<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(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, 1996
-------------
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 12, 1996
- ------------------------------- --------------------------------
COMMON STOCK, $.10 PAR VALUE 5,186,627 SHARES
1
<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 providing 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 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"). The remaining outstanding HCC
common shares are listed and traded on the NASDAQ under the symbol HWCC.
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, 1996
are not necessarily indicative of the operating results for the full year.
The consolidated financial statements as of June 30, 1996 and for the
three and six month periods ended June 30, 1996 and 1995 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, 1996, the results of its operations for the three and six
month periods ended June 30, 1996 and 1995 and its cash flows for the six month
periods ended June 30, 1996 and 1995.
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 1995 Annual Report on Form 10-K.
2
<PAGE>
PRATT HOTEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1995
-------------- --------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 22,426,000 $ 28,067,000
Accounts receivable, net of allowances
of $15,758,000 and $16,496,000,
respectively 10,797,000 12,293,000
Inventories 4,181,000 4,462,000
Due from affiliates 1,443,000 2,435,000
Notes receivable 9,168,000 -
Deferred income taxes 3,918,000 4,055,000
Refundable deposits and other
current assets 4,558,000 2,764,000
------------- -------------
Total current assets 56,491,000 54,076,000
------------- -------------
Property and Equipment:
Land 37,807,000 37,807,000
Buildings and improvements 185,510,000 185,077,000
Operating equipment 93,514,000 92,474,000
Construction in progress 5,066,000 2,450,000
------------- -------------
321,897,000 317,808,000
Less - accumulated depreciation
and amortization (156,724,000) (148,531,000)
------------- -------------
Net property and equipment 165,173,000 169,277,000
------------- -------------
Other Assets:
Obligatory investments 5,565,000 5,521,000
Deferred financing costs 8,184,000 8,730,000
Notes receivable - 9,222,000
Other assets 4,436,000 3,457,000
------------- -------------
Total other assets 18,185,000 26,930,000
------------- -------------
$ 239,849,000 $ 250,283,000
============= =============
</TABLE>
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated balance sheets.
3
<PAGE>
PRATT HOTEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
LIABILITIES AND SHAREHOLDERS' DEFICIT
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1995
------------- -------------
<S> <C> <C>
Current Liabilities:
Borrowings from affiliate $ 5,000,000 $ 5,000,000
Short-term credit facilities 2,000,000 -
Current maturities of long-term debt 565,000 553,000
Accounts payable 10,007,000 9,503,000
Accrued liabilities -
Salaries and wages 3,822,000 4,349,000
Interest 12,503,000 11,856,000
Insurance 2,796,000 2,339,000
Other 11,049,000 8,868,000
Other current liabilities 2,834,000 3,630,000
------------- -------------
Total current liabilities 50,576,000 46,098,000
------------- -------------
Long-Term Debt 331,818,000 328,570,000
------------- -------------
Other Noncurrent Liabilities 8,710,000 8,747,000
------------- -------------
Due to Affiliate 5,283,000 5,283,000
------------- -------------
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 23,783,000 23,783,000
Accumulated deficit (180,840,000) (162,717,000)
------------- -------------
Total shareholders' deficit (156,538,000) (138,415,000)
------------- -------------
$ 239,849,000 $ 250,283,000
============= =============
</TABLE>
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated balance sheets.
4
<PAGE>
PRATT HOTEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
--------------------------
1996 1995
------------ ------------
<S> <C> <C>
Revenues:
Casino $65,310,000 $66,460,000
Rooms 3,766,000 3,821,000
Food and beverage 9,211,000 7,674,000
Other 3,813,000 3,026,000
----------- -----------
82,100,000 80,981,000
Less - promotional allowances (7,035,000) (6,224,000)
----------- -----------
Net revenues 75,065,000 74,757,000
----------- -----------
Expenses:
Casino 56,868,000 48,503,000
Rooms 1,184,000 1,255,000
Food and beverage 3,168,000 2,413,000
Other 1,284,000 1,083,000
General and administrative 6,849,000 6,664,000
Depreciation and amortization 5,346,000 5,174,000
----------- -----------
Total expenses 74,699,000 65,092,000
----------- -----------
Income from operations 366,000 9,665,000
----------- -----------
Non-operating income (expense):
Interest income 529,000 620,000
Interest expense (9,730,000) (9,616,000)
----------- -----------
Total non-operating expense, net (9,201,000) (8,996,000)
----------- -----------
(Loss) income before income taxes (8,835,000) 669,000
Income tax benefit (provision) 508,000 (351,000)
----------- -----------
Net (loss) income $(8,327,000) $ 318,000
=========== ===========
Net (loss) income per common share $ (1.60) $ .06
=========== ===========
</TABLE>
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated statements.
5
<PAGE>
PRATT HOTEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
----------------------------
1996 1995
------------ ------------
<S> <C> <C>
Revenues:
Casino $122,915,000 $130,336,000
Rooms 7,290,000 7,211,000
Food and beverage 18,161,000 15,542,000
Other 9,276,000 7,243,000
------------ ------------
157,642,000 160,332,000
Less - promotional allowances (14,154,000) (12,354,000)
------------ ------------
Net revenues 143,488,000 147,978,000
------------ ------------
Expenses:
Casino 109,981,000 98,241,000
Rooms 2,140,000 2,339,000
Food and beverage 6,049,000 5,003,000
Other 2,444,000 2,294,000
General and administrative 13,398,000 14,132,000
Depreciation and amortization 10,601,000 10,303,000
------------ ------------
Total expenses 144,613,000 132,312,000
------------ ------------
(Loss) income from operations (1,125,000) 15,666,000
------------ ------------
Non-operating income (expense):
Interest income 1,103,000 1,171,000
Interest expense (19,440,000) (19,232,000)
------------ ------------
Total non-operating expense, net (18,337,000) (18,061,000)
------------ ------------
Loss before income taxes (19,462,000) (2,395,000)
Income tax benefit (provision) 1,339,000 (277,000)
------------ ------------
Net loss $(18,123,000) $ (2,672,000)
============ ============
Net loss per common share $ (3.49) $ (.52)
============ ============
</TABLE>
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated statements.
6
<PAGE>
PRATT HOTEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
---------------------------
1996 1995
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $(18,123,000) $ (2,672,000)
Adjustments to reconcile net loss to net cash (used in)
provided by operating activities:
Depreciation and amortization, including
accretion of debt discount 14,134,000 13,690,000
Provision for doubtful accounts 894,000 1,537,000
Deferred income tax benefit (107,000) (291,000)
Decrease (increase) in accounts receivable 1,594,000 (198,000)
Increase in accounts payable and other accrued liabilities 3,462,000 488,000
Net change in other current assets and liabilities (2,362,000) 302,000
Net change in other noncurrent assets and liabilities (207,000) 196,000
------------ ------------
Net cash (used in) provided by operating activities (715,000) 13,052,000
------------ ------------
INVESTING ACTIVITIES:
Net property and equipment additions (5,275,000) (10,404,000)
Collections on notes receivable 54,000 51,000
Obligatory investments (1,432,000) (1,315,000)
Investments in and advances to unconsolidated affiliates - (1,005,000)
------------ ------------
Net cash used in investing activities (6,653,000) (12,673,000)
------------ ------------
FINANCING ACTIVITIES:
Net borrowings on credit facilities 2,000,000 2,000,000
Repayments of long-term debt (273,000) (2,750,000)
Deferred financing costs - (32,000)
------------ ------------
Net cash provided by (used in) financing activities 1,727,000 (782,000)
------------ ------------
Net decrease in cash and cash equivalents (5,641,000) (403,000)
Cash and cash equivalents at beginning of period 28,067,000 29,302,000
------------ ------------
Cash and cash equivalents at end of period $ 22,426,000 $ 28,899,000
============ ============
</TABLE>
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated statements.
7
<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. A previously
announced proposal for PHC to make a cash tender offer for the approximately one
million outstanding shares of its common stock not already owned by HCC was
rescinded during the second quarter of 1996.
PHC estimates that a significant amount of the Sands' revenues is
derived from patrons living in southeastern Pennsylvania, northern New Jersey
and metropolitan New York City. Competition in the Atlantic City gaming market
is intense and management believes that this competition will continue in the
future.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
PHC is self insured for a portion of its general liability, certain
health care and other liability exposures. Accrued insurance includes estimates
of such accrued liabilities based on an evaluation of the merits of individual
claims and historical claims experience; accordingly, PHC's ultimate liability
may differ from the amounts accrued.
During the fourth quarter of 1995, PHC adopted the provisions of
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets" ("SFAS 121"). SFAS 121 requires, among other
things, that an entity review its long-lived assets and certain related
intangibles for impairment whenever changes in circumstances indicate that the
carrying amount of an asset may not be fully recoverable. As a result of its
review, PHC does not believe that any material impairment currently exists
related to its long-lived assets.
The consolidated financial statements as of June 30, 1996 and for the
three and six month periods ended June 30, 1996 and 1995 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, 1996, the results of its operations for the three and six
month periods ended June 30, 1996 and 1995 and its cash flows for the six month
periods ended June 30, 1996 and 1995.
8
<PAGE>
PRATT HOTEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(2) SHORT-TERM CREDIT FACILITIES AND BORROWINGS FROM AFFILIATES
As of April 30, 1996 a subsidiary of PHC extended $2,000,000 of its
bank line of credit until April 30, 1997. As of June 30, 1996, $2,000,000 was
outstanding under the line of credit; no such borrowings were outstanding under
the line of credit at December 31, 1995. Borrowings under the line of credit
accrue interest at the bank's prime rate plus 3/4% per annum payable monthly and
are guaranteed by another subsidiary of PHC. Additionally, the guarantor has
pledged a certificate of deposit in the face amount of $2,000,000 as collateral
for the line of credit.
PHC and its subsidiaries had outstanding affiliate borrowings from HCC
of $6,000,000 as of both June 30, 1996 and December 31, 1995. Of the amounts
borrowed, $1,000,000, which is not due until April 1, 1998, is classified as
noncurrent in the accompanying consolidated balance sheets at June 30, 1996 and
December 31, 1995. In addition, $4,750,000 is due in May 1997 and is secured by
a pledge of certain notes receivable from a partnership owned by certain members
of the Pratt Family (see Note 5). 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. During July
and August 1996, a subsidiary of PHC borrowed an additional $6,500,000 from HCC.
(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,
1996 1995
------------ ------------
<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) 8,738,000 8,738,000
14 7/8% secured promissory note, due 2006, net of
discount of $47,777,000 and $51,310,000, respectively (d) 50,576,000 47,043,000
Other 3,069,000 3,342,000
------------ ------------
Total indebtedness 332,383,000 329,123,000
Less - current maturities (565,000) (553,000)
------------ ------------
Total long-term debt $331,818,000 $328,570,000
============ ============
</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
9
<PAGE>
PRATT HOTEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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 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. Principal totaling $6,262,000 with respect to the Junior
Subordinated Notes was subsequently 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. Because the PHC subsidiary had not met the financial
coverage tests, interest was not paid on February 17, 1996.
(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 the $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 paid to all third party holders of $58,364,000
principal amount of PCPI Notes concurrently redeemed. The PPI Funding
Notes were
10
<PAGE>
PRATT HOTEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
discounted to yield interest at the rate of 14 7/8% per annum and had an
original face value of $110,636,000. Subsequent principal payments by PPI
Funding Corp. have reduced the maturity value of the notes to $98,353,000.
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, 1996 are set forth
below:
<TABLE>
<S> <C>
1996 (six months) $ 280,000
1997 3,468,000
1998 5,439,000
1999 5,479,000
2000 5,515,000
Thereafter 359,979,000
------------
Total $380,160,000
============
</TABLE>
Interest paid amounted to $15,675,000 and $15,623,000, respectively,
during the six month periods ended June 30, 1996 and 1995.
(4) INCOME TAXES
Components of PHC's benefit for income taxes consist of the following:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -----------------------
1996 1995 1996 1995
-------- --------- ----------- ----------
<S> <C> <C> <C> <C>
Federal income tax benefit $ - $ - $ - $ -
State income tax benefit (provision):
Current 468,000 (515,000) 1,232,000 (568,000)
Deferred 40,000 164,000 107,000 291,000
-------- --------- ---------- ----------
$508,000 $(351,000) $1,339,000 $ (277,000)
======== ========= ========== ==========
</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. In addition, HCC compensates PHC for its
use of PHC's available tax net operating loss carryforwards ("NOL's"). PHC paid
no federal income taxes for the six month periods ended June 30, 1996 and 1995.
PHC paid state income taxes totaling $93,000 and $69,000, respectively, during
the six month periods ended June 30, 1996 and 1995.
11
<PAGE>
PRATT HOTEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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 NOL's totaling approximately $75,000,000
of which approximately $59,000,000 do not begin to expire until the year 2003.
Additionally, PHC and its subsidiaries have various tax credits available
totaling approximately $3,000,000, 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 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 1996, 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 utilization of its loss carryforwards.
12
<PAGE>
PRATT HOTEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
The components of the net deferred tax asset are as follows:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1995
------------ ------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 25,689,000 $ 20,668,000
Allowance for doubtful accounts 6,919,000 6,830,000
Investment and jobs tax credits 3,384,000 4,417,000
Equity losses of unconsolidated
subsidiaries and joint ventures 3,251,000 3,165,000
Other liabilities and accruals 2,608,000 2,455,000
Other 1,216,000 1,377,000
------------ ------------
Total deferred tax assets 43,067,000 38,912,000
------------ ------------
Deferred tax liabilities:
Depreciation and amortization (8,170,000) (8,555,000)
Other (682,000) (695,000)
------------ ------------
Total deferred tax liabilities (8,852,000) (9,250,000)
------------ ------------
Net deferred tax asset 34,215,000 29,662,000
Valuation allowance (34,215,000) (29,662,000)
------------ ------------
$ - $ -
============ ============
</TABLE>
Receivables and payables in connection with the aforementioned tax
allocation agreements are as follows:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1995
------------ ------------
<S> <C> <C>
Deferred income taxes - current $ 1,735,000 $ 1,950,000
Other noncurrent liabilities (1,735,000) (1,950,000)
</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. During the six month periods ended June 30, 1996 and 1995, PHC made
payments for property improvements under the hotel operating agreement totaling
$1,614,000 and $325,000,
13
<PAGE>
PRATT HOTEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
respectively. 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. The required
minimum rental payments (net of debt service receipts) amounted to $133,000
during each of the three month periods ended June 30, 1996 and 1995 and $264,000
and $267,000, respectively, during the six month periods ended June 30, 1996 and
1995. 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 in 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 $13,418,000 due May 31, 1997.
On June 7, 1996, Metroplex entered into a contract for the sale of the
hotel which is anticipated to close in September 1996. Upon consummation of the
sale, PHC will recover its $6,750,000 cost of the underlying indebtedness
together with payments made for property improvements in 1995 and 1996 expected
to aggregate approximately $2,500,000.
Pursuant to a management agreement, Pratt Management, L.P. ("PML"), a
limited partnership wholly owned by PHC, earns a base management fee from
Hollywood Casino - Aurora, Inc. ("HCA"), 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 $1,528,000 and $1,243,000, respectively, during the
three month periods ended June 30, 1996 and 1995 and $4,471,000 and $3,872,000,
respectively, during the six month periods ended June 30, 1996 and 1995. Unpaid
fees amounting to $1,087,000 and $2,177,000, respectively, are included in due
from affiliates in the accompanying consolidated balance sheets at June 30, 1996
and December 31, 1995.
Pursuant to a ten-year consulting agreement with Hollywood Casino -
Tunica, Inc. ("HCT"), 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 for each of the three month periods
ended June 30, 1996 and 1995 and $600,000 for each of the six month periods
ended June 30, 1996 and 1995.
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 from HCC to PHC amounted to $606,000 and $1,294,000,
respectively, during the three and six month periods ended June 30, 1996 and net
amounts charged to HCC by PHC amounted to $111,000 and $175,000, respectively,
during the three and six month periods ended June 30, 1995. In connection with
such allocated costs and fees, payables in the amount of $191,000 and $210,000
are included in due to affiliates, respectively, in the accompanying
consolidated balance sheets at June 30, 1996 and December 31, 1995.
14
<PAGE>
PRATT HOTEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
HCT and Advanced Casino Systems Corporation ("ACSC"), a PHC
subsidiary, entered into a Computer Services Agreement dated as of January 1,
1994. The agreement has a term of three years and provides, among other things,
that ACSC will sell HCT computer hardware and information systems equipment and
will license or sublicense to HCT computer software necessary to operate HCT's
casino, hotel and related facilities and business operations. HCT pays ACSC for
such equipment and licenses such software at amounts and on terms and conditions
that ACSC provides to unrelated third parties as well as a fixed license fee of
$30,000 a month. HCT also reimburses ACSC for its direct costs and expenses
incurred under this agreement. Total charges incurred under such agreement
amounted to $141,000 and $109,000, for the three month periods ended June 30,
1996 and 1995 and $312,000 and $258,000, respectively, for the six month periods
ended June 30, 1996 and 1995. HCA also receives certain computer-related
services from PHC subsidiaries including hardware, software, and operator
support. HCA reimburses PHC for its direct costs and any expenses incurred.
Such costs totaled $31,000 and $231,000, respectively, for the three month
periods ended June 30, 1996 and 1995 and $80,000 and $539,000, respectively,
during the six month periods ended June 30, 1996 and 1995.
Greate Bay Hotel and Casino, Inc. ("GBHC"), the PHC subsidiary which
owns and operates the Sands, performs certain administrative and marketing
services on behalf of HCT and HCA. During the three month periods ended June
30, 1996 and 1995, fees charged by GBHC for such services totaled $261,000 and
$183,000, respectively. Such fees totaled $590,000 and $389,000, respectively,
during the six month periods ended June 30, 1996 and 1995.
Interest expense with respect to borrowings from HCC is set forth below:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- -----------------------
1996 1995 1996 1995
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
PPI Funding Notes held
by HCC (Note 3) $1,784,000 $1,695,000 $3,533,000 $3,387,000
Junior Subordinated Notes (Note 3) 319,000 318,000 638,000 635,000
Short-term borrowings (Note 2) 214,000 212,000 426,000 422,000
</TABLE>
During 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 balances at June 30, 1996 and December
31, 1995.
Interest accrued on short-term borrowings at both June 30, 1996 and
December 31, 1995 amounting to $23,000 is included in interest payable on the
accompanying consolidated balance sheets together with interest on the Junior
Subordinated Notes amounting to $1,114,000 and $476,000, respectively, at June
30, 1996 and December 31, 1995.
15
<PAGE>
PRATT HOTEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(6) LITIGATION
PHC and its subsidiaries are parties in various 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) RECLASSIFICATIONS
Certain reclassifications have been made to the 1995 consolidated
financial statements to conform to the 1996 consolidated financial statement
presentation.
16
<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 $75.1 million and $143.5
million, respectively, during the second quarter and first six months of 1996
from $74.8 million and $148 million, respectively, for the second quarter and
first six months of 1995 resulting in income for operations of $366,000 during
the second quarter of 1996 and a loss from operations of $1.1 million during the
six month period ended June 30, 1996. These results compare to income from
operations of $9.7 million and $15.7 million, respectively, during the 1995
periods. This decline in operating results is attributable to decreases
experienced at the Sands as discussed below.
The Sands sustained losses from operations, exclusive of management fees
paid to NJMI, of $1.1 million and $5.2 million, respectively, for the three and
six month periods ended June 30, 1996 compared to income from operations of $8.6
million and $12.4 million, respectively, reported for the 1995 periods.
Operating results were adversely affected by the advent of unprecedented and
highly aggressive marketing programs instituted by certain other Atlantic City
casinos seeking to increase their market share together with record winter
snowstorms in January and weekend snowstorms in February. These factors, as
well as declines in both the table games and slot hold percentages, resulted in
three and six month declines in net revenues of .4% and 3.9%, respectively, (to
$70.5 million and $133.2 million in 1996 from $70.8 million and $138.6 million
in 1995). In addition, marketing and advertising costs increased by $7.3
million and $9.5 million (52.8% and 32.2%), respectively, during the second
quarter and first six months of 1996 compared to the same periods of 1995 in
response to competitive pressures.
17
<PAGE>
PRATT HOTEL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
GAMING OPERATIONS
The following table sets forth certain unaudited financial and operating
data relating to the Sands' operations:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- -------------------
1996 1995 1996 1995
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C>
REVENUES:
Table games $ 20,405 $ 24,582 $ 40,580 $ 47,543
Slot machines 43,830 40,841 80,271 80,578
Other (1) 1,075 1,037 2,064 2,215
-------- -------- -------- --------
Total $ 65,310 $ 66,460 $122,915 $130,336
======== ======== ======== ========
TABLE GAMES:
Gross Wagering
(Drop) (2) $148,995 $150,722 $283,383 $293,310
======== ======== ======== ========
Hold Percentages: (3)
Sands 13.7% 16.3% 14.3% 16.2%
Atlantic City Casino
Gaming Industry 15.2% 15.9% 15.8% 15.9%
SLOT MACHINES:
Gross Wagering
(Handle) (2) $536,139 $468,469 $975,519 $938,286
======== ======== ======== ========
Hold Percentage:(3)
Sands (4) 8.2% 8.7% 8.2% 8.6%
</TABLE>
____________________________
(1) Consists of revenues from poker and simulcast horse racing wagering.
(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.
18
<PAGE>
PRATT HOTEL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Table games drop at the Sands declined $1.7 million (1.1%) and $9.9
million (3.4%), respectively, during the three and six month periods ended June
30, 1996 compared with the same periods of 1995. The Sands' decreases compare
with increases of 7.4% and 5.6% 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 7.9% and 8% during the three and six month periods ended June
30, 1996 from 8.5% and 8.7% during the same periods of 1995. Table game drop
throughout the six month period was adversely impacted by the increase in
competitive pressures in the rated table market segment, of which a significant
portion was in the "high end" and mid-market segments.
Slot machine handle increased $67.7 million (14.4%) and $37.2 million
(4%) during the three and six month periods ended June 30, 1996 compared with
the same periods of 1995. The Sands' increases compare with 7.2% and 7.4%
increases in slot machine handle for all other Atlantic City casinos. As a
result, the Sands' market share increased to 6.5% from 6.1% during the second
quarter of 1996 compared to the same period in 1995; however, its market share
decreased to 6.3% from 6.5% during the six months ended June 30, 1996 compared
to the same period in 1995. The increases in slot machine handle are largely
attributable to increases in marketing programs, such as coin incentive
programs, which have resulted in significant increases in the number of bus and
drive-in patrons for the six months ended June 30, 1996 compared to 1995. The
Sands' average number of slot machines increased 1.4% during the first six
months of 1996 compared to an increase of 8.3% for all other Atlantic City
casinos. The greater percentage increase in the number of slot machines for
other Atlantic City casinos reflects, in part, expansions of certain facilities
during 1996 which resulted in an overall increase of approximately 107,000
square feet of casino space and further contributed to the Sands' decline in
market share.
REVENUES
Casino revenues at the Sands, including poker and simulcast horse racing
wagering revenues, decreased by $1.2 million (1.7%) and $7.4 million (5.7%),
respectively, for the three and six month periods ended June 30, 1996 compared
with the same periods of 1995. Casino revenues were negatively impacted by the
decline in table game wagering as discussed previously and by decreases in both
the table games and slot machine hold percentages at the Sands during the 1996
periods compared to the 1995 periods.
Rooms revenue did not change significantly during the three and six month
periods ended June 30, 1996 compared with 1995. Food and beverage revenues
increased $1.5 million (20%) and $2.6 million (16.9%), respectively, for the
three and six month periods ended June 30, 1996 compared with the prior year
periods primarily as a result of the opening of the Epic Buffet at the Sands
during the third quarter of 1995. Other revenues increased $787,000 (26%) and
$2 million (28.1%), respectively, during the three and six month periods ended
June 30, 1996 compared to the 1995 periods as a result of an increase in theater
entertainment revenue at the Sands and increased management fees earned from the
Aurora Casino.
Promotional allowances represent the estimated value of goods and
services provided free of charge to casino customers under various marketing
programs. As a percentage of rooms, food and beverage and other revenues at the
Sands, these allowances decreased to 57.7% and 58%, respectively, during the
three and
19
<PAGE>
PRATT HOTEL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
six month periods ended June 30, 1996 from 59.1% and 59.9% during the second
quarter and first six months of 1995. Such decreases are primarily attributable
to increases in other types of marketing programs in lieu of promotional
allowances.
DEPARTMENTAL EXPENSES
Casino expenses at the Sands increased $8.4 million (17.2%) and $11.7
million (12%), respectively, during the three and six month periods ended June
30, 1996 compared with 1995. These increases are primarily due to the expansion
of various marketing programs, particularly coin incentive programs, in response
to competitive pressures. The additional costs of such programs result in
greater allocation of rooms, food and beverage and other expenses to casino
expense.
Rooms expense decreased $71,000 (5.7%) and $199,000 (8.5%),
respectively, during the second quarter and first six months of 1996 as compared
to the same periods of 1995 primarily due to increased allocation of rooms
expense to casino expense at the Sands as a result of an increase in casino
marketing activities relating to rooms. Food and beverage expense increased by
$755,000 (31.3%) and $1 million (20.9%), respectively, during the three and six
month periods ended June 30, 1996 compared to the same periods in 1995.
Increased costs at the Sands associated with the Epic Buffet were partially
offset by increases in the casino's food and beverage marketing programs, the
costs of which are allocated to the casino department. Other expenses increased
$201,000 (18.6%) and $150,000 (6.5%), respectively, during the three and six
month periods ended June 30, 1996 compared with 1995 as increases in costs
related to theater entertainment at the Sands were partially offset by increased
allocations to the casino department, particularly during the first quarter of
1996.
GENERAL AND ADMINISTRATIVE
General and administrative expenses did not change significantly during
the second quarter of 1996 as compared to 1995. The six month decrease of
$734,000 (5.2%) is primarily due to decreases in legal expenses at the Sands
and, to a lesser extent, reductions in payroll costs associated with NJMI's
management of the Sands.
INTEREST
Interest income decreased $91,000 (14.7%) and $68,000 (5.8%),
respectively, during the three and six month periods ended June 30, 1996
compared with the same periods of 1995 due to the decrease in cash available for
short-term investment. Interest expense did not change significantly during the
three and six month periods ended June 30, 1996 compared to the prior year
periods.
20
<PAGE>
PRATT HOTEL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
INCOME TAX BENEFIT (PROVISION)
PHC and its subsidiaries have tax net operating loss carryforwards
("NOL's") totaling approximately $75 million of which approximately $59 million
do not begin to expire until the year 2003. Additionally, PHC and its
subsidiaries have various tax credits available totaling approximately $3
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 second quarter of 1996, management was unable to determine that
realization of such 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 six months of 1996, PHC's net cash used in operating
activities (after net interest expense and income taxes) amounted to $715,000. 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 six month period ended June 30, 1996
amounted to $5.6 million. During 1994, a subsidiary of PHC entered into a
consulting agreement with HCT with respect to the Tunica Casino which
21
<PAGE>
PRATT HOTEL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
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 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.
Historically, the Sands has also used short-term borrowings to fund seasonal
cash needs and has used long-term borrowings for certain capital projects.
PHC utilized existing cash together with borrowings on GBHC's short-term
credit facility during the six month period ended June 30, 1996 to meet its
operating needs, to fund capital additions ($5.3 million) and to make obligatory
investments at the Sands ($1.4 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.
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
indebtedness scheduled to mature in 1994, to repay $58.4 million of the other
publicly held indebtedness and to provide partial funding for an expansion of
gaming space at the Sands. During the first six months of 1996, PHC repaid
long-term indebtedness of $273,000. Scheduled maturities of long-term debt
during the remainder of 1996 are $280,000.
As of April 30, 1996, GBHC extended $2 million of its bank line of credit
until April 30, 1997. As of June 30, 1996, $2 million was outstanding under the
line of credit.
During July and August 1996, PHC borrowed $6.5 million from HCC which
accrues interest at the rate of 13 3/4% per annum payable semiannually. PHC
loaned such funds to GBHC on similar terms.
During the second quarter of 1996, HCC rescinded its previously announced
proposal which provided for PHC to make a cash tender offer for the
approximately one million outstanding shares of PHC common stock not already
owned by HCC.
During the third quarter of 1996, PHC engaged a major Wall Street banking
firm as its financial advisor to explore strategic transactions regarding the
Sands including, among other things, the potential consummation of strategic
alliances including joint ventures for the possible expansion of the Sands.
22
<PAGE>
PRATT HOTEL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
CAPITAL EXPENDITURES AND OTHER INVESTMENTS
Property and equipment additions during the first six months of 1996
totaled $5.3 million, of which capital expenditures at the Sands amounted to
approximately $3.7 million. Additional capital expenditures by PHC during the
first six months of 1996 included approximately $1.6 million 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). Management anticipates capital expenditures during the remainder of
1996 will be approximately $2.8 million at the Sands. Projects currently planned
during the remainder of 1996 include substantial upgrades and improvements to
all rooms at the Sands, including its higher-end suite product.
The Sands is required by the New Jersey Casino Control Act to make certain
investments with the Casino Reinvestment Development Authority, a governmental
agency which administers the statutorily mandated investments made by casino
licensees. Deposit requirements for the first six months of 1996 totaled $1.4
million and are anticipated to be approximately $1.8 million during the
remainder of 1996.
PHC has agreed to contribute up to $3.9 million, approximately $2.5 million
of which has been paid as of June 30, 1996, as an additional investment in an
unconsolidated hotel partnership to refurbish the hotel facility in Orlando,
Florida. No such payments were required during the six month period ended June
30, 1996; management does not anticipate making any such contributions during
the remainder of 1996. 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 $4 million have been made to date.
23
<PAGE>
PART II: OTHER INFORMATION
- ---------------------------
The Registrant did not file any reports on Form 8-K during the quarter
ended June 30, 1996.
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
Date: August 12, 1996 By: /s/ John C. Hull
----------------- -----------------------------------
John C. Hull
Corporate Controller
24
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF PRATT HOTEL CORPORATION AND SUBSIDIARIES
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996
<PERIOD-START> APR-01-1996 JAN-01-1996
<PERIOD-END> JUN-30-1996 JUN-30-1996
<CASH> 22,426 22,426
<SECURITIES> 0 0
<RECEIVABLES> 26,555 26,555
<ALLOWANCES> 15,758 15,758
<INVENTORY> 4,181 4,181
<CURRENT-ASSETS> 56,491 56,491
<PP&E> 321,897 321,897
<DEPRECIATION> 156,724 156,724
<TOTAL-ASSETS> 239,849 239,849
<CURRENT-LIABILITIES> 50,576 50,576
<BONDS> 331,818 331,818
0 0
0 0
<COMMON> 519 519
<OTHER-SE> (157,057) (157,057)
<TOTAL-LIABILITY-AND-EQUITY> 239,849 239,849
<SALES> 0 0
<TOTAL-REVENUES> 75,065 143,488
<CGS> 0 0
<TOTAL-COSTS> 62,177 119,720
<OTHER-EXPENSES> 12,195 23,999
<LOSS-PROVISION> 327 894
<INTEREST-EXPENSE> 9,201 18,337
<INCOME-PRETAX> (8,835) (19,462)
<INCOME-TAX> (508) (1,339)
<INCOME-CONTINUING> (8,327) (18,123)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (8,327) (18,123)
<EPS-PRIMARY> (1.60) (3.49)
<EPS-DILUTED> 0 0
</TABLE>
