<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 MARCH 31, 1997
--------------
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): (972) 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>
<S> <C> <C>
REGISTRANT CLASS OUTSTANDING AT MAY 12, 1997
- ------------------------ ----------------------------- ---------------------------
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 meet 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 Greate Bay Casino
Corporation ("GBCC"), also a Delaware corporation. GBCC 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 month period ended March 31, 1997 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 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"). Prior to December 31, 1996, HCC owned approximately 80% of
the outstanding common stock of GBCC; such stock was distributed by HCC to its
shareholders. Effective April 1, 1997, HCC acquired the general partnership
interest in PML from another subsidiary of GBCC. 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 March 31, 1997 and for the three month periods ended
March 31, 1997 and 1996 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 March 31, 1997, and their results of
operations and cash flows for the three month periods ended March 31, 1997 and
1996.
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 1996 Annual Report on Form 10-K.
2
<PAGE>
PRT FUNDING CORP.
(WHOLLY OWNED BY PRATT CASINO CORPORATION)
BALANCE SHEETS
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 14,000 $ 1,141,000
Interest receivable from affiliates 6,991,000 3,972,000
Due from affiliate 1,130,000 -
------------ ------------
Total current assets 8,135,000 5,113,000
------------ ------------
Notes receivable from affiliates 100,000,000 100,000,000
------------ ------------
$108,135,000 $105,113,000
============ ============
</TABLE>
LIABILITIES AND SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
<S> <C> <C>
Current liabilities:
Accrued interest payable $ 8,087,000 $ 5,068,000
Other current liabilities 2,000 2,000
Due to affiliates 18,000 17,000
------------ ------------
Total current liabilities 8,107,000 5,087,000
------------ ------------
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 27,000 25,000
------------ ------------
Total shareholder's equity 28,000 26,000
------------ ------------
$108,135,000 $105,113,000
============ ============
</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
MARCH 31,
-------------------------
1997 1996
---------- ----------
<S> <C> <C>
Revenues:
Interest income $3,022,000 $3,019,000
---------- ----------
Expenses:
Interest expense 3,019,000 3,019,000
---------- ----------
Income before income taxes 3,000 -
Income tax provision (1,000) -
---------- ----------
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 CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------------
1997 1996
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 2,000 $ -
Adjustments to reconcile net income
to net cash (used in) provided by operating activities:
Increase in receivable from affiliates (4,149,000) (1,922,000)
Increase in accrued interest payable 3,019,000 3,019,000
Net change in other current assets
and liabilities 1,000 (1,000)
----------- -----------
Net cash (used in) provided by operating activities (1,127,000) 1,096,000
Cash and cash equivalents at beginning of period 1,141,000 18,000
----------- -----------
Cash and cash equivalents at end of period $ 14,000 $ 1,114,000
=========== ===========
</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)
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 Greate Bay
Casino Corporation ("GBCC"). Both PCC and GBCC 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"), a Delaware corporation
which, prior to December 31, 1996, owned approximately 80% of the outstanding
common stock of GBCC.
PRT Funding was formed for the purpose of borrowing $85,000,000 for the
benefit of PCC and its affiliates. PRT Funding has no operations and is
dependent on the repayment of its notes due from various affiliates for
servicing its debt obligations. Administrative services for PRT Funding are
provided by other GBCC 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 March 31, 1997 and for the three month periods
ended March 31, 1997 and 1996 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 March 31, 1997 and the results of
its operations and cash flows for the three month periods ended March 31, 1997
and 1996.
(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 GBCC, 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.
6
<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. Principal totaling
$6,262,000 with respect to the Junior Subordinated Notes was subsequently
assigned to GBCC by HCC in recognition of tax net operating losses of GBCC used
by HCC. The remaining $8,738,000 of Junior Subordinated Notes, together with
interest accrued thereon, was assigned to GBCC by HCC in connection with the
distribution of its stock in GBCC to HCC's shareholders on December 31, 1996.
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 has not met the financial coverage tests, interest has not been paid
during 1997 and was not paid during 1996. At March 31, 1997 and December 31,
1996, accrued interest of $3,559,000 and $3,010,000, respectively, was payable
to GBCC. All such amounts are included in interest payable in the accompanying
balance sheets.
No interest was paid during either of the three month periods ended March 31,
1997 and 1996.
(3) INCOME TAXES
PRT Funding is included in the consolidated federal income tax return of GBCC
and, for periods prior to December 31, 1996, was included in the consolidated
federal income tax return of HCC, GBCC's parent prior to that date. Pursuant to
agreements between PCC and GBCC, 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 month
periods ended March 31, 1997 and 1996, no payments were made under the tax
allocation agreements. At March 31, 1997 and December 31, 1996, $6,000 and
$5,000, respectively, is included in due to affiliates on the accompanying
balance sheets representing taxes currently payable under the agreements.
7
<PAGE>
PRATT CASINO CORPORATION AND SUBSIDIARIES
(WHOLLY OWNED BY PPI CORPORATION)
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
------------- -------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 15,956,000 $ 18,650,000
Short-term investments - 2,000,000
Accounts receivable, net of allowances
of $14,757,000 and $15,524,000,
respectively 9,620,000 10,114,000
Inventories 3,745,000 3,873,000
Due from affiliates 2,286,000 2,541,000
Refundable deposits and other
current assets 2,984,000 3,197,000
------------- -------------
Total current assets 34,591,000 40,375,000
------------- -------------
Investment in Limited Partnership 1,996,000 1,746,000
------------- -------------
Property and Equipment:
Land 38,093,000 38,093,000
Buildings and improvements 185,508,000 185,508,000
Operating equipment 92,529,000 91,868,000
Construction in progress 1,595,000 1,535,000
------------- -------------
317,725,000 317,004,000
Less - accumulated depreciation and
amortization (164,234,000) (160,989,000)
------------- -------------
Net property and equipment 153,491,000 156,015,000
------------- -------------
Other Assets:
Obligatory investments 6,650,000 6,382,000
Due from affiliates 18,194,000 17,895,000
Deferred financing costs 7,379,000 7,653,000
Other assets 4,166,000 4,220,000
------------- -------------
Total other assets 36,389,000 36,150,000
------------- -------------
$ 226,467,000 $ 234,286,000
============= =============
</TABLE>
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated balance sheets.
8
<PAGE>
PRATT CASINO CORPORATION AND SUBSIDIARIES
(WHOLLY OWNED BY PPI CORPORATION)
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDER'S DEFICIT
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
------------- -------------
<S> <C> <C>
Current Liabilities:
Current maturities of long-term debt $ 5,012,000 $ 2,512,000
Short-term credit facilities - 2,000,000
Short-term borrowings from affiliates 8,000,000 6,500,000
Accounts payable 6,051,000 7,906,000
Accrued liabilities -
Salaries and wages 5,492,000 4,986,000
Interest 12,991,000 14,758,000
Insurance 3,180,000 3,117,000
Other 6,588,000 6,684,000
Due to affiliates 998,000 1,195,000
Other 4,017,000 5,431,000
------------- -------------
Total current liabilities 52,329,000 55,089,000
------------- -------------
Long-Term Debt 280,427,000 282,930,000
------------- -------------
Other Noncurrent Liabilities 1,345,000 1,372,000
------------- -------------
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 (107,635,000) (105,106,000)
------------- -------------
Total shareholder's deficit (107,634,000) (105,105,000)
------------- -------------
$ 226,467,000 $ 234,286,000
============= =============
</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 STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------------
1997 1996
----------- -----------
<S> <C> <C>
Revenues:
Casino $58,330,000 $57,605,000
Rooms 2,237,000 2,135,000
Food and beverage 7,920,000 8,524,000
Other 1,265,000 1,989,000
----------- -----------
69,752,000 70,253,000
Less - promotional allowances (6,255,000) (7,119,000)
----------- -----------
Net revenues 63,497,000 63,134,000
----------- -----------
Expenses:
Casino 49,009,000 54,494,000
Rooms 596,000 533,000
Food and beverage 2,339,000 2,464,000
Other 529,000 538,000
General and administrative 3,671,000 3,985,000
Depreciation and amortization 3,963,000 5,197,000
----------- -----------
Total expenses 60,107,000 67,211,000
----------- -----------
Income (loss) from operations 3,390,000 (4,077,000)
----------- -----------
Non-operating income (expenses):
Interest income 402,000 472,000
Interest expense (8,325,000) (8,122,000)
Gain on disposal of assets 7,000 15,000
Equity in earnings of limited
partnership 1,997,000 2,012,000
----------- -----------
Total non-operating expense, net (5,919,000) (5,623,000)
----------- -----------
Loss before income taxes (2,529,000) (9,700,000)
Income tax benefit - 3,654,000
----------- -----------
Net loss $(2,529,000) $(6,046,000)
=========== ===========
</TABLE>
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated statements.
10
<PAGE>
PRATT CASINO CORPORATION AND SUBSIDIARIES
(WHOLLY OWNED BY PPI CORPORATION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------------
1997 1996
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $(2,529,000) $(6,046,000)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 3,963,000 5,197,000
Gain on sale of assets (7,000) (15,000)
Provision for doubtful accounts 650,000 567,000
Equity in earnings of limited partnership (1,997,000) (2,012,000)
Dividends received from limited partnership 1,747,000 2,039,000
Deferred income tax benefit - (293,000)
Increase in accounts receivable (156,000) (257,000)
Decrease in accounts payable and other accrued liabilities (4,347,000) (678,000)
Net change in other current assets and liabilities 112,000 (3,591,000)
Net change in other noncurrent assets and liabilities (243,000) (298,000)
----------- -----------
Net cash used in operating activities (2,807,000) (5,387,000)
----------- -----------
INVESTING ACTIVITIES:
Net property and equipment additions (721,000) (1,130,000)
Obligatory investments (670,000) (762,000)
Proceeds from disposal of assets 7,000 15,000
Short-term investment 2,000,000 -
----------- -----------
Net cash provided by (used in) investing activities 616,000 (1,877,000)
----------- -----------
FINANCING ACTIVITIES:
(Repayments) borrowings on short-term credit facilities (2,000,000) 2,000,000
Repayments of long-term debt (3,000) (3,000)
Borrowings from affiliates 1,500,000 -
----------- -----------
Net cash (used in) provided by financing activities (503,000) 1,997,000
----------- -----------
Net decrease in cash and cash equivalents (2,694,000) (5,267,000)
Cash and cash equivalents at beginning of period 18,650,000 25,606,000
----------- -----------
Cash and cash equivalents at end of period $15,956,000 $20,339,000
=========== ===========
</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)
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 Greate Bay Casino Corporation ("GBCC"). 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") which, prior to December 31, 1996,
owned approximately 80% of the outstanding common stock of GBCC.
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 are 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 or intensify
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.
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets" 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
12
<PAGE>
PRATT CASINO CORPORATION AND SUBSIDIARIES
(WHOLLY OWNED BY PPI CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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.
The consolidated financial statements as of March 31, 1997 and for the three
month periods ended March 31, 1997 and 1996 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
March 31, 1997 and the results of its operations and cash flows for the three
month periods ended March 31, 1997 and 1996.
The accompanying consolidated financial statements have been prepared
assuming PCC will continue as a going concern. GBHC, which is PCC's most
significant subsidiary, incurred a net loss exclusive of management fees of
$26,726,000 in 1996 which in turn generated an operating cash flow deficit of
$6,070,000. As a consequence, GBHC has had to rely on borrowings from
affiliates to meet its debt service requirements and to fund working capital
needs during its seasonal low operating periods. The availability of additional
borrowings from GBCC and other subsidiaries of GBCC during 1997 is limited. HCC,
which has loaned $6,500,000 to GBCC for use by the Sands (see Note 5), is
subject to certain indenture provisions which restrict its ability to provide
ongoing financial support to an additional $3,500,000.
GBHC's principal and interest requirements during the twelve month period
ending March 31, 1998 amount to $25,038,000. Due to mild winter weather
conditions compared to a year ago and an abatement of the intense marketing
competition for bus customers, operating results for the first quarter 1997
reflect a substantial improvement over 1996. In the absence of a resumption of
the marketing wars which plagued Atlantic City casinos in 1996 or other
unforeseen events, management believes its operating plan for 1997 is attainable
and will provide sufficient funds from operating cash flow which, together with
funds available from affiliates, if required, will enable GBHC to satisfy its
debt service requirements through the first quarter of 1998.
(2) SHORT-TERM CREDIT FACILITIES
As of December 31, 1996, GBHC had $2,000,000 outstanding under a bank line of
credit. Borrowings under the line of credit were guaranteed to the extent of
$2,000,000 by PCC, which pledged a certificate of deposit in the face amount of
$2,000,000 as collateral for the line of credit. The line of credit was repaid
upon maturity of the certificate of deposit during January 1997 with proceeds
from affiliate borrowings (see Note 5) and the line of credit was cancelled.
13
<PAGE>
PRATT CASINO CORPORATION AND SUBSIDIARIES
(WHOLLY OWNED BY PPI CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(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>
MARCH 31, DECEMBER 31,
1997 1996
------------- -------------
<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 439,000 442,000
------------ ------------
Total indebtedness 285,439,000 285,442,000
Less - current maturities (5,012,000) (2,512,000)
------------ ------------
Total long-term debt $280,427,000 $282,930,000
============ ============
</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 with
the balance due at maturity. Such semiannual payments may be made in cash
or by tendering to the trustee 10 7/8% First Mortgage Notes previously
purchased or otherwise acquired by GB Property Funding. GB Property Funding
acquired $2,500,000 face amount of 10 7/8% First Mortgage Notes during May
1997 which it intends to use to make its July 15, 1997 required principal
payment. 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 PCC to pay dividends to GBCC, 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 requires minimum expenditures, as defined in the
indenture, for property and fixture renewals, replacements and betterments
at the Sands.
(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
14
<PAGE>
PRATT CASINO CORPORATION AND SUBSIDIARIES
(WHOLLY OWNED BY PPI CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
subsidiaries of PCC to pay dividends to GBCC, 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. Principal totaling
$6,262,000 with respect to the Junior Subordinated Notes was subsequently
assigned to GBCC by HCC in recognition of tax net operating losses of GBCC
used by HCC. The remaining $8,738,000 of Junior Subordinated Notes,
together with interest accrued thereon, was assigned to GBCC by HCC in
connection with the distribution of its stock in GBCC to HCC's shareholders
on December 31, 1996. 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 has not met the
financial coverage tests, interest has not been paid during 1997 and was not
paid during 1996.
Scheduled payments of long-term debt as of March 31, 1997 are set forth
below:
<TABLE>
<CAPTION>
<S> <C>
1997 (9 months) $ 2,509,000
1998 5,013,000
1999 5,014,000
2000 5,016,000
2001 5,017,000
Thereafter 262,870,000
------------
Total $285,439,000
============
</TABLE>
Interest paid amounted to $10,093,000 and $10,118,000, respectively, for the
three month periods ended March 31, 1997 and 1996.
15
<PAGE>
PRATT CASINO CORPORATION AND SUBSIDIARIES
(WHOLLY OWNED BY PPI CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(4) INCOME TAXES
Components of the income tax benefit consisted of the following:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------
1997 1996
-------- ---------
<S> <C> <C>
Benefit in lieu of federal income taxes:
Current $ - $2,580,000
Deferred - 226,000
State income tax benefit:
Current - 781,000
Deferred - 67,000
-------- ----------
$ - $3,654,000
======== ==========
</TABLE>
PCC is included in the consolidated federal income tax return of GBCC and,
for periods prior to December 31, 1996, was included in the consolidated federal
income tax return of HCC, GBCC's parent prior to that date. 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 three month
periods ended March 31, 1997 and 1996. 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 (the "Casino Commission").
Federal and state income tax provisions or benefits are based upon the
estimates of the results of operations for the current 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.
16
<PAGE>
PRATT CASINO CORPORATION AND SUBSIDIARIES
(WHOLLY OWNED BY PPI CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
The components of the net deferred tax asset as of March 31, 1997 and
December 31, 1996 were as follows:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforward $ 14,616,000 $ 13,720,000
Allowance for doubtful accounts 6,348,000 6,429,000
Other liabilities and accruals 2,853,000 2,732,000
Other 2,173,000 2,037,000
------------ ------------
Total deferred tax assets 25,990,000 24,918,000
------------ ------------
Deferred tax liabilities:
Depreciation and amortization (8,610,000) (8,520,000)
Other (597,000) (597,000)
------------ ------------
Total deferred tax liabilities (9,207,000) (9,117,000)
------------ ------------
Net deferred tax asset 16,783,000 15,801,000
Valuation allowance (16,783,000) (15,801,000)
------------ ------------
$ - $ -
============ ============
</TABLE>
At March 31, 1997, PCC and its subsidiaries have net operating loss
carryforwards ("NOL's") totaling approximately $29 million, none of which expire
before the 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 book and tax losses sustained in 1997 to date, management is
unable to determine that the realization of such asset is more likely than not
and, thus, has provided a valuation allowance for the entire deferred tax asset
at both March 31, 1997 and December 31, 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.
17
<PAGE>
PRATT CASINO CORPORATION AND SUBSIDIARIES
(WHOLLY OWNED BY PPI CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
The Internal Revenue Service is currently examining the consolidated
Federal income tax returns of HCC for the years 1993 and 1994 in which PCC was
included. Management believes that the results of such examination will not
have a material adverse effect on the consolidated financial position of PCC.
Net receivables from and payables to affiliates representing deferred
federal income taxes in connection with the aforementioned tax allocation
agreements were as follows:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
---------- -----------
<S> <C> <C>
Due from affiliates - current $1,656,000 $1,728,000
Due from affiliates - noncurrent 9,247,000 9,174,000
Due to affiliate - current - (129,000)
</TABLE>
(5) TRANSACTIONS WITH RELATED PARTIES
GBHC licenses the trade name "Sands" from GBCC, which licenses the name
from an unaffiliated third party. Amounts payable by the Sands under this
agreement are equal to the amounts paid to the unaffiliated third party. Such
charges amounted to $67,000 and $61,000, respectively, for the three month
periods ended March 31, 1997 and 1996.
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 $300,000 for each of the three month periods ended
March 31, 1997 and 1996.
An advance to a GBCC subsidiary in the amount of $5,672,000 was outstanding
as of both March 31, 1997 and December 31, 1996 which accrues interest at the
rate of 16.5% per annum. Interest receivable with respect to this advance was
$3,276,000 and $3,042,000 at March 31, 1997 and December 31, 1996, respectively.
The advance and related interest receivable are both included in noncurrent due
from affiliates in the accompanying consolidated balance sheets.
During the third quarter of 1996 and the first quarter of 1997, GBHC borrowed
a total of $8,000,000 from GBCC for working capital purposes. Such borrowings
accrue interest at the rate of 13 3/4% per annum, payable quarterly commencing
October 1, 1996. Interest accrued on affiliate loans in the amount of $656,000
and $398,000 is included in interest payable in the accompanying consolidated
balance sheets at March 31, 1997 and December 31, 1996, respectively. Repayment
of such borrowings from GBCC and the payment of the related interest are subject
to approval by the Casino Commission.
18
<PAGE>
PRATT CASINO CORPORATION AND SUBSIDIARIES
(WHOLLY OWNED BY PPI CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
Interest income (expense) incurred with respect to affiliate advances and
borrowings is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------
1997 1996
---------- ----------
<S> <C> <C>
Net borrowings/advances $ (24,000) $ 234,000
Junior Subordinated Notes (Note 3) (548,000) (548,000)
</TABLE>
Interest due to GBCC on the Junior Subordinated Notes of $3,558,000 and
$3,010,000 is included in interest payable on the accompanying consolidated
balance sheets at March 31, 1997 and December 31, 1996, respectively.
PCC and its subsidiaries perform certain services for other subsidiaries of
GBCC and 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 GBCC and HCC and
their respective subsidiaries that relate to PCC's business. Such affiliate
transactions are summarized below:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------------
1997 1996
---------- ------------
<S> <C> <C>
Billings to affiliates $ 331,000 $ 927,000
Charges from affiliates $(582,000) $(1,075,000)
</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 $2,727,000 and $2,943,000, respectively, during the three month
periods ended March 31, 1997 and 1996. PML also incurred operating and other
expenses amounting to $460,000 and $661,000, respectively, during the three
month periods ended March 31, 1997 and 1996. Effective April 1, 1997, HCC
acquired the general partnership in PML from PPI Corporation. 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 the general partner.
19
<PAGE>
PRATT CASINO CORPORATION AND SUBSIDIARIES
(WHOLLY OWNED BY PPI CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(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 prior years' consolidated
financial statements to conform to the 1997 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 during 1996 of
departmental allocations. Management believes that such reclassifications better
reflect the matching of costs with the associated revenues.
20
<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
This Quarterly Report on Form 10-Q contains forward-looking statements about
the business, financial condition and prospects of PCC. The actual results
could differ materially from those indicated by the forward-looking statements
because of various risks and uncertainties including, among other things,
changes in competition, economic conditions, tax regulations, state regulations
applicable to the gaming industry in general or PCC in particular, and other
risks indicated in PCC's filing with the Securities and Exchange Commission.
Such risks and uncertainties are beyond management's ability to control and, in
many cases, can not be predicted by management. When used in this Quarterly
Report on Form 10-Q, the words "believes", "estimates", "anticipates" and
similar expressions as they relate to PCC or its management are intended to
identify forward-looking statements.
GENERAL
The Sands earned income from operations, exclusive of management fees paid
to NJMI, of $3.5 million for the three month period ended March 31, 1997
compared to a loss from operations of $4 million reported for the 1996 period.
Operating results during the first quarter of 1997 were favorably impacted by
operating efficiencies and by management's decision to discontinue certain
aggressive marketing programs. Operating results during the first quarter of
1996 were adversely affected by record winter snowstorms in January, two
additional weekend snowstorms in February and the advent of both unprecedented
and highly aggressive marketing programs instituted by certain other Atlantic
City casinos seeking to increase their market share. Improved weather
conditions and a slight increase in slot hold percentage combined to produce an
overall increase in net revenues (from $62.8 million in 1996 to $63.2 million in
1997). In addition, marketing and advertising costs decreased by $2.7 million
(15.1%) during the first quarter of 1997 compared to the same period of 1996 as
a result of an easing in competitive pressures.
As a result of the foregoing, PCC reported income from operations of $3.4
million for the three month period ended March 31, 1997 as compared to a loss
from operations of $4.1 million during the same period of 1996.
Distributions received from PML amounted to $1.7 million during the first
quarter of 1997, approximating PCC's equity in PML's earnings; distributions
from PML are paid in arrears. Management fees earned by PML during the three
month period ended March 31, 1997 were $216,000 less than those earned during
the 1996 period primarily due to increased competition for the Aurora Casino as
a result of the opening of three riverboat facilities in northern Indiana during
June 1996. In addition, PCC received $300,000 with respect to its consulting
agreement with the Tunica Casino.
21
<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
MARCH 31,
----------------------
1997 1996
--------- --------
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C>
REVENUES:
Table games $ 19,491 $ 20,175
Slot machines 38,000 36,441
Other (1) 839 989
-------- --------
Total $ 58,330 $ 57,605
======== ========
TABLE GAMES:
Gross Wagering
(Drop) (2) $131,044 $134,388
======== ========
Hold Percentages: (3)
Sands 14.9% 15.0%
Atlantic City Casino
Gaming Industry 15.7% 16.5%
SLOT MACHINES:
Gross Wagering
(Handle) (2) $454,190 $439,380
======== ========
Hold Percentage:(3)
Sands (4) 8.4% 8.3%
</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.
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)
Table games drop at the Sands declined $3.3 million (2.5%) during the three
month period ended March 31, 1997 compared with the same period of 1996. The
Sands' decrease compares to an increase of 12.2% in table drop for all other
Atlantic City casinos during the same period. As a result, the Sands' table
game market share (expressed as a percentage of the Atlantic City industry
aggregate table game drop) decreased to 7.2% during the three month period ended
March 31, 1997 from 8.2% during the same period of 1996. The Sands' table game
drop decrease is primarily attributable to declines in patron volume from the
unrated or "mass" segment. Expansions of other Atlantic City casinos resulted
in an increase of over 110,000 square feet of gaming space and 106 tables at
March 31, 1997 compared to March 31, 1996. Such expansions typically result in
intense marketing campaigns which lure the "mass" segment to the new facility.
Gaming space at the Sands has remained virtually unchanged since the first
quarter of 1996 and the number of table games has decreased by 3.1%.
Furthermore, management discontinued certain promotional activities, including
the use of "special odds" offered at table games, which also impacted the Sands'
table drop.
Slot machine handle increased $14.8 million (3.4%) during the three month
period ended March 31, 1997 compared with the same period of 1996. The Sands'
increase in slot machine handle compares with a 5.3% increase in handle for all
other Atlantic City casinos. The Sands' average number of slot machines
decreased by less than 1% during the first quarter of 1997 compared to an
increase of 11.2% for all other Atlantic City casinos. The less than industry-
wide increase experienced by the Sands is a result of the same competitive
pressures resulting from casino expansions and related marketing campaigns at
other properties as discussed above with respect to table games.
REVENUES
Casino revenues at the Sands, including poker and simulcast horse racing
wagering revenues, increased slightly by $725,000 (1.3%) for the three month
period ended March 31, 1997 compared with the same period of 1996. Increases in
slot machine wagering together with an improvement in the slot hold percentage
allowed the Sands to overcome the decline in table game and other casino
revenues.
Rooms revenue increased $102,000 (4.8%) during the three month period ended
March 31, 1997 compared with 1996. Food and beverage revenues decreased
$604,000 (7.1%) for the three month period ended March 31, 1997 compared with
the prior year period as a result of reduced patron volume, the rescheduling of
unit operating hours to increase overall profitability and the reduction of
certain promotional activities. Other revenues decreased $724,000 (36.4%)
during the three month period ended March 31, 1997 compared to the 1996 period
as a result of decreases in theater entertainment.
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 56.2% during the three month period ended March
31, 1997 from 57.7% during the first quarter of 1996. Such decrease is
primarily attributable to reductions in certain marketing programs and other
promotional activities.
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)
DEPARTMENTAL EXPENSES
Casino expenses at the Sands decreased $5.5 million (10.1%) during the three
month period ended March 31, 1997 compared with 1996. During 1996, an
unprecedented and highly aggressive industry-wide attempt to increase market
share resulted in significantly higher costs with respect to coin incentive
packages. The abatement of these competitive pressures during the first quarter
of 1997 together with management's ongoing efforts to create operating
efficiencies, have significantly reduced expenses. Such factors have also
resulted in a reduction in the allocation of rooms, food and beverage and other
expenses to casino expense.
Rooms expense increased $63,000 (11.8%) during the first quarter of 1997
compared to the first quarter of 1996 primarily due to the decreased allocation
of rooms expense to casino expense as a result of rooms previously set aside for
casino marketing activities now being made available for paying guests. Food and
beverage expense decreased by $125,000 (5.1%) during the three month period
ended March 31, 1997 compared to the same period in 1996 primarily as a result
of reductions in food and beverage marketing programs, the costs of which are
allocated to the casino department, and to the decline in food and beverage
revenues as discussed above. Other expenses did not change significantly during
the three month period ended March 31, 1997 compared with 1996 as cost savings
with respect to theater entertainment were realized through reduced allocations
to the casino department.
GENERAL AND ADMINISTRATIVE
General and administrative expenses decreased by $314,000 (7.9%) during the
three month period ended March 31, 1997 compared to the 1996 period primarily
due to reduced overhead allocations from HCC.
DEPRECIATION AND AMORTIZATION
As a result of a revision in the estimated useful life of the Sands'
buildings effective October 1, 1996 and the completion of amortization with
respect to certain of its long-lived assets, PCC's depreciation and amortization
expense for the first quarter of 1997 decreased by $1.2 million (23.7%) compared
to the same period during 1996.
INTEREST
Interest income decreased $70,000 (14.8%) during the three month period
ended March 31, 1997 compared with the same period of 1996 due primarily to
reductions in temporary cash investments. Interest expense did not change
significantly during the three month period ended March 31, 1997 compared to the
prior year first quarter.
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)
EQUITY IN EARNINGS OF LIMITED PARTNERSHIP
Effective February 17, 1994, PCC acquired the limited partnership interest
in PML, a limited partnership which earns management fees from the operation of
the Aurora Casino. Effective April 1, 1997, HCC acquired the general
partnership interest in PML from PPI Corporation. 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 the general partner.
PCC's equity in the earnings of PML did not change significantly during the
first quarter of 1997 from the $2 million earned in 1996.
INCOME TAX BENEFIT
PCC's operations are included in GBCC's consolidated federal income tax
return and, for periods through December 31, 1996, were included in HCC's
consolidated federal income tax return. Pursuant to agreements between PCC and
GBCC, 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.
As of March 31, 1997, PCC and its subsidiaries have net operating loss
carryforwards ("NOL's") totaling approximately $29 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 book and tax losses sustained in 1997 to date, management is
unable to determine that the realization of such asset is more likely than not
and, thus, has provided a valuation allowance for the entire deferred tax asset
at March 31, 1997.
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.
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)
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.
Prior to 1996, GBCC's earnings before depreciation, interest, amortization,
taxes and intercompany management fees were 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. GBCC
has also used short-term borrowings to fund seasonal cash needs and for certain
capital projects.
OPERATING ACTIVITIES
At March 31, 1997, PCC had consolidated cash and cash equivalents of $16
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 three
month period ended March 31, 1997, net cash used in operating activities was
$2.8 million compared with $5.4 million during the same period of 1996. PCC
utilized its existing cash and short-term borrowings from affiliates during the
three month period ended March 31, 1997 to meet its operating needs, to fund
capital additions of $721,000 and to make obligatory investments of $670,000.
FINANCING ACTIVITIES
During February 1994, GBCC completed the refinancing of virtually all of its
casino-related outstanding debt (the "GBCC 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 GBCC
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. As of December 31, 1996, HCC had assigned
the entire principal amount of the junior subordinated notes to GBCC. 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 has not met the financial coverage tests, interest has not been paid
during 1997 and was not paid during 1996.
During the third quarter of 1996, GBHC borrowed $6.5 million from GBCC for
working capital purposes with interest at the rate of 13 3/4% per annum payable
quarterly commencing October 1, 1996. During the first quarter of 1997, GBHC
borrowed an additional $1.5 million from GBCC on similar terms. Repayment of
such borrowings and payment of the related accrued interest is subject to
regulatory approval.
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)
GBHC repaid its $2 million bank line of credit during January 1997 and the
line of credit was cancelled.
Commencing in July 1997, semiannual principal payments of $2.5 million will
become due with respect to the 10 7/8% First Mortgage Notes. Such semiannual
payments may be made in cash or by tendering to the trustee 10 7/8% First
Mortgage Notes previously purchased or otherwise acquired by GB Property
Funding. GB Property Funding acquired $2.5 million face amount of 10 7/8% First
Mortgage Notes during May 1997 which it intends to use to make its July 15, 1997
required principal payment. Total scheduled maturities of long-term debt during
the remainder of 1997 are $2.5 million.
CAPITAL EXPENDITURES AND OBLIGATORY INVESTMENTS
Capital expenditures at the Sands during the three month period ended March
31, 1997 amounted to approximately $721,000 and management anticipates capital
expenditures during the remainder of 1997 will be approximately $4.2 million.
Projects currently planned during 1997 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 quarter of 1997 totaled $670,000
and are anticipated to be approximately $2.4 million during the remainder of
1997.
SUMMARY
GBHC, which is PCC's most significant subsidiary, incurred a net loss
exclusive of management fees of $26.7 million in 1996 which in turn generated an
operating cash flow deficit of $6.1 million. As a consequence, GBHC has had to
rely on borrowings from affiliates to meet its debt service requirements and to
fund working capital needs during its seasonal low operating periods. The
availability of additional borrowings from GBCC and other subsidiaries of GBCC
during 1997 is limited. HCC, which loaned $6.5 million to GBCC for use by the
Sands, is subject to certain indenture provisions which restrict its ability to
provide ongoing financial support to an additional $3.5 million.
GBHC's principal and interest requirements during the twelve month period
ending March 31, 1998 amount to $25 million. Due to mild winter weather
conditions compared to a year ago and an abatement of the intense marketing
competition for bus customers, operating results for the first quarter of 1997
reflect a substantial improvement over 1996. In the absence of a resumption of
the marketing wars which plagued Atlantic City casinos in 1996 or other
unforeseen events, management believes its operating plan for 1997 is attainable
and will provide sufficient funds from operating cash flow which, together with
funds available from affiliates, if required, will enable GBHC to satisfy its
debt service requirements through the first quarter of 1998.
27
<PAGE>
PART II: OTHER INFORMATION
- ---------------------------
The Registrants did not file any reports on Form 8-K during the quarter
ended March 31, 1997. The Registrants filed their Annual Report on Form 10-K for
the year ended December 31, 1996 with the Securities and Exchange Commission on
March 31, 1997.
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: May 13, 1997 By: /s/ John C. Hull
----------------- ----------------------------
John C. Hull
Principal Accounting Officer
28
<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>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 14
<SECURITIES> 0
<RECEIVABLES> 6,991
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 8,135
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 108,135
<CURRENT-LIABILITIES> 8,107
<BONDS> 100,000
0
0
<COMMON> 1
<OTHER-SE> 27
<TOTAL-LIABILITY-AND-EQUITY> 108,135
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (3)
<INCOME-PRETAX> 3
<INCOME-TAX> 1
<INCOME-CONTINUING> 2
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2
<EPS-PRIMARY> 0
<EPS-DILUTED> 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>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 15,956
<SECURITIES> 0
<RECEIVABLES> 24,377
<ALLOWANCES> 14,757
<INVENTORY> 3,745
<CURRENT-ASSETS> 34,591
<PP&E> 317,725
<DEPRECIATION> 164,234
<TOTAL-ASSETS> 226,467
<CURRENT-LIABILITIES> 52,329
<BONDS> 280,427
0
0
<COMMON> 1
<OTHER-SE> (107,635)
<TOTAL-LIABILITY-AND-EQUITY> 226,467
<SALES> 0
<TOTAL-REVENUES> 63,497
<CGS> 0
<TOTAL-COSTS> 51,823
<OTHER-EXPENSES> 5,630
<LOSS-PROVISION> 650
<INTEREST-EXPENSE> 7,923
<INCOME-PRETAX> (2,529)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,529)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,529)
<EPS-PRIMARY> 0
<EPS-DILUTED> 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 ENTIREY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<CIK> 0000912928
<NAME> PRATT CASINO CORPORATION
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 20,339
<SECURITIES> 0
<RECEIVABLES> 28,149
<ALLOWANCES> 16,946
<INVENTORY> 4,161
<CURRENT-ASSETS> 52,858
<PP&E> 313,817
<DEPRECIATION> 149,814
<TOTAL-ASSETS> 250,608
<CURRENT-LIABILITIES> 40,131
<BONDS> 285,439
0
0
<COMMON> 1
<OTHER-SE> (77,458)
<TOTAL-LIABILITY-AND-EQUITY> 250,608
<SALES> 0
<TOTAL-REVENUES> 63,134
<CGS> 0
<TOTAL-COSTS> 57,462
<OTHER-EXPENSES> 7,155
<LOSS-PROVISION> 567
<INTEREST-EXPENSE> 7,650
<INCOME-PRETAX> (9,700)
<INCOME-TAX> 3,654
<INCOME-CONTINUING> (6,046)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,046)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
