<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
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 ACT OF 1934
For the transition period from to
------------ ---------------
Commission file number 33-69768
--------
PRT FUNDING CORP.
PRATT CASINO CORPORATION
------------------------
(Exact name of each Registrant as specified in its charter)
DELAWARE 75-2502289
DELAWARE 75-2502292
- ----------------------------------- --------------
(States or other jurisdictions of (I.R.S. Employer
incorporation or organization) Identification No.'s)
TWO GALLERIA TOWER, SUITE 2200
13455 NOEL ROAD, LB 48
DALLAS, TEXAS 75240
- ------------------------------------ -----------
(Address of principal executive offices) (Zip Code)
(Registrants' 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 each of the Registrants (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
Registrants were 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.
<TABLE>
<CAPTION>
REGISTRANT CLASS OUTSTANDING AT AUGUST 12, 1996
- ------------------------ ----------------------------- ------------------------------
<S> <C> <C>
PRT Funding Corp. Common Stock, $1.00 par value 1,000 shares
Pratt Casino Corporation Common Stock, $1.00 par value 1,000 shares
</TABLE>
Each of the Registrants meets the conditions set forth in General Instruction
(H)(1)(a) and (b) of Form 10-Q and is therefore filing this Form with the
reduced disclosure format.
1
<PAGE>
PRT FUNDING CORP.
PRATT CASINO CORPORATION
PART 1: FINANCIAL INFORMATION
- -----------------------------
INTRODUCTORY NOTES TO FINANCIAL STATEMENTS
- ------------------------------------------
The registered securities consist of 11 5/8% Senior Notes (the "PRT
Funding Notes") in the principal amount of $85,000,000 due April 15, 2004 issued
by PRT Funding Corp. ("PRT Funding") and listed on the American Stock Exchange.
PRT Funding is wholly owned by Pratt Casino Corporation ("PCC"), a Delaware
corporation and an indirect wholly owned subsidiary of Pratt Hotel Corporation
("PHC"), also a Delaware corporation. PHC is an American Stock Exchange listed
company subject to the reporting requirements of the Securities Act of 1934.
PRT Funding's obligations are unconditionally guaranteed as to the timely
payment of principal, premium, if any, and interest by PCC. PRT Funding and PCC
have principal executive offices at Two Galleria Tower, Suite 2200, 13455 Noel
Road, LB48, Dallas, Texas 75240.
PRT Funding was organized during September 1993 as a special purpose
subsidiary of PCC for the purpose of borrowing funds through the issuance of the
PRT Funding Notes for the benefit of PCC and certain of its subsidiaries.
Greate Bay Hotel and Casino, Inc. ("GBHC"), a wholly owned subsidiary
of PCC, 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 to
be reported for the full year. The Sands is managed by New Jersey Management,
Inc. ("NJMI"), which is also a subsidiary of PCC. The principal executive
offices of GBHC are located at the Sands Administrative and Employee Services
Complex, 136 South Kentucky Avenue, Atlantic City, New Jersey 08401, telephone
(609) 441-4000.
PCC is also the sole limited partner of Pratt Management, L.P.
("PML"), a limited partnership which, since February 17, 1994, manages a
riverboat gaming facility located in Aurora, Illinois (the "Aurora Casino")
owned by Hollywood Casino Corporation ("HCC"), PHC's parent. PCC also receives,
pursuant to a ten-year consulting agreement, a monthly consulting fee of
$100,000 from a subsidiary of HCC which in August 1994 opened a gaming and
lodging facility in Tunica County, Mississippi (the "Tunica Casino"). Debt
service on the PRT Funding Notes is funded primarily from management fees earned
by NJMI from the Sands, from distributions made to PCC by PML (resulting from
fees generated from the management of the Aurora Casino) and from consulting
fees earned from the Tunica Casino, supplemented by dividends, if any, received
from GBHC.
The financial statements of PRT Funding and the consolidated financial
statements of PCC as of June 30, 1996 and for the three and six month periods
ended June 30, 1996 and 1995 have been prepared without audit, pursuant to the
rules and regulations of the Securities and Exchange Commission. In the opinion
of management, their respective financial statements contain all adjustments
(consisting of only normal recurring adjustments) necessary to present fairly
their respective financial positions as of June 30, 1996, their results of
operations for the three and six month periods ended June 30, 1996 and 1995 and
their 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 financial statements should be
read in conjunction with the financial statements and notes thereto included in
PRT Funding and PCC's 1995 Annual Report on Form 10-K.
2
<PAGE>
PRT FUNDING CORP.
(WHOLLY OWNED BY PRATT CASINO CORPORATION)
BALANCE SHEETS
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1995
------------ ------------
<S> <C> <C>
Current Assets:
Cash $ 1,117,000 $ 18,000
Interest receivable from affiliates 2,875,000 2,875,000
------------ ------------
Total current assets 3,992,000 2,893,000
------------ ------------
Notes receivable from affiliates 100,000,000 100,000,000
------------ ------------
$103,992,000 $102,893,000
============ ============
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Accrued interest payable $ 3,972,000 $ 2,875,000
Due to affiliates 13,000 13,000
------------ ------------
Total current liabilities 3,985,000 2,888,000
------------ ------------
Long-term debt 85,000,000 85,000,000
------------ ------------
Notes payable to affiliates 15,000,000 15,000,000
------------ ------------
Shareholder's equity:
Common stock, $1.00 par value per
share, 1,000 shares authorized
and outstanding 1,000 1,000
Retained earnings 6,000 4,000
------------ ------------
Total shareholder's equity 7,000 5,000
------------ ------------
$103,992,000 $102,893,000
============ ============
</TABLE>
The accompanying introductory notes and notes to financial
statements are an integral part of these balance sheets.
3
<PAGE>
PRT FUNDING CORP.
(WHOLLY OWNED BY PRATT CASINO CORPORATION)
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
------------------------------
1996 1995
---------- ----------
<S> <C> <C>
Revenues:
Interest income $3,021,000 $3,019,000
Expenses:
Interest expense 3,019,000 3,019,000
---------- ----------
Income before income taxes 2,000 -
Income tax provision - -
---------- ----------
Net income $ 2,000 $ -
========== ==========
</TABLE>
The accompanying introductory notes and notes to financial
statements are an integral part of these financial statements.
4
<PAGE>
PRT FUNDING CORP.
(WHOLLY OWNED BY PRATT CASINO CORPORATION)
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-----------------------------
1996 1995
--------- ----------
<S> <C> <C>
Revenues:
Interest income $6,040,000 $6,038,000
---------- ----------
Expenses:
Interest expense 6,038,000 6,038,000
General and administrative expenses - 3,000
---------- ----------
Total expenses 6,038,000 6,041,000
---------- ----------
Income (loss) before income taxes 2,000 (3,000)
Income tax provision - -
---------- ----------
Net income (loss) $ 2,000 $ (3,000)
========== ==========
</TABLE>
The accompanying introductory notes and notes to financial
statements are an integral part of these financial statements.
5
<PAGE>
PRT FUNDING CORP.
(WHOLLY OWNED BY PRATT CASINO CORPORATION)
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-----------------------------
1996 1995
---------- ----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ 2,000 $ (3,000)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Decrease in receivable from affiliates - 1,097,000
Increase in accrued interest payable 1,097,000 97,000
Net change in other current assets
and liabilities - 2,000
---------- ----------
Net cash provided by operating activities 1,099,000 1,193,000
Cash at beginning of period 18,000 1,000
---------- ----------
Cash at end of period $1,117,000 $1,194,000
========== ==========
</TABLE>
The accompanying introductory notes and notes to financial
statements are an integral part of these financial statements.
6
<PAGE>
PRT FUNDING CORP.
(WHOLLY OWNED BY PRATT CASINO CORPORATION)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(1) ORGANIZATION AND OPERATIONS
PRT Funding Corp. ("PRT Funding"), a Delaware corporation, was
incorporated on September 29, 1993. PRT Funding is a wholly owned subsidiary of
Pratt Casino Corporation ("PCC"), which is an indirect, wholly owned subsidiary
of Pratt Hotel Corporation ("PHC"). Both PCC and PHC are also Delaware
corporations. PCC was incorporated in September 1993 and, on February 17, 1994,
acquired through capital contributions by its parent, all of the outstanding
capital stock of Greate Bay Hotel and Casino, Inc. ("GBHC"), which owns the
Sands Hotel and Casino in Atlantic City, New Jersey (the "Sands"). The Sands is
managed by New Jersey Management, Inc. ("NJMI"), a New Jersey corporation and
also a subsidiary of PCC. Substantially all of PCC's assets are attributable to
the Sands. PCC also earns management and consulting fees with respect to gaming
facilities owned by Hollywood Casino Corporation ("HCC"), the parent of PHC.
PRT Funding was formed for the purpose of borrowing $85,000,000 for
the benefit of PCC and its affiliates. Administrative services for PRT Funding
are provided by other PHC subsidiaries at no charge. The cost of such services
is not significant.
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.
The 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 PRT Funding
without audit. In the opinion of management, the financial statements contain
all adjustments (consisting of only normal recurring adjustments) necessary to
present fairly the financial position of PRT Funding 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.
(2) LONG-TERM DEBT
On February 17, 1994, PRT Funding 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 to the PRT Funding Notes contains various provisions which, among
other things, restrict the ability of certain subsidiaries of PCC 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 outstanding debt
of other PCC subsidiaries. Proceeds of the PRT Funding Notes were loaned to
various affiliates of PRT Funding on the same terms.
7
<PAGE>
PRT FUNDING CORP.
(WHOLLY OWNED BY PRATT CASINO CORPORATION)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
On February 17, 1994, PRT Funding issued $15,000,000 of junior
subordinated notes due in February 2005 (the "Junior Subordinated Notes") to
HCC, and loaned the proceeds to various affiliates on the same terms. During
1994, HCC assigned $6,262,000 principal amount of the Junior Subordinated Notes
to PHC. Interest on the Junior Subordinated Notes accrues at the rate of 14
5/8% per annum and is payable semiannually commencing August 17, 1994, with
payment subject to PCC, the guarantor, meeting certain financial coverage and
other payment restriction tests required by the indenture for the PRT Funding
Notes. Because PCC had not met the financial coverage tests, interest was not
paid on February 17, 1996. At June 30, 1996, accrued interest of $800,000 and
$1,114,000, respectively, was payable to PHC and HCC. At December 31, 1995,
accrued interest of $341,000 and $476,000, respectively, was payable to PHC and
HCC. All such amounts are included in interest payable in the accompanying
balance sheets.
Interest paid amounted to $4,941,000 and $5,941,000, respectively,
during the six month periods ended June 30, 1996 and 1995.
(3) INCOME TAXES
PRT Funding is included in the consolidated federal income tax return
of HCC. Pursuant to agreements between PCC, PHC and HCC, PRT Funding's
provision for federal income taxes is calculated as if a separate federal return
were filed. There are no timing differences resulting in deferred income taxes.
For the three and six month periods ended June 30, 1996 and 1995, no provision
for taxes or payments have been made under the tax allocation agreements. At
both June 30, 1996 and December 31, 1995, $1,000 is included in due to
affiliates on the accompanying balance sheets representing taxes currently
payable under the agreements.
8
<PAGE>
PRATT CASINO CORPORATION AND SUBSIDIARIES
(WHOLLY OWNED BY PPI CORPORATION)
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1995
------------- -------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 20,036,000 $ 25,606,000
Accounts receivable, net of allowances
of $15,756,000 and $16,494,000,
respectively 9,971,000 11,513,000
Inventories 3,997,000 4,268,000
Due from affiliates 3,245,000 10,009,000
Refundable deposits and other
current assets 4,156,000 4,764,000
------------- -------------
Total current assets 41,405,000 56,160,000
------------- -------------
Investment in Limited Partnership 742,000 2,017,000
------------- -------------
Property and Equipment:
Land 37,807,000 37,807,000
Buildings and improvements 185,508,000 185,077,000
Operating equipment 88,558,000 87,491,000
Construction in progress 3,288,000 2,310,000
------------- -------------
315,161,000 312,685,000
Less - accumulated depreciation and
amortization (153,326,000) (145,244,000)
------------- -------------
Net property and equipment 161,835,000 167,441,000
------------- -------------
Other Assets:
Obligatory investments 5,565,000 5,521,000
Due from affiliates 16,874,000 13,681,000
Deferred financing costs 8,184,000 8,730,000
Other assets 4,370,000 3,390,000
------------- -------------
Total other assets 34,993,000 31,322,000
------------- -------------
$ 238,975,000 $ 256,940,000
============= =============
</TABLE>
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated balance sheets.
9
<PAGE>
PRATT CASINO CORPORATION AND SUBSIDIARIES
(WHOLLY OWNED BY PPI CORPORATION)
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
LIABILITIES AND SHAREHOLDER'S DEFICIT
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1995
------------ ------------
<S> <C> <C>
Current Liabilities:
Current maturities of long-term debt $ 11,000 $ 11,000
Short-term credit facilities 2,000,000 -
Accounts payable 8,909,000 8,444,000
Accrued liabilities -
Salaries and wages 3,696,000 4,187,000
Interest 13,264,000 12,159,000
Insurance 2,788,000 2,336,000
Other 11,037,000 8,885,000
Due to affiliates 901,000 999,000
Other 2,760,000 3,498,000
------------ ------------
Total current liabilities 45,366,000 40,519,000
------------ ------------
Long-Term Debt 285,437,000 285,442,000
------------ ------------
Other Noncurrent Liabilities 1,553,000 2,390,000
------------ ------------
Commitments and Contingencies
Shareholder's Deficit:
Common stock $1.00 par value per share,
1,000 shares authorized and outstanding 1,000 1,000
Accumulated deficit (93,382,000) (71,412,000)
------------ ------------
Total shareholder's deficit (93,381,000) (71,411,000)
------------ ------------
$238,975,000 $256,940,000
============ ============
</TABLE>
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated balance sheets.
10
<PAGE>
PRATT CASINO CORPORATION AND SUBSIDIARIES
(WHOLLY OWNED BY PPI CORPORATION)
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 2,254,000 2,451,000
Food and beverage 8,787,000 7,347,000
Other 1,456,000 1,030,000
----------- -----------
77,807,000 77,288,000
Less - promotional allowances (7,035,000) (6,224,000)
----------- -----------
Net revenues 70,772,000 71,064,000
----------- -----------
Expenses:
Casino 56,868,000 48,503,000
Rooms 498,000 610,000
Food and beverage 2,699,000 2,050,000
Other 865,000 665,000
General and administrative 5,801,000 5,903,000
Depreciation and amortization 5,293,000 5,101,000
----------- -----------
Total expenses 72,024,000 62,832,000
----------- -----------
(Loss) income from operations (1,252,000) 8,232,000
----------- -----------
Non-operating income (expense):
Interest income 433,000 499,000
Interest expense (7,955,000) (7,917,000)
Equity in earnings of limited
partnership 742,000 598,000
----------- -----------
Total non-operating expense,
net (6,780,000) (6,820,000)
----------- -----------
(Loss) income before income taxes (8,032,000) 1,412,000
Income tax provision (7,892,000) (939,000)
----------- -----------
Net (loss) income $(15,924,000) $ 473,000
============ ===========
</TABLE>
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated statements.
11
<PAGE>
PRATT CASINO CORPORATION AND SUBSIDIARIES
(WHOLLY OWNED BY PPI CORPORATION)
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 4,389,000 4,670,000
Food and beverage 17,311,000 14,594,000
Other 3,310,000 1,954,000
------------ ------------
147,925,000 151,554,000
Less - promotional allowances (14,154,000) (12,354,000)
------------ ------------
Net revenues 133,771,000 139,200,000
------------ ------------
Expenses:
Casino 109,981,000 98,241,000
Rooms 808,000 1,185,000
Food and beverage 5,093,000 4,062,000
Other 1,605,000 1,464,000
General and administrative 11,258,000 12,421,000
Depreciation and amortization 10,490,000 10,151,000
------------ ------------
Total expenses 139,235,000 127,524,000
------------ ------------
(Loss) income from operations (5,464,000) 11,676,000
------------ ------------
Non-operating income (expense):
Interest income 905,000 923,000
Interest expense (15,927,000) (15,834,000)
Equity in earnings of limited
partnership 2,754,000 2,433,000
------------ ------------
Total non-operating expense, net (12,268,000) (12,478,000)
------------ ------------
Loss before income taxes (17,732,000) (802,000)
Income tax provision (4,238,000) (400,000)
------------ ------------
Net loss $(21,970,000) $ (1,202,000)
============ ============
</TABLE>
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated statements.
12
<PAGE>
PRATT CASINO CORPORATION AND SUBSIDIARIES
(WHOLLY OWNED BY PPI CORPORATION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------------------------------
1996 1995
------------- -----------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $(21,970,000) $ (1,202,000)
Adjustments to reconcile net loss to net cash (used in)
provided by operating activities:
Depreciation and amortization 10,490,000 10,151,000
Provision for doubtful accounts 894,000 1,537,000
Equity in earnings of limited partnership (2,754,000) (2,433,000)
Dividends received from limited partnership 4,029,000 3,843,000
Deferred income tax provision (benefit) 4,238,000 (1,404,000)
Decrease (increase) in accounts receivable 648,000 (1,436,000)
Increase in accounts payable and other accrued liabilities 3,682,000 661,000
Net change in other current assets and liabilities (1,049,000) 827,000
Net change in other noncurrent assets and liabilities (681,000) (469,000)
------------ ------------
Net cash (used in) provided by operating activities (2,473,000) 10,075,000
------------- ------------
INVESTING ACTIVITIES:
Net property and equipment additions (3,660,000) (10,109,000)
Obligatory investments (1,432,000) (1,315,000)
------------ ------------
Net cash used in investing activities (5,092,000) (11,424,000)
------------ ------------
FINANCING ACTIVITIES:
Borrowings on short-term credit facilities 2,000,000 2,000,000
Deferred financing costs - (32,000)
Repayments of long-term debt (5,000) (5,000)
------------ ------------
Net cash provided by financing activities 1,995,000 1,963,000
------------ ------------
Net (decrease) increase in cash and cash equivalents (5,570,000) 614,000
Cash and cash equivalents at beginning of period 25,606,000 25,457,000
------------ ------------
Cash and cash equivalents at end of period $ 20,036,000 $ 26,071,000
============ ============
</TABLE>
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated statements.
13
<PAGE>
PRATT CASINO CORPORATION AND SUBSIDIARIES
(WHOLLY OWNED BY PPI CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) ORGANIZATION, BUSINESS AND BASIS OF PRESENTATION
Pratt Casino Corporation ("PCC") is a Delaware corporation and a
wholly owned subsidiary of PPI Corporation, a New Jersey corporation and a
wholly owned subsidiary of Pratt Hotel Corporation ("PHC"). On February 17,
1994, PCC acquired, through capital contributions by its parent, all of the
outstanding stock of Greate Bay Hotel and Casino, Inc. ("GBHC"), a New Jersey
corporation which owns the Sands Hotel and Casino in Atlantic City, New Jersey
(the "Sands"). The Sands is managed by New Jersey Management, Inc. ("NJMI")
which also became a wholly owned subsidiary of PCC through a capital
contribution by its parent. Substantially all of PCC's assets are attributable
to the Sands. PCC also earns management and consulting fees with respect to
gaming facilities owned by Hollywood Casino Corporation ("HCC"), the parent of
PHC.
GB Property Funding Corp. ("GB Property Funding"), a Delaware
corporation and a wholly owned subsidiary of PCC, was incorporated on September
29, 1993 for the purpose of borrowing funds through the issuance of $185,000,000
of ten-year, nonrecourse first mortgage notes for the benefit of GBHC. PRT
Funding Corp. ("PRT Funding"), also a Delaware corporation and a wholly owned
subsidiary of PCC, was incorporated on September 29, 1993 for the purpose of
borrowing funds through the issuance of $85,000,000 of unsecured notes for the
benefit of PCC and its affiliates. GB Property Funding and PRT Funding
completed their respective debt offerings on February 17, 1994 and the proceeds
were loaned to various affiliates (see Note 3).
The accompanying consolidated financial statements include the
accounts and operations of PCC, NJMI and GBHC; all significant intercompany
balances and transactions have been eliminated.
PCC 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.
PCC is self insured for a portion of its general liability insurance,
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, PCC's ultimate
liability may differ from the amounts accrued.
During the fourth quarter of 1995, PCC 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, PCC does not believe that any material impairment currently exists
related to its long-lived assets.
14
<PAGE>
PRATT CASINO CORPORATION AND SUBSIDIARIES
(WHOLLY OWNED BY PPI CORPORATION)
NOTES TOCONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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
PCC 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
PCC 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.
(2) SHORT-TERM CREDIT FACILITIES
As of April 30, 1996, GBHC 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 as of December 31,
1995. Borrowings under the line of credit accrue interest at the bank's prime
lending rate plus 3/4% per annum payable monthly and are guaranteed by PCC.
Additionally, PCC has pledged a certificate of deposit in the face amount of
$2,000,000 as collateral for the line of credit.
(3) LONG-TERM DEBT AND PLEDGE OF ASSETS
Substantially all of PCC's assets are pledged in connection with long-
term indebtedness of its subsidiaries. Additionally, certain of the indentures
for indebtedness of PCC's subsidiaries contain 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) 15,000,000 15,000,000
Other 448,000 453,000
------------ ------------
Total indebtedness 285,448,000 285,453,000
Less - current maturities (11,000) (11,000)
------------ ------------
Total long-term debt $285,437,000 $285,442,000
============ ============
</TABLE>
(a) On February 17, 1994, GB Property Funding 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.
15
<PAGE>
PRATT CASINO CORPORATION AND SUBSIDIARIES
(WHOLLY OWNED BY PPI CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
The indenture for the 10 7/8% First Mortgage Notes contains various
provisions which, among other things, restrict the ability of certain
subsidiaries of PHC to pay dividends to PHC, to merge, consolidate or sell
substantially all of their assets or to incur additional indebtedness
beyond certain limitations. In addition, the indenture requires the
maintenance of certain cash balances and, commencing in 1994, requires that
a minimum of $7,000,000 be expended for property and fixture renewals,
replacements and betterments at the Sands, subject to increases of five
percent per annum thereafter. The indenture also contains certain cross-
default provisions with the indenture to the PRT Funding Notes described in
(b) below.
(b) On February 17, 1994, PRT Funding 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 PCC 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 the indenture to the 10 7/8% First
Mortgage Notes described in (a) above.
(c) On February 17, 1994, PRT Funding issued $15,000,000 of junior subordinated
notes (the "Junior Subordinated Notes") to HCC. During 1994, HCC assigned
$6,262,000 principal amount of the Junior Subordinated Notes to PHC. The
Junior Subordinated Notes are due in February 2005 and bear interest at the
rate of 14 5/8% per annum which, subject to PCC, the guarantor, 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 PCC had not met the financial coverage tests,
interest was not paid on February 17, 1996.
Scheduled payments of long-term debt as of June 30, 1996 are set forth
below:
<TABLE>
<CAPTION>
<S> <C>
1996 (6 months) $ 6,000
1997 2,512,000
1998 5,013,000
1999 5,014,000
2000 5,015,000
Thereafter 267,888,000
------------
Total $285,448,000
============
</TABLE>
Interest paid amounted to $15,126,000 and $16,040,000, respectively, for the
six month periods ended June 30, 1996 and 1995.
16
<PAGE>
PRATT CASINE CORPORATION AND SUBSIDIARIES
(WHOLLY OWNED BY PPI CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(4) INCOME TAXES
Components of the income tax provision 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>
Benefit in lieu of (provision for)
federal income taxes:
Current $(2,580,000) $(1,342,000) $ - $(1,336,000)
Deferred (4,416,000) 709,000 (4,190,000) 1,113,000
State income tax benefit (provision):
Current (781,000) (470,000) - (468,000)
Deferred (115,000) 164,000 (48,000) 291,000
----------- ----------- ----------- -----------
$(7,892,000) $ (939,000) $(4,238,000) $ (400,000)
=========== =========== =========== ===========
</TABLE>
PCC is included in HCC's consolidated federal income tax return. Pursuant
to tax allocation agreements, PCC's provision for federal income taxes is based
on the amount of tax which would be provided if a separate federal income tax
return were filed. No federal or state tax payments were made during the six
month periods ended June 30, 1996 and 1995. The payment of GBHC's taxes in
accordance with the tax allocation agreements is subject to the approval of the
New Jersey Casino Control Commission.
Federal and state income tax provisions or benefits are based upon the
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, meal 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.
17
<PAGE>
PRATT CASINO CORPORATION AND SUBSIDIARIES
(WHOLLY OWNED BY PPI CORPORATION)
NOTES TO CONSOLIDTED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
The components of the net deferred tax asset as of June 30, 1996 and
December 31, 1995 are as follows:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1995
------------- -------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforward $ 10,146,000 $ 3,267,000
Allowance for doubtful accounts 6,918,000 6,829,000
Other liabilities and accruals 2,277,000 2,149,000
Other 1,217,000 1,377,000
------------ -----------
Total deferred tax assets 20,558,000 13,622,000
------------ -----------
Deferred tax liabilities:
Depreciation and amortization (8,319,000) (8,679,000)
Other (597,000) (596,000)
------------ -----------
Total deferred tax liabilities (8,916,000) (9,275,000)
------------ -----------
Net deferred tax asset 11,642,000 4,347,000
Valuation allowance (11,642,000) -
------------ -----------
$ - $ 4,347,000
============ ===========
</TABLE>
PCC and its subsidiaries have net operating loss carryforwards
("NOL's") totaling approximately $23,000,000, none of which expire before the
year 2005 for federal tax purposes and which begin to expire in 1997 for state
tax purposes. Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes" ("SFAS 109") requires that the tax benefit of NOL's and
deferred tax assets resulting from temporary differences 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 and deferred tax assets is more likely than not, a
valuation allowance should be recorded. Due to the continued availability of
NOL's originating in prior years for federal and state tax purposes and the
significant book and tax losses sustained in 1996, management is unable to
determine that realization of such asset is more likely than not and, thus, has
provided a valuation allowance for the entire deferred tax asset at June 30,
1996.
Sales or purchases of PCC's common stock could cause a "change of
control", as defined in Section 382 of the Internal Revenue Code of 1986, as
amended, which would limit the ability of PCC 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 PCC's future utilization of its loss
carryforwards.
18
<PAGE>
PRATT CASINO CORPORATION AND SUBSIDIARIES
(WHOLLY OWNED BY PPI CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
Receivables from and payables to affiliates in connection with the
aforementioned tax allocation agreements are as follows:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1995
----------- -------------
<S> <C> <C>
Due from affiliates - current $2,275,000 $9,310,000
Due from affiliates - noncurrent 8,628,000 5,903,000
Due to affiliate - current (129,000) (129,000)
</TABLE>
(5) TRANSACTIONS WITH RELATED PARTIES
GBHC licenses the trade name "Sands" from PHC, which licenses the name
from an unaffiliated third party. Amounts payable by GBHC under this agreement
are equal to the amounts paid to the unaffiliated third party. Such charges
amounted to $70,000 and $74,000, respectively, for the three month periods ended
June 30, 1996 and 1995, and $131,000 and $140,000, respectively, for the six
month periods ended June 30, 1996 and 1995.
HWCC - Tunica, Inc. ("HCT"), a wholly owned subsidiary of HCC, owns
and operates a gaming and lodging facility in Tunica County, Mississippi (the
"Tunica Casino") which commenced operations in August 1994. Pursuant to a ten-
year consulting agreement with HCT, PCC receives monthly consulting fees of
$100,000. Such fees amounted to $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.
PCC has, from time to time, advanced monies to PHC or certain of its
subsidiaries and PHC or certain of its subsidiaries have advanced monies to PCC
primarily for working capital purposes. Subsidiaries of PCC have also
periodically entered into short-term borrowing arrangements with affiliated
companies in connection with various construction projects. An advance to a PHC
subsidiary in the amount of $5,672,000 was outstanding as of June 30, 1996 and
December 31, 1995 and bears interest at the rate of 16.5% per annum. Interest
income (expense) incurred with respect to affiliate advances and borrowings is
as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------- -----------------------------
1996 1995 1996 1995
------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
Advance $ 234,000 $ 234,000 $ 468,000 $ 468,000
Junior Subordinated Notes (Note 3) (549,000) (549,000) (1,097,000) (1,097,000)
</TABLE>
Interest receivable on affiliate advances, included in amounts due
from affiliates on the accompanying consolidated balance sheets at June 30, 1996
and December 31, 1995 was $2,574,000 and $2,106,000, respectively. Interest
accrued on the Junior Subordinated Notes of $1,914,000 ($800,000 due to PHC and
$1,114,000 due to HCC) and $817,000 ($341,000 due to PHC and $476,000 due to
HCC) is included in
19
<PAGE>
PRATT CASINO CORPORATION AND SUBSIDIARIES
(WHOLLY OWNED BY PPI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
interest payable on the accompanying consolidated balance sheets at June 30,
1996 and December 31, 1995, respectively.
During July and August 1996, GBHC borrowed $6,500,000 from PHC for
working capital purposes. Borrowings accrue interest at the rate of 13 3/4% per
annum payable semiannually.
From time to time, PCC and its subsidiaries perform certain services
for HCC and its subsidiaries and invoice those companies for PCC's cost of
providing those services. Similarly, PCC and its subsidiaries are charged for
certain legal, accounting and other expenses incurred by HCC and its
subsidiaries that relate to PCC's business. Such affiliate transactions are
summarized below:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ -------------------------
1996 1995 1996 1995
----------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Billings to affiliates $ 710,000 $ 604,000 $ 1,637,000 $ 1,235,000
Charges from affiliates (867,000) (615,000) (1,942,000) (1,234,000)
</TABLE>
(6) INVESTMENT IN LIMITED PARTNERSHIP
During February 1994, PCC acquired a limited partnership interest in
Pratt Management, L.P. ("PML"), a limited partnership which, since February 17,
1994, has managed a riverboat gaming and entertainment complex owned by HCC and
located in Aurora, Illinois (the "Aurora Casino"). PML earned management fees
amounting to $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. PML
also incurred operating and other expenses amounting to $528,000 and $389,000,
respectively, during the three month periods ended June 30, 1996 and 1995 and
$1,189,000 and $915,000, respectively, during the six month periods ended June
30, 1996 and 1995. PPI Corporation is the general partner of PML. In
accordance with certain terms of the Partnership Agreement, PCC, as limited
partner, receives 1% of the first $84,000 of net income earned by the
partnership each month and 99% of any net income earned above such amount, with
all remaining income distributed to PPI Corporation.
(7) LITIGATION
PCC's subsidiaries are parties in various legal proceedings with
respect to the conduct of casino and hotel operations. Although a possible
range of loss can not 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 PCC and its subsidiaries. The accompanying consolidated financial
statements do not include any adjustments that might result from the outcome of
such uncertainties.
20
<PAGE>
PRATT CASINO CORPORATION AND SUBSIDIARIES
(WHOLLY OWNED BY PPI CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(8) RECLASSIFICATIONS
Certain reclassifications have been made to the 1995 consolidated
financial statements to conform to the 1996 consolidated financial statement
presentation.
21
<PAGE>
PRATT CASINO CORPORATION AND SUBSIDIARIES
(WHOLLY OWNED BY PPI CORPORATION)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
GENERAL
The Sands sustained a loss 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 at the Sands 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.
As a result of the foregoing, PCC experienced a loss from operations of
$1.3 million and $5.5 million, respectively, for the three and six month periods
ended June 30, 1996 as compared to income from operations of $8.2 million and
$11.7 million, respectively, during the same periods of 1995.
Distributions received from PML amounted to $2 million and $4 million,
respectively, during the second quarter and first six months of 1996;
distributions from PML are paid in arrears. Management fees earned by PML
during the three and six month periods ended June 30, 1996 exceeded those earned
during the corresponding periods of 1995 by $285,000 (22.9%) and $599,000
(15.5%), respectively, primarily due to improved operating results subsequent to
the 1995 expansion of one of the Aurora Casino's two riverboats. In addition,
PCC received $300,000 and $600,000, respectively, with respect to its consulting
agreement with the Tunica Casino during the three and six month periods ended
June 30, 1996 and 1995.
22
<PAGE>
PRATT CASINO CORPORATION AND SUBSIDIARIES
(WHOLLY OWNED BY PRATT CASINO CORPORATION)
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.
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
23
<PAGE>
PRATT CASINO CORPORATION AND SUBSIDIARIES
(WHOLLY OWNED BY PRATT CASINO CORPORATION)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTNIUED)
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 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 decreased $197,000 (8%) and $281,000 (6%), respectively,
during the three and six month periods ended June 30, 1996 compared with 1995
due to a decline in the average rate earned per room as a result of marketing
activities. In addition, occupancy rates were lower in the first quarter of 1996
as a result of severe weather. Food and beverage revenues increased $1.4 million
(19.6%) and $2.7 million (18.6%), 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 during the third quarter of 1995. Other
revenues increased $426,000 (41.4%) and $1.4 million (69.4%) 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.
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
six month periods ended June 30, 1996 from 59.1% and 59.9% during the second
quarter and first six months
24
<PAGE>
PRATT CASINO CORPORAITON AND SUBSIDIARIES
(WHOLLY OWNED BY PRATT CASINO CORPORATION)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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 $112,000 (18.4%) and $377,000 (31.8%) 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 as
a result of increases in casino marketing activities relating to rooms.
Decreased payroll expenses at the Sands resulting from an overall decline in
occupancy particularly during the first quarter of 1996 as compared to 1995 also
contributed to the reduction in rooms expense. Food and beverage expense
increased by $649,000 (31.7%) and $1 million (25.4%) during the three and six
month periods ended June 30, 1996 compared to the same periods in 1995.
Increased costs associated with the Epic Buffet were partially offset by
increases in food and beverage marketing programs, the costs of which are
allocated to the casino department. Other expenses increased $200,000 (30.1%)
and $141,000 (9.6%) during the three and six month periods ended June 30, 1996
compared with the same periods of 1995 as increases in costs related to theater
entertainment at the Sands were 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
approximately $1.2 million (9.4%) 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 $66,000 (13.2%) during the three month period
ended June 30, 1996 compared with the same period of 1995 bringing year-to-date
totals in line with the prior year. Interest expense did not change
significantly during the three and six month periods ended June 30, 1996
compared to the prior year periods.
25
<PAGE>
PRATT CASINO CORPORATION AND SUBSIDIARIES
(WHOLLY OWNED BY PRATT CASINO CORPORATION)
MANAGEMENT'S DOSCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
EQUITY IN EARNINGS OF LIMITED PARTNERSHIP
Effective February 17, 1994, PCC acquired a limited partnership interest in
PML, a limited partnership in which PPI Corporation is the general partner and
PCC is the limited partner; PML earns management fees from the operation of the
Aurora Casino. The Agreement of Limited Partnership of PML provides for
distributions to PCC of 1% of the first $84,000 of net income earned by PML each
month and 99% of any net income earned above such amount, with all remaining
income distributed to PPI Corporation. PCC's equity in the earnings of PML
increased (24.1% and 13.2%, respectively) to $742,000 and $2.8 million,
respectively, during the second quarter and first six months of 1996 from
$598,000 and $2.4 million, respectively, in the same periods of 1995.
INCOME TAX PROVISION
PCC is included in HCC's consolidated federal income tax return. Pursuant
to agreements between PCC, PHC and HCC, PCC's provision for federal income taxes
is based on the amount of tax which would have been provided if a separate
return were filed.
PCC and its subsidiaries have net operating loss carryforwards ("NOL's")
totaling approximately $23 million none of which expire before the year 2005 for
federal tax purposes and which begin to expire in 1997 for state tax purposes.
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" ("SFAS 109") requires that the tax benefit of NOL's and deferred tax
assets resulting from temporary differences 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 and deferred tax assets is more likely than not, a valuation
allowance should be recorded. Due to the continued availability of NOL's
originating in prior years for federal and state tax purposes and the
significant book and tax losses sustained in 1996, management is unable to
determine that realization of such asset is more likely than not and, thus, has
provided a valuation allowance for the entire deferred tax asset at June 30,
1996.
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 PCC'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 PCC's casino revenues and
profitability.
26
<PAGE>
PRATT CASINO CORPORATION AND SUBSIDIARIES
(WHOLLY OWNED BY PRATT CASINO CORPORATION)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES
PCC's principal activities and resulting sources of liquidity and capital
resources include the operations of the Sands, management of the Aurora Casino
through PML, and consulting fees for services provided to the Tunica Casino.
The Sands' earnings before depreciation, interest, amortization, taxes and
intercompany management fees have been sufficient to meet debt service
obligations (other than certain maturities of principal that have been
refinanced) and to fund a substantial portion of its capital expenditures. The
Sands has also used short-term borrowings to fund seasonal cash needs and has
used long-term borrowings for certain capital projects.
OPERATING ACTIVITIES
At June 30, 1996, PCC had consolidated cash and cash equivalents of $20
million. Dividends, tax sharing payments and certain other transfers of cash
from the Sands to PCC or other affiliates of the Sands are restricted by
provisions to the indenture for the 10 7/8% First Mortgage Notes or are subject
to the approval of the New Jersey Casino Control Commission. During the six
month period ended June 30, 1996, net cash used in operating activities was $2.5
million compared with cash provided by operating activities of $10.1 million
during the same period of 1995. The change in net cash from operating
activities compared to 1995 resulted from a $12.5 million decline in cash flow
generated by the Sands. PCC utilized its existing cash and short-term
borrowings during the six month period ended June 30, 1996 to meet its operating
needs, to fund capital additions of $3.7 million and to make obligatory
investments of $1.4 million.
FINANCING ACTIVITIES
During February 1994, PHC completed the refinancing of virtually all of its
casino-related outstanding debt (the "PHC Recapitalization"). The refinancing
was completed through a public offering of $270 million of debt securities
consisting of $185 million of 10 7/8% First Mortgage Notes due January 15, 2004
and $85 million of 11 5/8% PRT Funding Notes due April 15, 2004. Proceeds from
the debt offerings were used, in part, to refinance the Sands' first mortgage
and other indebtedness scheduled to mature in 1994 and to provide partial
funding for an expansion of gaming space at the Sands. As part of the PHC
Recapitalization, a subsidiary of PCC also issued $15 million of 14 5/8% junior
subordinated notes due in 2005 to HCC; the subsidiary loaned $10 million of such
proceeds to GBHC on the same terms. During 1994, HCC assigned $6.3 million
principal amount of the junior subordinated notes to PHC. Interest on this
subordinated affiliate debt is payable semiannually commencing August 17, 1994,
with payment subject to meeting certain financial coverage and other payment
restriction tests required by the indenture for the PRT Funding Notes. Because
PCC had not met the financial coverage tests, interest was not paid on February
17, 1996.
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.
27
<PAGE>
PRATT CASINO CORPORATION AND SUBSIDIARIES
(WHOLLY OWNED BY PRATT CASINO CORPORATION)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
During July and August, GBHC borrowed $6.5 million from PHC for working
capital purposes with interest payable semiannually at the rate of 13 3/4% per
annum.
Scheduled maturities of long-term debt during the remainder of 1996 are
$6,000.
During the third quarter of 1996, PHC engaged a major Wall Street
investment 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 .
CAPITAL EXPENDITURES AND OBLIGATORY INVESTMENTS
Capital expenditures at the Sands during the six month period ended June
30, 1996 amounted to approximately $3.7 million and management anticipates
capital expenditures during the remainder of 1996 will be approximately $2.8
million. Projects currently planned during 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 are anticipated to be approximately $1.8 million during the remainder of
1996.
28
<PAGE>
PART II: OTHER INFORMATION
- ---------------------------
The Registrants 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,
each of the Registrants has duly caused this report to be signed on their behalf
by the undersigned thereunto duly authorized.
PRT FUNDING CORP.
PRATT CASINO CORPORATION
------------------------
Registrants
Date: August 12, 1996 By: /s/ John C. Hull
--------------- -------------------
John C. Hull
Principal Accounting Officer
29
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF PRT FUNDING CORP. AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000912897
<NAME> PRT FUNDING CORP
<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> 1,117 1,117
<SECURITIES> 0 0
<RECEIVABLES> 2,875 2,875
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 3,992 3,992
<PP&E> 0 0
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 103,992 103,992
<CURRENT-LIABILITIES> 3,985 3,985
<BONDS> 100,000 100,000
0 0
0 0
<COMMON> 1 1
<OTHER-SE> 6 6
<TOTAL-LIABILITY-AND-EQUITY> 103,992 103,992
<SALES> 0 0
<TOTAL-REVENUES> 0 0
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> (2) (2)
<INCOME-PRETAX> 2 2
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 2 2
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 2 2
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF PRATT CASINO CORPORATION AND SUBSIDIARIES
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000912928
<NAME> PRATT CASINO CORP.
<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> 20,036 20,036
<SECURITIES> 0 0
<RECEIVABLES> 25,727 25,727
<ALLOWANCES> 15,756 15,756
<INVENTORY> 3,997 3,997
<CURRENT-ASSETS> 41,405 41,405
<PP&E> 315,161 315,161
<DEPRECIATION> 153,326 153,326
<TOTAL-ASSETS> 238,975 238,975
<CURRENT-LIABILITIES> 45,366 45,366
<BONDS> 285,437 285,437
0 0
0 0
<COMMON> 1 1
<OTHER-SE> (93,382) (93,382)
<TOTAL-LIABILITY-AND-EQUITY> 238,975 238,975
<SALES> 0 0
<TOTAL-REVENUES> 70,772 133,771
<CGS> 0 0
<TOTAL-COSTS> 60,603 116,593
<OTHER-EXPENSES> 10,352 18,994
<LOSS-PROVISION> 327 894
<INTEREST-EXPENSE> 7,522 15,022
<INCOME-PRETAX> (8,032) (17,732)
<INCOME-TAX> 7,892 4,238
<INCOME-CONTINUING> (15,924) (21,970)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (15,924) (21,970)
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
</TABLE>
