<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, 1999
-----------------------------------------------
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 AUGUST 12, 1999
- ------------------------------------ ----------------------------------------
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 and provision of
services to casino properties. GBCC's current operating activities consist
primarily of development, installation and maintenance of casino systems by its
wholly owned subsidiary, Advanced Casino Systems Corporation ("ACSC"). Other
subsidiaries of GBCC own the Sands Hotel and Casino located in Atlantic City,
New Jersey (the "Sands") and hold management and consulting contracts with
gaming facilities located in Aurora, Illinois (the "Aurora Casino") and Tunica
County, Mississippi (the "Tunica Casino"). As explained below, these other
subsidiaries are currently in Chapter 11 proceedings and GBCC does not expect to
have ownership or operating control after reorganization. Accordingly, the
activities of the subsidiaries which own the Sands and hold the management
contracts with the Aurora and Tunica casinos are no longer included in the
operating results of GBCC. 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. On December 31, 1996, 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, GB Holdings, Inc. ("Holdings"), at the time a wholly
owned subsidiary of GBCC, together with Holdings' wholly owned subsidiaries,
Greate Bay Hotel and Casino, Inc. ("GBHC") and GB Property Funding Corp. ("GB
Property Funding"), filed petitions for relief under Chapter 11 of the United
States Bankruptcy Code (the "Bankruptcy Code") in the United States Bankruptcy
Court for the District of New Jersey (the "New Jersey 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 New Jersey Bankruptcy Court. On
January 11, 1999, the New Jersey Bankruptcy Court terminated the debtors'
exclusive right to file a plan of reorganization. On June 1, 1999, a plan of
reorganization was filed by the debtors with the New Jersey Bankruptcy Court.
The reorganization plan, as filed, provides for the secured bondholders to
receive new debt and equity ownership of Holdings in exchange for their current
claims and for unsecured creditors to receive a partial cash settlement of their
claims. The plan is presently under review by the creditors and the New Jersey
Bankruptcy Court. Effective on December 31, 1998, GBCC's ownership of Holdings
was reduced to 79%.
As a result of the Chapter 11 filings by Holdings, GB Property Funding and
GBHC, GBCC's control over the filing subsidiaries is subject to supervision of
the New Jersey 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 filings of petitions for relief by Holdings and its subsidiaries
resulted in a default under the indenture for $85 million principal amount of 11
5/8% senior notes due 2004 (the "PRT Funding Notes") issued by PRT Funding Corp.
("PRT Funding") and guaranteed by Pratt Casino Corporation ("PCC"), both wholly
owned, indirect subsidiaries of GBCC. Accordingly, the outstanding principal
amount of the PRT
2
<PAGE>
Funding Notes accelerated and became currently due and payable. PRT Funding
deferred payment of interest due on the April 15 and October 15, 1998 and April
15, 1999 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 continued. In connection
with the Restructuring (as defined below), PRT Funding paid deferred interest
amounting to $6.8 million to the bondholders on April 30, 1999.
On April 28, 1999, PCC, PRT Funding, New Jersey Management, Inc. ("NJMI", a
PCC subsidiary) GBCC, HCC and the holders of substantially all of the PRT
Funding Notes entered into a voting agreement which provides for the
restructuring of the PRT Funding Notes (the "Restructuring"). The agreement
provides for HCC to acquire the stock of PCC, the parent of PRT Funding, from
GBCC for nominal consideration. When acquired by HCC, PCC's assets will consist
of its limited partnership interest in a management contract for the Aurora
Casino and a consulting contract for the Tunica Casino and its liabilities will
consist of a newly issued promissory note in the principal amount of $40.3
million payable to the Trustee for the PRT Funding noteholders. The voting
agreement provides for HCC to immediately discharge the promissory note.
As part of the Restructuring, holders of the PRT Funding Notes will also
receive 100% of the remaining assets of PCC and its subsidiaries not acquired by
HCC. Such assets consist primarily of claims against Holdings, GB Property
Funding and GBHC in their Chapter 11 proceedings.
The successful completion of the Restructuring required that PCC, PRT
Funding and NJMI file for protection under Chapter 11 with the above
transactions included as part of a pre-negotiated plan of reorganization. Such
petitions for relief were filed on May 25, 1999 in the United States Bankruptcy
Court for the District of Delaware (the "Delaware Bankruptcy Court") and the
related plan of reorganization was filed on May 26, 1999. The plan will require
approval by the Delaware Bankruptcy Court as well as by various gaming
regulatory organizations. 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 Delaware Bankruptcy Court.
As a result of the Chapter 11 filings and plan of reorganization submitted
by PCC, PRT Funding and NJMI, GBCC's control over the filing subsidiaries is
subject to supervision of the Delaware Bankruptcy Court and GBCC does not expect
to have ownership or operating control of such subsidiaries after
reorganization. Accordingly, PCC, PRT Funding and NJMI are no longer included on
the accompanying consolidated balance sheets. As more fully explained in Note 1
of the Notes to Consolidated Financial Statements, GBCC's investment in PCC and
its subsidiaries as well as certain amounts due from PCC and its subsidiaries
were revalued to a zero basis effective on May 25, 1999. Accordingly, for
periods subsequent to May 25, 1999, GBCC is accounting for its investment in PCC
under the cost method of accounting.
The consolidated financial statements as of June 30, 1999 and for the three
and six month periods ended June 30, 1999 and 1998 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, 1999 and the results of its operations for the three and six
months periods ended June 30, 1999 and 1998 and its cash flows for the six month
periods ended June 30, 1999 and 1998.
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 1998 Annual Report on Form 10-K.
3
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
June 30,
1999 December 31,
(Unaudited) 1998
----------- -------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 5,372,000 $ 10,616,000
Accounts receivable 416,000 367,000
Inventories 621,000 378,000
Due from affiliates 1,187,000 1,303,000
Refundable deposits and other
current assets 527,000 938,000
----------- ------------
Total current assets 8,123,000 13,602,000
----------- ------------
Investment in Limited Partnership - 3,104,000
----------- ------------
Property and Equipment:
Operating equipment 747,000 1,564,000
Less - accumulated depreciation (349,000) (1,100,000)
----------- ------------
Net property and equipment 398,000 464,000
----------- ------------
Other Assets:
Due from affiliates, net of valuation allowances 2,289,000 2,767,000
Other assets - 9,000
----------- ------------
Total other assets 2,289,000 2,776,000
----------- ------------
$10,810,000 $ 19,946,000
=========== ============
</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 BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' DEFICIT
<TABLE>
<CAPTION>
June 30,
1999 December 31,
(Unaudited) 1998
------------- -------------
<S> <C> <C>
Current Liabilities:
Current maturities of long-term debt $ - $ 85,000,000
Borrowings from affiliate 6,750,000 6,750,000
Accounts payable 1,089,000 2,232,000
Accrued liabilities -
Salaries and wages 206,000 235,000
Interest 2,248,000 8,780,000
Other 131,000 239,000
Other current liabilities 245,000 296,000
------------- -------------
Total current liabilities 10,669,000 103,532,000
------------- -------------
Long-Term Debt 37,647,000 35,040,000
------------- -------------
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 (113,237,000) (194,357,000)
------------- -------------
Total shareholders' deficit (37,506,000) (118,626,000)
------------- -------------
$ 10,810,000 $ 19,946,000
============= =============
</TABLE>
The accompanying introductory notes and notes to consolidated financial
statement are an integral part of these consolidated balance sheets.
5
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
--------------------------
1999 1998
----------- -----------
<S> <C> <C>
Revenues:
Computer services $ 1,708,000 $ 1,025,000
Management and consulting fees 177,000 1,073,000
Other - 51,000
----------- -----------
Total revenues 1,885,000 2,149,000
----------- -----------
Expenses:
Computer services 899,000 152,000
General and administrative 1,400,000 823,000
Depreciation and amortization 45,000 31,000
----------- -----------
Total expenses 2,344,000 1,006,000
----------- -----------
(Loss) income from operations (459,000) 1,143,000
----------- -----------
Non-operating income (expense):
Interest income 176,000 232,000
Interest expense (3,046,000) (4,101,000)
Gain on elimination of investment in Pratt Casino
Corporation 85,989,000 -
Equity in earnings of Limited Partnership 638,000 712,000
Equity in earnings of GB Holdings, Inc. - 854,000
Restructuring costs (148,000) (984,000)
----------- -----------
Total non-operating income (expense), net 83,609,000 (3,287,000)
----------- -----------
Income (loss) before income taxes 83,150,000 (2,144,000)
Income tax benefit (provision) 6,000 (43,000)
----------- -----------
Net income (loss) $83,156,000 $(2,187,000)
=========== ===========
Basic and diluted net income (loss) per common share $ 16.03 $ (.42)
=========== ===========
</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 OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-----------------------------
1999 1998
------------ -----------
<S> <C> <C>
Revenues:
Computer services $ 3,611,000 $ 2,024,000
Management and consulting fees 477,000 2,539,000
Other - 68,000
------------ -----------
Total revenues 4,088,000 4,631,000
------------ -----------
Expenses:
Computer services 1,915,000 282,000
General and administrative 2,718,000 1,748,000
Depreciation and amortization 89,000 59,000
------------ -----------
Total expenses 4,722,000 2,089,000
------------ -----------
(Loss) income from operations (634,000) 2,542,000
------------ -----------
Non-operating income (expense):
Interest income 388,000 470,000
Interest expense (7,026,000) (8,190,000)
Gain on elimination of investment in Pratt Casino
Corporation 85,989,000
Equity in earnings of Limited Partnership 2,660,000 2,632,000
Equity in earnings of GB Holdings, Inc. - 3,723,000
Restructuring costs (230,000) (1,044,000)
------------ -----------
Total non-operating income (expense), net 81,781,000 (2,409,000)
------------ -----------
Income before income taxes 81,147,000 133,000
Income tax provision (27,000) (45,000)
------------ -----------
Net income $ 81,120,000 $ 88,000
============ ===========
Basic and diluted net income per common share $ 15.64 $ .02
============ ===========
</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
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------------------
1999 1998
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 81,120,000 $ 88,000
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation and amortization, including
accretion of debt discount 2,696,000 2,352,000
Gain on elimination of investment in Pratt Casino
Corporation (85,989,000) -
Equity in earnings of Limited Partnership (2,660,000) (2,632,000)
Distributions received from Limited Partnership 4,038,000 3,089,000
Equity in earnings of GB Holdings, Inc. - (3,723,000)
Deferred income tax provision (benefit) 2,000 (6,000)
Increase in accounts receivable (49,000) (90,000)
(Decrease) increase in accounts payable and
other accrued liabilities (3,765,000) 5,915,000
Net change in other current assets and liabilities (160,000) (1,132,000)
Net change in other noncurrent assets and liabilities 63,000 (466,000)
------------ ------------
Net cash (used in) provided by operating activities (4,704,000) 3,395,000
------------ ------------
INVESTING ACTIVITIES:
Purchases of property and equipment (23,000) (50,000)
Deconsolidation of Pratt Casino Corporation cash and cash
equivalents (868,000) -
Collections on notes receivable 351,000 297,000
------------ ------------
Net cash (used in) provided by investing activities (540,000) 247,000
------------ ------------
FINANCING ACTIVITIES:
Repayments of long-term debt - (26,000)
------------ ------------
Net cash used in financing activities - (26,000)
------------ ------------
Net (decrease) increase in cash and cash equivalents (5,244,000) 3,616,000
Cash and cash equivalents at beginning of period 10,616,000 6,555,000
------------ ------------
Cash and cash equivalents at end of period $ 5,372,000 $ 10,171,000
============ ============
</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 and provision of
services to casino properties. GBCC's current operating activities consist
primarily of development, installation and maintenance of casino systems by its
wholly owned subsidiary, Advanced Casino Systems Corporation ("ACSC"). Other
subsidiaries of GBCC own the Sands Hotel and Casino located in Atlantic City,
New Jersey (the "Sands") and hold management and consulting contracts with
gaming facilities located in Aurora, Illinois (the "Aurora Casino") and Tunica
County, Mississippi (the "Tunica Casino") (see Note 6). As explained below,
these other subsidiaries are currently in Chapter 11 proceedings and GBCC does
not expect to have ownership or operating control after reorganization.
Accordingly, as further described below, the activities of the subsidiaries
which own the Sands and hold the management contracts with the Aurora and Tunica
casinos will no longer be included in the operating results of GBCC.
On December 31, 1996, Hollywood Casino Corporation ("HCC"), owner of
approximately 80% of the outstanding common stock of GBCC, distributed such
stock to its shareholders. As a result, approximately 36% of GBCC's outstanding
stock is owned by Jack E. Pratt, Edward T. Pratt, Jr. and William D. Pratt and
by certain general partnerships and trusts controlled by the Pratts 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 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 through its wholly
owned subsidiary, Pratt Casino Corporation ("PCC"), was presented under the
equity method of accounting for periods prior to May 25, 1999 (see Note 7). As
explained below, the operating results of PCC for periods subsequent to May 25,
1999 are no longer included in the consolidated results of operations of GBCC.
On January 5, 1998, GB Holdings, Inc. ("Holdings"), at that time a wholly
owned subsidiary of GBCC, together with Holdings' 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 "New Jersey 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 New Jersey Bankruptcy Court. On
January 11, 1999, the New Jersey Bankruptcy Court terminated the debtors'
exclusive right to file a plan of reorganization. On June 1, 1999, a plan of
reorganization was filed by the debtors with the New Jersey Bankruptcy Court.
The reorganization plan, as filed, provides for the secured bondholders to
receive new debt and equity ownership of Holdings in exchange for their current
claims and for unsecured creditors to receive a partial cash settlement of their
claims. The plan is presently under review by the creditors and the New Jersey
Bankruptcy Court. Effective on December 31, 1998, GBCC's ownership of Holdings
was reduced to 79% (see Note 9).
As a result of the Chapter 11 filings, GBCC's control over the filing
subsidiaries is subject to supervision of the New Jersey Bankruptcy Court and
GBCC does not expect to have ownership or
9
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
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 New Jersey 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 during September 1998 (see Note 9), 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. 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 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 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 resulted in 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. ("PRT Funding"), an indirect,
wholly owned subsidiary of GBCC. Accordingly, the outstanding principal amount
of the PRT Funding Notes accelerated and became currently due and payable. PCC,
as guarantor of the PRT Funding Notes, does not have sufficient assets to
satisfy the outstanding amounts applicable to the PRT Funding Notes. PRT
Funding deferred payment of interest due on the April 15 and October 15, 1998
and April 15, 1999 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 PRT Funding Notes continued.
In connection with the Restructuring (as defined below) PRT Funding paid
deferred interest amounting to $6,768,000 to the bondholders on April 30, 1999.
On April 28, 1999, PCC, PRT Funding, NJMI, GBCC, HCC and the holders of
substantially all of the PRT Funding Notes entered into a voting agreement which
provides for the restructuring of the PRT Funding Notes (the "Restructuring").
The agreement provides for HCC to acquire the stock of PCC, the parent of PRT
Funding, from GBCC for nominal consideration. When acquired by HCC, PCC's
assets will consist of its limited partnership interest in a management contract
for the Aurora Casino and a consulting contract for the Tunica Casino and its
liabilities will consist of a newly issued promissory note in the principal
amount of $40,329,000 payable to the Trustee for the PRT Funding noteholders.
The voting agreement provides for HCC to immediately discharge the promissory
note.
10
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
As part of the Restructuring, holders of the PRT Funding Notes will also
receive 100% of the remaining assets of PCC and its subsidiaries not acquired by
HCC. Such assets consist primarily of claims against Holdings, GB Property
Funding and GBHC in their Chapter 11 proceedings.
The successful completion of the Restructuring required that PCC, PRT
Funding and NJMI file for protection under Chapter 11 with the above
transactions included as part of a pre-negotiated plan of reorganization. Such
petitions for relief were filed on a May 25, 1999 in the United States
Bankruptcy Court for the District of Delaware (the "Delaware Bankruptcy Court")
and the related plan of reorganization was filed on May 26, 1999. The plan will
require approval by the Delaware Bankruptcy Court as well as by various gaming
regulatory organizations. 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 Delaware Bankruptcy Court. There can be no assurance at this time that
the Restructuring will be successfully completed.
As a result of the Chapter 11 filings and plan of reorganization submitted
by PCC, PRT Funding and NJMI, GBCC's control over the filing subsidiaries is
subject to supervision of the Delaware Bankruptcy Court and GBCC does not expect
to have ownership or operating control of such subsidiaries after
reorganization. Accordingly, PCC, PRT Funding and NJMI are no longer included on
the accompanying consolidated balance sheets. GBCC's investment in PCC and its
subsidiaries as well as certain amounts due from PCC and its subsidiaries were
revalued to a zero basis effective on May 25, 1999. Accordingly, for periods
subsequent to May 25, 1999, GBCC is accounting for its investment in PCC under
the cost method of accounting.
After consummation of the Restructuring, GBCC's only significant remaining
operating activity will be the development, installation and maintenance of
casino systems by ACSC. GBCC and its subsidiaries will continue to have debt
outstanding to HCC consisting of (i) demand notes and accrued interest thereon
totaling $8,996,000 at June 30, 1999 (see Notes 3 and 6) and (ii) a 14 7/8%
secured promissory note due 2006 in the amount of $37,647,000 at June 30, 1999
(see Note 4). The current level of ACSC's operations is not sufficient to
provide debt service on the HCC obligations and, consequently, GBCC will be
insolvent after the Restructuring. GBCC has commenced discussions with HCC to
restructure its obligations; however, there can be no assurance at this time
that such discussions will result in a restructuring of GBCC's obligations with
HCC.
The insolvency of GBCC raises substantial doubt about its 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.
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.
11
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
In June 1998, the FASB issued a new statement, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"), which has been amended to be
effective for fiscal years beginning after June 15, 2000. SFAS 133 requires,
among other things, that derivatives be recorded on the balance sheet at fair
value. Changes in the fair value of derivatives may, depending on
circumstances, be recognized in earnings or deferred as a component of
shareholders' equity until a hedged transaction occurs. GBCC does not believe
the adoption of SFAS 133 will have a significant impact on its financial
position or results of operations.
The consolidated financial statements as of June 30, 1999 and for the three
and six month periods ended June 30, 1999 and 1998 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, 1999, the results of its operations for the three and six
month periods ended June 30, 1999 and 1998 and its cash flows for the six month
periods ended June 30, 1999 and 1998.
(2) Net Income (loss) per common share -
Basic earnings per common share is calculated by dividing the 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 potential common shares
outstanding. All potential common shares 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, 1999 and 1998,
there were no potential common shares outstanding and 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, 1999
and 1998.
(3) Borrowings from Affiliates
GBCC and its subsidiaries had outstanding affiliate borrowings from HCC of
$6,750,000 as of both June 30, 1999 and December 31, 1998. 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.
12
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(4) Long-term Debt And Pledge Of Assets
The January 5, 1998 filings for relief under Chapter 11 of the Bankruptcy
Code by Holdings, GB Property Funding and GBHC (see Note 1) constitute a default
under the indenture for the PRT Funding Notes. Accordingly, the outstanding
principal amount of the PRT Funding Notes accelerated, was currently due and
payable and was classified as current on the accompanying consolidated balance
sheet at December 31, 1998. On May 25, 1999, PRT Funding, PCC and NJMI filed
petitions for relief under Chapter 11 of the Bankruptcy Code. As discussed in
Note 1, these subsidiaries are no longer included in the consolidated financial
statements of GBCC after May 25, 1999.
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
------------ ------------
<S> <C> <C>
11 5/8% senior notes, due 2004 (a) $ - $ 85,000,000
14 7/8% secured promissory note, due 2006, net of
discount of $9,956,000 and $12,563,000,
respectively (b) 37,647,000 35,040,000
----------- ------------
Total indebtedness 37,647,000 120,040,000
Less - current maturities - 85,000,000
----------- ------------
Total long-term debt $37,647,000 $ 35,040,000
=========== ============
</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
currently in default and will be replaced by a new note to be issued by PCC
as part of the Restructuring (see Note 1).
(b) On February 17, 1994, PPI Funding Corp., a 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., another 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 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 (see Note 6). 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
13
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
$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
during 1997. 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, 1999 are $47,603,000 in
2006.
Interest paid amounted to $6,768,000 and $21,000, respectively, during the
six month periods ended June 30, 1999 and 1998.
(5) Income Taxes
GBCC's benefit (provision) for income taxes consists of the following:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
1999 1998 1999 1998
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Federal income tax (provision)
benefit:
Current $ - $ - $ (25,000) $(270,000)
Deferred (285,000) (870,000) 92,000 (216,000)
State income tax (provision)
benefit:
Current 2,000 (44,000) - (52,000)
Deferred (803,000) 72,000 (642,000) 489,000
Valuation allowance 1,092,000 799,000 548,000 4,000
---------- --------- --------- ---------
$ 6,000 $ (43,000) $ (27,000) $ (45,000)
========== ========= ========= =========
</TABLE>
GBCC paid federal income taxes totaling $25,000 and $270,000 during the six
month periods ended June 30, 1999 and 1998, respectively. GBCC paid no state
income taxes during the six month period ended June 30, 1999; GBCC paid state
income taxes totaling $103,000 and $110,000, respectively, during the six month
periods ended June 30, 1999 and 1998.
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 taxes are computed based on
the expected future tax effects of differences between the financial statement
and tax bases of assets and liabilities, using enacted tax rates. Deferred
income taxes result primarily from differences in the bases of investments in
subsidiaries and in outstanding obligations between financial and federal tax
reporting
14
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Unaudited)
purposes and from the use of the allowance method rather than the direct write-
off method for doubtful accounts.
As a result of the distribution of GBCC's stock by HCC to its shareholders at
December 31, 1996, GBCC is no longer included in HCC's consolidated federal
income tax return. In addition, as a result of a settlement agreement entered
into in September 1998 (see Note 9), Holdings and its subsidiaries are no longer
included in the consolidated tax return of GBCC for periods subsequent to
December 31, 1998. As of June 30, 1999, GBCC and its subsidiaries, exclusive of
Holdings and its subsidiaries, have net operating loss carryforwards ("NOL's")
totaling approximately $38,600,000 for federal income tax purposes, most of
which do not begin to expire until the year 2005. Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"),
requires that the tax benefit of such NOL's and deferred tax assets resulting
from temporary differences be recorded as an asset and, to the extent that
management can not assess that the utilization of such asset is more likely than
not, a valuation allowance should be recorded. Due to the continued
availability of NOL's originating in prior years and uncertainties regarding
GBCC's ability to continue as a going concern, management is unable to determine
that realization of such asset is more likely than not and, thus, has provided
valuation allowances for substantially all of the deferred tax assets for all
periods presented. The remaining deferred tax assets represent state timing
differences expected to be utilized and are included in other current assets on
the accompanying consolidated balance sheets.
The components of the net deferred tax asset are as follows:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
------------- -------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 14,106,000 $ 11,946,000
Allowance for doubtful accounts 84,000 130,000
Investment and other tax credits - 2,339,000
Investment in consolidated subsidiary 2,866,000 2,866,000
Other liabilities and accruals 110,000 113,000
Deferred financing costs 1,441,000 1,374,000
Other 267,000 242,000
------------ ------------
Deferred tax asset 18,874,000 19,010,000
Deferred tax liability -
Interest expense not recognized (414,000) -
------------ ------------
Net deferred tax asset 18,460,000 19,010,000
Valuation allowance (18,413,000) (18,961,000)
------------ ------------
$ 47,000 $ 49,000
============ ============
</TABLE>
15
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Unaudited)
Sales or purchases of GBCC common stock by certain five percent
stockholders, as defined in the Internal Revenue Code of 1986, as amended (the
"Code"), can cause a "change of control", as defined in Section 382 of the Code,
which would limit the ability of GBCC to utilize these loss carryforwards in
later tax periods. Should such a change of control occur, the amount of annual
loss carryforwards available for use would most likely be substantially reduced.
Future treasury regulations, administrative rulings or court decisions may also
effect GBCC's future utilization of its loss carryforwards.
Management believes that there will not be a material adverse effect on the
consolidated results of operations or financial position of GBCC as a result of
income tax implications resulting from the successful completion of the
Restructuring.
The Internal Revenue Service is currently examining the consolidated
federal income tax returns of HCC for the years 1993 through 1996 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.
(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 (see Note 7). 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, a
wholly owned subsidiary of GBCC.
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. The remaining note balances at June 30, 1999 and December
31, 1998 are $2,484,000 and $2,836,000, respectively. Of those balances,
$695,000 and $622,000 are included in current amounts due from affiliates at
June 30 1999 and December 31, 1998, respectively. Interest income on the note
from HCC amounted to $89,000 and $113,000, respectively, during the three month
periods ended June 30, 1999 and 1998 and $183,000 and $229,000, respectively,
during the six month periods ended June 30, 1999 and 1998. Accrued interest
receivable of $29,000 and $34,000, respectively, is included in amounts due from
affiliates on the accompanying consolidated balance sheets at June 30, 1999 and
December 31, 1998.
16
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Unaudited)
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 was
deferred and is to 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 and, with the passage of
time, the cancellation thereof.
Fees earned by NJMI under the management agreement and Interim Agreement
amounted to $744,000 and $1,910,000, respectively, for the three and six month
periods ended June 30, 1998. Management fees receivable from the Sands at
December 31, 1998 amounted to $267,000 net of a valuation allowance of $115,000.
Of the amount receivable at December 31, 1998, $30,000, net of the
aforementioned valuation allowance, 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 (see Note 9).
Pursuant to a consulting agreement which expires in December 2003 with
Hollywood Casino -Tunica, Inc. ("HCT"), the HCC subsidiary which owns and
operates the Tunica Casino, a subsidiary of GBCC receives monthly consulting
fees of $100,000. Total fees earned amounted to $177,000 and $300,000,
respectively, for the three month periods ended June 30, 1999 and 1998 and
$477,000 and $600,000, respectively, for the six month periods ended June 30,
1999 and 1998. Fees during 1999 are included in the accompanying consolidated
results of operations of GBCC through the deconsolidation of PCC on May 25,
1999.
HCC and its subsidiaries allocate certain general and administrative costs to
GBCC and its subsidiaries pursuant to services agreements. Net allocated costs
and fees charged to GBCC and its subsidiaries by HCC and its subsidiaries
amounted to $152,000 and $259,000, respectively, during the three month periods
ended June 30, 1999 and 1998 and $309,000 and $546,000, respectively, during the
six month periods ended June 30, 1999 and 1998. Net amounts due to HCC and its
subsidiaries amounted to $45,000 and $172,000 at June 30, 1999 and December 31,
1998, respectively.
ACSC provides computer, marketing and other administrative services to HCC
and its subsidiaries and to GBHC. 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
17
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Unaudited)
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. ACSC's billings to HCC and its subsidiaries for such services
amounted to $291,000 and $352,000, respectively, for the three month periods
ended June 30, 1999 and 1998 and $580,000 and $649,000, respectively, for the
six month periods ended June 30, 1999 and 1998. Unpaid charges to HCC and its
subsidiaries included in due from affiliates on the accompanying consolidated
balance sheets at June 30, 1999 and December 31, 1998 amounted to $155,000 and
$122,000, respectively. Billings to GBHC amounted to $232,000 and $122,000,
respectively, for the three month periods ended June 30, 1999 and 1998 and
$464,000 and $270,000, respectively, for the six month periods ended June 30,
1999 and 1998. Unpaid charges to GBHC included in due from affiliates on the
accompanying consolidated balance sheets at June 30, 1999 and December 31, 1998
amounted to $266,000 and $251,000, respectively. Such receivables from GBHC
were partially offset by amounts due to GBHC by ACSC totaling $159,000 and
$242,000, respectively, at June 30, 1999 and December 31, 1998.
Interest expense with respect to borrowings from HCC is set forth below:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- ----------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
PPI Funding Notes (Note 4) $1,328,000 $1,151,000 $2,606,000 $2,293,000
Short-term borrowings (Note 3) 235,000 235,000 467,000 467,000
</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, 1999 and December 31, 1998.
Interest accrued on short-term borrowings (see Note 3) amounting to
$2,248,000 and $1,781,000, respectively, at June 30, 1999 and December 31, 1998
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 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. 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 in the amount of $5,672,000 against the $10,000,000
and $5,000,000 loans described above. 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
18
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Unaudited)
with accrued interest of $6,200,000 and $5,652,000, respectively, are fully
reserved on the accompanying consolidated balance sheet at December 31, 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 New
Jersey Bankruptcy Court and to approval by the New Jersey Casino Control
Commission (the "Casino Commission"). For the same reasons cited in the previous
paragraph, the total 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 at 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.
PML earns management fees from the Aurora Casino and incurs operating and
other expenses with respect to its management thereof. PCC, as the limited
partner in PML received 1% of the first $84,000 of net income earned by the
partnership each month and 99% of any income earned above such amount. PML
earned management fees amounting to $1,612,000 and $1,279,000, respectively,
during the three month periods ended June 30, 1999 and 1998 and $4,212,000 and
$3,825,000, respectively, during the six month periods ended June 30, 1999 and
1998. PML also incurred operating and other expenses amounting to $284,000 and
$309,000, respectively, during the three month periods ended June 30, 1999 and
1998 and $591,000 and $666,000, respectively, during the six month periods ended
June 30, 1999 and 1998.
(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
19
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Unaudited)
to the significance of Holdings' operations, summarized consolidated results of
operations of Holdings for the three and six month periods ended June 30, 1998
are set forth below. Transactions with Holdings and its subsidiaries are
included in Note 6.
<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 New Jersey Bankruptcy Court. On January 11, 1999, the
New Jersey Bankruptcy Court terminated the debtors' exclusive right to file a
plan of reorganization. On June 1, 1999, a plan of reorganization was filed by
the debtors with the New Jersey Bankruptcy Court. The reorganization plan, as
filed, provides for the secured bondholders to receive new debt and equity
ownership of Holdings in exchange for their current claims and for unsecured
creditors to receive a partial cash settlement of their claims. The plan is
presently under review by the creditors and the New Jersey Bankruptcy Court.
The filings of petitions for relief by Holdings and its subsidiaries
resulted in a default and automatic acceleration under the indenture for the PRT
Funding Notes. On April 28, 1999, PCC, PRT Funding,
20
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Unaudited)
NJMI, GBCC, HCC and the holders of substantially all of the PRT Funding Notes
entered into a voting agreement with HCC which provides for the Restructuring of
the PRT Funding Notes. The agreement provides for HCC to acquire the stock of
PCC, the parent of PRT Funding, from GBCC for nominal consideration. When
acquired by HCC, PCC's assets will consist of its limited partnership interest
in a management contract for the Aurora Casino and a consulting contract for the
Tunica Casino and its liabilities will consist of a newly issued promissory note
in the principal amount of $40,329,000 payable to the Trustee for the PRT
Funding noteholders. The voting agreement provides for HCC to immediately
discharge the promissory note.
As part of the Restructuring, holders of the PRT Funding Notes will also
receive 100% of the remaining assets of PCC and its subsidiaries not acquired by
HCC. Such assets consist primarily of claims against Holdings, GB Property
Funding and GBHC in their Chapter 11 proceedings.
The successful completion of the Restructuring required that PCC, PRT Funding
and NJMI file for protection under Chapter 11 with the above transactions
included as part of a pre-negotiated plan of reorganization. Such petitions for
relief were filed on May 25, 1999 in the Delaware Bankruptcy Court and the plan
of reorganization was filed on May 26, 1999. The plan will require approval by
the Delaware Bankruptcy Court as well as by various gaming regulatory
organizations. 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
Delaware Bankruptcy Court.
On May 22, 1998, GBHC filed a motion with the New Jersey Bankruptcy Court
seeking to reject the management agreement with NJMI (see Note 6). The Interim
Agreement was entered into and approved by the New Jersey Bankruptcy Court on
July 7, 1998 and the motion to reject the management agreement was approved by
the New Jersey 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 and, with the passage of time, the cancellation thereof.
On July 27, 1998, GBHC filed an action in the New Jersey 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 New Jersey Bankruptcy Court. The terms of the settlement
agreement provided, among other things, (i) that the GBCC Parties convey the
land parcels and related mortgage note to GBHC in exchange for a cash payment
equal to the GBCC Parties' cost in such land parcels with an additional $500,000
payment
21
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Unaudited)
due upon confirmation of a plan of reorganization by the New Jersey 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. Such transfer was accomplished effective as of December
31, 1998. 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 (see Note 6) against a claim asserted by GBHC against
GBCC under the existing tax allocation agreements.
GBCC licenses the "Sands" name under a license agreement dated as of May 19,
1987, which rights are sublicensed to GBHC. The license agreement has a term of
99 years and requires a royalty payment of the greater of 1.5% of gross room
charges, as defined in the agreement, payable monthly, or $100,000 per calendar
year. The license agreement may be terminated by either party in the event of a
material breach, bankruptcy, suspension of normal business operations or certain
other actions by the other party. GBCC intends to terminate the license
agreement as a result of the licensor's suspension of normal business operations
evidenced by the destruction of the Sands Hotel and Casino in Las Vegas in 1996.
Pursuant to the terms of the sublicense agreement, termination of the license
agreement results in automatic termination of the sublicense agreement. GBCC
filed a motion with the New Jersey Bankruptcy Court to allow GBCC's termination
of the license agreement and the resulting termination of the sublicense
agreement; the New Jersey Bankruptcy Court denied such motion. As a result,
GBCC may not be able to terminate the license agreement, although the New Jersey
Bankruptcy Court may, at some future time, allow GBCC to do so. If unable to
terminate the license agreement, GBCC may remain liable for future royalty
payments. GBCC filed an appeal to the decision of the New Jersey Bankruptcy
Court on March 10, 1999; such appeal was denied on June 10, 1999. GBCC has filed
an appeal of such decision.
On April 22, 1999, GBHC filed a motion with the New Jersey Bankruptcy Court
seeking to disallow NJMI's pre-petition claims (see Note 6). The motion to
disallow is currently scheduled to be heard by the New Jersey Bankruptcy Court
in September 1999.
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.
22
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(Unaudited)
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.
Trial before a magistrate judge commenced on July 19, 1999 and concluded on
July 26, 1999. The judge has not yet issued a ruling and has provided no
definitive date by which such a ruling will be issued. 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 have defended their
position and pursued 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 -
On October 8, 1998, GBCC and HCC filed a complaint in the District Court of
Dallas County, Texas against Arthur Andersen LLP, GBCC and HCC's former
independent accountants, and selected 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. The lawsuit is
currently in the discovery stage.
(10) Reclassifications
Certain reclassifications have been made to the prior year's consolidated
financial statements to conform to the 1999 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, results of operations, cash flows, 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 (the "PCC Group") and
(iii) Holdings and GBHC.
GBCC, PPI Corporation and their direct subsidiaries have provided management
personnel for GBCC's non-casino operations. ACSC, a subsidiary of PPI
Corporation, licenses casino information technology systems to HCC's casino
facilities, the Sands and non-affiliated casino companies. As a result of
GBCC's exit from non-casino hotel operations, ACSC's operations have become the
most significant source of liquidity for GBCC, PPI Corporation and their direct
subsidiaries. The results of ACSC's operations for the three and six month
periods ended June 30, 1999 and 1998 are set forth below:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- -----------------------
1999 1998 1999 1998
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Computer service revenues $1,708,000 $1,025,000 $3,611,000 $2,024,000
---------- ---------- ---------- ----------
Computer service expenses 899,000 152,000 1,915,000 282,000
General and administrative 991,000 524,000 1,877,000 968,000
Depreciation and amortization 45,000 31,000 89,000 59,000
---------- ---------- ---------- ----------
1,935,000 707,000 3,881,000 1,309,000
---------- ---------- ---------- ----------
(Loss) income from operations $ (227,000) $ 318,000 $ (270,000) $ 715,000
========== ========== ========== ==========
</TABLE>
The decreases in operating income in the 1999 periods from the same periods
in 1998 are due to increased salaries and relatively fixed overhead costs
associated with ACSC's sales of information technology products to unaffiliated
third parties (see "Results of Operations" below).
24
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Prior to 1998, cash flow from management and consulting services provided by
the PCC Group, specifically the limited partnership interest in PML held by PCC,
the Tunica Consulting Contract and the Sands Management Contract, were
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 motion to reject the management
agreement was approved by the New Jersey Bankruptcy Court on September 28, 1998.
As a consequence of the September 1998 settlement agreement (see Note 9 of 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 and, with the passage of time, 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. PRT Funding deferred payment of interest due on the April 15 and
October 15, 1998 and April 15, 1999 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 PRT
Funding Notes continued. In connection with the Restructuring, PRT Funding paid
deferred interest amounting to $6.8 million to the bondholders on April 30,
1999.
On April 28, 1999, PCC, PRT Funding, NJMI, GBCC, HCC and the holders of
substantially all of the PRT Funding Notes entered into a voting agreement which
provides for the Restructuring of the PRT Funding Notes. The agreement provides
for HCC to acquire the stock of PCC, the parent of PRT Funding, from GBCC for
nominal consideration. When acquired by HCC, PCC's assets will consist of its
limited partnership interest in a management contract for the Aurora Casino and
a consulting contract for the Tunica Casino and its liabilities will consist of
a newly issued promissory note in the principal amount of $40.3 million payable
to the Trustee for the PRT Funding noteholders. The voting agreement provides
for HCC to immediately discharge the promissory note.
As part of the Restructuring, holders of the PRT Funding Notes would also
receive 100% of the beneficial interest in a liquidating trust which would hold
the remaining assets (except for the stock of Holdings) of PCC and its
subsidiaries not acquired by HCC. Such assets would consist primarily of claims
against Holdings, GB Property Funding and GBHC in their Chapter 11 proceedings.
The successful completion of the Restructuring required that PCC, PRT Funding
and NJMI file for protection under Chapter 11 with the above transactions
included as part of a pre-negotiated plan of reorganization. Such petitions for
relief were filed on May 25, 1999 in the Delaware Bankruptcy Court and the plan
of reorganization was filed on May 26, 1999. The plan will require approval by
the Delaware Bankruptcy Court as well as by various gaming regulatory
organizations. There can be no assurance at this time that the Restructuring
will be successfully completed.
25
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Assuming consummation of the Restructuring, GBCC's only significant remaining
operating activity will be the development, installation and maintenance of
casino systems by ACSC. GBCC and its subsidiaries will continue to have debt
outstanding to HCC consisting of (i) demand notes (the "GBCC Notes") and accrued
interest thereon totaling approximately $9 million at June 30, 1999 and (ii) a
14 7/8% secured promissory note due 2006 (the "PPI Funding Notes") in the amount
of approximately $37.6 million at June 30, 1999 (see "Financing Activities"
below). The current level of ACSC's operations is not sufficient to provide
debt service on the HCC obligations and, consequently, GBCC will be insolvent
after the Restructuring. GBCC has commenced discussions with HCC to restructure
its obligations; however, there can be no assurance at this time that such
discussions will result in a restructuring of GBCC's obligations with HCC.
The insolvency of GBCC raises substantial doubt about its 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.
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 these 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 New Jersey Bankruptcy Court. On January 11,
1999, the New Jersey Bankruptcy Court terminated the debtors' exclusive right to
file a plan of reorganization. The reorganization plan, as filed, provides for
the secured bondholders to receive new debt and equity ownership of Holdings in
exchange for their current claims and for unsecured creditors to receive a
partial cash settlement of their claims. The plan is presently under review by
the creditors and the New Jersey Bankruptcy Court. On June 1, 1999, a plan of
reorganization was filed by the debtors. Capital expenditures, other than
normal recurring capital expenditures in the ordinary course of business, will
require prior approval of the New Jersey Bankruptcy Court. The New Jersey
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 will be accepted by its creditors or the New
Jersey Bankruptcy Court. In any event, it is not anticipated that GBCC 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.
26
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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 PML, 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.
6 million. 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 (the "GBCC Notes"). 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 New Jersey Bankruptcy Court on
September 2, 1998.
As previously described, GBCC has commenced discussions with HCC to
restructure its obligations; however, there can be no assurance at this time
that such discussions will result in a restructuring of GBCC's obligations with
HCC.
Capital Expenditures and Other Investments
Property and equipment additions during the six month period ended June 30,
1999 totaled $23,000; management anticipates that capital expenditures during
the remainder of 1999, consisting only of ongoing equipment replacements and
enhancements at ACSC, will not be significant.
RESULTS OF OPERATIONS
General
As a result of the filings by Holdings, GB Property Funding, and GBHC, GBCC's
control over the filing subsidiaries is subject to the supervision of the New
Jersey Bankruptcy Court. GBCC does not expect to have ownership or operating
control of such subsidiaries after reorganizations. Accordingly, the
accompanying consolidated statement 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, 1999, however, the accompanying consolidated statements of operations
reflect the operations of Holdings and its subsidiaries under the cost method of
accounting.
As a result of the filings by PCC, NJMI and PRT Funding, GBCC's control
over these subsidiaries is subject to the supervision of the Delaware Bankruptcy
Court and GBCC does not expect to have ownership or control of such subsidiaries
after reorganization. Accordingly, the accompanying
27
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
consolidated statements of operations for periods subsequent to the filings (May
25, 1999) reflect the operations of PCC and its subsidiaries under the cost
method of accounting.
Revenues
Total revenues of GBCC declined $264,000 (12.3%) and $543,000 (11.7%),
respectively, during the three and six month periods ended June 30, 1999
compared to the prior year periods. Computer services revenues provided by ACSC,
a GBCC subsidiary that provides computer hardware and software to the gaming
industry, increased $683,000 (66.6%) and $1.6 million (78.4%), respectively,
during the three and six month periods ended June 30, 1999 compared to the same
periods of 1998. Such increases result from a significant installation contract
for ACSC's slot monitoring system. The increased revenues provided by ACSC were
more than offset on a consolidated basis, however, by the termination of the
Sands Management Contract in September 1998 which generated management fees of
$744,000 and $1.9 million, respectively, during the second quarter and first
half of 1998. In addition, as a result of the deconsolidation of PCC, fees
earned from a consulting contract with the Tunica Casino are not being
recognized for periods subsequent to the May 25, 1999 Chapter 11 filing by PCC .
Such fees for the corresponding periods during 1998 amounted to $123,000.
Computer Services Expenses
Computer services expenses increased $747,000 (491.4%) and $1.6 million
(579.1%), respectively, during the three and six month periods ended June 30,
1999 compared to the corresponding periods during 1998. Such increases are
primarily attributable to increased hardware purchases and commissions
associated with the aforementioned system installation contract.
General and Administrative Expenses
GBCC's general and administrative expenses increased by $577,000 and
(70.1%) and $970,000 (55.5%), respectively, during the three and six month
periods ended June 30, 1999 compared to the 1998 periods. The increases are
primarily due to increases in salaries, overhead costs and professional fees
incurred in connection with ACSC's increased efforts to market its information
technology products to unaffiliated third parties.
Depreciation and Amortization
Depreciation and amortization expense for the three and six month periods
ended June 30, 1999 increased by $14,000 (45.2%) and $30,000 (50.8%),
respectively, compared to the same periods of 1998 due to an expansion of office
space by ACSC.
Interest
Interest income decreased $56,000 (24.1%) and $82,000 (17.4%),
respectively, during the second quarter and first half of 1999 compared to the
same periods during 1998. All interest income earned by GBCC on loans and
advances to Holdings and its subsidiaries for periods subsequent to the January
5, 1998 bankruptcy filings is being reserved. Interest expense decreased $1.1
million (25.7%) and $1.2 million (14.2%), respectively, during the 1999 three
and six month periods ended June 30 compared to the
28
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
corresponding prior year periods. Interest expense with respect to the PRT
Funding Notes subsequent to PRT Funding's filing under Chapter 11 ($988,000) is
no longer included in GBCC's consolidated results of operations.
Gain on Elimination of Investment in Pratt Casino Corporation
As a result of the filing of petitions for relief under Chapter 11 by PCC,
NJMI and PRT Funding on May 25, 1999, GBCC does not expect to have ownership or
operating control of these subsidiaries after reorganization. Accordingly, these
subsidiaries are no longer included in the consolidated financial statements of
GBCC for any period subsequent to May 25, 1999. GBCC's investment in PCC and its
subsidiaries as well as certain amounts due from PCC and its subsidiaries were
revalued to a zero basis effective on May 25, 1999. The elimination of the
investment in and amounts due from PCC resulted in a gain amounting to $86
million for the three and six month periods ended June 30, 1999.
Equity in Earnings of Limited Partnership
Effective February 17, 1994, PCC acquired the limited partnership interest
in PML, a limited partnership which earns management fees from the operation of
the Aurora Casino. The Agreement of Limited Partnership of PML provides for
distributions to PCC of 1% of the first $84,000 of net income earned by PML each
month and 99% of any net income earned above such amount, with all remaining
income distributed to the general partner. PCC's equity in the earnings of PML
decreased $74,000 (10.4%) during the second quarter of 1999 from the same period
in 1998 bringing the six month earnings in line with those of the prior year
period. Increased management fees earned by PML during 1999 due to improved
operating results at the Aurora Casino were offset in the second quarter of 1999
as PCC's equity in the earnings of PML subsequent to May 25, 1999 ($430,000) is
no longer included in GBCC's consolidated results of operations.
Equity in Earnings of GB Holdings, Inc.
GBCC'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.
As a result of GBCC no longer controlling the operations of the Sands, the
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
intercompany balances with Holdings were revalued to a zero basis effective July
1, 1998. Accordingly, GBCC is no longer recognizing equity in the earnings of
Holdings and its subsidiaries.
Restructuring Costs
Restructuring costs decreased $836,000 (85%) and $814,000 (78%),
respectively, during the three and six month periods ended June 30, 1999
compared to the same periods of 1998. Professional fees and other corporate
overhead costs incurred with respect to the default of the PRT Funding Notes and
negotiations to restructure the obligations amounted to $984,000 during the
second quarter of 1998. Such costs declined to $148,000 in the corresponding
three month period of 1999 reflecting the Restructuring as set forth in the
voting agreement and plan of reorganization.
29
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Income Tax PRovision
As a result of a settlement agreement entered into in September 1998 (see
Note 9 of Notes to Consolidated Financial Statements), Holdings and its
subsidiaries are no longer included in the consolidated tax return of GBCC for
periods subsequent to December 31, 1998. Due to the continued availability of
NOL's originating in prior years and uncertainties regarding GBCC's ability to
continue as a going concern, management is unable to determine that realization
of deferred tax assets resulting from NOL's and temporary differences is more
likely than not. Accordingly, under the provisions of Statement of Financial
Accounting Standards No. 19, "Accounting for Income Taxes", GBCC has provided
valuation allowances for substantially all of the deferred tax assets at June
30, 1999 and December 31, 1998. The remaining deferred tax assets represent
state timing differences expected to be utilized.
On July 27, 1998 GBHC filed an action in the New Jersey 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.
Such transfer was accomplished effective as of December 31, 1998.
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.
30
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Inflation
Management believes that in the near term, modest inflation, together with
competition for qualified and experienced personnel, will continue to cause
increases in operating expenses, particularly labor and employee benefits costs.
Seasonality and Other Fluctuations
The Aurora Casino experiences some seasonality due to severe winter
weather, and, as a result, management fees earned by GBCC have fluctuated with
such seasonality. In addition, the Aurora Casino's operations may fluctuate due
to a number of factors, including chance. Such seasonality and fluctuations may
materially affect GBCC's results of operations.
31
<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 New Jersey Bankruptcy Court. On January 11, 1999 the New
Jersey Bankruptcy Court terminated the debtors' exclusive right to file a plan
of reorganization. On June 1, 1999, a reorganization plan was filed by the
debtors with the New Jersey Bankruptcy Court. The reorganization plan, as filed,
provides for the secured bondholders to receive new debt and equity ownership of
Holdings in exchange for their current claims and for unsecured creditors to
receive a partial cash settlement of their claims. The plan is presently under
review by the creditors and the New Jersey Bankruptcy Court.
The default under the GB Property Funding Notes resulted in an automatic
acceleration under the indenture for the PRT Funding Notes; accordingly, the
holders of the PRT Funding Notes could have initiated judicial proceedings to
enforce their claims for payment. On April 28, 1999, PCC, PRT Funding, NJMI,
GBCC, HCC and the holders of substantially all of the PRT Funding Notes entered
into a voting agreement which provides for the Restructuring of the PRT Funding
Notes. The agreement provides for HCC to acquire the stock of PCC, the parent of
PRT Funding, from GBCC for nominal consideration. When acquired by HCC, PCC's
assets will consist of its limited partnership interest in a management contract
for the Aurora Casino and a consulting contract for the Tunica Casino and its
liabilities will consist of a newly issued promissory note in the principal
amount of $40,329,000 payable to the Trustee for the PRT Funding noteholders.
The voting agreement provides for HCC to immediately discharge the promissory
note.
As part of the Restructuring, holders of the PRT Funding Notes will also
receive 100% of the remaining assets of PCC and its subsidiaries not acquired by
HCC. Such assets consist primarily of claims against Holdings, GB Property
Funding and GBHC in their Chapter 11 proceedings.
The successful completion of the Restructuring required that PCC, PRT
Funding and NJMI file for protection under Chapter 11 with the above
transactions included as part of a pre-negotiated plan of reorganization. Such
petitions for relief were filed on May 25, 1999 in the Delaware Bankruptcy Court
and the related plan of reorganization was filed on May 26, 1999. The plan will
require approval by the Delaware Bankruptcy Court as well as by the various
gaming regulatory organizations. 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 Delaware Bankruptcy Court.
GBCC licenses the "Sands" name under a license agreement dated as of May
19, 1987, which rights are sublicensed to GBHC. The license agreement has a term
of 99 years and requires a royalty payment of the greater of 1.5% of gross room
charges, as defined in the agreement, payable monthly, or $100,000 per calendar
year. The license agreement may be terminated by either party in the event of a
material breach, bankruptcy, suspension of normal business operations or certain
other actions by the other party. GBCC intends to terminate the license
agreement as a result of the licensor's suspension of normal business operations
evidenced by the destruction of the Sands Hotel and Casino in Las Vegas in 1996.
Pursuant to the terms of the sublicense agreement, termination of the license
agreement results in automatic termination of the sublicense agreement. GBCC
filed a motion with the New Jersey Bankruptcy Court to allow GBCC's termination
of the license agreement and the resulting termination of the sublicense
agreement; the New Jersey Bankruptcy Court denied such motion. As a result, GBCC
may not be able to terminate the license agreement, although the New Jersey
Bankruptcy Court may, at some future time, allow GBCC
32
<PAGE>
to do so. If unable to terminate the license agreement, GBCC may remain liable
for future royalty payments. GBCC filed an appeal to the decision of the New
Jersey Bankruptcy Court on March 10, 1999; such appeal was denied on
June 10, 1999. GBCC has filed an appeal of such decision.
On April 22, 1999, GBHC filed a motion with the New Jersey Bankruptcy Court
seeking to disallow NJMI's pre-petition claims. The motion to disallow is
currently scheduled to be heard by the New Jersey Bankruptcy Court on September
1999.
GBCC and certain of its affiliates are currently in litigation with Planet
Hollywood International, Inc. and others with respect to claims and
counterclaims involving the use of trademarks, service marks and trade dress.
Trial before a magistrate judge commenced on July 19, 1999 and concluded on July
26, 1999. The judge has not yet issued a ruling and has provided no definitive
date by which such a ruling will be issued.
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 and July
15, 1998 and on January 15, 1999 were not made. Under an order of the New Jersey
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 August 12, 1999, $400,000 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 approximately $41,400,000 as of August 12, 1999.
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 continued. In
connection with the Restructuring, PRT Funding paid deferred interest amounting
to $6,768,000 to the bondholders on April 30, 1999. On May 25, 1999, PRT Funding
Corp., PCC and NJMI filed petitions for relief under Chapter 11 of the
Bankruptcy Code and a plan of reorganization was filed on May 26, 1999. Interest
due on the Unsecured Senior Notes, exclusive of compound interest on amounts in
arrears, amounts to $6,378,000 as of August 12, 1999.
33
<PAGE>
Item 6.(a) - Exhibits
*99.1 Debtors' First Amended Joint Plan of Reorganization dated June 21, 1999,
as modified July 7, 1999, of PCC, PRT Funding and NJMI.
*99.2 Debtors' First Amended Joint Disclosure Statement Under 11 U.S.C.
(S)1125, as modified July 7, 1999, in Support of the Debtors' First
Amended Joint Plan of Reorganization dated June 21, 1999, as modified
July 7, 1999.
__________________________
* Incorporated by reference from the same numbered exhibit included in PCC
and PRT Funding's Form 10-Q for the quarter ended June 30, 1999.
Item 6.(b) - Reports on Form 8-K
The Registrant did not file any reports on Form 8-K during the quarter
ended June 30, 1999.
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: August 12, 1999 By: /s/ John C. Hull
------------------- ---------------------------
John C. Hull
Chief Executive Officer
35
<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-31-1999 DEC-31-1999
<PERIOD-START> APR-01-1999 JAN-01-1999
<PERIOD-END> JUN-30-1999 JUN-30-1999
<CASH> 5,372 5,372
<SECURITIES> 0 0
<RECEIVABLES> 416 416
<ALLOWANCES> 0 0
<INVENTORY> 621 621
<CURRENT-ASSETS> 8,123 8,123
<PP&E> 747 747
<DEPRECIATION> 349 349
<TOTAL-ASSETS> 10,810 10,810
<CURRENT-LIABILITIES> 10,669 10,669
<BONDS> 37,647 37,647
0 0
0 0
<COMMON> 519 519
<OTHER-SE> (38,025) (38,025)
<TOTAL-LIABILITY-AND-EQUITY> 10,810 10,810
<SALES> 0 0
<TOTAL-REVENUES> 1,885 4,088
<CGS> 0 0
<TOTAL-COSTS> 899 1,915
<OTHER-EXPENSES> (85,034) (85,612)
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 2,870 6,638
<INCOME-PRETAX> 83,150 81,147
<INCOME-TAX> (6) 27
<INCOME-CONTINUING> 83,156 81,120
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 83,156 81,120
<EPS-BASIC> 16.03 15.64
<EPS-DILUTED> 16.03 15.64
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