<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, 1998
--------------
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.)
C/O SANDS HOTEL & CASINO
INDIANA AVENUE & BRIGHTON PARK, 9TH FLOOR
ATLANTIC CITY, NEW JERSEY 08401
- ------------------------------------------------------ --------------
(Address of principal executive offices) (Zip Code)
(Registrant's 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 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, 1998
----- ---------------------------
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 in the operation and management of casino properties.
GBCC's principal operations consist of 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 County, Mississippi (the "Tunica Casino"). GBCC's common stock is listed
on the OTC Bulletin Board Service under the symbol "GEAA". Prior to December 31,
1996, Hollywood Casino Corporation ("HCC", a Delaware corporation) owned
approximately 80% of the outstanding common stock of GBCC. HCC distributed such
stock to its shareholders; as a result, approximately 36% 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.
On January 5, 1998, Greate Bay Hotel and Casino, Inc. ("GBHC"), GB
Holdings, Inc. ("Holdings") and GB Property Funding Corp. ("GB Property
Funding"), all of which are indirect, wholly owned subsidiaries of GBCC, 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 $85,000,000 principal amount of 11 5/8% senior notes due 2004 (the
"PRT Funding Notes") issued by PRT Funding Corp., an indirect, wholly owned
subsidiary of GBCC. 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.
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 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, 1998, and the results of its 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 consolidated financial statements should
be read in conjunction with the consolidated financial statements and notes
thereto included in GBCC's 1997 Annual Report on Form 10-K.
2
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (NOTE 1)
(UNAUDITED)
ASSETS
MARCH 31, DECEMBER 31,
1998 1997
------------ -------------
Current Assets:
Cash and cash equivalents $ 8,915,000 $ 6,555,000
Accounts receivable, net of allowances
of $220,000 and $213,000,
respectively 84,000 61,000
Inventories 158,000 164,000
Due from affiliates 1,134,000 723,000
Option payment 1,000,000 1,000,000
Refundable deposits and other
current assets 1,409,000 878,000
----------- -----------
Total current assets 12,700,000 9,381,000
----------- -----------
Investment in Limited Partnership 2,017,000 2,256,000
----------- -----------
Property and Equipment:
Land 864,000 864,000
Operating equipment 1,347,000 1,317,000
----------- -----------
2,211,000 2,181,000
Less - accumulated depreciation
and amortization (999,000) (971,000)
----------- -----------
Net property and equipment 1,212,000 1,210,000
----------- -----------
Other Assets:
Due from affiliates, net of valuation allowances 2,839,000 2,897,000
Other assets 9,000 8,000
----------- -----------
Total other assets 2,848,000 2,905,000
----------- -----------
$18,777,000 $15,752,000
=========== ===========
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 (NOTE 1)
(UNAUDITED)
LIABILITIES AND SHAREHOLDERS' DEFICIT
MARCH 31, DECEMBER 31,
1998 1997
--------- ------------
Current Liabilities:
Current maturities of long-term debt $ 85,056,000 $ 85,055,000
Borrowings from affiliate 12,422,000 12,422,000
Accounts payable 598,000 967,000
Accrued liabilities -
Salaries and wages 214,000 133,000
Interest 9,812,000 6,875,000
Insurance 156,000 128,000
Other 72,000 62,000
Other current liabilities 490,000 730,000
------------- -------------
Total current liabilities 108,820,000 106,372,000
------------- -------------
Investment in and Advances to GB Holdings, Inc. 18,090,000 20,996,000
------------- -------------
Long-Term Debt 32,022,000 30,894,000
------------- -------------
Other Noncurrent Liabilities 686,000 606,000
------------- -------------
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 75,212,000 75,212,000
Accumulated deficit (216,572,000) (218,847,000)
------------- -------------
Total shareholders' deficit (140,841,000) (143,116,000)
------------- -------------
$ 18,777,000 $ 15,752,000
============= =============
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 (NOTE 1)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------
1998 1997
<S> <C> <C>
Revenues:
Casino $ - $58,330,000
Rooms - 2,237,000
Food and beverage - 7,920,000
Other 2,352,000 5,964,000
----------- -----------
2,352,000 74,451,000
Less - promotional allowances - (6,255,000)
----------- -----------
Net revenues 2,352,000 68,196,000
----------- -----------
Expenses:
Casino - 49,009,000
Rooms - 596,000
Food and beverage - 2,339,000
Other 4,000 533,000
General and administrative 981,000 4,498,000
Depreciation and amortization 28,000 3,967,000
----------- -----------
Total expenses 1,013,000 60,942,000
----------- -----------
Income from operations 1,339,000 7,254,000
----------- -----------
Non-operating income (expense):
Interest income 238,000 227,000
Interest expense (4,089,000) (9,736,000)
Equity in earnings of Limited Partnership 1,920,000 -
Equity in earnings of GB Holdings, Inc. 2,869,000 -
Gain on disposal of assets - 7,000
----------- -----------
Total non-operating income (expense), net 938,000 (9,502,000)
----------- -----------
Income (loss) before income taxes 2,277,000 (2,248,000)
Income tax provision (2,000) (175,000)
----------- -----------
Net income (loss) $ 2,275,000 $(2,423,000)
=========== ===========
Basic and diluted net income (loss) per
common share $.44 $(.47)
=========== ===========
</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 (NOTE 1)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
---------------------
1998 1997
------ ------
OPERATING ACTIVITIES:
Net income (loss) $ 2,275,000 $(2,423,000)
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Depreciation and amortization, including
accretion of debt discount 1,170,000 5,948,000
Gain on disposal of assets - (7,000)
Provision for doubtful accounts 7,000 650,000
Equity in earnings of Limited Partnership (1,920,000) -
Distributions received from Limited Partnership 2,159,000 -
Equity in earnings of GB Holdings, Inc. (2,869,000) -
Deferred income tax benefit (5,000) -
(Increase) decrease in accounts receivable (30,000) 51,000
Increase (decrease) in accounts payable and
other accrued liabilities 2,687,000 (3,596,000)
Net change in other current assets and
liabilities (1,101,000) (1,173,000)
Net change in other noncurrent assets
and liabilities (124,000) (58,000)
----------- -----------
Net cash provided by (used in) operating
activities 2,249,000 (608,000)
----------- -----------
INVESTING ACTIVITIES:
Purchases of property and equipment (30,000) (731,000)
Proceeds from disposal of assets - 7,000
Collections on notes receivable 154,000 -
Obligatory investments - (670,000)
Short-term investments - 2,000,000
Distributions from unconsolidated affiliate - 500,000
----------- -----------
Net cash provided by investing activities 124,000 1,106,000
----------- -----------
FINANCING ACTIVITIES:
Repayments on credit facilities - (2,000,000)
Repayments of long-term debt (13,000) (58,000)
----------- -----------
Net cash used in financing activities (13,000) (2,058,000)
----------- -----------
Net increase (decrease) in cash and cash equivalents 2,360,000 (1,560,000)
Cash and cash equivalents at beginning of period 6,555,000 22,991,000
----------- -----------
Cash and cash equivalents at end of period $ 8,915,000 $21,431,000
=========== ===========
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 and management of casino properties.
GBCC's principal operations consist of 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 County, Mississippi (the "Tunica Casino") (see Note 6). 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") owned
approximately 80% of the outstanding common stock of GBCC. HCC distributed such
stock to its shareholders; as a result, approximately 36% 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.
Effective as of April 1, 1997, HCC acquired the general partnership
interest in Pratt Management, L.P. ("PML"), the limited partnership which holds
the management contract on the Aurora Casino, from PPI Corporation, a wholly
owned subsidiary of GBCC. As a result, GBCC's investment in PML is now being
presented under the equity method of accounting. For all periods through March
31, 1997, PML was wholly owned by subsidiaries of GBCC; accordingly, the
operating results of PML, together with its assets and liabilities, were
consolidated with GBCC for financial statement purposes.
On January 5, 1998, GB Holdings, Inc. ("Holdings") , a wholly owned
subsidiary of GBCC, together with its wholly owned subsidiaries, GB Property
Funding Corp. ("GB Property Funding") and Greate Bay Hotel and Casino, Inc.
("GBHC"), 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 $85,000,000 principal amount of 11 5/8% senior
notes due 2004 (the "PRT Funding Notes") issued by PRT Funding Corp., an
indirect, wholly owned subsidiary of GBCC. Accordingly, the outstanding
principal amount of the PRT Funding Notes has accelerated and is currently due
and payable.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
The accompanying consolidated financial statements include the operating
activities and cash flows of GBCC and its wholly owned subsidiaries. As a
result of the Chapter 11 filings discussed above,
7
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
GBCC's control over the filing subsidiaries is subject to supervision of the
Bankruptcy Court and GBCC 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. GBCC's
negative investment in Holdings and its subsidiaries on the accompanying
consolidated balance sheets reflects GBCC's investment under the equity method
of accounting. All significant intercompany balances and transactions have been
eliminated. Investments in unconsolidated affiliates, including joint ventures,
that are 50% or less owned are accounted for by the equity method.
The accompanying consolidated financial statements have been prepared
assuming that GBCC will continue as a going concern. As discussed above, certain
affiliates of GBCC filed for Chapter 11 bankruptcy protection on January 5,
1998. The affiliate filings under Chapter 11 have resulted in 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. As a result of the Chapter 11 filings, GBHC can reject the Sands'
management contract with NJMI, which would eliminate this source of cash to
GBCC. 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 restructure the notes with three bondholders who control
approximately 98% of the 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 GBCC will be able to restructure its obligations.
The default under the indenture for the PRT Funding Notes raises substantial
doubt about GBCC's ability to continue as a going concern. The consolidated
financial statements do not include any adjustments that might result from the
outcome of these uncertainties.
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, GBCC does not believe that any 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. GBCC 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. GBCC
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 GBCC
without audit. In the opinion of management, these consolidated financial
statements contain all adjustments (consisting of only normal recurring
8
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
adjustments) necessary to present fairly the consolidated financial position of
GBCC 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) EARNINGS PER SHARE
During 1997, GBCC adopted the provisions of Financial Accounting Standards
No. 128, "Earnings per Share" ("SFAS 128"). SFAS 128 requires the calculation
and disclosure of earnings per common share assuming no dilution (basic earnings
per share) and earnings per common share assuming full dilution (diluted
earnings per share). SFAS 128 became effective on December 15, 1997 and
requires the restatement of earnings per share for all prior years presented.
Under SFAS 128, basic earnings per common share is calculated by dividing
net income (loss) by the weighted average number of shares of common stock
outstanding. Diluted earnings per common share is calculated for periods in
which income from continuing operations was earned by dividing the components of
net income by the weighted average number of shares of common stock and common
stock equivalents outstanding. All common stock equivalents are excluded from
the calculation of diluted net loss per share for periods during which a loss
was incurred because the effect of their inclusion would be antidilutive.
For each of the three month periods ended March 31, 1998 and 1997, basic
and diluted income (loss) per share were the same. The weighted average number
of shares of common stock used in the calculation of both basic and diluted
income (loss) per share was 5,186,627 for each of the three month periods ended
March 31, 1998 and 1997. No common stock equivalents were outstanding during
such periods.
(3) SHORT-TERM CREDIT FACILITIES AND BORROWINGS FROM AFFILIATES
GBCC and its subsidiaries had outstanding affiliate borrowings from HCC of
$6,750,000 as of both March 31, 1998 and December 31, 1997. During the third
quarter of 1996, GBCC borrowed $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. In addition, $250,000 was due on April 1, 1998; to date, such
payment has not been made. Borrowings from HCC bear interest at the rate of 14%
per annum, payable semiannually.
GBHC made an advance to a GBCC subsidiary in the amount of $5,672,000. The
GBCC subsidiary which received the advance is insolvent and GBCC has no
obligation with respect to the advance. At March 31, 1998 and December 31, 1997,
such advance, together with accrued interest in the amount of $4,212,000 and
$3,978,000, respectively, has been reflected as an adjustment to GBCC's negative
investment in Holdings on the accompanying consolidated balance sheets.
9
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(4) LONG-TERM DEBT AND PLEDGE OF ASSETS
Substantially all of GBCC's assets are pledged in connection with its long-
term indebtedness. 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. 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 7/8% secured promissory note,
due 2006, net of
discount of $16,139,000 and
$17,281,000, respectively (b) 31,463,000 30,321,000
Other 615,000 628,000
------------ ------------
Total indebtedness 117,078,000 115,949,000
Less - current maturities (85,056,000) (85,055,000)
------------ ------------
Total long-term debt $ 32,022,000 $ 30,894,000
============ ============
- --------------------
(a) On February 17, 1994, PRT Funding issued 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 first mortgage
debt obligations of GB Property Funding.
(b) 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 (the "PCPI Notes") held by HCC
and issued by PCPI Funding Corp., a subsidiary of GBCC. The PPI Funding
Notes were discounted to yield interest at the rate of 14 7/8% per annum
and had a face
10
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
value of $110,636,000. Subsequent principal payment by PPI Funding Corp.
reduced the maturity value of the notes to $98,353,000 at December
31, 1996. During the second quarter of 1997, HCC assigned $13,750,000
undiscounted principal amount of the PPI Funding Notes to PPI
Corporation as consideration, in part, for HCC's acquisition of the
general partnership interest in PML. Such assignment reduced the
maturity value of the notes to $84,603,000. At December 31, 1997, an
additional $37,000,000 undiscounted face value ($23,631,000
discounted value) of the PPI Funding Notes was forgiven by HCC,
further reducing the maturity value to $47,603,000. Because of the
continued affiliation of HCC and GBCC, the forgiveness of debt was
reflected by GBCC as a credit to paid-in capital. Payment of interest
on the PPI Funding Notes 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.
Scheduled payments of long-term debt as of March 31, 1998, exclusive of the
PRT Funding Notes which are currently in default and accelerated, are set forth
below:
1998 (nine months) $ 42,000
1999 59,000
2008 64,000
2001 450,000
2002 -
Thereafter 47,602,000
-----------
Total $48,217,000
-----------
Interest paid amounted to $10,000 and $10,117,000, respectively, during the
three month periods ended March 31, 1998 and 1997.
11
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(5) INCOME TAXES
Components of GBCC's provision for income taxes consist of the following:
THREE MONTHS ENDED
MARCH 31,
----------------------
1998 1997
---------- ----------
Federal income tax (provision) benefit:
Current $ 286,000 $ 899,000
Deferred 98,000 (97,000)
State income tax (provision) benefit:
Current 404,000 (175,000)
Deferred 5,000 -
Valuation allowance (795,000) (802,000)
--------- ---------
$ (2,000) $(175,000)
========= =========
GBCC paid no federal income taxes during either of the three month periods
ended March 31, 1998 or 1997. GBCC paid state income taxes totaling $2,000 and
$3,000 during the three month periods ended March 31, 1998 and 1997,
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 meals and
entertainment and certain other expenses.
Deferred income taxes result primarily from the use of the allowance method
rather than the direct write-off method for doubtful accounts and differences in
the timing of income earned and deductions taken between tax and financial
reporting purposes for deferred financing costs and other accruals.
At March 31, 1998, GBCC and its subsidiaries have tax net operating loss
carryforwards ("NOL's") totaling approximately $25 million for federal income
tax purposes, most of which do no expire until the year 2006. Additionally,
GBCC and its subsidiaries have various tax credits available totaling
approximately $3.6 million, 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 the tax loss sustained in 1998 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.
12
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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 or results of
operations of GBCC.
The components of the net deferred tax asset were as follows:
MARCH 31, DECEMBER 31,
1998 1997
------------- -------------
Deferred tax assets:
Net operating loss carryforwards $ 10,080,000 $ 9,388,000
Forgiveness of affiliate debt 9,438,000 9,438,000
Allowance for doubtful accounts 199,000 85,000
Alternative minimum tax credit 270,000 270,000
Investment and jobs tax credits 3,378,000 3,378,000
Investment in consolidated subsidiary 4,428,000 4,428,000
Equity losses of unconsolidated
subsidiaries and joint ventures 85,000 85,000
Other liabilities and accruals 323,000 298,000
Deferred financing costs 863,000 899,000
Other 12,000 12,000
------------ ------------
Deferred tax asset 29,076,000 28,281,000
Valuation allowance (29,076,000) (28,281,000)
------------ ------------
$ - $ -
============ ============
(6) TRANSACTIONS WITH RELATED PARTIES
PML, a limited partnership wholly owned through March 31, 1997 by GBCC,
earns management fees pursuant to a management agreement with Hollywood Casino -
Aurora, Inc. ("HCA"), an HCC subsidiary. Such fees include a base management fee
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). Effective as of April 1, 1997,
13
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
HCC acquired the general partnership interest in PML from PPI Corporation.
Management fees earned by GBCC prior to the April 1, 1997 sale of the general
partnership interest amounted to $2,727,000.
HCC issued a five-year note in the original amount of $3,800,000 and
assigned $13,750,000 undiscounted principal amount ($7,597,000 discounted value)
of PPI Funding Notes (see Note 4) and $350,000 of accrued interest due from GBCC
to PPI Corporation in exchange for the general partnership interest in PML. The
$3,800,000 note is payable in monthly installments of $83,000, including
interest at the rate of 14% per annum, commencing on May 1, 1997, with
additional quarterly variable principal payments commencing on July 1, 1997 in
an amount equal to the general partner's share of quarterly cash distributions,
as defined, from PML. Interest income on the note from HCC amounted to $116,000
during the three month period ended March 31, 1998. Accrued interest receivable
of $39,000 and $41,000, respectively, is included in amounts due from affiliates
on the accompanying consolidated balance sheets at March 31, 1998 and December
31, 1997.
New Jersey Management, Inc. ("NJMI"), a wholly owned subsidiary of GBCC, 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 by NJMI 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.
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, 1998 and 1997
amounted to $300,000.
HCC allocates certain general and administrative costs to GBCC and its
subsidiaries pursuant to a services agreement. Net allocated costs charged to
GBCC and its subsidiaries by HCC amounted to $296,000 and $686,000,
respectively, during the three month periods ended March 31, 1998 and 1997. In
connection with such charges, payables in the amount of $81,000 and $156,000,
respectively, are included in accounts payable on the accompanying consolidated
balance sheets at March 31, 1998 and December 31, 1997.
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
14
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
licenses such software at amounts and on terms and conditions that ACSC provides
to unrelated third parties. HCT also pays ACSC a fixed license fee of $33,600
per month and reimburses ACSC for its direct costs and expenses incurred under
this agreement. Total charges incurred under such agreement amounted to $146,000
and $111,000, respectively, for the three month periods ended March 31, 1998 and
1997. HCA also receives certain computer-related services from ACSC subsidiaries
including hardware, software, and operator support. HCA reimburses ACSC for its
direct costs and any expenses incurred. Such costs totaled $134,000 and $43,000,
respectively, during the three month periods ended March 31, 1998 and 1997.
Unpaid fees and charges from HCT and HCA at March 31, 1998 and December 31, 1997
amounted to $229,000 and $55,000, respectively, and are included in amounts due
from affiliates on the accompanying consolidated balance sheets.
GBHC also performs certain administrative and marketing services on behalf
of HCA, HCT and PML. During the three month periods ended March 31, 1998 and
1997, fees charged by GBHC for such services totaled $10,000 and $268,000,
respectively. During the second half of 1997, ACSC began performing many of
these services. Fees charged by ACSC during the three month period ended March
31, 1998 amounted to $21,000. Unpaid fees amounting to $2,000 and $16,000,
respectively, are included in due from affiliates on the accompanying
consolidated balance sheets at March 31, 1998 and December 31, 1997.
Interest expense with respect to borrowings from HCC is set forth below:
THREE MONTHS ENDED
MARCH 31,
----------------------
1998 1997
---------- ----------
PPI Funding Notes held by HCC (Note 4) $1,142,000 $1,981,000
Short-term borrowings (Note 3) 232,000 267,000
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
4). Accretion of interest on the PPI Funding Notes is included in the
outstanding note payable balances at March 31, 1998 and December 31, 1997.
Interest accrued on short-term borrowings at March 31, 1998 and December
31, 1997 amounting to $1,071,000 and $839,000, respectively, is included in
interest payable on the accompanying consolidated balance sheets.
GBHC issued a promissory note in the amount of $10,000,000 on February 17,
1994 to PRT Funding. Such note accrues interest at the rate of 14 5/8% per
annum and is payable semiannually commencing on August 17, 1994. The principal
amount of the note is due on February 17, 2005. During the first quarter of
1997, GBHC also borrowed $5,000,000 from PCC for working capital purposes. Such
borrowing accrues interest at the rate of 14 5/8% per annum payable semiannually
commencing July 15, 1997. Prior to December 31, 1997, such note and related
interest were eliminated in consolidation. As a result of (i) GBHC no longer
being included as a consolidated subsidiary and (ii) GBHC's filing under
15
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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 GBCC's negative investment
in Holdings on the accompanying consolidated balance sheets at March 31, 1998
and December 31, 1997.
During the third quarter of 1996, GBCC loaned $6,500,000 to GBHC for
working capital purposes. Such advance accrues interest at the rate of 13 3/4%
per annum, payable quarterly commencing October 1, 1996. An additional
$1,500,000 was loaned to GBHC during the first quarter of 1997 on the same
terms. Repayment of such advances and the payment of the related interest are
subject to terms of a reorganization plan which requires confirmation by the
Bankruptcy Court and to approval by the New Jersey Casino Control Commission.
Prior to December 31, 1997, such notes and the related interest were eliminated
in consolidation. For the same reasons cited in the previous paragraph, the
advances to GBHC of $8,000,000, together with the related interest receivable of
$1,508,000 and $1,496,000, respectively, have been reflected as an adjustment to
GBCC's negative investment in Holdings on the accompanying consolidated balance
sheets at March 31, 1998 and December 31, 1997.
(7) INVESTMENT IN PRATT MANAGEMENT, L.P.
Effective as of April 1, 1997, HCC acquired the general partnership
interest in PML (see Notes 1 and 6) from PPI Corporation. 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. 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.
(8) LITIGATION
SUBSIDIARY CHAPTER 11 FILINGS -
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.
16
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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 -
GBHC is a party 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.
(9) RECLASSIFICATIONS
Certain reclassifications have been made to the prior year's consolidated
financial statements to conform to the 1998 consolidated financial statement
presentation.
17
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
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.
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES
GBCC and its subsidiaries conduct three major business activities. These
activities may be grouped by company as follows: (i) GBCC, PPI Corporation and
their direct, wholly owned subsidiaries, (ii) PCC and NJMI and (iii) Holdings
and GBHC.
GBCC, PPI Corporation and their direct subsidiaries have provided
management personnel for GBCC's non-casino hotel operations, including its joint
ventures, in the United States and Puerto Rico. GBCC completed its planned exit
from these operations in 1997. ACSC, a PPI Corporation subsidiary, licenses
casino information technology systems to the Sands, to HCC's casino facilities
and to non-affiliated casino companies.
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 filings 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 involved in negotiations to
restructure the notes with three bondholders who control approximately 98% of
the 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 GBCC to continue as
a going concern.
18
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
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.
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 the GBCC consolidated group.
FINANCING ACTIVITIES
During 1994, 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 PPI Corporation
the general partnership interest in the limited partnership which holds the
Aurora Management contract. The acquisition price for the general partnership
interest included a note in the amount of $3.8 million and the assignment of
$7.6 million discounted amount of the PPI Funding Notes to PPI Corporation.
Annual principal and interest payments by HCC on the $3.8 million note
approximate the general partner's share of annual partnership distributions
which are now being made to HCC. During 1997, HCC forgave $23.6 million
discounted principal amount of the PPI Funding Notes.
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.
19
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
CAPITAL EXPENDITURES AND OTHER INVESTMENTS
Property and equipment additions during the three month period ended March
31, 1998 totaled $30,000; management anticipates that capital expenditures
during the remainder of 1998, consisting only of ongoing equipment replacements
and enhancements, will not be significant.
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, GBCC's control over the filing subsidiaries is
subject to the supervision of the Bankruptcy Court and GBCC 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.
Prior to April 1, 1997, GBCC controlled both the general and limited
partnership interests in Pratt Management L.P. ("PML"), the entity which holds
the management contract on the Aurora Casino. Accordingly, the operations of PML
were consolidated with GBCC on the accompanying consolidated statement of
operations for the three month period ended March 31, 1997. As discussed in
Note 6 to the consolidated financial statements, HCC acquired the general
partnership interest in PML from a subsidiary of GBCC effective April 1, 1997.
From that date forward, GBCC holds only the limited partnership interest in PML,
which is presented under the equity method of accounting on the accompanying
consolidated statement of operations for the three month period ended March 31,
1998.
20
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
The following table sets forth GBCC's proforma results of operations for
the three month period ended March 31, 1997, exclusive of Holdings and its
subsidiaries and PML ("the GBCC Group"), on a basis comparable to the 1998
presentation.
THREE MONTHS ENDED
MARCH 31,
---------------------------
1998 PROFORMA 1997
------------ -------------
Revenues $ 2,352,000 $ 3,577,000
----------- -----------
Expenses:
General and administrative 981,000 725,000
Depreciation and amortization 28,000 93,000
Other 4,000 4,000
----------- -----------
Total expenses 1,013,000 822,000
----------- -----------
Income from operations 1,339,000 2,755,000
----------- -----------
Non-operating expenses:
Interest income 238,000 867,000
Interest expense (4,089,000) (4,887,000)
Equity in earnings of Limited Partnership 1,920,000 2,267,000
Equity in earnings (losses) of GB Holdings, Inc. 2,869,000 (3,261,000)
----------- -----------
Total non-operating income (expense), net 938,000 (5,014,000)
----------- -----------
Income (loss) before income taxes 2,277,000 (2,259,000)
Income tax provision (2,000) (164,000)
----------- -----------
Net income (loss) $ 2,275,000 $(2,423,000)
=========== ===========
21
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
REVENUES
Revenues of the GBCC Group declined $1.2 million (34.2%) during the three
month period ended March 31, 1998 compared to the prior year period. Revenues
at ACSC, a member of the GBCC Group that provides computer hardware and software
to the gaming industry, increased $647,000 (183.8%) during the three month
period ended March 31, 1998 compared to the same period of 1997. This revenue
increase was offset by a $1.8 million decrease in fees earned by GBCC with
respect to a hotel/casino it managed in San Juan, Puerto Rico. The 1997
revenues included a $1.5 million termination fee resulting from the sale of the
San Juan property.
GENERAL AND ADMINISTRATIVE EXPENSES
The GBCC Group's general and administrative expenses increased by $256,000
(35.3%) during the three month period ended March 31, 1998 compared to the 1997
period. The increase is primarily due to an increase in general and
administrative expenses at ACSC resulting from its significant increase in sales
volume.
DEPRECIATION AND AMORTIZATION
The GBCC Group's depreciation and amortization expense for the first
quarter of 1998 decreased by $65,000 (69.9%) compared to the same period of
1997. As a result of the default under the indenture for the PRT Funding Notes,
all deferred financing costs were written off at December 31, 1997. The
resulting $89,000 decline in amortization expense was partially offset by a
$24,000 increase in depreciation expense due to an increase in ACSC's
depreciable assets.
INTEREST
Interest income for the GBCC Group decreased $629,000 (72.5%) during the
first quarter of 1998 compared to the same period during 1997. All interest
income earned by the GBCC 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 declined $798,000 (16.3%) during the 1998
period compared to the prior year primarily due to HCC's forgiveness of $23.6
million discounted value of PPI Funding Notes at December 31, 1997.
22
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
EQUITY IN EARNINGS OF LIMITED PARTNERSHIP
Effective February 17, 1994, PCC acquired the limited partnership interest
in PML, a limited partnership which earns management fees from the operation of
the Aurora Casino. 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. The GBCC Group's equity in the
earnings of PML decreased to $1.9 million during the first quarter of 1998 from
the $2.3 million earned in the same period of 1997 reflecting the sale of the
general partnership interest to HCC.
EQUITY IN EARNINGS OF GB HOLDINGS, INC.
Holdings' consolidated net income for the three month period ended March
31, 1998 amounted to $2.9 million compared to a net loss of $3.3 million for the
same period of 1997. The overall $6.1 million (188%) 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
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 $2.7 million.
INCOME TAX PROVISION
As of March 31, 1998, GBCC and its subsidiaries have tax net operating loss
carryforwards ("NOL's") totaling approximately $25 million, most of which do not
expire until the year 2006. Additionally, GBCC and its subsidiaries have various
tax credits available totaling approximately $3.6 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 tax loss
23
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
sustained in 1998 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, 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.
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.
24
<PAGE>
PART II: OTHER INFORMATION
- ---------------------------
The Registrant did not file any reports on form 8-K during the quarter
ended March 31, 1998. The Registrant filed its 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, 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, 1998 By: /s/ Edward T. Pratt, Jr.
-------------- ----------------------------------
Edward T. Pratt, Jr.
Treasurer, Chief Financial Officer
and Principal Accounting Officer
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 AND
SUBSIDIARIES AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<CIK> 0000030117
<NAME> GREATE BAY 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> 8,915
<SECURITIES> 0
<RECEIVABLES> 304
<ALLOWANCES> 220
<INVENTORY> 158
<CURRENT-ASSETS> 12,700
<PP&E> 2,211
<DEPRECIATION> 999
<TOTAL-ASSETS> 18,777
<CURRENT-LIABILITIES> 108,820
<BONDS> 32,022
0
0
<COMMON> 519
<OTHER-SE> (141,360)
<TOTAL-LIABILITY-AND-EQUITY> 18,777
<SALES> 0
<TOTAL-REVENUES> 2,352
<CGS> 0
<TOTAL-COSTS> 4
<OTHER-EXPENSES> (3,787)
<LOSS-PROVISION> 7
<INTEREST-EXPENSE> 3,851
<INCOME-PRETAX> 2,277
<INCOME-TAX> 2
<INCOME-CONTINUING> 2,275
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,275
<EPS-PRIMARY> .44
<EPS-DILUTED> .44
</TABLE>
