243,000) 11,000
Deferred 210,000 (317,000) 501,000 (794,000)
--------- --------- ----------- ---------
$(465,000) $(850,000) $ (742,000) $(783,000)
========= ========= =========== =========
</TABLE>
PHC is included in HCC's consolidated federal income tax return. Pursuant
to agreements between HCC and PHC, PHC's provision for federal income taxes is
based on the amount of tax which would be provided if a separate federal income
tax return were filed. HCC compensated PHC for the use by HCC and its
subsidiaries (exclusive of PHC and its subsidiaries) of PHC's available tax net
operating loss carryforwards ("NOL's") at December 31, 1994 through the
assignment of principal and interest on the Junior Subordinated Notes (see
Note 3). PHC paid no federal income taxes for either of the nine month periods
ended September 30, 1995 or 1994. Total state income taxes paid by PHC amounted
to $85,000 and $255,000, respectively, for the nine month periods ended
September 30, 1995 and 1994.
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, meals and entertainment and other expenses.
Deferred income taxes result primarily from the use of the allowance method
rather than the direct write-off method for doubtful accounts, the use of
accelerated methods of depreciation for federal and state income tax purposes
and differences in the timing of deductions taken between tax and financial
reporting purposes for contributions of and adjustments to the carrying value of
certain investment obligations and for vacation and other accruals.
PHC and its subsidiaries have tax net operating loss carryforwards
("NOL's") totaling approximately $52,000,000 (after reduction for the
$23,360,000 used by HCC through 1994), of which approximately $43,000,000 do not
begin to expire until the year 2003. Additionally, PHC and its subsidiaries have
various tax credits available totaling approximately $4,400,000, most of which
expire by the year 2002. Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" ("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 losses
sustained for both financial and tax reporting by PHC and its
11 of 25
<PAGE>
PRATT HOTEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
subsidiaries through the third quarter of 1995, 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.
The components of the net deferred tax asset were as follows:
SEPTEMBER 30, DECEMBER 31,
1995 1994
------------- ------------
Deferred tax assets:
Net operating loss carryforwards $ 17,809,000 $ 20,462,000
Allowance for doubtful accounts 6,869,000 6,330,000
Investment and jobs tax credits 4,417,000 4,075,000
Equity losses of unconsolidated
subsidiaries and joint ventures 3,227,000 3,491,000
Other liabilities and accruals 2,335,000 1,942,000
Benefits accrual 1,593,000 1,514,000
Other 1,414,000 982,000
------------ ------------
Total deferred tax assets 37,664,000 38,796,000
------------ ------------
Deferred tax liabilities:
Depreciation and amortization (8,267,000) (8,897,000)
Other (891,000) (933,000)
------------ ------------
Total deferred tax liabilities (9,158,000) (9,830,000)
------------ ------------
Net deferred tax asset 28,506,000 28,966,000
Valuation allowance (28,506,000) (28,966,000)
------------ ------------
$ - $ -
============ ============
12 of 25
<PAGE>
PRATT HOTEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
Receivables and payables in connection with the aforementioned tax
allocation agreements were as follows:
SEPTEMBER 30, DECEMBER 31,
1995 1994
-------------- -------------
Deferred income taxes - current $ 1,680,000 $ 1,367,000
Other noncurrent liabilities (1,680,000) (1,367,000)
(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. During the nine month period ended September 30, 1995, PHC made capital
expenditures under the hotel operating agreement totaling approximately $700,000
toward property improvements. PHC is also obligated by 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, PHC utilized funds borrowed from HCC to purchase such underlying
indebtedness with a principal balance of $13,756,000 from third parties at a
cost of $6,750,000 and subject to third party indebtedness amounting to
$2,706,000. Such payments (net of debt service receipts since the February 1994
note acquisition date) amounted to $131,000 and $135,000 during the three month
periods ended September 30, 1995 and 1994 and $398,000 and $545,000,
respectively, during the nine month periods ended September 30, 1995 and 1994.
PHC recorded the note receivable from Metroplex at acquisition cost, which
management believes does not exceed the estimated realizable value of the
underlying collateral. The note is included in notes receivable on the
accompanying consolidated balance sheets. Payments from Metroplex, including
interest at the rate of 9 1/2% per annum, are due monthly with the remaining
principal balance of $13,533,000 due May 31, 1996.
A subsidiary of PHC earns, pursuant to a management agreement, a base
management fee from an HCC subsidiary equal to 5% of the Aurora Casino'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
approximately $2,716,000 and $2,901,000, respectively, during the three month
periods ended September 30, 1995 and 1994 and $6,588,000 and $7,279,000 during
the nine month period ended September 30, 1995 and 1994. Unpaid fees amounting
to $2,366,000 and $2,341,000, respectively, are included in due from affiliates
in the accompanying consolidated balance sheets at September 30, 1995 and
December 31, 1994.
Pursuant to a ten-year consulting agreement with the HCC subsidiary which
owns and operates the Tunica Casino, a subsidiary of PHC receives monthly
consulting fees of $100,000. The PHC subsidiary earned total fees of $300,000
during each of the three month periods ended September 30, 1995 and 1994, and
$900,000 during each of the nine month periods ended September 30, 1995 and
1994.
13 of 25
<PAGE>
PRATT HOTEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
HCC is obligated under the terms of an administrative services agreement to
pay PHC $50,000 per month. In addition, PHC and its subsidiaries share certain
general and administrative costs with HCC. Net allocated costs and fees charged
to HCC by PHC amounted to $63,000 and $238,000, respectively, during the three
and nine month periods ended September 30, 1995 and $49,000 and $194,000,
respectively, for the three and the nine month periods ended September 30, 1994.
Receivables in connection with such allocated costs and fees in the amounts of
$19,000 and $77,000, respectively, are included in due from affiliates in the
accompanying consolidated balance sheets at September 30, 1995 and December 31,
1994.
Interest expense with respect to borrowings from HCC is set forth below:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------------------- ---------------------------------------
1995 1994 1995 1994
------------------ ------------------ ------------------ -------------------
<S> <C> <C> <C> <C>
PPI Funding Notes and PCPI
Notes held by HCC (Note 3) $1,656,000 $1,540,000 $5,043,000 $4,502,000
Junior Subordinated
Notes (Note 3) 321,000 548,000 956,000 1,365,000
Short-term borrowings
(Note 2) 215,000 215,000 637,000 1,031,000
</TABLE>
During the three month period ended March 31, 1994, a newly formed PHC
subsidiary issued $40,524,000 discounted principal amount of PPI Funding Notes
in exchange for the PCPI Notes held by HCC (see Note 3). Accretion of interest
on the PPI Funding Notes is included in the outstanding note payable balance at
September 30, 1995 and December 31, 1994.
Interest accrued on short-term borrowings, which amounted to $238,000 and
$23,000, respectively, at September 30, 1995 and December 31, 1994, is included
in interest payable on the accompanying consolidated balance sheets together
with interest on the Junior Subordinated Notes amounting to $959,000 at
September 30, 1995. Outstanding interest on the Junior Subordinated Notes at
December 31, 1994 was assigned to PHC by HCC in recognition of tax net operating
losses of PHC used by HCC (see Note 3).
(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 a 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
14 of 25
<PAGE>
PRATT HOTEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
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 casino/hotel 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 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.
PHC and its subsidiaries have concluded a settlement with Penthouse and its
subsidiary in which a PHC subsidiary assigned its interest in a partnership to
the Penthouse subsidiary. Related claims in a separate action brought against
PHC subsidiaries by a former partner of Penthouse have been settled on a "walk
away" basis. The appeal from the state court judgement is pending but only with
respect to Trump and Trump Plaza Associates.
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
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<PAGE>
PRATT HOTEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
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 second
quarter of 1994, the Sands removed certain progressive jackpots from the gaming
floor, resulting in the reversal of $1,035,000 of progressive jackpot
liabilities and the corresponding recognition of an equal amount of slot machine
revenues.
(8) SUPPLEMENTAL CASH FLOW INFORMATION
During the third quarter of 1995, an adjustment of $55,000 was made to the
1994 year end assignment of a portion of the Junior Subordinated Notes by HCC to
PHC (see Notes 3 and 4). Such adjustment has been reflected as a charge to paid-
in capital and has been excluded from the accompanying consolidated statement of
cash flows as a noncash transaction.
During the first quarter of 1994, PHC acquired the underlying indebtedness
of the DFW North Holiday Inn subject to third party indebtedness totaling
$2,706,000 (see Note 5).
(9) RECLASSIFICATIONS
Certain reclassifications have been made to the 1994 consolidated financial
statements to conform to the 1995 consolidated financial statement presentation.
16 of 25
<PAGE>
PRATT HOTEL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
GENERAL
PHC's consolidated net revenues decreased to $83.3 million during the three
months ended September 30, 1995 from $90.4 million for the same period of 1994,
partially offsetting revenue gains achieved during the first half of 1995. Nine
month net revenues reflect an increase to $231.3 million for 1995 from $223.4
million for 1994. PHC's income from operations also declined to $11.8 million
during the third quarter of 1995 from $17.3 million during the same period of
1994; however, income from operations was substantially unchanged for the nine
month period ended September 30, 1995 compared to 1994. As further explained
below, a decline in revenues and income from operations at the Sands during the
third quarter of 1995 compared to the record-setting third quarter results in
1994 negatively impacted PHC's consolidated results of operations.
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,
-------------------- -----------------------
1995 1994 1995 1994
-------- -------- ---------- ----------
(in thousands, except percentages)
<S> <C> <C> <C> <C>
REVENUES:
Table games $ 24,978 $ 30,114 $ 72,521 $ 73,900
Slot machines 46,038 47,509 126,616 117,477
Other (1) 1,219 1,400 3,434 3,223
-------- -------- ---------- ----------
Total $ 72,235 $ 79,023 $ 202,571 $ 194,600
======== ======== ========== ==========
TABLE GAMES:
Gross Wagering
(Drop) (2) $170,245 $182,609 $ 463,555 $ 453,207
======== ======== ========== ==========
Hold Percentages: (3)
Sands 14.7% 16.5% 15.6% 16.3%
Atlantic City Casino
Gaming Industry 15.7% 15.7% 15.9% 15.7%
SLOT MACHINES:
Gross Wagering
(Handle) (2) $521,596 $540,056 $1,459,882 $1,319,909
======== ======== ========== ==========
Sands' Hold Percentage:(3)(4) 8.8% 8.8% 8.7% 8.8%
</TABLE>
____________________________
(1) Consists of revenues from poker ($830,000 and $2.4 million, respectively,
for the three and nine month periods ended September 30, 1995 and $947,000
and $2.2 million, respectively, for the three and nine month periods ended
September 30, 1994) and simulcast horse racing wagering ($389,000 and
17 of 25
<PAGE>
PRATT HOTEL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
$1 million, respectively, for the three and nine month periods ended
September 30, 1995 and $453,000 and $1 million, respectively, for the three
and nine month periods ended September 30, 1994).
(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 hold percentage calculation for the Sands has been
adjusted to exclude the recognition of approximately $1 million in slot
machine revenues during the second quarter of 1994 resulting from the
reversal of certain progressive jackpot liabilities (see "Revenues" below).
Table games drop decreased $12.4 million (6.8%) for the three month period
ended September 30, 1995 compared with the same period of 1994, reducing the
overall nine month increase to $10.3 million (2.3%). These changes compare with
increases of 3.8% and 4.8% in table drop for all other Atlantic City casinos
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) decreased to 8.5% from 9.3% during the third quarter of 1995 compared to
the same period in 1994. Overall, the Sands' table game market share for the
first nine months of 1995 has decreased to 8.6% from 8.8% during the same period
of 1994. The Sands' third quarter table game drop decrease is largely
attributable to an increase in competitive pressures in the rated table market
segment, of which a significant portion is in the "high end" and mid-market
segments. Such decreases have been offset on a year to date basis by increases
in the unrated table segment.
Slot machine handle decreased slightly ($18.5 million (3.4%)) during the
third quarter of 1995 compared with the same period of 1994, reducing the
overall nine month slot machine handle increase to $140 million (10.6%) in 1995
over 1994. In spite of the increase in the Sands' average number of slot
machines during the first nine months of 1995 of 14.3% compared to the Atlantic
City industry increase of 10.9%, the Sands' increase in slot machine handle for
the period lagged the increase in slot machine handle for all other Atlantic
City casinos of 17.5% during the same period. During the second quarter of 1995,
the Sands discontinued certain marketing programs and promotions (particularly
slot promotions which included cash giveaways) which management deemed to be
marginally profitable. This strategy worked well during the 1995 second quarter;
however, entering the peak summer season, many of the Sands' competitors
increased such spending programs and the Sands lost market share in the highly
profitable mass market segment.
The Sands' decreases in table game drop and slot machine handle during the
third quarter are also a direct result of significantly increased competition
from a number of casinos in Atlantic City which completed significant expansion
projects and mounted aggressive marketing campaigns during this period.
Similarly, during 1994, the Sands' incurred significant marketing and
advertising expenditures associated with the opening of its expanded gaming
facility on July 1, 1994. Such expenditures primarily impacted slot machine
18 of 25
<PAGE>
PRATT HOTEL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
handle from the infrequent mass market customer and resulted in record levels of
gross wagering during the third quarter of 1994, which could not be sustained in
1995.
REVENUES
Casino revenues at the Sands, including poker and simulcast horse racing
wagering revenues, decreased by $6.8 million (8.6%) and increased by $8 million
(4.1%), respectively, for the three and nine months ended September 30, 1995
compared with the same periods of 1994. Casino revenues during the second
quarter of 1994 included the recognition of approximately $1 million resulting
from the reversal of certain progressive jackpot liabilities; the exclusion of
such amount from 1994 revenues results in a more comparable 1995 nine month
increase in casino revenues of 4.7%. The decrease in revenue during the third
quarter of 1995 results from reduced marketing efforts as discussed above,
compounded by a decline in the third quarter table game hold percentage to 14.7%
in 1995 from 16.5% in 1994.
Rooms revenue did not change significantly during the three and nine month
periods ended September 30, 1995 compared with the same periods of 1994. Food
and beverage revenues increased $1.2 million (13.3%) and $2.5 million (10.6%),
respectively, for the third quarter and nine months ended September 30, 1995
compared with the prior year as a result of the opening of the Sands' Epic
Buffet during the third quarter of 1995. Other revenues decreased $795,000
(14.2%) and $1.5 million (10.9%), respectively, during the third quarter and the
first nine months of 1995 compared to the same periods in 1994 as a result of
decreases in headliner entertainment at the Sands during 1995 as compared to
1994 and reductions in management fees earned from the operation of the Aurora
Casino. Such management fees were negatively impacted by the removal from
service of one of the Aurora Casino's two riverboats for a period of 30 days
during the second quarter while the boat was being expanded and by a decline in
the Aurora Casino's operating results due to increased competition in its market
area.
Promotional allowances represent the estimated 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 increased to 57.5% and 59%, respectively, during the third
quarter and first nine months of 1995 from 54.7% and 58.5% , respectively,
during the corresponding periods of 1994. These increases are attributable to
promotional activity associated with the 1995 opening of the Epic Buffet.
DEPARTMENTAL EXPENSES
Casino expenses at the Sands did not change significantly during the third
quarter and increased $8.6 million (5.9%) during the first nine months of 1995
compared with the same periods in 1994. Higher operating costs during the first
half of 1995 resulted primarily from increased casino patronage at the expanded
Sands facility. The increased costs were most apparent during the first quarter
of 1995, which saw a $7.7 million increase (18.3%) compared to the first quarter
of 1994. Higher operating costs have been substantially offset during the second
and third quarters of 1995 by decreases in marketing programs as previously
discussed and by other cost containment measures implemented by management.
19 of 25
<PAGE>
PRATT HOTEL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Rooms expense did not change significantly during the third quarter of 1995
and increased $293,000 (9.5%) during the first nine months of 1995 compared with
the same periods in 1994. The nine month increase results primarily from
increased operating and payroll costs due to higher occupancy rates at the
Sands. These costs were offset by an increase in room complimentaries during the
third quarter of 1995 resulting in a greater portion of operating costs being
charged to casino expenses. Although food and beverage expense increased
$109,000 (3.2%) during the third quarter of 1995 compared to the same period in
1994, such expenses decreased by $692,000 (7.5%) during the nine months ended
September 30, 1995 compared to 1994. Increased costs associated with the third
quarter opening of the Sands' Epic Buffet have been offset by increases in food
and beverage complimentaries allocated to the casino department. Other expenses
decreased $1.1 million (50.4%) and $1.1 million (24.8%) during the third quarter
and first nine months of 1995 compared with 1994 due to reductions in headliner
entertainment at the Sands.
GENERAL AND ADMINISTRATIVE
General and administrative expenses decreased by $752,000 (10.8%) during
the third quarter of 1995 compared to 1994 primarily due to reductions in
payroll and marketing costs at the Sands. Such expenses did not change
significantly during the nine month period ended September 30, 1995 compared to
the same period in 1994.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense decreased $208,000 (3.9%) and
increased $1.1 million (7.8%), respectively, during the three and nine month
periods ended September 30, 1995 as compared with 1994. Increases in
depreciation expense during the current year attributable to the 1994 expansion
of gaming space at the Sands were offset in the third quarter of 1995 by reduced
amortization of investment credits on obligatory investments contributed to the
Casino Reinvestment Development Authority ("CRDA") (see "Liquidity and Capital
Resources - Capital Expenditures and Obligatory Investments").
INTEREST
Interest income decreased $701,000 (52.9%) and $748,000 (29.4%),
respectively, during the three and nine month periods ended September 30, 1995
compared to the same periods in 1994 due primarily to the recognition of
interest earned on funds escrowed for the repayment of debt as part of GBHC's
1994 debt refinancing (see "Liquidity and Capital Resources - Financing
Activities"). In addition, PHC earned interest income during 1994 on the
underlying indebtedness of a noncasino hotel which it had previously sold; such
indebtedness was repaid during the third quarter of 1994. The resulting decrease
in interest income was partially offset by incremental interest earned on the
underlying indebtedness of another noncasino hotel operated by PHC purchased
during February 1994 (see Note 5 of Notes to Consolidated Financial Statements).
Interest expense did not change significantly during either the three or nine
month periods ended September 30, 1995.
20 of 25
<PAGE>
PRATT HOTEL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
INCOME TAX PROVISION
PHC and its subsidiaries have tax net operating loss carryforwards
("NOL's") totaling approximately $52 million (after reduction for approximately
$23 million used by HCC through 1994), of which approximately $43 million do not
begin to expire until the year 2003. Additionally, PHC and its subsidiaries have
various tax credits available totaling approximately $4.4 million, many of which
expire by the year 2002. Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" 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 utilization of such NOL's is more likely than not, a
valuation allowance should be recorded. Due to losses sustained for both
financial and tax reporting by PHC and its subsidiaries through the third
quarter of 1995, management was unable to determine that realization of that
asset was more likely than not and, thus, provided valuation allowances for the
entire deferred tax asset for all periods presented.
INFLATION
Management believes that in the near term, modest inflation, together with
increasing competition within the gaming industry for qualified and experienced
personnel, will continue to cause increases in operating expenses, particularly
labor and employee benefits costs.
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, the
Aurora Casino has also experienced seasonality, but to a lesser degree than the
Sands, and, as a result, the management fees earned have fluctuated with such
seasonality. In addition, the Sands' and the Aurora Casino's operations may
fluctuate significantly due to a number of factors, including chance. Such
seasonality and fluctuations may materially affect PHC's casino revenues and
profitability.
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES
PHC's principal assets and sources of revenues are the Sands and management
and consulting contracts with the Aurora Casino and the Tunica Casino. During
the first nine months of 1995, PHC's net cash provided by operating activities
(after net interest expense and income taxes) amounted to $23.6 million. A PHC
subsidiary receives 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 the Aurora Casino.
Management fees received during the first nine months of 1995 amounted to $6.6
million. During 1994, a subsidiary of PHC entered into a consulting agreement
with HCT with respect to the Tunica Casino which provides for the payment of
$1.2 million annually by the Tunica Casino to the subsidiary for consulting
services and for reimbursement of direct costs and expenses incurred.
21 of 25
<PAGE>
PRATT HOTEL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
The Sands' earnings before depreciation, interest, amortization, taxes and
intercompany management fees of more than $42 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. Cash provided by operating
activities at the Sands, prior to payment of management fees to a subsidiary of
PHC, during the nine month period ended September 30, 1995 amounted to $19.3
million. Historically, the Sands has also utilized short-term borrowings to fund
seasonal cash needs and for certain capital projects.
PHC utilized its operating cash flow together with existing cash during the
first nine months of 1995 to fund capital additions ($16.4 million), prepay
long-term indebtedness to HCC ($5.5 million), make obligatory investments at the
Sands ($2.1 million) and provide funding to an unconsolidated partnership for
the refurbishment of a Florida hotel property ($1.1 million).
In prior years PHC's hotel operations required substantial infusions of
operating funds; however, the disposition of all but three of its hotel
properties has greatly 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. During February 1994, PHC purchased
such underlying indebtedness with a principal balance of $13.8 million from
third parties at a cost of $6.8 million, with funds borrowed from HCC, and
subject to third party indebtedness amounting to $2.7 million.
Tax allocation payments and the repayment of intercompany loans from the
Sands 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
eliminated as all material litigation has been resolved. The combination of
reduced costs and the introduction of management and consulting fees earned on
non-owned gaming facilities have substantially reduced PHC's reliance on
intercompany payments as a source of liquidity.
Effective December 31, 1994, HCC began compensating PHC for the use of
PHC's available tax net operating loss carryforwards. For the year ended
December 31, 1994, such payment was effected through the assignment to PHC of
$6.3 million principal amount of the 14 5/8% junior subordinated notes issued by
HCC to a subsidiary of PHC together with $1.9 million of accrued interest
thereon.
FINANCING ACTIVITIES
During February 1994, PHC completed the refinancing of virtually all of its
casino-related outstanding debt. 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% PRT
22 of 25
<PAGE>
PRATT HOTEL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Funding Notes due April 15, 2004. Proceeds from the debt offerings were used, in
part, to refinance outstanding mortgage notes on the Sands and other
indebtedness scheduled to mature in 1994, to repay $58.4 million of publicly
held PCPI Notes and to provide partial funding for an expansion of gaming space
at the Sands. During the first nine months of 1995, the PHC Group repaid long-
term indebtedness of $5.9 million, including the payment of $5.5 million to HCC
in connection with a deferred interest note issued by HCC as part of the
refinancing. Scheduled maturities of long-term debt during the remainder of 1995
are $133,000.
During June 1994, GBHC entered into an agreement for a $5 million bank line
of credit, which was renewed in April 1995, and all of which was available for
working capital purposes at September 30, 1995. Management does not anticipate
additional borrowings on this line of credit during the fourth quarter of 1995.
CAPITAL EXPENDITURES AND OTHER INVESTMENTS
Property and equipment additions during the first nine months of 1995
totaled $16.4 million, of which capital expenditures at the Sands amounted to
approximately $15.7 million. Projects completed during 1995 include the Epic
Buffet and the relocation of the Sands' simulcast and poker facilities and
reconfiguration of slot machines. Management anticipates capital expenditures
during the remainder of 1995 will be approximately $3 million as the Sands
continues its conversion to a motion picture theme currently used by affiliated
HCC facilities. This motion picture theme utilizes designs inspired by famous
movies, displays of motion picture memorabilia and movie-themed gaming,
entertainment and dining facilities. The entire thematic conversion is expected
to take 18 to 24 months at a cost in excess of $25 million with funding
anticipated to be provided by cash flow from operations. Projects currently
planned during the remainder of 1995 include additional refinements to the Epic
Buffet and the Sands' retail outlet, enhancements to management information
systems and continued renovation of hotel rooms and suites. PHC's additional
capital expenditures during the first nine months of 1995 included approximately
$700,000 of property improvements at a non-casino hotel property it operates
under an agreement with Metroplex Hotel Limited (see Note 5 of Notes to
Consolidated Financial Statements).
The Sands is required by the New Jersey Casino Control Act to make certain
investments with the CRDA, a governmental agency which administers the
statutorily mandated investments and reinvestments made by casino licensees.
Deposit requirements for the first nine months of 1995 totaled $2.1 million and
are anticipated to be approximately $896,000 during the remainder of 1995.
PHC has also agreed to contribute up to $3.9 million, approximately $1.9
million of which has been paid as of September 30, 1995 (including $1.1 million
in the first nine months of 1995), as an additional investment in an
unconsolidated hotel partnership to refurbish the hotel facility in Orlando,
Florida. Anticipated contributions during the remainder of 1995 toward such
commitment are approximately $750,000. Such contributions are in recognition of
PHC's partner having agreed to make $5 million in principal reductions on the
underlying mortgage note on the facility of which $3.5 million were made during
1994.
23 of 25
<PAGE>
PRATT HOTEL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
SUMMARY
Management anticipates that PHC's funding requirements for the next twelve
months will be satisfied by (i) existing cash, (ii) cash generated by the Sands'
operations, (iii) management fees from the Aurora Casino, (iv) consulting fees
from the Tunica Casino and (v) management fees from remaining hotel operations.
24 of 25
<PAGE>
PART II: OTHER INFORMATION
- ---------------------------
The registrant did not file any reports on Form 8-K during the quarter
ended September 30, 1995.
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 10, 1995 By:/s/ John C. Hull
-------------------- -------------------------
John C. Hull
Corporate Controller
25 of 25
<PAGE>
INDEX TO EXHIBITS
-----------------
Exhibit
Number Description
- ------ -----------
27 Financial Data Schedule for the Three and Nine Month Periods
Ended September 30, 1995
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1995
<PERIOD-START> JUL-01-1995 JAN-01-1995
<PERIOD-END> SEP-30-1995 SEP-30-1995
<CASH> 27,535 27,535
<SECURITIES> 0 0
<RECEIVABLES> 29,283 29,283
<ALLOWANCES> 16,534 16,534
<INVENTORY> 4,129 4,129
<CURRENT-ASSETS> 54,193 54,193
<PP&E> 319,723 319,723
<DEPRECIATION> 149,427 149,427
<TOTAL-ASSETS> 250,282 250,282
<CURRENT-LIABILITIES> 43,394 43,394
<BONDS> 327,085 327,085
<COMMON> 519 519
0 0
0 0
<OTHER-SE> (134,976) (134,976)
<TOTAL-LIABILITY-AND-EQUITY> 250,282 250,282
<SALES> 0 0
<TOTAL-REVENUES> 83,344 231,322
<CGS> 0 0
<TOTAL-COSTS> 59,489 165,829
<OTHER-EXPENSES> 11,336 35,771
<LOSS-PROVISION> 726 2,263
<INTEREST-EXPENSE> 8,985 27,046
<INCOME-PRETAX> 2,808 413
<INCOME-TAX> 465 742
<INCOME-CONTINUING> 2,343 (329)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 2,343 (329)
<EPS-PRIMARY> .45 (.06)
<EPS-DILUTED> 0 0
</TABLE>
