<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 SEPTEMBER 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 NOVEMBER 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 nine month periods ended September
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 September 30, 1996 and for the three and nine month
periods ended September 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 September 30, 1996,
their results of operations for the three and nine month periods ended September
30, 1996 and 1995 and their cash flows for the nine month periods ended
September 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>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
<S> <C> <C>
Current Assets:
Cash $ 1,130,000 $ 18,000
Interest receivable from affiliates 5,894,000 2,875,000
------------ ------------
Total current assets 7,024,000 2,893,000
------------ ------------
Notes receivable from affiliates 100,000,000 100,000,000
------------ ------------
$107,024,000 $102,893,000
============ ============
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Accrued interest payable $ 6,991,000 $ 2,875,000
Due to affiliates 15,000 13,000
------------ ------------
Total current liabilities 7,006,000 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 17,000 4,000
------------ ------------
Total shareholder's equity 18,000 5,000
------------ ------------
$107,024,000 $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
SEPTEMBER 30,
-------------------------
1996 1995
---------- -----------
<S> <C> <C>
Revenues:
Interest income $3,031,000 $3,031,000
Expenses:
Interest expense 3,018,000 3,018,000
---------- ----------
Income before income taxes 13,000 13,000
Income tax provision (2,000) (3,000)
---------- ----------
Net income $ 11,000 $ 10,000
========== ==========
</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>
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------
1996 1995
----------- -----------
<S> <C> <C>
Revenues:
Interest income $9,071,000 $9,069,000
---------- ----------
Expenses:
Interest expense 9,056,000 9,056,000
General and administrative expenses - 3,000
---------- ----------
Total expenses 9,056,000 9,059,000
---------- ----------
Income before income taxes 15,000 10,000
Income tax provision (2,000) (3,000)
---------- ----------
Net income $ 13,000 $ 7,000
========== ==========
</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>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------
1996 1995
----------- ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 13,000 $ 7,000
Adjustments to reconcile net income
to net cash provided by operating activities:
Increase in receivable from affiliates (3,019,000) (825,000)
Increase in accrued interest payable 4,116,000 1,916,000
Net change in other current assets
and liabilities 2,000 4,000
----------- ----------
Net cash provided by operating activities 1,112,000 1,102,000
Cash at beginning of period 18,000 1,000
----------- ----------
Cash at end of period $ 1,130,000 $1,103,000
=========== ==========
</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 September 30, 1996 and for the three and
nine month periods ended September 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
September 30, 1996, the results of its operations for the three and nine month
periods ended September 30, 1996 and 1995 and its cash flows for the nine month
periods ended September 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 the February and
August 1996 interest payment dates. At September 30, 1996, accrued interest of
$1,028,000 and $1,434,000, 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 $4,940,000 and $7,140,000, respectively, during
the nine month periods ended September 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 nine month periods ended September 30, 1996 and 1995, no payments were made
under the tax allocation agreements. At September 30, 1996 and December 31,
1995, $3,000 and $1,000, respectively, 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>
SEPTEMBER 30, DECEMBER 31,
1996 1995
-------------- --------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 18,398,000 $ 25,606,000
Short-term investment 2,000,000 -
Accounts receivable, net of allowances
of $15,288,000 and $16,494,000,
respectively 10,744,000 11,513,000
Inventories 3,882,000 4,268,000
Due from affiliates 2,801,000 10,009,000
Refundable deposits and other
current assets 3,672,000 4,764,000
------------- -------------
Total current assets 41,497,000 56,160,000
------------- -------------
Investment in Limited Partnership 1,662,000 2,017,000
------------- -------------
Property and Equipment:
Land 37,807,000 37,807,000
Buildings and improvements 185,508,000 185,077,000
Operating equipment 89,657,000 87,491,000
Construction in progress 3,197,000 2,310,000
------------- -------------
316,169,000 312,685,000
Less - accumulated depreciation and
amortization (157,774,000) (145,244,000)
------------- -------------
Net property and equipment 158,395,000 167,441,000
------------- -------------
Other Assets:
Obligatory investments 5,999,000 5,521,000
Due from affiliates 17,449,000 13,681,000
Deferred financing costs 7,924,000 8,730,000
Other assets 4,441,000 3,390,000
------------- -------------
Total other assets 35,813,000 31,322,000
------------- -------------
$ 237,367,000 $ 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>
SEPTEMBER 30, DECEMBER 31,
1996 1995
-------------- -------------
<S> <C> <C>
Current Liabilities:
Current maturities of long-term debt $ 2,511,000 $ 11,000
Short-term credit facilities 2,000,000 -
Short-term borrowings from affiliate 6,500,000 -
Accounts payable 7,991,000 8,454,000
Accrued liabilities -
Salaries and wages 4,968,000 5,292,000
Interest 11,422,000 12,159,000
Insurance 3,007,000 2,336,000
Other 7,159,000 6,388,000
Due to affiliates 1,047,000 979,000
Other 3,944,000 4,900,000
------------ ------------
Total current liabilities 50,549,000 40,519,000
------------ ------------
Long-Term Debt 282,934,000 285,442,000
------------ ------------
Other Noncurrent Liabilities 1,461,000 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 (97,578,000) (71,412,000)
------------ ------------
Total shareholder's deficit (97,577,000) (71,411,000)
------------ ------------
$237,367,000 $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
SEPTEMBER 30,
----------------------------
1996 1995
------------- -----------
<S> <C> <C>
Revenues:
Casino $65,820,000 $72,235,000
Rooms 2,660,000 2,671,000
Food and beverage 9,167,000 9,905,000
Other 1,835,000 1,574,000
----------- -----------
79,482,000 86,385,000
Less - promotional allowances (7,462,000) (7,913,000)
----------- -----------
Net revenues 72,020,000 78,472,000
----------- -----------
Expenses:
Casino 56,240,000 55,998,000
Rooms 405,000 477,000
Food and beverage 3,149,000 3,071,000
Other 1,296,000 484,000
General and administrative 3,721,000 4,120,000
Depreciation and amortization 5,103,000 5,065,000
----------- -----------
Total expenses 69,914,000 69,215,000
----------- -----------
Income from operations 2,106,000 9,257,000
----------- -----------
Non-operating income (expense):
Interest income 421,000 519,000
Interest expense (8,275,000) (8,098,000)
Gain on sale of assets - 56,000
Equity in earnings of limited
partnership 1,662,000 1,979,000
----------- -----------
Total non-operating expense, net (6,192,000) (5,544,000)
----------- -----------
(Loss) income before income taxes (4,086,000) 3,713,000
Income tax provision (110,000) (1,865,000)
----------- -----------
Net (loss) income $(4,196,000) $ 1,848,000
</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>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------------
1996 1995
------------- -------------
<S> <C> <C>
Revenues:
Casino $188,735,000 $202,571,000
Rooms 7,049,000 7,341,000
Food and beverage 26,478,000 24,499,000
Other 5,432,000 3,828,000
------------ ------------
227,694,000 238,239,000
Less - promotional allowances (21,616,000) (20,267,000)
------------ ------------
Net revenues 206,078,000 217,972,000
------------ ------------
Expenses:
Casino 169,156,000 157,060,000
Rooms 1,675,000 1,953,000
Food and beverage 8,337,000 7,128,000
Other 2,488,000 1,476,000
General and administrative 11,900,000 13,906,000
Depreciation and amortization 15,593,000 15,216,000
------------ ------------
Total expenses 209,149,000 196,739,000
------------ ------------
(Loss) income from operations (3,071,000) 21,233,000
------------ ------------
Non-operating income (expense):
Interest income 1,326,000 1,442,000
Interest expense (24,502,000) (24,232,000)
Gain on sale of assets 13,000 56,000
Equity in earnings of limited
partnership 4,416,000 4,412,000
------------ ------------
Total non-operating expense, net (18,747,000) (18,322,000)
------------ ------------
(Loss) income before income taxes (21,818,000) 2,911,000
Income tax provision (4,348,000) (2,265,000)
------------ ------------
Net (loss) income $(26,166,000) $ 646,000
</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>
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------------
1996 1995
-------------- ---------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net (loss) income $ (26,166,000) $ 646,000
Adjustments to reconcile net (loss) income to net cash
(used in) provided by operating activities:
Depreciation and amortization 15,593,000 15,216,000
Provision for doubtful accounts 1,562,000 2,263,000
Equity in earnings of limited partnership (4,416,000) (4,412,000)
Dividends received from limited partnership 4,771,000 4,442,000
Deferred income tax provision (benefit) 4,348,000 (2,395,000)
Increase in accounts receivable (793,000) (802,000)
Increase (decrease) in accounts payable and other accrued liabilities 82,000 (581,000)
Net change in other current assets and liabilities (767,000) 4,050,000
Net change in other noncurrent assets and liabilities (988,000) (683,000)
------------ ------------
Net cash (used in) provided by operating activities (6,774,000) 17,744,000
------------ ------------
INVESTING ACTIVITIES:
Net property and equipment additions (4,668,000) (15,664,000)
Obligatory investments (2,248,000) (2,102,000)
Short-term investment (2,000,000) -
------------ ------------
Net cash used in investing activities (8,916,000) (17,766,000)
------------ ------------
FINANCING ACTIVITIES:
Borrowings on short-term credit facilities 2,000,000 -
Short-term borrowings from affiliates 6,500,000 -
Deferred financing costs (10,000) (32,000)
Repayments of long-term debt (8,000) (8,000)
------------ ------------
Net cash provided by (used in) financing activities 8,482,000 (40,000)
------------ ------------
Net decrease in cash and cash equivalents (7,208,000) (62,000)
Cash and cash equivalents at beginning of period 25,606,000 25,457,000
------------ ------------
Cash and cash equivalents at end of period $ 18,398,000 $ 25,395,000
============ ============
</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
14
<PAGE>
PRATT CASINO CORPORATION AND SUBSIDIARIES
(WHOLLY OWNED BY PPI CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
fully recoverable. As a result of its review, PCC does not believe that any
material impairment currently exists related to its long-lived assets.
The consolidated financial statements as of September 30, 1996 and for
the three and nine month periods ended September 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 September 30, 1996, the results of its operations for the
three and nine month periods ended September 30, 1996 and 1995 and its cash
flows for the nine month periods ended September 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 September 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; such deposit is
presented as a short-term investment in the accompanying consolidated financial
statements.
(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.
<TABLE>
<CAPTION>
SEPTEMBER 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 445,000 453,000
------------ ------------
Total indebtedness 285,445,000 285,453,000
Less - current maturities (2,511,000) (11,000)
------------ ------------
Total long-term debt $282,934,000 $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
15
<PAGE>
PRATT CASINO CORPORATION AND SUBSIDIARIES
(WHOLLY OWNED BY PPI CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
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.
(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 the February and August 1996 interest payment
dates.
16
<PAGE>
PRATT CASINO CORPORATION AND SUBSIDIARIES
(WHOLLY OWNED BY PPI CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
Scheduled payments of long-term debt as of September 30, 1996 are set
forth below:
<TABLE>
<CAPTION>
<S> <C>
1996 (three months) $ 3,000
1997 2,512,000
1998 5,013,000
1999 5,014,000
2000 5,015,000
Thereafter 267,888,000
------------
Total $285,445,000
============
</TABLE>
Interest paid amounted to $25,239,000 and $27,351,000, respectively, for
the nine month periods ended September 30, 1996 and 1995.
(4) INCOME TAXES
Components of the income tax provision consist of the following:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------- --------------------------
1996 1995 1996 1995
-------------- --------------- ------------ ------------
<S> <C> <C> <C> <C>
Benefit in lieu of (provision for)
federal income taxes:
Current $ - $ (2,245,000) $ - $(3,581,000)
Deferred (110,000) 780,000 (4,300,000) 1,893,000
State income tax benefit
(provision):
Current - (611,000) - (1,079,000)
Deferred (110,000) 211,000 (48,000) 502,000
--------- ----------- ----------- -----------
$(110,000) $(1,865,000) $(4,348,000) $(2,265,000)
========= =========== =========== ===========
</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 nine
month periods ended September 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 ("CCC").
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.
17
<PAGE>
PRATT CASINO CORPORATION AND SUBSIDIARIES
(WHOLLY OWNED BY PPI CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
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.
The components of the net deferred tax asset as of September 30, 1996 and
December 31, 1995 are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
-------------- -------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforward $ 11,154,000 $ 3,267,000
Allowance for doubtful accounts 6,552,000 6,829,000
Other liabilities and accruals 2,512,000 2,149,000
Other 2,016,000 1,377,000
------------ -----------
Total deferred tax assets 22,234,000 13,622,000
------------ -----------
Deferred tax liabilities:
Depreciation and amortization (8,212,000) (8,679,000)
Other (597,000) (596,000)
------------ -----------
Total deferred tax liabilities (8,809,000) (9,275,000)
------------ -----------
Net deferred tax asset 13,425,000 4,347,000
Valuation allowance (13,425,000) -
------------ -----------
$ - $ 4,347,000
============ ===========
</TABLE>
PCC and its subsidiaries have net operating loss carryforwards ("NOL's")
totaling approximately $19,000,000, 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 September
30, 1996.
18
<PAGE>
PRATT CASINO CORPORATION AND SUBSIDIARIES
(WHOLLY OWNED BY PPI CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
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.
Receivables from and payables to affiliates in connection with the
aforementioned tax allocation agreements are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
-------------- -------------
<S> <C> <C>
Due from affiliates - current $1,934,000 $9,310,000
Due from affiliates - noncurrent 8,969,000 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 $80,000 for each of the three month periods ended September 30, 1996
and 1995 and $211,000 and $220,000, respectively, for the nine month periods
ended September 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 September 30, 1996 and 1995 and $900,000 for each of the nine month
periods ended September 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. An advance to a PHC subsidiary in the
amount of $5,672,000 was outstanding as of September 30, 1996 and December 31,
1995 and bears interest at the rate of 16.5% per annum. During the third
quarter of 1996, GBHC borrowed a total of $6,500,000 from PHC for working
capital purposes. Such borrowings accrue
19
<PAGE>
PRATT CASINO CORPORATION AND SUBSIDIARIES
(WHOLLY OWNED BY PPI CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
interest at the rate of 13 3/4% per annum payable quarterly commencing October
1, 1996. Repayment of such borrowings from PHC and the payment of the related
interest are subject to approval by the CCC. Interest income (expense) incurred
with respect to affiliate advances and borrowings is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- --------------------------
1996 1995 1996 1995
---------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
Net advances $ 52,000 $ 234,000 $ 520,000 $ 702,000
Junior Subordinated Notes (Note 3) (548,000) (548,000) (1,645,000) (1,645,000)
</TABLE>
Interest receivable on affiliate advances, included in amounts due from
affiliates on the accompanying consolidated balance sheets at September 30, 1996
and December 31, 1995 was $2,808,000 and $2,106,000, respectively. Interest
accrued on the Junior Subordinated Notes of $2,462,000 ($1,028,000 due to PHC
and $1,434,000 due to HCC) and $817,000 ($341,000 due to PHC and $476,000 due to
HCC) is included in interest payable on the accompanying consolidated balance
sheets at September 30, 1996 and December 31, 1995, respectively, together with
interest payable of $182,000 at September 30, 1996 with respect to the advance
from PHC.
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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ---------------------------
1996 1995 1996 1995
---------- ---------- ------------ -------------
<S> <C> <C> <C> <C>
Billings to affiliates $ 782,000 $ 626,000 $ 2,419,000 $ 1,861,000
Charges from affiliates (850,000) (612,000) (2,792,000) (1,846,000)
</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 $2,339,000 and $2,716,000, respectively, during the three month
periods ended September 30, 1996 and 1995 and $6,810,000 and $6,588,000,
respectively, during the nine month periods ended September 30, 1996 and 1995.
PML also incurred operating and other expenses amounting to $410,000 and
$468,000, respectively, during the three month periods ended September 30, 1996
and 1995 and $1,599,000 and $1,383,000, respectively, during the nine month
periods ended September 30,
20
<PAGE>
PRATT CASINO CORPORATION AND SUBSIDIARIES
(WHOLLY OWNED BY PPI CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
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.
(8) RECLASSIFICATIONS
Certain reclassifications have been made to the 1995 consolidated
financial statements to conform to the 1996 consolidated financial statement
presentation. Such reclassifications include the reallocation of certain costs
among the various operating departments and general and administrative expenses
resulting from the completion of a comprehensive internal review of departmental
allocations. Management believes that such reclassifications better reflect the
matching of costs with the associated revenues.
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 earned income from operations, exclusive of management fees paid
to NJMI, of $2.5 million and sustained a loss from operations of $2.4 million,
respectively, for the three and nine month periods ended September 30, 1996
compared to income from operations of $9.6 million and $22.2 million,
respectively, earned for the 1995 periods. Operating results have been 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 machine hold percentages, resulted in three and nine month
declines in net revenues at the Sands of 8.3% and 5.5%, respectively (to $71.7
million and $205.2 million in 1996 from $78.2 million and $217.1 million in
1995). In addition, marketing and advertising costs increased by $1.2 million
and $10.7 million (7% and 22.8%), respectively, during the third quarter and
first nine months of 1996 compared to the same periods of 1995 in response to
competitive pressures.
As a result of the foregoing, PCC experienced income from operations of
$2.1 million during the three month period ended September 30, 1996 and a loss
from operations of $3.1 million for the nine month period ended September 30,
1996 as compared to income from operations of $9.3 million and $21.2 million,
respectively, during the same periods of 1995.
Distributions received from PML amounted to $742,000 and $4.8 million,
respectively, during the third quarter and first nine months of 1996;
distributions from PML are paid in arrears. Management fees earned by PML during
the three month period ended September 30, 1996 declined $377,000 (13.9%) as
compared to the prior year quarter; however, such fees continue to show an
increase for the nine month period ended September 30, 1996 of $222,000 (3.4%).
Increased management fees during the first half of 1996 were primarily due to
improved operating results subsequent to the 1995 expansion of one of the Aurora
Casino's two riverboats. Area flooding and the opening of riverboat gaming
operations in northern Indiana during the third quarter of 1996 had a negative
impact on management fees earned by PML. In addition, PCC received $300,000 and
$900,000, respectively, with respect to its consulting agreement with the Tunica
Casino during the three and nine month periods ended September 30, 1996 and
1995.
22
<PAGE>
PRATT CASINO CORPORATION AND SUBSIDIARIES
(WHOLLY OWNED BY PPI 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
1996 1995 1996 1995
------------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
(in thousands, except percentages)
REVENUES:
Table games $ 21,170 $ 24,978 $ 61,750 $ 72,521
Slot machines 43,663 46,038 123,934 126,616
Other (1) 987 1,219 3,051 3,434
--------- --------- --------- ----------
Total $ 65,820 $ 72,235 $ 188,735 $ 202,571
========= ========= ========= ==========
TABLE GAMES:
Gross Wagering
(Drop) (2) $161,052 $ 170,245 $ 444,435 $ 463,555
======== ========= ========= ==========
Hold Percentages: (3)
Sands 13.1% 14.7% 13.9% 15.6%
Atlantic City Casino
Gaming Industry 15.2% 15.7% 15.5% 15.9%
SLOT MACHINES:
Gross Wagering
(Handle) (2) $535,346 $521,596 $1,510,865 $1,459,882
======== ======== ========== ==========
Hold Percentage:(3)
Sands (4) 8.2% 8.8% 8.2% 8.7%
</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 $9.2 million (5.4%) and $19.1
million (4.1%), respectively, during the three and nine month periods ended
September 30, 1996 compared with the same periods of 1995. The Sands' decreases
compare with increases of 6.6% and 5.9% 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
23
<PAGE>
PRATT CASINO CORPORATION AND SUBSIDIARIES
(WHOLLY OWNED BY PPI CORPORATION)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
percentage of the Atlantic City industry aggregate table game drop) decreased to
7.6% and 7.9%, respectively, during the three and nine month periods ended
September 30, 1996 from 8.5% and 8.6%, respectively, during the same periods of
1995. Table game drop throughout the nine 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. The
third quarter of 1996 also saw a decline in the unrated table market segment as
expansions at competing properties, construction on roadways into the city and
other factors all served to reduce unrated table play at the Sands.
Slot machine handle increased $13.8 million (2.6%) and $51 million (3.5%),
respectively, during the three and nine month periods ended September 30, 1996
compared with the same periods of 1995. The Sands' increases compare with 2.4%
and 5.5% increases in slot machine handle for all other Atlantic City casinos.
As a result, the Sands' maintained its market share of 6% during the third
quarter of 1996 compared to 1995; however, its market share decreased slightly
to 6.2% from 6.3% during the nine months ended September 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 and
direct marketing programs, which have resulted in significant increases in the
number of bus patrons for the nine months ended September 30, 1996 compared to
1995. The Sands' average number of slot machines increased .9% during the first
nine months of 1996 compared to an increase of 9.2% 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 118,000
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 $6.4 million (8.9%) and $13.8 million (6.8%),
respectively, for the three and nine month periods ended September 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 nine month
periods ended September 30, 1996 compared with 1995. Food and beverage revenues
decreased $738,000 (7.5%) for the three month period ended September 30, 1996
compared with the 1995 period primarily due to the decline in patron volume;
such revenues increased $2 million (8.1%) for the nine month period ended
September 30, 1996 compared with the prior year period primarily as a result of
the opening of the Epic Buffet during the third quarter of 1995. Other revenues
increased $261,000 (16.6%) and $1.6 million (41.9%), respectively, during the
three and nine month periods ended September 30, 1996 compared to the 1995
periods as a result of an increase in theater entertainment revenue.
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 55.8% and 56.8%, respectively, during the
24
<PAGE>
PRATT CASINO CORPORATION AND SUBSIDIARIES
(WHOLLY OWNED BY PPI CORPORATION)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
three and nine month periods ended September 30, 1996 from 57.1% and 58.3%
during the third quarter and first nine 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 remained flat during the third quarter of 1996
compared to 1995 and increased $12.1 million (7.7%) during the nine month period
ended September 30, 1996 compared to the same period in 1995. The nine month
increase is 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 $72,000 (15.1%) during the third quarter of 1996 as
compared to the same period of 1995 resulting in a nine month decrease of
$278,000 (14.2%) primarily due to increased allocation of rooms expense to
casino expense resulting from increases in casino marketing activities relating
to rooms. Decreased payroll expenses 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 did not
change significantly during the three month period ended September 30, 1996
compared to the three month period ended September 30, 1995. The increase of
$1.2 million (17%) in food and beverage expense during the nine month period
ended September 30, 1996 compared to the same period in 1995 reflects increased
costs associated with the Epic Buffet which were partially offset by increases
in marketing programs, the costs of which are allocated to the casino
department. Other expenses increased $812,000 (167.8%) and $1 million (68.6%),
respectively, during the three and nine month periods ended September 30, 1996
compared with the same periods in 1995 as increases in theater entertainment
costs were partially offset by increased allocations to the casino department.
GENERAL AND ADMINISTRATIVE
General and administrative expenses decreased $399,000 (9.7%) and $2
million (14.4%), respectively, during the third quarter and first nine months of
1996 as compared to 1995. These decreases are primarily due to decreases in
equipment rental and 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 $98,000 (18.9%) and $116,000 (8%), respectively,
during the three and nine month periods ended September 30, 1996 compared with
the same periods of 1995 due to a decrease in the amount of cash available for
temporary cash investments. Interest expense did not change significantly
during the three and nine month periods ended September 30, 1996 compared to the
prior year periods.
25
<PAGE>
PRATT CASINO CORPORATION AND SUBSIDIARIES
(WHOLLY OWNED BY PPI CORPORATION)
MANAGEMENT'S DISCUSSION 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
declined by 16% to $1.7 from $2 million during the third quarter of 1996
compared to the same period of 1995 primarily as a result of the factors
impacting the Aurora Casino's operations as previously discussed. For the nine
month period ended September 30, 1996, PCC's equity in the earnings of PML were
substantially unchanged compared to the prior year period.
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 $19 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 September
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
26
<PAGE>
PRATT CASINO CORPORATION AND SUBSIDIARIES
(WHOLLY OWNED BY PPI CORPORATION)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
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.
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 September 30, 1996, PCC had consolidated cash and cash equivalents of
$18.4 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 nine
month period ended September 30, 1996, net cash used in operating activities was
$6.8 million compared with cash provided by operating activities of $17.7
million during the same period of 1995. The change in net cash from operating
activities compared to 1995 resulted primarily from a decline in operating cash
flow generated by the Sands. The Sands sustained an operating cash flow deficit
of $10.6 million for the nine months ended September 30, 1996 compared to net
cash generated from operations of $13.4 million during the 1995 period,
resulting in an aggregate decline in operating cash flow of $24 million and a
decline in working capital of $25.4 million compared to September 30, 1995. PCC
utilized its existing cash, available lines of credit and short-term borrowings
from affiliates during the nine month period ended September 30, 1996 to meet
its operating needs, to fund capital additions of $4.7 million and to make
obligatory investments of $2.2 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
27
<PAGE>
PRATT CASINO CORPORATION AND SUBSIDIARIES
(WHOLLY OWNED BY PPI CORPORATION)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
the indenture for the PRT Funding Notes. Because PCC had not met the financial
coverage tests, interest was not paid on the February and August 1996 interest
payment dates.
As of April 30, 1996, GBHC extended $2 million of its bank line of credit
until April 30, 1997. As of September 30, 1996, $2 million was outstanding under
the line of credit.
During the third quarter of 1996, GBHC borrowed $6.5 million from PHC for
working capital purposes with interest at the rate of 13 3/4% per annum payable
quarterly commencing October 1, 1996. Repayment of such borrowings and payment
of the related accrued interest is subject to regulatory approval.
Scheduled maturities of long-term debt during the remainder of 1996 are
$3,000. Commencing in July 1997, semiannual principal payments of $2.5 million
will become due with respect to the 10 7/8% First Mortgage Notes.
CAPITAL EXPENDITURES AND OBLIGATORY INVESTMENTS
Capital expenditures at the Sands during the nine month period ended
September 30, 1996 amounted to approximately $4.7 million and management
anticipates capital expenditures during the remainder of 1996 will be
approximately $1 million. Projects currently planned during the remainder of
1996 include additional upgrades and improvements to rooms at the Sands,
including its higher-end suite product, and other departmental expenditures.
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 nine months of 1996 totaled $2.2
million are anticipated to be approximately $800,000 during the remainder of
1996.
SUMMARY
As previously discussed, the Sands sustained a significant cash flow
deficit from operations during the nine month period ended September 30, 1996
and required additional cash from affiliate borrowings and its line of credit to
meet its financial obligations.
In order to fund its future cash requirements, including debt service and
obligatory investments, the Sands will need to achieve substantially improved
operating results or rely on additional borrowings from affiliates. It appears
that absent any further material deterioration of operating results, the Sands
will be able to rely on borrowings from affiliates to meet its obligations in
the near term; however, its long-term financial viability as well as that of PCC
is dependent on a substantial improvement in operating results of the Sands as
its affiliates have certain limitations on their ability to provide ongoing
financial support.
28
<PAGE>
PRATT CASINO CORPORATION AND SUBSIDIARIES
(WHOLLY OWNED BY PPI CORPORATION)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
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.
29
<PAGE>
PART II: OTHER INFORMATION
- ---------------------------
The Registrants did not file any reports on Form 8-K during the quarter
ended September 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: November 12, 1996 By: /s/ John C. Hull
----------------- -------------------------
John C. Hull
Principal Accounting Officer
30
<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 9-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996
<PERIOD-START> JUL-01-1996 JAN-01-1996
<PERIOD-END> SEP-30-1996 SEP-30-1996
<CASH> 1,130 1,130
<SECURITIES> 0 0
<RECEIVABLES> 5,894 5,894
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 7,024 7,024
<PP&E> 0 0
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 107,024 107,024
<CURRENT-LIABILITIES> 7,006 7,006
<BONDS> 100,000 100,000
0 0
0 0
<COMMON> 1 1
<OTHER-SE> 17 17
<TOTAL-LIABILITY-AND-EQUITY> 107,024 107,024
<SALES> 0 0
<TOTAL-REVENUES> 0 0
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> (13) (15)
<INCOME-PRETAX> 13 15
<INCOME-TAX> 2 2
<INCOME-CONTINUING> 11 13
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 11 13
<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 CORPORATION
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996
<PERIOD-START> JUL-01-1996 JAN-01-1996
<PERIOD-END> SEP-30-1996 SEP-30-1996
<CASH> 18,398 18,398
<SECURITIES> 0 0
<RECEIVABLES> 26,032 26,032
<ALLOWANCES> 15,288 15,288
<INVENTORY> 3,882 3,882
<CURRENT-ASSETS> 41,497 41,497
<PP&E> 316,169 316,169
<DEPRECIATION> 157,774 157,774
<TOTAL-ASSETS> 237,367 237,367
<CURRENT-LIABILITIES> 50,549 50,549
<BONDS> 282,934 282,934
0 0
0 0
<COMMON> 1 1
<OTHER-SE> (97,578) (97,578)
<TOTAL-LIABILITY-AND-EQUITY> 237,367 237,367
<SALES> 0 0
<TOTAL-REVENUES> 72,020 206,078
<CGS> 0 0
<TOTAL-COSTS> 60,422 180,094
<OTHER-EXPENSES> 7,162 23,064
<LOSS-PROVISION> 668 1,562
<INTEREST-EXPENSE> 7,854 23,176
<INCOME-PRETAX> (4,086) (21,818)
<INCOME-TAX> 110 4,348
<INCOME-CONTINUING> (4,196) (26,166)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (4,196) (26,166)
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
</TABLE>
