10-Q 1 d10q.txt FORM 10-Q (QE 6-30-2001) 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, 2001 ------------- 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) ------------------------------------------------------

(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 8, 2001 ---------------------------- ----------------------------- Common Stock, $.10 par value 5,186,627 shares 1 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 "GEAA". Approximately 36% of GBCC's outstanding stock is owned by Jack E. Pratt, Edward T. Pratt, Jr., William D. Pratt, Edward T. Pratt III and by certain general partnerships and trusts controlled by the Pratts and by other family members (collectively, the "Pratt Family"). The Pratt Family also owns approximately 54% of Hollywood Casino Corporation ("HCC", a Delaware corporation), which owns the Aurora Casino and the Tunica Casino. The principal executive offices of GBCC are located at 200 Decadon Avenue, Suite 100, Egg Harbor Township, New Jersey 08234, telephone (609) 441-0704. GBCC is insolvent and its only 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, 2001, GBCC and its subsidiaries had debt outstanding to HCC consisting of (1) demand notes and accrued interest thereon totaling $9.7 million and (2) a 14.875% promissory note due 2006 and accrued interest thereon totaling $50.2 million. ACSC's operations do not generate sufficient cash flow to provide debt service on the HCC demand notes and, consequently, GBCC is currently insolvent. Additionally, semi-annual interest payments of approximately $3.5 million attributable to the 14.875% promissory note become payable commencing in August 2001. GBCC is currently negotiating with HCC to restructure its obligations and, in that connection, has entered into certain standstill agreements with HCC. Under the standstill agreements, all payments of principal and interest due from HCC during the period from March 1, 2000 through September 1, 2001 with respect to an intercompany note as detailed in Note 7 of the Notes to Consolidated Financial Statements have been deferred until October 1, 2001 in consideration of HCC's agreement not to demand payment of principal or interest on GBCC's obligations to HCC (see (1) and (2) above). The fair market value of GBCC's assets is substantially less than its existing obligations to HCC. Accordingly, management anticipates that any restructuring of GBCC's obligations will result in the conveyance of all of its assets (or the proceeds from the sale of its assets) to HCC, resulting in no cash or other assets remaining available for distribution to the Company's shareholders. Any restructuring of GBCC's obligations, consensual or otherwise, will require the Company to file for protection under federal bankruptcy laws and will ultimately result in liquidation of the Company. The insolvency of GBCC raises substantial doubt about its ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties. SUBSIDIARY CHAPTER 7 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 "Delaware Bankruptcy Court"). The subsidiaries were originally formed to 2 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 cases were closed by the Trustee in Bankruptcy in December 2000 and are awaiting a final liquidation order from the Delaware Bankruptcy Court. 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, 2001 and for the three and six month periods ended June 30, 2001 and 2000 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, 2001, the results of its operations for the three and six month periods ended June 30, 2001 and 2000 and its cash flows for the six month periods ended June 30, 2001 and 2000. 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 2000 Annual Report on Form 10-K. 3 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, 2001, and the related condensed consolidated statements of operations for the three and six month periods ended June 30, 2001 and 2000 and of cash flows for the six month periods ending June 30, 2001 and 2000. These financial statements are the responsibility of the Corporation's management. We conducted our reviews 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 reviews, 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, 2000, 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 March 15, 2001 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, 2000 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 3, 2001 4 GREATE BAY CASINO CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ASSETS

The accompanying introductory notes and notes to consolidated financial statements are an integral part of these consolidated balance sheets. 5 GREATE BAY CASINO CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS LIABILITIES AND SHAREHOLDERS' DEFICIT

The accompanying introductory notes and notes to consolidated financial statements are an integral part of these consolidated balance sheets. 6 GREATE BAY CASINO CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

The accompanying introductory notes and notes to consolidated financial statements are an integral part of these consolidated statements. 7 GREATE BAY CASINO CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

The accompanying introductory notes and notes to consolidated financial statements are an integral part of these consolidated statements. 8 GREATE BAY CASINO CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

The accompanying introductory notes and notes to consolidated financial statements are an integral part of these consolidated statements. 9 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"). Approximately 36% of GBCC's outstanding stock is owned by Jack E. Pratt, Edward T. Pratt, Jr., William D. Pratt, Edward T. Pratt III and by certain general partnerships and trusts controlled by the Pratts and by other family members (collectively, the "Pratt Family"). The Pratt Family also owns approximately 54% of Hollywood Casino Corporation ("HCC"), which owns the Aurora Casino and the Tunica Casino. CURRENT GBCC OPERATIONS - GBCC is insolvent and its only remaining operating subsidiary is ACSC. At June 30, 2001, GBCC and its subsidiaries had debt outstanding to HCC consisting of (1) demand notes and accrued interest thereon totaling $9,736,000 and (2) a 14.875% promissory note due 2006 and accrued interest thereon totaling $50,153,000. ACSC's operations do not generate sufficient cash flow to provide debt service on the HCC demand notes and, consequently, GBCC is currently insolvent. Additionally, semi-annual interest payments of $3,540,000 attributable to the 14.875% promissory note become payable commencing in August 2001. GBCC is currently negotiating with HCC to restructure its obligations and, in that connection, has entered into certain standstill agreements with HCC. Under the standstill agreements, all payments of principal and interest due from HCC during the period from March 1, 2000 through September 1, 2001 with respect to an intercompany note as detailed in Note 7 have been deferred until October 1, 2001 in consideration of HCC's agreement not to demand payment of principal or interest on GBCC's obligations to HCC (see (1) and (2) above). The fair market value of GBCC's assets is substantially less than its existing obligations to HCC. Accordingly, management anticipates that any restructuring of GBCC's obligations will result in the conveyance of all of its assets (or the proceeds from the sale of its assets) to HCC, resulting in no cash or other assets remaining available for distribution to the Company's shareholders. Any restructuring of GBCC's obligations, consensual or otherwise, will require the Company to file for protection under federal bankruptcy laws and will ultimately result in liquidation of the Company. The insolvency of GBCC raises substantial doubt about its ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties. 10 GREATE BAY CASINO CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) SUBSIDIARY CHAPTER 7 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 "Delaware Bankruptcy Court"). 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 cases were closed by the Trustee in Bankruptcy in December 2000 and are awaiting a final liquidation order from the Delaware Bankruptcy Court. The filings did not and are not expected to have a significant effect on the operations or financial position of GBCC. FINANCIAL REPORTING - In July 2001, the Financial Accounting Standards Board issued Statement No. 141, "Business Combinations" ("SFAS 141") and Statement No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 141 requires the use of the purchase method of accounting for all business combinations initiated after June 30, 2001. SFAS 142 establishes new standards for goodwill acquired in a business combination and requires that goodwill and other intangible assets be periodically reviewed for impairment rather than being amortized. SFAS 142 is effective for fiscal years beginning after December 15, 2001 with earlier application permitted. The Company does not expect the adoption of SFAS 142 to have a material effect on its consolidated financial statements. 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. The consolidated financial statements as of June 30, 2001 and for the three and six month periods ended June 30, 2001 and 2000 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, 2001, the results of its operations for the three and six month periods ended June 30, 2001 and 2000 and its cash flows for the six month periods ended June 30, 2001 and 2000. (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, 2001 and 2000, there were no potential common shares outstanding and basic and diluted earnings per share 11 GREATE BAY CASINO CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) 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, 2001 and 2000. (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 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 $5,704,000 at both June 30, 2001 and December 31, 2000. During 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. 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) while GBCC continues negotiations with HCC to restructure its obligations. During October 2000, GBCC paid $900,000 of the outstanding principal balance and agreed to offset an additional $146,000 of principal against other receivables due from HCC while negotiations to restructure the debt continued. 12 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:

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 $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 payments 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, a wholly owned subsidiary of GBCC, as consideration, in part, for HCC's acquisition of the general partnership interest in the entity which held the management contract for the Aurora Casino (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 was deferred through February 17, 2001 and would have become payable semiannually beginning on August 17, 2001. Payment of interest is currently subject to a standstill agreement (see Notes 1 and 7). The unpaid principal balance of the PPI Funding Notes is due on February 17, 2006. No interest was paid during the either of the six month periods ended June 30, 2001 or 2000. 13 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:

GBCC paid no federal income taxes during either of the six month periods ended June 30, 2001 or 2000. GBCC paid state income taxes of $294,000 and $1,000, respectively, during the six month periods ended June 30, 2001 and 2000. 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. As of June 30, 2001, GBCC and its subsidiaries have net operating loss carryforwards ("NOL's") totaling approximately $19,300,000 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 $414,000, respectively. Alternative minimum tax credits do not expire and the other tax credits expire in 2001. Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"), requires that the tax benefit of such NOL's, credit carryforwards and deferred tax assets resulting from temporary differences be recorded as an asset and, to the extent that management can not assess that the utilization of 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. 14 GREATE BAY CASINO CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) GBCC was included in the consolidated federal income tax returns of HCC until HCC distributed the stock of GBCC it owned to its shareholders on December 31, 1996. The Internal Revenue Service has been examining the consolidated federal income tax returns of HCC for the years 1993 through 1996 during which period GBCC was included. Such examination for 1993 and 1994 has been completed and resulted in adjustments to GBCC's consolidated NOL's and deferred tax assets, but in no additional tax obligations. The Internal Revenue Service is continuing its examination of the consolidated federal income tax returns of HCC, including GBCC, for 1995 and 1996. Until such examination is completed, allocations of tax attributes and additional alternative minimum tax or regular tax obligations, if any, can not be determined. As a result, management is presently unable to estimate the ultimate impact of the examination on the consolidated financial position or results of operations of GBCC. (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 the entity that held the management contract for the Aurora Casino. The $3,800,000, as amended in October 1999, provides 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 September 1, 2001 in consideration of HCC's agreement not to demand payment on the short-term borrowings described in Note 4 and interest on the PPI Funding Notes described in Note 5. 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 October 1, 2001. The outstanding note receivable balance at both June 30, 2001 and December 31, 2000 is $1,893,000, all of which is included in current amounts due from affiliates on the accompanying consolidated balance sheet at June 30, 2001. At December 31, 2000, $198,000 of the outstanding balance was included in noncurrent due from affiliates on the accompanying consolidated balance sheet. Interest income on the note from HCC amounted to $67,000 during each of the three month periods ended June 30, 2001 and 2000 and $132,000 and $133,000, respectively, during the six month periods ended June 30, 2001 and 2000. Accrued interest receivable of $375,000 and $243,000, respectively, is included in amounts due from affiliates on the accompanying consolidated balance sheets at June 30, 2001 and December 31, 2000. Interest expense with respect to borrowings from HCC is set forth below:

15 GREATE BAY CASINO CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) Accretion of interest on the PPI Funding Notes for periods prior to February 17, 2001 is included in the outstanding note payable balance. Interest accrued on short-term borrowings from HCC and on the PPI Funding Notes for periods subsequent to February 17, 2001 amounted to $6,582,000 and $3,635,000, respectively, at June 30, 2001 and December 31, 2000. (8) LITIGATION SUBSIDIARY CHAPTER 7 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 Delaware Bankruptcy Court. 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 cases were closed by the Trustee in Bankruptcy in December 2000 and are awaiting a final liquidation order from the Delaware Bankruptcy Court. The filings did not and are not expected to have a significant effect on the operations or financial position of GBCC. (9) MAJOR CUSTOMERS ACSC's computer service revenues are derived primarily from either system installation contracts or from sales to affiliates. System installation contracts generally require an extended period of time to complete and represent significant, but nonrecurring revenue earned from a given customer. Upon completion of an installation, ACSC may continue to recognize service or maintenance revenues from the customer at a much reduced amount. The following table demonstrates ACSC's dependence on installation contracts and on sales to affiliates:

(10) RECLASSIFICATIONS Certain reclassifications have been made to the prior year's consolidated financial statements to conform to the 2001 consolidated financial statement presentation. 16 GREATE BAY CASINO CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Quarterly Report on Form 10-Q contains forward-looking statements about the business, results of operations, cash flows, financial condition and prospects of GBCC. The actual results could differ materially from those indicated by the forward-looking statements because of various risks and uncertainties including, among other things, changes in competition, economic conditions, tax regulations, state regulations applicable to ACSC's operations, and other risks indicated in GBCC's filing with the Securities and Exchange Commission. Such risks and uncertainties are beyond management's ability to control and, in many cases, can not be predicted by management. When used in this Quarterly Report on Form 10-Q, the words "believes", "estimates", "anticipates" and similar expressions as they relate to GBCC or its management are intended to identify forward-looking statements. LIQUIDITY AND CAPITAL RESOURCES OPERATING ACTIVITIES GBCC's current business activity consists solely of the operations of ACSC. ACSC licenses casino information technology systems to HCC's casino facilities and non-affiliated casino companies. The results of ACSC's operations for the three and six month periods ended June 30, 2001 and 2000 are set forth below:

The improvement in operating results during the second quarter and first half of 2001 from the same periods in 2000 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 which 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 17 GREATE BAY CASINO CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) contracts. Growth in the performance of installation contracts has greatly diminished ACSC's reliance on affiliate sales which, in prior periods, were a significant source of its revenues. The following table demonstrates ACSC's dependence on installation contracts and on sales to affiliates:

GBCC is insolvent and its only remaining operating activity is the development, installation and maintenance of casino systems by ACSC. At June 30, 2001, GBCC and its subsidiaries had debt outstanding to HCC consisting of (1) demand notes and accrued interest thereon totaling $9.7 million and (2) a 14.875% promissory note due 2006 and accrued interest thereon totaling $50.2 million. ACSC's operations do not generate sufficient cash flow to provide debt service on the HCC demand notes and, consequently, GBCC is currently insolvent. Additionally, semi-annual interest payments of approximately $3.5 million attributable to the 14.875% promissory note become payable commencing in August 2001. GBCC is currently negotiating with HCC to restructure its obligations and, in that connection, has entered into certain standstill agreements with HCC. Under the standstill agreements, all payments of principal and interest due from HCC during the period from March 1, 2000 through September 1, 2001 with respect to an intercompany note as detailed in Note 7 of the Notes to Consolidated Financial Statements have been deferred until October 1, 2001 in consideration of HCC's agreement not to demand payment of principal or interest on GBCC's obligations to HCC (see (1) and (2) above). The fair market value of GBCC's assets is substantially less than its existing obligations to HCC. Accordingly, management anticipates that any restructuring of GBCC's obligations will result in the conveyance of all of its assets (or the proceeds from the sale of its assets) to HCC, resulting in no cash or other assets remaining available for distribution to the Company's shareholders. Any restructuring of GBCC's obligations, consensual or otherwise, will require the Company to file for protection under federal bankruptcy laws and will ultimately result in liquidation of the Company. The insolvency of GBCC raises substantial doubt about its ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties. 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 was deferred through February 17, 2001 and would have become payable semiannually beginning on August 17, 2001. Payment of interest is currently subject to the standstill agreement described above. The unpaid principal balance of the PPI Funding Notes is due on February 17, 2006. 18 GREATE BAY CASINO CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Effective as of April 1, 1997, HCC acquired from PPI Corporation the general partnership interest in the entity which held the management contract for the Aurora Casino. 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 approximated the general partner's share of annual partnership distributions. 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 September 1, 2001 while GBCC negotiates with HCC to restructure its obligations. 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 October 1, 2001. The demand notes consist primarily of loans in the original amount of $6.5 million borrowed from HCC during the third quarter of 1996. Such borrowings accrue interest at the rate of 13.75% per annum payable quarterly commencing October 1, 1996. Although payment is on a demand basis, HCC has agreed not to do so as part of the standstill agreements described in the previous paragraph. During October 2000, GBCC paid $900,000 of the outstanding principal balance of the demand notes to HCC and agreed to offset an additional $146,000 of principal against other receivables due from HCC while negotiations to restructure GBCC's debt continued. As previously described, GBCC is currently negotiating with HCC to restructure its obligations. The fair market value of GBCC's assets is substantially less than its existing obligations to HCC. Accordingly, management anticipates that any restructuring of GBCC's obligations will result in the conveyance of all of its assets (or the proceeds from the sale of its assets) to HCC, resulting in no cash or other assets remaining available for distribution to the Company's shareholders. Any restructuring of GBCC's obligations, consensual or otherwise, will require the Company to file for protection under federal bankruptcy laws and will ultimately result in liquidation of the Company. CAPITAL EXPENDITURES AND OTHER INVESTMENTS Property and equipment additions during the six month period ended June 30, 2001 totaled $173,000; management anticipates that capital expenditures during the remainder of 2001, consisting only of ongoing equipment replacements and enhancements at ACSC, will not be significant. RESULTS OF OPERATIONS REVENUES System sales and support service revenues earned by ACSC increased $6.2 million (150.4%) and $12 million (247.6%) during the three and six month periods ended June 30, 2001 compared to the prior year periods. Such increases were a result of increased system installations during 2001 compared to 2000. During the first six months of 2001, ACSC was engaged in nine system installation contracts, two of which have been completed. These nine contracts accounted for approximately $9 million and $13.8 million of revenues during the second quarter and first half of 2001. By comparison, the 2000 second quarter and first half periods included revenues with respect to four system installations amounting to $3.7 million and $3.8 million, respectively. Revenues from inventory sales and from consulting and 19 GREATE BAY CASINO CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) other services provided to third parties also increased in the three and six month periods of 2001 to $2.6 million and $1.1million, respectively, from $575,000 and $309,000, respectively, in the comparable 2000 periods. The addition of personnel during 2000 has better positioned ACSC to service multiple contracts and provide other ancillary services. COST OF SALES ACSC's cost of sales increased by $2.8 million (152.3%) and $5.3 million (253.8%), respectively, during the three and six month periods ended June 30, 2001 compared to the same periods in 2000. The increases reflect the increased contract installations during the 2001 periods compared to 2000. Cost of sales may 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. MARKETING EXPENSES Marketing expenses for ACSC increased $185,000 (44.7%) and $399,000 (87.3%), respectively, during the second quarter and first half of 2001 compared to the same periods during 2000. The second quarter increases reflect additional sales volume; however, the second quarter increase has been lessened due to a change in sales commission policies, whereby the expense is now incurred ratably over the completion of the underlying installation contract. SYSTEM DEVELOPMENT AND SUPPORT SERVICE EXPENSES System development and support services increased by $878,000 (97.1%) and $1.7 million (103.4%), respectively, for the three and six month periods ended June 30, 2001 compared to the same periods in 2000. The increases result from additional personnel and equipment costs as a result of the dramatic increase in sales volume. GENERAL AND ADMINISTRATIVE EXPENSES GBCC's consolidated general and administrative expenses increased by $267,000 and $571,000, respectively, during the three and six month periods ended June 30, 2001 compared to the same periods in 2000. The 2001 three and six month increases of $336,000 and $660,000, respectively, at ACSC resulting from the expansion of its operations was partially offset by reductions in corporate expenses resulting from the curtailment of GBCC's operations other than ACSC. INTEREST Interest income increased by 9.3% and 13.9%, respectively, during the second quarter and first half of 2001 compared to the same periods in 2000 due to increases in cash available for investment purposes. Interest expense increased $220,000 (12.4%) and $422,000 (12.1%), respectively, during the second quarter and first half of 2001 compared to the same periods in 2000 reflecting additional amortization of discount and the accrual of interest with respect to the PPI Funding Notes. 20 GREATE BAY CASINO CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) INCOME TAX PROVISION 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, 2001 and December 31, 2000. The remaining deferred tax assets represent state timing differences expected to be utilized. GBCC was included in the consolidated federal income tax returns of HCC until HCC distributed the stock of GBCC it owned to its shareholders on December 31, 1996. The Internal Revenue Service has been examining the consolidated federal income tax returns of HCC for the years 1993 through 1996 during which period GBCC was included. Such examination for 1993 and 1994 has been completed and resulted in adjustments to GBCC's consolidated NOL's and deferred tax assets, but in no additional tax obligations. The Internal Revenue Service is continuing its examination of the consolidated federal income tax returns of HCC, including GBCC, for 1995 and 1996. Until such examination is completed, allocations of tax attributes and additional alternative minimum tax or regular tax obligations, if any, can not be determined. As a result, management is presently unable to estimate the ultimate impact of the examination on the consolidated financial position or results of operations of GBCC. 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. 21 PART II: OTHER INFORMATION --------------------------- ITEM 1. LEGAL PROCEEDINGS SUBSIDIARY CHAPTER 7 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 "Delaware Bankruptcy Court"). 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 cases were closed by the Trustee in Bankruptcy in December 2000 and are awaiting a final liquidation order from the Delaware Bankruptcy Court. The filings did not and are not expected to have a significant effect on the operations or financial position of GBCC. 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, 2001. SIGNATURES ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. GREATE BAY CASINO CORPORATION Date: August 9, 2001 By: /s/ John C. Hull ------------------------- ------------------------- John C. Hull Chief Executive Officer 22

GREATE BAY CASINO CORP 10-Q