<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 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 November 11, 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 activity consists
solely of development, installation and maintenance of casino systems by its
wholly owned subsidiary, Advanced Casino Systems Corporation ("ACSC"). A
subsidiary of GBCC owns the Sands Hotel and Casino located in Atlantic City, New
Jersey (the "Sands"). As explained below, this subsidiary is currently in
Chapter 11 proceedings and GBCC does not expect to have ownership or operating
control after reorganization. Another GBCC subsidiary which held management and
consulting contracts with gaming facilities located in Aurora, Illinois (the
"Aurora Casino") and Tunica County, Mississippi (the "Tunica Casino") was also
in Chapter 11 proceedings. A plan of reorganization was confirmed by the United
States Bankruptcy Court for the District of Delaware (the "Delaware Bankruptcy
Court") on October 1, 1999 and, as a result, GBCC no longer holds the management
and consulting contracts. Due to the Chapter 11 proceedings, the activities of
the subsidiaries which own the Sands and which held the management contracts
with the Aurora and Tunica casinos are not 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.
2
<PAGE>
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 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 provided for the
restructuring of the PRT Funding Notes (the "Restructuring"). The agreement
provided 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 were to
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 were to consist of a new obligation in the amount of $40.3 million
payable in satisfaction of the PRT Funding Notes. The voting agreement provided
for HCC to immediately discharge the obligation.
As part of the Restructuring, holders of the PRT Funding Notes were also to
receive 100% of the remaining assets of PCC and its subsidiaries not acquired by
HCC. Such assets consisted 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 was
confirmed by the Delaware Bankruptcy Court on October 1, 1999 and the
Restructuring was completed on October 14, 1999.
As a result of the Chapter 11 filings and plan of reorganization of PCC,
PRT Funding and NJMI, GBCC's control over the filing subsidiaries was subject to
supervision of the Delaware Bankruptcy Court. GBCC did not expect to have
ownership or operating control of such subsidiaries after reorganization.
Accordingly, PCC, PRT Funding and NJMI are not included on the accompanying
consolidated balance sheet at September 30, 1999. 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 accounted for its
investment in PCC under the cost method of accounting.
The consolidated financial statements as of September 30, 1999 and for the
three and nine month periods ended September 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 September 30, 1999 and the results of its
operations for the three and nine months periods ended September 30, 1999 and
1998 and its cash flows for the nine month periods ended September 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>
September 30,
1999 December 31,
(Unaudited) 1998
-------------- -------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 5,061,000 $10,616,000
Accounts receivable 359,000 367,000
Inventories 586,000 378,000
Due from affiliates 1,271,000 1,303,000
Refundable deposits and other
current assets 716,000 938,000
----------- -----------
Total current assets 7,993,000 13,602,000
----------- -----------
Investment in Limited Partnership - 3,104,000
----------- -----------
Property and Equipment:
Operating equipment 753,000 1,564,000
Less - accumulated depreciation (395,000) (1,100,000)
----------- -----------
Net property and equipment 358,000 464,000
----------- -----------
Other Assets:
Due from affiliates, net of valuation allowances 2,089,000 2,767,000
Other assets - 9,000
----------- -----------
Total other assets 2,089,000 2,776,000
----------- -----------
$10,440,000 $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>
September 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 919,000 2,232,000
Accrued liabilities -
Salaries and wages 317,000 235,000
Interest 2,485,000 8,780,000
Other 121,000 239,000
Other current liabilities 268,000 296,000
------------- -------------
Total current liabilities 10,860,000 103,532,000
------------- -------------
Long-Term Debt 39,020,000 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 (115,171,000) (194,357,000)
------------- -------------
Total shareholders' deficit (39,440,000) (118,626,000)
------------- -------------
$ 10,440,000 $ 19,946,000
============= =============
</TABLE>
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated balance sheets.
5
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
--------------------------
1999 1998
----------- ------------
<S> <C> <C>
Revenues:
Computer services $ 1,587,000 $ 747,000
Management and consulting fees - 795,000
Other - 14,000
----------- -----------
Total revenues 1,587,000 1,556,000
----------- -----------
Expenses:
Computer services 667,000 50,000
General and administrative 1,445,000 1,344,000
Depreciation and amortization 46,000 31,000
----------- -----------
Total expenses 2,158,000 1,425,000
----------- -----------
(Loss) income from operations (571,000) 131,000
----------- -----------
Non-operating income (expense):
Interest income 142,000 251,000
Interest expense (1,609,000) (4,060,000)
Gain on elimination of investment
in Pratt Casino Corporation 140,000 -
Equity in earnings of Limited Partnership - 1,866,000
Gain on elimination of investment in GB Holdings, Inc. - 27,482,000
Restructuring costs - (387,000)
----------- -----------
Total non-operating (expense) income, net (1,327,000) 25,152,000
----------- -----------
(Loss) income before income taxes (1,898,000) 25,283,000
Income tax provision (36,000) (56,000)
----------- -----------
Net (loss) income $(1,934,000) $25,227,000
=========== ===========
Basic and diluted net (loss) income per common share $(.37) $4.86
=========== ===========
</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>
Nine Months Ended
September 30,
-----------------------------
1999 1998
------------- -------------
<S> <C> <C>
Revenues:
Computer services $ 5,198,000 $ 2,771,000
Management and consulting fees 477,000 3,334,000
Other - 82,000
----------- ------------
Total revenues 5,675,000 6,187,000
----------- ------------
Expenses:
Computer services 2,582,000 332,000
General and administrative 4,163,000 3,092,000
Depreciation and amortization 135,000 90,000
----------- ------------
Total expenses 6,880,000 3,514,000
----------- ------------
(Loss) income from operations (1,205,000) 2,673,000
----------- ------------
Non-operating income (expense):
Interest income 530,000 721,000
Interest expense (8,635,000) (12,250,000)
Gain on elimination of investment in Pratt Casino
Corporation 86,129,000 -
Equity in earnings of Limited Partnership 2,660,000 4,498,000
Equity in earnings of and gain on elimination of
investment in GB Holdings, Inc. - 31,205,000
Restructuring costs (230,000) (1,431,000)
----------- ------------
Total non-operating income (expense), net 80,454,000 22,743,000
----------- ------------
Income before income taxes 79,249,000 25,416,000
Income tax provision (63,000) (101,000)
----------- ------------
Net income $79,186,000 $ 25,315,000
=========== ============
Basic and diluted net income per common share $15.27 $4.88
=========== ============
</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>
Nine Months Ended
September 30,
---------------------------
1999 1998
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 79,186,000 $ 25,315,000
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation and amortization, including
accretion of debt discount 4,115,000 3,573,000
Gain on elimination of investment in Pratt Casino
Corporation (86,129,000) -
Equity in earnings of and gain on elimination of
investment in GB Holdings, Inc. - (31,205,000)
Equity in earnings of Limited Partnership (2,660,000) (4,498,000)
Distributions received from Limited Partnership 4,038,000 3,801,000
Deferred income tax provision (benefit) 2,000 (14,000)
Decrease (increase) in accounts receivable 8,000 (141,000)
(Decrease) increase in accounts payable and
other accrued liabilities (3,514,000) 9,434,000
Net change in other current assets and liabilities (291,000) (507,000)
Net change in other noncurrent assets and liabilities 61,000 (810,000)
------------ ------------
Net cash (used in) provided by operating activities (5,184,000) 4,948,000
------------ ------------
INVESTING ACTIVITIES:
Purchases of property and equipment (29,000) (86,000)
Proceeds from disposal of assets - 1,300,000
Increase in cash from sale of subsidiary - 245,000
Deconsolidation of Pratt Casino Corporation cash and cash
equivalents (868,000) -
Collections on notes receivable 526,000 445,000
------------ ------------
Net cash (used in) provided by investing activities (371,000) 1,904,000
------------ ------------
FINANCING ACTIVITIES:
Repayments of long-term debt - (36,000)
------------ ------------
Net cash used in financing activities - (36,000)
------------ ------------
Net (decrease) increase in cash and cash equivalents (5,555,000) 6,816,000
Cash and cash equivalents at beginning of period 10,616,000 6,555,000
------------ ------------
Cash and cash equivalents at end of period $ 5,061,000 $ 13,371,000
============ ============
</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 activity consists
solely 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, prior to October 13, 1999, held 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, the GBCC subsidiary which owns the Sands is currently
in Chapter 11 proceedings and GBCC does not expect to have ownership or
operating control after reorganization. The GBCC subsidiary which held the
management and consulting contracts completed its reorganization under Chapter
11 in October 1999 and is no longer owned by GBCC. Accordingly, as further
described below, the activities of the subsidiaries which own the Sands and
which held the management contracts with the Aurora and Tunica casinos are not
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.
Until October 1999, HCC owned the general partnership interest in Pratt
Management, L.P. ("PML"), the limited partnership which held the management
contract on the Aurora Casino. Such ownership interest was acquired from PPI
Corporation, a wholly owned subsidiary of GBCC, effective April 1, 1997. As a
result, GBCC's remaining limited partnership interest in PML held by 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 not 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).
9
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 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, did 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
provided for the restructuring of the PRT Funding Notes (the "Restructuring").
The agreement provided 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 were to 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 were to consist of a new obligation in the amount of
$40,329,000 payable in satisfaction of the PRT Funding Notes. The voting
agreement provided for HCC to immediately discharge the obligation.
10
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
As part of the Restructuring, holders of the PRT Funding Notes were also to
receive 100% of the remaining assets of PCC and its subsidiaries not acquired by
HCC. Such assets consisted 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 was
confirmed by the Delaware Bankruptcy Court on October 1, 1999. HCC completed its
acquisition of PCC and settled PCC's obligations on October 14, 1999 (see Note
10).
As a result of the Chapter 11 filings and plan of reorganization of PCC,
PRT Funding and NJMI, GBCC's control over the filing subsidiaries was subject to
supervision of the Delaware Bankruptcy Court and GBCC did not expect to have
ownership or operating control of such subsidiaries after reorganization.
Accordingly, PCC, PRT Funding and NJMI are not included on the accompanying
consolidated balance sheet at September 30, 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. Accordingly, for
periods subsequent to May 25, 1999, GBCC accounted for its investment in PCC
under the cost method of accounting. An additional adjustment in the amount of
$140,000 was recorded during the third quarter of 1999.
GBCC's only significant remaining operating activity is the development,
installation and maintenance of casino systems by ACSC. GBCC and its
subsidiaries continue to have debt outstanding to HCC consisting of (i) demand
notes and accrued interest thereon totaling $9,235,000 at September 30, 1999
(see Notes 3 and 6) and (ii) a 14 7/8% secured promissory note due 2006 in the
amount of $39,020,000 at September 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 is currently insolvent. 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.
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
11
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 September 30, 1999 and for the
three and nine month periods ended September 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 September 30, 1999, the results of its
operations for the three and nine month periods ended September 30, 1999 and
1998 and its cash flows for the nine month periods ended September 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 nine month periods ended September 30, 1999 and
1998, there were no potential common shares outstanding and basic and diluted
income per share were the same. The weighted average number of shares of common
stock used in the calculation of both basic and diluted income per share was
5,186,627 for each of the three and nine month periods ended September 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 September 30, 1999 and December 31, 1998. The borrowings
consist of a $6,500,000 demand note to HCC with interest at the rate of 13 3/4%
per annum payable quarterly commencing October 1, 1996 and an additional
$250,000 which became due on April 1, 1998 for which payment has not been made.
The $250,000 loan continues to accrue interest at the rate of 14% per annum.
The $6,500,000 was 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).
12
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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) constituted a
default under the indenture for the PRT Funding Notes. Accordingly, the
outstanding principal amount of the PRT Funding Notes accelerated, became
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 not included in the consolidated
financial statements of GBCC after May 25, 1999.
<TABLE>
<CAPTION>
September 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 $8,583,000 and $12,563,000,
respectively (b) 39,020,000 35,040,000
----------- ------------
Total indebtedness 39,020,000 120,040,000
Less - current maturities - 85,000,000
----------- ------------
Total long-term debt $39,020,000 $ 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 were
cancelled 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 $47,603,000. Because of the continued affiliation of HCC and GBCC, the
forgiveness of debt was
13
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 September 30, 1999 are
$47,603,000 in 2006.
Interest paid amounted to $6,768,000 and $29,000, respectively, during the
nine month periods ended September 30, 1999 and 1998.
(5) Income Taxes
GBCC's benefit (provision) for income taxes consists of the following:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ --------------------------
1999 1998 1999 1998
---------- ------------ ---------- --------------
<S> <C> <C> <C> <C>
Federal income tax (provision)
benefit:
Current $ (4,000) $ - $ (29,000) $ (270,000)
Deferred (814,000) (2,745,000) (722,000) (2,961,000)
State income tax (provision)
benefit:
Current (32,000) (64,000) (32,000) (116,000)
Deferred 640,000 61,000 (2,000) 550,000
Valuation allowance 174,000 2,692,000 722,000 2,696,000
--------- ----------- --------- -----------
$ (36,000) $ (56,000) $ (63,000) $ (101,000)
========= =========== ========= ===========
</TABLE>
GBCC paid federal income taxes totaling $25,000 and $270,000 during the
nine month periods ended September 30, 1999 and 1998, respectively. GBCC paid
state income taxes totaling $103,000 and $160,000, respectively, during the nine
month periods ended September 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 purposes and from the use of the allowance method rather than the
direct write-off method for doubtful accounts.
14
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 September 30, 1999, GBCC and its subsidiaries,
exclusive of Holdings and its subsidiaries, have net operating loss
carryforwards ("NOL's") totaling approximately $40,550,000 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>
September 30, December 31,
1999 1998
-------------- -------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 14,748,000 $ 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 129,000 113,000
Deferred financing costs 1,642,000 1,374,000
Other 267,000 242,000
------------ ------------
Deferred tax asset 19,736,000 19,010,000
Deferred tax liability -
Interest expense not recognized (1,450,000) -
------------ ------------
Net deferred tax asset 18,286,000 19,010,000
Valuation allowance (18,239,000) (18,961,000)
------------ ------------
$ 47,000 $ 49,000
============ ============
</TABLE>
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
15
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 during which
period GBCC was included. Such examination for 1993 and 1994 has been completed
with respect to GBCC, but not for all of HCC's subsidiaries. Accordingly,
allocations of tax attributes and additional alternative minimum tax or regular
tax obligations, if any, can not yet be determined. Due to the inclusion of
Holdings and its subsidiaries in such consolidated returns, an as yet
undetermined portion of any resulting tax liability to GBCC may be recoverable
from Holdings. As a result, management is presently unable to estimate the
ultimate impact of the examination on the consolidated financial position or
results of operations of GBCC and is continuing to review the preliminary
findings with the assistance of its tax advisors. The Internal Revenue Service
is continuing its examination of the consolidated Federal income tax returns of
HCC, including GBCC, for 1995 and 1996.
(6) Transactions with Related Parties
PML, a limited partnership wholly owned through March 31, 1997 by GBCC,
earned management fees pursuant to a management agreement with Hollywood Casino
- - Aurora, Inc. ("HCA"), an HCC subsidiary (see Note 7). Such fees included 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 (see Note 10).
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 September 30, 1999 and
December 31, 1998 are $2,310,000 and $2,836,000, respectively. Of those
balances, $721,000 and $622,000 are included in current amounts due from
affiliates at September 30, 1999 and December 31, 1998, respectively. Interest
income on the note from HCC amounted to $84,000 and $107,000, respectively,
during the three month periods ended September 30, 1999 and 1998 and $267,000
and $336,000, respectively, during the nine month periods ended September 30,
1999 and 1998. Accrued
16
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
interest receivable of $27,000 and $34,000, respectively, is included in amounts
due from affiliates on the accompanying consolidated balance sheets at September
30, 1999 and December 31, 1998.
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 $495,000 and $2,405,000, respectively, for the three and nine month
periods ended September 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, was included in noncurrent due from affiliates on the accompanying
consolidated balance sheet and was subject to terms of a reorganization plan
requiring confirmation by the Bankruptcy Court (see Note 9).
Pursuant to a consulting agreement which was terminated effective October
13, 1999 (see Note 10) with Hollywood Casino -Tunica, Inc. ("HCT"), the HCC
subsidiary which owns and operates the Tunica Casino, a subsidiary of GBCC
received monthly consulting fees of $100,000. Total fees earned amounted to
$300,000 for the three month period ended September 30, 1998 and $477,000 and
$900,000, respectively, for the nine month periods ended September 30, 1999 and
1998. Fees during 1999 are included in the accompanying consolidated results of
operations of GBCC only 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 $157,000 and $249,000, respectively, during the three month periods
ended September 30, 1999 and 1998 and $466,000 and $795,000, respectively,
during the nine month periods ended September 30, 1999 and 1998. Net amounts due
to HCC and its subsidiaries amounted to $2,000 and $172,000 at September 30,
1999 and December 31, 1998, respectively.
17
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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
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 $214,000 and $253,000, respectively, for the three month periods
ended September 30, 1999 and 1998 and $794,000 and $915,000, respectively, for
the nine month periods ended September 30, 1999 and 1998. Unpaid charges to HCC
and its subsidiaries included in due from affiliates on the accompanying
consolidated balance sheets at September 30, 1999 and December 31, 1998 amounted
to $195,000 and $122,000, respectively. Billings to GBHC amounted to $162,000
and $182,000, respectively, for the three month periods ended September 30, 1999
and 1998 and $626,000 and $452,000, respectively, for the nine month periods
ended September 30, 1999 and 1998. Unpaid charges to GBHC included in due from
affiliates on the accompanying consolidated balance sheets at September 30, 1999
and December 31, 1998 amounted to $283,000 and $251,000, respectively. Such
receivables from GBHC were partially offset by amounts due to GBHC by ACSC
totaling $160,000 and $242,000, respectively, at September 30, 1999 and December
31, 1998.
Interest expense with respect to borrowings from HCC is set forth below:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
PPI Funding Notes (Note 4) $1,374,000 $1,189,000 $3,980,000 $3,482,000
Short-term borrowings (Note 3) 237,000 237,000 704,000 704,000
</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 September 30, 1999 and December 31, 1998.
Interest accrued on short-term borrowings (see Note 3) amounting to
$2,485,000 and $1,781,000, respectively, at September 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 accrued interest at the rate of 14 5/8% per
annum payable semiannually commencing on August 17, 1994. The principal amount
of the note was 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 accrued interest at the rate of 14 5/8% per annum payable semiannually
commencing July 15,
18
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1997. In accordance with certain provisions of the September 1998 settlement
agreement with GBCC (see Note 9), GBHC preserved whatever rights of offset, if
any, it might have had 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 with accrued interest of
$6,200,000 and $5,652,000, respectively, were 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 accrued 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 were
subject to terms of a reorganization plan which would have required confirmation
by the New Jersey Bankruptcy Court and 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.
Prior to the Restructuring in October 1999 (see Note 10), PCC held the
limited partnership interest in PML which earned management fees from the Aurora
Casino and incurred operating and other expenses with respect to its management
thereof. As the limited partner in PML, PCC 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 $3,061,000 and
$2,444,000, respectively, during the three month periods ended September 30,
1999 and 1998 and $7,273,000 and $6,269,000, respectively, during the nine month
periods ended September 30, 1999 and 1998. PML also incurred operating and
other expenses amounting to $406,000 and $310,000, respectively, during the
three month periods ended September 30, 1999 and 1998 and $997,000 and $976,000,
respectively, during the nine month periods ended September 30, 1999 and 1998.
The accompanying consolidated statements of operations include PCC's equity
in the earnings of PML only through the deconsolidation of PCC on May 25, 1999.
(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
(Unaudited)
to the significance of Holdings' operations, summarized consolidated results of
operations of Holdings for such period are set forth below. Transactions with
Holdings and its subsidiaries are included in Note 6.
<TABLE>
<CAPTION>
Six Months Ended
June 30, 1998
-----------------
<S> <C>
Net revenues $114,066,000
------------
Departmental expenses 95,499,000
General and administrative expenses 7,115,000
Depreciation and amortization 5,825,000
------------
Total operating expenses 108,439,000
------------
Income from operations 5,627,000
------------
Interest, net 899,000
Gain on disposal of assets 28,000
------------
Total non-operating income 927,000
------------
Income before taxes and other item 6,554,000
Income tax provision -
------------
Income before other items 6,554,000
Reorganization and other related costs (2,831,000)
------------
Net income $ 3,723,000
============
</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, NJMI, GBCC, HCC and the
holders of substantially all of the PRT Funding Notes entered into a voting
20
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
agreement with HCC which provided for the Restructuring of the PRT Funding
Notes. The agreement provided 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 were to 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 were to consist of a new obligation in the amount of
$40,329,000 in satisfaction of the PRT Funding Notes. The voting agreement
provided for HCC to immediately discharge the obligation (see Note 10).
As part of the Restructuring, holders of the PRT Funding Notes were also to
receive 100% of the remaining assets of PCC and its subsidiaries not acquired by
HCC. Such assets consisted 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 was confirmed
by the Delaware Bankruptcy Court on October 1, 1999. HCC completed its
acquisition of PCC and settled PCC's obligations on October 14, 1999.
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 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
21
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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). In November 1999,
a compromise was reached establishing the amount of the claim at $75,000. The
ultimate settlement of this amount is subject to the confirmation of a plan of
reorganization by the New Jersey Bankruptcy Court.
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 19, 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 3, 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
(Unaudited)
In its lawsuit, PHII seeks a declaratory judgment that it is entitled to
use the name "Planet Hollywood" for a casino. In addition, PHII seeks damages
alleging, 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 trace practices. In their counterclaims, the Hollywood Defendants
and GBCC seek a declaratory judgement that PHII is not entitled to use the name
"Planet Hollywood" for a casino. In addition, the Hollywood Defendants and GBCC
seek damages alleging, 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.
On June 7, 1999, the magistrate judge severed the litigation as to
liability and damages. A trial on the liability issues commenced on July 19,
1999 and concluded on July 26, 1999. In oral argument on July 26, 1999, the
Hollywood Defendants and GBCC waived their declaratory judgement claims based,
in part, on PHII's reported deteriorating financial condition and perceived
inability to enter into the casino business. On August 25, 1999, the Hollywood
Defendants and GBCC filed a motion to dismiss the declaratory judgement claims
of all parties asserting, among other things, that as a result of PHII's
reported deteriorating financial condition and perceived inability to enter into
the casino business, there is no longer any actual case or controversy. On
October 12, 1999, Planet Hollywood (Region IV), Inc. filed a petition for
reorganization under Chapter 11 of the United States Bankruptcy Code. The judge
has not yet issued a ruling on either the liability issues or the motion to
dismiss and has provided no definitive date by which either such 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 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) Subsequent Events
As discussed in Note 1, PCC, PRT Funding and NJMI's joint plan of
reorganization under Chapter 11 of the Bankruptcy Code was confirmed by the
Delaware Bankruptcy Court in October 1999. On October 13, 1999, GBCC sold its
ownership of PCC, which held the limited partnership interest in PML and the
consulting agreement with the Tunica Casino (see Notes 6 and 7) to HCC. When
sold by GBCC, PCC's assets consisted of the limited partnership interest and the
consulting agreement valued in
23
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
the aggregate at $40,329,000. PCC's liabilities consisted of an obligation in
the amount of $40,329,000 payable in satisfaction of the PRT Funding Notes.
GBCC's claims against Holdings, GB Property Funding and GBHC in their Chapter 11
proceedings as well as other claims previously held by PCC, PRT Funding and NJMI
were conveyed to a new GBCC subsidiary for the benefit of the PRT Funding
noteholders. It is anticipated that GBCC will record a charge to non-operating
expenses in the approximate amount of $500,000 during the fourth quarter of 1999
representing the transfer of its claims for the benefit of the PRT Funding
noteholders. Neither the gain on forgiveness of debt resulting from the
settlement of the PRT Funding Notes for less than their face amount nor the
subsequent sale of PCC to HCC are expected to have a material impact on the
consolidated financial statements of GBCC during the fourth quarter of 1999
since GBCC's investment in PCC was revalued to a zero basis and substantially
all receivables from PCC and its subsidiaries were fully reserved in May 1999.
(11) Major Customers
ACSC's computer service revenues are derived primarily from either system
installation contracts or from sales to affiliates. System installation
contracts generally require an extended period of time to complete and represent
significant, but nonrecurring revenue earned from a given customer. Upon
completion of an installation, ACSC may continue to recognize service or
maintenance revenues from the customer at a much reduced amount. The following
table demonstrates ACSC's dependence on installation contracts and on sales to
affiliates:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- ------------------
1999 1998 1999 1998
--------- ------- -------- --------
<S> <C> <C> <C> <C>
Total percentage of period
revenues attributable to
installation contracts 61.3% 39.7% 63.1% 55.4%
Percentage of period
revenues attributable to
affiliate sales 11.8% 35.0% 16.5% 28.0%
</TABLE>
(12) Reclassifications
Certain reclassifications have been made to the prior year's consolidated
financial statements to conform to the 1999 consolidated financial statement
presentation.
24
<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
In prior years, GBCC and its subsidiaries conducted three major business
activities: (i) non-casino operations and the management thereof, (ii)
management services for casino operations and (iii) ownership of the Sands Hotel
and Casino in Atlantic City, New Jersey. As a result of the Chapter 11 filings
by PCC, PRT Funding and NJMI and the resulting plan of reorganization confirmed
in October 1999, GBCC no longer provides casino-related management services. As
a result of Holdings and GBHC's Chapter 11 filings, GBCC does not anticipate
that it will retain an equity position in the Sands. Accordingly, GBCC's
current operating activity consists solely of ACSC and its management.
ACSC licenses casino information technology systems to HCC's casino
facilities, the Sands and non-affiliated casino companies. The results of
ACSC's operations for the three and nine month periods ended September 30, 1999
and 1998 are set forth below:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- ---------------------------
1999 1998 1999 1998
----------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
Computer service revenues $1,587,000 $ 747,000 $5,198,000 $2,771,000
---------- ---------- ---------- ----------
Computer service expenses 667,000 50,000 2,582,000 332,000
General and administrative 1,143,000 584,000 3,020,000 1,552,000
Depreciation and amortization 46,000 31,000 135,000 90,000
---------- ---------- ---------- ----------
1,856,000 665,000 5,737,000 1,974,000
---------- ---------- ---------- ----------
(Loss) income from operations $ (269,000) $ 82,000 $ (539,000) $ 797,000
========== ========== ========== ==========
</TABLE>
The decreases in operating income in the 1999 periods from the same periods
in 1998 are due to increased salary and personnel costs and overhead costs
associated with ACSC's sales of information technology products to unaffiliated
third parties (see "Results of Operations" below).
25
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
ACSC's computer service revenues are derived primarily from either system
installation contracts or from sales to affiliates. System installation
contracts generally require an extended period of time to complete and represent
significant, but nonrecurring revenue earned from a given customer. Upon
completion of an installation, ACSC may continue to recognize service or
maintenance revenues from the customer at a much reduced amount. Accordingly,
in order to maintain its current level of revenues, ACSC would need to continue
to obtain installation contracts. The following table demonstrates ACSC's
dependence on installation contracts and on sales to affiliates:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- ------------------
1999 1998 1999 1998
-------- -------- -------- -------
<S> <C> <C> <C> <C>
Total percentage of period
revenues attributable to
installation contracts 61.3% 39.7% 63.1% 55.4%
Percentage of period
revenues attributable to
affiliate sales 11.8% 35.0% 16.5% 28.0%
</TABLE>
GBCC and its subsidiaries continue to have debt outstanding to HCC
consisting of (i) demand notes (the "GBCC Notes") and accrued interest thereon
totaling $9.2 million at September 30, 1999 and (ii) a 14 7/8% secured
promissory note due 2006 (the "PPI Funding Notes") in the amount of $39 million
at September 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 is currently insolvent. 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.
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, prior to October 14, 1999, held
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 have approximated the general partner's share of annual partnership
distributions which were 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.
26
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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 nine month period ended
September 30, 1999 totaled $29,000; 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 reorganization. Accordingly, the accompanying
consolidated statement of operations for the nine month period ended September
30, 1998 reflects the operations of the filing subsidiaries for the period from
January 1, 1998 through June 30, 1998 under the equity method of accounting and
for the period subsequent to June 30, 1998 under the cost method of accounting.
For the three and nine month periods ended September 30, 1999, 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 was subject to the supervision of the Delaware
Bankruptcy Court and GBCC did not expect to have ownership or control of such
subsidiaries after reorganization. Accordingly, the accompanying 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.
27
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Revenues
Total revenues of GBCC increased $31,000 (2%) during the three month period
ended September 30, 1999 compared to the 1998 third quarter period resulting in
a year to date decrease of $512,000 (8.3%) during 1999 compared to the prior
year period. Computer services revenues provided by ACSC, a GBCC subsidiary
that provides computer hardware and software to the gaming industry, increased
$840,000 (112.5%) and $2.4 million (87.6%), respectively, during the three and
nine month periods ended September 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 virtually
offset on a consolidated basis, however, by (i) the termination of the Sands
Management Contract in September 1998 which generated management fees of
$495,000 and $2.4 million, respectively, during the third quarter and first nine
months of 1998 and (ii) the deconsolidation of PCC, which resulted in fees
earned from its consulting contract with the Tunica Casino no longer being
recognized for periods subsequent to the May 25, 1999 Chapter 11 filing by PCC.
Such fees amounted to $477,000 during 1999 through the date of PCC's
deconsolidation and amounted to $300,000 and $900,000, respectively, for the
three and nine month periods ended September 30, 1998.
Computer Services Expenses
Computer services expenses increased $617,000 (1,234%) and $2.3 million
(677.7%), respectively, during the three and nine month periods ended September
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 $101,000 and (7.5%)
and $1.1 million (34.6%), respectively, during the three and nine month periods
ended September 30, 1999 compared to the 1998 periods. The increases are
primarily due to increases in salary and personal costs, overhead costs and
professional fees incurred in connection with ACSC's increased efforts to market
its information technology products to unaffiliated third parties. As discussed
under "Liquidity and Capital Resources -Operating Activities" above, in order to
maintain its current level of revenues, ACSC needs to obtain new installation
contracts. Accordingly, it has hired the additional personnel necessary to both
perform such installations as well as to pursue marketing opportunities to
obtain new installation contracts. These personnel costs have become part of
ACSC's general and administrative expenses to the extent that they can not be
associated with a particular installation or other customer related services.
Depreciation and Amortization
Depreciation and amortization expense for the three and nine month periods
ended September 30, 1999 increased by $15,000 (48.4%) and $45,000 (50%),
respectively, compared to the same periods of 1998 due to an expansion of office
space by ACSC.
28
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Interest
Interest income decreased $109,000 (43.4%) and $191,000 (26.5%),
respectively, during the third quarter and first nine months of 1999 compared to
the same periods during 1998. Interest income earned on temporary cash
investments by PCC and its subsidiaries subsequent to May 25, 1999 is no longer
included in GBCC's consolidated results of operations. In addition, 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 $2.5 million (60.4%) and $3.6
million (29.5%), respectively, during the 1999 three and nine month periods
ended September 30 compared to the corresponding prior year periods. Interest
expense with respect to the PRT Funding Notes subsequent to PRT Funding's filing
under Chapter 11 ($3 million and $4 million, respectively, for the three and
nine month periods) 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 $140,000 and $86.1 million, respectively, for the three and nine
month periods ended September 30, 1999. The third quarter adjustment to the
gain of $140,000 represents a change from the original estimate at May 25, 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 $1.9 million (100%) and $1.8 million (40.9%), respectively, during the
third quarter and first nine months of 1999 from the same periods in 1998 as
PCC's equity in the earnings of PML subsequent to May 25, 1999 ($2.4 million and
$2.8 million, respectively, for the three and nine month periods) is no longer
included in GBCC's consolidated results of operations. The limited partnership
interest was acquired by HCC in October 1999 as part of the Restructuring.
Equity in Earnings of and Elimination of Investment in GB Holdings, Inc.
GBCC's equity in the earnings of Holdings' for the nine month period ended
September 30, 1998 amounted to $3.7 million and represents equity in earnings
for the period from January 1, 1998 through June 30, 1998. 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,
29
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GBCC has not recognized equity in the earnings of Holdings and its subsidiaries
since July 1, 1998. The elimination of the investment in and amounts due to
Holdings resulted in a gain amounting to $27,482,000 during the three and nine
month periods ended September 30, 1998.
Restructuring Costs
Restructuring costs decreased $387,000 (100%) and $1.2 million (83.9%),
respectively, during the three and nine month periods ended September 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 were significantly reduced during
the first half of 1999. Such costs for periods subsequent to the May 25, 1999
deconsolidation of PCC are not included in the consolidated results of
operations of GBCC.
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
September 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.
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 during which
period GBCC was included. Such examination for 1993 and 1994 has been completed
with respect to GBCC, but not for all of HCC's subsidiaries. Accordingly,
allocations of tax attributes and additional alternative minimum tax or regular
tax obligations, if any, can not yet be determined. Due to the inclusion of
Holdings and its subsidiaries in such
30
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
consolidated returns, an as yet undetermined portion of any resulting tax
liability to GBCC may be recoverable from Holdings. As a result, management is
presently unable to estimate the ultimate impact of the examination on the
consolidated financial position or results of operations of GBCC and is
continuing to review the preliminary findings with the assistance of its tax
advisors. The Internal Revenue Service is continuing its examination of the
consolidated Federal income tax returns of HCC, including GBCC, for 1995 and
1996.
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.
GBCC currently relies on the computer systems of HCC for its administrative
and financial operations. These systems, which are contractually provided to
HCC by outside parties, are expected to be fully Year 2000 compliant by the end
of 1999. However, there can be no assurance that HCC and its suppliers will
successfully assess and remediate these systems, if necessary.
GBCC and its subsidiaries may also be exposed to the Year 2000 problems of
its suppliers if their systems are not compliant. The Company has 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 will fully resolve their 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.
ACSC's information technology systems are sold to third parties. Such third
parties have similarly sought assurances from ACSC that the systems sold by ACSC
are Year 2000 compliant. Management has completed its program to assess ACSC's
readiness for the Year 2000. Such program included the use of both internal and
external resources to test and, where necessary, modify or replace hardware and
software applications. The costs of acquiring, testing and converting systems
have not been significant and have been included in income from operations.
Management believes that ACSC's current information technology systems are Year
2000 compliant and that all significant customer applications will be converted
to Year 2000 compliant versions before the end of 1999.
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.
31
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Seasonality
Management believes that with the termination of its management contracts
and limited partnership interest in such contracts, seasonality will no longer
materially affect GBCC's results of operations.
32
<PAGE>
PART II: OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings
On January 5, 1998, Holdings, GB Property Funding and GBHC filed petitions
for relief under Chapter 11 of the Bankruptcy Code. Each company continues to
operate in the ordinary course of business, as set forth in the Bankruptcy Code,
and each company's executive officers and directors remain in office, subject to
the jurisdiction of the 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 provided for the Restructuring of the PRT Funding
Notes. The agreement provided 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 were to consist of its limited partnership interest in a management
contract for the Aurora Casino and a consulting contract for the Tunica Casino
valued in the aggregate at approximately $40.3 million. PCC's liabilities were
to consist of a new obligation in the amount of $40.3 million payable in
satisfaction of the PRT Funding Notes. The voting agreement provided for HCC to
immediately discharge the obligation.
As part of the Restructuring, holders of the PRT Funding Notes were also to
receive 100% of the remaining assets of PCC and its subsidiaries not acquired by
HCC. Such assets consisted 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 was
confirmed by the Delaware Bankruptcy Court on October 1, 1999. HCC completed its
acquisition of PCC and settled PCC's obligations on October 14, 1999.
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
33
<PAGE>
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. In November 1999, a compromise
was reached establishing the amount of the claim at $75,000. The ultimate
settlement of this amount is subject to the confirmation of a plan of
reorganization by the New Jersey Bankruptcy Court.
GBCC and certain of its affiliates are currently in litigation with Planet
Hollywood International, Inc. ("PHII") and others with respect to claims and
counterclaims involving the use of trademarks, service marks and trade dress.
On June 7, 1999, the magistrate judge severed the litigation as to liability and
damages. A trial on the liability issues commenced on July 19, 1999 and
concluded on July 26, 1999. In oral argument on July 26, 1999, the Hollywood
Defendants and GBCC waived their declaratory judgement claims based, in part, on
PHII's reported deteriorating financial condition and perceived inability to
enter into the casino business. On August 25, 1999, the Hollywood Defendants
and GBCC filed a motion to dismiss the declaratory judgement claims of all
parties asserting, among other things, that as a result of PHII's reported
deteriorating financial condition and perceived inability to enter into the
casino business, there is no longer any actual case or controversy. On October
12, 1999, Planet Hollywood (Region IV), Inc. filed a petition for reorganization
under Chapter 11 of the United States Bankruptcy Code. The judge has not yet
issued a ruling on either the liability issues or the motion to dismiss and has
provided no definitive date by which either such 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 November 11, 1999, $404,000 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 $46,329,000 as of November 11, 1999.
Item 6.(a) - Exhibits
*99.1 Debtors' Second Amended Joint Plan of Reorganization dated August 16,
1999, as Modified.
*99.2 Debtors' "Plan Supplement" in Conjunction with Debtors' Second Amended
Joint Plan of Reorganization Dated August 16, 1999, as Modified.
*99.3 Debtors' First Modification, Pursuant to 11 U.S.C. (S)1127(a) and F.R.
B.P. 3019, to Debtors' Second Amended Joint Plan of Reorganization Dated
August 16, 1999, as Modified.
__________________________
* Incorporated by reference from the same numbered exhibit included in
GBCC's Form 8-K as filed with the SEC on October 22, 1999.
34
<PAGE>
Item 6.(b) - Reports on Form 8-K
The Registrant filed a report on Form 8-K on October 22, 1999 to report the
sale of Pratt Casino Corporation, its wholly owned subsidiary, to Hollywood
Casino Corporation on October 13, 1999 under the terms of a Plan of
Reorganization confirmed on October 1, 1999 by the United States Bankruptcy
Court for the District of Delaware.
SIGNATURES
- ----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GREATE BAY CASINO CORPORATION
Date: November 11, 1999 By: /s/ John C. Hull
------------------------------ ------------------------------
John C. Hull
Chief Executive Officer
35
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE COANTAINS SUMMARY FINACIAL 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>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1999
<PERIOD-START> JUL-01-1999 JAN-01-1999
<PERIOD-END> SEP-30-1999 SEP-30-1999
<CASH> 5,061 5,061
<SECURITIES> 0 0
<RECEIVABLES> 359 359
<ALLOWANCES> 0 0
<INVENTORY> 586 586
<CURRENT-ASSETS> 7,993 7,993
<PP&E> 753 753
<DEPRECIATION> 395 395
<TOTAL-ASSETS> 10,440 10,440
<CURRENT-LIABILITIES> 10,860 10,860
<BONDS> 39,020 39,020
0 0
0 0
<COMMON> 519 519
<OTHER-SE> (39,959) (39,959)
<TOTAL-LIABILITY-AND-EQUITY> 10,440 10,440
<SALES> 0 0
<TOTAL-REVENUES> 1,587 5,675
<CGS> 0 0
<TOTAL-COSTS> 667 2,582
<OTHER-EXPENSES> 1,351 (84,261)
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 1,467 8,105
<INCOME-PRETAX> (1,898) 79,249
<INCOME-TAX> 36 63
<INCOME-CONTINUING> (1,934) 79,186
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (1,934) 79,186
<EPS-BASIC> (.37) 15.27
<EPS-DILUTED> (.37) 15.27
</TABLE>
