<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended MARCH 31, 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 SANDS HOTEL & CASINO, INC.
INDIANA AVENUE & BRIGHTON PARK, 9TH FLOOR
ATLANTIC CITY, NEW JERSEY 08401
- ------------------------------------------- ---------------------------------
(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 MAY 12, 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 "GEAA"; 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 Indiana Avenue and Brighton Park, 9th Floor, Atlantic City, New Jersey 08401.
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"). The
Sands is 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 officers and directors as of the date of the
filing remain in office, subject to the supervision of the Bankruptcy Court. On
May 11, 1998, the Bankruptcy Court extended the exclusive period of the debtors
to file a plan of reorganization for 90 days and, as such, the exclusivity
period expires as of August 10, 1998. 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 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
approximately 98% of the $85,000,000 note issue. PRT Funding has deferred
payment of interest due April 15, 1998 pending the outcome of such negotiations.
PCC is a holding company that, through its subsidiaries, owns and manages 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. Debt service on the PRT Funding Notes
is funded primarily from management fees earned by NJMI from the Sands, from
distributions made to PCC by PML (resulting from fees generated from the
management of the Aurora Casino) and from consulting fees earned from the Tunica
Casino, supplemented by dividends, if any, received from GBHC.
2
<PAGE>
The financial statements of PRT Funding and the consolidated financial
statements of PCC as of March 31, 1998 and for the three month periods ended
March 31, 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 March 31, 1998, and their results of
operations and cash flows for the three month periods ended March 31, 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)
ASSETS
MARCH 31, DECEMBER 31,
1998 1997
------------ ------------
Current Assets:
Cash and cash equivalents $ 13,000 $ 13,000
Interest receivable from affiliates 6,081,000 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 70,961,000 68,321,000
------------ ------------
Due from affiliates, net of valuation allowance 5,000,000 5,000,000
------------ ------------
$ 75,961,000 $ 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 10,282,000 7,263,000
Due to affiliates 5,000 18,000
------------ ------------
Total current liabilities 95,287,000 92,281,000
------------ ------------
Notes payable to affiliates 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 (34,327,000) (33,961,000)
------------ ------------
Total shareholder's deficit (34,326,000) (33,960,000)
------------ ------------
$ 75,961,000 $ 73,321,000
============ ============
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
MARCH 31,
------------------------
1998 1997
----------- -----------
Revenues:
Interest income $2,653,000 $3,022,000
Expenses:
Interest expense 3,019,000 3,019,000
---------- ----------
(Loss) income before income taxes (366,000) 3,000
Income tax provision - (1,000)
---------- ----------
Net (loss) income $ (366,000) $ 2,000
========== ==========
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 CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
--------------------------
1998 1997
------------ ------------
OPERATING ACTIVITIES:
Net (loss) income $ (366,000) $ 2,000
Adjustments to reconcile net (loss) income
to net cash used in operating activities:
Increase in receivable from affiliates (2,653,000) (4,149,000)
Increase in accrued interest payable 3,019,000 3,019,000
Net change in other current assets
and liabilities - 1,000
----------- -----------
Net cash used in operating activities - (1,127,000)
Cash and cash equivalents at beginning of period 13,000 1,141,000
----------- -----------
Cash and cash equivalents at end of period $ 13,000 $ 14,000
=========== ===========
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)
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"). The Sands is 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 officers and directors as of the date of the
filing remain in office, subject to the supervision of the Bankruptcy Court. On
May 11, 1998, the Bankruptcy Court extended the exclusive period of the debtors
to file a plan of reorganization for 90 days and, as such, the exclusivity
period expires as of August 10, 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. PCC, as guarantor of the PRT Funding Notes, is
currently involved in negotiations to restructure the notes with three
bondholders who control approximately 98% of the $85,000,000 note issue. PRT
Funding has deferred payment of interest due April 15, 1998 pending the outcome
of such negotiations. 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.
7
<PAGE>
PRT FUNDING CORP.
(WHOLLY OWNED BY PRATT CASINO CORPORATION)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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 March 31, 1998 and for the three month
periods ended March 31, 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 March 31, 1998 and
the results of its operations and cash flows for the three month periods ended
March 31, 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 March 31, 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 March 31, 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") to HCC, and loaned
the proceeds to various affiliates on the same terms. Principal totaling
$6,262,000 with respect to the Junior Subordinated Notes was subsequently
assigned to GBCC by HCC in recognition of tax net operating losses of GBCC used
by HCC. The remaining $8,738,000 of Junior Subordinated Notes, together with
interest accrued thereon, was assigned to GBCC by HCC in connection with the
distribution of its stock in GBCC to HCC's shareholders on December 31, 1996.
Interest on the Junior Subordinated Notes accrues at the rate of 14 5/8% per
annum and is payable semiannually commencing August 17, 1994, with payment
subject to PCC, the
8
<PAGE>
PRT FUNDING CORP.
(WHOLLY OWNED BY PRATT CASINO CORPORATION)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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 March 31, 1998 and December 31, 1997, accrued interest in the amount of
$5,753,000 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 either of the three month periods ended March
31, 1998 and 1997.
(3) INCOME TAXES
Components of the provision for income taxes consisted of the following:
THREE MONTHS
ENDED MARCH 31,
--------------------
1998 1997
--------- --------
Benefit in lieu of (provision for) federal
income taxes:
Current $ - $(1,000)
Deferred 114,000 -
State income tax benefit:
Deferred 33,000 -
Valuation allowance (147,000) -
--------- -------
$ - $(1,000)
========= =======
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. No payments were made under the tax allocation agreements during
the three month periods ended March 31, 1998 or 1997. At both March 31, 1998
and December 31, 1997, $5,000 is included in due to affiliates on the
accompanying balance sheets 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 March 31, 1998 and December 31, 1997, the valuation
provision on affiliate receivables results in a deferred tax asset of
$13,721,000 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 provided a valuation allowance for the
entire deferred tax asset at March 31, 1998 and December 31, 1997.
9
<PAGE>
PRT FUNDING CORP.
(WHOLLY OWNED BY PRATT CASINO CORPORATION)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(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. As a
result of PRT Funding's evaluation of its net realizable value, the note,
together with accrued interest totalling $3,204,000 and $2,738,000, has been
reserved on the accompanying balance sheets at March 31, 1998 and December 31,
1997, respectively.
(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 officers and directors as of the date of the filing remain in
office, subject to the supervision of the Bankruptcy Court. On May 11, 1998,
the Bankruptcy Court extended the exclusive period of the debtors to file a plan
of reorganization for 90 days and, as such, the exclusivity period expires as of
August 10, 1998.
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 approximately 98% of the note issue.
10
<PAGE>
PRATT CASINO CORPORATION AND SUBSIDIARIES
(WHOLLY OWNED BY PPI CORPORATION)
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
MARCH 31, DECEMBER 31,
1998 1997
---------- ------------
Current Assets:
Cash and cash equivalents $5,371,000 $2,231,000
Due from affiliates, net of valuation allowance 49,000 174,000
Refundable deposits and other
current assets 183,000 194,000
---------- ----------
Total current assets 5,603,000 2,599,000
---------- ----------
Investment in Limited Partnership 2,017,000 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 allowances 148,000 1,395,000
Other assets 9,000 8,000
---------- ----------
Total other assets 157,000 1,403,000
---------- ----------
$7,777,000 $6,258,000
========== ==========
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated balance sheets.
11
<PAGE>
PRATT CASINO CORPORATION AND SUBSIDIARIES
(WHOLLY OWNED BY PPI CORPORATION)
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDER'S DEFICIT
(UNAUDITED)
MARCH 31, DECEMBER 31,
1998 1997
------------- -------------
Current Liabilities:
Current maturities of long-term debt $ 85,000,000 $ 85,000,000
Accrued liabilities -
Interest 10,281,000 7,263,000
Other 11,000 10,000
Due to affiliates 443,000 417,000
------------- -------------
Total current liabilities 95,735,000 92,690,000
------------- -------------
Investment in and Advances to GB Holdings, Inc. 37,483,000 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 (140,442,000) (141,575,000)
------------- -------------
Total shareholder's deficit (140,441,000) (141,574,000)
------------- -------------
$ 7,777,000 $ 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 STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
-------------------------
1998 1997
----------- -----------
Revenues:
Casino $ - $58,330,000
Rooms - 2,237,000
Food and beverage - 7,920,000
Other 1,466,000 1,265,000
----------- -----------
1,466,000 69,752,000
Less - promotional allowances - (6,255,000)
----------- -----------
Net revenues 1,466,000 63,497,000
----------- -----------
Expenses:
Casino - 49,009,000
Rooms - 596,000
Food and beverage - 2,339,000
Other - 529,000
General and administrative 541,000 3,671,000
Depreciation and amortization - 3,963,000
----------- -----------
Total expenses 541,000 60,107,000
----------- -----------
Income from operations 925,000 3,390,000
----------- -----------
Non-operating income (expense):
Interest income 64,000 402,000
Interest expense (3,019,000) (8,325,000)
Gain on disposal of assets - 7,000
Equity in earnings of Limited
Partnership 1,920,000 1,997,000
Equity in earnings of GB Holdings, Inc. 2,635,000 -
----------- -----------
Total non-operating income (expense), net 1,600,000 (5,919,000)
----------- -----------
Income (loss) before income taxes 2,525,000 (2,529,000)
Income tax provision (1,392,000) -
----------- -----------
Net income (loss) $ 1,133,000 $(2,529,000)
=========== ===========
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated statements.
13
<PAGE>
PRATT CASINO CORPORATION AND SUBSIDIARIES
(WHOLLY OWNED BY PPI CORPORATION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
--------------------------
1998 1997
------------ ------------
OPERATING ACTIVITIES:
Net income (loss) $ 1,133,000 $(2,529,000)
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating
activities:
Depreciation and amortization - 3,963,000
Gain on disposal of assets - (7,000)
Provision for doubtful accounts 141,000 650,000
Equity in earnings of Limited Partnership (1,920,000) (1,997,000)
Distributions received from Limited Partnership 2,159,000 1,747,000
Equity in earnings of GB Holdings, Inc. (2,635,000) -
Increase in accounts receivable - (156,000)
Increase (decrease) in accounts payable and
other accrued liabilities 3,019,000 (4,347,000)
Net change in other current assets and
liabilities 21,000 112,000
Net change in other noncurrent assets and
liabilities 1,222,000 (243,000)
----------- -----------
Net cash provided by (used in) operating
activities 3,140,000 (2,807,000)
----------- -----------
INVESTING ACTIVITIES:
Purchases of property and equipment - (721,000)
Obligatory investments - (670,000)
Proceeds from disposal of assets - 7,000
Short-term investment - 2,000,000
----------- -----------
Net cash provided by investing activities - 616,000
----------- -----------
FINANCING ACTIVITIES:
Repayments on short-term credit facilities - (2,000,000)
Repayments of long-term debt - (3,000)
Borrowings from affiliates - 1,500,000
----------- -----------
Net cash used in financing activities - (503,000)
----------- -----------
Net increase (decrease) in cash and cash
equivalents 3,140,000 (2,694,000)
Cash and cash equivalents at beginning
of period 2,231,000 18,650,000
----------- -----------
Cash and cash equivalents at end of period $ 5,371,000 $15,956,000
=========== ===========
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)
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"). The Sands is 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 officers and directors as of the date of the filing remain in office,
subject to the supervision of the Bankruptcy Court. On May 11, 1998, the
Bankruptcy Court extended the exclusive period of the debtors to file a plan of
reorganization for 90 days and, as such, the exclusivity period expires as of
August 10, 1998.
The accompanying consolidated financial statements include the operating
activities and cash flows of PCC and all of its wholly owned subsidiaries. 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 be in control of such subsidiaries after reorganization. Accordingly,
Holdings, GB Property Funding and GBHC are no longer included on the
accompanying consolidated balance sheets and, effective for periods subsequent
to December 31, 1997, the operations of Holdings and its subsidiaries are
accounted for under the equity method of accounting. PCC's negative investment
in Holdings and its subsidiaries on the accompanying consolidated balance sheets
reflects PCC's investment under the equity method of accounting. All
significant intercompany balances and transactions have been eliminated.
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, does not
have sufficient assets to satisfy the outstanding amounts and is currently
involved in negotiations to
15
<PAGE>
PRATT CASINO CORPORATION AND SUBSIDIARIES
(WHOLLY OWNED BY PPI CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
restructure the notes with three bondholders who control approximately 98% of
the $85,000,000 note issue. PRT Funding has deferred payment of interest due
April 15, 1998 pending the outcome of such negotiations. 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 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 March 31, 1998 and for the three
month periods ended March 31, 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
March 31, 1998 and the results of its operations and cash flows for the three
month periods ended March 31, 1998 and 1997.
16
<PAGE>
PRATT CASINO CORPORATION AND SUBSIDIARIES
(WHOLLY OWNED BY PPI CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(2) LONG-TERM DEBT AND PLEDGE OF ASSETS
Substantially all of PCC's assets are pledged in connection with its long-
term indebtedness. Additionally, certain of the indentures to PCC's indebtedness
contain cross-default provisions. 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 officers and directors as of the date of the filing remain in
office, subject to the supervision of the Bankruptcy Court. On May 11, 1998,
the Bankruptcy Court extended the exclusive period of the debtors to file a plan
of reorganization for 90 days and, as such, the exclusivity period expires as of
August 10, 1998. 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.
MARCH 31, 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
============ ============
- --------------------
(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. The indenture also contains
certain cross default provisions with the indenture to the 10 7/8% First
Mortgage Notes.
17
<PAGE>
PRATT CASINO CORPORATION AND SUBSIDIARIES
(WHOLLY OWNED BY PPI CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(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, interest has not been paid during 1998 and
was not paid during 1997 or 1996.
No interest was paid during the three month period ended March 31, 1998.
Interest paid amounted to $10,093,000 for the three month period ended March 31,
1997.
(4) INCOME TAXES
Components of the income tax provision consisted of the following:
THREE MONTHS ENDED
MARCH 31,
-----------------------
1998 1997
----------- ---------
Benefit in lieu of (provision) for
federal income taxes:
Current $ (187,000) $ 697,000
Deferred 15,000 67,000
State income tax benefit (provision):
Current 406,000 199,000
Deferred 5,000 19,000
Valuation allowance (1,631,000) (982,000)
----------- ---------
$(1,392,000) $ -
=========== =========
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. No federal or state tax payments were made during
either of the three month periods ended March 31, 1998 or 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.
18
<PAGE>
PRATT CASINO CORPORATION AND SUBSIDIARIES
(WHOLLY OWNED BY PPI CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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.
The components of the net deferred tax asset as of March 31, 1998 and
December 31, 1997 were as follows:
MARCH 31, DECEMBER 31,
1998 1997
----------- ------------
Deferred tax assets:
Net operating loss carryforward $ 1,799,000 $ 188,000
Valuation allowance on affiliate receivables 56,000 -
Deferred financing costs 863,000 899,000
Other liabilities and accruals 3,000 3,000
----------- -----------
Total deferred tax assets 2,721,000 1,090,000
Valuation allowance (2,721,000) (1,090,000)
----------- -----------
$ - $ -
=========== ===========
At March 31, 1998, PCC and its subsidiaries have net operating loss
carryforwards ("NOL's") totaling approximately $4 million, none of which expire
before the year 2013 for federal tax purposes and which begin to expire in 1998
for state tax purposes. Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" ("SFAS 109") requires that the tax benefit of
NOL's and deferred tax assets resulting from temporary differences be recorded
as an asset and, to the extent that management can not assess that the
utilization of all or a portion of such NOL's and deferred tax assets is more
likely than not, a valuation allowance should be recorded. Due to the continued
availability of NOL's originating in prior years for federal and state tax
purposes and the book and tax losses sustained in 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 March 31, 1998.
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
19
<PAGE>
PRATT CASINO CORPORATION AND SUBSIDIARIES
(WHOLLY OWNED BY PPI CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
of such examination will not have a material adverse effect on the consolidated
financial position or results of operations of PCC.
Receivables from and payables to affiliates in connection with the
aforementioned tax allocation agreements are as follows:
MARCH 31, DECEMBER 31,
1998 1997
--------- ------------
Due from affiliates - noncurrent $ - $1,394,000
Due to affiliate - current (5,000) (5,000)
(5) TRANSACTIONS WITH RELATED PARTIES
New Jersey Management, Inc. ("NJMI"), a wholly owned subsidiary of PCC, is
responsible for the operations of the Sands under a management agreement. NJMI
is 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. Management
fees earned amounted to $1,166,000 during the three month period ended March 31,
1998. Management fees receivable from the Sands at March 31, 1998 and December
31, 1997 amounted to $194,000 and $34,000, respectively. Of the amount
receivable at March 31, 1998, $145,000 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. Management of GBHC has requested modification to the fee arrangement
under the Sands management agreement and has reserved its right to reject the
agreement.
GBHC licenses the trade name "Sands" from GBCC, which licenses the name
from an unaffiliated third party. Amounts payable by the Sands under this
agreement are equal to the amounts paid to the unaffiliated third party. Such
charges amounted to $67,000 for the three month period ended March 31, 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
March 31, 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 March
31, 1998 and 1997. Interest due to GBCC on the Junior Subordinated Notes of
$5,752,000 and $5,204,000, respectively, is included in interest payable on the
accompanying consolidated balance sheets at March 31, 1998 and December 31,
1997.
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
20
<PAGE>
PRATT CASINO CORPORATION AND SUBSIDIARIES
(WHOLLY OWNED BY PPI CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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. 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 $3,482,000 and $3,458,000, respectively, have been reflected as an
adjustment to PCC's negative investment in Holdings on the accompanying
consolidated balance sheets at March 31, 1998 and 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.
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. 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
MARCH 31,
---------------------
1998 1997
--------- ---------
Billings to affiliates $ - $ 331,000
Charges from affiliates (265,000) (582,000)
(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 $2,546,000 and $2,727,000, respectively, during the three month
periods ended March 31, 1998 and 1997. PML also incurred operating and other
expenses amounting to $357,000 and $460,000, respectively, during the three
month periods ended March 31, 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.
21
<PAGE>
PRATT CASINO CORPORATION AND SUBSIDIARIES
(WHOLLY OWNED BY PPI CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(7) 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 officers and directors as of the date of the filing remain in
office, subject to the supervision of the Bankruptcy Court. On May 11, 1998,
the Bankruptcy Court extended the exclusive period of the debtors to file a plan
of reorganization for 90 days and, as such, the exclusivity period expires as of
August 10, 1998.
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 approximately 98% of the note issue.
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.
22
<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 permits it to
reject the Sands Management Agreement which is an important source of funds for
debt service on the PRT Funding Notes. Management of GBHC has requested
modification to the fee arrangement under the Sands management agreement and has
reserved its right to reject the agreement. 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
approximately 98% of the $85 million note issue. PRT Funding has deferred
payment of interest due April 15, 1998 pending the outcome of such negotiations.
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 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.
23
<PAGE>
PRATT CASINO CORPORATION AND SUBSIDIARIES
(WHOLLY OWNED BY PPI CORPORATION)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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 May 11, 1998, the
Bankruptcy Court extended the exclusive period of the debtors to file a plan of
reorganization for 90 days and, as such, the exclusivity period expires as of
August 10, 1998. Capital expenditures, other than normal recurring capital
expenditures in the ordinary course of business, will require prior approval of
the Bankruptcy Court. 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 be in
control of such subsidiaries after reorganization. Accordingly, the
accompanying consolidated statement of operations for the three month period
ended March 31, 1998 reflects the operations of the filing subsidiaries under
the equity method of accounting. For the three month period ended March 31,
1997, however, the accompanying consolidated statement of operations includes
the operations of Holdings and its subsidiaries on a consolidated basis.
24
<PAGE>
PRATT CASINO CORPORATION AND SUBSIDIARIES
(WHOLLY OWNED BY PPI CORPORATION)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
The following table sets forth PCC's proforma results of operations for the
three month period ended March 31, 1997, exclusive of Holdings and its
subsidiaries (the "PCC Group"), on a basis comparable to the 1998 presentation.
THREE MONTHS ENDED
MARCH 31,
---------------------------
1998 PROFORMA 1997
----------- -------------
Revenues $ 1,466,000 $ 1,605,000
----------- -----------
Expenses:
General and administrative 541,000 316,000
Amortization - 89,000
----------- -----------
Total expenses 541,000 405,000
----------- -----------
Income from operations 925,000 1,200,000
----------- -----------
Non-operating expense:
Interest income 64,000 554,000
Interest expense (3,019,000) (3,019,000)
Equity in earnings of
Limited Partnership 1,920,000 1,997,000
Equity in earnings (losses)
of GB Holdings, Inc. 2,635,000 (3,261,000)
----------- -----------
Total non-operating income
(expense), net 1,600,000 (3,729,000)
----------- -----------
Income (loss) before income taxes 2,525,000 (2,529,000)
Income tax provision (1,392,000) -
----------- -----------
Net income (loss) $ 1,133,000 $(2,529,000)
=========== ===========
REVENUES
Revenues of the PCC Group declined $139,000 (8.7%) during the three month
period ended March 31, 1998 compared to the same period of 1997. The decrease
is due to a decline in management fees earned under the NJMI management contract
with the Sands. As discussed in Note 5 to the consolidated financial
statements, the management fee earned by NJMI is primarily dependent on the
level of revenues at the Sands. The Sands' revenues declined 12% during the
three month period ended March 31, 1998 compared to the same period of 1997.
25
<PAGE>
PRATT CASINO CORPORATION AND SUBSIDIARIES
(WHOLLY OWNED BY PPI CORPORATION)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses for the PCC Group increased $225,000
(71.2%) during the three month period ended March 31, 1998 compared to the 1997
period. This increase is primarily due to the provision of a reserve on
affiliate receivables in the amount of $141,000 and to approximately $60,000 of
professional fees and other corporate overhead costs incurred with respect to
the default of the PRT Funding Notes and efforts to restructure the obligations.
Management believes that such reorganization costs will increase in the near
term pending the outcome of restructuring discussions.
AMORTIZATION
The PCC Group's amortization expense for the first quarter of 1998 decreased
by $89,000 (100%) compared to the same period during 1997. 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.
INTEREST
Interest income for the PCC Group decreased $490,000 (88%) during the three
month period ended March 31, 1998 compared with the same period of 1997. All
interest income earned by the PCC Group on loans and advances to Holdings and
its subsidiaries for periods subsequent to the January 5, 1998 bankruptcy
filings is being reserved. Interest expense did not change during the three
month period ended March 31, 1998 compared to the same period of the prior year.
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 slightly to $1.9 million during the first quarter of 1998 from the $2
million earned in the same period of 1997.
EQUITY IN EARNINGS OF GB HOLDINGS, INC.
Holdings' consolidated net income for the three month period ended March 31,
1998 amounted to $2.6 million compared to a net loss of $3.3 million for the
same period of 1997. The resulting $5.9 million (180.8%) increase in Holdings'
net income between the two periods is primarily due to two factors: ( i) a $1.3
million (57.4%) improvement in income from operations and (ii) a $5.6 million
(95.4%) decline in interest expense.
The increase in operating income reflects a $7.6 million (12%) decline in
net revenues offset by an $8.8 million (14.5%) reduction in operating expenses
for the first quarter of 1998 compared to the first quarter of 1997. The
revenue decrease is a direct result of significant declines in total gross
wagering at
26
<PAGE>
PRATT CASINO CORPORATION AND SUBSIDIARIES
(WHOLLY OWNED BY PPI CORPORATION)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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. The
decline in operating expenses is attributable to the decreased patron volume as
well as to management's efforts to eliminate certain marginally effective
marketing programs and create operating efficiencies.
Holdings' $5.6 million improvement in interest expense is attributable to
its Chapter 11 filing. As a result of the filing, the accrual of interest
expense on Holdings' debt obligations has been suspended. Had the contractual
interest expense ($5.8 million) been accrued, Holdings' net loss for the three
month period ended March 31, 1998 would have amounted to $2.9 million.
INCOME TAX PROVISION
PCC's operations are included in GBCC's consolidated federal income tax
return and, for periods through December 31, 1996, were included in HCC's
consolidated federal income tax return. Pursuant to agreements between PCC and
GBCC, PCC's provision for federal income taxes is based on the amount of tax
which would have been provided if a separate return were filed.
As of March 31, 1998, PCC and its subsidiaries have net operating loss
carryforwards ("NOL's") totaling approximately $4 million, none of which expire
before the year 2013 for federal tax purposes and which begin to expire in 1998
for state tax purposes. Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" ("SFAS 109") requires that the tax benefit of
NOL's and deferred tax assets resulting from temporary differences be recorded
as an asset and, to the extent that management can not assess that the
utilization of all or a portion of such NOL's and deferred tax assets is more
likely than not, a valuation allowance should be recorded. Due to the continued
availability of NOL's originating in prior years for federal and state tax
purposes and the book and tax losses sustained in 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 March 31, 1998.
YEAR 2000 COMPLIANCE
Management believes that its information systems are Year 2000 compliant.
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.
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)
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.
28
<PAGE>
PART II: OTHER INFORMATION
- ---------------------------
The Registrants did not file any reports on Form 8-K during the quarter
ended March 31, 1998. The Registrants filed their Annual Report on Form 10-K for
the year ended December 31, 1997 with the Securities and Exchange Commission on
March 31, 1998.
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: May 13, 1998 By: /s/ Edward T. Pratt, Jr.
------------ ----------------------------------------
Edward T. Pratt, Jr.
Chief Financial Officer and
Principal Accounting Officer
29
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF PRT FUNDING CORP. AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000912897
<NAME> PRT FUNDING CORP.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 13
<SECURITIES> 0
<RECEIVABLES> 6,081
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 70,961
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 75,961
<CURRENT-LIABILITIES> 95,287
<BONDS> 15,000
0
0
<COMMON> 1
<OTHER-SE> (34,327)
<TOTAL-LIABILITY-AND-EQUITY> 75,961
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 366
<INCOME-PRETAX> (366)
<INCOME-TAX> 0
<INCOME-CONTINUING> (366)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (366)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF PRATT CASINO CORPORATION AND SUBSIDIARIES
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000912928
<NAME> PRATT CASINO CORPORATION
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 5,371
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 5,603
<PP&E> 3
<DEPRECIATION> 3
<TOTAL-ASSETS> 7,777
<CURRENT-LIABILITIES> 95,735
<BONDS> 15,000
0
0
<COMMON> 1
<OTHER-SE> (140,442)
<TOTAL-LIABILITY-AND-EQUITY> 7,777
<SALES> 0
<TOTAL-REVENUES> 1,466
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> (4,155)
<LOSS-PROVISION> 141
<INTEREST-EXPENSE> 2,955
<INCOME-PRETAX> 2,525
<INCOME-TAX> 1,392
<INCOME-CONTINUING> 1,133
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,133
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
