<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, 1998
-----------------------------------------------
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)
C/O ADVANCED CASINO SYSTEMS CORPORATION
200 DECADON DRIVE, SUITE 100
EGG HARBOR TOWNSHIP, NEW JERSEY 08234
- ---------------------------------------- -------------------------------------
(Address of principal executive offices) (Zip Code)
(Registrants' telephone number, including area code): (609) 441-0704
---------------------------
(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 19, 1998
- -------------------------- ----------------------------- --------------------------------
<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>
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"). 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. Prior to December 31, 1996, Hollywood Casino Corporation ("HCC")
owned approximately 80% of the common stock of GBCC; such stock was distributed
by HCC to its shareholders. GBCC's common stock is listed on the OTC Bulletin
Board Service under the trading symbol "GEAAQ"; GBCC is 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 200 Decadon Drive, Suite 100, Egg Harbor Township, New Jersey 08234.
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 GB
Holdings, Inc. ("Holdings"), which is a wholly owned subsidiary of PCC, owns the
Sands Hotel and Casino located in Atlantic City, New Jersey (the "Sands").
Prior to July 7, 1998, the Sands was managed by New Jersey Management, Inc.
("NJMI"), which is also a subsidiary of PCC.
On January 5, 1998, Holdings, GBHC and GB Property Funding Corp. ("GB
Property Funding") filed petitions for relief under Chapter 11 of the United
States Bankruptcy Code (the "Bankruptcy Code") in the United States Bankruptcy
Court for the District of New Jersey (the "Bankruptcy Court"). Each company
continues to operate in the ordinary course of business, as set forth in the
Bankruptcy Code, and each company's executive officers and directors remain in
office, subject to the jurisdiction of the Bankruptcy Court. On both May 11 and
August 10, 1998, the Bankruptcy Court extended the exclusive period of the
debtors to file a plan of reorganization for 90 days. On November 9, 1998, the
Bankruptcy Court granted an additional 60-day extension of the exclusivity
period.
The filings of petitions under Chapter 11 constitute a default under the
indenture for the PRT Funding Notes; accordingly, the outstanding principal
amount of the PRT Funding Notes has accelerated and is currently due and
payable. PCC, as guarantor of the PRT Funding Notes, is currently involved in
negotiations to restructure the notes with three bondholders who control in
excess of 95% of the $85,000,000 note issue. PRT Funding deferred payment of
interest due on the April 15 and October 15, 1998 interest payment dates. On
October 22, 1998, PRT Funding paid to the bondholders an amount equal to a
single semiannual interest payment ($4,941,000) while negotiations to
restructure the notes continue.
PCC is a holding company that, through Holdings, owns the Sands. In
addition to its ownership of Holdings, PCC is also the sole limited partner of
Pratt Management, L.P. ("PML"), a limited partnership which manages a riverboat
gaming and entertainment facility located in Aurora, Illinois (the "Aurora
Casino") owned by HCC. Effective April 1, 1997, HCC acquired the general
partnership interest in PML from another subsidiary of GBCC. PCC also has a
consulting agreement with HWCC-Tunica, Inc., a wholly owned subsidiary of HCC,
which operates a gaming and lodging facility in Tunica County, Mississippi (the
"Tunica Casino"). The contract, which expires on December 31, 2003, provides for
a monthly fee of $100,000. Historically, debt service on the PRT Funding Notes
has been funded primarily from management fees earned by NJMI from the Sands,
from distributions made to PCC by PML (resulting
2
<PAGE>
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.
As a result of the Chapter 11 filings discussed above, PCC's control over
the filing subsidiaries is subject to supervision of the Bankruptcy Court and
PCC does not expect to have ownership or operating control of such subsidiaries
after reorganization. Furthermore, as a result of a settlement agreement reached
by GBCC and Holdings during September 1998, GBCC no longer participates in the
management of the Sands. Accordingly, Holdings, GB Property Funding and GBHC are
no longer included on the accompanying consolidated balance sheets of PCC. As
more fully explained in Note 1 of the Notes to Consolidated Financial Statement
of PCC, during the period from January 1, 1998 through June 30, 1998, the
operations of Holdings and its subsidiaries were accounted for by PCC under the
equity method of accounting. As a result of PCC no longer controlling the
operations of the Sands, the continued expectation that ownership control of
Holdings will only be temporary and the September 1998 settlement agreement
which resolved certain significant uncertainties, PCC's investment in Holdings
and its subsidiaries was revalued to a zero basis effective on July 1, 1998.
Accordingly, for periods subsequent to June 30, 1998, PCC is accounting for its
investment in Holdings under the cost method of accounting.
The financial statements of PRT Funding and the consolidated financial
statements of PCC as of September 30, 1998 and for the three and nine month
periods ended September 30, 1998 and 1997 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, 1998,
their results of operations for the three and nine month periods ended September
30, 1998 and 1997 and their respective cash flows for the nine month periods
ended September 30, 1998 and 1997.
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 1997 Annual Report on Form 10-K.
3
<PAGE>
PRT FUNDING CORP.
(WHOLLY OWNED BY PRATT CASINO CORPORATION)
BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
ASSETS
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 8,000 $ 13,000
Interest receivable from affiliates 11,387,000 3,428,000
Due from affiliate 1,117,000 1,130,000
Notes receivable from affiliates, net of valuation allowance 63,750,000 63,750,000
----------- -----------
Total current assets 76,262,000 68,321,000
----------- -----------
Due from affiliates, net of valuation allowance 5,000,000 5,000,000
----------- -----------
$81,262,000 $73,321,000
=========== ===========
LIABILITIES AND SHAREHOLDER'S DEFICIT
Current liabilities:
Current maturities of long-term debt $ 85,000,000 $ 85,000,000
Accrued interest payable 16,319,000 7,263,000
Due to affiliates - 18,000
----------- -----------
Total current liabilities 101,319,000 92,281,000
----------- -----------
Notes payable to affiliate 15,000,000 15,000,000
----------- -----------
Shareholder's deficit:
Common stock, $1.00 par value per
share, 1,000 shares authorized
and outstanding 1,000 1,000
Accumulated deficit (35,058,000) (33,961,000)
----------- -----------
Total shareholder's deficit (35,057,000) (33,960,000)
----------- -----------
$81,262,000 $73,321,000
=========== ===========
</TABLE>
The accompanying introductory notes and notes to financial
statements are an integral part of these balance sheets.
4
<PAGE>
PRT FUNDING CORP.
(WHOLLY OWNED BY PRATT CASINO CORPORATION)
STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED
SEPTEMBER 30,
-----------------------
1998 1997
----------- ----------
Revenues:
Interest income $2,653,000 $3,018,000
Expenses:
Interest expense 3,019,000 3,018,000
---------- ----------
Loss before taxes (366,000) -
Income tax provision - -
---------- ----------
Net loss $ (366,000) $ -
========== ==========
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 OPERATIONS
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
1998 1997
------------ -----------
Revenues:
Interest income $ 7,959,000 $9,059,000
Expenses:
Interest expense 9,056,000 9,056,000
----------- ----------
(Loss) income before taxes (1,097,000) 3,000
Income tax provision - (1,000)
----------- ----------
Net (loss) income $(1,097,000) $ 2,000
=========== ==========
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)
STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------
1998 1997
------------ ------------
OPERATING ACTIVITIES:
Net (loss) income $(1,097,000) $ 2,000
Adjustments to reconcile net (loss) income
to net cash used in operating activities:
Increase in receivable from affiliates (7,959,000) (5,244,000)
Increase in accrued interest payable 9,056,000 4,116,000
Net change in other current assets
and liabilities (5,000) (1,000)
----------- -----------
Net cash used in operating activities (5,000) (1,127,000)
Cash and cash equivalents at beginning of period 13,000 1,141,000
----------- -----------
Cash and cash equivalents at end of period $ 8,000 $ 14,000
=========== ===========
The accompanying introductory notes and notes to financial
statements are an integral part of these financial statements.
7
<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 also owns all of the common stock of GB Holdings, Inc. ("Holdings"), the
parent of Greate Bay Hotel and Casino, Inc. ("GBHC"), which owns the Sands Hotel
and Casino in Atlantic City, New Jersey (the "Sands"). Prior to July 7, 1998,
the Sands was managed by New Jersey Management, Inc. ("NJMI"), a New Jersey
corporation and also a subsidiary of PCC. 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.
On January 5, 1998, Holdings, GBHC and GB Property Funding Corp. ("GB
Property Funding") filed petitions for relief under Chapter 11 of the United
States Bankruptcy Code (the "Bankruptcy Code") in the United States Bankruptcy
Court for the District of New Jersey (the "Bankruptcy Court"). Each company
continues to operate in the ordinary course of business, as set forth in the
Bankruptcy Code, and each company's executive officers and directors remain in
office, subject to the jurisdiction of the Bankruptcy Court. On both May 11 and
August 10, 1998, the Bankruptcy Court extended the exclusive period of the
debtors to file a plan of reorganization for 90 days. On November 9, 1998, the
Bankruptcy Court granted an additional 60-day extension of the exclusivity
period.
The accompanying financial statements have been prepared assuming that PRT
Funding will continue as a going concern. As discussed above, certain
affiliates of PRT Funding filed for Chapter 11 bankruptcy protection on January
5, 1998. PRT Funding is also dependent on these affiliates to provide cash to
repay its debt obligations. The affiliate filings under Chapter 11 have created
a default under the indenture for PRT Funding's debt obligations; accordingly,
the outstanding principal amount of the PRT Funding Notes has accelerated and is
currently due and payable. PCC, as guarantor of the PRT Funding Notes, is
currently involved in negotiations to restructure the notes with three
bondholders who control in excess of 95% of the $85,000,000 note issue. PRT
Funding deferred payment of interest due on the April 15 and October 15, 1998
interest payment dates. On October 22, 1998, PRT Funding paid to the
bondholders an amount equal to a single semiannual interest payment ($4,941,000)
while negotiations to restructure the notes continue. No assurance can be given
that PRT Funding will be able to restructure its obligations. The default under
the indenture for PRT Funding's debt obligations raises substantial doubt about
PRT Funding's ability to continue as a going concern. The financial statements
do not include any adjustments that might result from the outcome of these
uncertainties.
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
8
<PAGE>
PRT FUNDING CORP.
(WHOLLY OWNED BY PRATT CASINO CORPORATION)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
The Financial Accounting Standards Board has issued a new standard,
"Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 requires the
presentation and disclosure of comprehensive income, which is defined as the
change in a company's equity resulting from non-owner transactions and events.
SFAS 130 became effective December 15, 1997 and requires the restatement of all
prior periods presented. PRT Funding has adopted the provisions of SFAS 130;
however, the statement provides that an enterprise that has no items of other
comprehensive income for any period presented need only report net income. PRT
Funding has no such other comprehensive income items for any period presented;
accordingly, the presentation and disclosure requirements of SFAS 130 are not
applicable.
The financial statements as of September 30, 1998 and for the three and
nine month periods ended September 30, 1998 and 1997 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, 1998 and the results of its operations for the three and nine
month periods ended September 30, 1998 and 1997 and cash flows for the nine
month periods ended September 30, 1998 and 1997.
(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 for
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 debt of other PCC subsidiaries. As a
result of the Chapter 11 filings discussed in Note 1, a default under the
indenture for the PRT Funding Notes occurred; the notes accelerated by the terms
of the indenture and are currently due and payable. Accordingly, the
outstanding principal amount of the PRT Funding Notes has been classified as
current on the accompanying balance sheets at September 30, 1998 and December
31, 1997. Proceeds of the PRT Funding Notes were loaned to various affiliates
of PRT Funding on the same terms. The events of default under the PRT Funding
Notes also resulted in the classification of such affiliate loans as currently
due on the accompanying balance sheets at September 30, 1998 and December 31,
1997. Based on PRT Funding's evaluation of the realizability of the affiliate
loans, these notes are shown net of a valuation allowance in the amount of
$21,250,000 on the accompanying balance sheets.
On February 17, 1994, PRT Funding issued $15,000,000 of junior subordinated
notes due in February 2005 (the "Junior Subordinated Notes") and loaned the
proceeds to various affiliates on the same terms. Interest on the Junior
Subordinated Notes accrues at the rate of 14 5/8% per annum and is payable
9
<PAGE>
PRT FUNDING CORP.
(WHOLLY OWNED BY PRATT CASINO CORPORATION)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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, no interest has been paid during 1998, 1997 or
1996. At September 30, 1998 and December 31, 1997, accrued interest in the
amount of $6,849,000 and $5,204,000 was payable to GBCC with respect to the
Junior Subordinated Notes and is included in interest payable on the
accompanying balance sheets.
No interest was paid during the nine month period ended September 30, 1998;
interest paid amounted to $4,940,000 during the nine month period ended
September 30, 1997.
(3) INCOME TAXES
Components of the provision for income taxes consisted of the following:
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS ENDED
ENDED SEPTEMBER 30, SEPTEMBER 30,
-------------------- ------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Benefit in lieu of (provision for)
federal income taxes:
Current $ - $ - $ - $( 1,000)
Deferred 112,000 - 339,000 -
State income tax benefit:
Deferred 33,000 - 99,000 -
Valuation allowance (145,000) - (438,000) -
-------- -------- -------- --------
$ - $ - $ - $ (1,000)
======== ======== ======== ========
</TABLE>
PRT Funding's operations are included in the consolidated federal income
tax return of GBCC. 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. PRT Funding paid $5,000 under the tax allocation agreements during
the nine month period ended September 30, 1998; no such payments were made
during the nine month period ended September 30, 1997. At September 30, 1998, no
liabilities were outstanding under the tax allocation agreements. At December
31, 1997, $5,000 is included in due to affiliates on the accompanying balance
sheet representing taxes currently payable under the agreements.
Deferred income taxes result from differences in the timing of income
between tax and financial reporting from the use of valuation allowances on
certain receivables. At September 30, 1998 and December 31, 1997, the valuation
provision on affiliate receivables results in a deferred tax asset of
$14,013,000 and $13,574,000, respectively. Statement of Financial Accounting
Standards No. 109 ("SFAS 109") requires that the tax benefit of 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 deferred tax assets is more likely than not, a valuation allowance
should be recorded. Due to the limited operations of PRT Funding and questions
regarding its ability to continue as a going concern, management is unable to
determine that realization of such asset is more likely than not and, thus, has
10
<PAGE>
PRT FUNDING CORP.
(WHOLLY OWNED BY PRATT CASINO CORPORATION)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
provided a valuation allowance for the entire deferred tax asset at September
30, 1998 and December 31, 1997.
(4) NOTES RECEIVABLE
GBHC issued a promissory note in the amount of $10,000,000 to PRT Funding
on February 17, 1994 in exchange for $10,000,000 of the proceeds PRT Funding
received with respect to the Junior Subordinated Notes. The promissory note
accrues interest at the rate of 14 5/8% per annum payable semiannually
commencing on August 17, 1994 with the principal due on February 17, 2005.
Interest income on the accompanying statements of operations is shown net of
valuation reserves of $366,000 and $1,097,000, respectively, for the three and
nine month periods ended September 30, 1998. As a result of the Chapter 11
filings, PRT Funding made an evaluation of the collectability of such notes and
established a valuation allowance to fully reserve the $10,000,000 note together
with the related interest due from GBHC of $3,835,000 and $2,738,000,
respectively, at September 30, 1998 and December 31, 1997. On September 2, 1998,
various subsidiaries of GBCC and HCC entered into an agreement (the "Settlement
Agreement") with Holdings, GB Property Funding and GBHC. Although PRT Funding
was not a direct party to the Settlement Agreement, the Settlement Agreement
provides, among other things, that GBHC preserves whatever rights of offset, if
any, it might have with respect to the $10,000,000 notes and related interest
against certain other obligations owed to GBHC by another GBCC subsidiary.
(5) LITIGATION
On January 5, 1998, Holdings, GB Property Funding and GBHC filed petitions
for relief under Chapter 11 of the Bankruptcy Code. Each company continues to
operate in the ordinary course of business, as set forth in the Bankruptcy Code,
and each company's executive officers and directors remain in office, subject to
the jurisdiction of the Bankruptcy Court. On both May 11 and August 10, 1998,
the Bankruptcy Court extended the exclusive period of the debtors to file a plan
of reorganization for 90 days. On November 9, 1998, the Bankruptcy Court granted
an additional 60-day extension of the exclusivity period.
As a result of the default and automatic acceleration under the indenture
for the PRT Funding Notes, the holders of the PRT Funding Notes could initiate
judicial proceedings to enforce their claims for payment. No such proceedings
have been initiated and PCC, as guarantor of the PRT Funding Notes, is currently
involved in negotiations to restructure the notes with three bondholders who
control in excess of 95% of the note issue.
11
<PAGE>
PRATT CASINO CORPORATION AND SUBSIDIARIES
(WHOLLY OWNED BY PPI CORPORATION)
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
SEPTEMBER 30, DECEMBER 31,
1998 1997
-------------- -------------
Current Assets:
Cash and cash equivalents $ 7,016,000 $2,231,000
Due from affiliates, net of valuation
allowances 237,000 174,000
Refundable deposits and other
current assets 122,000 194,000
----------- ----------
Total current assets 7,375,000 2,599,000
----------- ----------
Investment in Limited Partnership 2,953,000 2,256,000
----------- ----------
Property and Equipment:
Operating equipment 3,000 3,000
Less - accumulated depreciation and
amortization (3,000) (3,000)
----------- ----------
Net property and equipment - -
----------- ----------
Other Assets:
Due from affiliates, net of valuation
allowances 145,000 1,395,000
Other assets 9,000 8,000
----------- ----------
Total other assets 154,000 1,403,000
----------- ----------
$10,482,000 $6,258,000
=========== ==========
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated balance sheets.
12
<PAGE>
PRATT CASINO CORPORATION AND SUBSIDIARIES
(WHOLLY OWNED BY PPI CORPORATION)
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDER'S DEFICIT
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
1998 1997
-------------- --------------
Current Liabilities:
Current maturities of long-term debt $ 85,000,000 $ 85,000,000
Accounts payable 345,000 -
Accrued liabilities -
Interest 16,319,000 7,263,000
Other 25,000 10,000
Due to affiliates 403,000 417,000
------------- -------------
Total current liabilities 102,092,000 92,690,000
------------- -------------
Investment in and Advances to
GB Holdings, Inc. - 40,142,000
------------- -------------
Long-Term Debt 15,000,000 15,000,000
------------- -------------
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 (106,611,000) (141,575,000)
------------- -------------
Total shareholder's deficit (106,610,000) (141,574,000)
------------- -------------
$ 10,482,000 $ 6,258,000
============= =============
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated balance sheets.
13
<PAGE>
PRATT CASINO CORPORATION AND SUBSIDIARIES
(WHOLLY OWNED BY PPI CORPORATION)
CONSOLIDATED STATEMENTS OF OPERATIONS (NOTE 1)
(UNAUDITED)
THREE MONTHS ENDED
SEPTEMBER 30,
--------------------------
1998 1997
------------ ------------
Revenues:
Casino $ - $63,272,000
Rooms - 2,713,000
Food and beverage - 9,043,000
Other 795,000 1,475,000
----------- -----------
795,000 76,503,000
Less - promotional allowances - (6,962,000)
----------- -----------
Net revenues 795,000 69,541,000
----------- -----------
Expenses:
Casino - 52,384,000
Rooms - 630,000
Food and beverage - 3,105,000
Other - 908,000
General and administrative 503,000 3,593,000
Depreciation and amortization - 3,440,000
----------- -----------
Total expenses 503,000 64,060,000
----------- -----------
Income from operations 292,000 5,481,000
----------- -----------
Non-operating income (expenses):
Interest income 88,000 438,000
Interest expense (3,019,000) (8,272,000)
Gain on disposal of assets - 22,000
Equity in earnings of Limited Partnership 1,866,000 1,974,000
Gain on elimination of investment in
GB Holdings, Inc. 36,864,000 -
Restructuring costs (387,000) -
----------- -----------
Total non-operating income (expense), net 35,412,000 (5,838,000)
----------- -----------
Income (loss) before income taxes 35,704,000 (357,000)
Income tax benefit - 134,000
----------- ----------
Net income (loss) $35,704,000 $ (223,000)
=========== ==========
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated statements.
14
<PAGE>
PRATT CASINO CORPORATION AND SUBSIDIARIES
(WHOLLY OWNED BY PPI CORPORATION)
CONSOLIDATED STATEMENTS OF OPERATIONS (NOTE 1)
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------
1998 1997
------------ -------------
Revenues:
Casino $ - $183,425,000
Rooms - 7,405,000
Food and beverage - 25,420,000
Other 3,305,000 3,987,000
----------- ------------
3,305,000 220,237,000
Less - promotional allowances - (19,418,000)
----------- ------------
Net revenues 3,305,000 200,819,000
----------- ------------
Expenses:
Casino - 152,789,000
Rooms - 1,897,000
Food and beverage - 8,325,000
Other - 2,053,000
General and administrative 1,303,000 10,770,000
Depreciation and amortization - 11,152,000
----------- ------------
Total expenses 1,303,000 186,986,000
----------- ------------
Income from operations 2,002,000 13,833,000
----------- ------------
Non-operating income (expenses):
Interest income 228,000 1,312,000
Interest expense (9,056,000) (24,894,000)
Gain on disposal of assets - 46,000
Equity in earnings of Limited Partnership 4,498,000 4,752,000
Equity in earnings of and gain on
elimination of investment in GB Holdings, Inc. 40,118,000 -
Restructuring costs (1,431,000) -
----------- ------------
Total non-operating income (expense), net 34,357,000 (18,784,000)
----------- ------------
Income (loss) before income taxes and
extraordinary item 36,359,000 (4,951,000)
Income tax provision (1,395,000) (8,000)
----------- ------------
Income (loss) before extraordinary item 34,964,000 (4,959,000)
Gain on early extinguishment of debt - 310,000
----------- ------------
Net income (loss) $34,964,000 $ (4,649,000)
=========== ============
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated statements.
15
<PAGE>
PRATT CASINO CORPORATION AND SUBSIDIARIES
(WHOLLY OWNED BY PPI CORPORATION)
CONSOLIDATED STATEMENTS OF CASH FLOWS (NOTE 1)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
1998 1997
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $34,964,000 $(4,649,000)
Adjustments to reconcile net income (loss) to
net cash
provided by operating activities:
Extraordinary item - (310,000)
Depreciation and amortization - 11,152,000
Gain on disposal of assets - (46,000)
Provision for doubtful accounts 141,000 2,265,000
Equity in earnings of Limited Partnership (4,498,000) (4,752,000)
Distributions received from Limited Partnership 3,801,000 4,525,000
Equity in earnings of and gain on elimination
of investment in GB Holdings, Inc. (40,118,000) -
Increase in accounts receivable - (1,349,000)
Increase (decrease) in accounts payable and other accrued
liabilities 9,416,000 (1,029,000)
Net change in other current assets and liabilities (179,000) (2,338,000)
Net change in other noncurrent assets and liabilities 1,258,000 (878,000)
----------- -----------
Net cash provided by operating activities 4,785,000 2,591,000
----------- -----------
INVESTING ACTIVITIES:
Purchases of property and equipment - (1,917,000)
Obligatory investments - (2,089,000)
Proceeds from disposal of assets - 46,000
Short-term investment - 2,000,000
----------- -----------
Net cash used in investing activities - (1,960,000)
----------- -----------
FINANCING ACTIVITIES:
Repayments on short-term credit facilities - (2,000,000)
Repayments of long-term debt - (2,133,000)
Borrowings from affiliates - 1,500,000
----------- -----------
Net cash used in financing activities - (2,633,000)
----------- -----------
Net increase (decrease) in cash and cash equivalents 4,785,000 (2,002,000)
Cash and cash equivalents at beginning of period 2,231,000 18,650,000
----------- -----------
Cash and cash equivalents at end of period $ 7,016,000 $16,648,000
=========== ===========
</TABLE>
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated statements.
16
<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 which is wholly
owned by Greate Bay Casino Corporation ("GBCC"). PCC also owns all of the common
stock of GB Holdings, Inc. ("Holdings"), the parent 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"). Prior to July 7, 1998, the
Sands was managed by New Jersey Management, Inc. ("NJMI"), also a wholly owned
subsidiary of PCC. 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 Holdings, 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 ("the 10 7/8% 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.
On January 5, 1998, Holdings, GBHC and GB Property Funding filed petitions
for relief under Chapter 11 of the United States Bankruptcy Code (the
"Bankruptcy Code") in the United States Bankruptcy Court for the District of New
Jersey (the "Bankruptcy Court"). Each company continues to operate in the
ordinary course of business, as set forth in the Bankruptcy Code, and each
company's executive officers and directors remain in office, subject to the
jurisdiction of the Bankruptcy Court. On both May 11 and August 10, 1998, the
Bankruptcy Court extended the exclusive period of the debtors to file a plan of
reorganization for 90 days. On November 9, 1998, the Bankruptcy Court granted
an additional 60-day extension of the exclusivity period.
Except as noted in the following paragraph, the accompanying consolidated
financial statements include the operating activities and cash flows of PCC and
all of its wholly owned subsidiaries. All significant intercompany balances and
transactions have been eliminated.
As a result of the Chapter 11 filings discussed above, PCC's control over
the filing subsidiaries is subject to supervision of the Bankruptcy Court and
PCC does not expect to have ownership or operating control of such subsidiaries
after reorganization. Prior to July 7, 1998, NJMI was responsible for the
operations of the Sands under a management agreement with GBHC (see Note 5). On
May 22, 1998, GBHC filed a motion with the Bankruptcy Court seeking to reject
the existing management agreement with NJMI. A substitute agreement (the
"Interim Agreement") was entered into on June 27, 1998 and approved by the
Bankruptcy Court on July 7, 1998. Under the Interim Agreement, NJMI continued to
provide certain agreed upon services to GBHC until September 28, 1998.
Furthermore, as the result of a settlement agreement reached by GBCC and
Holdings (see Note 8) during September 1998, PCC no longer controls the
management of the Sands. Accordingly, Holdings, GB Property Funding and GBHC are
no longer included on the accompanying consolidated balance sheets. PCC's
negative investment in Holdings
17
<PAGE>
PRATT CASINO CORPORATION AND SUBSIDIARIES
(WHOLLY OWNED BY PPI CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
and its subsidiaries on the accompanying consolidated balance sheet at December
31, 1997 reflects PCC's investment under the equity method of accounting. During
the period from January 1, 1998 through June 30, 1998, the operations of
Holdings and its subsidiaries were accounted for under the equity method of
accounting (see Note 7). As a result of PCC no longer controlling the operations
of the Sands, the continued expectation that ownership control of Holdings will
only be temporary and the September 1998 settlement agreement which resolved
certain significant uncertainties, PCC's investment in Holdings and its
subsidiaries was revalued to a zero basis effective on July 1, 1998.
Accordingly, for periods subsequent to June 30, 1998, PCC is accounting for its
investment in Holdings under the cost method of accounting. The elimination of
the investment in Holdings has resulted in a gain of $36,864,000 which has been
combined with equity in the earnings of Holdings on the accompanying
consolidated statements of operations for the three and nine month periods ended
September 30, 1998.
The accompanying financial statements have been prepared assuming that PRT
Funding will continue as a going concern. As discussed above, certain
affiliates of PRT Funding filed for Chapter 11 bankruptcy protection on January
5, 1998. PRT Funding is also dependent on these affiliates to provide cash to
repay its debt obligations. The affiliate filings under Chapter 11 have created
a default under the indenture for PRT Funding's debt obligations; accordingly,
the outstanding principal amount of the PRT Funding Notes has accelerated and is
currently due and payable. As a result of the Chapter 11 filings, GBHC filed a
motion seeking to reject the Sands' management contract with NJMI. The Interim
Agreement entered into by NJMI and GBHC significantly reduced the fees paid to
NJMI (see Note 5). The motion to reject the management contract was granted by
the Bankruptcy Court on September 28, 1998. As a consequence of the September
1998 settlement agreement (see Note 8), GBCC and GBHC may no longer assert
claims against each other with respect to the management agreement or the
cancellation thereof. PCC, as guarantor of the PRT Funding Notes, does not have
sufficient assets to satisfy the outstanding amounts applicable to the PRT
Funding Notes and is currently involved in negotiations to restructure the notes
with three bondholders who control in excess of 95% of the $85,000,000 note
issue. PRT Funding deferred payment of interest due on the April 15 and October
15, 1998 interest payment dates. On October 22, 1998, PRT Funding paid to the
bondholders an amount equal to a single semiannual interest payment ($4,941,000)
while negotiations to restructure the notes continue. No assurance can be given
that PRT Funding will be able to restructure its obligations. The default under
the indenture for PRT Funding's debt obligations raises substantial doubt about
PRT Funding's ability to continue as a going concern. The financial statements
do not include any adjustments that might result from the outcome of these
uncertainties.
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.
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of"
requires, among other things, that an entity review its long-lived assets and
certain related intangibles for impairment whenever changes in
18
<PAGE>
PRATT CASINO CORPORATION AND SUBSIDIARIES
(WHOLLY OWNED BY PPI CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
circumstances indicate that the carrying amount of an asset may not be fully
recoverable. As a result of its review, PCC does not believe that any such
changes have occurred.
The Financial Accounting Standards Board has issued a new standard,
"Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 requires the
presentation and disclosure of comprehensive income, which is defined as the
change in a company's equity resulting from non-owner transactions and events.
SFAS 130 became effective December 15, 1997 and requires the restatement of all
prior periods presented. PCC has adopted the provisions of SFAS 130; however,
the statement provides that an enterprise that has no items of other
comprehensive income for any period presented need only report net income. PCC
has no such other comprehensive income items for any period presented;
accordingly, the presentation and disclosure requirements of SFAS 130 are not
applicable.
The consolidated financial statements as of September 30, 1998 and for the
three and nine month periods ended September 30, 1998 and 1997 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, 1998 and the results of its operations for
the three and nine month periods ended September 30, 1998 and 1997 and its cash
flows for the nine month periods ended September 30, 1998 and 1997.
(2) LONG-TERM DEBT AND PLEDGE OF ASSETS
Certain of the indentures to PCC's indebtedness contain cross-default
provisions with first mortgage notes issued by GB Property Funding. On January
5, 1998, Holdings, GB Property Funding and GBHC filed petitions for relief under
Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court. Each
company continues to operate in the ordinary course of business, as set forth in
the Bankruptcy Code, and each company's executive officers and directors remain
in office, subject to the jurisdiction of the Bankruptcy Court. On both May 11
and August 10, 1998, the Bankruptcy Court extended the exclusive period of the
debtors to file a plan of reorganization for 90 days. On November 9, 1998, the
Bankruptcy Court granted an additional 60-day extension of the exclusivity
period. The filings of such petitions constitute a default under the indenture
for the PRT Funding Notes. Accordingly, the outstanding principal amount of the
PRT Funding Notes has accelerated, is currently due and payable and is
classified as current on the accompanying consolidated balance sheets.
SEPTEMBER 30, DECEMBER 31,
1998 1997
-------------- -------------
11 5/8% senior notes, due 2004 (a) $ 85,000,000 $ 85,000,000
14 5/8% junior subordinated notes, due 2005 (b) 15,000,000 15,000,000
------------ ------------
Total indebtedness 100,000,000 100,000,000
Less - current maturities (85,000,000) (85,000,000)
------------ ------------
Total long-term debt $ 15,000,000 $ 15,000,000
============ ------------
19
<PAGE>
PRATT CASINO CORPORATION AND SUBSIDIARIES
(WHOLLY OWNED BY PPI CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
- ------------------------
(a) 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 GBCC, to merge, consolidate
or sell substantially all of their assets or to incur additional
indebtedness beyond certain limitations.
(b) 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, no interest has been paid during 1998, 1997
or 1996.
No interest was paid during the nine month period ended September 30, 1998.
Interest paid amounted to $25,062,000 for the nine month period ended September
30, 1997.
(4) INCOME TAXES
As previously disclosed in PCC's quarterly report on Form 10-Q for the
period ended June 30, 1998, the Company and GBCC were advised by HCC, GBCC's
former parent, that a revised tax treatment with respect to the distribution of
GBCC stock owned by HCC to HCC's shareholders on December 31, 1996 might be
necessary. HCC subsequently revised its tax treatment of the distribution which
resulted in a reduction of the net operating loss carryforwards ("NOL's")
available to PCC for federal income tax purposes. The revised tax treatment had
no effect on PCC's assets, liabilities or operating results as reflected in its
consolidated financial statements for any period presented as PCC had provided
valuation allowances to fully reserve its net deferred tax assets, including
NOL's, for all such reporting periods. The effects on deferred taxes and on the
valuation allowance resulting from the revised tax treatment have been included
herein as adjustments during the three month period ended September 30, 1998.
In connection with the revised tax treatment, GBCC has commenced litigation
against its former independent accountants and tax advisors alleging negligent
advice and breach of contract. The Company continues to work with its new
outside advisors and consultants to review these tax issues.
20
<PAGE>
PRATT CASINO CORPORATION AND SUBSIDIARIES
(WHOLLY OWNED BY PPI CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
The impact of the revised tax treatment on state income taxes has not yet
been determined; however, the effect, if any, on the consolidated financial
statements of PCC is not anticipated to be material.
Components of the income tax provision consisted of the following:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Benefit in lieu of (provision) for
federal income taxes:
Current $(1,346,000) $ 511,000 $ (524,000) $ 1,821,000
Deferred 6,191,000 (419,000) 6,179,000 (433,000)
State income tax benefit
(provision):
Current 55,000 (304,000) 537,000 (55,000)
Deferred 1,801,000 (122,000) 1,797,000 (126,000)
Change in valuation allowance (6,701,000) 468,000 (9,384,000) (1,215,000)
----------- ----------- ----------- -----------
$ - $ 134,000 $(1,395,000) $ (8,000)
=========== =========== =========== ===========
</TABLE>
PCC is included in the consolidated federal income tax return of GBCC.
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. PCC made federal tax payments to GBCC under the
tax allocation agreements totalling $5,000 during the nine month period ended
September 30, 1998; no such payments were made during the nine month period
ended September 30, 1997. State tax payments of $1,000 were made during the
nine month period ended September 30, 1998; no such payments were made during
the nine month period ended September 30, 1997.
Federal and state income tax provisions or benefits are based upon
estimates of the results of operations for the current period and reflect the
nondeductibility for income tax purposes of certain items, including meal and
entertainment and other expenses.
Deferred income taxes result primarily from differences in the timing of
deductions taken between tax and financial reporting purposes for adjustments to
the carrying value of deferred financing costs and for other accruals.
At September 30, 1998, PCC and its subsidiaries have net operating loss
carryforwards ("NOL's") totaling approximately $7 million for federal income tax
purposes, none of which expire before the year 2009. 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
21
<PAGE>
PRATT CASINO CORPORATION AND SUBSIDIARIES
(WHOLLY OWNED BY PPI CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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 1998 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 September 30, 1998.
The components of PCC's net deferred tax asset, exclusive of Holdings and
its subsidiaries' net deferred tax asset, as of September 30, 1998 and December
31, 1997 were as follows:
SEPTEMBER 30, DECEMBER 31,
1998 1997
-------------- ------------
Deferred tax assets:
Net operating loss carryforward $ 1,596,000 $ 188,000
Valuation allowance on affiliate receivables 8,086,000 -
Deferred financing costs 792,000 899,000
Other liabilities and accruals - 3,000
------------ -----------
Total deferred tax assets 10,474,000 1,090,000
Valuation allowance (10,474,000) (1,090,000)
------------ -----------
$ - $ -
============ ===========
Receivables from and payables to affiliates in connection with the
aforementioned tax allocation agreements are as follows:
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------ -----------
Due from affiliates - noncurrent $ - $ 1,394,000
Due to affiliate - current - (5,000)
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.
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 or results
of operations of PCC.
22
<PAGE>
PRATT CASINO CORPORATION AND SUBSIDIARIES
(WHOLLY OWNED BY PPI CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(5) TRANSACTIONS WITH RELATED PARTIES
Prior to May 1, 1998, NJMI, was responsible for the operations of the Sands
under a management agreement with GBHC. Under such agreement, NJMI was entitled
to receive annually (i) a basic consulting fee of 1.5% of "adjusted gross
revenues," as defined, and (ii) incentive compensation of between 5% and 7.5% of
gross operating profits in excess of certain stated amounts should annual "gross
operating profits," as defined, exceed $5,000,000. On May 22, 1998, GBHC filed
a motion with the Bankruptcy Court seeking to reject the existing management
agreement with NJMI. The Interim Agreement was entered into on June 27, 1998 and
was approved by the Bankruptcy Court on July 7, 1998. Under the Interim
Agreement, effective as of May 1, 1998 and terminating on September 28, 1998,
NJMI continued to provide certain agreed upon services to GBHC at a monthly fee
of $165,000 of which $122,000 was paid on a monthly basis in arrears and the
remaining $43,000 is deferred and will be paid upon confirmation of GBHC's plan
of reorganization by the Bankruptcy Court. All management fees terminated upon
the granting of GBHC's motion to reject the management contract by the
Bankruptcy Court on September 28, 1998. As a consequence of the September 1998
settlement agreement (see Note 8), GBCC and GBHC may no longer assert claims
against each other with respect to the operation of the management contract or
the cancellation thereof.
Fees earned by NJMI under the management agreement and Interim Agreement
amounted to $495,000 and $2,405,000, respectively, during the three and nine
month periods ended September 30, 1998. Management fees receivable from the
Sands at September 30, 1998 and December 31, 1997 amounted to $382,000 and
$34,000, respectively. Of the amount receivable at September 30, 1998,
$145,000, which was earned prior to GBHC's bankruptcy filing, is included in
noncurrent due from affiliates on the accompanying consolidated balance sheet
and is subject to terms of a reorganization plan which requires confirmation by
the Bankruptcy Court.
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 $82,000 and $222,000, respectively, for the three and nine
month periods ended September 30, 1997.
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
September 30, 1998 and 1997 and $900,000 for each of the nine month periods
ended September 30, 1998 and 1997.
Interest expense incurred with respect to the Junior Subordinated Notes
(Note 3) amounted to $548,000 during each of the three month periods ended
September 30, 1998 and 1997 and $1,645,000 during each of the nine month periods
ended September 30, 1998 and 1997. Interest due to GBCC on the Junior
Subordinated Notes of $6,849,000 and $5,204,000, respectively, is included in
interest payable on the accompanying consolidated balance sheets at September
30, 1998 and December 31, 1997.
23
<PAGE>
PRATT CASINO CORPORATION AND SUBSIDIARIES
(WHOLLY OWNED BY PPI CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
GBHC issued a promissory note in the amount of $10,000,000 on February 17,
1994 to PRT Funding. Such note accrues interest at the rate of 14 5/8% per annum
and is payable semiannually commencing on August 17, 1994. The principal amount
of the note is due on February 17, 2005. During the first quarter of 1997, GBHC
also borrowed $5,000,000 from PCC for working capital purposes. Such borrowing
accrues interest at the rate of 14 5/8% per annum payable semiannually
commencing July 15, 1997. Prior to December 31, 1997, such note and related
interest were eliminated in consolidation. As a result of (i) GBHC no longer
being included as a consolidated subsidiary and (ii) GBHC's filing under Chapter
11 making prospects for ultimate collection doubtful, the notes, together with
accrued interest receivable aggregating $3,458,000 were reflected as an
adjustment to PCC's negative investment in Holdings on the accompanying
consolidated balance sheet at December 31, 1997. Interest income on the notes
has not been recognized for periods subsequent to GBHC's filing under Chapter 11
on January 5, 1998. In accordance with certain provisions of the September 1998
settlement agreement with GBCC (see Note 8), GBHC preserves whatever rights of
offset, if any, it might have with respect to an advance made by GBHC to another
GBCC subsidiary against the $10,000,000 and $5,000,000 loans described above.
The notes, together with accrued interest of $3,484,000, are fully reserved on
the accompanying consolidated balance sheet at September 30, 1998.
PCC and its subsidiaries (including Holdings and its subsidiaries for
periods prior to January 1, 1998) performed certain services for other
subsidiaries of GBCC and for HCC and its subsidiaries and invoiced those
companies for PCC's cost of providing those services. PCC and its subsidiaries
have also provided services to GBHC for periods subsequent to January 1, 1998
and have billed GBHC for such 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:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- --------------------------
1998 1997 1998 1997
---------- ---------- ---------- --------------
Billings to affiliates $ - $ 175,000 $ - $ 784,000
Billings to GBHC 21,000 - 63,000 -
Charges from affiliates (238,000) (512,000) (740,000) (1,809,000)
(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 $2,444,000 and $2,668,000, respectively, during the three month
periods ended September 30, 1998 and 1997 and $6,269,000 and $6,840,000,
respectively, during the nine month periods ended September 30, 1998 and 1997.
PML also incurred operating and other expenses amounting to $310,000 and
$423,000, respectively, during the three month periods ended September 30, 1998
and 1997 and $976,000 and $1,290,000, respectively, during the nine month
periods ended September 30,
24
<PAGE>
PRATT CASINO CORPORATION AND SUBSIDIARIES
(WHOLLY OWNED BY PPI CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
1998 and 1997. 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.
(7) EQUITY IN EARNINGS OF GB HOLDINGS, INC.
As discussed in Note 1, the operations of Holdings and its subsidiaries are
accounted for under the equity method of accounting for the six month period
from January 1, 1998 through June 30, 1998. Due to the significance of
Holdings' operations, summarized consolidated results of operations of Holdings
and its subsidiaries for such period are set forth below:
Net revenues $114,066,000
------------
Departmental expenses 95,499,000
General and administrative expenses 7,115,000
Depreciation and amortization 5,825,000
------------
Total operating expenses 108,439,000
------------
Income from operations 5,627,000
------------
Interest, net 430,000
Gain on disposal of assets 28,000
------------
Total non-operating income 458,000
------------
Income before taxes and other item 6,085,000
Income tax provision -
------------
Income before other items 6,085,000
Reorganization and other related costs (2,831,000)
------------
Net income $ 3,254,000
============
(8) LITIGATION
On January 5, 1998, Holdings, GB Property Funding and GBHC filed petitions
for relief under Chapter 11 of the Bankruptcy Code. Each company continues to
operate in the ordinary course of business, as set forth in the Bankruptcy Code,
and each company's executive officers and directors remain in office, subject to
the jurisdiction of the Bankruptcy Court. On both May 11 and August 10, 1998,
the Bankruptcy Court extended the exclusive period of the debtors to file a plan
of reorganization for 90 days. On November 9, 1998, the Bankruptcy Court granted
an additional 60-day extension of the exclusivity period.
25
<PAGE>
PRATT CASINO CORPORATION AND SUBSIDIARIES
(WHOLLY OWNED BY PPI CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
As a result of the default and automatic acceleration under the indenture
for the PRT Funding Notes, the holders of the PRT Funding Notes could initiate
judicial proceedings to enforce their claims for payment; however, no such
proceedings have been initiated. PCC, as guarantor of the PRT Funding Notes, is
currently involved in negotiations to restructure the notes with three
bondholders who control in excess of 95% of the note issue.
On May 22, 1998, GBHC filed a motion with the Bankruptcy Court seeking to
reject the management agreement with NJMI (see Note 5). The Interim Agreement
was entered into and approved by the Bankruptcy Court on July 7, 1998 and the
motion to reject the management agreement was approved by the Bankruptcy Court
on September 28, 1998. As a consequence of the September 1998 settlement
agreement described below, GBCC and GBHC may no longer assert claims against
each other with respect to the operation of the management contract or the
cancellation thereof.
On July 27, 1998, GBHC filed an action in the Bankruptcy Court against GBCC
seeking, among other things, to enjoin GBCC from using the tax NOL's of GBHC.
On September 2, 1998, GBCC reached a settlement with GBHC which was approved by
the Bankruptcy Court. The terms of the settlement agreement provided, among
other things, that GBHC be included in the consolidated federal income tax
return of GBCC for 1997 and 1998 enabling GBCC to utilize GBHC's tax NOL's. The
agreement also provided that on or before December 31, 1998, GBCC would cause
Holdings and its subsidiaries to be deconsolidated from the GBCC federal income
tax return by means of transferring 21% of the stock ownership of Holdings to an
unconsolidated entity.
GBHC is a party 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.
(9) RECLASSIFICATIONS
Certain reclassifications have been made to the prior year consolidated
financial statements to conform to the 1998 consolidated financial presentation.
26
<PAGE>
PRATT CASINO CORPORATION AND SUBSIDIARIES
(WHOLLY OWNED BY PPI CORPORATION)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND 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.
LIQUIDITY AND CAPITAL RESOURCES
PCC and its subsidiaries conduct two major business activities.
PCC and NJMI provide management and consulting services or invest in
entities which provide such services to affiliates which own hotel and casino
properties. Cash flow from such activities, specifically the PML limited
partnership interest held by PCC, the Tunica Consulting Contract and the Sands
Management Contract have historically been sufficient to meet debt service
obligations on the PRT Funding Notes ($9.9 million annually) and, when permitted
by the PRT Funding Note indenture, on the Junior Subordinated Notes.
As a consequence of the Chapter 11 filing by Holdings, GB Property Funding
and GBHC, PRT Funding is in default on the $85 million principal amount of PRT
Funding Notes which, together with accrued interest, accelerated and became
immediately due and payable. The bankruptcy filing of GBHC also permitted it to
reject the Sands Management Agreement, an important source of funds for debt
service on the PRT Funding Notes. Management of GBHC requested modification to
the fee arrangement under the Sands management agreement and reserved its right
to reject the agreement. A modified agreement was entered into effective May 1,
1998, and expired on September 28, 1998, which reduced the monthly fee to
$165,000 compared to an average monthly fee of $532,000 during the same period
in 1997. GBHC's motion to reject the management agreement was approved by the
Bankruptcy Court on September 28, 1998. As a consequence of the September 1998
settlement agreement (see Note 8 of Notes to Consolidated Financial Statements
of PCC), GBCC and GBHC may no longer assert claims against each other with
respect to the management agreement or the cancellation thereof. PCC does not
have the financial resources or the capacity to borrow sufficient cash to
satisfy the $85 million principal amount of the PRT Funding Notes which have
accelerated. Consequently, PCC, as guarantor of the PRT Funding Notes, is
currently involved in negotiations to restructure the notes with three
bondholders who control in excess of 95% of the $85 million note issue. PRT
Funding deferred payment of interest due on the April 15 and October 15, 1998
interest payment dates. On October 22, 1998, PRT Funding paid to the
bondholders an amount equal to a single semiannual interest payment ($4.9
million) while negotiations to restructure the notes continue. There can be no
assurance at this time that such negotiations will result in restructuring of
its obligations. Accordingly, there is substantial doubt about the ability of
PCC to continue as a going concern.
Holdings and GBHC own the Sands Hotel and Casino in Atlantic City. Prior to
1996, the Sands' cash flow was sufficient to meet debt service obligations and
fund a substantial portion of annual capital
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)
expenditures. The Sands also used short-term borrowings to fund seasonal cash
needs for certain capital projects. During 1996 and 1997, declines in operating
cash flow at the Sands resulted in the need for periodic financial assistance
from PCC and GBCC in order to meet debt service obligations. Substantial
additional financial assistance would have been required to make the January 15,
1998 principal and interest payments due on the 10 7/8% First Mortgage Notes.
GBHC was unable to obtain additional borrowings from affiliates or other
sources and, accordingly, on January 5, 1998, Holdings, GB Property Funding and
GBHC filed petitions seeking protection under Chapter 11 of the Bankruptcy Code.
As a result of the filings, the Sands has sufficient cash flow to continue
normal operations while it seeks to develop a plan of reorganization for
submission to its creditors and the Bankruptcy Court. On both May 11 and August
10, 1998, the Bankruptcy Court extended the exclusive period of the debtors to
file a plan of reorganization for 90 days. On November 9, 1998, the Bankruptcy
Court granted an additional 60-day extension of the exclusivity period. Capital
expenditures, other than normal recurring capital expenditures in the ordinary
course of business, will require prior approval of the Bankruptcy Court. The
Bankruptcy Court has approved a $13.6 million, two-year capital expenditure
program including $7.1 million for rooms renovations and $6.5 million for the
replacement of slot machines. There can be no assurance at this time that
GBHC's plan of reorganization, when submitted, will be accepted by its creditors
or the Bankruptcy Court. In any event, it is not anticipated that PCC will
retain a substantial equity position in Holdings as a result of a reorganization
and, accordingly, it is not anticipated that the Holdings group will contribute
significantly to the future cash flows of PCC.
RESULTS OF OPERATIONS
GENERAL
On January 5, 1998, Holdings, GB Property Funding, and GBHC filed petitions
for relief under Chapter 11 of the Bankruptcy Code in the Bankruptcy Court. As
a result of these filings, PCC's control over the filing subsidiaries is subject
to the supervision of the Bankruptcy Court and PCC does not expect to have
ownership or operating control of such subsidiaries after reorganization.
Accordingly, the accompanying consolidated statement of operations for the nine
month period ended September 30, 1998 reflects the operations of the filing
subsidiaries for the period from January 1, 1998 through June 30, 1998 under the
equity method of accounting and for the period subsequent to June 30, 1998 under
the cost method of accounting. For the three and nine month periods ended
September 30, 1997, however, the accompanying consolidated statements of
operations include the operations of Holdings and its subsidiaries on a
consolidated basis.
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)
The following table sets forth PCC's proforma income from operations for
the three and nine month periods ended September 30, 1997, exclusive of Holdings
and its subsidiaries (the "PCC Group"), on a basis comparable to the 1998
presentation.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- --------------------------------
1998 PROFORMA 1997 1998 PROFORMA 1997
-------- ------------- ----------------- -------------
<S> <C> <C> <C> <C>
Revenues $795,000 $1,930,000 $3,305,000 $5,332,000
-------- ---------- ---------- ----------
Expenses:
General and administrative 503,000 410,000 1,303,000 1,076,000
Amortization - 90,000 - 269,000
-------- ---------- ---------- ----------
Total expenses 503,000 500,000 1,303,000 1,345,000
-------- ---------- ---------- ----------
Income from operations $292,000 $1,430,000 $2,002,000 $3,987,000
======== ========== ========== ==========
</TABLE>
PCC GROUP
- ---------
REVENUES
Revenues of the PCC Group declined $1.1 million (58.8%) and $2 million
(38%), respectively, during the three and nine month periods ended September 30,
1998 compared to the same periods of 1997. The decreases are due to declines in
management fees earned under the NJMI management contract with the Sands. As
discussed in Note 5 of the Notes to Consolidated Financial Statements of PCC, a
substitute agreement was effective from May 1, 1998 through September 28, 1998.
Management fees earned by NJMI under the original management agreement were
primarily dependent on the level of revenues and gross operating profits at the
Sands. The revised fee arrangement consisted of a fixed fee of $165,000 per
month. Accordingly, the third quarter and year-to-date decreases in the PCC
Group's revenues are primarily attributable to the reduced management fee.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses for the PCC Group increased $93,000
(22.7%) and increased $227,000 (21.1%), respectively, during the three and nine
month periods ended September 30, 1998 compared to the 1997 periods. The
increases reflects the provision of reserves for collectability with respect to
certain receivables from GBHC.
29
<PAGE>
PRATT CASINO CORPORATION AND SUBSIDIARIES
(WHOLLY OWNED BY PPI CORPORATION)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
AMORTIZATION
As a result of the cross default under the indenture for the PRT Funding
Notes, all deferred financing costs were written off at December 31, 1997,
eliminating the PCC Group's amortization expense associated with such costs.
PCC CONSOLIDATED
- ----------------
INTEREST
Consolidated interest income for PCC decreased $350,000 (79.9%) and $1.1
million (82.6%), respectively, during the three and nine month periods ended
September 30, 1998 compared with the same periods of 1997 as less cash was
available during the 1998 periods for investment purposes. Interest expense
decreased by $5.3 million (63.5%) and $15.8 million (63.6%), respectively,
during the three and nine month periods ended September 30, 1998 compared to the
same periods of the prior year. Such declines reflect the absence of interest
on Holdings' 10 7/8% First Mortgage Notes ($5 million and $15 million,
respectively, during the three and nine month periods ended September 30, 1997).
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. 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
decreased to $1.9 million and $4.5 million, respectively, during the three and
nine month periods ended September 30, 1998 compared to $2 million and $4.8
million, respectively, earned in the same periods of 1997. Such decreases
reflect reduced management fees earned by PML due to a significant increase in
gaming taxes imposed on the Aurora Casino's operations. Management fees are
based, in part, on the operating results of the Aurora Casino.
EQUITY IN EARNINGS OF AND GAIN ON ELIMINATION OF INVESTMENT IN GB HOLDINGS,
INC.
PCC's equity in the earnings of Holdings for the nine month period ended
September 30, 1998 amounted to $3.3 million and represents equity in earnings
for the period from January 1, 1998 through June 30, 1998. Effective July 1,
1998, PCC eliminated its investment in Holdings and is no longer recognizing
equity in the earnings of Holdings and its subsidiaries. For the three and nine
month periods ended September 30, 1997, the results of operations of Holdings
and its subsidiaries were consolidated with those of PCC. Had such operating
results been accounted for under the equity method of accounting, PCC would have
reflected equity in losses of $1.3 million and $6 million, respectively, for the
three and nine month period ended September 30, 1997. The significant
improvement in earnings compared to the prior year is primarily due to declines
in interest expense which have more than offset costs associated with the
reorganization under Chapter 11.
30
<PAGE>
PRATT CASINO CORPORATION AND SUBSIDIARIES
(WHOLLY OWNED BY PPI CORPORATION)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Generally, the Sands has experienced small increases in operating income
during 1998 compared to 1997 despite declines in net revenues. The revenue
decreases are a direct result of significant declines in total gross wagering at
the Sands due to increased competition in the Atlantic City market, the
reduction of promotional marketing activities in an effort to control costs and
the negative publicity resulting from GBHC's filing under Chapter 11. Operating
costs have decreased due to decreased patron volume as well as to management's
efforts to eliminate certain marginally effective marketing programs and create
operating efficiencies. Reorganization and other related costs attributable to
the Chapter 11 filing amounted to $2.8 million during the period from January 1,
1998 through June 30, 1998.
The most significant change in PCC's equity in the earnings of Holdings has
been the reduction in interest expense. As a result of the filing, the accrual
of interest expense on Holdings' debt obligations has been suspended. Had the
contractual interest expense been accrued, PCC's equity in the losses of
Holdings for the 1998 period would have been comparable to the similar prior
year period.
As a result of PCC no longer controlling the operations of the Sands, the
continued expectation that control of Holdings will only be temporary and the
September 1998 settlement agreement which resolved certain significant
uncertainties, PCC's investment in Holdings and its subsidiaries was revalued to
a zero basis effective on July 1, 1998. The elimination of the investment in
Holdings resulted in a gain amounting to $36,864,000 during the three and nine
month periods ended September 30, 1998.
RESTRUCTURING COSTS
The three and nine month period increases result from professional fees and
other corporate overhead costs associated with the default of the PRT Funding
Notes and efforts to restructure the obligations. Management believes that such
reorganization costs will continue in the near term pending the outcome of
restructuring discussions.
INCOME TAX PROVISION
As previously disclosed in PCC's quarterly report on Form 10-Q for the
period ended June 30, 1998, the Company and GBCC were advised by HCC, GBCC's
former parent, that a revised tax treatment with respect to the distribution of
GBCC stock owned by HCC to HCC's shareholders on December 31, 1996 might be
necessary. HCC subsequently revised its tax treatment of the distribution which
resulted in a reduction of the net operating loss carryforwards ("NOL's")
available to PCC for federal income tax purposes. The revised tax treatment had
no effect on PCC's assets, liabilities or operating results as reflected in its
consolidated financial statements for any period presented as PCC had provided
valuation allowances to fully reserve its net deferred tax assets, including
NOL's, for all such reporting periods. The comments with respect to federal
income taxes which follow reflect the changes arising from the revised tax
treatment.
In connection with the revised tax treatment, GBCC has commenced litigation
against its former independent accountants and tax advisors alleging negligent
advice and breach of contract. The Company continues to work with its new
outside advisors and consultants to review these tax issues.
31
<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 impact of the revised tax treatment on state income taxes has not yet
been determined; however, the effect, if any, on the consolidated financial
statements of PCC is not anticipated to be material.
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 September 30, 1998, PCC and its subsidiaries have NOL's totaling
approximately $7 million for federal income tax purposes, none of which expire
before the year 2009. 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 1998 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 September 30, 1998.
YEAR 2000 COMPLIANCE
In the year 2000, computer programs that have date sensitive software may
recognize a date using "00" as the year 1900 rather than 2000. Such an error
could result in a system failure or miscalculations causing disruptions of
operations including, among other things, a temporary inability to process
transactions or engage in similar normal business activities.
Management has initiated a program to prepare the Company's computer
systems and applications for the year 2000. Such program includes the use of
both internal and external resources to test and, if necessary, modify or
replace software applications. The costs of acquiring, testing and converting
such systems are expected to be minimal. Management expects its Year 2000 date
conversion projects to be completed on a timely basis. The company has also
initiated formal communication with its significant suppliers to determine the
extent to which its information systems are vulnerable to those third parties'
failure to resolve their Year 2000 issues. While there can be no assurance that
the Company and its suppliers and customers will fully resolve the Year 2000
issues, neither the estimated cost nor the outcome of the Year 2000 problem is
expected to have a material impact on the Company's operations, liquidity or
financial position.
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 at the Sands.
32
<PAGE>
PRATT CASINO CORPORATION AND SUBSIDIARIES
(WHOLLY OWNED BY PPI CORPORATION)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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 revenues and
profitability.
33
<PAGE>
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On January 5, 1998, Holdings, GB Property Funding and GBHC filed petitions
for relief under Chapter 11 of the Bankruptcy Code. Each company continues to
operate in the ordinary course of business, as set forth in the Bankruptcy Code,
and each company's executive officers and directors remain in office, subject to
the jurisdiction of the Bankruptcy Court. On both May 11 and August 10, 1998
the Bankruptcy Court extended the exclusive period of the debtors to file a plan
of reorganization for 90 days. On November 9, 1998, the Bankruptcy Court granted
an additional 60-day extension of the exclusivity period.
As a result of the default and automatic acceleration under the indenture
for the PRT Funding Notes, the holders of the PRT Funding Notes could initiate
judicial proceedings to enforce their claims for payment; however, no such
proceedings have been initiated. PCC, as guarantor of the PRT Funding Notes, is
currently involved in negotiations to restructure the notes with three
bondholders who control in excess of 95% of the note issue.
On May 22, 1998, GBHC filed a motion with the Bankruptcy Court seeking to
reject its existing management agreement with NJMI. A substitute agreement (the
"Interim Agreement") was entered into and approved by the Bankruptcy Court on
July 7, 1998. Under the Interim Agreement, effective May 1, 1998 and
terminating on September 28, 1998, NJMI continued to provide certain agreed upon
services to GBHC at a reduced monthly fee. The motion to reject the management
agreement was granted on September 28, 1998. As a consequence of the September
1998 settlement agreement described below, GBCC and GBHC may no longer assert
claims against each other with respect to the operation of the management
contract or the cancellation thereof.
On July 27, 1998, GBHC filed a motion with the Bankruptcy Court against
GBCC seeking, among other things, to enjoin GBCC from using the tax net
operating loss carryovers ("NOL's") of GBHC. On September 2, 1998, GBCC reached
a settlement with GBHC which was approved by the Bankruptcy Court. The terms of
the settlement agreement provided, among other things, that GBHC be included in
the consolidated federal income tax return of GBCC for 1997 and 1998 enabling
GBCC to utilize GBHC's tax NOL's. The agreement also provided that on or before
December 31, 1998, GBCC would cause Holdings and its subsidiaries to be
deconsolidated from the GBCC federal income tax return by means of transferring
21% of the stock ownership of Holdings to an unconsolidated entity.
On October 8, 1998, GBCC and HCC filed a complaint in the District Court of
Dallas County, Texas against Arthur Andersen L.L.P., GBCC's independent
accountants, and certain of its partners alleging negligent advice and breach of
contract with respect to the tax consequences resulting from the spin-off of
GBCC's stock to HCC's shareholders on December 31, 1996.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
As a result of the filings discussed in Item 1. above, $182,500,000
principal amount of 10 7/8% First Mortgage Notes issued by GB Property Funding
are in default. Principal payments of $2,500,000 each due on January 15, 1998
and July 15, 1998 were not made. Under an order of the Bankruptcy Court
permitting the disposition of furniture and equipment in the ordinary course of
business, any payments received by GBHC for the sale of such assets, which are
part of the security for the 10 7/8% First Mortgage Notes, must be remitted to
the Trustee for the 10 7/8% First Mortgage Notes as reductions to the
outstanding principal. As of November 13, 1998, $67,000 has been remitted to
the Trustee from the proceeds on the sale of equipment. The accrual of interest
on the 10 7/8% First Mortgage Notes for periods subsequent to the filings has
been suspended; such interest on a contractual basis amounts to $26,407,000 as
of November 13, 1998.
The default on the 10 7/8% First Mortgage Notes also resulted in a default
under the indenture for the $85,000,000 11 5/8% Unsecured Senior Notes issued by
PRT Funding Corp. and guaranteed by Pratt
34
<PAGE>
Casino Corporation. Accordingly, the maturity of the PRT Funding Notes has
accelerated. On October 22, 1998, PRT Funding paid the bondholders an amount
equal to a single interest payment ($4,941,000) while negotiations to
restructure the notes continue. Interest due on such notes, exclusive of
compound interest on amounts in arrears, amounts to $5,709,000 as of November
13, 1998.
ITEM 6.(a) - EXHIBITS
*10.1 Agreement dated as of September 2, 1998 by and among GBHC, GB Holdings,
Inc., and GB Property Funding Corp., on the one hand, and GBCC, PHC
Acquisition Corp., Lieber Check Cashing, LLC, Jack E. Pratt, William D.
Pratt, Edward T. Pratt, Jr. and HCC, on the other.
- -------------------------
* Incorporated by reference from the same-numbered exhibit included in
GBCC's Quarterly Report on Form 10-Q for the quarter ended September 30,
1998.
ITEM 6.(b) - REPORTS ON FORM 8-K
The Registrants did not file any reports on Form 8-K during the quarter
ended September 30, 1998. On October 22, 1998, the Registrants filed a Form 8-K
to report a change in certifying accountants. On October 30, 1998 the
Registrants filed a form 8-K/A to include their former accountants' letter to
the Securities and Exchange Commission as an exhibit.
35
<PAGE>
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 its behalf by the
undersigned thereunto duly authorized.
PRT FUNDING CORP.
PRATT CASINO CORPORATION
------------------------
Registrants
Date: November 20, 1998 By: /s/ John C. Hull
----------------- ------------------------
John C. Hull
President and Chief
Executive Officer
36
<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-31-1998 DEC-31-1998
<PERIOD-START> JUL-01-1998 JAN-01-1998
<PERIOD-END> SEP-30-1998 SEP-30-1998
<CASH> 8 8
<SECURITIES> 0 0
<RECEIVABLES> 12,504 12,504
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 76,262 76,262
<PP&E> 0 0
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 81,262 81,262
<CURRENT-LIABILITIES> 101,319 101,319
<BONDS> 15,000 15,000
0 0
0 0
<COMMON> 1 1
<OTHER-SE> (35,058) (35,058)
<TOTAL-LIABILITY-AND-EQUITY> 81,262 81,262
<SALES> 0 0
<TOTAL-REVENUES> 0 0
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 366 1,097
<INCOME-PRETAX> (366) (1,097)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (366) (1,097)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (366) (1,097)
<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-31-1998 DEC-31-1998
<PERIOD-START> JUL-01-1998 JAN-01-1998
<PERIOD-END> SEP-30-1998 SEP-30-1998
<CASH> 7,016 7,016
<SECURITIES> 0 0
<RECEIVABLES> 377 377
<ALLOWANCES> 140 140
<INVENTORY> 0 0
<CURRENT-ASSETS> 7,375 7,375
<PP&E> 3 3
<DEPRECIATION> 3 3
<TOTAL-ASSETS> 10,482 10,482
<CURRENT-LIABILITIES> 102,092 102,092
<BONDS> 15,000 15,000
0 0
0 0
<COMMON> 1 1
<OTHER-SE> (106,611) (106,611)
<TOTAL-LIABILITY-AND-EQUITY> 10,482 10,482
<SALES> 0 0
<TOTAL-REVENUES> 795 3,305
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> (37,840) (42,023)
<LOSS-PROVISION> 0 141
<INTEREST-EXPENSE> 2,931 8,828
<INCOME-PRETAX> 35,704 36,359
<INCOME-TAX> 0 1,395
<INCOME-CONTINUING> 35,704 34,964
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 35,704 34,964
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
</TABLE>
