<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 SEPTEMBER 30, 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 ADVANCED CASINO SYSTEMS CORPORATION
200 DECADON DRIVE, SUITE 100
EGG HARBOR TOWNSHIP, NEW JERSEY 08234
---------------------------------------- ----------
(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 NOVEMBER 19, 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 ownership 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 "GEAAQ".
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 54% 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 executive officers and directors remain in office, subject to the
jurisdiction of the Bankruptcy Court. On both May 11 and August 10, 1998, the
Bankruptcy Court extended the exclusive period of the debtors to file a plan of
reorganization for 90 days. On November 9, 1998, the Bankruptcy Court granted an
additional 60-day extension of the exclusivity period.
The filings of such petitions constitute a default under the indenture for
$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. Pratt Casino Corporation, an
indirect, wholly owned subsidiary of GBCC and guarantor of the PRT Funding
Notes, is currently involved in negotiations to restructure the notes with three
bondholders who control in excess of 95% of the $85,000,000 note issue. PRT
Funding deferred payment of interest due on the April 15 and October 15, 1998
interest payment dates. On October 22, 1998, PRT Funding paid to the
bondholders an amount equal to a single semiannual interest payment ($4,941,000)
while negotiations to restructure the notes continue.
As a result of the Chapter 11 filings discussed above, GBCC's control over
the filing subsidiaries is subject to supervision of the Bankruptcy Court and
GBCC does not expect to have ownership or operating control of such subsidiaries
after reorganization. Furthermore, as the result of a settlement agreement
reached by GBCC and Holdings during September 1998, GBCC no longer participates
in the management of the Sands. Accordingly, Holdings, GB Property Funding and
GBHC are no longer included on the accompanying consolidated balance sheets. As
more fully explained in Note 1 of the Notes to Consolidated Financial
Statements, during the period from January 1, 1998 through June 30, 1998, the
operations of Holdings and its subsidiaries were accounted for by GBCC under the
equity method of accounting. As a result of GBCC no longer controlling the
operations of the Sands, the continued expectation that ownership control of
Holdings will only be temporary and the September 1998 settlement agreement
which resolved certain significant uncertainties, GBCC's investment in Holdings
and its subsidiaries as well as certain amounts due to Holdings were revalued to
a zero basis effective on July 1, 1998. Accordingly, for periods subsequent to
June 30, 1998, GBCC is accounting for its investment in Holdings under the cost
method of accounting.
The consolidated financial statements as of September 30, 1998 and for the
three and nine month periods ended September 30, 1998 and 1997 have been
prepared by 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 September 30, 1998, the
2
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results of its operations for the three and nine month periods ended September
30, 1998 and 1997 and cash flows for the nine month periods ended September 30,
1998 and 1997.
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.
3
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (NOTE 1)
(UNAUDITED)
ASSETS
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
Current Assets:
Cash and cash equivalents $13,371,000 $ 6,555,000
Accounts receivable, net of allowances
of $209,000 and $213,000, respectively 202,000 61,000
Inventories 94,000 164,000
Due from affiliates 1,146,000 723,000
Option payment - 1,000,000
Refundable deposits and other
current assets 612,000 878,000
----------- -----------
Total current assets 15,425,000 9,381,000
----------- -----------
Investment in Limited Partnership 2,953,000 2,256,000
----------- -----------
Property and Equipment:
Land - 864,000
Operating equipment 1,403,000 1,317,000
----------- -----------
1,403,000 2,181,000
Less - accumulated depreciation
and amortization (1,061,000) (971,000)
----------- -----------
Net property and equipment 342,000 1,210,000
----------- -----------
Other Assets:
Due from affiliates, net of valuation allowances 2,551,000 2,897,000
Other assets 9,000 8,000
----------- -----------
Total other assets 2,560,000 2,905,000
----------- -----------
$21,280,000 $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 BALANCE SHEETS (NOTE 1)
(UNAUDITED)
LIABILITIES AND SHAREHOLDERS' DEFICIT
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- -------------
Current Liabilities:
Current maturities of long-term debt $ 85,000,000 $ 85,055,000
Borrowings from affiliate 6,750,000 12,422,000
Accounts payable 1,530,000 967,000
Accrued liabilities -
Salaries and wages 235,000 133,000
Interest 11,012,000 6,875,000
Insurance 135,000 128,000
Other 85,000 62,000
Other current liabilities 530,000 730,000
------------- -------------
Total current liabilities 105,277,000 106,372,000
------------- -------------
Investment in and Advances to GB Holdings, Inc. - 20,996,000
------------- -------------
Long-Term Debt 33,804,000 30,894,000
------------- -------------
Other Noncurrent Liabilities - 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 (193,532,000) (218,847,000)
------------- -------------
Total shareholders' deficit (117,801,000) (143,116,000)
------------- -------------
$ 21,280,000 $ 15,752,000
============= =============
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated balance sheets.
5
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (NOTE 1)
(UNAUDITED)
THREE MONTHS ENDED
SEPTEMBER 30,
------------------------
1998 1997
----------- -----------
Revenues:
Casino $ - $63,272,000
Rooms - 2,713,000
Food and beverage - 9,043,000
Computer services 747,000 157,000
Other 809,000 1,554,000
----------- -----------
1,556,000 76,739,000
Less - promotional allowances - (6,962,000)
----------- -----------
Net revenues 1,556,000 69,777,000
----------- -----------
Expenses:
Casino - 52,384,000
Rooms - 630,000
Food and beverage - 3,105,000
Other 43,000 990,000
General and administrative 1,351,000 4,263,000
Depreciation and amortization 31,000 3,453,000
----------- -----------
Total expenses 1,425,000 64,825,000
----------- -----------
Income from operations 131,000 4,952,000
----------- -----------
Non-operating income (expenses):
Interest income 251,000 392,000
Interest expense (4,060,000) (9,484,000)
Equity in earnings of Limited Partnership 1,866,000 1,974,000
Gain on elimination of investment in GB Holdings, Inc. 27,482,000 -
Restructuring costs (387,000) -
Gain on disposal of assets - 22,000
----------- -----------
Total non-operating income (expense), net 25,152,000 (7,096,000)
----------- -----------
Income (loss) before income taxes 25,283,000 (2,144,000)
Income tax provision (56,000) (131,000)
----------- -----------
Net income (loss) $25,227,000 $(2,275,000)
=========== ===========
Basic and diluted net income (loss) per common share $ 4.86 $ (.43)
=========== ===========
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
CONSOLIDATED STATEMENTS OF OPERATIONS (NOTE 1)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------
1998 1997
------------- ------------
<S> <C> <C>
Revenues:
Casino $ - $183,425,000
Rooms - 7,405,000
Food and beverage - 25,420,000
Computer services 2,771,000 675,000
Other 3,416,000 8,708,000
------------ ------------
6,187,000 225,633,000
Less - promotional allowances - (19,418,000)
------------ ------------
Net revenues 6,187,000 206,215,000
------------ ------------
Expenses:
Casino - 152,789,000
Rooms - 1,897,000
Food and beverage - 8,325,000
Other 332,000 2,287,000
General and administrative 3,092,000 12,646,000
Depreciation and amortization 90,000 11,172,000
------------ ------------
Total expenses 3,514,000 189,116,000
------------ ------------
Income from operations 2,673,000 17,099,000
------------ ------------
Non-operating income (expenses):
Interest income 721,000 1,046,000
Interest expense (12,250,000) (28,665,000)
Equity in earnings of Limited Partnership 4,498,000 2,755,000
Equity in earnings of and gain on elimination of
investment in GB Holdings, Inc. 31,205,000 -
Restructuring costs (1,431,000) -
Gain on disposal of assets - 46,000
------------ ------------
Total non-operating income (expense), net 22,743,000 (24,818,000)
------------ ------------
Income (loss) before income taxes and extraordinary item 25,416,000 (7,719,000)
Income tax provision (101,000) (341,000)
------------ ------------
Income (loss) before extraordinary item 25,315,000 (8,060,000)
Gain on early extinguishment of debt - 310,000
------------ ------------
Net income (loss) $ 25,315,000 $ (7,750,000)
============ ============
Basic and diluted net income (loss) per common share:
Income (loss) before extraordinary item $ 4.88 $ (1.55)
Extraordinary item - .06
------------ ------------
Basic and diluted net income (loss) $ 4.88 $ (1.49)
============ ============
</TABLE>
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated statements.
7
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (NOTE 1)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------------
1998 1997
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ 25,315,000 $(7,750,000)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Gain on early extinguishment of debt - (310,000)
Depreciation and amortization, including
accretion of debt discount 3,573,000 16,757,000
Gain on disposal of assets - (46,000)
Provision for doubtful accounts - 2,265,000
Equity in earnings of Limited Partnership (4,498,000) (2,755,000)
Distributions received from Limited Partnership 3,801,000 2,882,000
Equity in earnings of and gain on elimination of
investment in GB Holdings, Inc. (31,205,000) -
Deferred income tax benefit (14,000) -
Increase in accounts receivable (141,000) (842,000)
Increase (decrease) in accounts payable and
other accrued liabilities 9,434,000 (2,821,000)
Net change in other current assets and liabilities (507,000) (2,438,000)
Net change in other noncurrent assets and liabilities (810,000) 12,000
------------ -----------
Net cash provided by operating activities 4,948,000 4,954,000
------------ -----------
INVESTING ACTIVITIES:
Purchases of property and equipment (86,000) (2,124,000)
Proceeds from disposal of assets 1,300,000 46,000
Increase in cash from sale of subsidiary 245,000 -
Decrease in cash from sale of Limited Partnership - (451,000)
Collections on notes receivable 445,000 206,000
Obligatory investments - (2,089,000)
Short-term investments - 2,000,000
Distributions from unconsolidated affiliate - 500,000
------------ -----------
Net cash provided by (used in) investing activities 1,904,000 (1,912,000)
------------ -----------
FINANCING ACTIVITIES:
Repayments on credit facilities - (2,000,000)
Repayments of long-term debt (36,000) (2,304,000)
------------ -----------
Net cash used in financing activities (36,000) (4,304,000)
------------ -----------
Net increase in cash and cash equivalents 6,816,000 (1,262,000)
Cash and cash equivalents at beginning of period 6,555,000 22,991,000
------------ -----------
Cash and cash equivalents at end of period $ 13,371,000 $21,729,000
============ ===========
</TABLE>
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated statements.
8
<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
54% 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 executive officers and directors remain in office,
subject to the jurisdiction of the Bankruptcy Court. On May 11 and August 10,
1998, the Bankruptcy Court extended the exclusive period of the debtors to file
a plan of reorganization for 90 days. On November 9, 1998, the Bankruptcy Court
granted an additional 60-day extension of the exclusivity period.
The filings of such petitions constitute a default under the indenture for
$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.
9
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GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
Except as noted in the following paragraph, the accompanying consolidated
financial statements include the operating activities and cash flows of GBCC and
its wholly owned subsidiaries. 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.
As a result of the Chapter 11 filings discussed above, GBCC's control over
the filing subsidiaries is subject to supervision of the Bankruptcy Court and
GBCC does not expect to have ownership or operating control of such subsidiaries
after reorganization. Prior to July 7, 1998, New Jersey Management, Inc.
("NJMI"), a wholly owned subsidiary of GBCC, was responsible for the operations
of the Sands under a management agreement with GBHC (see Note 6). On May 22,
1998, GBHC filed a motion with the Bankruptcy Court seeking to reject the
existing management agreement with NJMI. A substitute agreement (the "Interim
Agreement") was entered into on June 27, 1998 and approved by the Bankruptcy
Court on July 7, 1998. Under the Interim Agreement, NJMI continued to provide
certain agreed upon services to GBHC until September 28, 1998. Furthermore, as
the result of a settlement agreement reached by GBCC and Holdings (see Note 9)
during September 1998, GBCC no longer controls the management of the Sands.
Accordingly, Holdings, GB Property Funding and GBHC are no longer included on
the accompanying consolidated balance sheets. GBCC's negative investment in
Holdings and its subsidiaries on the accompanying consolidated balance sheet at
December 31, 1997 reflects GBCC's investment under the equity method of
accounting. During the period from January 1, 1998 through June 30, 1998, the
operations of Holdings and its subsidiaries were accounted for under the equity
method of accounting (see Note 8). As a result of GBCC no longer controlling
the operations of the Sands, the continued expectation that ownership control of
Holdings will only be temporary and the September 1998 settlement agreement
which resolved certain significant uncertainties, GBCC's investment in Holdings
and its subsidiaries as well as certain amounts due to Holdings (see Note 3)
were revalued to a zero basis effective on July 1, 1998. Accordingly, for
periods subsequent to June 30, 1998, GBCC is accounting for its investment in
Holdings under the cost method of accounting. The elimination of the investment
in and amounts due to Holdings has resulted in a gain of $27,482,000 which has
been combined with equity in the earnings of Holdings on the accompanying
consolidated statements of operations for the three and nine month periods ended
September 30, 1998.
The accompanying 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 filed a motion seeking
to reject the Sands' management contract with NJMI. The Interim Agreement
entered into by NJMI and GBHC significantly reduced the fees paid to NJMI (see
Note 6). The motion to reject the management contract was granted by the
Bankruptcy Court on September 28, 1998. As a consequence of the September 1998
settlement agreement (see Note 9), GBCC and GBHC may no longer assert claims
against each other with respect to the operation of the management contract or
the cancellation thereof. Pratt Casino Corporation ("PCC"), a wholly owned
subsidiary of GBCC and guarantor of the PRT Funding Notes, does not have
sufficient assets to satisfy the outstanding amounts applicable to the PRT
Funding Notes and is currently involved in negotiations to restructure the notes
with
10
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
three bondholders who control in excess of 95% of the note issue. PRT Funding
deferred payment of interest due on the April 15 and October 15, 1998 interest
payment dates. On October 22, 1998, PRT Funding paid to the bondholders an
amount equal to a single semiannual interest payment ($4,941,000) while
negotiations to restructure the notes continue. No assurance can be given that
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 September 30, 1998 and for the
three and nine month periods ended September 30, 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 adjustments) necessary to present fairly the consolidated
financial position of GBCC as of September 30, 1998, and the results of its
operations for the three and nine month periods ended September 30, 1998 and
1997 and cash flows for the nine month periods ended September 30, 1998 and
1997.
(2) 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 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
11
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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 and nine month periods ended September 30, 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 and nine
month periods ended September 30, 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 September 30, 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. On September 2, 1998, the working capital loans to GBHC were
cancelled as part of a settlement agreement among GBCC and Holdings, together
with certain of their subsidiaries, and HCC (see Note 9). In addition, a
$250,000 loan from HCC with interest at the rate of 14% per annum payable
semiannually was due on April 1, 1998; to date, such payment has not been made.
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 December 31, 1997, the accompanying
consolidated balance sheet reflects such advance in borrowings from affiliates
and reflects accrued interest in the amount of $3,978,000 in interest payable.
A settlement agreement entered into by GBCC and GBHC during September 1998 (see
Note 9) provides, among other things, that GBHC preserves whatever rights of
offset, if any, it might have with respect to such advance together with accrued
interest thereon against $15,000,000 of subordinated loans made to GBHC by other
GBCC subsidiaries (see Note 6). As GBHC's only recourse, if any, is against
intercompany obligations already fully reserved by GBCC, the advance and accrued
interest amounting to $4,602,000 have been eliminated from the consolidated
balance sheet of GBCC and are included in the gain of $27,482,000 included on
the accompanying consolidated statements of operations for the three and nine
month periods ended September 30, 1998 (see Note 1).
12
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(4) LONG-TERM DEBT AND PLEDGE OF ASSETS
On January 5, 1998, Holdings, GB Property Funding and GBHC filed petitions
for relief under Chapter 11 of the Bankruptcy Code. Each company continues to
operate in the ordinary course of business, as set forth in the Bankruptcy Code,
and each company's executive officers and directors remain in office, subject to
the jurisdiction of the Bankruptcy Court. On both May 11 and August 10, 1998,
the Bankruptcy Court extended the exclusive period of the debtors to file a plan
of reorganization for 90 days. On November 9, 1998, the Bankruptcy Court granted
an additional 60-day extension of the exclusivity period. The filings of such
petitions constitute a default under the indenture for the PRT Funding Notes.
Accordingly, the outstanding principal amount of the PRT Funding Notes has
accelerated, is currently due and payable and is classified as current on the
accompanying consolidated balance sheets.
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------ ------------
11 5/8% senior notes, due 2004 (a) $ 85,000,000 $ 85,000,000
14 7/8% secured promissory note, due 2006, net of
discount of $13,799,000 and $17,282,000,
respectively (b) 33,804,000 30,321,000
Other (Note 10) - 628,000
------------ ------------
Total indebtedness 118,804,000 115,949,000
Less - current maturities (85,000,000) (85,055,000)
------------ ------------
Total long-term debt $ 33,804,000 $ 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
13
<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 September 30, 1998, exclusive of
the PRT Funding Notes which are currently in default and accelerated, are
$47,603,000 in 2006.
Interest paid amounted to $29,000 and $25,138,000, respectively, during the
nine month periods ended September 30, 1998 and 1997.
(5) INCOME TAXES
As previously disclosed in GBCC's quarterly report on Form 10-Q for the
period ended June 30, 1998, the Company was advised by HCC, its former parent,
that a revised tax treatment with respect to the distribution of GBCC stock
owned by HCC to HCC's shareholders on December 31, 1996 might be necessary. HCC
subsequently revised its tax treatment of the distribution which resulted in a
reduction of the net operating loss carryforwards ("NOL's") available to GBCC
for federal income tax purposes. In addition, the revised tax treatment
resulted in adjustments to GBCC's deferred tax assets and liabilities as
previously reported. The revised tax treatment had no effect on GBCC's assets,
liabilities or operating results as reflected in its consolidated financial
statements for any period presented as GBCC had provided valuation allowances to
fully reserve its net deferred tax assets, including NOL's, for all such
reporting periods. The effects on deferred taxes and on the valuation allowance
resulting from the revised tax treatment have been included herein as
adjustments during the three month period ended September 30, 1998.
In connection with the revised tax treatment, GBCC has commenced litigation
against its former independent accountants and tax advisors alleging negligent
advice and breach of contract. The Company continues to work with its new
outside advisors and consultants to review these tax issues.
The impact of the revised tax treatment on state income taxes has not yet
been determined; however, the effect, if any, on the consolidated financial
statements of GBCC is not anticipated to be material.
14
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
Components of GBCC's provision for income taxes consist of the following:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ----------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Federal income tax (provision) benefit:
Current $ 3,900,000 $(4,310,000) $ 4,465,000 $ 1,114,000
Deferred (6,645,000) 1,091,000 (7,696,000) 999,000
State income tax (provision) benefit:
Current (10,000) (131,000) 421,000 (341,000)
Deferred 7,000 - 13,000 -
Change in valuation allowance 2,692,000 3,219,000 2,696,000 (2,113,000)
----------- ----------- ----------- -----------
$ (56,000) $ (131,000) $ (101,000) $ (341,000)
=========== =========== =========== ===========
</TABLE>
GBCC paid federal income taxes in the amount of $270,000 during the nine
months ended September 30, 1998; no federal taxes were paid during the nine
month period ended September 30, 1997. GBCC paid state income taxes totaling
$160,000 and $124,000 during the nine month periods ended September 30, 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 differences in the bases of
investments in subsidiaries and in outstanding obligations between financial and
federal tax reporting purposes, from the use of the allowance method rather than
the direct write-off method for doubtful accounts and from differences in the
timing of income earned and deductions taken between tax and financial reporting
purposes for deferred financing costs and other accruals.
At September 30, 1998, GBCC and its subsidiaries have NOL's totaling
approximately $47,700,000 for federal income tax purposes, which do not begin to
expire until the year 2005. Additionally, GBCC and its subsidiaries have
various tax and alternative minimum tax credits available totaling approximately
$2,609,000, 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 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
15
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
valuation allowance for substantially all of the deferred tax asset for all
periods presented. The remaining deferred tax asset represents state timing
differences expected to be utilized.
The components of GBCC's net deferred tax asset, exclusive of Holdings and
its subsidiaries' net deferred tax asset, are as follows:
SEPTEMBER 30, DECEMBER 31,
1998 1997
-------------- -------------
Deferred tax assets:
Net operating loss carryforwards $ 14,390,000 $ 9,388,000
Forgiveness of affiliate debt - 9,438,000
Allowance for doubtful accounts 4,621,000 85,000
Alternative minimum tax credit 270,000 270,000
Investment and jobs tax credits 2,339,000 3,378,000
Investment in consolidated subsidiary 2,866,000 4,428,000
Equity losses of unconsolidated
subsidiaries and joint ventures - 85,000
Other liabilities and accruals 114,000 310,000
Deferred financing costs 792,000 899,000
Basis in intercompany obligations 242,000 -
------------ ------------
Deferred tax asset 25,634,000 28,281,000
Valuation allowance (25,585,000) (28,281,000)
------------ ------------
$ 49,000 $ -
============ ============
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.
16
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(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, 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 $107,000
and $336,000, respectively, during the three and nine month periods ended
September 30, 1998 and $129,000 and $260,000, respectively, during the three and
nine month periods ended September 30, 1997. Accrued interest receivable of
$35,000 and $41,000, respectively, is included in amounts due from affiliates on
the accompanying consolidated balance sheets at September 30, 1998 and December
31, 1997.
Prior to May 1, 1998, NJMI was responsible for the operations of the Sands
under a management agreement with GBHC. NJMI was entitled to receive annually
(i) a basic consulting fee of 1.5% of "adjusted gross revenues," as defined, and
(ii) incentive compensation of between 5% and 7.5% of gross operating profits in
excess of certain stated amounts should annual "gross operating profits," as
defined, exceed $5,000,000. On May 22, 1998, GBHC filed a motion with the
Bankruptcy Court seeking to reject the existing management agreement with NJMI.
The Interim Agreement was entered into on June 27, 1998 and was approved by the
Bankruptcy Court on July 7, 1998. Under the Interim Agreement, effective as of
May 1, 1998 and terminating on September 28, 1998, NJMI continued to provide
certain agreed upon services to GBHC at a monthly fee of $165,000 of which
$122,000 was paid on a monthly basis in arrears and the remaining $43,000 is
deferred and will be paid upon confirmation of GBHC's plan of reorganization by
the Bankruptcy Court. All management fees terminated upon the granting of
GBHC's motion to reject the management contract by the Bankruptcy Court on
September 28, 1998. As a consequence of the September 1998 settlement agreement
(see Note 9), GBCC and GBHC may no longer assert claims against each other with
respect to the operation of the management contract or the cancellation thereof.
Fees earned by NJMI under the management agreement and Interim Agreement
amounted to $495,000 and $2,405,000, respectively, during the three and nine
month periods ended September 30, 1998. Management fees receivable from the
Sands at September 30, 1998 and December 31, 1997
17
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
amounted to $382,000 and $34,000, respectively. Of the amount receivable at
September 30, 1998, $145,000, which was earned prior to GBHC's bankruptcy
filing, is included in noncurrent due from affiliates on the accompanying
consolidated balance sheet and is subject to terms of a reorganization plan
which requires confirmation by the Bankruptcy Court.
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. Such fees
amounted to $300,000 for each of the three month periods ended September 30,
1998 and 1997 and $900,000 for each of the nine month periods ended September
30, 1998 and 1997.
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 $262,000 and $423,000,
respectively, during the three month periods ended September 30, 1998 and 1997
and $833,000 and $1,447,000, respectively, for the nine month periods ended
September 30, 1998 and 1997. In connection with such charges, payables in the
amount of $79,000 and $156,000, respectively, are included in accounts payable
on the accompanying consolidated balance sheets at September 30, 1998 and
December 31, 1997.
Advanced Casino Systems Corporation ("ACSC"), a GBCC subsidiary, provides
computer, marketing and other administrative services to GBHC and to HCC and its
subsidiaries. Computer services provided include hardware, software and
operator support and, for the most part, such services are billed by ACSC at its
direct cost plus expenses incurred. ACSC and HCT entered into a Computer
Services Agreement dated as of January 1, 1994 and renewed through December 31,
1999 to provide such services and to 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. HCT also pays ACSC a fixed license fee of $33,600 per month.
Unpaid charges included in due from affiliates on the accompanying consolidated
balance sheets at September 30, 1998 and December 31, 1997 amounted to $92,000
and $78,000, respectively. ACSC's billings for such services are set forth
below:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- ---------------------
1998 1997 1998 1997
--------- --------- --------- ---------
GBHC $ 182,000 $ 71,000 $ 452,000 $ 303,000
HCC and its subsidiaries 253,000 254,000 915,000 578,000
Many of the marketing and administrative services now provided by ACSC were
previously provided to HCC and its subsidiaries by GBHC. Such charges amounted
to $140,000 and $661,000, respectively, during the three and nine month periods
ended September 30, 1997.
18
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
Interest expense with respect to borrowings from HCC is set forth below:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
PPI Funding Notes held by HCC
(Note 4) $1,189,000 $1,832,000 $3,482,000 $5,585,000
Short-term borrowings (Note 3) 237,000 237,000 704,000 739,000
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 September 30, 1998 and December 31, 1997.
Interest accrued on short-term borrowings at September 30, 1998 and
December 31, 1997 amounting to $1,543,000 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 Chapter
11 making prospects for ultimate collection doubtful, the notes, together with
accrued interest receivable aggregating $3,458,000, were reflected as an
adjustment to GBCC's negative investment in Holdings on the accompanying
consolidated balance sheet at December 31, 1997. In accordance with certain
provisions of the September 1998 settlement agreement with GBCC (see Note 9),
GBHC preserves whatever rights of offset, if any, it might have with respect to
an advance made by GBHC to a GBCC subsidiary (see Note 3) against the
$10,000,000 and $5,000,000 loans described above. The notes, together with
accrued interest of $3,484,000, are fully reserved on the accompanying
consolidated balance sheet at September 30, 1998.
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
$1,496,000, were reflected as an adjustment to GBCC's negative investment in
Holdings on the accompanying consolidated balance sheet at
19
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
December 31, 1997. On September 2, 1998, the working capital loans to GBHC were
cancelled as part of a settlement agreement among GBCC and Holdings, together
with certain of their subsidiaries, and HCC (see Note 9).
(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 $2,444,000 and
$2,668,000, respectively, during the three month periods ended September 30,
1998 and 1997 and $6,269,000 and $6,840,000, respectively, during the nine month
periods ended September 30, 1998 and 1997. PML also incurred operating and other
expenses amounting to $310,000 and $423,000, respectively, during the three
month periods ended September 30, 1998 and 1997 and $976,000 and $1,290,000,
respectively, during the nine month periods ended September 30, 1998 and 1997.
(8) EQUITY IN EARNINGS OF GB HOLDINGS, INC.
As discussed in Note 1, the operations of Holdings and its subsidiaries
were accounted for under the equity method of accounting for the six month
period from January 1, 1998 through June 30, 1998. Due to the significance of
Holdings' operations, summarized consolidated results of operations of Holdings
and its subsidiaries for such period are set forth below:
Net revenues $114,066,000
------------
Departmental expenses 95,499,000
General and administrative expenses 7,115,000
Depreciation and amortization 5,825,000
------------
Total operating expenses 108,439,000
------------
Income from operations 5,627,000
------------
Interest, net 899,000
Gain on disposal of assets 28,000
------------
Total non-operating income 927,000
------------
Income before taxes and other item 6,554,000
Income tax provision -
------------
Income before other items 6,554,000
Reorganization and other related costs (2,831,000)
------------
Net income $ 3,723,000
============
20
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(9) LITIGATION
SUBSIDIARY CHAPTER 11 FILINGS AND RELATED LITIGATION-
On January 5, 1998, Holdings, GB Property Funding and GBHC filed petitions
for relief under Chapter 11 of the Bankruptcy Code. Each company continues to
operate in the ordinary course of business, as set forth in the Bankruptcy Code,
and each company's executive officers and directors remain in office, subject to
the jurisdiction of the Bankruptcy Court. On both May 11 and August 10, 1998,
the Bankruptcy Court extended the exclusive period of the debtors to file a plan
of reorganization for 90 days. On November 9, 1998, the Bankruptcy Court granted
an additional 60-day extension of the exclusivity period.
As a result of the default and automatic acceleration under the indenture
for the PRT Funding Notes, the holders of the PRT Funding Notes could initiate
judicial proceedings to enforce their claims for payment; however, no such
proceedings have been initiated. PCC, as guarantor of the PRT Funding Notes, is
currently involved in negotiations to restructure the notes with three
bondholders who control in excess of 95% of the note issue.
On May 22, 1998, GBHC filed a motion with the Bankruptcy Court seeking to
reject the management agreement with NJMI (see Note 6). The Interim Agreement
was entered into and approved by the Bankruptcy Court on July 7, 1998 and the
motion to reject the management agreement was approved by the Bankruptcy Court
on September 28, 1998. As a consequence of the September 1998 settlement
agreement described below, GBCC and GBHC may no longer assert claims against
each other with respect to the operation of the management contract or the
cancellation thereof.
On July 27, 1998, GBHC filed an action in the Bankruptcy Court against
GBCC, certain affiliates of GBCC and Jack E. Pratt, Edward T. Pratt, Jr. and
William D. Pratt as directors of GBCC and former directors of GBHC
(collectively, the "GBCC Parties"), which alleged, among other things,
usurpation of corporate opportunities of GBHC and breach of fiduciary duty with
respect to GBHC in connection with the acquisition of certain land parcels in
Atlantic City, New Jersey. The action sought, among other things, to enjoin the
GBCC Parties from transferring the land parcels to third parties and to require
that the land parcels be conveyed to GBHC. The action also sought to enjoin GBCC
from using the tax NOL's of GBHC.
On September 2, 1998, the GBCC Parties reached a settlement with GBHC which
was approved by the Bankruptcy Court. The terms of the settlement agreement
provided, among other things, (i) that the GBCC Parties convey the land parcels
to GBHC in exchange for a cash payment equal to the GBCC Parties' cost in such
land parcels with an additional $500,000 payment due upon confirmation of a plan
of reorganization by the Bankruptcy Court and (ii) that GBHC be included in the
consolidated federal income tax return of GBCC for 1997 and 1998 enabling GBCC
to utilize GBHC's tax NOL's. The agreement also provided that on or before
December 31, 1998, GBCC would cause Holdings and its subsidiaries to be
deconsolidated from the GBCC federal income tax return by means of transferring
21% of the stock ownership of Holdings to an unconsolidated entity. In
addition, the settlement agreement also allowed
21
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
GBHC to offset its working capital loan from GBCC in the amount of $8,000,000
together with interest accrued thereon (see Note 6) against a claim asserted by
GBHC against GBCC under the existing tax allocation agreements.
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.
22
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(10) SUPPLEMENTAL CASH FLOW INFORMATION
During the third quarter of 1998, GBCC transferred ownership of an indirect
subsidiary to GBHC as part of the September 2, 1998 settlement agreement (see
Note 9). In connection with the transfer, certain liabilities of the subsidiary
were assumed by GBHC as follows:
Land $(864,000)
Other assets (1,000)
Net cash received 245,000
Investment in GBHC 28,000
---------
Mortgage note assumed $ 592,000
=========
During the second quarter of 1997, HCC acquired the general partnership in
PML (see Notes 1 and 6). The purchase price included the assignment of certain
receivables from GBCC and the issuance of a note to PPI Corporation. In
connection with the acquisition, certain liabilities of PPI Corporation were
assumed as follows:
Assignment of PPI Funding Notes $(7,597,000)
Assignment of interest receivable (350,000)
Note issued (3,800,000)
Interest reserve on PPI Funding Notes (277,000)
Charge to paid-in capital 13,024,000
-----------
Liabilities assumed $ 1,000,000
===========
(11) RECLASSIFICATIONS
Certain reclassifications have been made to the prior year's consolidated
financial statements to conform to the 1998 consolidated financial statement
presentation.
23
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This Quarterly Report on Form 10-Q contains forward-looking statements
about the business, financial condition and prospects of 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. Income from operations provided by ACSC
during the three and nine month periods ended September 30, 1998 amounted to
$82,000 and $797,000, respectively, compared with losses from operations of
$385,000 and $390,000, respectively, during the corresponding periods in 1997.
Such improvement has been generated by new contracts with third party gaming
companies to provide and install ACSC's slot monitoring systems.
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 on January 5, 1998, PRT Funding is in default on the $85 million
principal amount of PRT Funding Notes which, together with accrued interest,
accelerated and became immediately due and payable. The bankruptcy filing of
GBHC also permitted it to reject the Sands Management Agreement, an important
source of funds for debt service on the PRT Funding Notes. Management of GBHC
requested modification to the fee arrangement under the Sands management
agreement and reserved its right to reject the agreement. A modified agreement
was entered into effective May 1, 1998 and expired on September 28, 1998 which
reduced the monthly fee to $165,000 compared to an average monthly fee of
$532,000 during the same period in 1997. GBHC's notion to reject the management
agreement was approved by the Bankruptcy Court on September 28, 1998. As a
consequence of the September 1998 settlement agreement
24
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
(see Note 9 to the Notes to Consolidated Financial Statements), GBCC and GBHC
may no longer assert claims against each other with respect to the operations of
the management contract or the cancellation thereof. PCC does not have the
financial resources or the capacity to borrow sufficient cash to satisfy the $85
million principal amount of the PRT Funding Notes which have accelerated.
Consequently, PCC, as guarantor of the PRT Funding Notes, is involved in
negotiations to restructure the notes with three bondholders who control in
excess of 95% of the $85 million note issue. PRT Funding deferred payment of
interest due on the April 15 and October 15, 1998 interest payment dates. On
October 22, 1998, PRT Funding paid to the bondholders an amount equal to a
single semiannual interest payment ($4.9 million) while negotiations to
restructure the notes continue. There can be no assurance at this time that such
negotiations will result in restructuring of its obligations.
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 both May 11 and August
10, 1998, the Bankruptcy Court extended the exclusive period of the debtors to
file a plan of reorganization for 90 days. On November 9, 1998, the Bankruptcy
Court granted an additional 60-day extension of the exclusivity period. Capital
expenditures, other than normal recurring capital expenditures in the ordinary
course of business, will require prior approval of the Bankruptcy Court. The
Bankruptcy Court has approved a $13.6 million, two-year capital expenditure
program including $7.1 million for rooms renovations and $6.5 million for the
replacement of slot machines. There can be no assurance at this time that
GBHC's plan of reorganization, when submitted, will be accepted by its creditors
or the Bankruptcy Court. In any event, it is not anticipated that PCC will
retain a substantial equity position in Holdings as a result of a reorganization
and, accordingly, it is not anticipated that the Holdings group will contribute
significantly to the future cash flows of 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
25
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
$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. The
remaining PPI Funding Notes have a maturity value of $47,603,000. 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 balance due on
February 17, 2006.
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. The loans to
GBHC together with the related interest were cancelled as part of a settlement
agreement approved by the Bankruptcy Court on September 2, 1998.
CAPITAL EXPENDITURES AND OTHER INVESTMENTS
Property and equipment additions during the nine month period ended
September 30, 1998 totaled $86,000; management anticipates that capital
expenditures during the remainder of 1998, consisting only of ongoing equipment
replacements and enhancements at ACSC, 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
have ownership or operating control of such subsidiaries after reorganization.
Accordingly, the accompanying consolidated statement of operations for the nine
month period ended September 30, 1998 reflects the operations of the filing
subsidiaries for the period from January 1, 1998 through June 30, 1998 under the
equity method of accounting and for the period subsequent to June 30, 1998 under
the cost method of accounting. For the three and nine month periods ended
September 30, 1997, however, the accompanying consolidated statements of
operations include the operations of Holdings and its subsidiaries on a
consolidated basis.
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 first quarter of 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
statements of operations.
26
<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 income from operations for
the three and nine month periods ended September 30, 1997, exclusive of Holdings
and its subsidiaries and PML ("the GBCC Group"), on a basis comparable to the
1998 presentations.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------
1998 PROFORMA 1997 1998 PROFORMA 1997
---------- ------------- ---------- -------------
Revenues $1,556,000 $2,166,000 $6,187,000 $8,001,000
---------- ---------- ---------- ----------
Expenses:
General and administrative 1,351,000 1,080,000 3,092,000 2,534,000
Other operating expenses 43,000 82,000 332,000 234,000
Depreciation and
amortization 31,000 103,000 90,000 289,000
---------- ---------- ---------- ----------
Total expenses 1,425,000 1,265,000 3,514,000 3,057,000
---------- ---------- ---------- ----------
Income from operations $131,000 $901,000 $2,673,000 $4,944,000
========== ========== ========== ==========
GBCC GROUP
- ----------
REVENUES
Revenues of the GBCC Group decreased $610,000 (28.2%) and $1.8 million
(22.7%), respectively, during the three and nine month periods ended September
30, 1998 compared to the prior year periods. Revenues at ACSC, a member of the
GBCC Group that provides computer hardware and software to the gaming industry,
increased by $591,000 and $2.1 million, respectively, to $747,000 and $2.8
million, respectively, during the three and nine month periods ended September
30, 1998 compared to the same periods of 1997. These revenue increases were
partially offset, however, by decreases of $44,000 and $1.8 million,
respectively, in management and termination fees earned by GBCC with respect to
a hotel/casino it managed in San Juan, Puerto Rico. Also, as discussed in Note
6 to the consolidated financial statements, management fees earned by NJMI under
the NJMI management contract with the Sands decreased by $1.1 million and $2
million, respectively, to $495,000 and $2.4 million, respectively, during the
three and nine month periods ended September 30, 1998 compared to the 1997
periods. Such decreases resulted from a revised fee arrangement providing for a
fixed fee of $165,000 per month. The original management agreement provided for
significantly higher fees which were based on revenues and gross operating
profits at the Sands.
27
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
GENERAL AND ADMINISTRATIVE EXPENSES
The GBCC Group's general and administrative expenses increased by $271,000
(25.1%) and $558,000 (22%), respectively, during the three and nine month
periods ended September 30, 1998 compared to the 1997 periods. Such increases
result primarily from the provision of reserves for collectability with respect
to certain receivables from GBHC.
OTHER EXPENSES
Other expenses decreased by $39,000 (47.6%) during the three month period
ended September 30, 1998 compared to the same period in 1997 bringing the nine
month increase to $98,000 (41.9%). The fluctuations primarily result from costs
associated with ACSC's sales activities. Such costs amounted to $40,000 and
$322,000, respectively, for the three and nine month periods ended September 30,
1998 compared to $25,000 and $217,000, respectively, for the same periods in
1997.
DEPRECIATION AND AMORTIZATION
The GBCC Group's depreciation and amortization expense decreased by $72,000
(69.9%) and $199,000 (68.9%), respectively, during the three and nine month
periods ended September 30, 1998 compared to the same periods 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 and $268,000 decreases in amortization expense, respectively, were
partially offset by $17,000 and $69,000 increases in depreciation expense,
respectively, due to an increase in ACSC's depreciable assets.
GBCC CONSOLIDATED
- -----------------
INTEREST
Consolidated interest income for GBCC decreased $141,000 (36%) and $325,000
(31.1%), respectively, during the three and nine month periods ended September
30, 1998 compared to the same periods of 1997 as less cash was available during
the period for investment purposes. Interest expense declined $5.4 million
(57.2%) and $16.4 million (57.3%), respectively, during the 1998 periods
compared to the prior year primarily due to the absence of interest on Holdings'
10 7/8% First Mortgage Notes ($5 million and $15 million, respectively, during
the three and nine month periods ended September 30, 1997) and to HCC's
forgiveness of $23.6 million discounted value of PPI Funding Notes at December
31, 1997.
EQUITY IN EARNINGS OF LIMITED PARTNERSHIP
Effective February 17, 1994, PCC acquired the limited partnership interest
in PML, a limited partnership which earns management fees from the operation of
the Aurora Casino. The Agreement of Limited Partnership of PML provides for
distributions to PCC of 1% of the first $84,000 of net income earned by PML each
month and 99% of any net income earned above such amount, with all remaining
28
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
income distributed to the general partner. GBCC's equity in the earnings of PML
decreased to $1.9 million during the three month period ended September 30, 1998
compared to $2 million earned during the same period of 1997 reflecting reduced
management fees earned by PML due to a significant increase in gaming taxes
imposed on the Aurora Casino's operations. Equity in the earnings of PML
increased to $4.5 million for the nine month period ended September 30, 1998
from $2.8 million for the comparable period in 1997. Prior to April 1, 1997,
PML's results of operations were consolidated with those of GBCC; therefore, the
$2.8 million equity in earnings for the 1997 nine month period only reflects six
months of such earnings. Restated on a comparable nine month period basis,
GBCC's equity in the earnings of PML for the 1997 period would have been $5
million. The resulting decline to $4.5 million in 1998 also reflects the
reduction in management fees due to the increase in gaming taxes. Management
fees are based, in part, on the operating results of the Aurora Casino.
EQUITY IN EARNINGS OF AND GAIN ON ELIMINATION OF INVESTMENT IN GB HOLDINGS,
INC.
GBCC's equity in the earnings of Holdings for the nine month period ended
September 30, 1998 amounted to $3.7 million and represents equity in earnings
for the period from January 1, 1998 through June 30, 1998. Effective July 1,
1998, GBCC eliminated its investment in Holdings and is no longer recognizing
equity in the earnings of Holdings and its subsidiaries. For the three and nine
month periods ended September 30, 1997, the results of operations of Holdings
and its subsidiaries were consolidated with those of GBCC. Had such operating
results been accounted for under the equity method of accounting, GBCC would
have reported equity in losses of $1.3 million and $6 million, respectively, for
the three and nine month periods ended September 30, 1997. The significant
improvement in earnings compared to the prior year is primarily due to declines
in interest expense which have more than offset costs associated with the
reorganization under Chapter 11.
Generally, the Sands has experienced small increases in operating income
during 1998 compared to 1997 despite declines in net revenues. The revenue
decreases are a direct result of significant declines in total gross wagering at
the Sands due to increased competition in the Atlantic City market, the
reduction of promotional marketing activities in an effort to control costs and
the negative publicity resulting from GBHC's filing under Chapter 11. Operating
costs have decreased due to decreased patron volume as well as to management's
efforts to eliminate certain marginally effective marketing programs and create
operating efficiencies. Reorganization and other related costs attributable to
the Chapter 11 filing amounted to $2.8 million during the period from January 1
through June 30, 1998.
The most significant change in Holdings'operations has been its reduction
in interest expense. As a result of the filing, the accrual of interest expense
on Holdings' debt obligations has been suspended. Had the contractual interest
expense been accrued, GBCC's equity in the losses of Holdings for the 1998
period would have been comparable to the similar prior year period.
As a result of GBCC no longer controlling the operations of the Sands, the
continued expectation that control of Holdings will only be temporary and the
September 1998 settlement agreement which resolved certain significant
uncertainties, GBCC's investment in Holdings and its subsidiaries as well as
certain amounts due to Holdings were revalued to a zero basis effective on July
1, 1998. The elimination of the
29
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
investment in and amounts due to Holdings resulted in a gain amounting to
$27,482,000 during the three and nine month periods ended September 30, 1998.
RESTRUCTURING COSTS
The three and nine month period increases result from professional fees and
other corporate overhead costs associated with the default of the PRT Funding
Notes and efforts to restructure the obligations. Management believes that such
reorganization costs will continue in the near term pending the outcome of
restructuring discussions.
INCOME TAX PROVISION
As previously disclosed in GBCC's quarterly report on Form 10-Q for the
period ended June 30, 1998, the Company was advised by HCC, its former parent,
that a revised tax treatment with respect to the distribution of GBCC stock
owned by HCC to HCC's shareholders on December 31, 1996 might be necessary. HCC
subsequently revised its tax treatment of the distribution which resulted in a
reduction of the net operating loss carryforwards ("NOL's") available to GBCC
for federal income tax purposes. In addition, the revised tax treatment
resulted in adjustments to GBCC's deferred tax assets and liabilities as
previously reported. The revised tax treatment had no effect on GBCC's assets,
liabilities or operating results as reflected in its consolidated financial
statements for any period presented as GBCC had provided valuation allowances to
fully reserve its net deferred tax assets, including NOL's, for all such
reporting periods. The comments with respect to federal income taxes which
follow reflect the changes arising from the revised tax treatment.
In connection with the revised tax treatment, GBCC has commenced litigation
against its former independent accountants and tax advisors alleging negligent
advice and breach of contract. As a result of the revised tax treatment and the
ensuing litigation, GBCC has replaced its independent accountants. The Company
continues to work with its new outside advisors and consultants to review these
tax issues.
The impact of the revised tax treatment on state income taxes has not yet
been determined; however, the effect, if any, on the consolidated financial
statements of GBCC is not anticipated to be material.
As of September 30, 1998, GBCC and its subsidiaries have NOL's for federal
income tax purposes totaling approximately $47.7 million, which do not begin to
expire until the year 2005. Additionally, GBCC and its subsidiaries have
various tax and alternative minimum tax credits available totaling approximately
$2.6 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 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
substantially all of the
30
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
deferred tax asset at September 30, 1998. The remaining deferred tax asset
represents state timing differences expected to be utilized.
On July 27, 1998 GBHC filed an action in the Bankruptcy Court against GBCC,
certain affiliates of GBCC and Jack E. Pratt, Edward T. Pratt, Jr. and William
D. Pratt as directors of GBCC and former directors of GBHC (collectively, the
"GBCC Parties"), which sought, among other things, to enjoin GBCC from using the
tax NOL's of GBHC. On September 2, 1998, the GBCC Parties reached a settlement
with GBHC which was approved by the Bankruptcy Court. The terms of the
settlement agreement provided, among other things, that GBHC be included in the
consolidated federal income tax return of GBCC for 1997 and 1998 enabling GBCC
to utilize GBHC's tax NOL's. The agreement also provided that on or before
December 31, 1998, GBCC would cause Holdings and its subsidiaries to be
deconsolidated from the GBCC federal income tax return by means of transferring
21% of the stock ownership of Holdings to an unconsolidated entity.
YEAR 2000 COMPLIANCE
In the year 2000, computer programs that have date sensitive software may
recognize a date using "00" as the year 1900 rather than 2000. Such an error
could result in a system failure or miscalculations causing disruptions of
operations including, among other things, a temporary inability to process
transactions or engage in similar normal business activities.
Management has initiated a program to prepare the Company's computer
systems and applications for the year 2000. Such program includes the use of
both internal and external resources to test and, if necessary, modify or
replace software applications. The costs of acquiring, testing and converting
such systems are expected to be minimal. Management expects its Year 2000 date
conversion projects to be completed on a timely basis. The Company has also
initiated formal communication with its significant suppliers to determine the
extent to which its information systems are vulnerable to those third parties'
failure to resolve their Year 2000 issues. While there can be no assurance that
the Company and its suppliers and customers will fully resolve the Year 2000
issues, neither the estimated cost nor the outcome of the Year 2000 problem is
expected to have a material impact on the Company's operations, liquidity or
financial position.
INFLATION
Management believes that in the near term, modest inflation, together with
increasing competition within the gaming industry for qualified and experienced
personnel, will continue to cause increases in operating expenses, particularly
labor and employee benefits costs at the Sands.
31
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
SEASONALITY
Historically, the Sands' operations have been highly seasonal in nature,
with the peak activity occurring from May to September. Consequently, the
results of 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.
32
<PAGE>
PART II: OTHER INFORMATION
- ---------------------------
ITEM 1. LEGAL PROCEEDINGS
On January 5, 1998, Holdings, GB Property Funding and GBHC filed petitions
for relief under Chapter 11 of the Bankruptcy Code. Each company continues to
operate in the ordinary course of business, as set forth in the Bankruptcy Code,
and each company's executive officers and directors remain in office, subject to
the jurisdiction of the Bankruptcy Court. On both May 11 and August 10, 1998
the Bankruptcy Court extended the exclusive period of the debtors to file a plan
of reorganization for 90 days. On November 9, 1998, the Bankruptcy Court granted
an additional 60-day extension of the exclusivity period.
As a result of the default and automatic acceleration under the indenture
for the PRT Funding Notes, the holders of the PRT Funding Notes could initiate
judicial proceedings to enforce their claims for payment; however, no such
proceedings have been initiated. PCC, as guarantor of the PRT Funding Notes, is
currently involved in negotiations to restructure the notes with three
bondholders who control in excess of 95% of the note issue.
On May 22, 1998, GBHC filed a motion with the Bankruptcy Court seeking to
reject its existing management agreement with NJMI. A substitute agreement (the
"Interim Agreement") was entered into and approved by the Bankruptcy Court on
July 7, 1998. Under the Interim Agreement, effective May 1, 1998 and
terminating on September 28, 1998, NJMI continued to provide certain agreed upon
services to GBHC at a reduced monthly fee. The motion to reject the management
agreement was granted on September 28, 1998. As a consequence of the September
1998 settlement agreement described below, GBCC and GBHC may no longer assert
claims against each other with respect to the operation of the management
contract or the cancellation thereof.
On July 27, 1998, GBHC filed an action in the Bankruptcy Court against
GBCC, certain affiliates of GBCC and Jack E. Pratt, Edward T. Pratt, Jr. and
William D. Pratt as directors of GBCC and former directors of GBHC
(collectively, the "GBCC Parties"), which alleged, among other things,
usurpation of corporate opportunities of GBHC and breach of fiduciary duty with
respect to GBHC in connection with the acquisition of certain land parcels in
Atlantic City, New Jersey. The action sought, among other things, to enjoin the
GBCC Parties from transferring the land parcels to third parties and to require
that the land parcels be convey to GBHC. The action also sought to enjoin GBCC
from using the tax net operating loss carryforwards ("NOL's") of GBHC. On
September 2, 1998, the GBCC Parties reached a settlement with GBHC which was
approved by the Bankruptcy Court. The terms of the settlement agreement
provided, among other things, (i) that the GBCC Parties conveyed the land
parcels to GBHC in exchange for a cash payment equal to the GBCC Parties' cost
in such land parcels with an additional $500,000 payment due upon confirmation
of a plan of reorganization by the Bankruptcy Court and (ii) that GBHC be
included in the consolidated federal income tax return of GBCC for 1997 and 1998
enabling GBCC to utilize GBHC's tax NOL's. The agreement also provided that on
or before December 31, 1998, GBCC would cause Holdings and its subsidiaries to
be deconsolidated from the GBCC federal income tax return by means of
transferring 21% of the stock ownership of Holdings to an unconsolidated entity.
In addition, the settlement agreement also allowed GBHC to offset its working
capital loan from GBCC in the amount of $8,000,000 together with interest
accrued thereon against a claim asserted by GBHC against GBCC under the existing
tax allocation agreements.
On October 8, 1998, GBCC and HCC filed a complaint in the District Court of
Dallas County, Texas against Arthur Andersen L.L.P., GBCC's independent
accountants, and certain of its partners alleging negligent advice and breach of
contract with respect to the tax consequences resulting from the spin-off of
GBCC's stock to HCC's shareholders on December 31, 1996.
33
<PAGE>
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
As a result of the filings discussed in Item 1. above, $182,500,000
principal amount of 10 7/8% First Mortgage Notes issued by GB Property Funding
are in default. Principal payments of $2,500,000 each due on January 15, 1998
and July 15, 1998 were not made. Under an order of the Bankruptcy Court
permitting the disposition of furniture and equipment in the ordinary course of
business, any payments received by GBHC for the sale of such assets, which are
part of the security for the 10 7/8% First Mortgage Notes, must be remitted to
the Trustee for the 10 7/8% First Mortgage Notes as reductions to the
outstanding principal. As of November 13, 1998, $67,000 has been remitted to the
Trustee from the proceeds on the sale of equipment. The accrual of interest on
the 10 7/8% First Mortgage Notes for periods subsequent to the filings has been
suspended; such interest on a contractual basis amounts to $26,407,000 as of
November 13, 1998.
The default on the 10 7/8% First Mortgage Notes also resulted in a default
under the indenture for the $85,000,000 11 5/8% Unsecured Senior Notes issued by
PRT Funding Corp. and guaranteed by Pratt Casino Corporation. Accordingly, the
maturity of the PRT Funding Notes has accelerated. On October 22, 1998, PRT
Funding paid to the bondholders an amount equal to a single semiannual interest
payment ($4,941,000) while negotiations to restructure the notes continue.
Interest due on such notes, exclusive of compound interest on amounts in
arrears, amounts to $5,709,000 as of November 13, 1998.
ITEM 6.(a) - EXHIBITS
10.1 Agreement dated as of September 2, 1998 by and among GBHC, GB Holdings,
Inc., and GB Property Funding Corp., on the one hand, and GBCC, PHC
Acquisition Corp., Lieber Check Cashing, LLC, Jack E. Pratt, William D.
Pratt, Edward T. Pratt, Jr. and HCC, on the other.
*99.1 Petition filed on October 8, 1998 in the District Court of Dallas County,
Texas by Hollywood Casino Corporation and Greate Bay Casino Corporation
("Plaintiffs") against Arthur Andersen L.L.P., Richard L. Robbins,
Michael E. Gamache, Daniel J. Meehan, and Brent A. Railsback
("Defendants")
- --------------------
* Incorporated by reference to the same-numbered exhibit to the Form 8-K
filed October 22, 1998 by the Registrant with the Securities and Exchange
Commission.
ITEM 6.(b) - REPORTS ON FORM 8-K
The Registrant did not file any reports on Form 8-K during the quarter
ended September 30, 1998. On October 22, 1998, the Registrant filed a Form 8-K
to report a change in certifying accountants. On October 30, 1998 the
Registrant filed a Form 8-K/A to include its former accountants' letter to the
Securities and Exchange Commission as an exhibit.
34
<PAGE>
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: November 20, 1998 By: /s/ John C. Hull
------------------- ------------------------------------
John C. Hull
Chief Executive Officer
35
<PAGE>
EXHIBIT 10.1
AGREEMENT
This Agreement (herein so called) is entered into as of this 2nd day of
September, 1998 by and among Greate Bay Hotel and Casino, Inc. ("GBHC"), GB
Holdings, Inc., ("GBH"), GB Property Funding Corp. ("GBPF") (collectively with
their Subsidiaries, the "Debtors"), on the one hand, and Greate Bay Casino Corp.
("GBCC"), PHC Acquisition Corp. ("PHC"), Lieber Check Cashing, LLC. ("Lieber"),
Jack E. Pratt, William D. Pratt, and Edward T. Pratt, Jr. (collectively, the
"Pratts" and together with GBCC, PHC, and Lieber, the "Defendants"), and
Hollywood Casino Corporation ("HCC"), on the other.
. R E C I T A L S
A. On January 5, 1998, the Debtors commenced proceedings under Chapter 11 of
Title 11 of the United States Code (the "Chapter 11 Proceedings") in the
United States Bankruptcy Court for the District of New Jersey, Camden
Vicinage (the "Court").
B. On July 27, 1998, GBHC filed a certain adversary proceeding against the
Defendants in the Court that was docketed at No. 98-1220 seeking to recover,
among other things, the rights under that certain contract of sale between
PHC and FGP Bala, Inc. ("FGP") dated as of January 1, 1998 for the sale of
Lots 5, 6, 7, 2, 3, 16, 19, & 42 on Block 30 and Lot 73 on Block 33 on the
Tax Map of the City of Atlantic City and what is commonly known in Atlantic
City, New Jersey as the Midtown Bala (the "Midtown Bala Option"), and the
rights to Lot 14 on Block 30 of the Tax Map of the City of Atlantic City that
Lieber acquired, subject to a purchase money mortgage, from Andermatt Corp.
by deed dated July 22, 1996 (the "Lieber Parcel"), and to restrain the
Defendants from using the Net Operating Loss tax attributes (the "NOL's") of
the Debtors (the "Adversary Proceeding").
C. On or about August 19, 1998, the Defendants filed a Motion in the Adversary
Proceeding seeking to disqualify Gibbons Del Deo Griffinger & Vecchione as
counsel to the Debtors in the Adversary Proceeding (the "Gibbons DQ Motion"),
and on or about August 20, 1998 filed a Motion seeking a Preliminary
Injunction Against Frederick H. Kraus (the "FK Motion").
D. On August 24, 1998, GBCC filed a Response and Emergency Application in the
Adversary Proceeding (the "Consolidated Return Motion").
E. The Debtors, on one side, and the Defendants, on the other side, have reached
a settlement in the Adversary Proceeding which resolves all of the issues
raised in the Adversary Proceeding, including the Consolidated Return Motion,
and which results in the dismissal with prejudice of the Gibbons DQ Motion
and the FK Motion.
<PAGE>
NOW, THEREFORE, the Debtors, the Defendants, and where applicable, HCC, for
themselves and all entities owned or controlled by them, including direct or
indirect subsidiaries ("Subsidiaries") stipulate and agree as follows:
1. Forthwith upon the execution of this Agreement and approval of this
Agreement by the Court, the Debtors will provide GBCC with executed Internal
Revenue Service Form 1122's for the 1997 tax year with respect to the GBCC
Group, as hereafter defined, for each of the Debtors and the Subsidiaries of GBH
and the remaining tax issues are resolved in accordance with the terms as
follows:
a. HCC may file an amended consolidated federal corporate tax return
("Amended Return") for calendar year 1996. HCC may use any NOL's
attributable to the Debtors as of December 31, 1996 for any purpose in
the Amended Return. However, if any tax, interest or penalties are due
on the Amended Return, HCC, GBCC or any of GBCC's Subsidiaries other than
the Debtors will satisfy all such obligations from its or their own
funds.
b. GBCC will file a timely return by the September 15, 1998 extended
date for the filing of a return previously obtained by GBCC for a new
consolidated group for calendar year 1997 consisting of GBCC and all of
its Subsidiaries (the "GBCC Group"). GBCC may use any NOL's attributable
to the Debtors as of December 31, 1997 for any purpose in the GBCC 1997
return. However, if any tax is due on the GBCC 1997 return, GBCC or any
of its Subsidiaries other than the Debtors will satisfy all such
obligations from its or their own funds.
c. The GBCC Group will file a return for calendar year 1998 and in a
manner in accordance with prior practice. HCC represents and covenants
that it will take no action that will require any cancellation of debt
income or any gains on disposition of assets to be recognized by the GBCC
Group in 1998. GBCC represents and covenants that any restructuring of
the obligations of Pratt Casino Corporation ("PCC"), PRT Funding Corp.
("PRT"), and/or New Jersey Management, Inc. ("NJMI") (the "PRT
Restructuring") will not result in any cancellation of debt income or
other taxable gains to the GBCC Group while the Debtors are members of
the GBCC Group; provided that nothing herein shall prevent the
cancellation of indebtedness in a bankruptcy proceeding. In the event
that GBHC seeks to take a deduction for tax purposes for post petition
interest expense as part of the 1998 return, GBHC will deliver to GBCC an
opinion addressed to GBCC from a law firm reasonably satisfactory to GBCC
or from a nationally recognized "Big Five" certified public accounting
firm that there is substantial authority for such deduction. GBCC
represents and covenants that NOL's of the GBCC Group will be available
to shelter any taxable income from GBH and Subsidiaries in 1998 or from
the deconsolidation of the GBH Group as hereafter defined, and otherwise
GBCC or its Subsidiaries will pay any resulting tax liability. However,
to the extent that there is tax actually due as a result of GBHC not
taking a deduction for post petition interest expense and if the
remaining NOL's of the GBCC Group are insufficient to shelter the tax
liability resulting from nondeducted
2
<PAGE>
post petition interest expense, GBHC will be obligated to pay any such
tax liability. In addition, after allowing for the use of GBCC Group
NOL's to shelter any income of the Debtors, regardless of whether such
income results from nondeducted interest or otherwise, HCC may take
action that would result in cancellation of debt income or gain on the
disposition of assets to the GBCC Group, if GBCC and its Subsidiaries
other than the Debtors pay any tax due.
d. On or before December 31, 1998, GBCC will cause GBH and its
Subsidiaries to become deconsolidated from the GBCC Group by causing PCC
to transfer 21% of the stock ownership interest of PCC in GBH (the "GBH
Stock Interest") free and clear of liens and encumbrances to a person
other than any member of the GBCC Group such that PCC and its affiliates
would no longer be the owner of at least 80% of the vote and value of the
GBH stock as set forth in 26 USC (S)1504 or, with the written consent of
GBHC, by otherwise causing GBH and its Subsidiaries to cease to be
members of the GBCC Group so that GBH and its Subsidiaries can form a new
consolidated group with GBH as the common parent (the GBH Group").
Unless GBCC notifies GBHC within seven (7) days of the approval of this
Agreement by the Court that GBCC will otherwise cause the deconsolidation
of GBH and its Subsidiaries or notifies GBHC of the identity of a person
to hold the GBH Stock Interest, GBCC authorizes GBHC to file a petition
with the New Jersey Casino Control Commission, seeking approval to
transfer the GBH Stock Interest to a designee of the Debtors (or to the
person designated by GBCC if notice is provided within such seven (7)
days) effective on or before December 31, 1998 and will cooperate with
GBHC, using GBCC's good faith best efforts, to cause such approval to be
obtained. GBHC will use its good faith best efforts to obtain approval of
such a petition. In addition, GBCC will cause PCC to take no action that
will prevent the effectiveness of the consent of GBH to be the common
parent of the GBH Group. At the deconsolidation of GBH and its
Subsidiaries, the Debtors will receive their allocated share of any
unused NOL's available to the GBCC Group in accordance with regulations
and procedures of the IRS. GBCC Group shall not make an election under
Treas. Reg. 1.1502-20(g) with respect to such deconsolidation. If
because of the deconsolidation, any adjustment is required by the
Treasury Regulations promulgated under 26 U.S.C. Section 1502, GBCC will
fully disclose to the Debtors its analysis and calculation of such
adjustments on a timely basis but no later than forty-five (45) days
before the GBCC Group's 1998 federal income tax return is due (taking
into account any extension). The inclusion of all such adjustments that
relate to the GBH Group as a result of such deconsolidation shall be
subject to the written consent of the GBH Group. Any dispute concerning
such adjustments shall be resolved by the Court.
e. HCC and GBCC represent and covenant with respect to any audits for
returns covering tax periods beginning prior to January 1, 1997, and GBCC
represents and covenants with respect to any audits covering tax periods
beginning subsequent to December 31, 1996 and until formation of the GBH
Group, that the Debtors will be protected from exposure to liabilities
resulting from activities of HCC and its Subsidiaries or GBCC and its
Subsidiaries, as the case may be, other than the Debtors, and, to the
extent there is money
3
<PAGE>
due the IRS as a result of audits with respect to such activities, HCC
and/or GBCC will be responsible for payment of such amounts. The Debtors
represent and covenant with respect to any audit adjustments covering tax
periods prior to the formation of the GBH Group that the GBCC Group
(other than the Debtors) and HCC will be protected from exposure to
liabilities resulting from activities of the Debtors and, to the extent
there is money due the IRS as a result of audits with respect to such
activities, the Debtors will be responsible for payment of such amounts.
f. Except as provided in this Agreement, neither HCC nor GBCC will enter
into any agreements with the IRS or take a position in any IRS audit or
amend any returns that will adversely affect the tax attributes of the
Debtors or any tax issues affecting the Debtors without the written
consent of the Debtors nor will HCC and/or GBCC engage in any
negotiations with the IRS where either HCC or GBCC will make concessions
with respect to issues or tax attributes affecting the Debtors in return
for favorable treatment or the absence of any action with respect to
issues or tax attributes affecting HCC and/or GBCC and their Subsidiaries
other than the Debtors without the Debtors written consent. HCC and GBCC
will fully disclose to the Debtors all audit issues, notices and
correspondence with the IRS as they arise that would affect the Debtors
so the Debtors can enforce, at their expense, the rights provided to them
under the provisions of this paragraph.
2. With respect to that certain promissory note by GBHC in favor of GBCC
dated February 7, 1997 in the amount of $8,000,000 together with accrued
interest (the "GBHC Demand Note"), and with respect to that certain claim in the
amount of $10,902,000 for the claimed double payment of taxes by GBHC against
GBCC arising from the payment of deferred taxes to Pratt Casino Properties,
Inc., PPI Corporation, or GBCC (the "Deferred Tax Claim"), GBHC releases GBCC
and its Subsidiaries, their officers, directors, employees, shareholders,
agents, and insurers from the Deferred Tax Claim in exchange for a release of
GBHC, which GBCC hereby grants to GBHC and its Subsidiaries, their officers,
directors, employees, shareholders, agents, and insurers, from the claims
arising from the GBHC Demand Note.
3. With respect to the claim of GBHC against PCPI Funding Corp. ("PCPI")
arising from an advance on or about September 27, 1990 in the amount of $6.6
million plus accrued interest (the "PCPI Advance"), GBHC covenants not to sue
any members of the GBCC Group or any of their officers, directors, employees,
shareholders, agents, and insurers for, or take any other action with respect
to, any claim arising out of the PCPI Advance, except that GBHC preserves
whatever rights it may have to offset the amount of the PCPI Advance against the
holders of, and with respect to, the Subordinated Notes as hereafter defined.
4. PHC represents that it and FGP entered into that certain Extension of
Closing Date Agreement dated as of July 28, 1998, which extended the closing
date under the Midtown Bala Option until September 30, 1999 (the "Extension").
Under the Midtown Bala Option, PHC has made the required down payment of
$1,000,000 to be applied against the purchase price and the down payment of
$1,000,000 is being held in escrow in accordance with the terms of that certain
Escrow Agreement dated as of January 1, 1998 (the "Escrow") between PHC, FGP,
and the Title Company
4
<PAGE>
of Jersey (the "Title Company"). PHC also represents that it has paid the
$300,000 required under the Extension to FGP and that the only act required to
extend the Midtown Bala Option under the Extension to September 30, 1999 is the
payment of another $1,000,000 to be held under the Escrow and to be applied
against the purchase price under the Midtown Bala Option. PHC also represents
that its rights under the Midtown Bala Option remain freely assignable as
provided under the original provisions of the Midtown Bala Option. PHC agrees to
assign, and, by this Agreement, does hereby assign, effective immediately after
the transfer of the Membership interests in Lieber to GBHC, as described in
paragraph 5 below, all of its right, title, and interest under the Midtown Bala
Option and the Extension and to the funds held by the Title Company under the
Escrow to Lieber in return for the payment by GBHC of $1,300,000 upon approval
of this Agreement by the Court and for the Confirmation Payment as hereafter
defined. PHC also agrees to deliver to GBHC a separate confirmatory instrument
of assignment consistent with the provisions of this paragraph and in a form
reasonably satisfactory to GBHC.
5. Lieber owns the Lieber Parcel. The Lieber Parcel shall be conveyed as
described below, subject to the purchase money mortgage in favor of Andermatt
Corp. (the "Mortgage"), for the sum of (a) $150,000, representing the payments
made to Andermatt Corp. on account of the purchase price (the "Downpayment")
plus (b) principal and interest payments on the Mortgage (the "P&I Payments"),
plus (C) out of pocket expenses incurred by Lieber at or after closing for the
Lieber Parcel (other than attorney's fees) (the "Expenses") less (d) all income
received in respect of the Lieber Parcel on or after closing (the "Income") (the
"Downpayment", the "P&I Payments", and the "Expenses" less the "Income,
collectively, the "Purchase Price") upon the approval of this Agreement by the
Court, and upon payment of the Purchase Price. GBHC and Lieber agree that the
Purchase Price equals the $251,000 advanced by GBCC under the Lieber Note as
hereafter defined provided that GBHC shall be entitled to any cash on hand in
the checking account of Lieber. GBHC will pay the Purchase Price to GBCC in
complete satisfaction of that certain promissory note by Lieber in favor of GBCC
dated July 22, 1996 (the "Lieber Note") and in return for the transfer of the
ownership of the Lieber Parcel, and the rights to the lease for the Lieber
Parcel to FGP (the "Lieber Lease") upon the approval of this Agreement by the
Court. The transfer of the ownership of the Lieber Parcel and the rights to the
Lieber Lease shall be accomplished by transfer of the Membership Interests of
PHC Properties, Inc. ("PHCP") and PHC Holdings, Inc. ("PHCH") in Lieber to GBHC
and, by this Agreement, the Membership Interests of PHCP and PHCH in Lieber,
constituting all of the Membership Interests in Lieber, are assigned to GBHC
upon approval of this Agreement by the Court and upon payment of the Purchase
Price. Except for the Mortgage, Lieber represents and covenants that the
transfer of the Lieber Parcel and the Lieber Lease will be free and clear of the
claims of any persons other than customary restrictions and easements of record
and identified in the "marked-up" title commitment of the Title Company at the
closing on the Lieber Parcel on July 22, 1996, and GBCC represents that Lieber
has no debts or obligations to anyone other than the Lieber Note that will be
satisfied as a result of the actions contemplated in this paragraph. GBCC also
agrees to deliver to GBHC a confirmatory instrument of assignment of the
Membership interests of PHCH and PHCP in Lieber consistent with the provisions
of this paragraph and in a form reasonably satisfactory to GBHC.
5
<PAGE>
6. The Confirmation Payment is $500,000, is not subject to offset, and is
payable to a designee of GBCC as an allowed administrative claim under Sections
503 and 507 of the Bankruptcy Code upon the effective date of a Plan of
Reorganization of GBHC.
7. This Agreement resolves all of the issues raised in the Adversary
Proceeding and the Adversary Proceeding including the Consolidated Return
Motion, the Gibbons DQ Motion and the FK Motion are dismissed with prejudice.
Except to the extent set forth herein, HCC on its behalf and on behalf of its
Subsidiaries and GBCC on its behalf and on behalf of its Subsidiaries exclusive
of the Debtors, on one side, and the Debtors on their own behalf and on behalf
of their Subsidiaries, on the other side, do hereby release each other and their
respective officers, directors, employees, shareholders, counsel, agents, and
insurers (collectively, the "Released Parties"). The Released Parties agree to
deliver to each other confirmatory mutual releases consistent with the
provisions of this paragraph and in a form reasonably satisfactory to each
other. Nothing in this paragraph shall be deemed to amend those certain
agreements dated June 28, 1998, which were approved by the Court on July 7, 1998
and by the Casino Control Commission on July 8, 1998, and those agreements
remain in effect in accordance with their terms. Nothing in this Agreement
shall release any claim against a party that is not a Released Party.
8. GBCC will cause the opposition to the pending Motion of GBHC to Reject
the Management Agreement, which is returnable September 28, 1998 (the "Rejection
Motion"), to be withdrawn and will do so in a form reasonably satisfactory to
GBHC for presentation to the Court contemporaneously at the hearing on the
approval of this Agreement for the entry of an Order granting the Rejection
Motion effective September 28, 1998. The withdrawal of the opposition to the
Rejection Motion is without prejudice to NJMI to assert a damages claim (the
"Rejection Claim") and without prejudice to the Debtors to assert any defenses
they have to that rejection damages claim and, except as provided in paragraph
8a below, including a fraudulent conveyance claim. Notwithstanding the
foregoing, and as provided in paragraph 8a below, the fraudulent conveyance
claim may not be asserted against any member of the GBCC Group (other than NJMI
and PRT) and HCC. Without limiting the standing of NJMI to assert the Rejection
Claim, the Rejection Claim may only be brought by or on behalf, and, in either
case, only for the benefit of, the bondholders of PRT (the "Bondholders") or the
designees of the Bondholders provided, however, that, if the Rejection Claim is
successful, whether by reason of settlement or trial, there shall be no direct
or indirect distribution to or for the benefit of the Released Parties except
that PCC or NJMI could use any proceeds to pay the operating expenses of PCC or
NJMI incurred on or before any such recovery. Neither HCC and its Subsidiaries
nor GBCC and its Subsidiaries other than NJMI or PRT will provide financial
support for the prosecution of the Rejection Claim.
8a. Except with respect to NJMI and PRT, the Debtors will not assert and
hereby release claims arising under Chapter 5 of the Bankruptcy Code ("Avoidance
Actions/Claims") against HCC, GBCC, and their affiliates, including but not
limited to, PCC. With respect to NJMI and PRT, the Debtors additionally will
not assert Avoidance Actions/Claims against either of them or the PRT
Bondholders unless a Rejection Claim is filed within 30 days after Court
approval of this Agreement (the "Rejection Claims Bar Date"). If a Rejection
Claim is not timely filed, it shall be deemed released and waived with
prejudice, and, similarly, any Avoidance Actions/Claims of the Debtors
6
<PAGE>
against NJMI and PRT and the PRT Bondholders will be deemed released and waived
with prejudice simultaneously with the expiration of the Rejection Claim at the
Rejection Claim Bar Date. If a Rejection Claim is timely filed by the Rejection
Claim Bar Date, then the Debtors may assert Avoidance Actions/Claims against PRT
or NJMI or against any holder of the Rejection Damage Claim or the Subordinated
Notes (except for PCC with respect to the PCC Sub Note other than the offset
described in the next sentence), but may not seek to levy, collect upon or
otherwise recover from any intercompany balance, debt, receivable, note, or
other obligation owing to PRT or NJMI from PCC or any other nonDebtor affiliate
of GBCC or HCC. Notwithstanding the release of the Avoidance Actions/Claims as
to PCC described in this paragraph, the Debtors may, in the event a Rejection
Claim is timely filed by the Rejection Bar Date, defensively assert Avoidance
Actions/Claims as an offset to the PCC Sub Note, but the Debtors may not assert
Avoidance Actions/Claims affirmatively against any other assets of PCC. Pursuant
to this Agreement, PCC and all other affiliates of GBCC and HCC, other than NJMI
and PRT, are buying their peace with the Debtors and are fully released from all
claims by the Debtors or their estates.
9. Except as provided in paragraphs 8 or 8a of this Agreement, nothing in
this Agreement shall operate to prejudice the rights, if any, of the holders of
that certain Subordinated Promissory Note of GBHC in favor of PRT dated February
17, 1994 in the amount of $10,000,000 (the "PRT Sub Note") and that certain
Subordinated Promissory Note of GBHC in favor of PCC dated January 14, 1997 in
the amount of $5,000,000 (the "PCC Sub Note" and together with the PRT Sub Note,
the "Subordinated Notes"). All defenses, if any, the Debtors have to the
Subordinated Notes are preserved. The rights, if any, in the Subordinated Notes
are preserved for the benefit of the Bondholders in the PRT Restructuring and,
in the event of recovery on the Subordinated Notes, whether by reason of
settlement or trial, there will be no distribution to or for the benefit of the
nonDebtor Released Parties, provided that the holders of the Subordinated
Notes have standing to assert any claim on the Subordinated Notes for the
benefit of the Bondholders.
10. GBHC and HCC have already commenced the process of splitting off the
employees of GBHC from the HCC Employee 401K Retirement Savings Plan (the "401K
Plan") and will jointly cause the employees to become part of a separate 401K
Plan by January 1, 1999. Until that changeover, HCC will continue to administer
the 401K Plan and GBHC will continue to pay its allocated share of external
costs of administration in accordance with present practice.
11. This agreement is without prejudice to the proofs of claims filed by
HCC or GBCC or their Subsidiaries in the GBHC Chapter 11 Proceedings for goods,
services or royalty fees provided in the ordinary course of business to GBHC.
The only claims held by HCC, or any of the Defendants or any of their
Subsidiaries against any of the Debtors or the Debtors Subsidiaries as of the
date immediately prior to giving effect to this Agreement are set forth on
Exhibit A (the "Claims"). Except as provided herein, the defenses, offsets, and
counterclaims, if any, of GBHC to any such proofs of claims are also preserved
provided, however, that the counterclaims with respect to NJMI and PRT are
described in paragraphs 8 and 8a above and otherwise are limited to intercompany
accounts arising from the provision of goods or services by or on behalf of the
Debtors in the ordinary course of business to HCC or GBCC or their Subsidiaries.
HCC, the Defendants, and their Subsidiaries shall (a) not amend or increase any
of the Claims, (b) consent to the expungement of
7
<PAGE>
any of the Claims which are released pursuant to this Agreement, and (C) not
acquire or assert any claims against any of the Debtors or their Subsidiaries
which are not set forth on Exhibit A. Nothing in this paragraph 11 varies or
modifies the provisions of paragraphs 2, 3, 6, 8, 8a, or 9 above with respect to
the claims or defenses described therein. With respect to post petition
intercompany accounts between GBH and its Subsidiaries and HCC or its
Subsidiaries or GBCC or its Subsidiaries other than the Debtors, nothing in this
Agreement releases any person from any obligation for goods, services or
royalties provided by or on behalf of any other person in the ordinary course of
business.
12. Neither HCC nor any of the Defendants will make any application to
terminate the exclusivity period of the Debtors or to oppose any future
extension of the exclusivity period. Neither HCC nor GBCC will seek, request,
apply for or support directly or indirectly the appointment of a trustee or
examiner for any of the Debtors. HCC and GBCC will cause their Subsidiaries to
comply with the provisions of this paragraph.
13. Pending the hearing on the settlement on the Adversary Proceeding
represented by this Agreement, the Debtors agree to adjourn the date for
responsive pleadings in the Adversary Proceedings by the Defendants and, in the
event this settlement of the Adversary Proceeding is not approved by the Court,
agree that such responsive pleadings may be filed within five days after the
date of a decision by the Court rejecting the settlement of the Adversary
Proceeding. The dates by which GBHC may respond to the Gibbons DQ Motion, the
FK Motion, or any discovery served in this action is extended to the later of
the date otherwise required by the discovery rules or five days after the date
of a decision by the Court rejecting the settlement of the Adversary Proceeding.
14. The parties to this Agreement agree to cooperate with each other, and
to take all actions necessary, to confirm the transactions contemplated by this
Agreement.
15. Time is of the essence in the performance of this Agreement.
16. This Agreement may not be amended or modified in any respect except
with the written consent of the parties hereto, is binding upon the successors
and assigns of the parties and their successors in interest, and shall be
interpreted in accordance with New Jersey law without regard to the conflicts of
laws principles of New Jersey law.
17. This Agreement will be effective when executed by all of the parties
hereto and when approved by the Court. This Agreement may be executed in
counterparts by the parties and a
THE REMAINDER OF THIS PAGE LEFT INTENTIONALLY BLANK
8
<PAGE>
telecopied signature is as effective as an original.
ACCEPTED AND AGREED:
Greate Bay Casino Corporation
PHC Acquisition Corp.
BY:/s/ John C. Hull BY:/s/ William D. Pratt
---------------- --------------------
Lieber Check Cashing, LLC. Hollywood Casino Corporation
BY:/s/ Jack E. Pratt BY:/s/ Edward T. Pratt III
----------------- -------------------------
Jack E. Pratt, President of its
Members, PHC Properties, Inc. and
PHC Holdings, Inc.
Jack E. Pratt William D. Pratt
/s/ Jack E. Pratt /s/ William D. Pratt
--------------------------- -------------------------
Edward T. Pratt, Jr.
/s/ Edward T. Pratt Jr.
---------------------------
Greate Bay Hotel and Casino, Inc. GB Holdings, Inc.
BY:/s/ Timothy A. Ebling BY:/s/ Timothy A. Ebling
------------------------------- ---------------------
Timothy A. Ebling Timothy A. Ebling
Exec. VP Exec. VP
GB Property Funding Corp.
BY:/s/ Timothy A. Ebling
-------------------------------
Timothy A. Ebling
Exec. VP
9
<PAGE>
EXHIBIT "A" TO AGREEMENT
DATED SEPTEMBER 2, 1998
PROOFS OF CLAIM AND INTEREST FILED BY GBCC GROUP,
HCC AND AFFILIATES IN THE SANDS BANKRUPTCY
<TABLE>
<CAPTION>
Claimant Amount/1/ Explanation
- -------- -------- -----------
<S> <C> <C>
PCC $5,728,000.00 Based upon GBHC $5 Million Note, a.k.a. the "PCC
Sub Note"
PCC 1,279.58 On account of routine corporate expenses paid prepetition
on behalf of GB Holdings (claim is against GB Holdings)/2/
PCC N/A Proof of interest (as opposed to a proof of claim) to reflect
PCC's 100% ownership interest in GB Holdings, as evidenced by
that certain stock certificate dated October 27, 1993
reflecting PCC's ownership of 1000 shares of common stock.
PRT 12,754,375.00 Based upon GBHC $10 Million Note, a.k.a. the "PRT Sub Note"
GBCC 9,479,871.98 Based upon GBHC $8 Million Note, a.k.a. the "GBHC Demand
Note" (amount is net of certain prepetition payables owed to GBHC)/3/
</TABLE>
- ---------------------
/1/ Amounts include the respective claimants' computation of principal,
interest accrued as of the January 5, 1998 bankruptcy petition date with respect
to the Sands Group, charges and offsets, where applicable, all as set forth in
detail in the various proofs of claim.
/2/ All other proofs of claim listed herein, with the exception of this one
proof of claim filed by PCC against GB Holdings, are against GBHC. The proof of
interest described in the third line hereinabove is against GB Holdings.
/3/ This proof of claim is to be deemed withdrawn and/or released pursuant to
paragraph 2 of the Agreement.
1 of 2
<PAGE>
NJMI 128,899.60 On account of unpaid, prepetition management fees
for the 12/1/97 -1/4/98 time period (amount is net
of certain prepetition payables owed to GBHC).
NJMI will likely file an additional proof of claim
in respect of rejection damages, after the
September 28, 1998 rejection of the NJMI
Management Services Agreement, pursuant to
paragraph 7 of the Agreement.
ACSC 49,230.74 On account of various prepetition goods and
services provided (amount is net of certain
prepetition payables owed to GBHC)
PPI Corp. 22,467.09 On account of unpaid, prepetition royalty fees for
use of the "Sands" trademark for the 12/1/97 -
1/4/98 time period
HCC 3,360.30 On account of various prepetition services
provided (amount is net of certain prepetition
payables owed to GBHC)
HMI 19,253.35 On account of various prepetition services
provided (amount is net of certain prepetition
payables owed to GBHC)
2 of 2
<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> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998
<PERIOD-START> JUL-01-1998 JAN-01-1998
<PERIOD-END> SEP-30-1998 SEP-30-1998
<CASH> 13,371 13,371
<SECURITIES> 0 0
<RECEIVABLES> 411 411
<ALLOWANCES> 209 209
<INVENTORY> 94 94
<CURRENT-ASSETS> 15,425 15,425
<PP&E> 1,403 1,403
<DEPRECIATION> 1,061 1,061
<TOTAL-ASSETS> 21,280 21,280
<CURRENT-LIABILITIES> 105,277 105,277
<BONDS> 33,804 33,804
0 0
0 0
<COMMON> 519 519
<OTHER-SE> (118,830) (118,830)
<TOTAL-LIABILITY-AND-EQUITY> 21,280 21,280
<SALES> 0 0
<TOTAL-REVENUES> 1,556 6,187
<CGS> 0 0
<TOTAL-COSTS> 43 332
<OTHER-EXPENSES> (27,579) 31,090
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 3,809 11,529
<INCOME-PRETAX> 25,283 25,416
<INCOME-TAX> 56 101
<INCOME-CONTINUING> 25,227 25,315
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 25,227 25,315
<EPS-PRIMARY> 4.86 4.88
<EPS-DILUTED> 4.86 4.88
</TABLE>
