<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, 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 August 9, 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 six month periods ended June 30, 1995
are not necessarily indicative of the operating results for the full year.
The consolidated financial statements as of June 30, 1995 and for the three
and six month periods ended June 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 June 30, 1995, the results of its operations for the three and six
month periods ended June 30, 1995 and 1994 and its cash flows for the six month
periods ended June 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
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1995 1994
-------------- --------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 28,899,000 $ 29,302,000
Accounts receivable, net of allowances
of $16,083,000 and $15,297,000,
respectively 14,035,000 13,982,000
Inventories 4,249,000 4,389,000
Due from affiliates 1,598,000 2,990,000
Deferred income taxes 3,391,000 3,242,000
Refundable deposits and other
current assets 4,092,000 3,889,000
------------- -------------
Total current assets 56,264,000 57,794,000
------------- -------------
Property and Equipment:
Land 37,807,000 37,807,000
Buildings and improvements 181,849,000 181,849,000
Operating equipment 85,689,000 83,373,000
Construction in progress 8,414,000 326,000
------------- -------------
313,759,000 303,355,000
Less - accumulated depreciation
and amortization (145,015,000) (136,138,000)
------------- -------------
Net property and equipment 168,744,000 167,217,000
------------- -------------
Other Assets:
Obligatory investments 4,660,000 4,027,000
Deferred financing costs 9,279,000 9,811,000
Notes receivable 9,274,000 9,325,000
Other assets 2,487,000 2,570,000
------------- -------------
Total other assets 25,700,000 25,733,000
------------- -------------
$ 250,708,000 $ 250,744,000
============= =============
</TABLE>
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>
JUNE 30, DECEMBER 31,
1995 1994
-------------- --------------
<S> <C> <C>
Current Liabilities:
Borrowings from affiliate $ 5,000,000 $ 250,000
Current maturities of long-term debt 532,000 511,000
Borrowings under credit facilities 2,000,000 -
Accounts payable 7,425,000 8,584,000
Accrued liabilities -
Salaries and wages 3,643,000 4,065,000
Interest 12,018,000 11,385,000
Other 10,973,000 9,592,000
Other current liabilities 3,370,000 3,645,000
------------- -------------
Total current liabilities 44,961,000 38,032,000
------------- -------------
Long-Term Debt 328,515,000 327,889,000
------------- -------------
Other Noncurrent Liabilities 12,977,000 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;
5,186,627 shares issued and outstanding 519,000 519,000
Additional paid-in capital 23,838,000 23,838,000
Accumulated deficit (161,102,000) (158,430,000)
------------- -------------
Total shareholders' deficit (136,745,000) (134,073,000)
------------- -------------
$ 250,708,000 $ 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
JUNE 30,
-------------------------
1995 1994
----------- -----------
<S> <C> <C>
Revenues:
Casino $66,460,000 $61,441,000
Rooms 3,821,000 3,690,000
Food and beverage 7,674,000 7,744,000
Other 3,026,000 3,669,000
----------- -----------
80,981,000 76,544,000
Less - Promotional allowances (6,224,000) (6,176,000)
----------- -----------
Net revenues 74,757,000 70,368,000
----------- -----------
Expenses:
Casino 48,503,000 48,086,000
Rooms 1,255,000 1,071,000
Food and beverage 2,413,000 2,866,000
Other 1,083,000 1,304,000
General and administrative 6,664,000 6,996,000
Depreciation and amortization 5,174,000 4,566,000
----------- -----------
Total expenses 65,092,000 64,889,000
----------- -----------
Income from operations 9,665,000 5,479,000
----------- -----------
Non-operating income (expense):
Interest income 620,000 775,000
Interest expense, net of capitalized interest
of $762,000 in 1994 (9,616,000) (9,208,000)
----------- -----------
Total non-operating expense, net (8,996,000) (8,433,000)
----------- -----------
Income (loss) before income taxes 669,000 (2,954,000)
Income tax provision (351,000) (106,000)
----------- -----------
Net income (loss) $ 318,000 $(3,060,000)
=========== ===========
Net income (loss) per common share $ .06 $ (.59)
=========== ===========
</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>
SIX MONTHS ENDED
JUNE 30,
---------------------------
1995 1994
------------ -------------
<S> <C> <C>
Revenues:
Casino $130,336,000 $115,577,000
Rooms 7,211,000 6,898,000
Food and beverage 15,542,000 14,271,000
Other 7,243,000 7,916,000
------------ ------------
160,332,000 144,662,000
Less - Promotional allowances (12,354,000) (11,622,000)
------------ ------------
Net revenues 147,978,000 133,040,000
------------ ------------
Expenses:
Casino 98,241,000 90,144,000
Rooms 2,339,000 2,036,000
Food and beverage 5,003,000 5,804,000
Other 2,294,000 2,290,000
General and administrative 14,132,000 13,678,000
Depreciation and amortization 10,303,000 8,980,000
------------ ------------
Total expenses 132,312,000 122,932,000
------------ ------------
Income from operations 15,666,000 10,108,000
------------ ------------
Non-operating income (expense):
Interest income 1,171,000 1,218,000
Interest expense, net of capitalized interest
of $762,000 in 1994 (19,232,000) (19,062,000)
------------ ------------
Total non-operating expense, net (18,061,000) (17,844,000)
------------ ------------
Loss before income taxes (2,395,000) (7,736,000)
Income tax (provision) benefit (277,000) 67,000
------------ ------------
Net loss $ (2,672,000) $ (7,669,000)
============ ============
Net loss per common share $ (.52) $ (1.48)
============ ============
</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>
SIX MONTHS ENDED
JUNE 30,
---------------------------------
1995 1994
----------------- --------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (2,672,000) $ (7,669,000)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization, including
accretion of debt discount 13,690,000 11,220,000
Provision for doubtful accounts 1,537,000 1,390,000
Deferred income tax (benefit) provision (291,000) 477,000
Increase in receivables (198,000) (2,586,000)
Increase in accounts payable and accrued expenses 488,000 436,000
Net change in other current assets and liabilities 302,000 533,000
Net change in other noncurrent assets and liabilities 196,000 (588,000)
----------------- -------------
Net cash provided by operating activities 13,052,000 3,213,000
----------------- -------------
INVESTING ACTIVITIES:
Net property and equipment additions (10,404,000) (10,745,000)
Collections on notes receivable 51,000 140,000
Obligatory investments (1,315,000) (219,000)
Purchase of mortgage note - (5,750,000)
Investments in and advances to unconsolidated
affiliates (1,005,000) -
----------------- -------------
Net cash used in investing activities (12,673,000) (16,574,000)
----------------- -------------
FINANCING ACTIVITIES:
Repayment of short-term debt - (21,000,000)
Net borrowings under credit facilities 2,000,000 -
Net repayments to affiliate - (11,133,000)
Deferred financing costs (32,000) (10,155,000)
Issuance of long-term debt - 285,000,000
Repayments of long-term debt (2,750,000) (220,452,000)
Issuance of common stock - 27,000
----------------- -------------
Net cash (used in) provided by financing activities (782,000) 22,287,000
----------------- -------------
Net (decrease) increase in cash and cash equivalents (403,000) 8,926,000
Cash and cash equivalents at beginning of period 29,302,000 15,466,000
----------------- -------------
Cash and cash equivalents at end of period $ 28,899,000 $ 24,392,000
================= =============
</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 June 30, 1995 and for the three
and six month periods ended June 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 June 30, 1995, the results of its operations for the three and six
month periods ended June 30, 1995 and 1994 and its cash flows for the six month
periods ended June 30, 1995 and 1994. Operating results for the three and six
month periods ended June 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.
As of June 30, 1995, borrowings under the line of credit totaled $2,000,000.
There were no borrowings outstanding under the line of credit at December 31,
1994.
As of June 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
June 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 noncurrent due to affiliate in the
accompanying consolidated balance sheet at December 31, 1994. 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.
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1995 1994
------------ ------------
<S> <C> <C>
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) 8,683,000 8,683,000
14 7/8% secured promissory note, due 2006, net of
discount of $58,199,000 and $64,759,000 (d) 46,764,000 45,877,000
Other 3,600,000 3,840,000
------------ ------------
Total indebtedness 329,047,000 328,400,000
Less - current maturities (532,000) (511,000)
------------ ------------
Total long-term debt $328,515,000 $327,889,000
============ ============
</TABLE>
____________________________________
(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 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 quarter
of 1995, PPI Funding Corp. repaid $2,500,000 of principal on the PPI
Funding Notes, reducing the maturity value of the notes to $104,963,000.
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 June 30, 1995 are set forth
below:
<TABLE>
<CAPTION>
<S> <C>
1995 (6 months) $ 260,000
1996 553,000
1997 3,465,000
1998 5,439,000
1999 5,479,000
Thereafter 372,050,000
------------
Total $387,246,000
============
</TABLE>
10 of 25
<PAGE>
PRATT HOTEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
Interest paid, net of amounts capitalized, amounted to $15,623,000 and
$11,563,000, respectively, during the six month periods ended June 30, 1995 and
1994.
(4) INCOME TAXES
Components of PHC's income tax (provision) benefit consisted of the
following:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
-------------------------- ----------------------------
1995 1994 1995 1994
--------- ---------- --------- ---------
<S> <C> <C> <C> <C>
Federal income tax
benefit $ - $ - $ - $ -
State income tax benefit
(provision):
Current (515,000) 120,000 (568,000) 544,000
Deferred 164,000 (226,000) 291,000 (477,000)
--------- --------- --------- ---------
$(351,000) $(106,000) $(277,000) $ 67,000
========= ========= ========= =========
</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 $6,317,000 principal amount of Junior Subordinated Notes together
with $1,914,000 of accrued interest thereon. PHC paid no federal income taxes
for either of the six month periods ended June 30, 1995 or 1994. Total state
income taxes paid by PHC amounted to $69,000 and $234,000, respectively, for the
six month periods ended June 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 $59,000,000 (after reduction for the
$23,516,000 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 $4,000,000, 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
11 of 25
<PAGE>
PRATT HOTEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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
subsidiaries through the second 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:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1995 1994
------------ ------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 20,023,000 $ 20,462,000
Allowance for doubtful accounts 6,676,000 6,330,000
Investment and jobs tax credits 4,075,000 4,075,000
Equity losses of unconsolidated
subsidiaries and joint ventures 3,342,000 3,491,000
Other liabilities and accruals 2,200,000 1,942,000
Benefits accrual 1,566,000 1,514,000
Other 1,269,000 982,000
------------ ------------
Total deferred tax assets 39,151,000 38,796,000
------------ ------------
Deferred tax liabilities:
Depreciation and amortization (8,841,000) (8,897,000)
Other (1,244,000) (933,000)
------------ ------------
Total deferred tax liabilities (10,085,000) (9,830,000)
------------ ------------
Net deferred tax asset 29,066,000 28,966,000
Valuation allowance (29,066,000) (28,966,000)
------------ ------------
$ - $ -
============ ============
</TABLE>
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:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1995 1994
------------ -------------
<S> <C> <C>
Deferred income taxes - current $ 1,744,000 $ 1,367,000
Other noncurrent liabilities (1,744,000) (1,367,000)
</TABLE>
(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 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. Payments under the hotel operating
agreement (net of debt service receipts since the February 1994 note acquisition
date) amounted to $133,000 during each of the three month periods ended June 30,
1995 and 1994 and $267,000 and $410,000, respectively, during the six month
periods ended June 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 $1,243,000 and $1,693,000, respectively, during the three month
periods ended June 30, 1995 and 1994 and $3,872,000 and $4,378,000 during the
six month period ended June 30, 1995 and 1994. Unpaid fees amounting to
$1,243,000 and $2,341,000, respectively, are included in due from affiliates in
the accompanying consolidated balance sheets at June 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 June 30, 1995 and 1994, and
$600,000 during each of the six month periods ended June 30, 1995 and 1994.
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 $111,000 and $175,000, respectively,
13 of 25
<PAGE>
PRATT HOTEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
during the three and six month periods ended June 30, 1995. Such fees totaled
$76,000 and $145,000, respectively, during the three and six month periods ended
June 30, 1994. A receivable in connection with such allocated costs and fees in
the amounts of $26,000 and $77,000, respectively, is included in due from
affiliates in the accompanying consolidated balance sheets at June 30, 1995 and
December 31, 1994.
Interest expense with respect to borrowings from HCC is set forth below:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
1995 1994 1995 1994
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
PPI Funding Notes and PCPI
Notes held by HCC (Note 3) $1,695,000 $1,508,000 $3,387,000 $2,962,000
Junior Subordinated
Notes (Note 3) 318,000 549,000 635,000 817,000
Short-term borrowings
(Note 2) 212,000 340,000 422,000 816,000
</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). As a result of this
exchange, PHC's cash interest payments were reduced by approximately $6,000,000
per year. Accretion of interest on the PPI Funding Notes is included in the
outstanding note payable balance at June 30, 1995 and December 31, 1994.
Interest accrued on short-term borrowings which amounted to $23,000 at both
June 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 $635,000 at June 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 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.
14 of 25
<PAGE>
PRATT HOTEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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 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 quarter ended June 30, 1994, the
Sands removed certain progressive jackpots from
15 of 25
<PAGE>
PRATT HOTEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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 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
Management fees earned from the Aurora Casino and the expansion of gaming
space at the Sands have enabled PHC to increase its consolidated net revenues to
$74.8 million and $148 million, respectively, for the three and six month
periods ended June 30, 1995 from $70.4 million and $133 million, respectively,
for the three and six month periods ended June 30, 1994. PHC's income from
operations has improved to $9.7 million and $15.7 million, respectively, during
the second quarter and first six months of 1995 from $5.5 million and $10.1
million, respectively, during the same periods of 1994.
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,
------------------- -------------------
1995 1994 1995 1994
-------- -------- -------- --------
(in thousands, except percentages)
<S> <C> <C> <C> <C>
REVENUES:
Table games $ 24,582 $ 21,622 $ 47,543 $ 43,786
Slot machines 40,841 38,839 80,578 69,967
Other (1) 1,037 980 2,215 1,824
-------- -------- -------- --------
Total $ 66,460 $ 61,441 $130,336 $115,577
======== ======== ======== ========
TABLE GAMES:
Gross Wagering
(Drop) (2) $150,722 $148,470 $293,310 $270,599
======== ======== ======== ========
Hold Percentages: (3)
Sands 16.3% 14.6% 16.2% 16.2%
Atlantic City Casino
Gaming Industry 15.9% 15.3% 15.9% 15.7%
SLOT MACHINES:
Gross Wagering
(Handle) (2) $468,469 $427,879 $938,286 $779,853
======== ======== ======== ========
Sands' Hold Percentage:(3)(4) 8.7% 8.8% 8.6% 8.8%
</TABLE>
____________________________
17 of 25
<PAGE>
PRATT HOTEL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
(1) Consists of revenues from poker ($724,000 and $1,564,000, respectively, for
the three and six month periods ended June 30, 1995 and $644,000 and
$1,254,000, respectively, for the three and six month periods ended June
30, 1994) and simulcast horse racing wagering ($313,000 and $651,000,
respectively, for the three and six month periods ended June 30, 1995 and
$336,000 and $570,000, respectively, for the three and six month periods
ended June 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 increased $2.3 million (1.5%) and $22.7 million (8.4%),
respectively, for the three and six month periods ended June 30, 1995 compared
with the same periods of 1994. These changes compare with increases of 5.6% and
5.4% 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
8.8% during the second quarter of 1995 compared to the same period in 1994.
Despite this second quarter decrease, the Sands' table game market share for the
first six months of 1995 has increased to 8.7% from 8.5% during the same period
of 1994. The Sands' table game drop increase is largely attributable to the
completion of a 25,000 square foot expansion of gaming space in June 1994,
which, among other things, provided patrons with non-smoking areas and resulted
in a more spacious and comfortable gaming environment. Such enhancements were
designed to appeal to the mass market segment and resulted in both a significant
increase in the number of table games and improved accessibility of table games
to casino patrons. A number of factors also adversely affected the first quarter
of 1994 including the relocation of many blackjack tables to a less accessible
temporary gaming space during construction and 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.
Slot machine handle increased $40.6 million (9.5%) and $158.4 million
(20.3%), respectively, during the second quarter and first six months of 1995
compared with the same periods of 1994. The Sands' slot machine handle increases
during 1995 compare to increases of 15.5% and 19.7% in slot machine handle for
all other Atlantic City casinos during the same periods. The Sands increased its
average number of slot machines during the first six months of 1995 by 22.3%
compared to the Atlantic City industry increase of 12.7%. The Sands' six month
1995 slot handle increase exceeded the average industry handle increase as a
result of the expansion of gaming space and the introduction of new slot
machines operated at a higher payback percentage, which encourages extended
patron play. In addition,
18 of 25
<PAGE>
PRATT HOTEL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
slot marketing efforts implemented in connection with the opening of the
expanded Sands facility continued through the first quarter of 1995 contributing
to significant increases in the important mass market segment. During the second
quarter of 1995, the Sands discontinued certain of these marketing programs and
promotions which management deemed to be less cost effective. While this
decision negatively impacted second quarter growth in slot machine handle,
overall profitability of the slot machine market segment improved. Despite the
curtailment of certain marketing programs, increased patronage from the
important mass market segment, for which the Sands could not effectively compete
prior to its expansion, was maintained as evidenced by the 1995 six month
increases in bus passengers and cars parked of 21% and 47.4%, respectively,
compared to 1994.
REVENUES
Casino revenues at the Sands, including poker and simulcast horse racing
wagering revenues, increased by $5 million (8.2%) and $14.8 million (12.8%),
respectively, for the three and six months ended June 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 more comparable 1995 three and six month increases in casino
revenues of 10% and 13.8%, respectively. The 1995 revenue increases result from
the expansion of gaming space and improved marketing efforts as demonstrated by
the aforementioned increases in slot machine and table games gross wagering. The
impact on revenue of such volume increases was partially offset by a decline in
the slot machine hold percentage; such a decline is consistent with the
competitive trend in Atlantic City towards lower hold percentages.
Rooms revenue did not change significantly during either the three or six
month periods ended June 30, 1995 compared with the same periods of 1994. Food
and beverage revenues during the second quarter of 1995 did not change
significantly compared with the same period of 1994, but did increase $1.3
million (8.9%) for the six months ended June 30, 1995 compared with the prior
year as a result of the expansion of an existing dining outlet and increases in
casino patronage at the Sands. Other revenues decreased $643,000 (17.5%) and
$673,000 (8.5%), respectively, during the second quarter and first six months of
1995 compared to the same periods in 1994 as a result of a second quarter
decrease in management fees earned from the Aurora Casino. One of the Aurora
Casino's two riverboats was removed from service for a period of 30 days in
connection with the completion of a 10,000 square foot extension of the
riverboat. Such extension was completed and the riverboat returned to service on
May 10, 1995.
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 decreased to 59.1% and 59.9%, respectively, during the second
quarter and first six months of 1995 from 59.2% and 61.2%, respectively, during
the corresponding periods of 1994. As a result of the Sands' expansion, wagering
attributable to the mass market segment (which generally does not require the
same level of complimentaries) has increased at a greater rate than overall
wagering.
19 of 25
<PAGE>
PRATT HOTEL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
DEPARTMENTAL EXPENSES
Casino expenses at the Sands did not change significantly during the second
quarter and increased $8.1 million (9%) during the first six months of 1995
compared with the same periods in 1994. This six month increase was primarily
due to higher operating costs during the first quarter of 1995 as a result of
increased casino patronage at the expanded Sands facility. Casino expenses did
not increase significantly during the second quarter of 1995 compared with the
1994 second quarter primarily due to decreases in marketing programs as
previously discussed and other cost containment measures implemented by
management. As a result, second quarter costs were basically unchanged although
casino revenues increased by over $5 million.
Rooms expense increased $184,000 (17.2%) and $303,000 (14.9%),
respectively, during the second quarter and first six months of 1995 compared
with the same periods in 1994 primarily as a result of increased operating and
payroll costs due to the higher occupancy rates at the Sands. In addition, the
Sands has experienced a decrease in room complimentaries resulting in a
reduction of operating costs allocated to casino expenses. Food and beverage
expense decreased $453,000 (15.8%) and $801,000 (13.8%), respectively, during
the three and six month periods ended June 30, 1995 compared with 1994 as a
result of increased food and beverage complimentaries allocated to the casino
department at the Sands partially offset by increased payroll and operating
costs associated with the Sands' expansion of food and beverage outlets. Other
expenses decreased $221,000 (16.9%) during the second quarter of 1995 compared
with 1994, but did not change significantly for the 1995 six month period
compared with 1994 since higher payroll and production costs associated with
theater entertainment in 1995 were offset by reductions in headliner
entertainment salaries.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense increased $608,000 (13.3%) and $1.3
million (14.7%), respectively, during the three and six month period ended June
30, 1995 as compared with 1994. Increases in depreciation expense during 1995
are attributable to 1994 capital asset additions in connection with the
expansion of gaming space at the Sands.
INTEREST
Interest income decreased $155,000 (20%) and $47,000 (3.9%), during the
three and six month periods ended June 30, 1995 compared to the same periods in
1994. During 1994, PHC earned interest income 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 six month periods ended June 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 $59 million (after reduction for approximately
$24 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 million, many of which
expire by the year 2002. The provisions of Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" require 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 second
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.
21 of 25
<PAGE>
PRATT HOTEL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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 six months of 1995, PHC's net cash provided by operating activities
(after net interest expense and income taxes) amounted to $13.1 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 half of 1995 amounted to $5 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.
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 six month period ended June 30, 1995 amounted to $11.3 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 six months of 1995 to fund capital additions ($10.4 million), make
obligatory investments at the Sands ($1.3 million) and provide funding to an
unconsolidated partnership for the refurbishment of a Florida hotel property ($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
22 of 25
<PAGE>
PRATT HOTEL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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 by HCC
and its subsidiaries (exclusive of PHC and its subsidiaries) 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
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 debt
maturing in 1994, to repay $58.4 million of publicly held PCPI Notes and to
provide additional funding for capital expenditures in connection with an
expansion of gaming space at the Sands. During the first half of 1995, the PHC
Group repaid long-term indebtedness of $2.8 million, including the payment of
$2.5 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 $260,000.
During June 1994, GBHC entered into an agreement for a $5 million bank line
of credit which was renewed in April 1995. At June 30, 1995, $2 million had been
borrowed under the agreement for working capital purposes. Management does not
anticipate additional borrowings on this line of credit during the remainder of
1995.
23 of 25
<PAGE>
PRATT HOTEL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
CAPITAL EXPENDITURES AND OTHER INVESTMENTS
Capital expenditures at the Sands during the first six months of 1995
amounted to approximately $10.1 million. Management anticipates capital
expenditures during the remainder of 1995 will be approximately $4.2 million as
the Sands begins 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; such funds
are anticipated to be provided by cash flow from operations. Projects currently
planned during the remainder of 1995 include completion of the Hollywood Epic
Buffet, relocation of the Sands' simulcast and poker facilities and a
reconfiguration of its slot machines and continued renovation of hotel rooms and
suites.
The Sands is required by the New Jersey Casino Control Act to make certain
investments with the Casino Reinvestment Development Authority ("CRDA"), a
governmental agency which administers the statutorily mandated investments and
reinvestments made by casino licensees. Deposit requirements for the first six
months of 1995 totaled $1.3 million and are anticipated to be approximately $1.8
million during the remainder of 1995.
PHC has also agreed to contribute up to $3.9 million, approximately $1.8
million of which has been paid as of June 30, 1995 (including $1 million in the
first six 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.
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 June 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: August 11, 1995 By:/s/ John C. Hull
-------------------- -----------------------
John C. Hull
Corporate Controller
25 of 25
<PAGE>
INDEX TO EXHIBITS
-----------------
Exhibit
Number Description
-------- -----------------------------------------------------------------
27.1 Financial Data Schedule for the Three and Six Month Periods Ended
June 30, 1995
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1995
<PERIOD-START> APR-01-1995 JAN-01-1995
<PERIOD-END> JUN-30-1995 JUN-30-1995
<CASH> 28,899 28,899
<SECURITIES> 0 0
<RECEIVABLES> 30,118 30,118
<ALLOWANCES> 16,083 16,083
<INVENTORY> 4,249 4,249
<CURRENT-ASSETS> 56,264 56,264
<PP&E> 313,759 313,759
<DEPRECIATION> 145,015 145,015
<TOTAL-ASSETS> 250,708 250,708
<CURRENT-LIABILITIES> 44,961 44,961
<BONDS> 328,515 328,515
<COMMON> 519 519
0 0
0 0
<OTHER-SE> (137,264) (137,264)
<TOTAL-LIABILITY-AND-EQUITY> 250,708 250,708
<SALES> 0 0
<TOTAL-REVENUES> 74,757 147,978
<CGS> 0 0
<TOTAL-COSTS> 52,522 106,340
<OTHER-EXPENSES> 11,838 24,435
<LOSS-PROVISION> 732 1,537
<INTEREST-EXPENSE> 8,996 18,061
<INCOME-PRETAX> 669 (2,395)
<INCOME-TAX> (351) (277)
<INCOME-CONTINUING> 318 (2,672)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 318 (2,672)
<EPS-PRIMARY> .06 (.52)
<EPS-DILUTED> 0 0
</TABLE>
