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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended DECEMBER 31, 1997
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 33-69716
----------------------------
GB PROPERTY FUNDING CORP.
GB HOLDINGS, INC.
GREATE BAY HOTEL AND CASINO, INC.
- --------------------------------------------------------------------------------
(Exact name of each Registrant as specified in its CHARTER)
DELAWARE 75-2502290
DELAWARE 75-2502293
NEW JERSEY 22-2242014
- ----------------------------------------------------- -----------------------
(States or other jurisdictions of (I.R.S. Employer
incorporation or organization) Identification No.'s)
C/O SANDS HOTEL & CASINO
INDIANA AVENUE & BRIGHTON PARK, 9TH FLOOR
ATLANTIC CITY, NEW JERSEY 08401
- ------------------------------------------------------- -----------------------
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code): (609) 441-0704
---------------------------
Securities registered pursuant to Section 12(b) of the Act:
$185,000,000 PRINCIPAL
AMOUNT OF 10 7/8% FIRST MORTGAGE NOTES DUE
JANUARY 15, 2004
- ------------------------------------------- ------------------------------------
Title of each class Name of exchange on which registered
Securities registered pursuant to Section 12(g) of the Act:
NONE
- --------------------------------------------------------------------------------
(Title of Class)
Indicate by check mark whether each of the Registrants (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
Registrants were required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. YES X NO
------ ------
As of March 27, 1998, 1,000 shares of Common Stock of GB Holdings, Inc.,
$1.00 par value, were outstanding, all of which were held by an affiliate. As
of March 27, 1998, 1,000 shares of Common Stock of GB Property Funding Corp.,
$1.00 par value, and 100 shares of Common Stock of Greate Bay Hotel and Casino,
Inc., no par value, were outstanding, all of which were held by GB Holdings,
Inc.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents are incorporated by reference into the
indicated part or parts of this report.
NONE
1
PART I
ITEM 1. BUSINESS
GENERAL
- -------
The registered securities consist of 10 7/8% First Mortgage Notes (the "10
7/8% First Mortgage Notes") in the original principal amount of $185,000,000 due
January 15, 2004 issued by GB Property Funding Corp. ("GB Property Funding").
GB Property Funding's obligations are unconditionally guaranteed by GB Holdings,
Inc. ("Holdings"), a Delaware corporation with principal executive offices at
Indiana Avenue and Brighton Park, 9th Floor, Atlantic City, New Jersey 08401 and
by Greate Bay Hotel and Casino, Inc. ("GBHC"), a New Jersey corporation and a
wholly owned subsidiary of Holdings with principal offices at 136 South Kentucky
Avenue, Atlantic City, New Jersey 08401.
GB Property Funding is wholly owned by Holdings. Holdings is a wholly owned
subsidiary of Pratt Casino Corporation ("PCC"), which is an indirect, wholly
owned subsidiary of Greate Bay Casino Corporation ("GBCC"). GBCC's common stock
is listed on the OTC Bulletin Board Service under the trading symbol "GEAA".
GB Property Funding was organized during September 1993 as a special purpose
subsidiary of Holdings for the purpose of borrowing funds through the issuance
of the 10 7/8% First Mortgage Notes for the benefit of GBHC. GBHC owns the
Sands Hotel and Casino located in Atlantic City, New Jersey (the "Sands").
Substantially all of Holdings' assets and operations relate to the Sands. New
Jersey Management, Inc. ("NJMI"), which is also an indirect, wholly owned
subsidiary of GBCC, is responsible for the operations of the Sands under a
management agreement with GBHC.
On January 5, 1998, Holdings, GB Property Funding and 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 "Bankruptcy Court"). Each company continues to operate in the
ordinary course of business, as set forth in the Bankruptcy Code, and each
company's officers and directors as of the date of the filing remain in office,
subject to the supervision of the Bankruptcy Court.
THE SANDS
- ---------
For a description of the Sands' facilities, please refer to "Item 2. -
Properties."
Business Strategy. The Sands' marketing strategy in the highly competitive
-----------------
Atlantic City market has consisted of seeking higher-value repeat patrons
through its ongoing capital improvements program and its use of sophisticated
casino information technology to monitor and control certain casino operations
and to target marketing efforts toward frequent visitors. Traditionally, the
Sands has been successful in its marketing efforts toward the high end, frequent
table game and slot patron through its offering of private, limited-access
facilities and related amenities to premium patrons. While the Sands has
strived to maintain its position in this segment, the completion of the Sands'
expansion in 1994 has allowed the Sands to broaden its appeal to the mass drive-
in patron for continued growth in this market segment.
Generally, the Sands has three types of patrons: high-end patrons, drive-in
patrons, and bus patrons. High-end patrons have gaming budgets of $5,000 or more
per visit, drive-in patrons typically live within a 200 mile radius of the Sands
and utilize the Sands' parking garage and bus patrons are generally day-
travelers who purchase "ticket coin packages" which include bus transportation
to and from the casino and a specified amount of coins to use in the casino.
2
In implementing the Sands' marketing and operating strategy, the Sands uses
modern casino information technology which includes table game and slot machine
monitoring systems which enable the Sands to track and rate patron play through
the use of a casino player's card. These systems provide management with the
key characteristics of patron play as slot machines are connected with, and
information with respect to table games can be input into, its data base
monitoring system. When patrons use the casino player's card at slot machines
or table games, the information is immediately available to management and
allows management to implement marketing programs to recognize and reward
patrons during their visits to the casino. Certain of these marketing programs
allow patrons to automatically credit themselves with complimentaries based on
their levels of play. Such promotions and complimentaries include free meals,
hotel accommodations, retail merchandise, parking and sweepstakes giveaways
based on slot machine patrons' gross wagering. Management believes that its
ability to reward its customers on a "same-visit" basis is valuable in
developing a loyal base of higher value patrons. Such systems also allow the
Sands to monitor, analyze and control the granting of gaming credit, promotional
expenses and other marketing costs.
Management uses its data bases to focus its marketing efforts on patrons who
have been identified as higher value patrons. Management believes that its
process of identifying higher value patrons, encouraging participation in its
casino player's card program and tailoring promotions and special events to
cater to this market segment enhances the profitability of the Sands.
The Sands also markets to the "mass" casino patron market segment through
various forms of advertising media as well as through group and bus tour
packages. Once new patrons are introduced to the Sands' gaming facilities and
the casino player's card program, management uses its data base capabilities to
directly market to these patrons in an attempt to convert them into repeat
patrons.
Competition. The Sands faces intense competition from the 11 other existing
-----------
Atlantic City casinos. According to reports of the New Jersey Casino Control
Commission (the "Casino Commission"), the twelve Atlantic City casinos currently
offer over one million square feet of gaming space. Several companies have
announced plans to build and operate additional casino/hotels over the next few
years. For example, Mirage Resorts has announced plans for an approximately $1
billion resort complex consisting of a casino, a 4,000 room hotel, several
theaters and an upscale shopping concourse at a site located in the Marina
District. The State of New Jersey has announced a tunnel project connecting the
Atlantic City Expressway with the Marina District. Sun International acquired
an existing casino in Atlantic City and is proceeding with a significant
expansion and renovation including the addition of hotel rooms and gaming space.
Bally's Park Place is currently constructing a new parking and bus facility and
Caesars' Atlantic City is constructing a new entrance to their facility, both
directly on Pacific Avenue. Other individuals have also submitted applications
and have been qualified in New Jersey to hold casino licenses. Legislation
enacted during 1996 and 1993 requires the allocation of an aggregate of $175
million of Casino Reinvestment Development Authority ("CRDA") funds and credits
to subsidize the construction of new hotel rooms by casinos in Atlantic City.
The CRDA is a governmental agency which administers the statutorily mandated
investments made by casino licensees. Competitors of the Sands which have the
financial resources and that can currently access such funds and are capable of
physically expanding their facilities so as to take advantage of such subsidy
may benefit disproportionately from such legislation. Plans have been announced
by other casino operators to complete expansions within the required subsidy
period. The expansion of existing gaming facilities and the addition of new
casinos could significantly increase the competitiveness of the Atlantic City
market.
In this highly competitive environment, each property's relative success is
affected by a great many factors that relate to its location and facilities.
These include availability and number of parking spaces, hotel accommodations,
proximity to the Boardwalk, proximity to other casino/hotels, and access to the
main expressway entering into Atlantic City. GBHC believes that in prior years
its operating strategy
3
enabled the Sands to compete against most other Atlantic City casino/hotels.
However, many of its competitors have greater sources of funding for capital
improvements and financial resources for marketing and promotional budgets than
GBHC and, as a result, the Sands' facilities and amenities have fallen behind
many of the other casinos. In addition, the lack of access to Pacific Avenue has
hampered the Sands' efforts to expand its "drive-in" patron base.
Management estimates that a significant amount of the Sands' revenues is
derived from patrons living within a 120 mile radius of Atlantic City, New
Jersey, particularly from southeastern Pennsylvania, northern New Jersey and
metropolitan New York City. Proposals to allow casino gaming in certain areas
of Pennsylvania and New York have been defeated within the past two years. If
casino gaming were to be legalized in those areas or in other venues that are
more convenient to those areas, it could have a material adverse effect on the
Sands. Gaming is currently conducted on Indian lands in nearby states,
including the Foxwoods and Mohegan Sun Casinos in Connecticut and the Turning
Stone Casino in Oneida, New York near Syracuse. Gaming on cruise ships
departing from New York City has recently begun and further expansion of such
activities is uncertain at this time. In addition, slot machines are now
allowed at race tracks in the State of Delaware.
Industry Developments. A number of significant changes to the regulations
---------------------
governing the casino industry have been approved by New Jersey regulators in
recent years. Significant deregulation of the industry began in 1995 with the
enactment of legislation amending the New Jersey Casino Control Act (the "Casino
Act") and has continued with additional rule modifications to stimulate industry
growth. Partly as a result of such regulatory changes, revenues have shown
small, but steady increases from $3.7 billion in 1995 to $3.8 billion in 1996 to
$3.9 billion in 1997.
Casino/hotel operators have also benefited in recent years from a trend
toward increased slot play as slot machines have increasingly become more
popular than table games with loyal and frequent patrons, as well as with
recreational and other casual visitors. Casino operators have been catering
increasingly to slot patrons through new forms of promotions and incentives such
as slot machines which are linked between the various casinos to pay out a
pooled jackpot and more attractive gaming machines. Slot machines generally
produce higher margins and profitability than table games because they require
less labor and have lower operating costs. As a result, slot machine revenue
growth has significantly outpaced table game revenue growth in recent years to
the point where for 1997 slot win accounted for nearly 70% of total Atlantic
City gaming win. Table games remain important, however, to a select segment of
gaming patrons as well as in adding to the gaming ambience and providing a
varied gaming experience.
Casino Credit. Casino operations are conducted on both a credit and a cash
-------------
basis. Gaming debts arising in Atlantic City in accordance with applicable
regulations are enforceable under New Jersey law. For the year ended December
31, 1997, gaming credit extended to Sands' customers accounted for approximately
26.8% of overall table game wagering, while table game wagering accounted for
approximately 21.5% of overall casino wagering during the period. At December
31, 1997, gaming receivables amounted to $22 million before allowances for
uncollectible gaming receivables amounting to $14.9 million. Management of the
Sands believes that the allowances for uncollectible gaming receivables are
adequate.
License Agreement. GBCC entered into a 99-year license agreement (the "Sands
-----------------
License Agreement") during 1987 to use the trade name "Sands" in Atlantic City,
New Jersey . GBHC pays an annual royalty of 3% of gross room charges, as
defined in the Sands License Agreement. Such charges amounted to $290,000,
$283,000 and $288,000 during the years ended December 31, 1997, 1996 and 1995,
respectively.
The Sands Management Contract. NJMI is responsible for the operations of the
-----------------------------
Sands pursuant to the Sands Management Contract, which was executed in August
1987 and has an initial term of 99 years.
4
NJMI receives (i) a base services fee of 1.5% of gross revenues (as defined),
which approximates net revenue, and (ii) an incentive fee determined as a
varying percentage of gross operating profit (as defined), less the base service
fee. The incentive fee equals 5% of gross operating profit and increases in
increments (up to 7.5%) for each $5 million increase in gross operating profit.
Both the base services and incentive fees are paid monthly in arrears. As a
result of its bankruptcy filing, GBHC can move before the Bankruptcy Court to
assume or reject any executory contract including the Sands' Management
Contract, and a party to a rejected executory contract may assert a damage claim
as part of the Chapter 11 proceedings.
Employees and Labor Relations. In Atlantic City, all casino employees,
-----------------------------
except certain hotel employees, must be licensed under the Casino Act. Due to
the seasonality of the operations of the Sands, the number of employees varies
during the course of the year. At December 31, 1997, there were approximately
3,000 employees at the Sands. The Sands has collective bargaining agreements
with three unions that represent approximately 1,000 employees, substantially
all of whom are represented by the Hotel, Restaurant Employees and Bartenders
International Union, AFL-CIO, Local 54. The collective bargaining agreement
with Local 54 expires in September 1999. Collective bargaining agreement
negotiations with a fourth union are currently underway. Management considers
its labor relations to be good.
CASINO REGULATION
- -----------------
Casino gaming is strictly regulated in Atlantic City under the Casino Act and
the rules and regulations of the Casino Commission, which affect virtually all
aspects of the operations of the Sands. The laws, rules and regulations
affecting Atlantic City gaming operations concern primarily the financial
stability, integrity and character of casino operators, their employees, their
debt and equity security holders and others financially interested in casino
operations; the nature of casino/hotel facilities; the operation methods
(including rules of games and credit granting procedures); and financial and
accounting practices used in connection with casino operations. A number of
these regulations require practices that are different from those in casinos in
Nevada and elsewhere, and some of these regulations result in casino operating
costs greater than those in comparable facilities in Nevada and elsewhere.
Casino Licenses. The Casino Act requires that all casino owners and
---------------
management contractors be licensed by the Casino Commission and that all
employees (except for certain non-casino job positions), major shareholders and
other persons or entities financially interested in the casino operation be
either licensed or approved by the Casino Commission. A license is not
transferable and may be revoked or suspended under certain circumstances by the
Casino Commission. A plenary license authorizes the operation of a casino with
the games authorized in an operation certificate issued by the Casino
Commission, and the operation certificate may be issued only on a finding that
the casino conforms to the requirements of the Casino Act and applicable
regulations and that the casino is prepared to entertain the public. Under such
determination, GBHC and NJMI, as the management contractor, have been issued
plenary casino licenses, and GBCC has been approved as a holding company of a
casino licensee.
The plenary licenses issued to GBHC and NJMI with respect to the Sands were
renewed by the Casino Commission in September 1996 and extended through
September 30, 2000, subject to review of the Sands' financial stability during
1997. Such review took place and the Sands is scheduled for another review in
1998. Terms of the current license require GBHC to comply with periodic
financial reporting requirements and to obtain prior Casino Commission approval
of certain cash transactions with affiliates.
The Casino Act provides for a casino license fee of not less than $200,000
based upon the cost of the investigation and consideration of the license
application, and a renewal fee of not less than $100,000 or $200,000 for a one
year or four year renewal, respectively, based upon the cost of maintaining
control and regulatory activities. In addition, a licensee must pay annual
taxes of 8% of casino win (as defined in the
5
Casino Act), net of a provision for uncollectible accounts of up to 4% of casino
win. During the years ended December 31, 1997, 1996 and 1995, the taxes assessed
by, and the license and other fees incurred by the Sands amounted to $22.4
million, $23.5 million and $25 million, respectively.
The Casino Act also requires a casino licensee to make certain approved
investments (including CRDA bonds) in New Jersey of at least 1.25% of its gross
casino revenues (as defined in the Casino Act) or pay an investment alternative
tax of 2.5% of its gross casino revenues.
GBHC has, from time to time, contributed certain amounts held in escrow to
the CRDA. In return, the CRDA granted GBHC waivers of certain of its investment
obligations in future periods. GBHC made such contributions during the years
ended December 31, 1997, 1996 and 1995 totaling $147,000, $1.5 million and
$250,000, respectively, resulting in waivers granted by the CRDA during 1997 and
1995 totaling $75,000 and $128,000, respectively. No such waivers were granted
during 1996; however, the contributions were designated for projects expected to
benefit the community and the Sands facility.
The Casino Act also imposes certain restrictions upon the ownership of
securities issued by a corporation that holds a casino license or is a holding
company of a corporate licensee. Among other restrictions, the sale,
assignment, transfer, pledge or other disposition of any security issued by a
corporate licensee or holding company is subject to the regulation of the Casino
Commission. In the case of corporate holding companies whose stock is publicly
traded, the Casino Commission may require divestiture of the security held by a
disqualified holder such as an officer, director or controlling stockholder who
is required to be qualified under the Casino Act.
Note holders are also subject to the qualification provisions of the Casino
Act and may, in the sole discretion of the Casino Commission, be required to
make filings, submit to regulatory proceedings and qualify under the Casino Act.
If an investor is an "Institutional Investor" such as a retirement fund for
governmental employees, a registered investment company or adviser, a collective
investment trust, or an insurance company, then, in the absence of a prima facie
showing by the New Jersey Division of Gaming Enforcement that the "Institutional
Investor" may be found unqualified, the Casino Commission shall grant a waiver
of this qualification requirement with respect to publicly traded debt or equity
securities if the investor will own (i) less than 10% of the common stock of the
company in question on a fully diluted basis, (ii) less than 20% of such
company's indebtedness or (iii) less than 50% of an outstanding issue of
indebtedness of such company; the Casino Commission, upon a showing of good
cause, may, in its sole discretion, grant a waiver of qualification to an
"Institutional Investor" not satisfying the above criteria. An Institutional
Investor must also purchase securities for investment and have no intent to
influence the management or operations of such company. The Casino Commission
may, in its sole discretion, grant a waiver of the qualification requirement to
investors not qualifying as "Institutional Investors" under the Casino Act if
such investor will own less than 5% of the publicly traded common stock of such
company on a fully diluted basis or less than 15% of the publicly traded
outstanding indebtedness of such company.
ITEM 2. PROPERTIES
The Sands is located in Atlantic City, New Jersey on approximately 4.8 acres
of land one-half block from the boardwalk at Brighton Park between Indiana
Avenue and Dr. Martin Luther King, Jr. Boulevard. The Sands facility currently
consists of a casino and simulcasting facility with approximately 76,000 square
feet of gaming space containing approximately 2,025 slot machines and
approximately 105 table games; a hotel with 532 rooms (including 59 suites); six
restaurants; two cocktail lounges; two private lounges for invited guests (the
Plaza Club and the Island Club); an 800-seat cabaret theater; retail space; an
adjacent nine-story executive office building with approximately 77,000 square
feet of office space for its executive, financial and administrative personnel;
the "People Mover", an elevated, enclosed, one-way moving sidewalk connecting
the Sands to the Boardwalk; and parking for approximately 1,750 vehicles. In
6
addition, a nearby warehouse and a building in Atlantic City that houses an auto
shop facility also support the Sands' operations.
On February 17, 1994, GB Property Funding issued the 10 7/8% First Mortgage
Notes collateralized by a first mortgage on the Sands. Interest on the notes
accrues at the rate of 10 7/8% per annum, payable semiannually commencing July
15, 1994. Interest only was payable during the first three years. Commencing
on July 15, 1997, semiannual principal payments of $2.5 million became due on
each interest payment date with the balance due at maturity. Such semiannual
payments may be made in cash or by tendering to the trustee 10 7/8% First
Mortgage Notes previously purchased or otherwise acquired by GB Property
Funding. During May 1997, GB Property Funding acquired $2,500,000 face amount
of 10 7/8% First Mortgage Notes which were used on June 4, 1997 to make the July
15, 1997 required principal payment.
On January 5, 1998, GB Property Funding, Holdings, and GBHC filed petitions
for relief under Chapter 11 of the Bankruptcy Code in the United States
Bankruptcy Court for the District of New Jersey. Each company continues to
operate in the ordinary course of business, as set forth in the Bankruptcy Code,
and each company's officers and directors as of the date of the filing remain in
office, subject to the supervision of the Bankruptcy Court. As a consequence of
the filing, the principal and interest payment due on January 15, 1998 was not
made and the accrual of additional interest on the 10 7/8% First Mortgage Notes
has been suspended.
ITEM 3. LEGAL PROCEEDINGS
On January 5, 1998, Holdings, GB Property Funding and GBHC filed petitions
for relief under Chapter 11 of the Bankruptcy Code. Each company continues to
operate in the ordinary course of business, as set forth in the Bankruptcy Code,
and each company's officers and directors as of the date of the filing remain in
office, subject to the supervision of the Bankruptcy Court.
GBHC is a party in various legal proceedings with respect to the conduct of
casino and hotel operations. Although a possible range of loss can not be
estimated, in the opinion of management, based upon the advice of counsel,
settlement or resolution of these proceedings should not have a material
adverse impact upon the consolidated financial position or results of operations
of Holdings or GBHC.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of 1997, no matter was submitted to a vote of
security holders through the solicitation of proxies or otherwise.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
GB Property Funding's common stock, 1,000 shares with par value of $1.00 per
share, is its sole voting security; all of the 1,000 shares outstanding are
owned by Holdings.
GBHC's common stock, 100 shares with no par value per share, is its sole
voting security; all of the 100 shares are owned by Holdings.
Holdings' common stock, 1,000 shares with par value of $1.00 per share, is
its sole voting security; all of the 1,000 shares are owned by PCC.
7
Neither GB Property Funding nor Holdings have paid any dividends in the past
and have no plans to pay any dividends in the future. GBHC is currently
restricted from the payment of dividends by the Casino Commission without prior
approval.
ITEM 6. SELECTED FINANCIAL DATA
GB PROPERTY FUNDING CORP. AND GB HOLDINGS, INC.
-----------------------------------------------
The following tables set forth selected financial information for GB Property
Funding Corp. and GB Holdings, Inc. and are qualified in their entirety by, and
should be read in conjunction with, GB Property Funding's and GB Holdings'
Financial Statements and notes thereto contained elsewhere herein. The data as
of December 31, 1997 and 1996 and for the years ended December 31, 1997, 1996
and 1995 have been derived from the audited financial statements of GB Property
Funding and GB Holdings contained elsewhere in Item 8.
GB PROPERTY FUNDING CORP.
STATEMENT OF OPERATIONS DATA: YEAR ENDED DECEMBER 31,
----------------------------------------------------
1997 1996 1995 1994 1993 (1)
--------- --------- --------- --------- ---------
(IN THOUSANDS)
Interest income................ $ 19,941 $ 20,119 $ 20,119 $ 17,548 $ -
Interest expense............... (19,941) (20,119) (20,119) (17,548) -
-------- -------- -------- -------- --------
Net income..................... $ - $ - $ - $ - $ -
======== ======== ======== ======== ========
BALANCE SHEET DATA: DECEMBER 31,
-----------------------------------------------------
1997 1996 1995 1994 1993 (1)
-------- -------- -------- -------- ---------
(IN THOUSANDS)
Total assets................... $191,653 $194,278 $194,278 $194,278 $ 1
Total debt..................... 182,500 185,000 185,000 185,000 -
Shareholder's equity........... 1 1 1 1 1
_______________________________
(1) GB Property Funding was incorporated on September 29, 1993.
8
GB HOLDINGS, INC.
STATEMENT OF OPERATIONS DATA:
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1997 1996 1995 1994 (1) 1993 (1)
--------- --------- --------- --------- ---------
(IN THOUSANDS)
Net revenues.................................... $256,255 $264,761 $283,950 $275,139 $261,840
-------- -------- -------- -------- --------
Expenses:
Departmental................................. 215,907 235,285 223,631 215,081 197,179
General and administrative................... 17,409 18,486 23,021 23,439 27,691
Depreciation and amortization................ 14,062 19,310 19,937 18,872 19,829
-------- -------- -------- -------- --------
Total expenses.............................. 247,378 273,081 266,589 257,392 244,699
-------- -------- -------- -------- --------
Income (loss) from operations................ 8,877 (8,320) 17,361 17,747 17,141
-------- -------- -------- -------- --------
Non-operating income (expense):
Interest income.............................. 1,680 1,590 1,808 2,186 1,822
Interest expense............................. (23,260) (22,236) (21,680) (21,053) (22,349)
Gain on disposal of assets................... 59 13 56 73 -
-------- -------- -------- -------- --------
Total non-operating expenses, net........... (21,521) (20,633) (19,816) (18,794) (20,527)
-------- -------- -------- -------- --------
Loss before income taxes, cumulative effect of
accounting change, extraordinary and
other items.................................. (12,644) (28,953) (2,455) (1,047) (3,386)
Valuation provision on affiliate receivables.... (9,650) - - - -
Write off deferred financing costs.............. (4,265) - - - -
Reorganization costs............................ (505) - - - -
-------- -------- -------- -------- --------
Loss before income taxes, cumulative effect of
accounting change and extraordinary item..... (27,064) (28,953) (2,455) (1,047) (3,386)
Income tax (provision) benefit.................. (10,902) (2,417) (186) (920) 131
-------- -------- -------- -------- --------
Loss before cumulative effect of accounting
change and extraordinary item................ (37,966) (31,370) (2,641) (1,967) (3,255)
Cumulative effect of accounting change.......... - - - - 2,000
Extraordinary item - early extinguishment of
debt, net of related tax benefits............ 310 - - - (5,667)
-------- -------- -------- -------- --------
Net loss........................................ $(37,656) $(31,370) $ (2,641) $ (1,967) $ (6,922)
======== ======== ======== ======== ========
BALANCE SHEET DATA:
DECEMBER 31,
-----------------------------------------------------
1997 1996 1995 1994 (1) 1993 (1)
-------- -------- -------- -------- ---------
(IN THOUSANDS)
Total assets.................................... $187,728 $224,438 $245,558 $245,721 $223,275
Total debt...................................... 205,932 203,942 195,453 195,463 190,177
Shareholder's (deficit) equity.................. (58,600) (20,944) 10,426 13,067 34
____________________________
(1) Holdings acquired GBHC on February 17, 1994. The merger was accounted for
as a pooling of interests; accordingly, the consolidated financial
statements are presented as if the accounts have always been combined.
Holdings has no significant operations other than those of GBHC.
9
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This Annual Report on Form 10-K contains forward-looking statements about
the business, financial condition and prospects of Holdings. 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 Holdings in particular, and
other risks indicated in Holdings' filings 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 Annual Report on Form 10-K, the words "believes", "estimates",
"anticipates" and similar expressions as they relate to Holdings or its
management are intended to identify forward-looking statements.
LIQUIDITY AND CAPITAL RESOURCES
Holdings owns GBHC which owns the Sands Hotel and Casino in Atlantic City.
Prior to 1996, the Sands' cash flow was sufficient to meet debt service
obligations and fund a substantial portion of annual capital expenditures. The
Sands also used short-term borrowings to fund seasonal cash needs for certain
capital projects. Beginning in early 1996 and continuing through 1997, due to
declines in operating cash flow discussed in "Results of Operations," the Sands
required periodic financial assistance from PCC and GBCC in order to meet debt
service obligations and would have required substantial additional financial
assistance to make the January 15, 1998 principal and interest payments due on
the 10 7/8% First Mortgage Notes.
GBHC was unable to obtain additional borrowings from affiliates or other
sources and, accordingly, on January 5, 1998, Holdings, GB Property Funding and
GBHC filed petitions seeking protection under Chapter 11 of the Bankruptcy Code.
As a result of the filings, the Sands has sufficient cash flow to continue
normal operations while it seeks to develop a plan of reorganization for
submission to its creditors and the Bankruptcy Court. Capital expenditures,
other than normal recurring capital expenditures in the ordinary course of
business, will require prior approval of the Bankruptcy Court. There can be no
assurance at this time that GBHC's plan of reorganization, when submitted, will
be accepted by its creditors or the Bankruptcy Court.
OPERATING ACTIVITIES
At December 31, 1997, GBHC had cash and cash equivalents of $13.9 million.
GBHC generated cash flow from operations of $2.2 million for 1997 compared to an
operating cash flow deficit of $6.1 million during 1996. GBHC utilized cash
from its operations, together with its existing cash and borrowings from
affiliates, during 1997 to meet its operating needs, to fund capital additions
totaling $3.5 million, to repay credit facilities and long-term indebtedness
totalling $4.1 million and to make obligatory investments of $2.9 million.
FINANCING ACTIVITIES
As of April 30, 1996, GBHC extended $2 million of its bank line of credit
until April 30, 1997. As of December 31, 1996, $2 million was outstanding under
the line of credit; the outstanding balance was repaid in January 1997 with
proceeds from affiliate borrowings and the line of credit was cancelled.
During the third quarter of 1996, GBHC borrowed $6.5 million from GBCC for
working capital purposes with interest at the rate of 13 3/4% per annum payable
quarterly commencing October 1, 1996. During the first quarter of 1997, GBHC
borrowed an additional $1.5 million from GBCC and $5 million
10
from other subsidiaries of GBCC on similar terms. Repayment of such borrowings
and payment of the related accrued interest is subject to regulatory approval.
Commencing in July 1997, semiannual principal payments of $2.5 million became
due with respect to the 10 7/8% First Mortgage Notes. Total scheduled
maturities of long-term debt during 1998, exclusive of the 10 7/8% First
Mortgage Notes and the $10 million affiliate loan, are $14,000.
CAPITAL EXPENDITURES AND OBLIGATORY INVESTMENTS
Capital expenditures at the Sands during 1997 amounted to approximately $3.5
million and management anticipates capital expenditures taking place in the
ordinary course of business during 1998 will be approximately $2 million.
Projects currently planned during 1998 include only ongoing and necessary
departmental expenditures. The Sands has filed a motion with the Bankruptcy
Court seeking approval of a capital expenditure plan consisting of approximately
$7.1 million for a rooms renovation project and $6.3 million for replacement of
slot machines within a two-year period.
The Sands is required by the New Jersey Casino Control Act to make certain
investments with the Casino Reinvestment Development Authority, a governmental
agency which administers the statutorily mandated investments made by casino
licensees. Deposit requirements for 1997 totaled $2.9 million and are
anticipated to be approximately $2.9 million during 1998.
SUMMARY
The Sands' operating results for 1997 although improved from the prior year
period results, were significantly below its operating plan. Cash provided by
operating activities of $2.2 million during 1997 was insufficient to meet
Holdings' debt service and regulatory obligations and to make necessary capital
expenditures without significant borrowings from affiliates. Holdings' cash
balances were reduced to $13.9 million at December 31, 1997 and debt service
payments of approximately $12.5 million became due in the month of January 1998.
On January 5, 1998, Holdings, GB Property Funding and GBHC filed petitions for
relief under Chapter 11 of the United States Bankruptcy Code. Accordingly,
there is significant doubt about Holdings' ability to continue as a going
concern. Management is in the process of developing a reorganization plan. As
a result of the filing, the debt service payment due in January 1998 was not
made. The accrual of interest on the 10 7/8% First Mortgage Notes for periods
subsequent to the filing has been suspended.
RESULTS OF OPERATIONS
GENERAL
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 officers and directors as of the date of the filing remain in
office, subject to the supervision of the Bankruptcy Court.
The Sands earned income from operations of $8.9 million for the year ended
December 31, 1997 compared to a loss from operations of $8.3 million sustained
during 1996 and income earned of $17.4 million in 1995. Operating results
during the first nine months of 1997 were favorably impacted by operating
efficiencies and by management's decision to discontinue certain aggressive
marketing programs. Operating results were adversely affected in 1996 by the
advent of unprecedented and highly aggressive marketing programs instituted by
certain other Atlantic City casinos seeking to increase their market share and
to a lesser degree by severe winter snowstorms in January and February.
Although net revenues declined to $256.3 million in 1997 from $264.8 million in
1996 and $284 million in 1995, operating
11
expenses decreased significantly in 1997 by $25.7 million (9.4%) from 1996. This
decrease is due to reductions in marketing and advertising costs of $11.1
million (15.1%) and salaries and related benefits costs of $5.9 million (6%) as
a result of management's efforts to control costs while maintaining positive
gross operating profit. Operating expenses increased by $6.5 million (2.4%)
during 1996 compared to 1995 primarily due to a $10.9 million (17.3%) increase
in advertising and marketing costs due to the aggressive marketing programs
discussed above.
GAMING OPERATIONS
The following table sets forth certain unaudited financial and operating data
relating to the Sands' operations:
YEAR ENDED DECEMBER 31,
-------------------------------------
1997 1996 1995
----------- ----------- -----------
(IN THOUSANDS, EXCEPT PERCENTAGES)
REVENUES:
Table games $ 74,083 $ 79,127 $ 95,835
Slot machines 157,312 159,972 163,821
Other (1) 3,082 3,790 4,392
---------- ---------- ----------
Total $ 234,477 $ 242,889 $ 264,048
========== ========== ==========
TABLE GAMES:
Gross Wagering
(Drop) (2) $ 524,040 $ 576,577 $ 606,283
========== ========== ==========
Hold Percentages: (3, 4)
Sands 14.1% 13.7% 15.8%
Atlantic City 15.0% 15.5% 15.9%
SLOT MACHINES:
Gross Wagering
(Handle) (2) $1,916,350 $1,954,612 $1,892,159
========== ========== ==========
Hold Percentages: (3, 4)
Sands 8.2% 8.2% 8.7%
Atlantic City 8.4% 8.3% 8.5%
____________________________
(1) Consists of revenues from poker and simulcast horse racing wagering.
(2) Gross wagering consists of the total value of chips purchased for table
games (excluding poker) and keno wagering (collectively, the "drop") and
coins wagered in slot machines ("handle").
(3) Casino revenues consist of the portion of gross wagering that a casino
retains and, as a percentage of gross wagering, is referred to as the "hold
percentage".
(4) The Sands' hold percentages are reflected on an accrual basis. Comparable
data for the Atlantic City gaming industry is not available; consequently,
industry percentages have been calculated based on information available
from the New Jersey Casino Control Commission.
12
Table games drop at the Sands declined $52.5 million (9.1%) during 1997
compared with 1996 and $29.7 million (4.9%) during 1996 compared with 1995. The
Sands' decreases compare with increases of 4% and 5%, respectively, in table
drop for all other Atlantic City casinos during the same periods. As a result,
the Sands' table game market share (expressed as a percentage of the Atlantic
City industry aggregate table game drop) decreased to 6.8% during 1997 from 7.7%
during 1996 and from 8.5% during 1995. The Sands' 1997 table game drop decrease
is attributable to declines in patron volume from both the rated and unrated
segments. Expansions of other Atlantic City casinos resulted in an increase of
approximately 92,000 square feet of gaming space and 73 tables at December 31,
1997 compared to December 31, 1996. Such expansions typically result in intense
marketing campaigns which lure the "mass" segment to the new facility. Gaming
space at the Sands has remained virtually unchanged since mid-1996 and the
number of table games has decreased by 3.1%. The decline in table game drop
during 1997 also reflects management's decision to discontinue certain
promotional activities, including the use of "special odds" offered at table
games, which has caused a decline in the rated table market segment. Table game
drop throughout 1996 was adversely impacted by the increase in competitive
pressures in the rated table market segment, of which a significant portion was
in the "high end" and mid-market segments. The last six months of 1996 also saw
a decline in the unrated table market segment as expansions at competing
properties, construction on roadways into the city and other factors all served
to reduce unrated table play at the Sands.
Slot machine handle decreased $38.3 million (2%) during 1997 compared with
1996 after increasing $62.5 million (3.3%) during 1996 compared with 1995. The
Sands' changes compare with increases in slot machine handle of 2.2% and 4.9%
for all other Atlantic City casinos during the same periods. As a result, the
Sands' market share of slot machine play declined to 5.9% in 1997 from 6.1% in
1996 and 6.2% in 1995. The Sands' average number of slot machines remained
virtually unchanged during 1997 compared to an increase of 7.8% for all other
Atlantic City casinos. The below industry-wide performance in handle
experienced by the Sands during 1997 is a result of the same competitive
pressures resulting from casino expansions and related marketing campaigns at
other properties as discussed above with respect to table games. The 1996
increase in slot machine handle is largely attributable to increases in
marketing programs, such as coin incentive and direct marketing programs, which
resulted in significant increases in the number of bus patrons for 1996 compared
to 1995. The Sands' average number of slot machines increased by less than 1%
during 1996 compared to an increase of 11.3% for all other Atlantic City
casinos. The greater percentage increase in the number of slot machines for
other Atlantic City casinos reflects, in part, expansions of certain facilities
during 1996 which resulted in an overall increase of approximately 121,000
square feet of casino space and further contributed to the Sands' decline in
market share.
REVENUES
Casino revenues at the Sands decreased by $8.4 million (3.5%) during 1997
compared with 1996 and by $21.2 million (8%) during 1996 compared with 1995.
Decreases in both slot machine and table game wagering during 1997 were
partially offset by improvements in the table game hold percentage. Most of the
decline in casino revenues during 1996 is attributable to table games which were
impacted by both a decline in gross wagering as discussed previously and by a
significant and unusual decrease in the table games hold percentage at the Sands
to 13.7% during 1996 compared to 15.8% during 1995. The 3.3% increase in slot
machine wagering at the Sands during 1996 compared to 1995 was more than offset
by a decline in the slot machine hold percentage to 8.2% from 8.7%.
Rooms revenue did not change significantly during 1997 compared with 1996 or
during 1996 compared with 1995. Food and beverage revenues decreased $1.7
million (4.8%) during 1997 compared with 1996 after increasing $1.6 million
(4.9%) during 1996 compared with 1995. The 1997 decrease reflects the decline
in patron volume while the 1996 increase reflects the opening of the Epic Buffet
during the third quarter of 1995. Other revenues decreased $1.6 million (27.9%)
during 1997 compared to 1996
13
as a result of replacing ongoing "review show" type entertainment with less
frequent "star show" entertainment. Other revenues increased $1.4 million
(31.3%) during 1996 compared with 1995 as a result of an increase in theater
entertainment revenue.
Promotional allowances represent the estimated value of goods and services
provided free of charge to casino customers under various marketing programs.
As a percentage of rooms, food and beverage and other revenues at the Sands,
these allowances decreased to 53.4% during 1997 from 56.1% during 1996 and 57.6%
during 1995. Such decreases are primarily attributable to reductions in certain
marketing programs and other promotional activities.
DEPARTMENTAL EXPENSES
Casino expenses at the Sands decreased $19.2 million (8.8%) during 1997
compared to 1996 after having increased by $9.7 million (4.6%) during 1996
compared to 1995. During 1996, an unprecedented and highly aggressive industry-
wide attempt to increase market share resulted in significantly higher costs
with respect to coin incentive packages. The abatement of these competitive
pressures during 1997 together with management's ongoing efforts to create
operating efficiencies, have significantly reduced expenses. Such factors have
also resulted in a reduction in the allocation of rooms, food and beverage and
other expenses to casino expense. The 1996 increase was primarily due to the
expansion of various marketing programs in response to competitive pressures.
The additional costs of marketing programs in 1996 resulted in greater
allocation of rooms, food and beverage and other expenses to casino expense.
Such increases were partially offset by a $1.6 million reduction in gaming taxes
during 1996 compared with 1995.
Rooms expense increased $171,000 (7.1%) during 1997 compared to 1996
following a decrease of $186,000 (7.1%) during 1996 compared to 1995. The 1997
increase results from a lesser percentage of rooms being sold on a complimentary
basis which has reduced the allocation of room costs to the casino department.
The 1996 decrease reflects the increased allocation of rooms expense to the
casino department resulting from increases in casino marketing activities
relating to rooms. Food and beverage expense did not change significantly
during 1997 compared to 1996 following on increase of $867,000 (8.9%) during
1996 compared to 1995. The 1996 increase reflects increased costs associated
with the opening of the Epic Buffet partially offset by increases in marketing
programs, the costs of which are allocated to the casino department. Other
expenses decreased $502,000 (15.4%) in 1997 from 1996 after increasing $1.3
million (63.5%) in 1996 from 1995. The 1997 decrease is primarily due to cost
savings with respect to theater entertainment whereas the 1996 increase results
from higher theather entertainment costs partially offset by increased
allocations to the casino department.
GENERAL AND ADMINISTRATIVE
General and administrative expenses decreased an additional $1.1 million
(5.8%) during 1997 compared to 1996 following a $4.5 million (19.7%) decrease
during 1996 compared to 1995. Cost containment measures implemented by
management during the second half of 1996 have continued to reduce
administrative costs through 1997. In addition, 1996 costs decreased compared
to 1995 due to decreases in management fees and equipment rentals.
DEPRECIATION AND AMORTIZATION
As a result of revising the estimated useful life of its buildings effective
October 1, 1996 and the completion of amortization with respect to certain long
lived assets, the Sands' depreciation and amortization expense during 1997
decreased by $5.2 million (27.2%) compared to 1996. The decrease in
depreciation and amortization expense during 1996 compared to 1995 was $627,000
(3.1%).
14
INTEREST
Interest income increased slightly by $90,000 (5.7%) during 1997 compared
with 1996 following a decrease of $218,000 (12.1%) during 1996 compared with
1995. The 1996 decline in interest income results from a decrease in the amount
of cash available for temporary cash investments. Interest expense increased $1
million (4.6%) in 1997 compared to 1996 primarily due to additional interest
with respect to GBHC's borrowings from affiliates. Interest expense did not
change significantly during 1996 compared to the prior year.
NONRECURRING ITEMS
At December 31, 1997, GBHC reserved the balance of an advance to an
affiliated company in the amount of $5.7 million together with interest
amounting to $4 million as collection of the receivables is uncertain.
Also at December 31, 1997, the remaining deferred financing costs associated
with the 10 7/8% First Mortgage Notes ($4.3 million) were written off as a
result of GBHC's petition for relief under Chapter 11 of the United States
Bankruptcy Code filed on January 5, 1998. In addition, professional fees with
respect to the filing ($505,000) were expensed during 1997.
INCOME TAX BENEFIT (PROVISION)
Holdings is included in the consolidated federal income tax return of GBCC
and, for periods prior to December 31, 1996, was included in the consolidated
federal income tax return of Hollywood Casino Corporation ("HCC"). Prior to
December 31, 1996, HCC owned approximately 80% of the outstanding stock of GBCC.
Pursuant to agreements between Holdings and GBCC, Holdings' provision for
federal income taxes is calculated as if a separate federal return were filed.
Holdings and its subsidiaries have net operating loss carryforwards
("NOL's") totaling approximately $37 million, none of which expire before the
year 2009 for federal tax purposes and the year 2001 for state tax purposes.
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" ("SFAS 109") requires that the tax benefit of NOL's and deferred tax
assets resulting from temporary differences be recorded as an asset and, to the
extent that management can not assess that the utilization of all or a portion
of such NOL's and deferred tax assets is more likely than not, a valuation
allowance should be recorded. As a result of book and tax losses incurred in
1997 and the filing under Chapter 11 by Holdings in January 1998, management is
unable to determine that the realization of Holdings' net deferred tax asset is
more likely than not and, thus, has provided a valuation allowance for the
entire amount at December 31, 1997.
EXTRAORDINARY ITEM
A subsidiary of Holdings acquired $2.5 million of 10 7/8% First Mortgage
notes at a discount of $375,000 with which to make its scheduled July 1997
principal payment (see "Liquidity and Capital Resources - Financing
Activities"). Such gain was partially offset by the write off of associated
financing costs, resulting in a net gain from early extinguishment of debt
amounting to $310,000.
YEAR 2000 COMPLIANCE
Management believes that its information systems are Year 2000 compliant.
15
INFLATION
Management believes that in the near term, modest inflation, together with
increasing competition within the gaming industry for qualified and experienced
personnel, will continue to cause increases in operating expenses, particularly
labor and employee benefits costs.
SEASONALITY
Historically, the Sands' operations have been highly seasonal in nature,
with the peak activity occurring from May to September. Consequently, the
results of Holdings' operations for the first and fourth quarters are
traditionally less profitable than the other quarters of the fiscal year. In
addition, the Sands' operations may fluctuate significantly due to a number of
factors, including chance. Such seasonality and fluctuations may materially
affect Holdings' casino revenues and profitability.
16
ITEM 8. INDEX TO FINANCIAL STATEMENTS
PAGE
----
GB PROPERTY FUNDING CORP.
Report of Independent Public Accountants to GB Property
Funding Corp........................................................ 18
Balance Sheets of GB Property Funding Corp. as of
December 31, 1997 and 1996.......................................... 19
Statements of Operations of GB Property Funding Corp.
for the Years Ended December 31, 1997, 1996 and 1995................ 20
Statements of Cash Flows of GB Property Funding Corp.
for the Years Ended December 31, 1997, 1996 and 1995................ 21
Notes to Financial Statements of GB Property Funding Corp............ 22
GB HOLDINGS, INC. AND SUBSIDIARIES
Report of Independent Public Accountants to GB Holdings, Inc.
and Subsidiaries.................................................... 25
Consolidated Balance Sheets of GB Holdings, Inc.
and Subsidiaries as of December 31, 1997 and 1996................... 26
Consolidated Statements of Operations of GB Holdings, Inc.
and Subsidiaries for the Years Ended
December 31, 1997, 1996 and 1995.................................... 28
Consolidated Statement of Changes in Shareholder's Equity (Deficit)
of GB Holdings, Inc. and Subsidiaries for
the Three Years Ended December 31, 1997............................. 29
Consolidated Statements of Cash Flows of GB Holdings, Inc.
and Subsidiaries for the Years Ended
December 31, 1997, 1996 and 1995................................... 30
Notes to Consolidated Financial Statements of GB Holdings, Inc.
and Subsidiaries.................................................... 31
17
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
----------------------------------------
To GB Property Funding Corp.:
We have audited the accompanying balance sheets of GB Property Funding Corp.
(the Company and a Delaware corporation) as of December 31, 1997 and 1996, and
the related statements of operations and cash flows for each of the three years
in the period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of GB Property Funding Corp. as of
December 31, 1997 and 1996, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1997 in conformity
with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
accompanying financial statements, on January 5, 1998, the Company filed a
voluntary petition for relief under Chapter 11 of the U.S. Bankruptcy Code.
These matters, among others, raise substantial doubt about the Company's ability
to continue as a going concern. Management is in the process of developing a
plan of reorganization that will be submitted to the U.S. Bankruptcy Court and
the Company's creditors for their approval. In the event the plan of
reorganization is accepted, continuation of the business thereafter is dependent
on the Company's ability to achieve successful future operations. The
accompanying financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or the amounts and
classification of liabilities that might be necessary should the Company be
unable to continue as a going concern.
ARTHUR ANDERSEN LLP
Roseland, New Jersey
March 23, 1998
18
GB PROPERTY FUNDING CORP.
(WHOLLY OWNED BY GB HOLDINGS, INC.)
BALANCE SHEETS
ASSETS
DECEMBER 31,
--------------------------
1997 1996
------------ ------------
Current assets:
Cash $ 1,000 $ 1,000
Interest receivable from affiliate - 9,277,000
Note receivable from affiliate - 2,500,000
------------ ------------
Total current assets 1,000 11,778,000
------------ ------------
Interest receivable from affiliate 9,152,000 -
Note receivable from affiliate 182,500,000 182,500,000
------------ ------------
$191,653,000 $194,278,000
============ ============
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Current maturities of long-term debt $ - $ 2,500,000
Accrued interest payable - 9,277,000
------------ ------------
Total current liabilities - 11,777,000
------------ ------------
Accrued interest payable 9,152,000 -
Long-term debt 182,500,000 182,500,000
Shareholder's equity (Note 1):
Common stock, $1.00 par value per share,
1,000 shares authorized and outstanding 1,000 1,000
------------ ------------
$191,653,000 $194,278,000
============ ============
The accompanying notes to financial statements
are an integral part of these balance sheets.
19
GB PROPERTY FUNDING CORP.
(WHOLLY OWNED BY GB HOLDINGS, INC.)
STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
-------------------------------------
1997 1996 1995
----------- ----------- -----------
Revenues:
Interest income $19,941,000 $20,119,000 $20,119,000
Expenses:
Interest expense 19,941,000 20,119,000 20,119,000
----------- ----------- -----------
Net income $ - $ - $ -
=========== =========== ===========
The accompanying notes to financial statements
are an integral part of these financial statements.
20
GB PROPERTY FUNDING CORP.
(WHOLLY OWNED BY GB HOLDINGS, INC.)
STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
----------------------------
1997 1996 1995
--------- ------- ---------
OPERATING ACTIVITIES:
Net income $ - $ - $ -
Adjustments to reconcile net income to net
cash provided by operating activities:
Decrease in interest receivable from affiliate 125,000 - -
Decrease in accrued interest payable (125,000) - -
--------- ------ ------
Net cash provided by operating activities - - -
Cash at beginning of year 1,000 1,000 1,000
--------- ------ ------
Cash at end of year $ 1,000 $1,000 $1,000
========= ====== ======
The accompanying notes to financial statements
are an integral part of these financial statements.
21
GB PROPERTY FUNDING CORP.
(WHOLLY OWNED BY GB HOLDINGS, INC.)
NOTES TO FINANCIAL STATEMENTS
(1) ORGANIZATION AND OPERATIONS
GB Property Funding Corp. ("GB Property Funding"), a Delaware corporation,
was incorporated on September 29, 1993. GB Property Funding is a wholly owned
subsidiary of GB Holdings, Inc. ("Holdings"), a Delaware corporation which is an
indirect, wholly owned subsidiary of Greate Bay Casino Corporation ("GBCC").
Holdings was incorporated in September 1993 and, on February 17, 1994, acquired
through capital contributions by its parent, all of the outstanding capital
stock of Greate Bay Hotel and Casino, Inc. ("GBHC"), which owns the Sands Hotel
and Casino in Atlantic City, New Jersey (the "Sands"). GB Property Funding was
formed for the purpose of borrowing $185,000,000 for the benefit of GBHC; such
debt was issued during February 1994 at the rate of 10 7/8% per annum and the
proceeds were loaned to GBHC (see Note 2).
GB Property Funding has no operations and is dependent on the repayment of
its note to GBHC for servicing its debt obligations (see Note 2).
Administrative services for GB Property Funding are provided by other GBCC
subsidiaries at no charge. The cost of such services is not significant.
The operation of an Atlantic City casino/hotel is subject to significant
regulatory control. Under provisions of the New Jersey Casino Control Act, GBHC
is required to maintain a nontransferable license to operate a casino in
Atlantic City.
The accompanying financial statements have been prepared assuming that GB
Property Funding will continue as a going concern. On January 5, 1998, GB
Property Funding, GBHC and Holdings filed voluntary petitions for relief under
Chapter 11 of the United States Bankruptcy Code (the "Bankruptcy Code"). GB
Property Funding is dependent on repayment of its note from GBHC to meet its
debt obligations. These matters, among others, raise substantial doubt about GB
Property Funding's ability to continue as a going concern. Management is in the
process of developing a plan of reorganization that will be submitted to the
United States Bankruptcy Court (the "Bankruptcy Court") and GB Property
Funding's creditors for their approval. In the event the plan of reorganization
is accepted, continuation of the business thereafter is dependent on GBHC's
ability to achieve successful future operations. The accompanying financial
statements do not include any adjustments relating to the recoverability and
classification of recorded asset amounts or the amounts and classification of
liabilities that might be necessary should GB Property Funding be unable to
continue as a going concern.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
(2) LONG-TERM DEBT AND FINANCIAL REORGANIZATION
On February 17, 1994, GB Property Funding issued $185,000,000 of non-recourse
first mortgage notes due January 15, 2004 (the "10 7/8% First Mortgage Notes").
Interest on the notes accrues at the rate of 10 7/8% per annum, payable
semiannually commencing July 15, 1994. Interest only was payable during the
first three years. Commencing on July 15, 1997, semiannual principal payments
of $2,500,000 are due on each interest payment date with the balance due at
maturity. Such semiannual payments may be made in cash or by tendering to the
trustee 10 7/8% First Mortgage Notes previously purchased or
22
otherwise acquired by GB Property Funding. During May 1997, GB Property Funding
acquired $2,500,000 face amount of 10 7/8% First Mortgage Notes which were used
on June 4, 1997 to make the July 15, 1997 required principal payment.
The indenture for the 10 7/8% First Mortgage Notes contains various
provisions which, among other things, restrict the ability of certain
subsidiaries of GBCC to pay dividends to GBCC, to merge, consolidate or sell
substantially all of their assets or to incur additional indebtedness beyond
certain limitations. In addition, the indenture requires the maintenance of
certain cash balances and requires minimum expenditures, as defined in the
indenture, for property and fixture renewals, replacements and betterments at
the Sands. The proceeds of the 10 7/8% First Mortgage Notes were loaned to GBHC
on the same terms and conditions.
On January 5, 1998, GB Property Funding, Holdings, and GBHC filed petitions
for relief under Chapter 11 of the Bankruptcy Code in the Bankruptcy Court for
the District of New Jersey. Each company continues to operate in the ordinary
course of business, as set forth in the Bankruptcy Code, and each company's
officers and directors as of the date of the filing remain in office, subject to
the supervision of the Bankruptcy Court. As a result of the filing under
Chapter 11, the debt service payment due in January 1998 was not made. The
accrual of interest on the 10 7/8% First Mortgage Notes for periods subsequent
to the filing has been suspended.
Interest paid and received with respect to the 10 7/8% First Mortgage Notes
and the loan to GBHC was $20,066,000 during the year ended December 31, 1997 and
$20,119,000 during each of the years ended December 31, 1996 and 1995. Accrued
interest payable and receivable amounting to $9,152,000 and $9,277,000,
respectively, is included on the accompanying balance sheets at December 31,
1997 and 1996. At December 31, 1997, the interest payable and receivable on
such notes is included in noncurrent assets and liabilities as such payments are
subject to the final reorganization plan to be approved by the Bankruptcy Court.
As a result of the filing under Chapter 11, the debt service payment due in
January 1998 was not made. The accrual of interest on the 10 7/8% First
Mortgage Notes for periods subsequent to the filing has been suspended.
(3) INCOME TAXES
GB Property Funding is included in the consolidated federal income tax return
of GBCC and, for periods prior to December 31, 1996, was included in the
consolidated federal income tax return of Hollywood Casino Corporation ("HCC"),
GBCC's parent prior to that date. Pursuant to agreements between Holdings and
GBCC, GB Property Funding's provision for federal income taxes is calculated as
if a separate federal return were filed. For the years ended December 31, 1997,
1996 and 1995, no provisions or payments have been made under the agreements.
(4) LITIGATION
On January 5, 1998, GB Property Funding, Holdings 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 officers and directors as of the date of the filing remain in
office, subject to the supervision of the Bankruptcy Court.
23
(5) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value:
CASH - The carrying amount approximates fair value.
----
INTEREST RECEIVABLE AND INTEREST PAYABLE - At December 31, 1996, the carrying
----------------------------------------
amount approximates fair value because of the short maturity of the obligation.
As a result of the Chapter 11 filing, the fair market value at December 31, 1997
is not readily determinable; accordingly, the fair value set forth below is the
carrying amount.
NOTE RECEIVABLE AND LONG-TERM DEBT - The fair value of GB Property Funding's
----------------------------------
note receivable and long-term debt was estimated based on the quoted market
prices for recent trades of the issue prior to year end.
The estimated carrying amounts and fair values of GB Property Funding's
financial instruments are as follows:
DECEMBER 31, 1997 DECEMBER 31, 1996
------------------------------------ --------------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
----------------- ----------------- ------------ ------------
Financial Assets:
Cash $ 1,000 $ 1,000 $ 1,000 $ 1,000
Interest receivable from
affiliate 9,152,000 9,152,000 9,277,000 9,277,000
Note receivable from
affiliate 182,500,000 152,388,000 185,000,000 154,475,000
Financial Liabilities:
Accrued interest payable 9,152,000 9,152,000 9,277,000 9,277,000
10 7/8% First Mortgage
Notes 182,500,000 152,388,000 185,000,000 154,475,000
(6) SUPPLEMENTAL CASH FLOW INFORMATION
During May 1997, GB Property Funding received 10 7/8% First Mortgage Notes
with a face value of $2,500,000 from GBHC in settlement of its principal payment
obligation under the intercompany borrowing. GB Property Funding tendered such
10 7/8% First Mortgage Notes to the trustee in June 1997 in settlement of its
principal payment obligation. Both the receipt and tendering of the notes is
excluded from the accompanying statement of cash flows as non-cash transactions.
24
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
----------------------------------------
To GB Holdings, Inc.:
We have audited the accompanying consolidated balance sheets of GB Holdings,
Inc. (the Company and a Delaware Corporation) and subsidiaries as of December
31, 1997 and 1996, and the related consolidated statements of operations,
changes in shareholder's equity (deficit) and cash flows for each of the three
years in the period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of GB Holdings, Inc. and
subsidiaries as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997 in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. The Company has
experienced significant losses over the last two years and has a net capital
deficiency of $58,600,000 at December 31, 1997. As discussed in Note 1 to the
accompanying consolidated financial statements, on January 5, 1998, the Company
filed a voluntary petition for relief under Chapter 11 of the U. S. Bankruptcy
Code. These matters, among others, raise substantial doubt about the Company's
ability to continue as a going concern. Management is in the process of
developing a plan of reorganization that will be submitted to the U.S.
Bankruptcy Court and the Company's creditors for their approval. In the event
the plan of reorganization is accepted, continuation of the business thereafter
is dependent on the Company's ability to achieve successful future operations.
The accompanying consolidated financial statements do not include any
adjustments relating to the recoverability and classification of recorded asset
amounts or the amounts and classification of liabilities that might be necessary
should the Company be unable to continue as a going concern.
ARTHUR ANDERSEN LLP
Roseland, New Jersey
March 23, 1998
25
GB HOLDINGS, INC. AND SUBSIDIARIES
(WHOLLY OWNED BY PRATT CASINO CORPORATION)
CONSOLIDATED BALANCE SHEETS
ASSETS
DECEMBER 31,
-----------------------------
1997 1996
------------- --------------
Current Assets:
Cash and cash equivalents $ 13,871,000 $ 15,624,000
Accounts receivable, net of allowances
of $14,955,000 and $15,524,000, respectively 7,794,000 10,112,000
Inventories 3,372,000 3,873,000
Due from affiliate 258,000 2,382,000
Refundable deposits and other current
assets 2,793,000 3,180,000
------------- -------------
Total current assets 28,088,000 35,171,000
------------- -------------
Property and Equipment:
Land 38,093,000 38,093,000
Buildings and improvements 185,508,000 185,508,000
Operating equipment 94,501,000 91,865,000
Construction in progress 2,433,000 1,535,000
------------- -------------
320,535,000 317,001,000
Less - accumulated depreciation and
amortization (172,819,000) (160,987,000)
------------- -------------
Net property and equipment 147,716,000 156,014,000
------------- -------------
Other Assets:
Obligatory investments 7,910,000 6,382,000
Due from affiliate, net of valuation allowance - 17,606,000
Deferred financing costs and other assets 4,014,000 9,265,000
------------- -------------
Total other assets 11,924,000 33,253,000
------------- -------------
$ 187,728,000 $ 224,438,000
============= =============
The accompanying notes to consolidated financial
statements are an integral part of these consolidated balance sheets.
26
GB HOLDINGS, INC. AND SUBSIDIARIES
(WHOLLY OWNED BY PRATT CASINO CORPORATION)
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDER'S DEFICIT
DECEMBER 31,
---------------------------
1997 1996
------------ ------------
Current Liabilities:
Current maturities of long-term debt $ 14,000 $ 2,512,000
Short-term credit facilities - 2,000,000
Short-term borrowings from affiliates - 6,500,000
Accounts payable 6,366,000 7,881,000
Accrued liabilities -
Salaries and wages 4,824,000 4,981,000
Interest 4,000 10,978,000
Insurance 2,984,000 3,112,000
Other 6,510,000 6,683,000
Due to affiliates 456,000 826,000
Other current liabilities 3,959,000 5,429,000
------------ ------------
Total current liabilities 25,117,000 50,902,000
------------ ------------
Accrued Interest Payable 9,152,000 -
------------ ------------
Long-Term Debt 192,918,000 192,930,000
------------ ------------
Other Noncurrent Liabilities 1,187,000 1,550,000
------------ ------------
Due to Affiliates 17,954,000 -
------------ ------------
Commitments and Contingencies
Shareholder's Deficit:
Common stock, $1.00 par value per share;
1,000 shares authorized and
outstanding 1,000 1,000
Additional paid-in capital 18,438,000 18,438,000
Accumulated deficit (77,039,000) (39,383,000)
------------ ------------
Total shareholder's deficit (58,600,000) (20,944,000)
------------ ------------
$187,728,000 $224,438,000
============ ============
The accompanying notes to consolidated financial
statements are an integral part of these consolidated balance sheets.
27
GB HOLDINGS, INC. AND SUBSIDIARIES
(WHOLLY OWNED BY PRATT CASINO CORPORATION)
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
------------------------------------------
1997 1996 1995
------------ ------------ ------------
Revenues:
Casino $234,477,000 $242,889,000 $264,048,000
Rooms 9,691,000 9,446,000 9,602,000
Food and beverage 32,968,000 34,638,000 33,029,000
Other 4,123,000 5,717,000 4,354,000
------------ ------------ ------------
281,259,000 292,690,000 311,033,000
Less - Promotional allowances (25,004,000) (27,929,000) (27,083,000)
------------ ------------ ------------
Net revenues 256,255,000 264,761,000 283,950,000
------------ ------------ ------------
Expenses:
Casino 199,746,000 218,990,000 209,282,000
Rooms 2,590,000 2,419,000 2,605,000
Food and beverage 10,815,000 10,618,000 9,751,000
Other 2,756,000 3,258,000 1,993,000
General and administrative 17,409,000 18,486,000 23,021,000
Depreciation and amortization 14,062,000 19,310,000 19,937,000
------------ ------------ ------------
Total expenses 247,378,000 273,081,000 266,589,000
------------ ------------ ------------
Income (loss) from operations 8,877,000 (8,320,000) 17,361,000
------------ ------------ ------------
Non-operating income (expense):
Interest income 1,680,000 1,590,000 1,808,000
Interest expense (23,260,000) (22,236,000) (21,680,000)
Gain on disposal of assets 59,000 13,000 56,000
------------ ------------ ------------
Total non-operating expense, net (21,521,000) (20,633,000) (19,816,000)
------------ ------------ ------------
Loss before income taxes,
extraordinary and other items (12,644,000) (28,953,000) (2,455,000)
Valuation provision on affiliate receivables (9,650,000) - -
Write off deferred financing costs (4,265,000) - -
Reorganization costs (505,000) - -
------------ ------------ ------------
Loss before income taxes and extraordinary
item (27,064,000) (28,953,000) (2,455,000)
Income tax provision (10,902,000) (2,417,000) (186,000)
------------ ------------ ------------
Loss before extraordinary item (37,966,000) (31,370,000) (2,641,000)
Extraordinary item:
Gain on early extinguishment of debt 310,000 - -
------------ ------------ ------------
Net loss $(37,656,000) $(31,370,000) $ (2,641,000)
============ ============ ============
The accompanying notes to consolidated financial statements are an
integral part of these consolidated statements.
28
GB HOLDINGS, INC. AND SUBSIDIARIES
(WHOLLY OWNED BY PRATT CASINO CORPORATION)
CONSOLIDATED STATEMENT OF CHANGES
IN SHAREHOLDER'S EQUITY (DEFICIT)
FOR THE THREE YEARS ENDED DECEMBER 31, 1997
ADDITIONAL
COMMON STOCK PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT
---------- ------- ----------- ------------
BALANCE, JANUARY 1, 1995 1,000 $1,000 $18,438,000 $ (5,372,000)
Net loss - - - (2,641,000)
---------- ------- ----------- ------------
BALANCE, DECEMBER 31, 1995 1,000 1,000 18,438,000 (8,013,000)
Net loss - - - (31,370,000)
---------- ------- ----------- ------------
BALANCE, DECEMBER 31, 1996 1,000 1,000 18,438,000 (39,383,000)
Net loss - - - (37,656,000)
---------- ------- ----------- ------------
BALANCE, DECEMBER 31, 1997 1,000 $1,000 $18,438,000 $(77,039,000)
========== ======= =========== ============
The accompanying notes to consolidated financial statements are an
integral part of this consolidated statement.
29
GB HOLDINGS, INC. AND SUBSIDIARIES
(WHOLLY OWNED BY PRATT CASINO CORPORATION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
------------------------------------------
1997 1996 1995
------------ ------------ ------------
OPERATING ACTIVITIES:
Net loss $(37,656,000) $(31,370,000) $ (2,641,000)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Extraordinary item (310,000) - -
Valuation provision on affiliate receivables 9,650,000 - -
Write off deferred financing costs 4,265,000 - -
Depreciation and amortization 14,062,000 19,310,000 19,937,000
Gain on disposal of assets (59,000) (13,000) (56,000)
Provision for doubtful accounts 3,195,000 2,167,000 2,988,000
Deferred income tax provision (benefit) 10,902,000 2,417,000 (2,458,000)
Increase in accounts receivable (877,000) (1,235,000) (965,000)
Increase in accounts payable and accrued expenses 1,159,000 1,795,000 3,297,000
Net change in other current assets and liabilities (1,155,000) 2,044,000 2,560,000
Net change in other noncurrent assets and liabilities (943,000) (1,185,000) (1,921,000)
------------ ------------ ------------
Net cash provided by (used in) operating activities 2,233,000 (6,070,000) 20,741,000
------------ ------------ ------------
INVESTING ACTIVITIES:
Purchases of property and equipment (3,534,000) (5,505,000) (19,156,000)
Proceeds from disposition of assets 59,000 13,000 56,000
Obligatory investments (2,876,000) (3,062,000) (2,967,000)
------------ ------------ ------------
Net cash used in investing activities (6,351,000) (8,554,000) (22,067,000)
------------ ------------ ------------
FINANCING ACTIVITIES:
Net (repayments) borrowings on credit facilities (2,000,000) 2,000,000 -
Deferred financing costs - (10,000) (32,000)
Repayments of long-term debt (2,135,000) (11,000) (10,000)
Net borrowings from affiliates 6,500,000 6,500,000 -
------------ ------------ ------------
Net cash provided by (used in) financing activities 2,365,000 8,479,000 (42,000)
------------ ------------ ------------
Net decrease in cash and cash equivalents (1,753,000) (6,145,000) (1,368,000)
Cash and cash equivalents at beginning of year 15,624,000 21,769,000 23,137,000
------------ ------------ ------------
Cash and cash equivalents at end of year $ 13,871,000 $ 15,624,000 $ 21,769,000
============ ============ ============
The accompanying notes to consolidated financial statements are an
integral part of these consolidated statements.
30
GB HOLDINGS, INC. AND SUBSIDIARIES
(WHOLLY OWNED BY PRATT CASINO CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) ORGANIZATION, BUSINESS AND BASIS OF PRESENTATION
GB Holdings, Inc. ("Holdings") is a Delaware corporation and a wholly owned
subsidiary of Pratt Casino Corporation ("PCC"), also a Delaware corporation.
PCC was incorporated during September 1993 and is wholly owned by PPI
Corporation, a New Jersey corporation and a wholly owned subsidiary of Greate
Bay Casino Corporation ("GBCC"). On February 17, 1994, Holdings acquired Greate
Bay Hotel and Casino, Inc. ("GBHC"), a New Jersey corporation, through a capital
contribution by its parent. GBHC's principal business activity is its ownership
of the Sands Hotel and Casino in Atlantic City, New Jersey (the "Sands"). New
Jersey Management, Inc. ("NJMI"), also a wholly owned subsidiary of PCC, is
responsible under a management agreement for the operations of the Sands. GB
Property Funding Corp. ("GB Property Funding"), a Delaware corporation and a
wholly owned subsidiary of Holdings, was incorporated in September 1993 for the
purpose of borrowing funds through the issuance of $185,000,000 of ten-year,
nonrecourse first mortgage notes for the benefit of GBHC; such debt was issued
in February 1994 at the rate of 10 7/8% per annum and the proceeds were loaned
to GBHC (see Note 4). Holdings has no operating activities and its only
significant asset is its investment in GBHC. The accompanying consolidated
financial statements include the accounts and operations of Holdings, GBHC and
GB Property Funding; all significant intercompany balances and transactions have
been eliminated. Holdings had no operating activities prior to the merger.
GBHC estimates that a significant amount of the Sands' revenues are derived
from patrons living in southeastern Pennsylvania, northern New Jersey and
metropolitan New York City. Competition in the Atlantic City gaming market is
intense and management believes that this competition will continue or intensify
in the future.
The accompanying consolidated financial statements have been prepared
assuming that Holdings will continue as a going concern. Holdings has
experienced significant losses over the last two years and has a net capital
deficiency of $58,600,000 at December 31, 1997. On January 5, 1998, Holdings
filed a voluntary petition for relief under Chapter 11 of the United States
Bankruptcy Code (the "Bankruptcy Code"). These matters, among others, raise
substantial doubt about Holdings' ability to continue as a going concern.
Management is in the process of developing a plan of reorganization that will be
submitted to the United States Bankruptcy Court (the "Bankruptcy Court") and
Holdings' creditors for their approval. In the event the plan of reorganization
is accepted, continuation of the business thereafter is dependent on Holdings
ability to achieve successful future operations. The accompanying consolidated
financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or the amounts and
classification of liabilities that might be necessary should Holdings be unable
to continue a going concern.
Since Holdings filed for protection under the Bankruptcy Code subsequent to
December 31, 1997, the accompanying consolidated financial statements have not
been prepared in accordance with Statement of Position No. 90-7, "Financial
Reporting By Entities in Reorganization Under The Bankruptcy Code," ("SOP 90-7")
and do not include disclosures of liabilities subject to compromise. Financial
statements prepared subsequent to the filing under Chapter 11 will be prepared
reflecting such amounts subject to compromise.
31
GB HOLDINGS, INC. AND SUBSIDIARIES
(WHOLLY OWNED BY PRATT CASINO CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies followed in the preparation of the
accompanying consolidated financial statements are discussed below. The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
CASINO REVENUES, PROMOTIONAL ALLOWANCES AND DEPARTMENTAL EXPENSES -
The Sands recognizes the net win from gaming activities (the difference
between gaming wins and losses) as casino revenues. Casino revenues are net of
accruals for anticipated payouts of progressive and certain other slot machine
jackpots and certain progressive table game payouts. Such anticipated jackpots
and payouts are reflected as current liabilities on the accompanying
consolidated balance sheets.
The estimated value of rooms, food and beverage and other items which were
provided to customers without charge has been included in revenues and a
corresponding amount has been deducted as promotional allowances. The costs of
such complimentaries have been included as casino expenses on the accompanying
consolidated statements of operations. Costs of complimentaries allocated from
the rooms, food and beverage and other operating departments to the casino
department during the years ended December 31, 1997, 1996 and 1995 were as
follows:
1997 1996 1995
----------- ----------- -----------
Rooms $ 5,617,000 $ 6,170,000 $ 6,023,000
Food and Beverage 28,144,000 29,357,000 28,259,000
Other 2,991,000 4,435,000 3,631,000
----------- ----------- -----------
$36,752,000 $39,962,000 $37,913,000
=========== =========== ===========
CASH AND CASH EQUIVALENTS -
Cash and cash equivalents are generally comprised of cash and investments
with original maturities of three months or less, such as commercial paper,
certificates of deposit and fixed repurchase agreements.
ALLOWANCE FOR DOUBTFUL ACCOUNTS -
The allowance for doubtful accounts is maintained at a level considered
adequate to provide for possible future losses. Provisions for doubtful
accounts amounting to $3,195,000, $2,167,000 and $2,988,000 were made during the
years ended December 31, 1997, 1996 and 1995, respectively.
32
GB HOLDINGS, INC. AND SUBSIDIARIES
(WHOLLY OWNED BY PRATT CASINO CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
INVENTORIES -
Inventories are stated at the lower of cost (on a first-in, first-out
basis) or market.
PROPERTY AND EQUIPMENT -
Property and equipment have been recorded at cost and are being depreciated
utilizing the straight-line method over their estimated useful lives as follows:
Buildings and improvements 25-40 years
Operating equipment 3-7 years
On October 1, 1996, GBHC revised the estimated useful life of its buildings
from 25 years to 40 years. Management believes the change in estimated life
more appropriately reflects the timing of the economic benefit to be received
from these assets. The effect of this change reduced depreciation and
amortization expense and net loss by approximately $2,880,000 and $761,000, for
the years ended December 31, 1997 and 1996, respectively.
Interest costs related to property and equipment acquisitions were
capitalized during the acquisition period and are being amortized over the
useful lives of the related assets.
DEFERRED FINANCING COSTS -
The costs of issuing long-term debt, including all underwriting, legal and
accounting fees, have been capitalized and were being amortized over the term of
the related debt issue. As a result of the filing under Chapter 11 on January
5, 1998, the remaining deferred financing costs in the amount of $4,265,000 were
determined to be unrealizable and were written off on the accompanying statement
of operations for the year ended December 31, 1997. The unamortized balance of
deferred financing costs amounted to $5,045,000 at December 31, 1996.
Amortization of such costs was $714,000, $729,000 and $755,000 for the years
ended December 31, 1997, 1996 and 1995, respectively.
LONG-LIVED ASSETS -
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"
requires, among other things, that an entity review its long-lived assets and
certain related intangibles for impairment whenever changes in circumstances
indicate that the carrying amount of an asset may not be fully recoverable.
As discussed in Note 1, GBHC filed for protection under the Bankruptcy Code
and management is currently preparing its plan of reorganization. Although
management has not determined that an impairment of the carrying value currently
exists, future adjustments to the carrying amount of GBHC's assets are possible
with respect to the fresh-start reporting which would take place at the
confirmation date of a plan of reorganization approved by the Bankruptcy Court.
33
GB HOLDINGS, INC. AND SUBSIDIARIES
(WHOLLY OWNED BY PRATT CASINO CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
ACCRUED INSURANCE -
GBHC is self insured for a portion of its general liability, certain health
care and other liability exposures. Accrued insurance includes estimates of
such accrued liabilities based on an evaluation of the merits of individual
claims and historical claims experience; accordingly, GBHC's ultimate liability
may differ from the amounts accrued.
INCOME TAXES -
Holdings is included in the consolidated federal income tax return of GBCC
and, for periods prior to December 31, 1996, was included in the consolidated
federal income tax return of Hollywood Casino Corporation ("HCC"), GBCC's parent
prior to that date. Pursuant to agreements between Holdings, PCC and GBCC,
Holdings' provision for federal income taxes is based on the amount of tax which
would be provided if a separate federal income tax return were filed.
RECLASSIFICATIONS -
Certain reclassifications have been made to prior years' consolidated
financial statements to conform to the 1997 consolidated financial statement
presentation.
(3) SHORT-TERM CREDIT FACILITIES
As of December 31, 1996, GBHC had $2,000,000 outstanding under a bank line
of credit. Borrowings under the line of credit were guaranteed to the extent of
$2,000,000 by PCC, which pledged a certificate of deposit in the face amount of
$2,000,000 as collateral for the line of credit. The line of credit was repaid
upon maturity of the certificate of deposit during January 1997 with proceeds
from affiliate borrowings (see Note 6) and the line of credit was cancelled.
34
GB HOLDINGS, INC. AND SUBSIDIARIES
(WHOLLY OWNED BY PRATT CASINO CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(4) LONG-TERM DEBT AND PLEDGE OF ASSETS
Substantially all of Holdings' and GBHC's assets are pledged in connection
with their long-term indebtedness. On January 5, 1998, Holdings, GB Property
Funding and GBHC filed petitions for relief under Chapter 11 of the Bankruptcy
Code in the Bankruptcy Court for the District of New Jersey. Each company
continues to operate in the ordinary course of business, as set forth in the
Bankruptcy Code, and each company's officers and directors as of the date of the
filing remain in office, subject to the supervision of the Bankruptcy Court.
DECEMBER 31,
---------------------------
1997 1996
------------ ------------
10 7/8% first mortgage notes, due 2004 (a) $182,500,000 $185,000,000
14 5/8% affiliate loan, due 2005 (b) 10,000,000 10,000,000
Other 432,000 442,000
------------ ------------
Total indebtedness 192,932,000 195,442,000
Less - current maturities (14,000) (2,512,000)
------------ ------------
Total long-term debt $192,918,000 $192,930,000
============ ============
- --------------------
(a) On February 17, 1994, the Sands obtained $185,000,000 from GB Property
Funding, which issued $185,000,000 of non-recourse first mortgage notes due
January 15, 2004 (the "10 7/8% First Mortgage Notes"). Interest on the
notes accrues at the rate of 10 7/8% per annum, payable semiannually
commencing July 15, 1994. Interest only was payable during the first three
years. Commencing on July 15, 1997, semiannual principal payments of
$2,500,000 are due on each interest payment date with the balance due at
maturity. Such semiannual payments may be made in cash or by tendering 10
7/8% First Mortgage Notes previously purchased or otherwise acquired by
Holdings. Holdings acquired $2,500,000 face amount of 10 7/8% First
Mortgage Notes at a discount during May 1997 which it used during June to
make its July 15, 1997 required principal payment. As a result of the
filing under Chapter 11, the debt service payment due in January 1998 was
not made. The accrual of interest on the 10 7/8% First Mortgage Notes for
periods subsequent to the filing has been suspended.
The indenture for the 10 7/8% First Mortgage Notes contains various
provisions which, among other things, restrict the ability of certain
subsidiaries of GBCC to pay dividends to GBCC, to merge, consolidate or
sell substantially all of their assets or to incur additional indebtedness
beyond certain limitations. In addition, the indenture requires the
maintenance of certain cash balances and requires minimum expenditures, as
defined in the indenture, for property and fixture renewals, replacements
and betterments at the Sands.
(b) On February 17, 1994, GBHC issued a $10,000,000 subordinated promissory
note to an affiliate. The note bears interest at the rate of 14 5/8% per
annum, payable semiannually commencing August 17, 1994, subject to
maintaining average daily cash balances required by the indenture for
35
GB HOLDINGS, INC. AND SUBSIDIARIES
(WHOLLY OWNED BY PRATT CASINO CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
the 10 7/8% First Mortgage Notes, with the principal due in February 2005.
As a result of such payment restrictions, interest has been paid only
through February 17, 1996.
As a result of the Chapter 11 filing, principal payments with respect to
the 10 7/8% First Mortgage Notes and the affiliate loan are subject to
reorganization. Pending such reorganization, the entire amount of the 10 7/8%
First Mortgage Notes and the affiliate loan are included in long-term debt on
the accompanying consolidated balance sheet at December 31, 1997. Scheduled
payments of long-term debt as of December 31, 1997, exclusive of payments on the
10 7/8% First Mortgage Notes and the affiliate loan, are set forth below:
1998 $ 14,000
1999 14,000
2000 16,000
2001 17,000
2002 19,000
Thereafter 352,000
--------
Total $432,000
========
Interest paid amounted to $20,128,000, $21,086,000 and $22,411,000,
respectively, during the years ended December 31, 1997, 1996 and 1995. Pending
the reorganization of its debt obligations, accrued interest on the 10 7/8%
First Mortgage Notes in the amount of $9,152,000 is included in noncurrent
accrued interest payable on the accompanying consolidated balance sheet at
December 31, 1997.
(5) INCOME TAXES
Components of the provision for income taxes consisted of the following:
YEAR ENDED DECEMBER 31,
---------------------------------------
1997 1996 1995
------------ ------------ -----------
Benefit in lieu of (provision for)
federal income taxes:
Current $ 3,896,000 $ 7,412,000 $(2,052,000)
Deferred 4,246,000 657,000 1,953,000
State income tax (provision) benefit:
Current 1,133,000 2,156,000 (592,000)
Deferred 1,236,000 187,000 505,000
Valuation allowance (21,413,000) (12,829,000) -
------------ ------------ -----------
$(10,902,000) $ (2,417,000) $ (186,000)
============ ============ ===========
36
GB HOLDINGS, INC. AND SUBSIDIARIES
(WHOLLY OWNED BY PRATT CASINO CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Holdings made no federal tax payments during the years ended December 31,
1997, 1996 and 1995. The payment of taxes in accordance with the tax allocation
agreements is subject to the approval of the New Jersey Casino Control
Commission (the "Casino Commission"). Holdings also paid no state income taxes
during the years ended December 31, 1997, 1996 and 1995. Additionally, $278,000
of current federal taxes payable were offset against other intercompany
obligations in 1995 (see Note 9).
A reconciliation between the calculated tax benefit based on the statutory
rates in effect and the effective tax rates follows:
YEAR ENDED DECEMBER 31,
------------------------------------------
1997 1996 1995
------------ ------------ ------------
Calculated income tax benefit at 34% $ 9,096,000 $ 9,844,000 $ 835,000
Amortization of excess purchase price - (601,000) (803,000)
Disallowance of meals and entertainment (144,000) (337,000) (353,000)
State income taxes 1,564,000 1,546,000 (57,000)
Utilization of tax credits - 99,000 98,000
Adjustment to prior year taxes - (134,000) 96,000
Valuation allowance change (21,413,000) (12,829,000) -
Other (5,000) (5,000) (2,000)
------------ ------------ ------------
Tax provision as shown on
consolidated statements of operations $(10,902,000) $ (2,417,000) $ (186,000)
============ ============ ============
Deferred income taxes result primarily from the use of the allowance method
rather than the direct write-off method for doubtful accounts, the use of
accelerated methods of depreciation for federal and state income tax purposes,
the provision of a valuation allowance on affiliate receivables, the write off
of deferred financing costs and differences in the timing of deductions taken
between tax and financial reporting purposes for contributions of and
adjustments to the carrying value of certain investment obligations and for
vacation and other accruals.
37
GB HOLDINGS, INC. AND SUBSIDIARIES
(WHOLLY OWNED BY PRATT CASINO CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The components of the deferred tax asset as of December 31, 1997 and 1996
were as follows:
DECEMBER 31,
---------------------------
1997 1996
------------ ------------
Deferred tax assets:
Net operating loss carryforwards $ 16,303,000 $ 10,746,000
Allowance for doubtful accounts 6,201,000 6,429,000
Valuation allowance on affiliate receivables 3,854,000 -
Other liabilities and accruals 2,615,000 2,734,000
Write off deferred financing costs 1,703,000 -
Other 3,566,000 3,822,000
------------ ------------
Total deferred tax assets 34,242,000 23,731,000
Valuation allowance (34,242,000) (12,829,000)
------------ ------------
$ - $ 10,902,000
============ ============
At December 31, 1997, Holdings and its subsidiaries have net operating loss
carryforwards ("NOL's") totaling approximately $37 million, none of which expire
before the year 2009 for federal tax purposes and the year 2001 for state tax
purposes. The availability of the NOL's and credit carryforwards will further
be subject to the tax consequences of the final plan of reorganization approved
by the Bankruptcy Court. Statement of Financial Accounting Standards No. 109
("SFAS 109") requires that the tax benefit of NOL's and deferred tax assets
resulting from temporary differences be recorded as an asset and, to the extent
that management can not assess that the utilization of all or a portion of such
NOL's and deferred tax assets is more likely than not, a valuation allowance
should be recorded. At December 31, 1996, deferred tax assets amounting to
$10,902,000 were anticipated to be recoverable. As a result of book and tax
losses incurred in 1997 and the filing under Chapter 11 by Holdings in January
1998, management is unable to determine that realization of Holdings' deferred
tax asset is more likely than not and, thus, has provided a valuation allowance
for the entire amount at December 31, 1997.
Sales or purchases of Holdings' common stock could cause a "change of
control", as defined in Section 382 of the Internal Revenue Code of 1986, as
amended, which would limit the ability of Holdings 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 Holdings' future utilization of its loss
carryforwards.
38
GB HOLDINGS, INC. AND SUBSIDIARIES
(WHOLLY OWNED BY PRATT CASINO CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Net receivables from and payables to affiliates in connection with the
aforementioned tax allocation agreements are as follows:
DECEMBER 31,
----------------------
1997 1996
--------- ----------
Due from affiliate - current $ - $2,010,000
Due from affiliate - non-current - 8,892,000
Due to affiliate - current (129,000) (129,000)
The amounts set forth above as due to affiliate at December 31, 1997 and
1996 represent current federal taxes. The amounts set forth above as due from
affiliates at December 31, 1996 represent deferred federal taxes.
(6) TRANSACTIONS WITH RELATED PARTIES
NJMI, under a management agreement with GBHC, is responsible for the
operatioins of the Sands. NJMI is entitled to receive annually (i) a basic
consulting fee of 1.5% of "adjusted gross revenues," as defined, and (ii)
incentive compensation of between 5% and 7.5% of gross operating profits in
excess of certain stated amounts should annual "gross operating profits," as
defined, exceed $5,000,000. Such fees amounted to $5,430,000, $4,644,000 and
$6,811,000 during the years ended December 31, 1997, 1996 and 1995,
respectively, and are included in general and administrative expenses on the
accompanying consolidated financial statements. Management fees payable to NJMI
at December 31, 1997 and 1996 amounted to $34,000 and $231,000, respectively.
GBHC licenses the trade name "Sands" from GBCC which licenses the name from
an unaffiliated third party. Amounts payable by the Sands under this agreement
are equal to the amounts paid to the unaffiliated third party. Such charges
amounted to $290,000, $283,000 and $288,000 for the years ended December 31,
1997, 1996 and 1995, respectively.
An advance to a GBCC subsidiary in the amount of $5,672,000 was outstanding
as of December 31, 1996 and accrued interest at the rate of 16.5% per annum.
Interest receivable with respect to this advance was $3,042,000 at December 31,
1996. At December 31, 1997, the advance, together with accrued interest
amounting to $3,978,000, was reserved by GBHC as collection of the receivables
is uncertain. The advance and related interest receivable were both included in
noncurrent amounts due from affiliates on the accompanying consolidated balance
sheet at December 31, 1996.
During the third quarter of 1996, GBCC borrowed a total of $6,500,000 from
HCC which it then loaned to GBHC for working capital purposes. Such borrowings
accrue interest at the rate of 13 3/4% per annum payable quarterly commencing
October 1, 1996. During the first quarter of 1997, GBHC borrowed an additional
$1,500,000 from GBCC on similar terms. GBHC also borrowed $5,000,000 from
another subsidiary of GBCC during January 1997 at the rate of 14 5/8% per annum
payable semiannually commencing July 15, 1997. At December 31, 1997, interest
accrued on such loans amounted to $2,216,000 and is included in noncurrent
amounts due to affiliates on the accompanying consolidated balance sheet.
Interest accrued on affiliate loans in the amount of $410,000 is included in
interest payable
39
GB HOLDINGS, INC. AND SUBSIDIARIES
(WHOLLY OWNED BY PRATT CASINO CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
on the accompanying consolidated balance sheet at December 31, 1996. Repayment
of such borrowings from GBCC and the payment of the related interest are subject
to approval of the Bankruptcy Court and the Casino Commission.
Interest income (expense) incurred with respect to affiliate advances and
borrowings is as follows:
YEAR ENDED DECEMBER 31,
---------------------------------------
1997 1996 1995
----------- ----------- -----------
Net advances $ (870,000) $ 525,000 $ 936,000
Affiliate loan (Note 4) (1,463,000) (1,463,000) (1,463,000)
Interest accrued on the Affiliate loan (Note 4) of $2,738,000 and
$1,276,000 at December 31, 1997 and 1996, respectively, is included in
noncurrent amounts due to affiliates and interest payable on the accompanying
consolidated balance sheets.
GBHC performs certain services for other subsidiaries of GBCC and for HCC
and its subsidiaries and invoices those companies for the Sands' cost of
providing those services. Similarly, GBHC is charged for certain legal,
accounting and other expenses incurred by GBCC and HCC and their respective
subsidiaries that relate to the Sands' business. Such affiliate transactions are
summarized below:
YEAR ENDED DECEMBER 31,
---------------------------------------
1997 1996 1995
----------- ----------- -----------
Billings to affiliates $1,080,000 $1,594,000 $1,023,000
Charges from affiliates 917,000 1,178,000 659,000
(7) NEW JERSEY REGULATIONS AND OBLIGATORY INVESTMENTS
The Sands conducts gaming operations in Atlantic City, New Jersey and
operates a hotel and several restaurants, as well as related support facilities.
The operation of an Atlantic City casino/hotel is subject to significant
regulatory control. Under the New Jersey Casino Control Act (the "Casino Act"),
GBHC was required to obtain and is required to periodically renew its operating
license. A casino license is not transferable and, after the initial licensing
and two one-year renewal periods, is issued for a term of up to four years.
However, the Casino Commission still has the authority to reopen license
hearings at any time. During September 1996, the Casino Commission renewed
GBHC's license to operate the Sands through September 30, 2000, subject to
review of the Sands' financial stability during 1997. Such review took place
and the Sands is scheduled for another review in 1998. Terms of the current
license require the Sands to comply with periodic financial reporting
requirements as well as obtain prior Casino Commission approval of certain cash
transactions with affiliates. If it were determined that gaming laws were
violated by a licensee, the gaming license could be conditioned, suspended or
revoked. In addition, the licensee and other persons involved could be subject
to substantial fines.
40
GB HOLDINGS, INC. AND SUBSIDIARIES
(WHOLLY OWNED BY PRATT CASINO CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Casino Act requires casino licensees to make certain approved
investments in New Jersey or to pay an investment alternative tax. Casino
licensees may obtain investment credits, which amount to 1.25% of casino
revenues, by purchasing bonds at below-market interest rates from the Casino
Reinvestment Development Authority (the "CRDA") or by making qualified
investments approved by the CRDA. This governmental agency administers the
statutorily mandated investments made by casino licensees and is required to
expend the monies received by it for eligible projects defined in the statute.
The investment alternative tax amounts to 2.5% of casino revenues. Payments of
the investment obligations must be made quarterly. The Sands has elected to
comply with the requirements by obtaining investment credits or by making
qualified investments.
As of December 31, 1997 and 1996, the Sands had purchased bonds totaling
$6,500,000 and $5,237,000, respectively. In addition, the Sands had remaining
funds on deposit and held in escrow by the CRDA at December 31, 1997 and 1996 of
$6,981,000 and $5,546,000, respectively. The bonds purchased and the amounts on
deposit and held in escrow are collectively referred to as "obligatory
investments" on the accompanying consolidated financial statements.
Obligatory investments at December 31, 1997 and 1996 are net of accumulated
valuation allowances of $5,571,000 and $4,401,000, respectively, based upon the
estimated realizable values of the investments. Provisions for valuation
allowances during the years ended December 31, 1997, 1996 and 1995 amounted to
$1,241,000, $1,344,000 and $1,457,000, respectively.
The Sands has, from time to time, contributed certain amounts held in
escrow to the CRDA. In consideration thereof, the CRDA granted the Sands waivers
of certain of its investment obligations in future periods. GBHC made such
contributions of obligatory investments during the years ended December 31,
1997, 1996 and 1995 totaling $147,000, $1,500,000 and $250,000, respectively,
resulting in waivers granted by the CRDA during 1997 and 1995 totaling $75,000
and $128,000, respectively. No such waivers were granted during 1996; however,
the contributions were designated for projects expected to benefit the community
and the Sands facility. Accordingly, intangible assets aggregating $2,361,000
and $2,433,000, respectively, have been included in other assets on the
accompanying consolidated balance sheets at December 31, 1997 and 1996, and will
be amortized over a period of ten years effective with the completion of the
projects. Amortization of waivers granted totaled $200,000 and $128,000 during
the years ended December 31, 1997 and 1995, respectively.
(8) 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 officers and directors as of the date of the filing remain in
office, subject to the supervision of the Bankruptcy Court.
GBHC is a party in various legal proceedings with respect to the conduct of
casino and hotel operations. Although a possible range of loss can not be
estimated, in the opinion of management, based upon the advice of counsel,
settlement or resolution of these proceedings should not have a material adverse
impact upon the consolidated financial position or results of operations of
Holdings and GBHC. The
41
GB HOLDINGS, INC. AND SUBSIDIARIES
(WHOLLY OWNED BY PRATT CASINO CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
accompanying consolidated financial statements do not include any adjustments
that might result from the outcome of the uncertainties described above.
(9) SUPPLEMENTAL CASH FLOW INFORMATION
During 1995, GBHC and a subsidiary of GBCC settled certain intercompany
obligations on a noncash basis. An intercompany receivable totaling $278,000 in
1995 was eliminated against a portion of GBHC's current federal tax obligations
under the tax allocation agreement (see Note 5). The effects of this
elimination have been excluded from the accompanying consolidated statements of
cash flows as a noncash transaction.
(10) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value:
CASH AND CASH EQUIVALENTS - The carrying amounts approximate fair value
-------------------------
because of the short maturity of these instruments.
OBLIGATORY INVESTMENTS - The carrying amount of obligatory investments
----------------------
approximates fair value as a result of an allowance reflecting the below market
interest rate associated with such investments.
INTEREST RECEIVABLE AND INTEREST PAYABLE - Interest receivable from and
----------------------------------------
payable to affiliates are valued at the carrying amount. As a result of the
Chapter 11 filing, the fair market value at December 31, 1997 of accrued
interest payable with respect to the 10 7/8% First Mortgage Notes is not readily
determinable; accordingly, the fair value set forth below is the carrying
amount. The carrying amount of other interest payable approximates fair value
because of the short maturity of the obligation.
NOTE RECEIVABLE AND LONG-TERM DEBT - The fair value of Holdings' long-term
----------------------------------
debt is estimated based on either the quoted market prices of the issue or on
the discounted cash flow of future payments utilizing current rates available to
Holdings for debt of similar remaining maturities. Debt obligations with a
short remaining maturity and obligations to and from affiliates are valued at
the carrying amount.
42
GB HOLDINGS, INC. AND SUBSIDIARIES
(WHOLLY OWNED BY PRATT CASINO CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The estimated carrying amounts and fair values of Holdings' financial
instruments at December 31, 1997 and 1996 are as follows:
DECEMBER 31, 1997 DECEMBER 31, 1996
--------------------------- ---------------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
------------ ------------ ------------ ------------
Financial Assets
Cash and cash equivalents $ 13,871,000 $ 13,871,000 $ 15,624,000 $ 15,624,000
Interest receivable - - 3,042,000 3,042,000
16 1/2% affiliate advance - - 5,672,000 5,672,000
Obligatory investments 7,910,000 7,910,000 6,382,000 6,382,000
Financial Liabilities
Interest payable 9,156,000 9,156,000 10,978,000 10,978,000
Borrowings from affiliates 13,000,000 13,000,000 6,500,000 6,500,000
Interest on affiliate borrowings 4,954,000 4,954,000 - -
10 7/8% First Mortgage Notes 182,500,000 152,388,000 185,000,000 154,475,000
14 5/8% affiliate loan 10,000,000 10,000,000 10,000,000 10,000,000
Other notes payable 432,000 432,000 442,000 442,000
(11) SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
QUARTER
-----------------------------------------------------------
FIRST SECOND THIRD FOURTH
------------ ------------ ------------ -----------
YEAR ENDED DECEMBER 31, 1997:
Net revenues $ 63,197,000 $ 67,481,000 $ 69,241,000 $ 56,336,000
============ ============ ============ ============
Net loss $ (3,261,000) $ (1,441,000) $ (1,335,000) $(31,619,000)
============ ============ ============ ============
YEAR ENDED DECEMBER 31, 1996:
Net revenues $ 62,834,000 $70,624,000 $71,720,000 $59,583,000
============ =========== =========== ===========
Net loss $ (6,233,000) $(13,305,000) $(4,227,000) $(7,605,000)
============ ============ =========== ===========
43
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None of the Registrants had disagreements with its independent accountants
to report under this item.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTS
Directors of GB Property Funding, Holdings and GBHC are elected annually to
serve until the next annual meeting of stockholders or until their successors
have been duly elected and qualified.
No family relationships exist between any directors or executive officers
of GB Property Funding, Holdings or GBHC.
DIRECTORS AND OFFICERS
Certain information is set forth below concerning the directors and
executive officers of each of GB Property Funding, Holdings and GBHC.
Name Age Position
- -------------------------- --- ---------------------------------
Richard D. Knight (1) (4) 50 Chairman of the Board, Chief
Executive Officer, President and
Director
Frederick H. Kraus (2) (4) 48 Executive Vice President, General
Counsel and Secretary
Timothy A. Ebling (3) (4) 39 Executive Vice President, Chief
Financial Officer, Principal Accounting
Officer and Director
(1) Richard D. Knight was elected Chairman of the Board of Directors, Chief
Executive Officer and President of each of the Companies on January 2,
1998. He concurrently holds the position of Executive Vice President of
Operations of Hollywood Casino Corporation ("HCC") to which he was elected
in May 1995. He has also served as Executive Vice President and Chief
Operating Officer of Hollywood Casino - Aurora, Inc. since 1992 and HWCC-
Tunica, Inc. since 1994. Mr. Knight has over 20 years of casino operating
experience and was previously employed as a senior operating officer within
the Bally organization, serving most recently as Senior Vice President of
Bally's Park Place, Inc. in Atlantic City, New Jersey from 1991 to 1992.
(2) Frederick H. Kraus was elected Executive Vice President, General Counsel,
Secretary and Director of each of the companies on January 2, 1998. He
previously served as Vice President, Corporate Counsel and Secretary of
GBHC since September 1, 1994 and, prior to that date, as Director of Legal
Affairs of GBHC.
(3) Timothy A. Ebling was elected Executive Vice President, Chief Financial
Officer and a Director of each of the companies on January 2, 1998. He
previously served as Vice President of Finance of GBHC since March 1994
and, prior to that date, as Director of Corporate Accounting of GBHC.
44
(4) On January 5, 1998, each of the Companies filed petitions for relief under
Chapter 11 of the United States Bankruptcy Code in the United States
Bankruptcy Court for the District of New Jersey (the "Bankruptcy Court").
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION
Neither Holdings nor GB Property Funding pay any compensation to any
employee, executive officer or director. The following table provides certain
summary information concerning compensation paid or accrued by GBHC, to or on
behalf of (i) GBHC's Chief Executive Officer; (ii) each of the other executive
officers of GBHC determined as of the end of the last fiscal year; and (iii)
additional individuals who would have qualified as among the executive officers
of GBHC but for the fact that the individual was not serving as an executive
officer at the end of the last fiscal year (hereafter referred to as the named
executive officers) for the fiscal years ended December 31, 1997, 1996 and 1995.
ANNUAL COMPENSATION LONG-TERM
--------------------------------------- COMPENSATION
OTHER ANNUAL AWARDS/ ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION OPTIONS COMPENSATION (1)
- -------------------------------- ------- --------- ------- ------------------- ------------ ----------------
Richard D. Knight (2) 1997 $ - $ - - $ - $ -
Chief Executive Officer, 1996 - - - - -
President and Chairman of the 1995 - - - - -
Board of GBHC
Frederick H. Kraus 1997 214,133 - - - 3,500
Executive Vice President, 1996 210,800 25,000 - - 1,980
General Counsel, Secretary 1995 185,800 - - - 1,961
and Director of GBHC
Timothy A. Ebling 1997 189,186 - - - 3,500
Executive Vice President, 1996 173,400 - - - 1,980
Chief Financial Officer 1995 150,646 25,000 - - 1,834
and Director of GBHC
Jack E. Pratt (3) 1997 - - - - -
Formerly Chief Executive 1996 - - - - -
Officer and Chairman of the 1995 - - - - -
Board of GBHC
Leonard M. DeAngelo 1997 510,543 - - - 3,500
Formerly President of GBHC 1996 482,258 - - - 1,980
1995 284,772 75,000 - - 1,980
Rober J. DeSalvio 1997 248,871 - - - 3,500
Formerly Executive Vice 1996 339,400 - - - 1,980
President of Marketing of 1995 289,400 50,000 - - 1,980
GBHC
__________________________
45
(1) Includes matching contributions by GBHC to The Hollywood Casino Corporation
and Subsidiaries Retirement Savings Plan on behalf of the named executive
officer.
(2) Richard D. Knight concurrently serves as Executive Vice President of
Operations of HCC and as Executive Vice President and Chief Financial
Operating Officer of two of HCC's subsidiaries. Mr. Knight's compensation
during 1997, 1996 and 1995 was paid by HCC or one of its subsidiaries.
During 1997, a portion of Mr. Knight's salary was reimbursed by a subsidiary
of GBCC; however, GBHC did not reimburse any portion of Mr. Knight's salary.
(3) Jack E. Pratt concurrently served as Chief Executive Officer and Chairman of
the Board of Directors of HCC and of Greate Bay Casino Corporation ("GBCC"),
the indirect parent of GBHC. Mr. Pratt's salary was paid by HCC or was
allocated to subsidiaries of GBCC; however, GBHC did not reimburse any
portion of Mr. Pratt's salary.
OPTION GRANTS IN LAST FISCAL YEAR
None of the Companies has a stock option plan.
EMPLOYMENT CONTRACTS
Richard D. Knight, Chief Executive Officer and President of GBHC, is under
an employment contract with HCC, amended as of December 31, 1997, and continuing
through December 31, 2000 unless sooner terminated by either party. The terms of
Mr. Knight's agreement provide for an annual base salary of $456,000, subject to
annual review and adjustment. In accordance with the employment contract, for
such period of time as Mr. Knight serves as President of GBHC, HCC will be
obligated to pay Mr. Knight any portion of his compensation not paid by GBHC.
Frederick H. Kraus, Executive Vice President, General Counsel and Secretary
of GBHC, is under an employment agreement, amended as of January 1, 1998, in
such capacities continuing through December 31, 2000. The terms of the
agreement provide for an annual base salary of $225,000, subject to annual
increases on each anniversary date of the agreement equal to no less than the
change in the Consumer Price Index, as defined, and no more than five percent.
Timothy A. Ebling, Executive Vice President and Chief Financial Officer of
GBHC, is under an employment agreement, amended as of January 1, 1998, in such
capacities continuing through November 30, 2000. The terms of the agreement
provide for an annual base salary of $190,000, subject to annual increases on
each anniversary date of the agreement equal to no less than the change in the
Consumer Price Index, as defined, and no more than five percent.
In addition, the Bankruptcy Court has approved a Stay Bonus and Severance
Plan for certain management employees, including Mr. Kraus and Mr. Ebling.
Under the Stay Bonus Plan, Mr. Kraus and Mr. Ebling would receive a bonus equal
to 75% of their base salary if they continue their employment for the lesser of
two years or until a reorganization plan is approved by the Bankruptcy Court.
Under the Severance Plan, if the Reorganized Entity, as defined in the plan,
terminated the employment of Mr. Kraus or Mr. Ebling without Cause, as defined
in their employment agreements, Mr. Kraus and Mr. Ebling would be entitled to a
lump sum payment equal to the greater of two years of their base salary or the
remaining term of their employment agreements.
The employment agreements of Messrs. Kraus and Ebling were approved by the
Bankruptcy Court, which modified the amount of annual salary increases from five
percent to the terms set forth above and which reduced the period over which
periodic payments of salary upon a termination without cause not connected with
a change in control could be made to no more than two years.
46
EMPLOYEE RETIREMENT SAVINGS PLAN
GBHC participates in the Hollywood Casino Corporation and Subsidiaries
Retirement Savings Plan (the "Savings Plan"), a qualified defined contribution
plan for the benefit of all of GBHC's employees who satisfy certain eligibility
requirements. The Savings Plan is qualified under the requirements of Section
401(k) of the Internal Revenue Code allowing participating employees to benefit
from the tax deferral opportunities provided therein. All employees of GBHC who
have completed one year of service, as defined, and who have attained the age of
21, are eligible to participate in the Savings Plan.
The Savings Plan provides for a matching contribution by GBHC based upon
certain criteria, including levels of participation by GBHC's employees. GBHC
incurred matching contributions totaling approximately $1.3 million for the year
ended December 31, 1997.
COMPENSATION OF DIRECTORS
Directors of GBHC received an annual fee of $10,000 for service on the Board
of Directors and a fee of $1,000 for each meeting attended. The Board of
Directors did not hold any meetings during the year ended December 31, 1997.
All directors attended at least 75% of all meetings of the Board of Directors
and committees thereof for which they were eligible to serve.
The Board of Directors of GBHC also has an Audit Committee. Members of the
Audit Committee received an annual fee of $2,500 for service on the committee
and a fee of $500 for each meeting attended. There is no Compensation Committee
of the Board of Directors; such function is performed by the Board as a whole.
AUDIT COMMITTEE. The Audit Committee has the duty to (i) recommend annually
to the Board of Directors the independent public accountants to be engaged to
audit the books, records and accounts of the companies for the ensuing year;
(ii) arrange the details for the engagement of the independent public
accountants, including the remuneration to be paid; (iii) review with the
companies' independent public accountants, as well as the companies' controller
and other appropriate personnel, the companies' general policies and procedures
with respect to audits and accounting and financial controls and the general
accounting and reporting principles that should be applied in preparing the
companies' financial statements; (iv) meet with the independent public
accountants as required and review with them the companies' interim and year-end
financial statements, any certification, report or opinion that the independent
public accountants propose to render in connection with such statements, and any
other appropriate matter; and (v) make such reports and recommendations to the
Board of Directors in connection with the foregoing as it shall deem appropriate
or as the Board of Directors may request, and take such action thereon as the
Board of Directors may direct it to take. During 1997, the Audit Committee was
comprised of Messrs. Bernard A. Capaldi, Edward D. Muir and Edward T. Pratt, Jr.
Mr. Muir was succeeded to the Audit Committee effective September 9, 1997 by Mr.
Michael J. Chesser. All committee members resigned from such positions on
January 2, 1998. The Audit Committee met four times during 1997.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The common stock of GB Property Funding, 1,000 shares $1.00 per value, is its
only voting security. All such shares are owned by Holdings.
The common stock of GBHC, 2,500 shares no par value, is GBHC's sole voting
security. All such shares are owned by Holdings.
The common stock of Holdings, 1,000 shares $1.00 par value, is Holding's only
voting security. All such shares are owned by Pratt Casino Corporation.
47
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
New Jersey Management, Inc. ("NJMI"), an indirect subsidiary of GBCC, is
responsible for the operations of the Sands under a management agreement. NJMI
is entitled to receive annually (i) a basic consulting fee of 1.5% of "adjusted
gross revenues," as defined, and (ii) incentive compensation of between 5% and
7.5% of gross operating profits in excess of certain stated amounts should
annual "gross operating profits," as defined, exceed $5,000,000. Such fees
amounted to $5,430,000 during the year ended December 31, 1997. Management fees
payable to NJMI at December 31, 1997 amounted to $34,000.
GBHC licenses the trade name "Sands" from GBCC which licenses the name from
an unaffiliated third party. Amounts payable by the Sands under this agreement
are equal to the amounts paid to the unaffiliated third party. Such charges
amounted to $290,000 for the year ended December 31, 1997.
An advance to a GBCC subsidiary in the amount of $5,672,000 was outstanding
as of December 31, 1996 which accrued interest at the rate of 16.5% per annum.
At December 31, 1997, the advance, together with accrued interest amounting to
$3,978,000, was reserved by GBHC as collection of the receivables is uncertain.
Interest earned on the advance amounted to $936,000 during the year ended
December 31, 1997.
During the third quarter of 1996, GBCC borrowed a total of $6,500,000 from
HCC which it then loaned to GBHC for working capital purposes. Such borrowings
accrue interest at the rate of 13 3/4% per annum payable quarterly commencing
October 1, 1996. During the first quarter of 1997, GBHC borrowed an additional
$1,500,000 from GBCC on similar terms. GBHC also borrowed $5,000,000 from
another subsidiary of GBCC during January 1997 at the rate of 14 5/8% per annum
payable semiannually commencing July 15, 1997. At December 31, 1997, interest
accrued on such loans amounted to $2,216,000. Repayment of such borrowings from
GBCC and the payment of the related interest are subject to approval of the
Bankruptcy Court and the New Jersey Casino Control Commission (the "Casino
Commission"). Interest expense on such advances amounted to $1,806,00 during
the year ended December 31, 1997.
On February 17, 1994, GBHC issued a $10,000,000 subordinated promissory note
to a subsidiary of GBCC. The note bears interest at the rate of 14 5/8% per
annum, payable semiannually commencing August 17, 1994, subject to maintaining
average daily cash balances required by the indenture for the 10 7/8% First
Mortgage Notes, with the principal due February 2005. As a result of such
payment restrictions, interest has been paid only through February 17, 1996.
Interest expense on such loan amounted to $1,463,000 during the year ended
December 31, 1997 and total accrued interest payable on the loan totalled
$2,738,000 at December 31, 1997.
GBHC performs certain services for other subsidiaries of GBCC and for HCC and
its subsidiaries and invoices those companies for the Sands' cost of providing
those services. Similarly, GBHC is charged for certain legal, accounting and
other expenses incurred by GBCC and HCC and their respective subsidiaries that
relate to the Sands' business. Total billings to affiliates amounted to
$1,080,000 during the year ended December 31, 1997. Total charges from
affiliates amounted to $917,000 during the year ended December 31, 1997.
As of December 31, 1996, GBHC had $2,000,000 outstanding under a bank line of
credit. Borrowings under the line of credit were guaranteed to the extent of
$2,000,000 by a subsidiary of GBCC, which pledged a certificate of deposit in
the face amount of $2,000,000 as collateral for the line of credit. The line of
credit was repaid upon maturity of the certificate of deposit during January
1997 with proceeds from affiliate borrowings (see above) and the line of credit
was cancelled.
48
Holdings, GB Property Funding and GBHC are parties to tax allocation
agreements with GBCC and its subsidiaries. Pursuant to the agreements, each
company's provision for income taxes is based on the amount of tax which would
be provided if a separate income tax return were filed. No payments under the
agreements were required during the year ended December 31, 1997. At December
31, 1997, GBHC had payables under the tax sharing agreement amounting to
$129,000. The payment of taxes in accordance with the tax allocation agreements
is subject to the approval of the Casino Commission.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this report:
1. FINANCIAL STATEMENTS
The financial statements filed as part of this report are listed on the
Index to Financial Statements on page 17.
2. FINANCIAL STATEMENT SCHEDULES
-- Report of Independent Public Accountants
-- Schedule I; Condensed Financial Information of Registrant, GB Holdings,
Inc. (Parent Company)
-- Balance Sheets
-- Statements of Operations
-- Statements of Cash Flows
-- Note to Parent Company Financial Statements
-- Schedule II; Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under
the related instructions and are inapplicable and therefore have been
omitted.
3. EXHIBITS
+3.1 -- Certificate of Incorporation of GB Property Funding.
(Exhibit 3.1)
+3.2 -- Certificate of Incorporation, as amended, of GBHC.
(Exhibit 3.2)
+3.3 -- Certificate of Incorporation of Holdings. (Exhibit 3.3)
+3.4 -- Bylaws of GB Property Funding. (Exhibit 3.4)
+3.5 -- Bylaws of GBHC. (Exhibit 3.5)
+3.6 -- Bylaws of Holdings. (Exhibit 3.6)
*4.1 -- Indenture dated as of February 15, 1994 among GB Issuer,
Holdings and GBHC, as Guarantors, and Property Funding,
as Shawmut Bank Connecticut, N.A., as Trustee. (Exhibit
10.50)
*4.2 -- Mortgage, Fixture Filing and Security Agreement GBHC in
favor of Shawmut Bank Connecticut, dated February 17,
1994, by National Association, as Mortgagee. (Exhibit
10.51)
*4.3 -- Security Agreement dated February 17, 1994 made Corp.,
GBHC, GB Holdings, Inc., Advanced Casino by GB Property
Funding Systems International, Inc., Computerized
Management Systems International, Inc. and any Additional
Collateral Grantor to Shawmut Bank Connecticut, National
Association, as Trustee. (Exhibit 10.52)
*4.4 -- Collateral Assignment of Leases dated as of favor of
Shawmut Bank Connecticut, National February 17, 1994, by
GBHC, in Association, as Assignee. (Exhibit 10.53)
49
++10.1 -- Management Services Agreement dated August 19,
Management, Inc. ("PHMI"), the predecessor of 1987,
between Pratt Hotel NJMI, and GBHC. (Exhibit 10.1)
++10.2 -- Tax Allocation Agreement by and among Pratt PCPI Funding
Corp., GBHC and certain other parties Casino Properties,
Inc., PHMI, effective as of January 1, 1987. (Exhibit
10.18)
++10.3 -- Amended License Agreement by and between Hughes Hotel
Corporation (now known as GBCC) dated May Properties,
Inc. and Pratt 19, 1987. (Exhibit 10.3)
10.4 -- First and Second Amendments to Employment Agreement dated
as of January 1,1998, between GBHC and Frederick H.
Kraus.
10.5 -- First and Second Amendments to Employment Agreement dated
as of January 1, 1998, between GBHC and Timothy A.
Ebling.
+10.6 -- Deed dated November 27, 1978, from Colony Associates,
L.P. to GBHC. (Exhibit 10.13)
21.1 -- Subsidiaries of GB Holdings, Inc.
+99.1 -- Appraisal of the Sands as of August 1, 1993. (Exhibit
99.1)
#99.2 -- Voluntary petition for bankruptcy pursuant to Code for
Greate Bay Hotel and Casino, Inc. dated Chapter 11 of the
Bankruptcy January 5, 1998. (Exhibit 99.2)
#99.3 -- Voluntary petition for bankruptcy pursuant to Chapter 11
of the Bankruptcy Code for GB Holdings, Inc. dated
January 5, 1998 (Exhibit 99.3)
#99.4 -- Voluntary petition for bankruptcy pursuant to Chapter 11
of the Bankruptcy Code for GB Property Funding Corp.
dated January 5, 1998 (Exhibit 99.4)
_________________________
+ Incorporated by reference from the exhibit shown in parenthesis to
Form S-1 Registration Statement (Registration No. 33-69716) for GB
Property Funding Corp. as filed with the SEC on February 2, 1994.
++ Incorporated by reference from the exhibit shown in parenthesis to
Form S-1 Registration Statement (Registration No. 33-58732) for
Hollywood Casino Corporation as filed with the SEC on February 26,
1993.
* Incorporated by reference from the exhibit shown in parenthesis to
Form S-1 Registration Statement (Registration No. 33-77502) for
Hollywood Casino Corporation as filed with the SEC on April 8,
1994.
# Incorporated by reference from the exhibit shown in parenthesis to
Form 8-K for GB Property Funding Corp., GB Holdings, Inc. and
Greate Bay Hotel and Casino, Inc. as filed with the SEC on January
9, 1998.
(b) REPORTS ON FORM 8-K
None of the Registrants filed any reports on Form 8-K during the
quarter ended December 31, 1997. A report on Form 8-K was filed on January 9,
1998 to report the filing on January 5, 1998 of petitions for relief under
Chapter 11 of the United States Bankruptcy Code by Holdings, GB Property Funding
and GBHC.
50
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, in the City of
Atlantic City, State of New Jersey on March 27, 1998.
GB PROPERTY FUNDING CORP.
By:/s/ Richard D. Knight
-------------------------
Richard D. Knight
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant in
the capacities and on the dates indicated:
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Richard D. Knight Chief Executive Officer, March 27, 1998
- ------------------------------ President and Director
Richard D. Knight
/s/ Frederick H. Kraus Executive Vice President, March 27, 1998
- ------------------------------ General Counsel, Secretary
Frederick H. Kraus and Director
/s/ Timothy A. Ebling Executive Vice President, March 27, 1998
- ------------------------------ Chief Financial Officer,
Timothy A. Ebling Principal Accounting Officer,
and Director
51
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, in the City of
Atlantic City, State of New Jersey on March 27, 1998.
GB HOLDINGS, INC.
By:/s/ Richard D. Knight
----------------------------
Richard D. Knight
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant in
the capacities and on the dates indicated:
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Richard D. Knight Chief Executive Officer, March 27, 1998
- ------------------------------ President and Director
Richard D. Knight
/s/ Frederick H. Kraus Executive Vice President, March 27, 1998
- ------------------------------ General Counsel, Secretary
Frederick H. Kraus and Director
/s/ Timothy A. Ebling Executive Vice President, March 27, 1998
- ------------------------------ Chief Financial Officer,
Timothy A. Ebling Principal Accounting Officer
and Director
52
INDEX TO FINANCIAL STATEMENT SCHEDULES
GB HOLDINGS, INC. AND SUBSIDIARIES
-- Report of Independent Public Accountants
-- Schedule I; Condensed Financial Information of Registrant
-- Balance Sheets
-- Statements of Operations
-- Statements of Cash Flows
-- Note to Parent Company Financial Statements
-- Schedule II; Valuation and Qualifying Accounts
53
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
----------------------------------------
To GB Holdings, Inc.:
We have audited in accordance with generally accepted auditing
standards, the consolidated financial statements of GB Holdings, Inc. and
subsidiaries included in this Form 10-K and have issued our report thereon dated
March 23, 1998. Our audit was made for the purpose of forming an opinion on the
basic financial statements taken as a whole. The schedules listed in the index
to financial statement schedules are the responsibility of the Company's
management and are presented for purposes of complying with the Securities and
Exchange Commission's rules and are not part of the basic financial statements.
These schedules have been subjected to the auditing procedures applied in the
audit of the basic financial statements and, in our opinion, fairly state in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Roseland, New Jersey
March 23, 1998
54
SCHEDULE I
PAGE 1
GB HOLDINGS, INC. AND SUBSIDIARIES
(WHOLLY OWNED BY PRATT CASINO CORPORATION)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
GB HOLDINGS, INC.
(PARENT COMPANY)
BALANCE SHEETS
ASSETS
DECEMBER 31,
---------------------------
1997 1996
------------ ------------
Investment in and advances to consolidated
subsidiaries $ 1,000 $ 1,000
------------ ------------
Total assets $ 1,000 $ 1,000
============ ============
LIABILITIES AND SHAREHOLDER'S DEFICIT
Investment in and advances to consolidated
subsidiary $ 58,600,000 $ 20,944,000
------------ ------------
Due to affiliate 1,000 1,000
------------ ------------
Shareholder's deficit:
Common stock, $1.00 par value per share,
1,000 shares authorized and outstanding 1,000 1,000
Additional paid-in capital 18,438,000 18,438,000
Accumulated deficit (77,039,000) (39,383,000)
------------ ------------
Total shareholder's deficit (58,600,000) (20,944,000)
------------ ------------
$ 1,000 $ 1,000
============ ============
The accompanying notes to consolidated financial statements
are an integral part of this schedule.
SCHEDULE I
PAGE 2
GB HOLDINGS, INC. AND SUBSIDIARIES
(WHOLLY OWNED BY PRATT CASINO CORPORATION)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
GB HOLDINGS, INC.
(PARENT COMPANY)
STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
------------------------------------------
1997 1996 1995
------------- ------------- ------------
Equity in losses of consolidated
subsidiaries $(37,656,000) $(31,370,000) $(2,641,000)
------------ ------------ -----------
Net loss $(37,656,000) $(31,370,000) $(2,641,000)
============ ============ ===========
The accompanying notes to consolidated financial statements
are an integral part of this schedule.
SCHEDULE I
PAGE 3
GB HOLDINGS, INC. AND SUBSIDIARIES
(WHOLLY OWNED BY PRATT CASINO CORPORATION)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
GB HOLDINGS, INC.
(PARENT COMPANY)
STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
------------------------
1997 1996 1995
---- ---- ----
Net change in cash $ - $ - $ -
Cash at beginning of year - - -
---- ---- ----
Cash at end of year $ - $ - $ -
==== ==== ====
The accompanying notes to consolidated financial statements
are an integral part of this schedule.
SCHEDULE I
PAGE 4
GB HOLDINGS, INC. AND SUBSIDIARIES
(WHOLLY OWNED BY PRATT CASINO CORPORATION)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
GB HOLDINGS, INC.
(PARENT COMPANY)
NOTES TO PARENT COMPANY FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
The accompanying condensed parent company financial statements have been
prepared assuming that GB Holdings, Inc. ("Holdings") will continue as a going
concern. Holdings has experienced significant losses over the last two years
and has a net capital deficiency of $58,600,000 at December 31, 1997. As
discussed below, on January 5, 1998, Holdings filed a voluntary petition for
relief under Chapter 11 of the United States Bankruptcy Code (the "Bankruptcy
Code"). These matters, among others, raise substantial doubt about Holdings'
ability to continue as a going concern. Management is in the process of
developing a plan of reorganization that will be submitted to the United States
Bankruptcy Court (the "Bankruptcy Court") and Holdings' creditors for their
approval. In the event the plan of reorganization is accepted, continuation of
the business thereafter is dependent on Holdings' ability to achieve successful
future operations. The accompanying condensed parent company financial
statements do not include any adjustments relating to the recoverability and
classification of recorded asset amounts or the amounts and classification of
liabilities that might be necessary should Holdings be unable to continue as a
going concern.
(2) GUARANTEE OF REGISTRANT
Holdings has unconditionally guaranteed the debt obligations of GB Property
Funding Corp. ("GB Property Funding"), a wholly owned subsidiary, as to the
timely payment of principal, premium, if any, and interest (see Note 3).
(3) DEBT REORGANIZATION
On January 5, 1998, Holdings, together with GB Property Funding and Greate
Bay Hotel and Casino, Inc. ("GBHC"), both wholly owned subsidiaries of Holdings,
filed petitions for relief under Chapter 11 of the Bankruptcy Code in the
Bankruptcy Court for the District of New Jersey to restructure $185,000,000
original principal amount of 10 7/8% First Mortgage Notes issued by GB Property
Funding for the benefit of GBHC. Each company continues to operate in the
ordinary course of business, as set forth in the Bankruptcy Code, and each
company's officers and directors as of the date of the filing remain in office,
subject to the supervision of the Bankruptcy Court.
The accompanying notes to consolidated financial
statements are an integral part of this schedule.
SCHEDULE II
GB HOLDINGS, INC. AND SUBSIDIARIES
(WHOLLY OWNED BY PRATT CASINO CORPORATION)
VALUATION AND QUALIFYING ACCOUNTS
AMOUNTS
BALANCE AT CHARGED TO BALANCE
BEGINNING COSTS AND AT END
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS OF PERIOD
- ------------------------------- ----------- ----------- ---------------- -----------
YEAR ENDED DECEMBER 31, 1997:
Allowance for doubtful
accounts receivable $15,524,000 $ 3,195,000 $(3,764,000) (1) $14,955,000
Valuation allowance on
affiliate receivables - 9,650,000 - 9,650,000
Allowance for obligatory
investments 4,401,000 1,241,000 (71,000) (2) 5,571,000
----------- ----------- --------------- -----------
$19,925,000 $14,086,000 $ (3,835,000) $30,176,000
=========== =========== =============== ===========
YEAR ENDED DECEMBER 31, 1996:
Allowance for doubtful
accounts receivable $16,494,000 $ 2,167,000 $(3,137,000) (1) $15,524,000
Allowance for obligatory
investments 3,792,000 1,344,000 (735,000) (2) 4,401,000
----------- ----------- --------------- -----------
$20,286,000 $ 3,511,000 $ (3,872,000) $19,925,000
=========== =========== =============== ===========
YEAR ENDED DECEMBER 31, 1995:
Allowance for doubtful
accounts receivable $15,288,000 $ 2,988,000 $(1,782,000) (1) $16,494,000
Allowance for obligatory
investments 2,458,000 1,457,000 (123,000) (2) 3,792,000
----------- ----------- --------------- -----------
$17,746,000 $ 4,445,000 $ (1,905,000) $20,286,000
=========== =========== =============== ===========
________________________
(1) Represents net write-offs of uncollectible accounts.
(2) Represents write-offs of obligatory investments in connection with the
contribution of certain obligatory investments to the Casino Reinvestment
Development Authority.
The accompanying notes to consolidated financial statements
are an integral part of this schedule.
INDEX TO EXHIBITS
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER PAGE
- ------- ------------
+3.1 -- Certificate of Incorporation of GB Property Funding.
(Exhibit 3.1)
+3.2 -- Certificate of Incorporation, as amended, of GBHC.
(Exhibit 3.2)
+3.3 -- Certificate of Incorporation of Holdings. (Exhibit 3.3)
+3.4 -- Bylaws of GB Property Funding. (Exhibit 3.4)
+3.5 -- Bylaws of GBHC. (Exhibit 3.5)
+3.6 -- Bylaws of Holdings. (Exhibit 3.6)
*4.1 -- Indenture dated as of February 15, 1994 among GB
Property Funding, as Issuer, Holdings and GBHC, as
Guarantors, and Shawmut Bank Connecticut, N.A., as
Trustee. (Exhibit 10.50)
*4.2 -- Mortgage, Fixture Filing and Security Agreement dated
February 17, 1994, by GBHC in favor of Shawmut
Bank Connecticut, National Association, as Mortgagee.
(Exhibit 10.51)
*4.3 -- Security Agreement dated February 17, 1994 made by
GB Property Funding Corp., GBHC, GB Holdings,
Inc., Advanced Casino Systems International, Inc.,
Computerized Management Systems International, Inc.
and any Additional Collateral Grantor to Shawmut Bank
Connecticut, National Association, as Trustee.
(Exhibit 10.52)
*4.4 -- Collateral Assignment of Leases dated as of
February 17, 1994, by GBHC, in favor of Shawmut
Bank Connecticut, National Association, as Assignee.
(Exhibit 10.53)
++10.1 -- Management Services Agreement dated August 19,
1987, between Pratt Hotel Management, Inc. ("PHMI"),
the predecessor of NJMI, and GBHC. (Exhibit 10.1)
++10.2 -- Tax Allocation Agreement by and among Pratt Casino
Properties, Inc., PHMI, PCPI Funding Corp., GBHC
and certain other parties effective as of January 1, 1987.
(Exhibit 10.18)
++10.3 -- Amended License Agreement by and between Hughes
Properties, Inc. and Pratt Hotel Corporation (now
known as GBCC) dated May 19, 1987. (Exhibit 10.3)
10.4 -- First and Second Amendments to Employment
Agreement dated as of January 1, 1998, between GBHC
and Frederick H. Kraus.
10.5 -- First and Second Amendments to Employment
Agreement dated as of January 1, 1998, between GBHC
and Timothy A. Ebling.
+10.6 -- Deed dated November 27, 1978, from Colony
Associates, L.P. to GBHC. (Exhibit 10.13)
21.1 -- Subsidiaries of GB Holdings, Inc.
+99.1 -- Appraisal of the Sands as of August 1, 1993.
(Exhibit 99.1)
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER PAGE
------- ------------
#99.2 -- Voluntary petition for bankruptcy pursuant to Chapter
11 of the Bankruptcy Code for Greate Bay Hotel and
Casino, Inc. dated January 5, 1998. (Exhibit 99.2)
#99.3 -- Voluntary petition for bankruptcy pursuant to Chapter
11 of the Bankruptcy Code for GB Holdings, Inc. dated
January 5, 1998 (Exhibit 99.3)
#99.4 -- Voluntary petition for bankruptcy pursuant to Chapter
11 of the Bankruptcy Code for GB Property Funding
Corp. dated January 5, 1998 (Exhibit 99.4)
- -------------------------
+ Incorporated by reference from the exhibit shown in parenthesis to
Form S-1 Registration Statement (Registration No. 33-69716) for GB
Property Funding Corp. as filed with the SEC on February 2, 1994.
++ Incorporated by reference from the exhibit shown in parenthesis to
Form S-1 Registration Statement (Registration No. 33-58732) for
Hollywood Casino Corporation as filed with the SEC on February 26,
1993.
* Incorporated by reference from the exhibit shown in parenthesis to
Form S-1 Registration Statement (Registration No. 33-77502) for
Hollywood Casino Corporation as filed with the SEC on April 8, 1994.
# Incorporated by reference from the exhibit shown in parenthesis to
Form 8-K for GB Property Funding Corp., GB Holdings, Inc., and
Greate Bay Hotel and Casino, Inc. as filed with the SEC on January
9, 1998.