<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, 2000
-----------------------------------------------
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 10, 2000
------------------------------------------ -----------------------------------
Common Stock, $.10 par value 5,186,627 shares
1
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GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
PART I: FINANCIAL INFORMATION
-----------------------------
Introductory Notes to Consolidated Financial Statements
-------------------------------------------------------
Current GBCC Operations -
Greate Bay Casino Corporation, a Delaware corporation, and its subsidiaries
("GBCC" or the "Company") are engaged in the development and sale of casino-
related information technology systems. In prior years, GBCC was also engaged in
casino-related operations consisting of management and consulting contracts with
gaming facilities located in Aurora, Illinois (the "Aurora Casino") and Tunica
County, Mississippi (the "Tunica Casino") and ownership and operation of the
Sands Hotel and Casino in Atlantic City, New Jersey (the "Sands"). GBCC's common
stock is listed on the OTC Bulletin Board Service under the trading symbol
"GEAAQ". Approximately 36% of GBCC's outstanding stock is owned by Jack E.
Pratt, Edward T. Pratt, Jr., William D. Pratt, Edward T. Pratt III 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 Hollywood Casino Corporation ("HCC", a Delaware
corporation), which owns the Aurora Casino and the Tunica Casino. The principal
executive offices of GBCC are located at 200 Decadon Avenue, Suite 100, Egg
Harbor Township, New Jersey 08234, telephone (609) 441-0704.
GBCC is insolvent and its only significant remaining operating activity is
the development, installation and maintenance of casino systems by its wholly
owned subsidiary, Advanced Casino Systems Corporation ("ACSC"). At September 30,
2000 GBCC and its subsidiaries had debt outstanding to HCC consisting of (1)
demand notes and accrued interest thereon totaling $10.2 million and (2) a
14.875% secured promissory note due 2006 in the amount of $45.1 million. ACSC's
operations do not generate sufficient cash flow to provide debt service on the
HCC demand notes and, consequently, GBCC is currently insolvent. Additionally,
semi-annual interest payments of approximately $3.5 million attributable to the
14.875% secured promissory note become payable commencing in February 2001.
Accordingly, GBCC is currently negotiating with HCC to restructure its
obligations and, in that connection, has entered into a standstill agreement
with HCC. Under the standstill agreement, all payments of principal and interest
due from HCC during the period from March 1, 2000 through December 1, 2000 with
respect to an intercompany note as detailed in Note 7 of the Notes to
Consolidated Financial Statements have been deferred until January 1, 2001 in
consideration of HCC's agreement not to demand payment of principal or interest
on the demand notes owed by GBCC (see (1) above). The fair market value of
GBCC's assets is substantially less than its existing obligations to HCC.
Accordingly, management anticipates that any restructuring of GBCC's obligations
will result in the conveyance of all of its assets (or the proceeds from the
sale of its assets) to HCC, resulting in no cash or other assets remaining
available for distribution to the Company's shareholders. Any restructuring of
GBCC's obligations, consensual or otherwise, will require the Company to file
for protection under federal bankruptcy laws and will ultimately result in
liquidation of the Company.
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.
GB Holdings, Inc. and Subsidiaries -
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"). On
June 1, 1999, a plan of reorganization was filed by the debtors with the New
Jersey Bankruptcy Court. The reorganization plan, as filed, provided for the
secured bondholders to receive new debt and 100% of the equity ownership of
Holdings in exchange for their claims and for unsecured creditors to receive a
partial cash settlement of their claims. Subsequent to the filing of a
reorganization plan by the debtors, two competing plans were filed by (1) Park
Place Entertainment Corporation, a large and diversified gaming company with
significant operations in Atlantic City, and (2) jointly by High River Limited
Partnership ("High River"), an entity controlled by Carl C. Icahn, and by the
Official Committee of Unsecured Creditors (the "Joint Plan"). On August 14,
2000, the New
2
<PAGE>
Jersey Bankruptcy Court confirmed the Joint Plan. The Sands subsequently
transferred 46.3% of its equity interests to High River in exchange for $65
million in cash and the secured bondholders received $110 million in new notes
plus the remaining equity interests in exchange for the $182.5 million of first
mortgage notes in default. No distributions were made to the previous
shareholders, including Greate Bay Holdings, L.L.C., an indirect, wholly owned
subsidiary of GBCC, which held 79% of the outstanding common stock of Holdings.
As a result of the Chapter 11 filings discussed above, GBCC's control over
the filing subsidiaries was subject to supervision of the New Jersey Bankruptcy
Court and GBCC did not expect to have ownership or operating control of such
subsidiaries after reorganization. Furthermore, as a result of a settlement
agreement reached by GBCC and Holdings during September 1998, GBCC no longer
participated in the management of the Sands. Accordingly, Holdings, GB Property
Funding and GBHC have not been included in the accompanying consolidated
financial statements of GBCC.
Pratt Casino Corporation and Subsidiaries -
The filings of petitions for relief by Holdings and its subsidiaries
resulted in a default under the indenture for $85 million principal amount of
11.625% senior notes (the "PRT Funding Notes") issued by PRT Funding Corp. 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 due and payable. PRT Funding deferred
payment of interest due on the April 15 and October 15, 1998 and April 15, 1999
payment dates. On October 22, 1998, PRT Funding paid to the bondholders an
amount equal to a single semiannual interest payment ($4.9 million) while
negotiations to restructure the PRT Funding Notes continued.
On April 28, 1999, PCC, PRT Funding Corp., 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 voting
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 its 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 which consisted primarily of claims against Holdings, GB Property Funding
and GBHC in their Chapter 11 proceedings. In connection with the Restructuring,
PRT Funding also paid deferred interest amounting to $6.8 million to the
bondholders on April 30, 1999.
The successful completion of the Restructuring required that PCC, PRT
Funding and NJMI file for protection under Chapter 11 with the above
transactions included as part of a pre-negotiated plan of reorganization. Such
petitions for relief were filed on May 25, 1999 in the United States Bankruptcy
Court for the District of Delaware (the "Delaware Bankruptcy Court") and the
related plan of reorganization was filed on May 26, 1999. The plan 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, GBCC's investment in PCC and its subsidiaries as well as certain
intercompany balances with PCC and its subsidiaries were revalued to a zero
basis effective on May 25, 1999. For the period from May 25, 1999 until the sale
of PCC to HCC on October 13, 1999, GBCC accounted for its investment in PCC
under the cost method of accounting.
3
<PAGE>
Other Filings -
On June 30, 2000, three inactive, wholly owned, indirect subsidiaries of
GBCC filed for liquidation under Chapter 7 of the United States Bankruptcy Code
in the United States Bankruptcy Court for the District of Delaware. The
subsidiaries were originally formed to acquire property and build a second
casino/hotel in Atlantic City, New Jersey. These plans were subsequently
abandoned; however, the companies remained in existence pending the outcome of
certain litigation which was substantially resolved in 1996. The filings did not
and are not expected to have a significant effect on the operations or financial
position of GBCC.
Financial Reporting -
The consolidated financial statements as of September 30, 2000 and for the
three and nine month periods ended September 30, 2000 and 1999 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, 2000 and the results of its
operations for the three and nine month periods ended September 30, 2000 and
1999 and its cash flows for the nine month periods ended September 30, 2000 and
1999.
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 1999 Annual Report on Form 10-K.
4
<PAGE>
INDEPENDENT ACCOUNTANTS' REPORT
To the Board of Directors and Stockholders of
Greate Bay Casino Corporation
Egg Harbor Township, New Jersey
We have reviewed the accompanying condensed consolidated balance sheet of Greate
Bay Casino Corporation and subsidiaries as of September 30, 2000, and the
related condensed consolidated statements of operations for the three and nine
month periods ended September 30, 2000 and 1999 and their cash flows for the
nine month periods ended September 30, 2000 and 1999. These financial statements
are the responsibility of the Corporation's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and of making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with auditing standards generally accepted in the United States of America, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to such condensed consolidated financial statements for them to be in
conformity with accounting principles generally accepted in the United States of
America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet of
Greate Bay Casino Corporation and subsidiaries as of December 31, 1999, and the
related consolidated statements of operations, shareholders' deficit, and cash
flows for the year then ended (not presented herein); and in our report dated
February 25, 2000 we expressed an unqualified opinion, including an explanatory
paragraph relating to an uncertainty as to the Company's ability to continue as
a going concern, on those consolidated financial statements. In our opinion, the
information set forth in the accompanying condensed consolidated balance sheet
as of December 31, 1999 is fairly stated, in all material respects, in relation
to the consolidated balance sheet from which it has been derived.
DELOITTE & TOUCHE LLP
Dallas, Texas
November 3, 2000
5
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
September 30,
2000 December 31,
(Unaudited) 1999
------------- -----------
Current Assets:
Cash and cash equivalents $ 6,404,000 $ 4,801,000
Accounts receivable, net of allowances of $33,000
and $28,000, respectively 893,000 391,000
Inventories 529,000 599,000
Costs and estimated earnings in excess of billings 1,048,000 126,000
Due from affiliates 1,929,000 1,088,000
Other current assets 583,000 473,000
------------ -----------
Total current assets 11,386,000 7,478,000
------------ -----------
Property and Equipment:
Operating equipment 870,000 771,000
Less - accumulated depreciation (568,000) (438,000)
------------ -----------
Net property and equipment 302,000 333,000
------------ -----------
Other Assets:
Note receivable from affiliate 471,000 1,180,000
Deferred income taxes 15,000 13,000
------------ -----------
Total other assets 486,000 1,193,000
------------ -----------
$ 12,174,000 $ 9,004,000
============ ===========
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated balance sheets.
6
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' DEFICIT
September 30,
2000 December 31,
(Unaudited) 1999
------------- -------------
Current Liabilities:
Borrowings from affiliate $ 6,750,000 $ 6,750,000
Accounts payable 2,038,000 1,223,000
Accrued liabilities -
Salaries and wages 274,000 188,000
Interest 3,428,000 2,722,000
Other 71,000 15,000
Unearned revenues 2,231,000 133,000
Other current liabilities 38,000 32,000
------------- -------------
Total current liabilities 14,830,000 11,063,000
------------- -------------
Long-Term Debt 45,069,000 40,446,000
------------- -------------
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 (123,456,000) (118,236,000)
------------- -------------
Total shareholders' deficit (47,725,000) (42,505,000)
------------- -------------
$ 12,174,000 $ 9,004,000
============= =============
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated balance sheets.
7
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
September 30,
-------------------------
2000 1999
----------- -----------
Revenues:
System sales and support services $ 4,644,000 $ 1,587,000
----------- -----------
Expenses:
Cost of sales 2,008,000 462,000
Marketing 415,000 291,000
System development and support services 924,000 703,000
General and administrative 619,000 656,000
Depreciation 44,000 46,000
----------- -----------
Total expenses 4,010,000 2,158,000
----------- -----------
Income (loss) from operations 634,000 (571,000)
----------- -----------
Non-operating income (expense):
Interest income 136,000 142,000
Interest expense (1,851,000) (1,609,000)
Gain on elimination of investment in Pratt
Casino Corporation - 140,000
----------- -----------
Total non-operating expense, net (1,715,000) (1,327,000)
----------- -----------
Loss before income taxes (1,081,000) (1,898,000)
Income tax provision (69,000) (36,000)
----------- -----------
Net loss $(1,150,000) $(1,934,000)
=========== ===========
Basic and diluted net loss per common share $ (.22) $ (.37)
=========== ===========
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
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Nine Months Ended
September 30,
-------------------------
2000 1999
----------- -----------
Revenues:
System sales and support services $ 9,509,000 $ 5,200,000
Consulting fees - 477,000
----------- -----------
Total revenues 9,509,000 5,677,000
----------- -----------
Expenses:
Cost of sales 4,098,000 2,277,000
Marketing 872,000 425,000
System development and support services 2,559,000 1,903,000
General and administrative 2,068,000 2,142,000
Depreciation 139,000 135,000
----------- -----------
Total expenses 9,736,000 6,882,000
----------- -----------
Loss from operations (227,000) (1,205,000)
----------- -----------
Non-operating income (expense):
Interest income 388,000 530,000
Interest expense (5,329,000) (8,635,000)
Equity in earnings of Limited Partnership - 2,660,000
Restructuring costs - (230,000)
Gain on elimination of investment in Pratt
Casino Corporation - 86,129,000
----------- -----------
Total non-operating (expense) income, net (4,941,000) 80,454,000
----------- -----------
(Loss) income before income taxes (5,168,000) 79,249,000
Income tax provision (52,000) (63,000)
----------- -----------
Net (loss) income $(5,220,000) $79,186,000
=========== ===========
Basic and diluted net (loss) income per common share $ (1.01) $ 15.27
=========== ===========
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated statements.
9
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GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-------------------------------
2000 1999
----------- ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net (loss) income $(5,220,000) $ 79,186,000
Adjustments to reconcile net (loss) income to net cash
provided by (used in) operating activities:
Depreciation and amortization, including
accretion of debt discount 4,762,000 4,115,000
Provision for doubtful accounts 5,000 -
Equity in earnings of Limited Partnership - (2,660,000)
Gain on elimination of investment in Pratt
Casino Corporation - (86,129,000)
Distributions received from Limited Partnership - 4,038,000
Deferred income tax provision (14,000) 2,000
(Increase) decrease in accounts receivable (507,000) 8,000
Increase (decrease) in accounts payable and
other accrued liabilities 1,663,000 (3,514,000)
Net change in other current assets and liabilities 882,000 (291,000)
Net change in noncurrent due from affiliates - 61,000
----------- ------------
Net cash provided by (used in) operating activities 1,571,000 (5,184,000)
----------- ------------
INVESTING ACTIVITIES:
Purchases of property and equipment (108,000) (29,000)
Collections on notes receivable 140,000 526,000
Deconsolidation of Pratt Casino Corporation cash and
cash equivalents - (868,000)
----------- ------------
Net cash provided by (used in) investing activities 32,000 (371,000)
----------- ------------
Net increase (decrease) in cash and cash equivalents 1,603,000 (5,555,000)
Cash and cash equivalents at beginning of period 4,801,000 10,616,000
----------- ------------
Cash and cash equivalents at end of period $ 6,404,000 $ 5,061,000
=========== ============
</TABLE>
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated statements.
10
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) Organization, Business and Basis of Presentation
Greate Bay Casino Corporation ("GBCC"), a Delaware corporation, is engaged
in the development, installation and maintenance of casino systems through its
wholly owned subsidiary, Advanced Casino Systems Corporation ("ACSC"). In prior
years, GBCC and its other subsidiaries were also engaged in the operation and
management of and provision of services to casino properties, including the
ownership and operation of the Sands Hotel and Casino located in Atlantic City,
New Jersey (the "Sands") and, until October 1999, contracts to manage and
consult with gaming facilities located in Aurora, Illinois (the "Aurora Casino")
and Tunica County, Mississippi (the "Tunica Casino") (see Notes 7 and 8). As
explained below, the GBCC subsidiary which owned the Sands recently emerged from
its Chapter 11 proceedings; as expected, GBCC did not retain 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 owned the Sands and
which held the management contracts with the Aurora and Tunica casinos are not
included in the consolidated operating results of GBCC.
Approximately 36% of GBCC's outstanding stock is owned by Jack E. Pratt,
Edward T. Pratt, Jr., William D. Pratt, Edward T. Pratt III 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 Hollywood Casino Corporation ("HCC"), which owns the Aurora
Casino and the Tunica Casino.
Until October 1999, GBCC's limited partnership interest in Pratt
Management, L.P. ("PML"), the limited partnership which held the management
contract on the Aurora Casino was held by its wholly owned subsidiary, Pratt
Casino Corporation ("PCC"), and was presented under the equity method of
accounting (see Note 8). As explained below, the operating results of PCC,
including its equity in the earnings of PML, for periods subsequent to May 25,
1999 are not included in the consolidated results of operations of GBCC.
Current GBCC Operations -
GBCC is insolvent and its only significant remaining operating activity is
the development, installation and maintenance of casino systems by ACSC. At
September 30, 2000, GBCC and its subsidiaries had debt outstanding to HCC
consisting of (1) demand notes and accrued interest thereon totaling $10,179,000
(see Notes 4 and 7) and (2) a 14.875% secured promissory note due 2006 in the
amount of $45,069,000 (see Note 5). ACSC's operations do not generate sufficient
cash flow to provide debt service on the HCC demand notes and, consequently,
GBCC is currently insolvent. Additionally, semi-annual interest payments of
$3,540,000 million attributable to the 14.875% secured promissory note become
payable commencing in February 2001. Accordingly, GBCC is currently negotiating
with HCC to restructure its obligations and, in that connection, has entered
into a standstill agreement with HCC. Under the standstill agreement, all
payments of principal and interest due from HCC during the period from March 1,
2000 through December 1, 2000 with respect to an intercompany note more fully
described in Note 7 have been deferred until January 1, 2001 in consideration of
HCC's agreement not to demand payment of principal or interest on the demand
notes owed by GBCC (see (1) above). The fair market value of GBCC's assets is
substantially less than its existing obligations to HCC. Accordingly, management
anticipates that any restructuring of GBCC's obligations will result in the
conveyance of all of its assets (or the proceeds from the sale of its assets) to
HCC, resulting in no cash or other assets remaining available for distribution
to the Company's shareholders. Any restructuring of GBCC's obligations,
consensual or otherwise, will require
11
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
the Company to file for protection under federal bankruptcy laws and will
ultimately result in liquidation of the Company.
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.
GB Holdings, Inc. and Subsidiaries -
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"). On June 1,
1999, a plan of reorganization was filed by the debtors with the New Jersey
Bankruptcy Court. The reorganization plan, as filed, provided for the secured
bondholders to receive new debt and 100% of the equity ownership of Holdings in
exchange for their current claims and for unsecured creditors to receive a
partial cash settlement of their claims. Subsequent to the filing of a
reorganization plan by the debtors, two competing plans were filed by (1) Park
Place Entertainment Corporation, a large and diversified gaming company with
significant operations in Atlantic City, and (2) jointly by High River Limited
Partnership ("High River"), an entity controlled by Carl C. Icahn, and by the
Official Committee of Unsecured Creditors (the "Joint Plan"). On August 14,
2000, the New Jersey Bankruptcy Court confirmed the Joint Plan . The Sands
subsequently transferred 46.3% of its equity interests to High River in exchange
for $65 million in cash and the secured bondholders received $110 million in new
notes plus the remaining equity interests in exchange for the $182.5 million of
first mortgage notes in default. No distributions were made to the previous
shareholders, including Greate Bay Holdings, L.L.C., an indirect, wholly owned
subsidiary of GBCC, which held 79% of the outstanding common stock of Holdings
(see Note 9).
As a result of the Chapter 11 filings, GBCC's control over the filing
subsidiaries was subject to supervision of the New Jersey Bankruptcy Court and
GBCC did 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 (see Note 10), GBCC no longer
participated in the management of the Sands. Accordingly, Holdings, GB Property
Funding and GBHC have not been included in the accompanying consolidated
financial statements of GBCC.
Pratt Casino Corporation and Subsidiaries -
The filings under Chapter 11 by Holdings, GB Property Funding and GBHC
resulted in a default under the indenture for $85,000,000 principal amount of
11.625% 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 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
12
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GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
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.
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 voting 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 its 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.
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 which consisted primarily of claims against Holdings, GB Property Funding
and GBHC in their Chapter 11 proceedings. In connection with the Restructuring,
PRT Funding paid deferred interest amounting to $6,768,000 to the bondholders on
April 30, 1999.
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. On October 13,
1999, GBCC sold its ownership of PCC to HCC. At the time of the sale, PCC's
assets consisted of the limited partnership interest and the consulting
agreement valued in the aggregate at $40,329,000 and its liabilities consisted
of an obligation in the amount of $40,329,000 payable in satisfaction of the PRT
Funding Notes. HCC settled the obligation on October 14, 1999. 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 Greate Bay Holdings, L.L.C. for the benefit of the PRT Funding
noteholders (see Note 9).
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, GBCC's investment in PCC and its subsidiaries as well as certain
intercompany balances with PCC and its subsidiaries were revalued to a zero
basis effective on May 25, 1999. For periods from May 25, 1999 until the sale of
PCC to HCC on October 13, 1999, GBCC accounted for its investment in PCC under
the cost method of accounting.
Other Filings -
On June 30, 2000, three inactive, wholly owned, indirect subsidiaries of
GBCC filed for liquidation under Chapter 7 of the United States Bankruptcy Code
in the United States Bankruptcy Court for the District of Delaware. The
subsidiaries were originally formed to acquire property and build a second
casino/hotel
13
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
in Atlantic City, New Jersey. These plans were subsequently abandoned; however,
the companies remained in existence pending the outcome of certain litigation
which was substantially resolved in 1996. The filings did not and are not
expected to have a significant effect on the operations or financial position of
GBCC.
Financial Reporting -
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America 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 December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin 101, "Revenue Recognition in Financial Statements," which
summarizes the application of generally accepted accounting principles to
revenue recognition in financial statements and which is effective for fiscal
year end 2000 financial statements. GBCC does not believe the adoption of Staff
Accounting Bulletin 101 will have a significant impact on its consolidated
financial position or results of operations.
The consolidated financial statements as of September 30, 2000 and for the
three and nine month periods ended September 30, 2000 and 1999 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, 2000 and the results of its operations for
the three and nine month periods ended September 30, 2000 and 1999 and its cash
flows for the nine month periods ended September 30, 2000 and 1999.
(2) Earnings per common share
Basic earnings per common share is calculated by dividing the net (loss)
income by the weighted average number of shares of common stock outstanding.
Diluted earnings per common share is calculated for any period in which income
from continuing operations was earned by dividing the components of net (loss)
income by the weighted average number of shares of common stock and potential
common shares outstanding. For each of the three and nine month periods ended
September 30, 2000 and 1999, there were no potential common shares outstanding
and basic and diluted earnings per share were the same. The weighted average
number of shares of common stock used in the calculation of both basic and
diluted earnings per share was 5,186,627 for each of the three and nine month
periods ended September 30, 2000 and 1999.
3) Revenue recognition
ACSC licenses casino information technology systems to affiliates of GBCC
as well as to non-affiliated casino companies. Revenue is generally recognized
when all significant contractual obligations have been satisfied and collection
is reasonably assured. Revenue from hardware and inventory sales is recognized
upon delivery and acceptance. Revenue from services is recognized upon
performance.
14
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Certain of ACSC's sales of software to third parties are pursuant to
agreements which specify modifications to be made, require on-going vendor
support or provide for other specialized terms and conditions. In recognizing
revenue under such agreements, ACSC has adopted and complies with the reporting
requirements of Statement of Position 97-2, "Software Revenue Recognition" ("SOP
97-2") issued by the American Institute of Certified Public Accountants. The
provisions of SOP 97-2 require, among other things, that revenue from software
sales that do not require significant production, modification or customization
be recognized when evidence of an arrangement exists, delivery has occurred, the
fee is fixed as determinable and collectability is probable. Software sales for
which significant modifications are required are recognized under a percentage-
of-completion method based on costs incurred to date compared with total
estimated costs. Profit estimates on such contracts are reviewed periodically
whenever there is a change in facts or circumstances. Any losses on a contract
would result in the full amount of the loss being recognized immediately.
Costs and estimated earnings in excess of billings on contracts in progress
represent recoverable costs and the estimated profits thereon which have not yet
been billed to the customer. Unearned revenues of $2,231,000 and $133,000 at
September 30, 2000 and December 31, 1999, respectively, represent deposits or
prepayments received by customers for services yet to be performed. Such advance
payments are applied over the lives of the contracts.
4) Borrowings from Affiliate
GBCC and its subsidiaries had outstanding affiliate borrowings from HCC of
$6,750,000 as of both September 30, 2000 and December 31, 1999. During the third
quarter of 1996, GBCC borrowed $6,500,000 from HCC on a demand basis with
interest at the rate of 13.75% per annum payable quarterly commencing October 1,
1996; such funds were loaned by GBCC to GBHC for working capital purposes on the
same terms. On September 2, 1998, the working capital loans to GBHC were
cancelled as part of a settlement agreement among GBCC and Holdings, together
with certain of their subsidiaries, and HCC (see Note 10). In addition, a
$250,000 loan from HCC with interest at the rate of 14% per annum payable
semiannually was due on April 1, 1998 and remains outstanding. These borrowings
from HCC are currently subject to a standstill agreement (see Notes 1 and 7).
During October 2000, GBCC paid $900,000 of the outstanding principal balance and
agreed to offset an additional $146,000 of principal against other receivables
due from HCC while negotiations to restructure the debt continue.
15
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(5) Long-Term Debt and Pledge of Assets
Long-term debt consists of the following:
September 30, December 31,
2000 1999
------------- ------------
14.875% secured promissory note, due 2006,
net of discount of $2,534,000 and $7,157,000,
respectively $ 45,069,000 $ 40,446,000
Less - current maturities - -
------------- ------------
Total long-term debt $ 45,069,000 $ 40,446,000
============= ============
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 15.5%
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 14.875% 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 7). 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. 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.
No interest was paid during the nine month period ended September 30, 2000.
Interest paid amounted to $6,768,000 during the nine month period ended
September 30, 1999.
16
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(6) Income Taxes
GBCC's (provision) benefit for income taxes consists of the following:
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ----------------------
2000 1999 2000 1999
--------- --------- ---------- ---------
Federal income tax
benefit (provision):
Current $ - $ (4,000) $ - $ (29,000)
Deferred (388,000) (814,000) 1,036,000 (722,000)
State income tax benefit
(provision):
Current (80,000) (32,000) (66,000) (32,000)
Deferred 11,000 640,000 14,000 (2,000)
Valuation allowance 388,000 174,000 (1,036,000) 722,000
--------- --------- ---------- ---------
$ (69,000) $ (36,000) $ (52,000) $ (63,000)
========= ========= ========== =========
GBCC paid no federal income taxes during the nine month period ended
September 30, 2000; federal income taxes of $25,000 were paid during the nine
month period ended September 30, 1999. GBCC paid state income taxes totaling
$1,000 and $103,000, respectively, during the nine month periods ended September
30, 2000 and 1999.
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 timing of deductions
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.
As a result of a settlement agreement entered into in September 1998 (see
Note 10), Holdings and its subsidiaries are no longer included in the
consolidated tax return of GBCC for periods subsequent to December 31, 1998. The
deconsolidation and sale of PCC and its subsidiaries has also resulted in those
entities no longer being included in GBCC's consolidated tax return for periods
subsequent to October 1999. As of September 30, 2000, GBCC and its subsidiaries,
exclusive of Holdings and its subsidiaries, have net operating loss
carryforwards ("NOL's") totaling approximately $17,700,000 for federal income
tax purposes, none of which begin to expire until the year 2012. Additionally,
GBCC and its subsidiaries have alternative minimum tax and other tax credits
available totaling approximately $29,000 and $511,000, respectively. Alternative
minimum tax credits do not expire and the other tax credits expire in 2000
($97,000) and 2001 ($414,000). Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes" ("SFAS 109"), requires that the tax benefit
of such NOL's, credit carryforwards and deferred tax assets resulting from
17
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
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.
September 30, December 31,
2000 1999
------------- ------------
Deferred tax assets:
Net operating loss carryforwards $ 6,009,000 $ 5,060,000
Allowance for doubtful accounts 97,000 94,000
Investment and jobs tax credits 511,000 511,000
Other 109,000 11,000
Alternative minimum tax credit 29,000 29,000
----------- -----------
Total deferred tax assets 6,755,000 5,705,000
Valuation allowance (6,719,000) (5,683,000)
----------- -----------
$ 36,000 $ 22,000
=========== ===========
Classified as:
Other current assets $ 21,000 $ 9,000
Deferred tax asset 15,000 13,000
----------- -----------
$ 36,000 $ 22,000
=========== ===========
Sales or purchases of GBCC common stock by certain five percent
stockholders, as defined in the Internal Revenue Code of 1986, as amended (the
"Code"), can cause a "change of control", as defined in Section 382 of the Code,
which would limit the ability of GBCC to utilize these loss carryforwards in
later tax periods. Should such a change of control occur, the amount of annual
loss carryforwards available for use would most likely be substantially reduced.
Future treasury regulations, administrative rulings or court decisions may also
effect GBCC's future utilization of its loss carryforwards.
GBCC was included in the consolidated federal income tax returns of HCC
until HCC distributed the stock of GBCC it owned to its shareholders on December
31, 1996. The Internal Revenue Service has been 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
and resulted in adjustments to GBCC's consolidated NOL's and deferred tax
assets, but in no additional tax obligations. The Internal Revenue Service is
continuing its examination of the consolidated federal income tax returns
18
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
of HCC, including GBCC, for 1995 and 1996. Until such examination is completed,
allocations of tax attributes and additional alternative minimum tax or regular
tax obligations, if any, can not be determined. 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.
(7) Transactions with Related Parties
In April 1997, 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 5) 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 was 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 note was amended as of
the October 1999 acquisition of PCC by HCC (see Note 1) to provide for monthly
installments of $83,000 including interest and additional quarterly principal
payments of $21,000 beginning January 1, 2000. PPI Corporation and HCC have
entered into agreements to defer all payments of principal and interest on the
note otherwise due during the period from March 1, 2000 through December 1,
2000. These deferrals do not extend the maturities or represent a forgiveness
of either principal or interest as all past due amounts, if not otherwise
restructured, will become due and payable on the extended payment date of
January 1, 2001. The outstanding note balances at September 30, 2000 and
December 31, 1999 are $1,893,000 and $2,033,000, respectively. Of these
balances, $1,422,000 and $853,000, respectively, are included in current amounts
due from affiliate and $471,000 and $1,180,000, respectively, are included in
noncurrent note receivable from affiliate at September 30, 2000 and December 31,
1999. Interest income on the note from HCC amounted to $66,000 and $84,000,
respectively, during the three month periods ended September 30, 2000 and 1999
and $199,000 and $267,000, respectively, during the nine month periods ended
September 30, 2000 and 1999. Accrued interest receivable of $175,000 and
$24,000, respectively, is included in amounts due from affiliates in the
accompanying consolidated balance sheets at September 30, 2000 and December 31,
1999.
Pursuant to a consulting agreement which was terminated effective October
13, 1999 with Hollywood Casino - Tunica, Inc. ("HCT"), the HCC subsidiary which
owns and operates the Tunica Casino, PCC received monthly consulting fees of
$100,000. Fees amounting to $477,000 are included in the accompanying
consolidated statement of operations for the nine month period ended September
30, 1999. Effective May 25, 1999, GBCC discontinued recognizing the income of
PCC, including income earned with respect to the consulting agreement.
HCC and its subsidiaries allocate certain general and administrative costs
to GBCC and its subsidiaries pursuant to services agreements and GBCC allocates
certain of its administrative costs to HCC. Net allocated costs and fees
charged to GBCC and its subsidiaries by HCC and its subsidiaries amounted to
$74,000 and $157,000, respectively, during the three month periods ended
September 30, 2000 and 1999 and $225,000 and $466,000, respectively, during the
nine month periods ended September 30, 2000 and 1999. In connection with such
charges, net payables in the amount of $11,000 and $20,000 are included in the
accompanying consolidated balance sheets at September 30, 2000 and December 31,
1999, respectively.
19
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
ACSC provides computer, marketing and other administrative services to GBHC
and to HCC and its subsidiaries. Computer services provided include hardware,
software and operator support and, for the most part, such services are billed
by ACSC at its direct cost plus expenses incurred. ACSC and HCT entered into a
Computer Services Agreement dated as of January 1, 1994 and renewed through
December 31, 1999 to provide such services and to license or sublicense to HCT
computer software necessary to operate HCT's casino, hotel and related
facilities and business operations. HCT paid ACSC for such equipment and
licensed such software at amounts and on terms and conditions that ACSC provided
to unrelated third parties. HCT also paid ACSC a fixed license fee of $33,600
per month. ACSC also provided services to HCA through HCA's management agreement
with PML. ACSC's service agreements with PML and HCT terminated on October 13
and December 31, 1999, respectively. ACSC has continued to provide services to
HCA and HCT on an as needed basis at third party consulting rates. ACSC entered
into new maintenance and support agreements with HCT and HCA effective as of
January 1, 2000 which provide for an aggregate monthly fee of $26,000 (subject
to change upon 60 days written notice) plus additional services at rates charged
by ACSC to third parties. The agreement has an initial term of one year with
automatic annual renewals unless notice of termination is given. ACSC's billings
to HCC and its subsidiaries for such services amounted to $164,000 and $214,000,
respectively, for the three month periods ended September 30, 2000 and 1999 and
$710,000 and $794,000, respectively, for the nine month periods ended September
30, 2000 and 1999. Unpaid charges from HCC and its subsidiaries included in due
from affiliates in the accompanying consolidated balance sheets at September 30,
2000 and December 31, 1999 amounted to $52,000 and $106,000, respectively.
Billings to GBHC amounted to $135,000 and $162,000, respectively, for the three
month periods ended September 30, 2000 and 1999 and $372,000 and $626,000,
respectively, for the nine month periods ended September 30, 2000 and 1999.
Unpaid charges from GBHC included in due from affiliates in the accompanying
consolidated balance sheets at September 30, 2000 and December 31, 1999 amounted
to $110,000 and $76,000, respectively.
ACSC is also providing and installing casino system software to a new HCC-
owned casino property presently under construction in Shreveport, Louisiana.
Total amounts billed during both the three and nine month periods ended
September 30, 2000 amounted to $1,126,000. The accompanying consolidated
balance sheet at September 30, 2000 includes receivables in the amount of
$19,000 in due from affiliates and costs and estimated earnings in excess of
billings in the amount of $620,000 with respect to the Shreveport installation.
ACSC has outstanding payables to GBHC amounting to $159,000 at both
September 30, 2000 and December 31, 1999 included in accounts payable in the
accompanying consolidated balance sheets.
Interest expense with respect to borrowings from HCC is set forth below:
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
PPI Funding Notes (Note 5) $ 1,614,000 $ 1,374,000 $ 4,623,000 $ 3,980,000
Other borrowings (Note 4) 237,000 237,000 706,000 704,000
20
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Accretion of interest on the PPI Funding Notes is included in the
outstanding note payable balances at September 30, 2000 and December 31, 1999.
Interest accrued on short-term borrowings at September 30, 2000 and December 31,
1999, which amounted to $3,428,000 and $2,722,000, respectively, is included in
interest payable in the accompanying consolidated balance sheets.
(8) Investment in Pratt Management, L.P.
Prior to the Restructuring in October 1999 (see Note 1), 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
$7,273,000, respectively, during the three and nine month periods ended
September 30, 1999. PML also incurred operating and other expenses amounting to
$406,000 and $997,000, respectively, during the three and nine month periods
ended September 30, 1999.
(9) Greate Bay Holdings, L.L.C.
Greate Bay Holdings, L.L.C. is an indirect, wholly owned limited liability
subsidiary of GBCC formed in October 1999 for the purpose of holding the
remaining assets of PCC not acquired by HCC in connection with the
Restructuring. Such assets consist primarily of claims against Holdings, GB
Property Funding and GBHC in their Chapter 11 proceedings. Greate Bay Holdings,
L.L.C. has no operating activities and all transactions, once approved by the
Delaware Bankruptcy Court, are accounted for as an adjustment to its net assets
and obligations. In accordance with the plan of reorganization confirmed by the
Delaware Bankruptcy Court in October 1999, the holders of the PRT Funding Notes
will at some future date receive whatever assets of Greate Bay Holdings, L.L.C.
remain in final settlement of their claims. Accordingly, because control by
GBCC of Greate Bay Holdings, L.L.C. is temporary and because all of its net
assets have an offsetting liability to the holders of the PRT Funding Notes, the
accounts of Greate Bay Holdings, L.L.C. are not included in the accompanying
consolidated balance sheets of GBCC.
21
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The schedule below sets forth the accounts of Greate Bay Holdings, L.L.C.:
September 30, December 31,
2000 1999
------------- ------------
Cash and cash equivalents $ 109,000 $ 402,000
Receivables from Holdings and its subsidiaries (a) 879,000 23,247,000
Receivable from Park Place Entertainment 300,000 -
------------- ------------
Total assets 1,288,000 23,649,000
------------- ------------
Accounts payable and accrued liabilities 9,000 156,000
Due to holders of PRT Funding Notes (a) 1,185,000 23,254,000
Litigation reserve as established by the plan
of reorganization 94,000 239,000
------------- ------------
Total obligations 1,288,000 23,649,000
------------- ------------
Net assets $ - $ -
============= ============
_______________________
(a) As a consequence of the confirmation of the Joint Plan, intercompany notes
and accrued interest which had a carrying amount of $22,368,000 are now
considered fully impaired. Greate Bay Holdings, L.L.C. received $711,000
from Holdings during October 2000 in satisfaction of certain receivables;
however, it expects to realize less than the remaining $168,000 carrying
amount of receivables from Holdings. Amounts due to holders of the PRT
Funding Notes will be reduced correspondingly.
(10) 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. On June 1, 1999, a plan of
reorganization was filed by the debtors with the New Jersey Bankruptcy Court.
Subsequent to this filing, two competing plans were filed, including the Joint
Plan (see Note 1). On August 14, 2000, the New Jersey Bankruptcy Court
confirmed the Joint Plan. The Sands subsequently transferred 46.3% of its
equity interests to High River in exchange for $65 million in cash and the
secured bondholders received $110 million in new notes plus the remaining equity
interests in exchange for the $182.5 million of first mortgage notes in default.
No distributions were made to the previous shareholders.
22
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
On May 22, 1998, GBHC filed a motion with the New Jersey Bankruptcy Court
seeking to reject its management agreement with New Jersey Management, Inc.
("NJMI"), a wholly owned subsidiary of GBCC. A substitute 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 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.
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, (1) 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 (2) 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 right to receive the additional $500,000 payment was subsequently
conveyed to Greate Bay Holdings, L.L.C. (Note 9). The agreement also provided
that on or before December 31, 1998, GBCC would cause Holdings and its
subsidiaries to be deconsolidated from the GBCC federal income tax return by
means of transferring 21% of the stock ownership of Holdings to an
unconsolidated entity. Such transfer was accomplished effective as of December
31, 1998. In addition, the settlement agreement also allowed GBHC to offset its
working capital loan from GBCC in the amount of $8,000,000 together with
interest accrued thereon against a claim asserted by GBHC against GBCC under
certain tax allocation agreements.
GBCC licenses the "Sands" name under a license agreement dated as of May
19, 1987, which rights with respect to Atlantic City, New Jersey were
sublicensed to GBHC. The license agreement has a term of 99 years and requires a
royalty payment for each location of the greater of 1.5% of gross room charges,
as defined in the agreement, payable monthly, or $100,000 per calendar year.
GBCC has entered into an agreement with the licensor whereby GBCC agreed to
relinquish all rights under the license agreement with respect to Atlantic City
and the licensor agreed to release GBCC from all liability and responsibility
with respect to Atlantic City. The agreement became effective on the September
29, 2000 Effective Date of the Joint Plan. The Joint Plan provides for a
substituted license agreement between GBHC and the licensor. GBCC does not
currently operate any properties under the "Sands" name.
23
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Other Filings -
On June 30, 2000, three inactive, wholly owned, indirect subsidiaries of
GBCC filed for liquidation under Chapter 7 of the United States Bankruptcy Code
in the United States Bankruptcy Court for the District of Delaware. The
subsidiaries were originally formed to acquire property and build a second
casino/hotel in Atlantic City, New Jersey. These plans were subsequently
abandoned; however, the companies remained in existence pending the outcome of
certain litigation which was substantially resolved in 1996. The filings did
not and are not expected to have a significant effect on the operations or
financial position of GBCC.
Planet Hollywood Litigation -
In 1996, Planet Hollywood International, Inc. and Planet Hollywood (Region
IV), Inc. filed a complaint in the United States District Court for the Northern
District of Illinois, Eastern Division, against GBCC and HCC and certain of its
subsidiaries seeking (1) a declaratory judgment that it was entitled to use the
name "Planet Hollywood" for a casino and (2) damages. In its complaint, Planet
Hollywood alleged, among other things, that GBCC and HCC had, in operating the
Hollywood Casino concept, infringed on their trademark, service mark and trade
dress and had engaged in unfair competition and deceptive trade practices. GBCC
and HCC and its subsidiaries filed counterclaims seeking (1) a declaratory
judgment that Planet Hollywood was not entitled to use the name "Planet
Hollywood" for a casino and (2) damages. The counterclaims alleged, among other
things, that Planet Hollywood had, through its planned use of its mark in
connection with casino services, infringed on GBCC and HCC's service marks and
trade dress and had engaged in unfair competition. The trial commenced on July
19, 1999 and was completed on July 26, 1999. On August 25, 1999, GBCC and HCC
and the other defendants filed a motion to dismiss the declaratory judgment
claims of all parties asserting, among other things, that as a result of Planet
Hollywood's reported deteriorating financial condition and perceived inability
to enter into the casino business, there was 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. On December 3, 1999 the judge entered a judgment in favor of GBCC and HCC
with respect to the damage claims brought by Planet Hollywood and granted their
motion to dismiss the declaratory judgment claims of all parties. Planet
Hollywood has filed a notice of appeal of the judgment with the Seventh Circuit
Court of Appeals.
Other Litigation -
On October 8, 1998, GBCC and HCC filed a complaint against their former
independent accountants and tax advisors in the District Court of Dallas County,
Texas. On September 8, 2000, a mutually acceptable agreement was reached
concluding the dispute and resulting in the dismissal of the lawsuit.
(11) Operating Leases
GBCC and its subsidiaries lease office space and operating equipment under
lease agreements accounted for as operating leases. The lease agreements expire
at various dates through the year 2004 and several contain automatic renewals
unless notice of termination is given. Total rental expense amounted to
$106,000, and $98,000, respectively, during the three month periods ended
September 30, 2000 and 1999
24
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
and $311,000 and $290,000, respectively, during the nine month periods ended
September 30, 2000 and 1999.
Future minimum lease payments as of September 30, 2000 under operating
leases having an initial or remaining noncancelable lease term in excess of one
year are as follows:
2000 (three months) $ 95,000
2001 351,000
2002 173,000
2003 4,000
2004 2,000
---------
$ 625,000
=========
(12) 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,
------------------------- ------------------------
2000 1999 2000 1999
------------ ---------- ----------- -----------
<S> <C> <C> <C> <C>
Total percentage of period
revenues attributable to
installation contracts 55.6% 72.0% 67.6% 70.1%
Percentage of period revenues
attributable to affiliate sales 27.0% 11.8% 17.9% 16.5%
</TABLE>
(13) Reclassifications
Certain reclassifications have been made to the prior year's consolidated
financial statements to conform to the 2000 consolidated financial statement
presentation.
25
<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 ACSC's operations,
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: (1) non-casino operations and the management thereof, (2) management
services for casino operations and (3) 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 and the confirmation of the Joint Plan
on August 14, 2000, GBCC no longer holds an equity position in the Sands.
Accordingly, GBCC's current business activity consists solely of the operations
of ACSC.
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, 2000
and 1999 are set forth below:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- --------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
System sales and support service
revenues $ 4,644,000 $ 1,587,000 $ 9,509,000 $ 5,200,000
----------- ----------- ----------- -----------
Cost of sales 2,008,000 462,000 4,098,000 2,277,000
Marketing 415,000 291,000 872,000 425,000
System development and support
services 924,000 703,000 2,559,000 1,903,000
General and administrative 493,000 355,000 1,315,000 1,000,000
Depreciation 44,000 46,000 139,000 135,000
----------- ----------- ----------- -----------
3,884,000 1,857,000 8,983,000 5,740,000
----------- ----------- ----------- -----------
Income (loss) from operations $ 760,000 $ (270,000) $ 526,000 $ (540,000)
=========== =========== =========== ===========
</TABLE>
26
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
The improvement in operating results during the third quarter and nine
month period of 2000 from the same periods in 1999 is primarily due to the
increased volume of system sales and installation contracts in the current year
as explained in "Results of Operations".
ACSC's computer service revenues are derived primarily from system
installation contracts and 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,
------------------------ ------------------------
2000 1999 2000 1999
---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Total percentage of period
revenues attributable to
installation contracts 55.6% 72.0% 67.6% 70.1%
Percentage of period revenues
attributable to affiliate sales 27.0% 11.8% 17.9% 16.5%
</TABLE>
At September 30, 2000, GBCC and its subsidiaries had debt outstanding to
HCC consisting of (1) demand notes (the "GBCC Notes") and accrued interest
thereon totaling $10.2 million and (2) a 14.875% secured promissory note due
2006 (the "PPI Funding Notes") which had a discounted value of $45.1 million.
ACSC's operations do not generate sufficient cash flow to provide debt service
on the HCC demand notes and, consequently, GBCC is currently insolvent.
Additionally, semi-annual interest payments of approximately $3.5 million
attributable to the PPI Funding Notes become payable commencing in February
2001. Accordingly, GBCC is currently negotiating with HCC to restructure its
obligations and, in that connection, has entered into a standstill agreement
with HCC. Under the standstill agreement, all payments of principal and interest
due from HCC during the period from March 1, 2000 through December 1, 2000 with
respect to an intercompany note more fully described in Note 7 of the Notes to
Consolidated Financial Statements have been deferred until January 1, 2001 in
consideration of HCC's agreement not to demand payment of principal or interest
on the GBCC Notes. The fair market value of GBCC's assets is substantially less
than its existing obligations to HCC. Accordingly, management anticipates that
any restructuring of GBCC's obligations will result in the conveyance of all of
its assets (or the proceeds from the sale of its assets) to HCC, resulting in no
cash or other assets remaining available for distribution to the Company's
shareholders. Any restructuring of GBCC's obligations, consensual or otherwise,
will require the Company to file for protection under federal bankruptcy laws
and will ultimately result in liquidation of the Company.
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.
27
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Financing Activities
During 1994, GBCC issued the PPI Funding Notes to HCC in exchange for $38.8
million principal amount of 15.5% notes issued by another GBCC subsidiary and
held by HCC. The 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.
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, among other things, the assignment of a portion of the PPI
Funding Notes to PPI Corporation and a new note in the original amount of $3.8
million. Principal and interest payments by HCC on the $3.8 million note
approximate the general partner's share of annual partnership distributions made
to HCC while PML held the Aurora management contract. GBCC and HCC have entered
into standstill agreements to defer all payments of principal and interest on
the note otherwise due during the period from March 1, 2000 through December 1,
2000. These deferrals do not extend the maturities or represent a forgiveness of
either principal or interest as all past due amounts, if not otherwise
restructured, will become due and payable on the extended payment date of
January 1, 2001.
The GBCC Notes consist primarily of $6.5 million borrowed from HCC during
the third quarter of 1996. Such borrowings accrue interest at the rate of
13.75% per annum payable quarterly commencing October 1, 1996. GBCC loaned the
proceeds from this loan to GBHC on similar terms. The loan to GBHC along with
the related interest receivable were cancelled as part of a settlement agreement
approved by the New Jersey Bankruptcy Court on September 2, 1998. Although
payment of the GBCC Notes is on a demand basis, HCC has agreed not to demand
payment as part of the standstill agreements described in the previous
paragraph. During October 2000, GBCC paid $900,000 of the outstanding principal
balance of the GBCC Notes to HCC and agreed to offset an additional $146,000 of
principal against other receivables due from HCC while negotiations to
restructure GBCC's debt continue.
As previously described, GBCC is currently negotiating with HCC to
restructure its obligations. The fair market value of GBCC's assets is
substantially less than its existing obligations to HCC. Accordingly,
management anticipates that any restructuring of GBCC's obligations will result
in the conveyance of all of its assets (or the proceeds from the sale of its
assets) to HCC, resulting in no cash or other assets remaining available for
distribution to the Company's shareholders. Any restructuring of GBCC's
obligations, consensual or otherwise, will require the Company to file for
protection under federal bankruptcy laws and will ultimately result in
liquidation of the Company.
Capital Expenditures and Other Investments
Property and equipment additions during the nine month period ended
September 30, 2000 totaled $108,000; management anticipates that capital
expenditures during the remainder of 2000, consisting only of ongoing equipment
replacements and enhancements at ACSC, will not be significant.
28
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
RESULTS OF OPERATIONS
General
As a result of the filings by Holdings, GB Property Funding, and GBHC, GBCC
did not expect to have ownership or operating control of such subsidiaries after
reorganization. For the three and nine month periods ended September 30, 2000
and 1999, the accompanying consolidated statements of operations reflect the
operations of Holdings and its subsidiaries under the cost method of accounting.
The accompanying consolidated statements of operations for the three and
nine month periods during 1999 include the activities of PCC, NJMI and PRT
Funding on a consolidated basis only through May 25, 1999, the date on which
these entities filed petitions under Chapter 11. GBCC accounted for its
investment in these three entities under the cost method of accounting for the
period from May 25, 1999 until their sale in October 1999 to HCC as part of the
plan of reorganization approved by the Delaware Bankruptcy Court.
HCC acquired the general partnership interest in PML from a subsidiary of
GBCC effective April 1, 1997. From that date until October 14, 1999, PCC
continued to hold the limited partnership interest in PML. This interest is
presented under the equity method of accounting in the accompanying consolidated
statements of operations during the three and nine month periods ended September
30, 1999 only through PCC's May 25, 1999 Chapter 11 filing date.
Revenues
System sales and support service revenues earned by ACSC increased $3.1
million (192.6%) and $4.3 million (82.9%), respectively, during the three and
nine month periods ended September 30, 2000 compared to the prior year periods.
Such increases were a result of increased system installations during 2000
compared to 1999. During 2000, ACSC provided services on four system
installation contracts, two of which were completed during the quarter. These
four contracts accounted for approximately $3.7 million of revenues during the
third quarter. By comparison, the 1999 third quarter period included revenues
with respect to a single system installation amounting to $973,000. For the
2000 nine month period, ACSC generated $7.5 million of revenue on five system
installations and upgrades compared to $3.3 million on two installations during
the 1999 nine month period. The addition of personnel during 1999 has better
positioned ACSC to service multiple contracts.
The recognition of consulting fees earned by PCC from the Tunica Casino,
which amounted to $477,000 during the first nine months of 1999, was
discontinued on May 25, 1999 upon the filing by PCC of its petition under
Chapter 11.
Cost of Sales
ACSC's cost of sales increased $1.5 million (334.6%) and $1.8 million
(80%), respectively, during the three and nine month periods ended September
30, 2000 compared to the same periods in 1999. The increases were a result of
increased contract installations during the 2000 periods compared to the same
periods of 1999. Cost of sales does not fluctuate proportionately with the
increase in revenues due to the mix
29
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
of revenues earned (sales versus support services) as well as to differences in
the profitability of system installation contracts resulting from the bidding
process.
Marketing Expenses
Marketing expenses for ACSC increased $124,000 (42.6%) and $447,000
(105.2%), respectively, during the three and nine month periods ended September
30, 2000 compared to the same periods during 1999. The increases reflect sales
commissions associated with the system sales and installation contract revenues
earned during the 2000 periods.
System Development and Support Service Expenses
System development and support services increased $221,000 (31.4%) and
$656,000 (34.5%), respectively, for the three and nine month periods ended
September 30, 2000 compared to the same periods in 1999. These increases result
from additional personnel and equipment costs.
General and Administrative Expenses
GBCC's consolidated general and administrative expenses decreased slightly
during the three and nine month periods ended September 30, 2000 compared to the
same periods in 1999. Reductions in corporate expenses resulting from the
curtailment of GBCC's operations other than ACSC offset the three and nine month
increases of $138,000 and $315,000, respectively, at ACSC resulting from the
expansion of its operations.
Interest
Interest income decreased slightly during the 2000 third quarter resulting
in a nine month decrease of $142,000 (26.8%) compared to the same period in 1999
as less cash was available for investment purposes and less interest was earned
on GBCC's note receivable from HCC as a result of principal reductions prior to
the standstill agreements.
Interest expense increased $242,000 (15%) during the 2000 third quarter
period resulting in a nine month decrease of $3.3 million (38.3%) compared to
the same period in 1999. Interest expense incurred on the PRT Funding Notes
prior to PRT Funding's filing under Chapter 11 on May 25, 1999 amounted to $4
million. The PRT Funding Notes were later settled as part of the Restructuring
in October 1999. Excluding interest with respect to the PRT Funding Notes, the
interest expense increases for the three and nine month periods ended September
30, 2000 reflect additional amortization of discount on the PPI Funding Notes.
Such increases amounted to $240,000 and $643,000, respectively, during the 2000
three and nine month periods compared to the like periods in 1999.
Equity in Earnings of Limited Partnership
During the first half of 1999, PCC continued to hold the limited
partnership interest in PML which earned management fees from the Aurora Casino.
The Agreement of Limited Partnership of PML provided for distributions to PCC of
1% of the first $84,000 of net income earned by PML each month and 99% of
30
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
any net income earned above such amount, with all remaining income distributed
to the general partner. GBCC reflected the equity in earnings of PML only
through the May 25, 1999 deconsolidation of PCC.
Restructuring Costs
Restructuring costs during 1999 relate to fees incurred with respect to the
Chapter 11 filings by PCC and its subsidiaries. Such costs ceased with the
deconsolidation of PCC in May 1999.
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 did not expect to have ownership or
operating control of these subsidiaries after reorganization. Accordingly,
these subsidiaries were 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 gains
amounting to $140,000 and $86.1 million, respectively, for the three and nine
month periods ended September 30, 1999. The third quarter gain of $140,000
represents an adjustment to the original estimate at May 25, 1999.
Income Tax Provision
As a result of a settlement agreement entered into in September 1998 (see
Note 10 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. The deconsolidation and sale of PCC
and its subsidiaries has also resulted in those entities no longer being
included in GBCC's consolidated tax return for periods subsequent to October
1999. Due to the 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. 109, "Accounting for Income Taxes", GBCC has provided valuation allowances
for substantially all of the deferred tax assets at September 30, 2000 and
December 31, 1999. The remaining deferred tax assets represent state timing
differences expected to be utilized.
GBCC was included in the consolidated federal income tax returns of HCC
until HCC distributed the stock of GBCC it owned to its shareholders on December
31, 1996. The Internal Revenue Service has been 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
and resulted in adjustments to GBCC's consolidated NOL's and deferred tax
assets, but in no additional tax obligations. The Internal Revenue Service is
continuing its examination of the consolidated federal income tax returns of
HCC, including GBCC, for 1995 and 1996. Until such examination is completed,
allocations of tax attributes and additional alternative minimum tax or regular
tax obligations, if any, can not be determined. 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.
31
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Year 2000 Compliance
At the beginning of the year 2000, computer programs that had date
sensitive software might have recognized a date using "00" as the year 1900
rather than 2000. Such an error could have resulted 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.
In preparation for the Year 2000, management conducted a program to prepare
the Company's computer systems and applications as well as its non-information
technology (embedded microchip) systems. Such program included the use of both
internal and external resources to test and, if necessary, modify or replace
software applications. Year 2000 date conversion projects were completed on a
timely basis and the cost of acquiring, testing and converting such systems
proved to be minimal. The Company also communicated with its significant
suppliers to determine the extent to which GBCC's information systems might have
been vulnerable to those third parties' failure to resolve their Year 2000
issues. Such suppliers either confirmed their compliance or new suppliers were
located.
As a result of its planning and implementation efforts, GBCC experienced no
significant disruptions to any of its computer systems and non-information
technology systems and management believes that all such systems have
successfully responded to the Year 2000 change. The Company also encountered no
significant Year 2000 problems with its vendors or suppliers. Management is
continuing to monitor the Company's systems and communicate with its suppliers
and vendors to ensure that any latent Year 2000 problems that might arise are
promptly addressed.
Market Risk
The Company does not have and does not expect to have any securities
subject to interest rate fluctuations. Management believes that all market risks
are immaterial.
Inflation
Management believes that in the near term, modest inflation, together with
competition for qualified and experienced personnel, will continue to cause
increases in operating expenses, particularly labor and employee benefits costs.
Seasonality
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
Subsidiary Chapter 11 Filings and Related Litigation -
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"). On
June 1, 1999, a plan of reorganization was filed by debtors with the New Jersey
Bankruptcy Court. The reorganization plan, as filed, provided for the secured
bondholders to receive a new debt and 100% of the equity ownership of Holdings
in exchange for their claims and for unsecured creditors to receive a partial
cash settlement of their claims. Subsequent to the filing of a reorganization
plan by the debtors, two competing plans were filed by (1) Park Place
Entertainment Corporation, a large and diversified gaming company with
significant operations in Atlantic City, and (2) jointly by High River Limited
Partnership ("High River"), an entity controlled by Carl C. Icahn, and by the
Official Committee of Unsecured Creditors (the "Joint Plan"). On August 14,
2000, the New Jersey Bankruptcy Court confirmed the Joint Plan. The Sands
subsequently transferred 46.3% of its equity interests to High River in exchange
for $65 million in cash and the secured bondholders received $110 million in new
notes plus the remaining equity interests in exchange for the $182.5 million of
first mortgage notes in default. No distributions were made to the previous
shareholders, including Greate Bay Holdings, L.L.C., an indirect, wholly owned
subsidiary of GBCC, which held 79% of the outstanding common stock of Holdings.
Other Filings -
On June 30, 2000, three inactive, wholly owned, indirect subsidiaries of
GBCC filed for liquidation under Chapter 7 of the United States Bankruptcy Code
in the United States Bankruptcy Court for the District of Delaware. The
subsidiaries were originally formed to acquire property and build a second
casino/hotel in Atlantic City, New Jersey. These plans were subsequently
abandoned; however, the companies remained in existence pending the outcome of
certain litigation which was substantially resolved in 1996. The filings did
not and are not expected to have a significant effect on the operations or
financial position of GBCC.
Planet Hollywood Litigation -
In 1996, Planet Hollywood International, Inc. and Planet Hollywood (Region
IV), Inc. filed a complaint in the United States District Court for the Northern
District of Illinois, Eastern Division, against GBCC and against HCC and certain
of its subsidiaries seeking (1) a declaratory judgment that it was entitled to
use the name "Planet Hollywood" for a casino and (2) damages. In its complaint,
Planet Hollywood alleged, among other things, that GBCC and HCC had, in
operating the Hollywood Casino concept, infringed on their trademark, service
mark and trade dress and had engaged in unfair competition and deceptive trade
practices. GBCC and HCC and its subsidiaries filed counterclaims seeking (1) a
declaratory judgment that Planet Hollywood was not entitled to use the name
"Planet Hollywood" for a casino and (2) damages. The counterclaims alleged,
among other things, that Planet Hollywood had, through its planned use of its
mark in connection with casino services, infringed on GBCC and HCC's service
marks and trade dress and had engaged in unfair competition. The trial
commenced on July 19, 1999 and was completed on July 26, 1999. On August 25,
1999, GBCC, HCC and the other defendants filed a motion to dismiss the
declaratory judgment claims of all parties asserting, among other things, that
as a result of Planet Hollywood's reported deteriorating financial condition
and perceived inability to enter into the casino business, there was no longer
any actual case or controversy. On October 12, 1999, Planet Hollywood (Region
IV), Inc. filed a
33
<PAGE>
petition for reorganization under Chapter 11 of the United States Bankruptcy
Code. On December 3, 1999 the judge entered a judgment in favor of GBCC and HCC
with respect to the damage claims brought by Planet Hollywood and granted their
motion to dismiss the declaratory judgment claims of all parties. Planet
Hollywood has filed a notice of appeal of the judgment with the Seventh Circuit
Court of Appeals.
Other Litigation -
On October 8, 1998, GBCC and HCC filed a complaint against their former
independent accountants and tax advisors in the District Court of Dallas County,
Texas. On September 8, 2000, a mutually acceptable agreement was reached
concluding the dispute and resulting in the dismissal of the lawsuit.
Item 6. - Exhibits and Reports on Form 8-K
The Registrant did not file any reports on Form 8-K during the quarter
ended September 30, 2000.
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 10, 2000 By: /s/ John C. Hull
------------------------- -------------------------------
John C. Hull
Chief Executive Officer
34
