<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 JUNE 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 SANDS HOTEL & CASINO
INDIANA AVENUE & BRIGHTON PARK, 9TH FLOOR
ATLANTIC CITY, NEW JERSEY 08401
- ----------------------------------------- --------------
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) (609) 441-0704
--------------
(NOT APPLICABLE)
----------------
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
------ ------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
CLASS OUTSTANDING AT AUGUST 17, 1998
- ----------------------------------- ------------------------------------
Common Stock, $.10 par value 5,186,627 shares
1
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
PART I: FINANCIAL INFORMATION
INTRODUCTORY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Greate Bay Casino Corporation, a Delaware corporation, and its subsidiaries
("GBCC") are engaged in the operation and management of casino properties.
GBCC's principal operations consist of the Sands Hotel and Casino located in
Atlantic City, New Jersey (the "Sands") and management and consulting contracts
with gaming facilities located in Aurora, Illinois (the "Aurora Casino") and
Tunica County, Mississippi (the "Tunica Casino"). GBCC's common stock is listed
on the OTC Bulletin Board Service under the symbol "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 May 11, 1998, the Bankruptcy Court extended the exclusive
period of the debtors to file a plan of reorganization for 90 days and, as such,
the exclusivity period expired on August 10, 1998. On August 10, 1998, the
Bankruptcy Court granted an additional 90-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 approximately 98% of the $85,000,000 note issue. PRT
Funding has deferred payment of interest due April 15, 1998 pending the outcome
of such negotiations.
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 be in control of such subsidiaries after reorganization.
Accordingly, Holdings, GB Property Funding and GBHC are no longer included on
the accompanying consolidated balance sheets of GBCC and, effective for periods
subsequent to December 31, 1997, the operations of Holdings and its subsidiaries
are accounted for by GBCC under the equity method of accounting.
The consolidated financial statements as of June 30, 1998 and for the three
and six month periods ended June 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 June 30, 1998, the results of its operations for the three and six
month periods ended June 30, 1998 and 1997 and cash flows for the six month
periods ended June 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.
2
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (NOTE 1)
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
------------ -------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $10,171,000 $ 6,555,000
Accounts receivable, net of allowances
of $209,000 and $213,000, respectively 151,000 61,000
Inventories 116,000 164,000
Due from affiliates 1,304,000 723,000
Option payment 1,000,000 1,000,000
Refundable deposits and other
current assets 1,217,000 878,000
----------- -----------
Total current assets 13,959,000 9,381,000
----------- -----------
Investment in Limited Partnership 1,799,000 2,256,000
----------- -----------
Property and Equipment:
Land 864,000 864,000
Operating equipment 1,367,000 1,317,000
----------- -----------
2,231,000 2,181,000
Less - accumulated depreciation
and amortization (1,030,000) (971,000)
----------- -----------
Net property and equipment 1,201,000 1,210,000
----------- -----------
Other Assets:
Due from affiliates, net of valuation allowances 2,721,000 2,897,000
Other assets 9,000 8,000
----------- -----------
Total other assets 2,730,000 2,905,000
----------- -----------
$19,689,000 $15,752,000
=========== ===========
</TABLE>
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated balance sheets.
3
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (NOTE 1)
(UNAUDITED)
LIABILITIES AND SHAREHOLDERS' DEFICIT
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
------------- -------------
<S> <C> <C>
Current Liabilities:
Current maturities of long-term debt $ 85,057,000 $ 85,055,000
Borrowings from affiliate 12,422,000 12,422,000
Accounts payable 976,000 967,000
Accrued liabilities -
Salaries and wages 184,000 133,000
Interest 12,751,000 6,875,000
Insurance 109,000 128,000
Other 60,000 62,000
Other current liabilities 420,000 730,000
------------- -------------
Total current liabilities 111,979,000 106,372,000
------------- -------------
Investment in and Advances to GB Holdings, Inc. 17,236,000 20,996,000
------------- -------------
Long-Term Debt 33,159,000 30,894,000
------------- -------------
Other Noncurrent Liabilities 343,000 606,000
------------- -------------
Commitments and Contingencies
Shareholders' Deficit:
Common stock, $.10 par value per
share; 10,000,000 shares authorized;
5,186,627 shares issued and outstanding 519,000 519,000
Additional paid-in capital 75,212,000 75,212,000
Accumulated deficit (218,759,000) (218,847,000)
------------- -------------
Total shareholders' deficit (143,028,000) (143,116,000)
------------- -------------
$ 19,689,000 $ 15,752,000
============= =============
</TABLE>
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated balance sheets.
4
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (NOTE 1)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
-------------------------
1998 1997
----------- -----------
<S> <C> <C>
Revenues:
Casino $ - $61,823,000
Rooms - 2,455,000
Food and beverage - 8,457,000
Computer services 1,025,000 205,000
Other 1,124,000 1,425,000
----------- -----------
2,149,000 74,365,000
Less - promotional allowances - (6,201,000)
----------- -----------
Net revenues 2,149,000 68,164,000
----------- -----------
Expenses:
Casino - 51,396,000
Rooms - 671,000
Food and beverage - 2,881,000
Other 155,000 686,000
General and administrative 820,000 3,885,000
Depreciation and amortization 31,000 3,752,000
----------- -----------
Total expenses 1,006,000 63,271,000
----------- -----------
Income from operations 1,143,000 4,893,000
----------- -----------
Non-operating income (expenses):
Interest income 232,000 427,000
Interest expense (4,101,000) (9,445,000)
Equity in earnings of Limited Partnership 712,000 781,000
Equity in earnings of GB Holdings, Inc. 854,000 -
Restructuring costs (984,000) -
Gain on disposal of assets - 17,000
----------- -----------
Total non-operating expense, net (3,287,000) (8,220,000)
----------- -----------
Loss before income taxes and extraordinary item (2,144,000) (3,327,000)
Income tax provision (43,000) (35,000)
----------- -----------
Loss before extraordinary item (2,187,000) (3,362,000)
Gain on early extinguishment of debt - 310,000
----------- -----------
Net loss $(2,187,000) $(3,052,000)
=========== ===========
Basic and diluted net loss per common share:
Loss before extraordinary item $(.42) $(.65)
Extraordinary item - .06
----------- -----------
Basic and diluted net loss $(.42) $(.59)
=========== ===========
</TABLE>
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated statements.
5
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (NOTE 1)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
---------------------------
1998 1997
------------ -------------
<S> <C> <C>
Revenues:
Casino $ - $120,153,000
Rooms - 4,692,000
Food and beverage - 16,377,000
Computer services 2,024,000 518,000
Other 2,607,000 7,154,000
----------- ------------
4,631,000 148,894,000
Less - promotional allowances - (12,456,000)
----------- ------------
Net revenues 4,631,000 136,438,000
----------- ------------
Expenses:
Casino - 100,405,000
Rooms - 1,267,000
Food and beverage - 5,220,000
Other 289,000 1,297,000
General and administrative 1,741,000 8,383,000
Depreciation and amortization 59,000 7,719,000
----------- ------------
Total expenses 2,089,000 124,291,000
----------- ------------
Income from operations 2,542,000 12,147,000
----------- ------------
Non-operating income (expenses):
Interest income 470,000 654,000
Interest expense (8,190,000) (19,181,000)
Equity in earnings of Limited Partnership 2,632,000 781,000
Equity in earnings of GB Holdings, Inc. 3,723,000 -
Restructuring costs (1,044,000) -
Gain on disposal of assets - 24,000
----------- ------------
Total non-operating expense, net (2,409,000) (17,722,000)
----------- ------------
Income (loss) before income taxes and extraordinary item 133,000 (5,575,000)
Income tax provision (45,000) (210,000)
----------- ------------
Income (loss) before extraordinary item 88,000 (5,785,000)
Gain on early extinguishment of debt - 310,000
----------- ------------
Net income (loss) $ 88,000 $ (5,475,000)
=========== ============
Basic and diluted net income (loss) per common share:
Income (loss) before extraordinary item $ .02 $ (1.12)
Extraordinary item - .06
----------- ------------
Basic and diluted net income (loss) $ .02 $ (1.06)
=========== ============
</TABLE>
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated statements.
6
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (NOTE 1)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------------------------
1998 1997
------------ -----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ 88,000 $(5,475,000)
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 2,352,000 11,472,000
Gain on disposal of assets - (24,000)
Provision for doubtful accounts - 1,559,000
Equity in earnings of Limited Partnership (2,632,000) (781,000)
Distributions received from Limited Partnership 3,089,000 2,101,000
Equity in earnings of GB Holdings, Inc. (3,723,000) -
Deferred income tax benefit (6,000) -
Increase in accounts receivable (90,000) (292,000)
Increase (decrease) in accounts payable and
other accrued liabilities 5,915,000 (931,000)
Net change in other current assets and liabilities (1,132,000) (1,561,000)
Net change in other noncurrent assets and liabilities (466,000) (46,000)
----------- -----------
Net cash provided by operating activities 3,395,000 5,712,000
----------- -----------
INVESTING ACTIVITIES:
Purchases of property and equipment (50,000) (1,312,000)
Proceeds from disposal of assets - 24,000
Decrease in cash from sale of Limited Partnership - (451,000)
Collections on notes receivable 297,000 78,000
Obligatory investments - (1,333,000)
Short-term investments - 2,000,000
Distributions from unconsolidated affiliate - 500,000
----------- -----------
Net cash provided by (used in) investing activities 247,000 (494,000)
----------- -----------
FINANCING ACTIVITIES:
Repayments on credit facilities - (2,000,000)
Repayments of long-term debt (26,000) (2,243,000)
----------- -----------
Net cash used in financing activities (26,000) (4,243,000)
----------- -----------
Net increase in cash and cash equivalents 3,616,000 975,000
Cash and cash equivalents at beginning of period 6,555,000 22,991,000
----------- -----------
Cash and cash equivalents at end of period $10,171,000 $23,966,000
=========== ===========
</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
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, 1998, the
Bankruptcy Court extended the exclusive period of the debtors to file a plan of
reorganization for 90 days and, as such, the exclusivity period expired on
August 10, 1998. On August 10, 1998, the Bankruptcy Court granted an additional
90-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.
8
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
The accompanying consolidated financial statements include the operating
activities and cash flows of GBCC and its wholly owned subsidiaries. As a
result of the Chapter 11 filings discussed above, GBCC's control over the filing
subsidiaries is subject to supervision of the Bankruptcy Court and GBCC does not
expect to be in control of such subsidiaries after reorganization. Accordingly,
Holdings, GB Property Funding and GBHC are no longer included on the
accompanying consolidated balance sheets and, effective for periods subsequent
to December 31, 1997, the operations of Holdings and its subsidiaries are
accounted for under the equity method of accounting (see Note 8). GBCC's
negative investment in Holdings and its subsidiaries on the accompanying
consolidated balance sheets reflects GBCC's investment under the equity method
of accounting. All significant intercompany balances and transactions have been
eliminated. Investments in unconsolidated affiliates, including joint ventures,
that are 50% or less owned are accounted for by the equity method.
The accompanying consolidated financial statements have been prepared
assuming that GBCC will continue as a going concern. As discussed above,
certain affiliates of GBCC filed for Chapter 11 bankruptcy protection on January
5, 1998. The affiliate filings under Chapter 11 have resulted in a default
under the indenture for the PRT Funding Notes; accordingly, the outstanding
principal amount of the PRT Funding Notes has accelerated and is currently due
and payable. As a result of the Chapter 11 filings, GBHC filed a motion seeking
to reject the Sands' management contract with New Jersey Management, Inc.
("NJMI"), a GBCC subsidiary. Although a substitute agreement was entered into
by NJMI and GBHC, the fees paid to NJMI have been significantly reduced (see
Note 6). 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 three
bondholders who control approximately 98% of the note issue. PRT Funding has
deferred payment of interest due April 15, 1998 pending the outcome of such
negotiations. No assurance can be given that GBCC will be able to restructure
its obligations. The default under the indenture for the PRT Funding Notes
raises substantial doubt about GBCC's ability to continue as a going concern.
The consolidated financial statements do not include any adjustments that might
result from the outcome of these uncertainties.
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of"
requires, among other things, that an entity review its long-lived assets and
certain related intangibles for impairment whenever changes in circumstances
indicate that the carrying amount of an asset may not be fully recoverable. As
a result of its review, GBCC does not believe that any changes have occurred.
The Financial Accounting Standards Board has issued a new standard,
"Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 requires the
presentation and disclosure of comprehensive income, which is defined as the
change in a company's equity resulting from non-owner transactions and events.
SFAS 130 became effective December 15, 1997 and requires the restatement of all
prior periods presented. GBCC has adopted the provisions of SFAS 130; however,
the statement provides that an enterprise that has no items of other
comprehensive income for any period presented need only report net income. GBCC
has no such other comprehensive income items for any period presented;
accordingly, the presentation and disclosure requirements of SFAS 130 are not
applicable.
9
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
The consolidated financial statements as of June 30, 1998 and for the three
and six month periods ended June 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 June 30, 1998, and the results of its operations for the three and
six month periods ended June 30, 1998 and 1997 and cash flows for the six month
periods ended June 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 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 six month periods ended June 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 six
month periods ended June 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 June 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. 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 June 30, 1998 and December 31, 1997,
such advance, together with accrued interest in the amount of $4,446,000 and
$3,978,000, respectively, has been reflected as an adjustment to GBCC's negative
investment in Holdings on the accompanying consolidated balance sheets.
10
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(4) LONG-TERM DEBT AND PLEDGE OF ASSETS
Substantially all of GBCC's assets are pledged in connection with its long-
term indebtedness. On January 5, 1998, Holdings, GB Property Funding and GBHC
filed petitions for relief under Chapter 11 of the Bankruptcy Code. Each
company continues to operate in the ordinary course of business, as set forth in
the Bankruptcy Code, and each company's executive officers and directors remain
in office, subject to the jurisdiction of the Bankruptcy Court. On May 11,
1998, the Bankruptcy Court extended the exclusive period of the debtors to file
a plan of reorganization for 90 days and, as such, the exclusivity period
expired on August 10, 1998. On August 10, 1998, the Bankruptcy Court granted an
additional 90-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.
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
------------- -------------
<S> <C> <C>
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 $14,988,000 and $17,281,000,
respectively (b) 32,615,000 30,321,000
Other 601,000 628,000
------------ ------------
Total indebtedness 118,216,000 115,949,000
Less - current maturities (85,057,000) (85,055,000)
------------ ------------
Total long-term debt $ 33,159,000 $ 30,894,000
============ ============
</TABLE>
- ------------------
(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
11
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
Funding Notes were discounted to yield interest at the rate of 14 7/8% per
annum and had a face 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 June 30, 1998, exclusive of the
PRT Funding Notes which are currently in default and accelerated, are set forth
below:
<TABLE>
<CAPTION>
<S> <C>
1998 (six months) $ 29,000
1999 59,000
2008 64,000
2001 450,000
2002 -
Thereafter 47,602,000
-----------
Total $48,204,000
-----------
</TABLE>
Interest paid amounted to $21,000 and $15,175,000, respectively, during the
six month periods ended June 30, 1998 and 1997.
12
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(5) INCOME TAXES
Components of GBCC's provision for income taxes consist of the following:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- --------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Federal income tax (provision)
benefit:
Current $ 279,000 $ 4,525,000 $ 565,000 $ 5,424,000
Deferred (1,149,000) 5,000 (1,051,000) (92,000)
State income tax (provision)
benefit:
Current 27,000 (35,000) 431,000 (210,000)
Deferred 1,000 - 6,000 -
Valuation allowance 799,000 (4,530,000) 4,000 (5,332,000)
----------- ----------- ----------- -----------
$ (43,000) $ (35,000) $ (45,000) $ (210,000)
=========== =========== =========== ===========
</TABLE>
GBCC paid federal income taxes in the amount of $269,000 during the six
months ended June 30, 1998; no federal taxes were paid during the six month
period ended June 30, 1997. GBCC paid state income taxes totaling $110,000 and
$85,000 during the six month periods ended June 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 the use of the allowance method
rather than the direct write-off method for doubtful accounts and differences in
the timing of income earned and deductions taken between tax and financial
reporting purposes for deferred financing costs and other accruals.
At June 30, 1998, GBCC and its subsidiaries have tax net operating loss
carryforwards ("NOL's") totaling approximately $30 million for federal income
tax purposes, which do not begin to expire until the year 2005. Additionally,
GBCC and its subsidiaries have various tax credits available totaling
approximately $2.3 million, most of which expire by the year 2004. Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS
109") requires that the tax benefit of such NOL's, credit carryforwards and
deferred tax assets resulting from temporary differences be recorded as an asset
and, to the extent that management can not assess that the utilization of all or
a portion of such NOL's and deferred tax assets is more likely than not, a
valuation allowance should be recorded. Due to the continued availability of
NOL's originating in prior years and the tax loss sustained in 1998 to date,
management is unable to determine that realization of such asset is more likely
than not and, thus, has
13
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
provided a 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 to be utilized.
As described in Note 9, GBHC has filed an action to enjoin GBCC from using
the tax NOL's of GBHC. If GBCC and its subsidiaries are precluded from using
the NOL's and therefore are precluded from filing a consolidated federal income
tax return for 1997 and subsequent years, certain GBCC subsidiaries may owe
federal income taxes for 1997 and 1998 on a separate company basis. These
companies may not have the resources available to satisfy such tax liabilities
and, consequently, as a result of certain intercompany obligations, GBCC may be
forced to seek protection under Chapter 11 of the Bankruptcy Code.
GBCC has also been 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 may be necessary. Such revision could
significantly reduce the amount of NOL's available to GBCC and its subsidiaries
as of January 1, 1997 (approximately $66 million). The amount of such
reduction, if any, can not reasonably be estimated at this time.
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.
14
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
The components of the net deferred tax asset were as follows:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
------------- -------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 10,434,000 $ 9,388,000
Forgiveness of affiliate debt 9,438,000 9,438,000
Allowance for doubtful accounts 195,000 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 4,428,000 4,428,000
Equity losses of unconsolidated
subsidiaries and joint ventures 85,000 85,000
Other liabilities and accruals 255,000 298,000
Deferred financing costs 828,000 899,000
Other 11,000 12,000
------------ ------------
Deferred tax asset 28,283,000 28,281,000
Valuation allowance (28,277,000) (28,281,000)
------------ ------------
$ 6,000 $ -
============ ============
</TABLE>
(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 $113,000
and $229,000, respectively, during the three and six month periods ended June
30, 1998. Accrued interest
15
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
receivable of $36,000 and $41,000, respectively, is included in amounts due from
affiliates on the accompanying consolidated balance sheets at June 30, 1998 and
December 31, 1997.
Prior to May 1, 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. 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.
A substitute agreement (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 unless extended by mutual agreement, NJMI continues to provide certain
agreed upon services to GBHC at a monthly fee of $165,000 of which $122,000 will
be paid on a monthly basis in arrears and the remaining $43,000 will be deferred
and paid upon confirmation of GBHC's plan of reorganization by the Bankruptcy
Court.
Fees earned by NJMI under the management agreement and Interim Agreement
amounted to $744,000 and $1,910,000, respectively, during the three and six
month periods ended June 30, 1998. Management fees receivable from the Sands at
June 30, 1998 and December 31, 1997 amounted to $497,000 and $34,000,
respectively. Of the amount receivable at June 30, 1998, $145,000 is included
in noncurrent due from affiliates on the accompanying consolidated balance sheet
and is subject to terms of a reorganization plan which requires confirmation by
the Bankruptcy Court.
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 June 30, 1998 and
1997 and $600,000 for each of the six month periods ended June 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 $275,000 and $277,000,
respectively, during the three month periods ended June 30, 1998 and 1997 and
$571,000 and $963,000, respectively, for the six month periods ended June 30,
1998 and 1997. In connection with such charges, payables in the amount of
$80,000 and $156,000, respectively, are included in accounts payable on the
accompanying consolidated balance sheets at June 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
16
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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 June 30, 1998 and December 31, 1997 amounted to $282,000 and $78,000,
respectively. ACSC's billings for such services are set forth below:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ -------------------
1998 1997 1998 1997
--------- -------- --------- --------
<S> <C> <C> <C> <C>
GBHC $121,000 $158,000 $270,000 $297,000
HCC and its subsidiaries 358,000 157,000 662,000 324,000
</TABLE>
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 $253,000 and $521,000, respectively, during the three and six month periods
ended June 30, 1997.
Interest expense with respect to borrowings from HCC is set forth below:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- ----------------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------------
<S> <C> <C> <C> <C>
PPI Funding Notes held by HCC
(Note 4) $1,151,000 $1,772,000 $2,293,000 $3,753,000
Short-term borrowings (Note 3) 235,000 235,000 467,000 502,000
</TABLE>
During 1994, a GBCC subsidiary issued $40,524,000 discounted principal amount
of PPI Funding Notes in exchange for the PCPI Notes held by HCC (see Note 4).
Accretion of interest on the PPI Funding Notes is included in the outstanding
note payable balances at June 30, 1998 and December 31, 1997.
Interest accrued on short-term borrowings at June 30, 1998 and December 31,
1997 amounting to $1,306,000 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 $3,482,000 and $3,458,000, respectively,
have been reflected as an adjustment to
17
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
GBCC's negative investment in Holdings on the accompanying consolidated balance
sheets at June 30, 1998 and December 31, 1997.
During the third quarter of 1996, GBCC loaned $6,500,000 to GBHC for
working capital purposes. Such advance accrues interest at the rate of 13 3/4%
per annum, payable quarterly commencing October 1, 1996. An additional
$1,500,000 was loaned to GBHC during the first quarter of 1997 on the same
terms. Repayment of such advances and the payment of the related interest are
subject to terms of a reorganization plan which requires confirmation by the
Bankruptcy Court and to approval by the New Jersey Casino Control Commission.
Prior to December 31, 1997, such notes and the related interest were eliminated
in consolidation. For the same reasons cited in the previous paragraph, the
advances to GBHC of $8,000,000, together with the related interest receivable of
$1,509,000 and $1,496,000, respectively, have been reflected as an adjustment to
GBCC's negative investment in Holdings on the accompanying consolidated balance
sheets at June 30, 1998 and December 31, 1997.
(7) INVESTMENT IN PRATT MANAGEMENT, L.P.
Effective as of April 1, 1997, HCC acquired the general partnership
interest in PML (see Notes 1 and 6) from PPI Corporation. PML earns management
fees from the Aurora Casino and incurs operating and other expenses with respect
to its management thereof. The general partner receives 99% of the first $84,000
of net income earned by the partnership each month and 1% of any income earned
above such amount. PML earned management fees amounting to $1,279,000 and
$1,445,000, respectively, during the three month periods ended June 30, 1998 and
1997 and $3,825,000 and $4,172,000, respectively, during the six month periods
ended June 30, 1998 and 1997. PML also incurred operating and other expenses
amounting to $309,000 and $407,000, respectively, during the three month periods
ended June 30, 1998 and 1997 and $666,000 and $867,000, respectively, during the
six month periods ended June 30, 1998 and 1997.
18
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(8) EQUITY IN EARNINGS OF GB HOLDINGS, INC.
As discussed in Note 1, the operations of Holdings and its subsidiaries are
accounted for under the equity method of accounting for periods subsequent to
December 31, 1997. Due to the significance of Holdings' operations, summarized
consolidated results of operations of Holdings and its subsidiaries are set
forth below:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1998 JUNE 30, 1998
------------------- -----------------
<S> <C> <C>
Net revenues $58,453,000 $114,066,000
----------- ------------
Departmental expenses 50,214,000 95,499,000
General and administrative expenses 3,134,000 7,115,000
Depreciation and amortization 2,926,000 5,825,000
----------- ------------
Total operating expenses 56,274,000 108,439,000
----------- ------------
Income from operations 2,179,000 5,627,000
----------- ------------
Interest, net 405,000 899,000
Gain on disposal of assets - 28,000
----------- ------------
Total non-operating income 405,000 927,000
----------- ------------
Income before taxes and other item 2,584,000 6,554,000
Income tax provision - -
----------- ------------
Income before other items 2,584,000 6,554,000
Reorganization and other related costs (1,730,000) (2,831,000)
----------- ------------
Net income $ 854,000 $ 3,723,000
=========== ============
</TABLE>
(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 May 11, 1998, the Bankruptcy Court
extended the exclusive period of the debtors to file a plan of reorganization
for 90 days and, as such, the exclusivity period expired on August 10, 1998. On
August 10, 1998, the Bankruptcy Court granted an additional 90-day extension of
the exclusivity period.
19
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
As a result of the default and automatic acceleration under the indenture
for the PRT Funding Notes, the holders of the PRT Funding Notes could initiate
judicial proceedings to enforce their claims for payment; however, no such
proceedings have been initiated. PCC, as guarantor of the PRT Funding Notes, is
currently involved in negotiations to restructure the notes with three
bondholders who control approximately 98% 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. The
motion to reject the management agreement is scheduled for hearing on September
28, 1998.
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"), alleging, 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 seeks, 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 seeks to enjoin GBCC from
using the tax NOL's of GBHC (see Note 5). The Bankruptcy Court set a hearing
date of October 7, 1998 with the understanding that the land parcels will not be
transferred by the GBCC Parties prior to such hearing and reserved August 24,
1998 to consider an interim request for relief with respect to the NOL's unless
sooner resolved by the parties. The GBCC Parties believe that GBHC's claims are
without merit and intend to defend their position vigorously.
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
20
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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.
(10) RECLASSIFICATIONS
Certain reclassifications have been made to the prior year's consolidated
financial statements to conform to the 1998 consolidated financial statement
presentation.
21
<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 six month periods ended June 30, 1998 amounted to $318,000
and $715,000, respectively, increasing from negligible amounts during the
corresponding periods in 1997. Such increases have 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 has reserved its right to reject the agreement. A modified
agreement was entered into effective May 1, 1998 and expiring on September 28,
1998 unless extended by mutual agreement which reduces the monthly fee to
$165,000 compared to an average monthly fee of $532,000 during the same period
in 1997. 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
22
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
involved in negotiations to restructure the notes with three bondholders who
control approximately 98% of the note issue. PRT Funding has deferred payment of
interest due April 15, 1998 pending the outcome of such negotiations. There can
be no assurance at this time that such negotiations will result in restructuring
of its obligations.
As described in Note 9 in the accompanying Notes to Consolidated Financial
Statements, GBHC has filed an action to enjoin GBCC from using the tax NOL's of
GBHC. If GBCC and its subsidiaries are precluded from using the NOL's and
therefore are precluded from filing a consolidated federal income tax return for
1997 and subsequent years, certain GBCC subsidiaries may owe federal income
taxes for 1997 and 1998 on a separate company basis. These companies may not
have the resources available to satisfy such tax liabilities and, consequently,
as a result of certain intercompany obligations, GBCC may be forced to seek
protection under Chapter 11 of the Bankruptcy Code. Accordingly, there is
substantial doubt about the ability of GBCC to continue as a going concern.
Holdings and GBHC own the Sands Hotel and Casino in Atlantic City. Prior to
1996, the Sands' cash flow was sufficient to meet debt service obligations and
fund a substantial portion of annual capital expenditures. The Sands also used
short-term borrowings to fund seasonal cash needs for certain capital projects.
During 1996 and 1997, declines in operating cash flow at the Sands resulted in
the need for periodic financial assistance from PCC and GBCC in order to meet
debt service obligations. Substantial additional financial assistance would have
been required to make the January 15, 1998 principal and interest payments due
on the 10 7/8% First Mortgage Notes.
GBHC was unable to obtain additional borrowings from affiliates or other
sources and, accordingly, on January 5, 1998, Holdings, GB Property Funding and
GBHC filed petitions seeking protection under Chapter 11 of the Bankruptcy Code.
As a result of the filings, the Sands has sufficient cash flow to continue
normal operations while it seeks to develop a plan of reorganization for
submission to its creditors and the Bankruptcy Court. On May 11, 1998, the
Bankruptcy Court extended the exclusive period of the debtors to file a plan of
reorganization for 90 days and, as such, the exclusivity period expired on
August 10, 1998. On August 10, 1998, the Bankruptcy Court granted an additional
90-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.
23
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
FINANCING ACTIVITIES
During 1994, GBCC issued $40.5 million discounted principal amount of
deferred interest notes (the "PPI Funding Notes") to HCC in exchange for $38.8
million principal amount of 15 1/2% notes issued by another GBCC subsidiary and
held by HCC. Effective as of April 1, 1997, HCC acquired from PPI Corporation
the general partnership interest in the limited partnership which holds the
Aurora Management contract. The acquisition price for the general partnership
interest included a note in the amount of $3.8 million and the assignment of
$7.6 million discounted amount of the PPI Funding Notes to PPI Corporation.
Annual principal and interest payments by HCC on the $3.8 million note
approximate the general partner's share of annual partnership distributions
which are now being made to HCC. During 1997, HCC forgave $23.6 million
discounted principal amount of the PPI Funding Notes. 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.
CAPITAL EXPENDITURES AND OTHER INVESTMENTS
Property and equipment additions during the six month period ended June 30,
1998 totaled $50,000; management anticipates that capital expenditures during
the remainder of 1998, consisting only of ongoing equipment replacements and
enhancements, will not be significant.
RESULTS OF OPERATIONS
GENERAL
On January 5, 1998, Holdings, GB Property Funding, and GBHC filed petitions
for relief under Chapter 11 of the Bankruptcy Code in the Bankruptcy Court. As
a result of these filings, GBCC's control over the filing subsidiaries is
subject to the supervision of the Bankruptcy Court and GBCC does not expect to
be in control of such subsidiaries after reorganization. Accordingly, the
accompanying consolidated statements of operations for the three and six month
periods ended June 30, 1998 reflect the operations of the filing subsidiaries
under the equity method of accounting. For the three and six month periods
ended June 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
24
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
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 for the three and six month periods ended June 30, 1998 and for the
three month period ended June 30, 1997.
The following table sets forth GBCC's proforma results of operations for
the three and six month periods ended June 30, 1997, exclusive of Holdings and
its subsidiaries and PML ("the GBCC Group"), on a basis comparable to the 1998
presentations.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- ------------------ ------------- ---------------
1998 PROFORMA 1997 1998 PROFORMA 1997
------------------- ----------------- ------------ --------------
<S> <C> <C> <C> <C>
Revenues $ 2,149,000 $ 2,180,000 $ 4,631,000 $ 5,835,000
----------- ----------- ----------- -----------
Expenses:
General and administrative 820,000 729,000 1,741,000 1,454,000
Other operating expenses 155,000 70,000 289,000 152,000
Depreciation and
amortization 31,000 93,000 59,000 186,000
----------- ----------- ----------- -----------
Total expenses 1,006,000 892,000 2,089,000 1,792,000
----------- ----------- ----------- -----------
Income from operations 1,143,000 1,288,000 2,542,000 4,043,000
----------- ----------- ----------- -----------
Non-operating income (expenses):
Interest income 232,000 1,034,000 470,000 1,901,000
Interest expense (4,101,000) (4,679,000) (8,190,000) (9,566,000)
Equity in earnings of Limited
Partnership 712,000 781,000 2,632,000 3,048,000
Equity in earnings (losses) of
GB Holdings, Inc. 854,000 (1,441,000) 3,723,000 (4,702,000)
Restructuring costs (984,000) - (1,044,000) -
----------- ----------- ----------- -----------
Total non-operating expense,
net (3,287,000) (4,305,000) (2,409,000) (9,319,000)
----------- ----------- ----------- -----------
(Loss) income before income
taxes (2,144,000) (3,017,000) 133,000 (5,276,000)
Income tax provision (43,000) (35,000) (45,000) (199,000)
----------- ----------- ----------- -----------
Net (loss) income $(2,187,000) $(3,052,000) $ 88,000 $(5,475,000)
=========== =========== =========== ===========
</TABLE>
25
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
REVENUES
Revenues of the GBCC Group decreased $31,000 (1.4%) and $1.2 million
(20.6%), respectively, during the three and six month periods ended June 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 $820,000 and $1.5 million, respectively, during the three and six
month periods ended June 30, 1998 compared to the same periods of 1997. These
revenue increases were offset, however, by decreases of $92,000 and $1.9
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
$753,000 and $892,000, respectively, during the three and six month periods
ended June 30, 1998 compared to the 1997 periods. Such decreases are due to a
revised fee arrangement that provides 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.
GENERAL AND ADMINISTRATIVE EXPENSES
The GBCC Group's general and administrative expenses increased by $91,000
(12.5%) and $287,000 (19.7%), respectively, during the three and six month
periods ended June 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 increased by $85,000 (121.4%) and $137,000 (90.1%),
respectively, during the three and six month periods in 1998 compared to the
same periods in 1997 primarily as a result of additional costs associated with
ACSC's increased revenues. Such costs amounted to $152,000 and $282,000,
respectively, for the three and six month periods ended June 30, 1998 compared
to $79,000 and $192,000, respectively, for the same periods in 1997.
DEPRECIATION AND AMORTIZATION
The GBCC Group's depreciation and amortization expense decreased by $62,000
(66.7%) and $127,000 (68.3%), respectively, during the three and six month
periods ended June 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 $90,000
and $179,000 decreases in amortization expense, respectively, were partially
offset by $28,000 and $52,000 increases in depreciation expense, respectively,
due to an increase in ACSC's depreciable assets.
26
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
INTEREST
Interest income for the GBCC Group decreased $802,000 (77.6%) and $1.4
million (75.3%), respectively, during the three and six month periods ended June
30, 1998 compared to the same periods of 1997. All interest income earned by
the GBCC Group on loans and advances to Holdings and its subsidiaries for
periods subsequent to the January 5, 1998 bankruptcy filings is being reserved.
Interest expense declined $578,000 (12.4%) and $1.4 million (14.4%),
respectively, during the 1998 periods compared to the prior year primarily due
to HCC's forgiveness of $23.6 million discounted value of PPI Funding Notes at
December 31, 1997.
EQUITY IN EARNINGS OF LIMITED PARTNERSHIP
Effective February 17, 1994, PCC acquired the limited partnership interest
in PML, a limited partnership which earns management fees from the operation of
the Aurora Casino. The Agreement of Limited Partnership of PML provides for
distributions to PCC of 1% of the first $84,000 of net income earned by PML each
month and 99% of any net income earned above such amount, with all remaining
income distributed to the general partner. The GBCC Group's equity in the
earnings of PML decreased to $712,000 and $2.6 million, respectively, during the
three and six month periods ended June 30, 1998 compared to $781,000 and $3
million, respectively, earned during the same periods of 1997. Such decreases
reflect reduced management fees earned by PML due to a significant increase in
gaming taxes imposed on the Aurora Casino's operations. Management fees are
based, in part, on the operating results of the Aurora Casino.
EQUITY IN EARNINGS OF GB HOLDINGS, INC.
The GBCC Group's equity in the earnings of Holdings for the three and six
month periods ended June 30, 1998 amounted to $854,000 and $3.7 million,
respectively, compared to equity in losses of $1.4 million and $4.7 million,
respectively, for the same periods of 1997. The significant improvement in
earnings over the prior year period is primarily due to declines in interest
expense which have more than offset reductions in income from operations and
costs associated with the reorganization under Chapter 11.
The Sands experienced decreases in operating income of $1.4 million (39.6%)
and $168,000 (2.9%), respectively, during the 1998 periods compared to the 1997
periods. Such decreases reflect declines in net revenues of $9 million (13.4%)
and $16.6 million (12.7%), respectively, for the three and six month periods
partially offset by corresponding reductions in operating expenses of $7.6
million (11.9%) and $16.4 million (13.2%). 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. The declines in operating
expenses are attributable 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
27
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
filing amounted to $1.7 million and $2.8 million, respectively, during the three
and six month periods ended June 30, 1998.
Holdings' interest expense decreased by $5.8 million and $11.4 million,
respectively, during the 1998 three and six month periods compared to the
corresponding 1997 periods. As a result of the filing, the accrual of interest
expense on Holdings' debt obligations has been suspended. Had the contractual
interest expense ($5.8 million and $11.6 million, respectively) been accrued,
the GBCC Group would have reported equity in losses for the three and six month
periods ended June 30, 1998 amounting to $4.9 million and $7.6 million,
respectively.
RESTRUCTURING COSTS
The three and six month period increases result from $984,000 and $1
million, respectively, in 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 of June 30, 1998, GBCC and its subsidiaries have tax net operating loss
carryforwards ("NOL's") totaling approximately $30 million, which do not begin
to expire until the year 2005. Additionally, GBCC and its subsidiaries have
various tax credits available totaling approximately $2.3 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 deferred tax asset at June 30, 1998. The remaining deferred tax asset
represents state timing differences expected to be utilized.
As described in Note 9 in the accompanying Notes to Consolidated Financial
Statements, GBHC has filed an action to enjoin GBCC from using the tax NOL's of
GBHC. If an automatic stay or preliminary injunction is granted by the
Bankruptcy Court, GBCC and its subsidiaries could effectively be precluded from
filing a consolidated federal income tax return for 1997 and subsequent years.
Accordingly, certain GBCC subsidiaries may owe federal income taxes for 1997 and
1998 on a separate company basis. Such companies do not have the resources
available to satisfy such obligations and, consequently, GBCC may be forced to
seek protection under Chapter 11 of the Bankruptcy Code.
GBCC has also been 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 may be necessary. Such revision could
significantly reduce the amount of NOL's available to GBCC and its
28
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
subsidiaries as of January 1, 1997 (approximately $66 million). The amount of
such reduction, if any, can not reasonably be estimated at this time.
YEAR 2000 COMPLIANCE
Management believes that its information systems are Year 2000 compliant.
INFLATION
Management believes that in the near term, modest inflation, together with
increasing competition within the gaming industry for qualified and experienced
personnel, will continue to cause increases in operating expenses, particularly
labor and employee benefits costs at the Sands.
SEASONALITY
Historically, the Sands' operations have been highly seasonal in nature,
with the peak activity occurring from May to September. Consequently, the
results of GBCC's operations for the first and fourth quarters are traditionally
less profitable than the other quarters of the fiscal year. Furthermore, the
Aurora Casino has also experienced seasonality, but to a lesser degree than the
Sands, and, as a result, the management fees earned have fluctuated with such
seasonality. In addition, the Sands' and the Aurora Casino's operations may
fluctuate significantly due to a number of factors, including chance. Such
seasonality and fluctuations may materially affect GBCC's casino revenues and
profitability.
29
<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 May 11, 1998 the Bankruptcy Court
extended the exclusive period of the debtors to file a plan of reorganization
for 90 days and, as such, the exclusivity period expired on August 10, 1998. On
August 10, 1998, the Bankruptcy Court granted an additional 90-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 approximately 98% 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 unless extended by mutual agreement, NJMI
continues to provide certain agreed upon services to GBHC at a reduced monthly
fee. The motion to reject the management agreement is scheduled for hearing on
September 28, 1998.
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"), alleging, 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 seeks, 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 seeks to enjoin GBCC from
using the tax net operating loss carryforwards ("NOL's") of GBHC. The Bankruptcy
Court set a hearing date of October 7, 1998 with the understanding that the land
parcels will not be transferred by the GBCC Parties prior to such hearing and
reserved August 24, 1998 to consider an interim request for relief with respect
to the NOL's unless sooner resolved by the parties. The GBCC Parties believe
that GBHC's claims are without merit and intend to defend their position
vigorously.
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. 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 $21,667,000 as of August 17, 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. Interest due on such notes
amounts to $8,289,000 as of August 17, 1998.
30
<PAGE>
ITEM 6.(a) - EXHIBITS
*10.1 Agreement by and among GBHC, Holdings, GB Property Funding and Advanced
Casino Systems International, Inc. ("ACSI"), on the one hand, and GBCC,
NJMI, PCC, PRT Funding Corp., PPI Corporation, ACSC and HCC, on the
other, dated June 27, 1998. (Exhibit 10.1)
*10.2 Software License Agreement by and between ACSC, ACSI, Computer Management
Systems International, Inc. and GBHC dated June 27, 1998. (Exhibit 10.2)
_____________________
* Incorporated by reference from the exhibit shown in parenthesis filed in
PRT Funding's Quarterly Report on Form 10-Q for the quarter ended June
30, 1998.
ITEM 6.(b) - REPORTS ON FORM 8-K
The Registrants did not file any reports on Form 8-K during the quarter
ended June 30, 1998.
31
<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: August 17, 1998 By: /s/ John C. Hull
----------------- ---------------------------------
John C. Hull
Chief Executive Officer
32
<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 6-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998
<PERIOD-START> APR-01-1998 JAN-01-1998
<PERIOD-END> JUN-30-1998 JUN-30-1998
<CASH> 10,171 10,171
<SECURITIES> 0 0
<RECEIVABLES> 360 360
<ALLOWANCES> 209 209
<INVENTORY> 116 116
<CURRENT-ASSETS> 13,959 13,959
<PP&E> 2,231 2,231
<DEPRECIATION> 1,030 1,030
<TOTAL-ASSETS> 19,689 19,689
<CURRENT-LIABILITIES> 111,979 111,979
<BONDS> 33,159 33,159
0 0
0 0
<COMMON> 519 519
<OTHER-SE> (143,547) (143,547)
<TOTAL-LIABILITY-AND-EQUITY> 19,689 19,689
<SALES> 0 0
<TOTAL-REVENUES> 2,149 4,631
<CGS> 0 0
<TOTAL-COSTS> 155 289
<OTHER-EXPENSES> 269 (3,511)
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 3,869 7,720
<INCOME-PRETAX> (2,144) 133
<INCOME-TAX> 43 45
<INCOME-CONTINUING> (2,187) 88
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (2,187) 88
<EPS-PRIMARY> (.42) .02
<EPS-DILUTED> (.42) .02
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF GREATE BAY CASINO CORPORATION AND
SUBSIDIARIES AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<RESTATED>
<CIK> 0000030117
<NAME> GREATE BAY CASINO CORPORATION
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997 DEC-31-1997
<PERIOD-START> JAN-01-1998 APR-01-1997 JAN-01-1997
<PERIOD-END> MAR-31-1998 JUN-30-1997 JUN-30-1997
<CASH> 8,915 23,966 23,966
<SECURITIES> 0 0 0
<RECEIVABLES> 304 23,760 23,760
<ALLOWANCES> 220 14,521 14,521
<INVENTORY> 158 3,828 3,828
<CURRENT-ASSETS> 12,700 42,784 42,784
<PP&E> 2,211 320,112 320,112
<DEPRECIATION> 999 168,368 168,368
<TOTAL-ASSETS> 18,777 216,864 216,864
<CURRENT-LIABILITIES> 108,820 48,341 48,341
<BONDS> 32,022 316,243 316,243
0 0 0
0 0 0
<COMMON> 519 519 519
<OTHER-SE> (141,360) (152,177) (152,177)
<TOTAL-LIABILITY-AND-EQUITY> 18,777 216,864 216,864
<SALES> 0 0 0
<TOTAL-REVENUES> 2,482 68,164 136,438
<CGS> 0 0 0
<TOTAL-COSTS> 134 54,725 106,630
<OTHER-EXPENSES> (3,787) 6,839 15,297
<LOSS-PROVISION> 7 909 1,559
<INTEREST-EXPENSE> 3,851 9,018 18,527
<INCOME-PRETAX> 2,277 (3,327) (5,575)
<INCOME-TAX> 2 35 210
<INCOME-CONTINUING> 2,275 (3,362) (5,785)
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 310 310
<CHANGES> 0 0 0
<NET-INCOME> 2,275 (3,052) (5,475)
<EPS-PRIMARY> (.44) (.59) (1.06)
<EPS-DILUTED> (.44) (.59) (1.06)
</TABLE>
