<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 1997
-------------------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE COMMISSION ACT OF 1934
For the transition period from _______________________ to ______________________
Commission file number 1-6339
------------
GREATE BAY CASINO CORPORATION
- --------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Delaware 75-1295630
- ----------------------------------------- --------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Two Galleria Tower, Suite 2200
13455 Noel Road, LB 48
Dallas, Texas 75240
- ----------------------------------------- --------------------------------------
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) (972) 386-9777
---------------------------
(Not Applicable)
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the Registrant (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
Registrant was 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.
Class Outstanding at May 12, 1997
- ----------------------------------------- --------------------------------------
Common Stock, $.10 par value 5,186,627 shares
1
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
PART I: FINANCIAL INFORMATION
- -----------------------------
Introductory Notes to Consolidated Financial Statements
- -------------------------------------------------------
Greate Bay Casino Corporation, a Delaware corporation, and its subsidiaries
("GBCC") are engaged primarily in the ownership, operation and management of the
Sands Hotel and Casino located in Atlantic City, New Jersey (the "Sands"); the
management of a riverboat gaming and entertainment facility located in Aurora,
Illinois (the "Aurora Casino") and providing consulting services to a gaming and
lodging facility in Tunica County, Mississippi (the "Tunica Casino"). GBCC has
also engaged in the casino gaming business in Puerto Rico and the management of
hotels in the United States. GBCC's outstanding common shares are listed and
traded on the American Stock Exchange under the symbol GBY. Prior to December
31, 1996, Hollywood Casino Corporation ("HCC", a Delaware corporation) owned
approximately 80% of the outstanding common stock of GBCC. Effective December
31, 1996, HCC distributed such stock to its shareholders; as a result,
approximately 37% of GBCC's outstanding stock is owned by certain general
partnerships and trusts controlled by Jack E. Pratt, Edward T. Pratt, Jr. and
William D. Pratt and by other family members (collectively, the "Pratt Family").
The Pratt Family also owns approximately 53% of HCC. HCC owns the Aurora Casino
and the Tunica Casino.
A significant portion of GBCC's assets relate to its wholly owned
subsidiary, Greate Bay Hotel and Casino, Inc. ("GBHC"), which owns the Sands.
Historically, the Sands' gaming operations have been highly seasonal in nature,
with the peak activity occurring from May to September; consequently, the
results of operations for the three month period ended March 31, 1997 are not
necessarily indicative of the operating results for the full year.
The consolidated financial statements as of March 31, 1997 and for the
three month periods ended March 31, 1997 and 1996 have been prepared by GBCC
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission. 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
GBCC as of March 31, 1997, and the results of its operations and cash flows for
the three month periods ended March 31, 1997 and 1996.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. These consolidated financial statements should
be read in conjunction with the consolidated financial statements and notes
thereto included in GBCC's 1996 Annual Report on Form 10-K.
2
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
ASSETS
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
-------------- --------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 21,431,000 $ 22,991,000
Short-term investment - 2,000,000
Accounts receivable, net of allowances
of $14,757,000 and $15,524,000,
respectively 9,955,000 10,656,000
Inventories 3,910,000 4,016,000
Due from affiliates 2,738,000 2,525,000
Deferred income taxes 1,614,000 1,627,000
Refundable deposits and other
current assets 2,278,000 2,388,000
------------- -------------
Total current assets 41,926,000 46,203,000
------------- -------------
Property and Equipment:
Land 38,957,000 38,957,000
Buildings and improvements 185,508,000 185,508,000
Operating equipment 93,471,000 92,769,000
Construction in progress 1,595,000 1,535,000
------------- -------------
319,531,000 318,769,000
Less - accumulated depreciation
and amortization (165,160,000) (161,882,000)
------------- -------------
Net property and equipment 154,371,000 156,887,000
------------- -------------
Other Assets:
Obligatory investments 6,650,000 6,382,000
Deferred financing costs 7,379,000 7,653,000
Other assets 4,165,000 4,220,000
------------- -------------
Total other assets 18,194,000 18,255,000
------------- -------------
$ 214,491,000 $ 221,345,000
============= =============
</TABLE>
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated balance sheets.
3
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
LIABILITIES AND SHAREHOLDERS' DEFICIT
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
-------------- --------------
<S> <C> <C>
Current Liabilities:
Borrowings from affiliate $ 6,750,000 $ 6,750,000
Short-term credit facilities - 2,000,000
Current maturities of long-term debt 5,585,000 3,127,000
Accounts payable 7,160,000 8,981,000
Accrued liabilities -
Salaries and wages 5,629,000 5,090,000
Interest 9,366,000 11,673,000
Insurance 3,343,000 3,276,000
Other 6,613,000 6,687,000
Other current liabilities 4,282,000 5,479,000
------------- -------------
Total current liabilities 48,728,000 53,063,000
------------- -------------
Long-Term Debt 322,362,000 322,897,000
------------- -------------
Other Noncurrent Liabilities 4,031,000 3,592,000
------------- -------------
Due to Affiliate 1,000,000 1,000,000
------------- -------------
Commitments and Contingencies
Shareholders' Deficit:
Common stock, $.10 par value per
share; 10,000,000 shares authorized;
5,186,627 shares issued and outstanding 519,000 519,000
Additional paid-in capital 38,557,000 38,557,000
Accumulated deficit (200,706,000) (198,283,000)
------------- -------------
Total shareholders' deficit (161,630,000) (159,207,000)
------------- -------------
$ 214,491,000 $ 221,345,000
============= =============
</TABLE>
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated balance sheets.
4
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------------
1997 1996
------------ -------------
<S> <C> <C>
Revenues:
Casino $58,330,000 $ 57,605,000
Rooms 2,237,000 3,524,000
Food and beverage 7,920,000 8,950,000
Other 5,964,000 5,598,000
----------- ------------
74,451,000 75,677,000
Less - promotional allowances (6,255,000) (7,119,000)
----------- ------------
Net revenues 68,196,000 68,558,000
----------- ------------
Expenses:
Casino 49,009,000 54,494,000
Rooms 596,000 1,179,000
Food and beverage 2,339,000 2,951,000
Other 533,000 958,000
General and administrative 4,498,000 5,077,000
Depreciation and amortization 3,967,000 5,255,000
----------- ------------
Total expenses 60,942,000 69,914,000
----------- ------------
Income (loss) from operations 7,254,000 (1,356,000)
----------- ------------
Non-operating income (expenses):
Interest income 227,000 574,000
Interest expense (9,736,000) (9,860,000)
Gain on disposal of assets 7,000 15,000
----------- ------------
Total non-operating expense, net (9,502,000) (9,271,000)
----------- ------------
Loss before income taxes (2,248,000) (10,627,000)
Income tax (provision) benefit (175,000) 831,000
----------- ------------
Net loss $(2,423,000) $ (9,796,000)
=========== ============
Net loss per common share $ (.47) $ (1.89)
=========== ============
</TABLE>
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated statements.
5
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------------------
1997 1996
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $(2,423,000) $(9,796,000)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization, including
accretion of debt discount 5,948,000 7,003,000
Gain on sale of assets (7,000) (15,000)
Provision for doubtful accounts 650,000 567,000
Deferred income tax benefit - (67,000)
Increase in accounts receivable and due from affiliate (162,000) (166,000)
Decrease in accounts payable and
other accrued liabilities (3,596,000) (777,000)
Net change in other current assets and liabilities (960,000) (686,000)
Net change in other noncurrent assets and liabilities (58,000) (53,000)
----------- -----------
Net cash used in operating activities (608,000) (3,990,000)
----------- -----------
INVESTING ACTIVITIES:
Net property and equipment additions (731,000) (2,024,000)
Proceeds from disposal of assets 7,000 15,000
Collections on notes receivable - 27,000
Obligatory investments (670,000) (762,000)
Short-term investments 2,000,000 -
Distributions from unconsolidated affiliate 500,000 -
----------- -----------
Net cash provided by (used in) investing activities 1,106,000 (2,744,000)
----------- -----------
FINANCING ACTIVITIES:
Net (repayments) borrowings on credit facilities (2,000,000) 2,000,000
Repayments of long-term debt (58,000) (136,000)
----------- -----------
Net cash (used in) provided by financing activities (2,058,000) 1,864,000
----------- -----------
Net decrease in cash and cash equivalents (1,560,000) (4,870,000)
Cash and cash equivalents at beginning of period 22,991,000 28,067,000
----------- -----------
Cash and cash equivalents at end of period $21,431,000 $23,197,000
=========== ===========
</TABLE>
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated statements.
6
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) Organization, Business and Basis of Presentation
Greate Bay Casino Corporation, a Delaware corporation, and its subsidiaries
("GBCC"), are engaged in the operation or management of casino properties.
GBCC's principal assets are the Sands Hotel and Casino located in Atlantic City,
New Jersey (the "Sands") and management and consulting contracts with gaming
facilities located in Aurora, Illinois (the "Aurora Casino") and Tunica,
Mississippi (the "Tunica Casino") (see Note 5). GBCC, through its subsidiaries
and various joint ventures, has also engaged to a lesser extent in other hotel
and casino operations in the United States and the Caribbean.
Prior to December 31, 1996, Hollywood Casino Corporation ("HCC", a Delaware
corporation) owned approximately 80% of the outstanding common stock of GBCC.
Effective December 31, 1996, HCC distributed such stock to its shareholders; as
a result, approximately 37% of GBCC's outstanding stock is owned by certain
general partnerships and trusts controlled by Jack E. Pratt, Edward T. Pratt,
Jr. and William D. Pratt and by other family members (collectively, the "Pratt
Family"). The Pratt Family also owns approximately 53% of HCC. HCC owns the
Aurora Casino and the Tunica Casino.
GBCC estimates that a significant amount of the Sands' revenues are derived
from patrons living in southeastern Pennsylvania, northern New Jersey and
metropolitan New York City. Competition in the Atlantic City gaming market is
intense and management believes that this competition will continue or intensify
in the future.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
GBCC is self insured for a portion of its general liability, certain health
care and other liability exposures. Accrued insurance includes estimates of such
accrued liabilities based on an evaluation of the merits of individual claims
and historical claims experience; accordingly, GBCC's ultimate liability may
differ from the amounts accrued.
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets" requires, among other things, that an entity
review its long-lived assets and certain related intangibles for impairment
whenever changes in circumstances indicate that the carrying amount of an asset
may not be fully recoverable. As a result of its review, GBCC does not believe
that any material impairment currently exists related to its long-lived assets.
The consolidated financial statements as of March 31, 1997 and for the
three month periods ended March 31, 1997 and 1996 have been prepared by GBCC
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
GBCC as of March 31, 1997, and the results of its operations and cash flows for
the three month periods ended March 31, 1997 and 1996.
7
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The accompanying consolidated financial statements have been prepared
assuming GBCC and its subsidiaries will continue as going concerns. Greate Bay
Hotel and Casino, Inc. ("GBHC"), which is GBCC's most significant operating
subsidiary, owns and operates the Sands and incurred a net loss exclusive of
management fees of $26,726,000 in 1996 which in turn generated an operating cash
flow deficit of $6,070,000. As a consequence, GBHC has had to rely on borrowings
from affiliates to meet its debt service requirements and to fund working
capital needs during its seasonal low operating periods. The availability of
additional borrowings from GBCC and other subsidiaries of GBCC during 1997 is
limited. HCC, which has loaned $6,500,000 to GBCC for use by the Sands (see Note
2), is subject to certain indenture provisions which restrict its ability to
provide ongoing financial support to an additional $3,500.000.
GBHC's principal and interest requirements during the twelve month period
ending March 31, 1998 amount to $25,308,000. Due to mild winter weather
conditions compared to a year ago and an abatement of the intense marketing
competition for bus customers, operating results for the first quarter of 1997
reflect a substantial improvement over 1996. In the absence of a resumption of
the marketing wars which plagued Atlantic City casinos in 1996 or other
unforeseen events, management believes its operating plan for 1997 is attainable
and will provide sufficient funds from operating cash flow which, together with
funds available from affiliates, if required, will enable GBHC to satisfy its
debt service requirements through the first quarter of 1998.
(2) Short-Term Credit Facilities and Borrowings from Affiliates
As of December 31, 1996, GBHC had $2,000,000 outstanding under a bank line
of credit. Borrowings under the line of credit were guaranteed to the extent of
$2,000,000 by another subsidiary of GBCC, which pledged a certificate of deposit
in the face amount of $2,000,000 as collateral for the line of credit. The line
of credit was repaid upon maturity of the certificate of deposit during January
1997 and the line of credit was cancelled.
GBCC and its subsidiaries had outstanding affiliate borrowings from HCC of
$7,750,000 as of both March 31, 1997 and December 31, 1996. Of the amounts
borrowed, $1,000,000, which is not due until April 1, 1998, is classified as
noncurrent in the accompanying consolidated balance sheets at March 31, 1997 and
December 31, 1996. In addition, $250,000 is due on demand, or if no demand is
made, on April 1, 1998. Such borrowings from HCC bear interest at the rate of
14% per annum, payable semiannually. During the third quarter of 1996, GBCC
borrowed an additional $6,500,000 from HCC on a demand basis with interest at
the rate of 13 3/4% per annum payable quarterly commencing October 1, 1996; such
funds were loaned by GBCC to GBHC for working capital purposes on the same
terms.
8
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(3) Long-Term Debt and Pledge of Assets
Substantially all of GBCC's assets are pledged in connection with GBCC's
long-term indebtedness. Additionally, the indentures with respect to the
February 1994 refinancing of substantially all of GBCC's casino related
outstanding debt contain certain cross-default provisions.
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
------------- -------------
<S> <C> <C>
10 7/8% first mortgage notes, due 2004 (a) $185,000,000 $185,000,000
11 5/8% senior notes, due 2004 (b) 85,000,000 85,000,000
14 7/8% secured promissory note, due 2006, net of
discount of $42,034,000 and $44,015,000,
respectively (c) 56,319,000 54,338,000
Other 1,628,000 1,686,000
------------ ------------
Total indebtedness 327,947,000 326,024,000
Less - current maturities (5,585,000) (3,127,000)
------------ ------------
Total long-term debt $322,362,000 $322,897,000
============ ============
</TABLE>
(a) On February 17, 1994, a subsidiary of GBCC issued $185,000,000 of non-
recourse first mortgage notes due January 15, 2004 (the "10 7/8% First
Mortgage Notes") and collateralized by a first mortgage on the Sands.
Interest on the notes accrues at the rate of 10 7/8% per annum, payable
semiannually commencing July 15, 1994. Interest only is payable during the
first three years. Commencing on July 15, 1997, semiannual principal
payments of $2,500,000 will become due on each interest payment date with
the balance due at maturity. Such semiannual payments may be made in cash
or by tendering to the trustee 10 7/8% First Mortgage Notes previously
purchased or otherwise acquired by GB Property Funding. GB Property
Funding acquired $2,500,000 face amount of 10 7/8% First Mortgage Notes
during May 1997 which it intends to use to make its July 15, 1997 required
principal payment. The 10 7/8% First Mortgage Notes are redeemable at the
option of the issuer, in whole or in part, on or after January 15, 1999 at
stated redemption prices ranging up to 104.08% of par plus accrued
interest.
The indenture for the 10 7/8% First Mortgage Notes contains various
provisions which, among other things, restrict the ability of certain
subsidiaries to pay dividends to GBCC, to merge, consolidate or sell
substantially all of their assets or to incur additional indebtedness
beyond certain limitations. In addition, the indenture requires the
maintenance of certain cash balances and requires minimum expenditures, as
defined in the indenture, for property and fixture renewals, replacements
and betterments at the Sands.
9
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINACIAL STATEMENTS (Continued)
(Unaudited)
(b) On February 17, 1994, a subsidiary of GBCC 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 GBCC 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 respect to the 10 7/8% First
Mortgage Notes described in (a) above.
(c) On February 17, 1994, PPI Funding Corp., a newly formed subsidiary of GBCC,
issued $40,524,000 discounted principal amount of new deferred interest
notes (the "PPI Funding Notes") to HCC in exchange for the $38,779,000
principal amount of 15 1/2% unsecured notes held by HCC and issued by PCPI
Funding Corp., a subsidiary of GBCC (the "PCPI Notes"). The increased
principal amount of the new notes included a call premium on the exchange
($1,745,000) equal to 4 1/2% of the principal amount of PCPI Notes
exchanged; such premium was paid to all third party holders of $58,364,000
principal amount of PCPI Notes concurrently redeemed. The PPI Funding
Notes were discounted to yield interest at the rate of 14 7/8% per annum
and had an original face value of $110,636,000. Subsequent principal
payments by PPI Funding Corp. have reduced the maturity value of the notes
to $98,353,000. Payment of interest is deferred through February 17, 2001
at which time interest will become payable semiannually, with the unpaid
principal balance due on February 17, 2006. The PPI Funding Notes are
collateralized by a pledge of all of the common stock of a subsidiary of
GBCC. Subsequent to March 31, 1997, HCC assigned a portion of the PPI
Funding Notes to GBCC (see Note 8).
Scheduled payments of long-term debt as of March 31, 1997 are set forth
below:
<TABLE>
<S> <C>
1997 (nine months) $ 3,069,000
1998 5,068,000
1999 5,074,000
2000 5,079,000
2001 5,467,000
Thereafter 346,224,000
------------
Total $369,981,000
------------
</TABLE>
Interest paid amounted to $10,117,000 and $10,181,000, respectively, during
the three month periods ended March 31, 1997 and 1996.
10
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINACIAL STATEMENTS (Continued)
(Unaudited)
(4) Income Taxes
Components of GBCC's (provision) benefit for income taxes consist of the
following:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1997 1996
--------- ---------
<S> <C> <C>
Federal income tax benefit $ - $ -
State income tax (provision) benefit:
Current (175,000) 764,000
Deferred - 67,000
--------- ---------
$(175,000) $ 831,000
========= =========
</TABLE>
For periods prior to December 31, 1996, GBCC was included in the
consolidated federal income tax return of HCC, GBCC's parent prior to that date.
Pursuant to agreements between HCC and GBCC, GBCC's provision for federal income
taxes was based on the amount of tax which would have been provided if a
separate federal income tax return were filed. In addition, HCC compensated GBCC
for the use by HCC and its subsidiaries (exclusive of GBCC and its subsidiaries)
of GBCC's available tax net operating loss carryforwards ("NOL's"). GBCC paid no
federal income taxes for the three month periods ended March 31, 1997 and 1996.
GBCC paid state income taxes totaling $3,000 and $25,000 during the three month
periods ended March 31, 1997 and 1996, respectively.
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 certain
amortization, meals and entertainment and other expenses.
Deferred income taxes result primarily from the use of the allowance method
rather than the direct write-off method for doubtful accounts, the use of
accelerated methods of depreciation for federal and state income tax purposes
and differences in the timing of deductions taken between tax and financial
reporting purposes for contributions of and adjustments to the carrying value of
certain investment obligations and for vacation and other accruals.
As a result of the distribution of GBCC's stock by HCC to its shareholders,
GBCC is no longer included in HCC's consolidated Federal income tax return. At
March 31, 1997, GBCC and its subsidiaries have NOL's totaling approximately $80
million for Federal income tax purposes of which approximately $63 million do
not begin to expire until the year 2003. Additionally, GBCC and its subsidiaries
have various tax credits available totaling approximately $3,200,000, most of
which expire by the year 2004. Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes" ("SFAS 109") requires that the tax benefit of
such NOL's, credit carryforwards 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
and
11
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
the book and tax losses sustained in 1997 to date, 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 for all periods
presented.
Sales or purchases of GBCC common stock by certain five percent
stockholders, as defined in the Internal Revenue Code of 1986, as amended (the
"Code"), can cause a "change of control", as defined in Section 382 of the Code,
which would limit the ability of GBCC 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 GBCC's 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 GBCC was
included. Management believes that the results of such examination will not have
a material adverse effect on the consolidated financial position of GBCC.
The components of the net deferred tax asset were as follows:
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
------------- -------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 27,234,000 $ 26,335,000
Allowance for doubtful accounts 6,348,000 6,428,000
Investment and jobs tax credits 3,223,000 3,223,000
Equity losses of unconsolidated
subsidiaries and joint ventures 3,113,000 3,293,000
Other liabilities and accruals 3,138,000 3,034,000
Other 2,173,000 2,037,000
------------ ------------
Total deferred tax assets 45,229,000 44,350,000
------------ ------------
Deferred tax liabilities:
Depreciation and amortization (8,411,000) (8,334,000)
Other (597,000) (597,000)
------------ ------------
Total deferred tax liabilities (9,008,000) (8,931,000)
------------ ------------
Net deferred tax asset 36,221,000 35,419,000
Valuation allowance (36,221,000) (35,419,000)
------------ ------------
$ - $ -
============ ============
</TABLE>
12
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(5) Transactions with Related Parties
Prior to sale of the property in September 1996, GBCC operated the Holiday
Inn located at the north entrance of the Dallas/Fort Worth Airport ("DFW North")
which was owned by Metroplex Hotel Limited ("Metroplex"), a partnership
controlled by certain members of the Pratt Family. During the three month period
ended March 31, 1996, GBCC made capital expenditures under the hotel operating
agreement totaling $885,000. GBCC was also obligated by the hotel operating
agreement to make minimum rental payments equal to Metroplex's principal and
interest payments on the underlying indebtedness of this hotel. During February
1994, GBCC utilized funds borrowed from HCC to purchase such underlying
indebtedness with a principal balance of $13,756,000 from third parties at a
cost of $6,750,000 and subject to third party indebtedness amounting to
$2,706,000. The required minimum rental payments (net of debt service receipts)
amounted to $131,000 during the three month period ended March 31, 1996. Upon
the sale of the hotel by Metroplex, GBCC received proceeds sufficient to repay
third party indebtedness of $1,873,000, recover its $6,750,000 acquisition cost
of the underlying indebtedness, recover $2,851,000 of its total investment in
property improvements and receive additional cash of approximately $770,000.
Pratt Management, L.P. ("PML"), a limited partnership wholly owned through
March 31, 1997 by GBCC, earns, pursuant to a management agreement, a base
management fee from Hollywood Casino - Aurora, Inc. ("HCA"), an HCC subsidiary,
equal to 5% of the Aurora Casino's operating revenues (as defined in the
agreement) subject to a maximum of $5.5 million annually, and an incentive fee
equal to 10% of gross operating profit (as defined in the agreement to generally
include all revenues, less expenses other than depreciation, interest,
amortization and taxes). Such fees totaled approximately $2,727,000 and
$2,943,000, respectively, during the three month periods ended March 31, 1997
and 1996. Unpaid fees amounting to $2,109,000 and $2,096,000, respectively, are
included in due from affiliates in the accompanying consolidated balance sheets
at March 31, 1997 and December 31, 1996. Effective as of April 1, 1997, HCC
acquired the general partnership interest in PML from a subsidiary of GBCC (see
Note 8).
Pursuant to a ten-year consulting agreement with Hollywood Casino -Tunica,
Inc. ("HCT"), the HCC subsidiary which owns and operates the Tunica Casino, a
subsidiary of GBCC receives monthly consulting fees of $100,000. Total fees
earned for each of the three month periods ended March 31, 1997 and 1996
amounted to $300,000.
GBCC and its subsidiaries share certain general and administrative costs
with HCC. Net allocated costs and fees charged to GBCC and its subsidiaries by
HCC amounted to $686,000 and $688,000, respectively, during the three month
periods ended March 31, 1997 and 1996. In connection with such allocated costs
and fees, payables in the amount of $476,000 and $203,000 are included in
accounts payable in the accompanying consolidated balance sheets at March 31,
1997 and December 31, 1996, respectively.
13
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
HCT and Advanced Casino Systems Corporation ("ACSC"), a GBCC subsidiary,
entered into a Computer Services Agreement dated as of January 1, 1994 and
renewed through December 31, 1999. The agreement provides, among other things,
that ACSC will sell HCT computer hardware and information systems equipment and
will license or sublicense to HCT computer software necessary to operate HCT's
casino, hotel and related facilities and business operations. HCT pays ACSC for
such equipment and licenses such software at amounts and on terms and conditions
that ACSC provides to unrelated third parties as well as a fixed license fee of
$33,600 per month ($30,000 prior to January 1, 1997). HCT also reimburses ACSC
for its direct costs and expenses incurred under this agreement. Total charges
incurred under such agreement amounted to $111,000 and $121,000, respectively,
for the three month periods ended March 31, 1997 and 1996. HCA also receives
certain computer-related services from GBCC subsidiaries including hardware,
software, and operator support. HCA reimburses GBCC for its direct costs and any
expenses incurred. Such costs totaled $43,000 and $49,000, respectively, during
the three month periods ended March 31, 1997 and 1996.
GBHC performs certain administrative and marketing services on behalf of
HCT and HCA. During the three month periods ended March 31, 1997 and 1996, fees
charged by GBHC for such services totaled $268,000 and $329,000, respectively.
Unpaid fees amounting to $343,000 and $128,000 are included in due from
affiliates in the accompanying consolidated balance sheets at March 31, 1997 and
December 31, 1996, respectively.
On February 17, 1994, PRT Funding Corp., a subsidiary of GBCC, issued
$15,000,000 of 14 5/8% 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.
Interest expense with respect to borrowings from HCC is set forth below:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------------
1997 1996
------------ ----------
<S> <C> <C>
PPI Funding Notes held by HCC (Note 3) $1,981,000 $1,749,000
Junior Subordinated Notes - 319,000
Short-term borrowings (Note 2) 267,000 212,000
</TABLE>
During 1994, a GBCC subsidiary issued $40,524,000 discounted principal
amount of PPI Funding Notes in exchange for the PCPI Notes held by HCC (see Note
3). Accretion of interest on the PPI Funding Notes is included in the
outstanding note payable balances at March 31, 1997 and December 31, 1996.
14
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Interest accrued on short-term borrowings at March 31, 1997 and December
31, 1996 amounting to $590,000 and $323,000, respectively, is included in
interest payable on the accompanying consolidated balance sheets at March 31,
1997 and December 31, 1996.
(6) Litigation
Planet Hollywood Litigation
---------------------------
Planet Hollywood International, Inc., a Delaware corporation, and Planet
Hollywood (Region IV), Inc., a Minnesota corporation (collectively, "PHII"),
filed a complaint in the United States District Court for the Northern District
of Illinois, Eastern Division on July 29, 1996 against HCC, HCA and a member of
the Pratt Family (collectively, the "Original Hollywood Defendants"). The
Original Hollywood Defendants filed with the Court on September 18, 1996 an
answer to PHII's lawsuit, along with numerous counterclaims against PHII, Robert
Earl and Keith Barish (collectively, the "PHII Defendants"). PHII filed with the
Court on January 21, 1997, an amendment to their complaint which, among other
things, added HCT (together with the Original Hollywood Defendants, the
"Hollywood Defendants") and GBCC as defendants. The Original Hollywood
Defendants filed with the Court on February 4, 1997, and GBCC and HCT filed with
the Court on February 20, 1997, answers and counterclaims to such amended
complaint.
In its lawsuit, PHII alleges, among other things, that the Hollywood
Defendants and GBCC have, in opening and operating the Hollywood Casino concept,
infringed on PHII's trademark, service mark and trade dress and have engaged in
unfair competition and deceptive trade practices. In their counterclaims, the
Hollywood Defendants and GBCC allege, among other things, that the PHII
Defendants have, through their planned use of their mark in connection with
casino services, infringed on certain of HCC's service marks and trade dress and
have engaged in unfair competition.
Given the uncertainties inherent in litigation, no assurance can be given
that the Hollywood Defendants and GBCC will prevail in this litigation; however,
the Hollywood Defendants and GBCC believe that PHII's claims are without merit
and intend to defend their position and pursue their counterclaims vigorously.
The accompanying consolidated financial statements do not include any
adjustments that might result from the outcome of the uncertainties described
above.
Other Litigation
----------------
GBCC and its subsidiaries are parties in various legal proceedings with
respect to the conduct of casino and hotel operations. Although a possible range
of loss cannot 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 GBCC and its subsidiaries. The accompanying consolidated financial
statements do not include any adjustments that might result from the outcome of
the uncertainties described above.
15
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(7) Reclassifications
Certain reclassifications have been made to the prior years' consolidated
financial statements to conform to the 1997 consolidated financial statement
presentation. Such reclassifications include the reallocation of certain costs
among the various operating departments and general and administrative expenses
resulting from the completion of a comprehensive internal review during 1996 of
departmental allocations. Management believes that such reclassifications better
reflect the matching of costs with the associated revenues.
(8) Subsequent Event
Effective as of April 1, 1997, HCC acquired the general partnership
interest in PML (see Note 5) owned by a subsidiary of GBCC. PML earns management
fees from the Aurora Casino and incurs operating and other expenses with respect
to its management thereof. The general partner receives 99% of the first $84,000
of net income earned by the partnership each month and 1% of any income earned
above such amount. The GBCC subsidiary received a five-year note in the original
amount of $3,800,000, $13,750,000 undiscounted principal amount of PPI Funding
Notes (see Note 4) and the assignment of $350,000 of accrued interest due from
GBCC in exchange for the general partnership interest.
16
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
This Quarterly Report on Form 10-Q contains forward-looking statements
about the business, financial condition and prospects of GBCC. 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 GBCC in particular,
and other risks indicated in GBCC'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 GBCC or its management
are intended to identify forward-looking statements.
General
GBCC's consolidated net revenues decreased to $68.2 million during the
first quarter of 1997 from $68.6 million for the first quarter of 1996; however,
significant reductions in operating expenses during the period resulted in
income from operations of $7.3 million in 1997 compared to a loss from
operations of $1.4 million during 1996. This improvement in operating results
is attributable to operations at the Sands as discussed below.
The Sands earned income from operations of $2.2 million during the three
month period ended March 31, 1997 compared to a loss from operations of $4.9
million reported for the three month period ended March 31, 1996. Operating
results during the first quarter of 1997 were favorably impacted by operating
efficiencies and by management's decision to discontinue certain aggressive
marketing programs. Operating results during the first quarter of 1996 were
adversely affected by record winter snowstorms in January, two additional
weekend snowstorms in February and the advent of both unprecedented and highly
aggressive marketing programs instituted by certain other Atlantic City casinos
seeking to increase their market share. Improved weather conditions and a
slight increase in slot hold percentage combined to produce an overall increase
in net revenues (from $62.8 million in 1996 to $63.2 million in 1997). In
addition, marketing and advertising costs decreased by $2.7 million (15.1%)
during the first quarter of 1997 compared to the same period of 1996 as a result
of an easing in competitive pressures.
17
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Gaming Operations
The following table sets forth certain unaudited financial and operating
data relating to the Sands' operations:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------------------
1997 1996
----------- ------------
(in thousands, except percentages)
<S> <C> <C>
Revenues:
Table games $ 19,491 $ 20,175
Slot machines 38,000 36,441
Other (1) 839 989
-------- --------
Total $ 58,330 $ 57,605
======== ========
Table games:
Gross Wagering
(Drop) (2) $131,044 $134,388
======== ========
Hold Percentages: (3)
Sands 14.9% 15.0%
Atlantic City Casino
Gaming Industry 15.7% 16.5%
Slot machines:
Gross Wagering
(Handle) (2) $454,190 $439,380
======== ========
Hold Percentage:(3)
Sands (4) 8.4% 8.3%
</TABLE>
____________________________
(1) Consists of revenues from poker and simulcast horse racing wagering.
(2) Gross wagering consists of the total value of chips purchased for table
games (excluding poker) and keno wagering (collectively, the "drop") and
coins wagered in slot machines ("handle").
(3) Casino revenues consist of the portion of gross wagering that a casino
retains and, as a percentage of gross wagering, is referred to as the "hold
percentage".
(4) The Sands' hold percentage with respect to slot machines is reflected on an
accrual basis. Comparable data for the Atlantic City gaming industry is not
available.
18
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Table games drop at the Sands declined $3.3 million (2.5%) during the three
month period ended March 31, 1997 compared with the same period of 1996. The
Sands' decrease compares to an increase of 12.2% in table drop for all other
Atlantic City casinos during the same period. As a result, the Sands' table
game market share (expressed as a percentage of the Atlantic City industry
aggregate table game drop) decreased to 7.2% during the three month period ended
March 31, 1997 from 8.2% during the same period of 1996. The Sands' table game
drop decrease is primarily attributable to declines in patron volume from the
unrated or "mass" segment. Expansions of other Atlantic City casinos resulted
in an increase of over 110,000 square feet of gaming space and 106 tables at
March 31, 1997 compared to March 31, 1996. Such expansions typically result in
intense marketing campaigns which lure the "mass" segment to the new facility.
Gaming space at the Sands has remained virtually unchanged since the first
quarter of 1996 and the number of table games has decreased by 3.1%.
Furthermore, management discontinued certain promotional activities, including
the use of "special odds" offered at table games, which also impacted the Sands'
table drop.
Slot machine handle increased $14.8 million (3.4%) during the three month
period ended March 31, 1997 compared with the same period of 1996. The Sands'
increase in slot machine handle compares with a 5.3% increase in handle for all
other Atlantic City casinos. The Sands' average number of slot machines
decreased by less than 1% during the first quarter of 1997 compared to an
increase of 11.2% for all other Atlantic City casinos. The less than industry-
wide increase experienced by the Sands is a result of the same competitive
pressures resulting from casino expansions and related marketing campaigns at
other properties as discussed above with respect to table games.
Revenues
Casino revenues at the Sands, including poker and simulcast horse racing
wagering revenues, increased slightly by $725,000 (1.3%) for the three month
period ended March 31, 1997 compared with the same period of 1996. Increases in
slot machine wagering together with an improvement in the slot hold percentage
allowed the Sands to overcome the decline in table game and other casino
revenues.
Rooms revenue decreased $1.3 million (36.5%) during the three month period
ended March 31, 1997 compared with 1996 as a result of GBCC's sale of its last
remaining non-casino hotel property in September 1996. Food and beverage
revenues decreased $1 million (11.5%) for the three month period ended March 31,
1997 compared with the prior year period as a result of the aforementioned hotel
sale combined with reduced patron volume, the rescheduling of unit operating
hours to increase overall profitability and the reduction of certain promotional
activities at the Sands. Other revenues increased $366,000 (6.5%) during the
three month period ended March 31, 1997 compared to the 1996 period. Decreases
resulting from the hotel sale and from reductions in theater entertainment at
the Sands were more than offset by the receipt of $1.5 million as a termination
fee in connection with the first quarter 1997 sale of a casino/hotel property
managed by GBCC.
Promotional allowances represent the estimated value of goods and services
provided free of charge to casino customers under various marketing programs.
As a percentage of rooms, food and beverage and
19
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
other revenues at the Sands, these allowances decreased to 56.2% during the
three month period ended March 31, 1997 from 57.7% during the first quarter of
1996. Such decrease is primarily attributable to reductions in certain
marketing programs and other promotional activities.
Departmental Expenses
Casino expenses at the Sands decreased $5.5 million (10.1%) during the
three month period ended March 31, 1997 compared with 1996. During 1996, an
unprecedented and highly aggressive industry-wide attempt to increase market
share resulted in significantly higher costs with respect to coin incentive
packages. The abatement of these competitive pressures during the first quarter
of 1997 together with management's ongoing efforts to create operating
efficiencies, have significantly reduced expenses. Such factors have also
resulted in a reduction in the allocation of rooms, food and beverage and other
expenses to casino expense.
Rooms expense decreased $583,000 (49.4%) during the first quarter of 1997
compared to the first quarter of 1996 primarily due to the sale of a noncasino
hotel and to the decreased allocation of rooms expense to casino expense at the
Sands as a result of rooms previously set aside for casino marketing activities
now being made available for paying guests. Food and beverage expense decreased
by $612,000 (20.7%) during the three month period ended March 31, 1997 compared
to the same period in 1996 primarily as a result of the hotel sale noted
previously, together with reductions in food and beverage marketing programs at
the Sands, the costs of which are allocated to the casino department. Other
expenses decreased $425,000 (44.4%) during the three month period ended March
31, 1997 compared with 1996 primarily due to the hotel sale.
General and Administrative
General and administrative expenses decreased by $579,000 (11.4%) during
the three month period ended March 31, 1997 compared to the 1996 period
primarily due to the disposal of GBCC's remaining noncasino hotel properties
together with reduced overhead allocations from HCC.
Depreciation and Amortization
As a result of a revision in the estimated useful life of the Sands'
buildings effective October 1, 1996 and the completion of amortization with
respect to certain of its long lived assets, GBCC's depreciation and
amortization expense for the first quarter of 1997 decreased by $1.3 million
(24.5%) compared to the same period during 1996.
Interest
Interest income decreased $347,000 (60.5%) during the first quarter of 1997
compared to the same period during 1996 as a result of GBCC no longer receiving
interest income on a note receivable with
20
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
respect to a hotel property sold in September 1996 and a reduction in temporary
cash investments. Interest expense did not change significantly during the 1997
period compared to the prior year.
Income Tax Benefit
From May 1992 through December 31, 1996, GBCC's results of operations were
included in HCC's consolidated Federal income tax return. Pursuant to
agreements between HCC and GBCC, GBCC's provision for Federal income taxes was
based on the amount of tax which would have been provided if a separate Federal
income tax return had been filed. As a result of the distribution of GBCC's
common stock by HCC to its shareholders, GBCC is no longer included in HCC's
consolidated Federal income tax return.
As of March 31, 1997, GBCC and its subsidiaries have tax net operating loss
carryforwards ("NOL's") totaling approximately $80 million, of which
approximately $63 million do not begin to expire until the year 2003.
Additionally, GBCC and its subsidiaries have various tax credits available
totaling approximately $3.2 million, most of which expire by the year 2004.
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" requires that the tax benefit of such NOL's, credit carryforwards and
deferred tax assets resulting from temporary differences be recorded as an asset
and, to the extent that management can not assess that utilization of such NOL's
is more likely than not, a valuation allowance should be recorded. Due to the
continued availability of NOL's originating in prior years and the book and tax
losses sustained in 1997 to date, 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, 1997.
Inflation
Management believes that in the near term, modest inflation, together with
increasing competition within the gaming industry for qualified and experienced
personnel, will continue to cause increases in operating expenses, particularly
labor and employee benefits costs.
Seasonality
Historically, the Sands' operations have been highly seasonal in nature,
with the peak activity occurring from May to September. Consequently, the
results of GBCC'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 GBCC's casino revenues and
profitability.
21
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
LIQUIDITY AND CAPITAL RESOURCES
Operating Activities
GBCC's principal assets and sources of revenues are the Sands and
management and consulting contracts with the Aurora Casino and the Tunica
Casino. During the first quarter of 1997, GBCC's net cash used in operating
activities (after net interest expense and income taxes) amounted to $608,000. A
GBCC subsidiary receives a base management fee equal to 5% of operating revenues
(as defined in the management agreement) subject to a maximum of $5.5 million
annually, and an incentive fee equal to 10% of gross operating profit (as
defined in the management agreement) from the operation of the Aurora Casino.
Management fees received during the first quarter of 1997 amounted to $2.7
million. During 1994, a subsidiary of GBCC entered into a consulting agreement
with HCT with respect to the Tunica Casino which provides for the payment of
$1.2 million annually by the Tunica Casino to the subsidiary for consulting
services and for reimbursement of direct costs and expenses incurred.
Prior to 1996, the Sands' earnings before depreciation, interest,
amortization, taxes and intercompany management fees were sufficient to meet its
debt service obligations (other than certain maturities of principal that have
been refinanced) and to fund a substantial portion of its capital expenditures.
Historically, the Sands has also used short-term borrowings to fund seasonal
cash needs and has used long-term borrowings for certain capital projects.
GBCC utilized existing cash, $1.5 million received as a termination fee in
connection with the sale of a casino/hotel property managed by GBCC and
distributions from an unconsolidated affiliate during the three month period
ended March 31, 1997 to meet its operating needs, to repay its $2 million bank
line of credit, to fund capital additions totaling $731,000 and to make
obligatory investments at the Sands of $670,000.
Financing Activities
During February 1994, GBCC completed the refinancing of virtually all of
its casino-related outstanding debt. The refinancing was completed through a
public offering of $270 million of debt securities consisting of $185 million of
10 7/8% First Mortgage Notes due January 15, 2004 and $85 million of 11 5/8% PRT
Funding Notes due April 15, 2004. Proceeds from the debt offerings were used, in
part, to refinance outstanding mortgage notes on the Sands and other
indebtedness scheduled to mature in 1994, to repay $58.4 million of the other
publicly held indebtedness and to provide partial funding for an expansion of
gaming space at the Sands. During the first quarter of 1997, GBCC repaid long-
term indebtedness of $58,000. Commencing in July 1997, semiannual principal
payments of $2.5 million will become due with respect to the 10 7/8% First
Mortgage Notes. Such semiannual payments may be made in cash or by tendering to
the trustee 10 7/8% First Mortgage Notes previously purchased or otherwise
acquired by GB Property Funding. GB Property Funding acquired $2.5 million face
amount of 10 7/8% First Mortgage Notes during May 1997 which it intends to use
to make its July 15, 1997 required principal payment. Total scheduled maturities
of long-term debt during the remainder of 1997 are $3.1 million.
22
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
In connection with the refinancing discussed in the previous paragraph, HCC
loaned $15 million on a junior subordinated basis to GBCC at 14 5/8% interest
(the "Junior Subordinated Notes"). As of December 31, 1996, HCC had assigned
the entire principal amount of the Junior Subordinated Notes together with
accrued interest thereon to GBCC in consideration for tax net operating losses
of GBCC utilized by HCC in 1994 ($6.3 million principal and $1.9 million
interest) and as a capital contribution in connection with the distribution of
GBCC stock to HCC's shareholders ($8.7 million principal and $1.8 million
interest).
Also in connection with the refinancing, GBCC issued $40.5 million
discounted principal amount of deferred interest notes (the "PPI Funding Notes")
to HCC in exchange for $38.8 million principal amount of 15 1/2% notes issued by
another GBCC subsidiary and held by HCC. Effective as of April 1, 1997, HCC
acquired from a GBCC subsidiary the general partnership interest in the limited
partnership which holds the Aurora management agreement. The acquisition price
for the general partnership interest included a note in the amount of $3.8
million and the assignment of $13.8 million undiscounted principal amount of PPI
Funding Notes and $350,000 of accrued interest due from GBCC. Annual principal
and interest payments by HCC on the $3.8 million note will approximate the
general partner's share of annual partnership distributions which will now be
made to HCC. With respect to the assignment of PPI Funding Notes, GBCC has
reduced both the amount of its future debt obligation to HCC and its annual non-
cash interest expense.
During the third quarter of 1996, GBCC borrowed $6.5 million from HCC which
accrues interest at the rate of 13 3/4% per annum payable quarterly commencing
October 1, 1996. GBCC loaned such funds to GBHC on similar terms.
GBHC repaid its $2 million bank line of credit during January 1997 and the
line of credit was cancelled.
Capital Expenditures and Other Investments
Property and equipment additions during the first quarter of 1997 totaled
$731,000, of which capital expenditures at the Sands amounted to approximately
$721,000. Management anticipates capital expenditures during the remainder of
1997 will be approximately $4.2 million at the Sands. Projects currently
planned during the remainder of 1997 include additional upgrades and
improvements to rooms at the Sands, including its higher-end suite product, and
other departmental expenditures.
The Sands is required by the New Jersey Casino Control Act to make certain
investments with the Casino Reinvestment Development Authority, a governmental
agency which administers the statutorily mandated investments made by casino
licensees. Deposit requirements for the first quarter of 1997 totaled $670,000
and are anticipated to be approximately $2.4 million during the remainder of
1997.
23
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Summary
GBHC, which is GBCC's most significant operating subsidiary, incurred a net
loss exclusive of management fees of $26.7 million in 1996 which in turn
generated an operating cash flow deficit of $6.1 million. As a consequence,
GBHC has had to rely on borrowings from affiliates to meet its debt service
requirements and to fund working capital needs during its seasonal low operating
periods. The availability of additional borrowings from GBCC and other
subsidiaries of GBCC during 1997 is limited. HCC, which loaned $6.5 million to
GBCC for use by the Sands, is subject to certain indenture provisions which
restrict its ability to provide ongoing financial support to an additional $3.5
million.
GBHC's principal and interest requirements during the twelve month period
ending March 31, 1998 amount to $25 million. Due to mild winter weather
conditions compared to a year ago and an abatement of the intense marketing
competition for bus customers, operating results for the first quarter of 1997
reflect a substantial improvement over 1996. In the absence of a resumption of
the marketing wars which plagued Atlantic City casinos in 1996 or other
unforeseen events, management believes that its operating plan for 1997 is
attainable and will provide sufficient funds from operating cash flow which,
together with funds available from affiliates, if required, will enable GBHC to
satisfy its debt service requirements through the first quarter of 1998.
24
<PAGE>
PART II: OTHER INFORMATION
- ---------------------------
The Registrant did not file any reports on form 8-K during the quarter
ended March 31, 1997. The Registrant filed its Annual Report on Form 10-K for
the year ended December 31, 1996 with the Securities and Exchange Commission on
March 31, 1997.
SIGNATURES
- ----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GREATE BAY CASINO CORPORATION
Date: May 13, 1997 By: /s/ John C. Hull
-------------------------- -------------------------------
John C. Hull
Corporate Controller
25
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF GREATE BAY CASINO CORPORATION (FORMERLY
PRATT HOTEL CORPORATION) AND SUBSIDIARIES AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 21,431
<SECURITIES> 0
<RECEIVABLES> 24,712
<ALLOWANCES> 14,757
<INVENTORY> 3,910
<CURRENT-ASSETS> 41,926
<PP&E> 319,531
<DEPRECIATION> 165,160
<TOTAL-ASSETS> 214,491
<CURRENT-LIABILITIES> 48,728
<BONDS> 322,362
0
0
<COMMON> 519
<OTHER-SE> (162,149)
<TOTAL-LIABILITY-AND-EQUITY> 214,491
<SALES> 0
<TOTAL-REVENUES> 68,196
<CGS> 0
<TOTAL-COSTS> 51,827
<OTHER-EXPENSES> 8,458
<LOSS-PROVISION> 650
<INTEREST-EXPENSE> 9,509
<INCOME-PRETAX> (2,248)
<INCOME-TAX> 175
<INCOME-CONTINUING> (2,423)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,423)
<EPS-PRIMARY> (.47)
<EPS-DILUTED> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF GREATE BAY CASINO CORPORATION (FORMERLY
PRATT HOTEL CORPORATION) AND SUBSIDIARIES AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 23,197
<SECURITIES> 0
<RECEIVABLES> 28,901
<ALLOWANCES> 16,948
<INVENTORY> 4,337
<CURRENT-ASSETS> 48,034
<PP&E> 319,831
<DEPRECIATION> 153,159
<TOTAL-ASSETS> 241,764
<CURRENT-LIABILITIES> 45,793
<BONDS> 330,176
0
0
<COMMON> 519
<OTHER-SE> (148,730)
<TOTAL-LIABILITY-AND-EQUITY> 241,764
<SALES> 0
<TOTAL-REVENUES> 68,558
<CGS> 0
<TOTAL-COSTS> 59,015
<OTHER-EXPENSES> 10,317
<LOSS-PROVISION> 567
<INTEREST-EXPENSE> 9,286
<INCOME-PRETAX> (10,627)
<INCOME-TAX> (831)
<INCOME-CONTINUING> (9,796)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,796)
<EPS-PRIMARY> (1.89)
<EPS-DILUTED> 0
</TABLE>
