<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 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 August 10, 2000
--------------------------------------- --------------------------------------
Common Stock, $.10 par value 5,186,627 shares
1
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
PART I: FINANCIAL INFORMATION
-----------------------------
Introductory Notes to Consolidated Financial Statements
-------------------------------------------------------
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". On December 31, 1996, Hollywood Casino Corporation ("HCC", a Delaware
corporation) which owned approximately 80% of the outstanding common stock of
GBCC, distributed such stock to its shareholders. As a result, approximately 36%
of GBCC's outstanding stock is owned by Jack E. Pratt, Edward T. Pratt, Jr. and
William D. Pratt and by certain general partnerships and trusts controlled by
the Pratts and by other family members (collectively, the "Pratt Family"). The
Pratt Family also owns approximately 54% of HCC, 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's 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 June 30, 2000 GBCC and its
subsidiaries had debt outstanding to HCC consisting of (1) demand notes and
accrued interest thereon totaling $9.9 million and (2) a 14.875% secured
promissory note due 2006 in the amount of $43.5 million. ACSC's operations do
not generate sufficient cash flow to provide debt service on the HCC demand
obligations 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 has commenced discussions 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 August 1, 2000 with
respect to an intercompany note as detailed in Note 7 of the Notes to
Consolidated Financial Statements have been deferred until September 1, 2000 in
consideration of HCC's agreement not to demand payment of principal or interest
on the demand notes owed by GBCC (see (1) above). There can be no assurance at
this time that the discussions with HCC will result in a restructuring of GBCC's
obligations to HCC. In addition, it is possible that any restructuring will
result in a conveyance of all of GBCC's remaining assets, including ACSC, to HCC
in order to satisfy GBCC's obligations to HCC. Any restructuring of GBCC's
obligations, consensual or otherwise, will require the Company to file for
protection under federal bankruptcy laws.
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,
2
<PAGE>
and by the Official Committee of Unsecured Creditors (the "Joint Plan"). On July
28, 2000, the New Jersey Bankruptcy Court issued its opinion approving the Joint
Plan under which the Sands will transfer 46.3% of its equity interests to High
River in exchange for $65 million in cash. The secured bondholders will receive
$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 will be
made to the present shareholders, including Greate Bay Holdings, L.L.C., an
indirect, wholly owned subsidiary of GBCC, which currently owns 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 is subject to supervision of the New Jersey Bankruptcy
Court and GBCC does not expect to have ownership or operating control of such
subsidiaries after reorganization. Furthermore, as a result of a settlement
agreement reached by GBCC and Holdings during September 1998, GBCC no longer
participates in the management of the Sands. Accordingly, Holdings, GB Property
Funding and GBHC are no longer included in the accompanying 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 June 30, 2000 and for the three
and six month periods ended June 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 June 30, 2000 and the results of its operations for the three and six
month periods ended June 30, 2000 and 1999 and its cash flows for the six month
periods ended June 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 June 30, 2000, and the related
condensed consolidated statements of operations for the three and six month
periods ended June 30, 2000 and 1999 and their cash flows for the six month
periods ended June 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
August 4, 2000
5
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
June 30,
2000 December 31,
(Unaudited) 1999
----------------- ------------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 4,370,000 $ 4,801,000
Accounts receivable, net of allowances of $28,000 1,567,000 391,000
Inventories 648,000 599,000
Costs and estimated earnings in excess of billings 610,000 126,000
Due from affiliates 1,490,000 1,088,000
Other current assets 609,000 473,000
----------------- -----------------
Total current assets 9,294,000 7,478,000
----------------- -----------------
Property and Equipment:
Operating equipment 826,000 771,000
Less - accumulated depreciation (530,000) (438,000)
----------------- -----------------
Net property and equipment 296,000 333,000
----------------- -----------------
Other Assets:
Note receivable from affiliate 720,000 1,180,000
Deferred income taxes 9,000 13,000
----------------- -----------------
Total other assets 729,000 1,193,000
----------------- -----------------
$ 10,319,000 $ 9,004,000
================= =================
</TABLE>
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
<TABLE>
<CAPTION>
June 30,
2000 December 31,
(Unaudited) 1999
----------------- -----------------
<S> <C> <C>
Current Liabilities:
Borrowings from affiliate $ 6,750,000 $ 6,750,000
Accounts payable 2,132,000 1,223,000
Accrued liabilities -
Salaries and wages 272,000 188,000
Interest 3,192,000 2,722,000
Other 153,000 15,000
Unearned revenues 908,000 133,000
Other current liabilities 32,000 32,000
----------------- ------------------
Total current liabilities 13,439,000 11,063,000
----------------- ------------------
Long-Term Debt 43,455,000 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 (122,306,000) (118,236,000)
----------------- ------------------
Total shareholders' deficit (46,575,000) (42,505,000)
----------------- ------------------
$ 10,319,000 $ 9,004,000
================= ==================
</TABLE>
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)
<TABLE>
<CAPTION>
Three Months Ended
June 30,
-------------------------------------
2000 1999
----------------- ---------------
<S> <C> <C>
Revenues:
System sales and support services $ 4,148,000 $ 1,708,000
Consulting fees - 177,000
----------------- -----------------
Total revenues 4,148,000 1,885,000
----------------- -----------------
Expenses:
Cost of sales 1,820,000 797,000
Marketing 414,000 125,000
System development and support services 904,000 588,000
General and administrative 818,000 789,000
Depreciation 48,000 45,000
----------------- -----------------
Total expenses 4,004,000 2,344,000
----------------- -----------------
Income (loss) from operations 144,000 (459,000)
----------------- -----------------
Non-operating income (expense):
Interest income 129,000 176,000
Interest expense (1,768,000) (3,046,000)
Equity in earnings of Limited Partnership - 638,000
Restructuring costs - (148,000)
Gain on elimination of investment in Pratt Casino Corporation - 85,989,000
----------------- -----------------
Total non-operating (expense) income, net (1,639,000) 83,609,000
----------------- -----------------
(Loss) income before income taxes (1,495,000) 83,150,000
Income tax (provision) benefit (50,000) 6,000
----------------- -----------------
Net (loss) income $ (1,545,000) $ 83,156,000
================= =================
Basic and diluted net (loss) income per common share $ (.30) $ 16.03
================= =================
</TABLE>
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated statements.
8
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
---------------------------------------
2000 1999
----------------- -----------------
<S> <C> <C>
Revenues:
System sales and support services $ 4,865,000 $ 3,613,000
Consulting fees - 477,000
----------------- -----------------
Total revenues 4,865,000 4,090,000
----------------- -----------------
Expenses:
Cost of sales 2,090,000 1,815,000
Marketing 457,000 134,000
System development and support services 1,635,000 1,200,000
General and administrative 1,449,000 1,486,000
Depreciation 95,000 89,000
----------------- -----------------
Total expenses 5,726,000 4,724,000
----------------- -----------------
Loss from operations (861,000) (634,000)
----------------- -----------------
Non-operating income (expense):
Interest income 252,000 388,000
Interest expense (3,478,000) (7,026,000)
Equity in earnings of Limited Partnership - 2,660,000
Restructuring costs - (230,000)
Gain on elimination of investment in Pratt Casino Corporation - 85,989,000
----------------- -----------------
Total non-operating (expense) income, net (3,226,000) 81,781,000
----------------- -----------------
(Loss) income before income taxes (4,087,000) 81,147,000
Income tax benefit (provision) 17,000 (27,000)
----------------- -----------------
Net (loss) income $ (4,070,000) $ 81,120,000
================= =================
Basic and diluted net (loss) income per common share $ (.79) $ 15.64
================= =================
</TABLE>
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated statements.
9
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
---------------------------------------
2000 1999
----------------- -----------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net (loss) income $ (4,070,000) $ 81,120,000
Adjustments to reconcile net (loss) income to net cash used in
operating activities:
Depreciation and amortization, including
accretion of debt discount 3,104,000 2,696,000
Equity in earnings of Limited Partnership - (2,660,000)
Gain on elimination of investment in Pratt
Casino Corporation - (85,989,000)
Distributions received from Limited Partnership - 4,038,000
Deferred income tax (benefit) provision (3,000) 2,000
Increase in accounts receivable (1,176,000) (49,000)
Increase (decrease) in accounts payable and
other accrued liabilities 1,601,000 (3,765,000)
Net change in other current assets and liabilities 31,000 (160,000)
Net change in noncurrent due from affiliates - 63,000
----------------- -----------------
Net cash used in operating activities (513,000) (4,704,000)
----------------- -----------------
INVESTING ACTIVITIES:
Purchases of property and equipment (58,000) (23,000)
Collections on notes receivable 140,000 351,000
Deconsolidation of Pratt Casino Corporation cash and
cash equivalents - (868,000)
---------------- -----------------
Net cash provided by (used in) investing activities 82,000 (540,000)
----------------- -----------------
Net decrease in cash and cash equivalents (431,000) (5,244,000)
Cash and cash equivalents at beginning of period 4,801,000 10,616,000
----------------- -----------------
Cash and cash equivalents at end of period $ 4,370,000 $ 5,372,000
================= =================
</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 owns the Sands is
currently in Chapter 11 proceedings and GBCC does not expect to have ownership
or operating control after reorganization. The GBCC subsidiary which held the
management and consulting contracts completed its reorganization under Chapter
11 in October 1999 and is no longer owned by GBCC. Accordingly, as further
described below, the activities of the subsidiaries which own the Sands and
which held the management contracts with the Aurora and Tunica casinos are no
longer included in the operating results of GBCC.
On December 31, 1996, Hollywood Casino Corporation ("HCC"), owner of
approximately 80% of the outstanding common stock of GBCC, distributed such
stock to its shareholders. As a result, approximately 36% of GBCC's outstanding
stock is owned by Jack E. Pratt, Edward T. Pratt, Jr. and William D. Pratt and
by certain general partnerships and trusts controlled by the Pratts and by other
family members (collectively, the "Pratt Family"). The Pratt Family also owns
approximately 54% of HCC, 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's only significant remaining operating activity is the
development, installation and maintenance of casino systems by ACSC. At June 30,
2000, GBCC and its subsidiaries had debt outstanding to HCC consisting of (1)
demand notes and accrued interest thereon totaling $9,942,000 (see Notes 4 and
7) and (2) a 14.875% secured promissory note due 2006 in the amount of
$43,455,000 (see Note 5). ACSC's operations do not generate sufficient cash flow
to provide debt service on the HCC demand obligations and, consequently, GBCC is
currently insolvent. Additionally, semi-annual interest payments of
approximately $3,540,000 million attributable to the 14.875% secured promissory
note become payable commencing in February 2001. Accordingly, GBCC has commenced
discussions 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 August 1, 2000 with respect to an intercompany note more fully
described in Note 7 have been deferred until September 1, 2000 in consideration
of HCC's agreement not to demand payment of principal or interest on the demand
notes owed by GBCC (see (1) above). There can be no assurance at this time that
the discussions with HCC will result in a restructuring of GBCC's obligations to
HCC. In addition, it is possible that any restructuring will result in a
conveyance of all of GBCC's remaining assets, including
11
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
ACSC, to HCC in order to satisfy GBCC's obligations to HCC. Any restructuring of
GBCC's obligations, consensual or otherwise, will require the Company to file
for protection under federal bankruptcy laws.
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"). Each company continues to operate in the ordinary course of business,
as set forth in the Bankruptcy Code, and each company's executive officers and
directors remain in office, subject to the jurisdiction of the New Jersey
Bankruptcy Court. On 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 July 28, 2000, the New Jersey Bankruptcy Court issued its opinion approving
the Joint Plan under which the Sands will transfer 46.3% of its equity interests
to High River in exchange for $65 million in cash. The secured bondholders will
receive $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 will be made to the present shareholders, including Greate Bay
Holdings, L.L.C., an indirect, wholly owned subsidiary of GBCC, which currently
owns 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 is subject to supervision of the New Jersey Bankruptcy Court and
GBCC does not expect to have ownership or operating control of such subsidiaries
after reorganization. Furthermore, as the result of a settlement agreement
reached by GBCC and Holdings during September 1998 (see Note 10), GBCC no longer
participates in the management of the Sands. Accordingly, Holdings, GB Property
Funding and GBHC are no longer 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
12
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
outstanding amounts applicable to the PRT Funding Notes. PRT Funding deferred
payment of interest due on the April 15 and October 15, 1998 and April 15, 1999
interest payment dates. On October 22, 1998, PRT Funding paid to the bondholders
an amount equal to a single semiannual interest payment ($4,941,000) while
negotiations to restructure the PRT Funding Notes continued.
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.
13
<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.
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 June 30, 2000 and for the
three and six month periods ended June 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 June 30, 2000 and the results of its operations for the three and six
month periods ended June 30, 2000 and 1999 and its cash flows for the six month
periods ended June 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 six month periods
ended June 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 six month
periods ended June 30, 2000 and 1999.
14
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(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.
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 $908,000 and
$133,000 at June 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 June 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).
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:
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
----------------- -----------------
<S> <C> <C>
14.875% secured promissory note, due 2006, net of
discount of $4,148,000 and $7,157,000,
respectively $ 43,455,000 $ 40,446,000
Less - current maturities - -
----------------- -----------------
Total long-term debt $ 43,455,000 $ 40,446,000
================= =================
</TABLE>
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 six month period ended June 30, 2000.
Interest paid amounted to $6,768,000 during the six month period ended June 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:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------------- ----------------------------------
2000 1999 2000 1999
--------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Federal income tax
benefit (provision):
Current $ - $ - $ - $ (25,000)
Deferred 553,000 (285,000) 1,424,000 92,000
State income tax
benefit (provision):
Current (51,000) 2,000 14,000 -
Deferred 1,000 (803,000) 3,000 (642,000)
Valuation allowance (553,000) 1,092,000 (1,424,000) 548,000
-------------- ---------------- --------------- ---------------
$ (50,000) $ 6,000 $ 17,000 $ (27,000)
============== ================ =============== ===============
</TABLE>
GBCC paid no federal income taxes during the six month period ended June
30, 2000; federal income taxes of $25,000 were paid during the six month period
ended June 30, 1999. GBCC paid state income taxes totalling $1,000 and $103,000,
respectively, during the six month periods ended June 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 June 30, 2000, GBCC and its subsidiaries,
exclusive of Holdings and its subsidiaries, have net operating loss
carryforwards ("NOL's") totaling approximately $18,900,000 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
temporary differences be recorded as an asset and, to the extent that management
can not assess that the
17
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
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.
The components of the net deferred tax asset are as follows:
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
----------------- -----------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 6,440,000 $ 5,060,000
Allowance for doubtful accounts 104,000 94,000
Investment and jobs tax credits 511,000 511,000
Other liabilities and accruals 78,000 11,000
Alternative minimum tax credit 29,000 29,000
--------------- ----------------
Total deferred tax assets 7,162,000 5,705,000
Deferred tax liability -
Depreciation (30,000) -
--------------- ----------------
Net deferred tax asset 7,132,000 5,705,000
Valuation allowance (7,107,000) (5,683,000)
--------------- ----------------
$ 25,000 $ 22,000
=============== ================
Classified as:
Other current assets $ 16,000 $ 9,000
Deferred tax asset 9,000 13,000
--------------- ----------------
$ 25,000 $ 22,000
=============== ================
</TABLE>
Sales or purchases of GBCC common stock by certain five percent
stockholders, as defined in the Internal Revenue Code of 1986, as amended (the
"Code"), can cause a "change of control", as defined in Section 382 of the Code,
which would limit the ability of GBCC to utilize these loss carryforwards in
later tax periods. Should such a change of control occur, the amount of annual
loss carryforwards available for 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
18
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
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. Due to the inclusion of Holdings
and its subsidiaries in such consolidated returns, an as yet undetermined
portion of any resulting tax liability to GBCC may be recoverable from Holdings.
As a result, management is presently unable to estimate the ultimate impact of
the examination on the consolidated financial position or results of operations
of GBCC.
(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 August 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
September 1, 2000. The outstanding note balances at June 30, 2000 and December
31, 1999 are $1,893,000 and $2,033,000, respectively. Of these balances,
$1,173,000 and $853,000, respectively, are included in current amounts due from
affiliate and $720,000 and $1,180,000, respectively, are included in noncurrent
note receivable from affiliate at June 30, 2000 and December 31, 1999. Interest
income on the note from HCC amounted to $67,000 and $89,000, respectively,
during the three month periods ended June 30, 2000 and 1999 and $133,000 and
$183,000, respectively, during the six month periods ended June 30, 2000 and
1999. Accrued interest receivable of $109,000 and $24,000, respectively, is
included in amounts due from affiliates in the accompanying consolidated balance
sheets at June 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 $177,000 and $477,000,
respectively, are included in the accompanying consolidated statement of
operations for the three and six month periods ended June 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
19
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
$82,000 and $152,000, respectively, during the three month periods ended June
30, 2000 and 1999 and $151,000 and $309,000, respectively, during the six month
periods ended June 30, 2000 and 1999. In connection with such charges, net
payables in the amount of $7,000 and $20,000 are included in the accompanying
consolidated balance sheets at June 30, 2000 and December 31, 1999,
respectively.
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 and HCA
entered into a new maintenance and support agreement effective as of January 1,
2000 which provides for a monthly fee of $13,000 (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 $162,000 and $291,000, respectively,
for the three month periods ended June 30, 2000 and 1999 and $546,000 and
$580,000, respectively, for the six month periods ended June 30, 2000 and 1999.
Unpaid charges from HCC and its subsidiaries included in due from affiliates in
the accompanying consolidated balance sheets at June 30, 2000 and December 31,
1999 amounted to $76,000 and $106,000, respectively. Billings to GBHC amounted
to $124,000 and $232,000, respectively, for the three month periods ended June
30, 2000 and 1999 and $237,000 and $464,000, respectively, for the six month
periods ended June 30, 2000 and 1999. Unpaid charges from GBHC included in due
from affiliates in the accompanying consolidated balance sheets at June 30, 2000
and December 31, 1999 amounted to $99,000 and $76,000, respectively.
ACSC has outstanding payables to GBHC amounting to $159,000 at both June
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:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------------- -----------------------------------
2000 1999 2000 1999
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
PPI Funding Notes (Note 5) $ 1,533,000 $ 1,328,000 $ 3,009,000 $ 2,606,000
Short-term borrowings (Note 4) 235,000 235,000 470,000 467,000
</TABLE>
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 June 30, 2000 and December 31, 1999.
Interest accrued on short-term borrowings at June 30, 2000 and December 31,
1999, which amounted to $3,192,000 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 $1,612,000 and
$4,212,000, respectively, during the three and six month periods ended June 30,
1999. PML also incurred operating and other expenses amounting to $284,000 and
$591,000, respectively, during the three and six month periods ended June 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>
The schedule below sets forth the accounts of Greate Bay Holdings, L.L.C.:
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
------------- ------------
<S> <C> <C>
Cash and cash equivalents $ 176,000 $ 402,000
Receivables from Holdings and its subsidiaries (a) 23,247,000 23,247,000
------------- ------------
Total assets 23,423,000 23,649,000
------------- ------------
Accounts payable and accrued liabilities 10,000 156,000
Due to holders of PRT Funding Notes (a) 23,261,000 23,254,000
Litigation reserve as established by the plan
of reorganization 152,000 239,000
------------- ------------
Total obligations 23,423,000 23,649,000
------------- ------------
Net assets $ - $ -
============= ============
</TABLE>
_____________________________
(a) As a consequence of the confirmation of the Joint Plan, Greate Bay
Holdings, L.L.C. will realize substantially less than the carrying amount
of the 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. Each company continues to
operate in the ordinary course of business, as set forth in the Bankruptcy Code,
and each company's executive officers and directors remain in office, subject to
the jurisdiction of the New Jersey Bankruptcy Court. On June 1, 1999, a plan of
reorganization
22
<PAGE>
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) the Joint Plan. On July 28, 2000, the New Jersey
Bankruptcy Court issued its opinion approving the Joint Plan under which the
Sands will transfer 46.3% of its equity interests to High River in exchange for
$65 million in cash. The secured bondholders will receive $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 will be made to the present
shareholders, including Greate Bay Holdings, L.L.C.
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.
23
<PAGE>
GBCC licenses the "Sands" name under a license agreement dated as of May
19, 1987, which rights with respect to Atlantic City, New Jersey are 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 has agreed to
relinquish all rights under the license agreement with respect to Atlantic City
and the licensor has agreed to release GBCC from all liability and
responsibility with respect to Atlantic City. The agreement becomes effective on
the Effective Date of the confirmation 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.
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.
24
<PAGE>
Other Litigation -
On October 8, 1998, GBCC and HCC filed a complaint in the District Court of
Dallas County, Texas against Arthur Andersen LLP, GBCC and HCC's former
independent accountants, and certain of its partners alleging negligent advice
and breach of contract with respect to the tax consequences resulting from the
spin-off of GBCC's stock to HCC's shareholders on December 31, 1996. The lawsuit
is currently in the discovery stage with a trial currently scheduled to begin in
September 2000.
(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
$104,000, and $94,000, respectively, during the three month periods ended June
30, 2000 and 1999 and $205,000 and $192,000, respectively, during the six month
periods ended June 30, 2000 and 1999.
Future minimum lease payments as of June 30, 2000 under operating leases
having an initial or remaining noncancelable lease term in excess of one year
are as follows:
2000 (six months) $ 191,000
2001 351,000
2002 173,000
2003 4,000
2004 2,000
---------
$ 721,000
=========
(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
25
<PAGE>
customer at a much reduced amount. The following table demonstrates ACSC's
dependence on installation contracts and on sales to affiliates:
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- ------------------
2000 1999 2000 1999
---------- -------- -------- --------
Total percentage of period
revenues attributable to
installation contracts 90.0% 63.9% 79.0% 69.3%
Percentage of period revenues
attributable to affiliate sales 2.6% 20.7% 9.1% 18.5%
(13) Reclassifications
Certain reclassifications have been made to the prior year's
consolidated financial statements to conform to the 2000 consolidated financial
statement presentation.
26
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This Quarterly Report on Form 10-Q contains forward-looking statements
about the business, results of operations, cash flows, financial condition and
prospects of GBCC. The actual results could differ materially from those
indicated by the forward-looking statements because of various risks and
uncertainties including, among other things, changes in competition, economic
conditions, tax regulations, state regulations applicable to the gaming industry
in general or GBCC in particular, and other risks indicated in GBCC's filing
with the Securities and Exchange Commission. Such risks and uncertainties are
beyond management's ability to control and, in many cases, can not be predicted
by management. When used in this Quarterly Report on Form 10-Q, the words
"believes", "estimates", "anticipates" and similar expressions as they relate to
GBCC or its management are intended to identify forward-looking statements.
LIQUIDITY AND CAPITAL RESOURCES
Operating Activities
In prior years, GBCC and its subsidiaries conducted three major business
activities: (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 opinion issued by the New Jersey
Bankruptcy Court on July 28, 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 six month periods ended June 30, 2000 and 1999 are
set forth below:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- -------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
System sales and support service revenues $ 4,148,000 $ 1,708,000 $ 4,865,000 $ 3,613,000
----------- ----------- ----------- -----------
Cost of sales 1,820,000 797,000 2,090,000 1,815,000
Marketing 414,000 125,000 457,000 134,000
System development and support services 904,000 588,000 1,635,000 1,200,000
General and administrative 426,000 380,000 822,000 645,000
Depreciation 48,000 45,000 95,000 89,000
----------- ----------- ----------- -----------
3,612,000 1,935,000 5,099,000 3,883,000
----------- ----------- ----------- -----------
Income (loss) from operations $ 536,000 $ (227,000) $ (234,000) $ (270,000)
=========== =========== =========== ===========
</TABLE>
27
<PAGE>
GREATE BAY CASINO CORPORATION AND SIBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION (continued)
The improvement in operating results during the second quarter and first
half 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 Six Months Ended
June 30, June 30,
----------------------------------- ----------------------------------
2000 1999 2000 1999
--------------- --------------- ---------------- --------------
<S> <C> <C> <C> <C>
Total percentage of period
revenues attributable to
installation contracts 90.0% 63.9% 79.0% 69.3%
Percentage of period revenues
attributable to affiliate sales 2.6% 20.7% 9.1% 18.5%
</TABLE>
At June 30, 2000, GBCC and its subsidiaries had debt outstanding to HCC
consisting of (1) demand notes (the "GBCC Notes") and accrued interest thereon
totaling $9.9 million and (2) a 14.875% secured promissory note due 2006 (the
"PPI Funding Notes") which had a discounted value of $43.5 million. ACSC's
operations do not generate sufficient cash flow to provide debt service on the
HCC demand obligations 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 has commenced discussions 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 August 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 September 1, 2000 in
consideration of HCC's agreement not to demand payment of principal or interest
on the GBCC Notes. There can be no assurance at this time that the discussions
with HCC will result in a restructuring of GBCC's obligations to HCC. In
addition, it is possible that any restructuring will result in a conveyance of
all of GBCC's remaining assets, including ACSC, to HCC in order to satisfy
GBCC's obligations to HCC. Any restructuring of GBCC's obligations, consensual
or otherwise, will require the Company to file for protection under federal
bankruptcy laws.
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.
28
<PAGE>
GREATE BAY CASINO CORPORATION AND SIBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION (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 August 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
September 1, 2000.
The GBCC Notes include $6.5 million borrowed from HCC during the third
quarter of 1996. Such borrowing accrues 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.
As previously described, GBCC has commenced discussions with HCC to
restructure its obligations. There can be no assurance at this time that the
discussions with HCC will result in a restructuring of GBCC's obligations to HCC
or that any restructuring will not result in a conveyance of all of GBCC's
remaining assets, including ACSC, to HCC in order to satisfy these obligations.
Any restructuring of GBCC's obligations, consensual or otherwise, will require
the Company to file for protection under federal bankruptcy laws.
Capital Expenditures and Other Investments
Property and equipment additions during the six month period ended
June 30, 2000 totaled $58,000; management anticipates that capital expenditures
during the remainder of 2000, consisting only of ongoing equipment replacements
and enhancements at ACSC, will not be significant.
29
<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 six month periods ended June 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 six 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 six month periods ended June 30,
1999 only through PCC's May 25, 1999 Chapter 11 filing date.
Revenues
System sales and support service revenues earned by ACSC increased
$2.4 million (142.9%) and $1.3 million (34.7%), respectively, during the three
and six month periods ended June 30, 2000 compared to the prior year periods.
Such increases were a result of increased system installations during 2000
compared to 1999. During the second quarter of 2000, ACSC began work on three
system installation contracts, including two which accounted for approximately
$3.4 million of revenues during the second quarter period. By comparison, the
1999 second quarter included revenues with respect to a single system
installation. 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 $177,000 and $477,000, respectively, during the second
quarter and first half 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 million (128.4%) and $275,000
(15.2%), respectively, during the three and six month periods ended June 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 of revenues earned (sales versus support
services) as well as to differences in the profitability of system installation
contracts resulting from the bidding process.
30
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION (Continued)
Marketing Expenses
Marketing expenses for ACSC increased $289,000 (231.2%) and $323,000
(241%), respectively, during the three and six month periods ended June 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 second quarter period.
System Development and Support Service Expenses
System development and support services increased $316,000 (53.7%) and
$435,000 (36.3%), respectively, for the three and six month periods ended June
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 did not change
significantly during the three and six month periods ended June 30, 2000
compared to the same periods in 1999.
Interest
Interest income decreased $47,000 (26.7%) and $136,000 (35.1%),
respectively, during the second quarter and first half of 2000 compared to the
same periods 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. Interest expense decreased $1.3 million (42%) and $3.5 million
(50.5%), respectively, during the three and six month periods ended June 30,
2000 compared to the same periods in 1999. Interest expense incurred on the PRT
Funding Notes amounted to $1.5 million and $4 million, respectively, during the
second quarter and first half of 1999 prior to PRT Funding's filing under
Chapter 11 on May 25, 1999. The PRT Funding Notes were settled as part of the
Restructuring in October 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 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 the first half of 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
31
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION (Continued)
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 a gain amounting to $86 million for both the three and six month periods
ended June 30, 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 June 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. Due to the inclusion
of Holdings and its subsidiaries in such consolidated returns, an as yet
undetermined portion of any resulting tax liability to GBCC may be recoverable
from Holdings. As a result, management is presently unable to estimate the
ultimate impact of the examination on the consolidated financial position or
results of operations of GBCC.
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
32
<PAGE>
GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION (Continued)
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.
33
<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 July 28, 2000,
the New Jersey Bankruptcy Court issued its opinion approving the Joint Plan
under which the Sands will transfer 46.3% of its equity interests to High River
in exchange for $65 million in cash. The secured bondholders will receive $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 will be made
to the present shareholders, including Greate Bay Holdings, L.L.C., an indirect,
wholly owned subsidiary of GBCC, which currently owns 79% of the outstanding
common stock of Holdings.
On May 22, 1998, GBHC filed a motion with the New Jersey Bankruptcy
Court seeking to reject its existing management agreement with NJMI. 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 with respect to management
fees. 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 sought to enjoin GBCC from
using the tax net operating loss carryforwards ("NOL's") of GBHC.
On September 2, 1998, the GBCC Parties reached a settlement with GBHC
which was approved by the 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
34
<PAGE>
tax NOL's. The right to receive the additional $500,000 payment was subsequently
conveyed to Greate Bay Holdings, L.L.C. 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 million together with interest accrued thereon against
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 are
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 has agreed to
relinquish all rights under the license agreement with respect to Atlantic City
and the licensor has agreed to release GBCC from all liability and
responsibility with respect to Atlantic City. The agreement becomes effective on
the Effective Date of the confirmation 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.
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
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.
35
<PAGE>
Other Litigation -
On October 8, 1998, GBCC and HCC filed a complaint in the District
Court of Dallas County, Texas against Arthur Andersen LLP, GBCC and HCC's former
independent accountants, and certain of its partners alleging negligent advice
and breach of contract with respect to the tax consequences resulting from the
spin-off of GBCC's stock to HCC's shareholders on December 31, 1996. The lawsuit
is currently in the discovery stage with a trial currently scheduled to begin in
September 2000.
Item 3. Defaults Upon Senior Securities
As a result of the filings discussed in Item 1. above, GB Property
Funding defaulted on its issue of $182,500,000 principal amount of 10.875% First
Mortgage Notes. Principal payments of $2,500,000 due each January 15 and July 15
were not made subsequent to July 15, 1997. Under an order of the Bankruptcy
Court permitting the disposition of furniture and equipment in the ordinary
course of business, any payments received by GBHC for the sale of such assets,
which are part of the security for the 10.875% First Mortgage Notes, must be
remitted to the Trustee for the 10.875% First Mortgage Notes as reductions to
the outstanding principal. As of May 11, 2000 , approximately $524,000 had been
remitted to the Trustee from the proceeds on the sale of equipment. The accrual
of interest on the 10.875% First Mortgage Notes for periods subsequent to the
filings has been suspended; such interest on a contractual basis amounts to
approximately $61,300,000 as of August 10, 2000.
Item 6. - Exhibits and Reports on Form 8-K
The Registrant did not file any reports on Form 8-K during the quarter
ended June 30, 2000.
SIGNATURES
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Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GREATE BAY CASINO CORPORATION
Date: August 10, 2000 By: /s/ John C. Hull
---------------------------------- -----------------------------
John C. Hull
Chief Executive Officer
36
