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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, 1998
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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___________________________
Commission file number 33-69716
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GB PROPERTY FUNDING CORP.
GB HOLDINGS, INC.
GREATE BAY HOTEL AND CASINO, INC.
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(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
ATLANTIC CITY, NEW JERSEY 08401
- --------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code): (609) 441-4000
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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 April 12, 1999, 1,000 shares of Common Stock of GB Holdings, Inc.,
$1.00 par value, were outstanding, 79% of which was held by Pratt Casino
Corporation and 21% by PBV, Inc. As of April 12, 1999, 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
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PART I
ITEM 1. BUSINESS
GENERAL
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The registered securities consist of 10 7/8% First Mortgage Notes (the
"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
136 South Kentucky Avenue, 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 was a wholly
owned subsidiary of Pratt Casino Corporation ("PCC") through December 31, 1998.
PCC is an indirect, wholly owned subsidiary of Greate Bay Casino Corporation
("GBCC"). Effective after December 31, 1998, PCC transferred 21% of the stock
ownership in Holdings to PBV, Inc., a newly formed entity controlled by certain
stockholders of GBCC ("PBV"). GBCC's common stock is listed on the OTC Bulletin
Board Service under the trading symbol "GEAAQ".
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 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.
Effective September 2, 1998, GBHC acquired the membership interests in
Lieber Check Cashing LLC ("Lieber"), a New Jersey limited liability company
which owns a land parcel adjacent to GBHC (the "Lieber Parcel") and GBHC
acquired and caused an option agreement on other adjacent land parcels (the
"Option Parcels") to be assigned to Lieber (the "Option Agreement"). The Option
Agreement expires, by its terms, after September 30, 1999. The Lieber Parcel and
the Option Parcels provide GBHC with an expansion opportunity and frontage on
Pacific Avenue, the principal street running parallel and closest to the
boardwalk in Atlantic City, New Jersey.
On January 5, 1998, Holdings, GB Property Funding and GBHC (collectively,
the "Debtors") 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"). The prior Boards of
Directors resigned on January 2, 1998 and new Boards of Directors were elected
at that time. Each company continues to operate in the ordinary course of
business, as set forth in the Bankruptcy Code, and each company's executive
officers and directors as of the date of the filing remain in office, subject to
the jurisdiction of the Bankruptcy Court, other than the following: as required
by the Settlement Agreement, as defined below, Richard Knight resigned as a
Director, President, and Chief Executive Officer of the Debtors effective July
8, 1998; John P. Belisle was elected President and Chief Executive Officer of
GBHC on July 28, 1998; and J. Timothy Smith was elected as a Director of the
Debtors on August 3, 1998. On May 11, 1998, August 10, 1998 and November 9,
1998, as a result of motions filed by the Debtors, the Bankruptcy Court extended
the exclusive period during which only the Debtors may file a plan of
reorganization for 90 days until August 10, 1998, for another 90 days until
November 9, 1998, and for another 60 days until January 11, 1999, respectively.
On January 11, 1999, the exclusivity period expired and, as a result, any party
in interest may file a plan of reorganization. Management is in the process of
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seeking sponsor(s) for a plan of reorganization, which requires confirmation by
the Bankruptcy Court in accordance with the Bankruptcy Code and approval by the
New Jersey Casino Control Commission ("the Casino Commission"). In the event the
plan of reorganization is confirmed, 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 as a going concern.
New Jersey Management, Inc. ("NJMI"), also a wholly owned subsidiary of
PCC, was responsible for the operations of the Sands under a management
agreement dated August 19, 1987, as amended, with GBHC (the "Management
Agreement"). On May 22, 1998, GBHC filed a motion with the Bankruptcy Court to
reject the Management Agreement (the "Rejection Motion"). GBCC, NJMI, and
certain of their affiliates, on one side, and the Debtors, on the other, entered
into an agreement on June 27, 1998, which was approved by the Bankruptcy Court
on July 7, 1998, and by the Casino Commission on July 8, 1998 (the "Settlement
Agreement"). Under the Settlement Agreement, among other things, the Management
Agreement was suspended and replaced with a services agreement until a decision
by the Bankruptcy Court on the Rejection Motion, and GBHC ceded ownership rights
to an affiliate of GBCC in, and obtained a perpetual license for, the software
used in its operations from the same affiliate of GBCC. On September 28, 1998,
and as a result of the Second Settlement Agreement, as defined below, the
Bankruptcy Court granted the Rejection Motion and, in conformity therewith, no
further fees will be paid under either the Management Agreement or the
Settlement Agreement.
On July 27, 1998, GBHC filed an adversary proceeding in the Bankruptcy
Court against GBCC, certain of its affiliates, and certain of the former
directors of GBHC (collectively the "Defendants") seeking to recover the Lieber
Parcel and the rights under the Option Agreement, and to restrain the use of its
Net Operating Losses (the "NOL's"). Effective September 2, 1998, the Debtors, on
one side, and the Defendants, on the other, entered into an agreement resolving,
among other things, the adversary proceeding (the "Second Settlement
Agreement"). Under the Second Settlement Agreement, among other things, the
Debtors agreed to be included in the consolidated federal income tax return of
GBCC for the years ended December 31, 1997 and 1998. GBCC agreed to allow the
Debtors to become deconsolidated from the GBCC group for federal income tax
purposes by causing PCC to transfer 21% of the stock ownership interest of PCC
in Holdings to a person other than any member of the GBCC Group by December 31,
1998. In accordance with the Second Settlement Agreement and in order to effect
the deconsolidation of the Debtors from the GBCC group, effective after December
31, 1998 PCC transferred 21% of the stock ownership in Holdings to PBV. The
Second Settlement Agreement also resulted in the noncash settlement of certain
outstanding intercompany transactions, the transfer of the membership interests
in Lieber to GBHC, and the assignment of the Option Agreement for the Option
Parcels to Lieber.
THE SANDS
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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 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 patrons through its offering of private, limited-access facilities
and related amenities to premium patrons. While the Sands has strived to
maintain
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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 to remain
competitive 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.
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 patrons' play
through the use of casino players' cards. These systems provide management with
the key characteristics of patrons' 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 Casino Commission, the twelve
Atlantic City casinos currently offer approximately 1.2 million square feet of
gaming space. Bally's Park Place opened a new parking and bus facility in 1998
adjoining Pacific Avenue and opened its "Wild West Casino" in 1997. Caesars'
Atlantic City has constructed a new entrance to its facility, on Pacific Avenue,
added additional casino space, and a new hotel tower in 1998. In addition,
several companies have announced plans to build and operate additional
casino/hotels over the next few years. For example, Mirage Resorts and Boyd
Gaming have announced plans for a resort complex consisting of a casino, a
hotel, several theaters and an upscale shopping concourse at a site located in
the Marina District. The anticipated opening of this project is early 2002.
Construction has commenced on a tunnel project connecting the Atlantic City
Expressway with the Marina District. 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
4
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 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 order to improve
GBHC's competitive position, GBHC sought the approval of the Bankruptcy Court
for a capital expenditure program to renovate the majority of its hotel rooms
and suites and to purchase approximately 700 slot machines. The capital
expenditure program in the amount of approximately $13.6 million was approved in
March, 1998. The renovations of the hotel suites has commenced and GBHC expects
to complete the renovation in 2000. Replacement and upgrading of slot machines
has commenced and is expected to be completed by the first half of 1999. In
addition, the lack of access to Pacific Avenue has hampered the Sands' efforts
to expand its "drive-in" patron base. Closing under the Option Agreement, which
is subject to Bankruptcy Court approval, will assist the Sands in expanding this
"drive-in" market.
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. In addition, slot machines are allowed at
race tracks in the State of Delaware. As discussed above, the Sands' is
currently in the process of upgrading slot machines with the purchase of 700
machines as allowed by the Bankruptcy Court approved capital expenditure
program.
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 $3.8 billion in 1996 to $3.9 billion in 1997
and to $4.0 billion in 1998.
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 through 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 slightly outpaced table game revenue growth in recent years
and for 1998 slot win accounted for nearly 70% of total
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Atlantic City gaming win. Table games remain important, however, to a select
segment of gaming patrons, and to gaming ambience and 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, 1998, gaming credit extended to Sands' customers accounted for approximately
23% of overall table game wagering, and table game wagering accounted for
approximately 18.4% of overall casino wagering during the period. At December
31, 1998, gaming receivables amounted to $18.3 million before allowances for
uncollectible gaming receivables amounting to $11.8 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 during
1987 to use the trade name "Sands" in Atlantic City, New Jersey. GBHC's rights
to the trade name "Sands" (the "Trade Name") are derived from this license
agreement between GBCC and an unaffiliated third party. Amounts payable by the
Sands for these rights are equal to the amounts paid to the unaffiliated third
party. Such charges amounted to $275,000, $290,000 and $283,000 for the years
ended December 31, 1998, 1997 and 1996. Under the Settlement Agreement, GBCC
agreed not to seek to cancel the rights of GBHC to use the Trade Name prior to
December 15, 1998, and GBHC preserved its legal position that GBCC lacked the
right to cancel the rights of GBHC to use the Trade Name. GBCC filed a motion in
the Bankruptcy Court seeking relief from the automatic stay, pursuant to U.S.C.
SS.362(A), to send a letter to the licensor purporting to terminate the license
agreement. GBHC opposed the motion and the motion was denied by Order of the
Bankruptcy Court dated March 2, 1999. On March 10, 1999, GBCC took an appeal to
the United States District Court for the District of New Jersey.
THE SANDS MANAGEMENT CONTRACT. Prior to July 8, 1998, NJMI was responsible
for the operations of the Sands under a Management Agreement with GBHC. Under
such agreement, NJMI was entitled to receive annually (i) a basic consulting fee
of 1.5% of "adjusted gross revenues," as defined, and (ii) incentive
compensation of between 5% and 7.5% of gross operating profits in excess of
certain stated amounts should annual "gross operating profits," as defined,
exceed $5,000,000. On May 22, 1998, GBHC filed the Rejection Motion. The
Settlement Agreement, partially resolving the Rejection Motion, was entered into
on June 27, 1998 and was approved by the Bankruptcy Court on July 7, 1998 and by
the Casino Commission on July 8, 1998. Under the Settlement Agreement and
effective as of May 1, 1998 and until decision on the Rejection Motion, NJMI
agreed to provide certain services to GBHC and GBHC agreed to pay a monthly fee
of $165,000, which was payable $122,000 on a monthly basis in arrears and
$43,000 per month upon confirmation of GBHC's plan of reorganization by the
Bankruptcy Court. On September 28, 1998, and as part of the Second Settlement
Agreement, the Bankruptcy Court approved the Rejection Motion. The current fees
under the Settlement Agreement have been paid and the deferred fees have been
accrued. As part of the Second Settlement Agreement, a rejection damages claim
of NJMI was preserved provided it was filed in the Bankruptcy Court within 30
days of the entry of the Order of the Bankruptcy Court on September 11, 1998
approving the Second Settlement Agreement. The rejection damages claim was not
filed and expired along with the corresponding avoiding powers causes of action
under the Bankruptcy Code of GBHC, as provided in the Second Settlement
Agreement. Accordingly, other than the deferred fees, no further management fees
will be paid under either the Management Agreement or the Settlement Agreement
except that NJMI possesses a disputed claim for prepetition management fees.
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, 1998, there were
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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. Management considers its
labor relations to be good.
CASINO REGULATION
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Casino gaming is strictly regulated in Atlantic City under the Casino Act
and the regulations of the Casino Commission, which affect virtually all aspects
of the operations of the Sands. The Casino Act and regulations affecting
Atlantic City casino licensees 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 has been issued a plenary casino license, and GBCC has been
approved as a holding company of a casino licensee.
The plenary license issued to the Sands was renewed by the Casino
Commission in September, 1996 and extended through September 30, 2000, subject
to review of the Sands' financial stability during 1997 and to the submission of
financial projections in 1998 and 1999 for calendar years 1999 and 2000,
respectively. The 1997 review took place and the 1999 financial projections were
filed and the Sands license will be up for renewal in 2000. Terms of the current
license require GBHC to comply with weekly and monthly financial reporting
requirements and to obtain prior Casino Commission approval of certain cash
transactions with affiliates. The Casino Commission may reopen licensing
hearings at any time.
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 Casino Act), net of a provision for
uncollectible accounts of up to 4% of casino win ("Gross Revenue"). During the
years ended December 31, 1998, 1997 and 1996, the taxes assessed by, and the
license and other fees incurred by the Sands amounted to $21.5 million, $22.4
million and $23.5 million, respectively.
The Casino Act requires casino licensees to pay an investment alternative
tax of 2.5% of Gross Revenue (the "2.5% Tax") or to make quarterly deposits of
1.25% of quarterly Gross Revenue with the CRDA (the "Deposits"). The Deposits
are then used to purchase bonds at below-market interest rates from the CRDA or
to make qualified investments approved by the CRDA. The CRDA administers the
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statutorily mandated investments made by casino licensees and is required to
expend the monies received by it for eligible projects defined in the Casino
Act. The Sands has elected to make the Deposits with the CRDA rather than pay
the 2.5% Tax.
GBHC has, from time to time, donated certain amounts held in escrow by the
CRDA to fund CRDA sponsored projects. In return, the CRDA granted GBHC waivers
of certain of its Deposit obligations in future periods. GBHC made such
donations during the years ended December 31, 1998, 1997 and 1996 totaling
$146,000, $147,000 and $1.5 million, respectively, resulting in waivers granted
by the CRDA during 1998 and 1997 totaling $74,000 and $75,000, respectively. No
such waivers were granted during 1996; however, the donations were designated
for projects expected to benefit the community.
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, or (ii) less than 20% of such
company's overall indebtedness provided the investors owns 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 percentage
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 investors 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 73,000 square
feet of gaming space containing approximately 2,008 slot machines and
approximately 99 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.
Effective September 2, 1998, GBHC acquired the membership interests in Lieber, a
New Jersey
8
limited liability company which owns the Lieber Parcel adjacent to GBHC and GBHC
acquired and caused the Option Agreement on the Option Parcels to be assigned to
Lieber. The Lieber Parcel and the Option Parcels provide GBHC with an expansion
opportunity and frontage on Pacific Avenue, the principal street running
parallel and closest to the boardwalk in Atlantic City, New Jersey. In addition,
a nearby building in Atlantic City that houses an auto shop facility and a
warehouse in Mystic Island, New Jersey also support the Sands' operations. In
March of 1998, GBHC commenced a $13.6 million capital expenditure program which
was approved by the Bankruptcy Court. This program includes the renovation of
the majority of its hotel rooms and suites and the purchase of approximately 700
slot machines.
On February 17, 1994, the Sands obtained $185,000,000 from GB Property
Funding, which issued $185,000,000 of first mortgage notes due January 15, 2004.
Interest on the First Mortgage Notes accrued 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 were due on each interest payment date with the balance
due at maturity. Such semiannual payments could be made in cash or by tendering
First Mortgage Notes previously purchased or otherwise acquired by Holdings.
Holdings acquired $2,500,000 face amount of First Mortgage Notes at a discount
during May 1997, which it used during June 1997 to make its July 15, 1997
required principal payment. As a result of the filing under Chapter 11, the debt
service payments due subsequent to January 5, 1998 were not made. The accrual of
interest on the First Mortgage Notes for periods subsequent to the filing has
been suspended.
ITEM 3. LEGAL PROCEEDINGS
On January 5, 1998, the Debtors filed petitions for relief under Chapter 11
of the Bankruptcy Code in the Bankruptcy Court. The prior Boards of Directors
resigned on January 2, 1998 and new Boards of Directors were elected at that
time. Each company continues to operate in the ordinary course of business, as
set forth in the Bankruptcy Code, and each company's executive officers and
directors as of the date of the filing remain in office, subject to the
jurisdiction of the Bankruptcy Court, other than the following: as required by
the Settlement Agreement, Richard Knight resigned as a Director, President, and
Chief Executive Officer of the Debtors effective July 8, 1998; John P. Belisle
was elected President and Chief Executive Officer of GBHC on July 28, 1998; and
J. Timothy Smith was elected as a Director of the Debtors on August 3, 1998. On
May 11, 1998, August 10, 1998 and on November 9, 1998, as a result of motions
filed by the Debtors, the Bankruptcy Court extended the exclusive period during
which only the Debtors may file a plan of reorganization for 90 days until
August 10, 1998, for another 90 days until November 9, 1998, and for another 60
days until January 11, 1999, respectively. On January 11, 1999, the exclusivity
period expired and, as a result, any party in interest may file a plan of
reorganization.
On May 22, 1998, GBHC filed the Rejection Motion with the Bankruptcy Court.
The Management Agreement was suspended as a result of the Settlement Agreement
and was replaced with a services agreement until the decision on the Rejection
Motion. On September 28, 1998, and as part of the Second Settlement Agreement,
the Bankruptcy Court granted the Rejection Motion.
On July 27, 1998, GBHC filed an action in the Bankruptcy Court (the
"Action") against GBCC, certain affiliates of GBCC, and Jack E. Pratt, Edward T.
Pratt Jr. and William D. Pratt, former directors of GBHC and current directors
of GBCC (collectively, the "Defendants"), alleging, inter alia, usurpation of
corporate opportunities of GBHC and breach of fiduciary duty with respect to
GBHC, in connection with the acquisition of an option for certain land parcels
and the acquisition of a land parcel on Pacific Avenue in Atlantic City, New
Jersey adjoining the Sands (collectively, the "Parcels"), and seeking, inter
alia, an order enjoining the Defendants from transferring the Parcels to third
parties and requiring the Defendants to convey the Parcels to GBHC. The Action
also sought to enjoin the Defendants from using the NOL's
9
of the Debtors. Effective September 2, 1998, the parties entered into the Second
Settlement Agreement resolving, among other things, the Action. Under the Second
Settlement Agreement, among other things, GBHC agreed to be included in the
consolidated income tax return of GBCC for the years ended December 31, 1997 and
1998. GBCC agreed to allow the Debtors to become deconsolidated from the GBCC
group for federal income tax purposes by causing PCC to transfer 21% of the
stock ownership interest of PCC in Holdings to a person other than any member of
the GBCC group by December 31, 1998. The agreement also resulted in the noncash
settlement of certain outstanding intercompany transactions, and the transfer of
the membership interests in Lieber to GBHC and the assignment of the Option
Agreement for the Option Parcels to Lieber. The Second Settlement Agreement also
resulted in the dismissal of all applications in the Bankruptcy Court related to
the Action. The Debtors and the Defendants also entered into mutual and general
releases subject to certain exceptions described in the Second Settlement
Agreement. In accordance with the Second Settlement Agreement and in order to
effect the deconsolidation of the Debtors from the GBCC group, effective after
December 31, 1998 PCC transferred 21% of the stock ownership in Holdings to PBV.
GBHC is a party in various legal proceedings with respect to the conduct of
casino and hotel operations. Although a possible range of losses 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 accompanying consolidated financial statements do not
include any adjustments that might result from the outcome of the uncertainties
described above.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of 1998, 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 were owned by PCC until
December 31, 1998. Effective after December 31, 1998, PCC transferred 21% of the
stock ownership in Holdings to PBV.
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.
10
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, 1998 and 1997 and for the years ended December 31, 1998,
1997, and 1996 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,
----------------------------------------------------------------
1998(1) 1997 1996 1995 1994
-------- -------- -------- -------- --------
(IN THOUSANDS)
Interest income .......... $ 221 $ 19,941 $ 20,119 $ 20,119 $ 17,548
Interest expense ......... (221) (19,941) (20,119) (20,119) (17,548)
-------- -------- -------- -------- --------
Net income ............... $ -- $ -- $ -- $ -- $ --
======== ======== ======== ======== ========
BALANCE SHEET DATA: DECEMBER 31,
----------------------------------------------------------------
1998(1) 1997 1996 1995 1994
-------- -------- -------- -------- --------
(IN THOUSANDS)
Total assets ............. $191,617 $191,653 $194,278 $194,278 $194,278
Total debt ............... 182,243 182,500 185,000 185,000 185,000
Shareholder's equity ..... 1 1 1 1 1
- ------------
(1) On January 5, 1998, Holdings, GB Property Funding and GBHC 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 accrual
of interest on the First Mortgage Notes for periods subsequent to the
filing has been suspended.
11
GB HOLDINGS, INC.
STATEMENT OF OPERATIONS DATA:
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------
1998 (1) 1997 1996 1995 1994 (2)
--------- --------- --------- --------- ---------
(IN THOUSANDS)
Net revenues .......................................... $ 237,344 $ 256,255 $ 264,761 $ 283,950 $ 275,139
--------- --------- --------- --------- ---------
Expenses:
Departmental .................................... 202,532 215,907 235,285 223,631 215,081
General and administrative ...................... 12,497 17,409 18,486 23,021 23,439
Depreciation and amortization ................... 12,795 14,062 19,310 19,937 18,872
--------- --------- --------- --------- ---------
Total expenses ................................ 227,824 247,378 273,081 266,589 257,392
--------- --------- --------- --------- ---------
Income (loss) from operations ................... 9,520 8,877 (8,320) 17,361 17,747
--------- --------- --------- --------- ---------
Non-operating income (expense):
Interest income ................................. 961 1,680 1,590 1,808 2,186
Interest expense ................................ (313) (23,260) (22,236) (21,680) (21,053)
Gain on disposal of assets ...................... 252 59 13 56 73
--------- --------- --------- --------- ---------
Total non-operating income (expense), net .... 900 (21,521) (20,633) (19,816) (18,794)
--------- --------- --------- --------- ---------
Income (loss) before income taxes, cumulative effect of
accounting change, extraordinary and
other items ..................................... 10,420 (12,644) (28,953) (2,455) (1,047)
Valuation provision on affiliate receivables .......... -- (9,650) -- -- --
Write off deferred financing costs .................... -- (4,265) -- -- --
Reorganization costs .................................. (4,069) (505) -- -- --
--------- --------- --------- --------- ---------
Income (loss) before income taxes, cumulative effect of
accounting change and extraordinary item ........ 6,351 (27,064) (28,953) (2,455) (1,047)
Income tax (provision) benefit ........................ -- (10,902) (2,417) (186) (920)
--------- --------- --------- --------- ---------
Income (loss) before cumulative effect of accounting
change and extraordinary item ................... 6,351 (37,966) (31,370) (2,641) (1,967)
Extraordinary item - early extinguishment of
debt, net of related tax benefits ............... -- 310 -- -- --
--------- --------- --------- --------- ---------
Net income (loss) ..................................... $ 6,351 $ (37,656) $ (31,370) $ (2,641) $ (1,967)
========= ========= ========= ========= =========
BALANCE SHEET DATA:
DECEMBER 31,
---------------------------------------------------------------------
1998 (1) 1997 1996 1995 1994 (2)
--------- --------- --------- --------- ---------
(IN THOUSANDS)
Total assets .......................................... $ 199,161 $ 187,728 $ 224,438 $ 245,558 $ 245,721
Total debt ............................................ 198,234 205,932 203,942 195,453 195,463
Shareholder's (deficit) equity......................... (42,741) (58,600) (20,944) 10,426 13,067
- ----------
(1) On January 5, 1998, Holdings, GB Property Funding and GBHC 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 accrual
of interest expense on the First Mortgage Notes, the Subordinated Notes (as
hereafter defined) and other affiliate advances for periods subsequent to
the filing has been suspended.
(2) Holdings acquired GBHC on February 17, 1994. The merger was accounted for
in a manner similar to 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.
12
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 to fund a substantial portion of annual capital expenditures.
The Sands also used short-term borrowings to fund seasonal cash needs for
certain capital projects. However, over time, the competitive position of the
Sands was impaired, which was due, in part, to insufficient capital
expenditures. As a result, and due to adverse weather in the first quarter of
1996, declines in hold percentages in 1996, and increased marketing expenses in
1996 on an industry wide basis, cash flow decreased significantly in 1996 and
improved in 1997, but remained significantly below historical levels. These
declines in operating cash flow at the Sands resulted in the need for periodic
financial assistance from PCC and GBCC in order to meet debt service
obligations. Substantial additional financial assistance would have been
required to make the January 15, 1998 principal and interest payments due on the
First Mortgage Notes.
GBHC was unable to obtain additional borrowings from affiliates or other
sources and, accordingly, on January 5, 1998, the Debtors filed petitions
seeking protection under Chapter 11 of the Bankruptcy Code in the Bankruptcy
Court. The prior Boards of Directors resigned on January 2, 1998 and new Boards
of Directors were elected at that time. Each company continues to operate in the
ordinary course of business, as set forth in the Bankruptcy Code, and each
company's executive officers and directors as of the date of filing remain in
office, subject to the jurisdiction of the Bankruptcy Court, other than the
following: as required under the Settlement Agreement, Richard Knight resigned
as a Director, President, and Chief Executive Officer of the Debtors effective
July 8, 1998; John P. Belisle was elected President and Chief Executive Officer
of GBHC on July 28, 1998; and J. Timothy Smith was elected as a Director of the
Debtors on August 3, 1998. On May 11, 1998, August 10, 1998 and on November 9,
1998, as a result of motions filed by the Debtors, the Bankruptcy Court extended
the exclusive period during which only the Debtors may file a plan of
reorganization for 90 days until August 10, 1998, for another 90 days until
November 9, 1998, and for another 60 days until January 11, 1999, respectively.
On January 11, 1999, the exclusivity period expired and, as a result, any party
in interest may file a plan of reorganization. Management is in the process of
seeking sponsor(s) for a plan of reorganization which requires confirmation by
the Bankruptcy Court in accordance with the Bankruptcy Code and approval by the
Casino Commission. There can be no assurance at this time that any plan of
reorganization, when submitted, will be confirmed by the Bankruptcy Court or
approved by the Casino Commission. In the event the plan of reorganization is
confirmed, continuation of the business thereafter is dependent on Holdings
ability to achieve successful future operations.
As a result of the Chapter 11 filings, GBHC has sufficient cash flow to
continue normal operations while it seeks to develop a plan of reorganization
which requires confirmation by the Bankruptcy Court
13
in accordance with the Bankruptcy Code and approval by the Casino Commission.
Capital expenditures, other than normal recurring capital expenditures in the
ordinary course of business, will require prior approval of the Bankruptcy
Court. In order to improve GBHC's competitive position, GBHC sought the approval
of the Bankruptcy Court for a capital expenditure program to renovate the
majority of its hotel rooms and suites and to purchase approximately 700 slot
machines. The capital expenditure program in the amount of approximately $13.6
million was approved in March, 1998. The renovations of the hotel suites has
commenced and GBHC expects to substantially complete the renovations in early
2000. Replacement and upgrading of slot machines has commenced and is expected
to be completed by the first half of 1999.
OPERATING ACTIVITIES
At December 31, 1998, GBHC had cash and cash equivalents of $23.8 million.
GBHC generated cash flow from operations of $20.9 million for 1998 compared to
$2.2 million during 1997. The 1997 period includes the payment of $20.1 million
in interest; the payment of such interest was suspended in 1998 by the Chapter
11 filing. GBHC utilized cash from its operations during 1998 to meet its
operating needs, to fund capital additions totaling $8.0 million, to make
obligatory investments of $2.6 million, and to purchase Lieber for $251,000. The
1998 cash flow from operations also includes the purchase by GBHC of the rights
under the Option Agreement for the Option Parcels for $1.3 million and $1
million to extend the closing on the Option Parcels. In the event of closing on
the Option Parcels, $2.0 million is to be applied against the purchase price,
or, to be forfeited as liquidated damages in the event of a failure of GBHC to
close.
FINANCING ACTIVITIES
Semiannual principal payments of $2.5 million which became due commencing
in July 1997 with respect to the First Mortgage Notes have been suspended as a
result of the Chapter 11 filing. Exclusive of the First Mortgage Notes, which
are subject to reorganization, total scheduled maturities of long-term debt in
1999 are $73,000.
Under an order of the Bankruptcy Court, permitting the disposition of
furniture and equipment in the ordinary course of business, any payments
received by GBHC for the sale of such assets, which are part of the security for
the First Mortgage Notes, must be remitted to the Indenture Trustee of the First
Mortgage Notes as reductions to the outstanding principal of the First Mortgage
Notes. During the year ended December 31, 1998, $257,000 has been remitted to
the Indenture Trustee as the proceeds on the sale of assets.
During the third quarter of 1996, GBCC borrowed a total of $6,500,000 from
Hollywood Casino Corporation ("HCC"), the parent company of GBCC, which GBCC
then loaned to GBHC to enable GBHC to make its debt service obligations and a
property tax payment. According to the terms of the corresponding note, such
borrowings accrued 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 stated terms. As part of the Second
Settlement Agreement, GBHC settled certain intercompany obligations on a noncash
basis. These loans to GBHC from GBCC, totaling $8,000,000 along with accrued
interest totaling $1,508,000, and a deferred federal tax asset of GBHC's,
totaling $10,902,000, representing a claim against an affiliate for the
overpayment of federal income taxes under a previously existing tax sharing
agreement, were mutually released.
GBHC also borrowed $5,000,000 from another subsidiary of GBCC during
January, 1997 at the stated rate of 14-5/8% per annum payable semiannually
commencing July 15, 1997 and, as set forth in the
14
terms of the corresponding note, the loan is subordinated to the First Mortgage
Notes and payment is subject to certain conditions (the "PCC Subordinated
Note"). Repayment of the PCC Subordinated Note and the payment of the related
interest are subject to approval of the Casino Commission, any setoffs and
defenses available under the Bankruptcy Code and applicable law, and to the
terms of a plan of reorganization, which requires approval by the Bankruptcy
Court and approval by the Casino Commission. The accrual of interest on the PCC
Subordinated Note for periods subsequent to the filing under Chapter 11 has been
suspended.
INVESTING ACTIVITIES
Capital expenditures at the Sands during 1998 amounted to approximately
$8.0 million and management anticipates capital expenditures taking place in the
ordinary course of business during 1999 will be approximately $5.0 million. In
addition to capital expenditures in the ordinary course, anticipated capital
expenditures during 1999 include approximately $7.4 million of a two year
capital expenditure of $13.6 million approved by the Bankruptcy Court. Of this
$7.4 million, it is anticipated that $4.4 million will be expended on the
ongoing room and suite renovations and $3.0 million will be expended for slot
machines and related equipment.
The Sands is required by the New Jersey Casino Control Act to make certain
deposits with the CRDA, a governmental agency which administers the deposits
required by casino licensees under the Casino Act. Deposit requirements for 1998
totaled $2.6 million and are anticipated to be approximately $2.8 million during
1999.
Effective September 2, 1998, and as part of the Second Settlement
Agreement, GBHC acquired the membership interests in Lieber from affiliates of
GBCC for $251,000. GBHC also caused Lieber to acquire the rights under the
Option Agreement for the Option Parcels from another affiliate of GBCC for
payment of $1.3 million and a payment of $500,000 at confirmation of a plan of
reorganization. During September 1998, GBHC provided Lieber with $1 million
which Lieber paid to the owner of the Option Parcels to extend the closing under
the Option Agreement for the Option Parcels to September 30, 1999. The Lieber
Parcel is subject to a mortgage in the amount of $572,000 at December 31, 1998.
SUMMARY
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 seeking sponsor(s) for a reorganization
plan which requires confirmation by the Bankruptcy Court in accordance with the
Bankruptcy Code and approval by the Casino Commission. On May 11, 1998, August
10, 1998 and on November 9, 1998, as a result of motions filed by the Debtors,
the Bankruptcy Court extended the exclusive period during which only the Debtors
may file a plan of reorganization for 90 days until August 10, 1998, for another
90 days until November 9, 1998, and for another 60 days until January 11, 1999,
respectively. On January 11, 1999 the exclusivity period expired and, as a
result, any party in interest may file a plan of reorganization. As a result of
the filing under Chapter 11, the debt service payments due subsequent to January
5, 1998 were not made. The accrual of interest on the First Mortgage Notes for
periods subsequent to the filing has been suspended. Management believes that
cash flows generated from operations during 1999 will be sufficient to meet its
operating plan.
15
RESULTS OF OPERATIONS
GENERAL
The Sands earned income from operations of $9.5 million for the year ended
December 31, 1998 compared to $8.9 million during 1997 and sustained a loss from
operations of $8.3 million in 1996. Operating results during 1998 were
positively impacted by higher table game hold percentages. The declines in
casino revenues were offset by operating efficiencies, management's ongoing
effort to discontinue certain marginally effective marketing programs, and by
the cessation of payment of the management fee. Although net revenues declined
during 1998 by $18.9 million (7.4%) as compared to 1997, operating expenses also
decreased significantly by $19.6 million (7.9%) for the same period. Such
operating expense decreases are due to reductions in salaries and related
benefits costs of $5.0 million (5.5%), and marketing and advertising costs of
$5.6 million (8.6%) resulting from managements efforts to control costs while
maintaining positive gross operating profit. Management fee expense decreased
$3.0 million (56.0%) as a result of the filing and granting of the Rejection
Motion. These decreases were slightly offset by an increase of $1.4 million in
additional provision for valuation allowance during 1998 for certain CRDA bond
investments due to the uncertainty of their realizable value. The negative
publicity surrounding the Sands filing for bankruptcy protection on January 5,
1998 could also have affected its operating results for the 1998 period.
Operating results during the first nine months of 1997 were also 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 of 1996.
16
GAMING OPERATIONS
The following table sets forth certain unaudited financial and operating
data relating to the Sands' operations:
YEAR ENDED DECEMBER 31,
------------------------------------------
1998 1997 1996
---------- ---------- ----------
(IN THOUSANDS, EXCEPT PERCENTAGES)
REVENUES:
Table games $ 64,744 $ 74,083 $ 79,127
Slot machines 151,749 157,312 159,972
Other (1) 2,875 3,082 3,790
---------- ---------- ----------
Total $ 219,368 $ 234,477 $ 242,889
========== ========== ==========
TABLE GAMES:
Gross Wagering
(Drop) (2) $ 426,343 $ 524,040 $ 576,577
========== ========== ==========
Hold Percentages: (3, 4)
Sands 15.2% 14.1% 13.7%
Atlantic City 15.4% 15.0% 15.5%
SLOT MACHINES:
Gross Wagering
(Handle) (2) $1,886,901 $1,916,350 $1,954,612
========== ========== ==========
Hold Percentages: (3, 4)
Sands 8.0% 8.2% 8.2%
Atlantic City 8.4% 8.4% 8.3%
- ----------
(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 (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.
Although the quantitative impact on wagering of GBHC's filing for
protection under Chapter 11 can not be estimated, management believes that the
negative publicity resulting from the filing has had an adverse effect on patron
volume.
17
Slot machine handle decreased $29.4 million (1.5%) during 1998 compared
with 1997 and $38.3 million (2%) during 1997 compared with 1996. The Sands'
decreases compare with increases in slot machine handle of 4.7% and 2.2%,
respectively, for all other Atlantic City casinos during the same periods. As a
result, the Sands' market share of slot machine play ( expressed as a percentage
of the Atlantic City industry aggregate slot machine handle) decreased to 5.6%
in 1998 from 5.9% in 1997 and 6.1% in 1996. Gaming space and the number of slot
machines have decreased slightly during 1998 at the Sands. Expansions of other
Atlantic City casinos resulted in an increase of approximately 76,000 square
feet of gaming space and approximately 1,670 additional slot machines at
December 31, 1998 compared to December 31, 1997. While the number of slot
machines has decreased slightly at the Sands during 1998, during the last half
of 1998 older slot machines have been replaced with new and more popular
machines as part of the Sands capital expenditure program which was approved by
the Bankruptcy Court. These replacements have had a positive impact on slot
machine handle; during the last six months of 1998 slot machine handle increased
$39.4 million (4.1%) compared to the last six months of 1997. This increase
during the last six months of 1998 could not offset the declines in slot handle
experienced during the first six months of 1998 as a result of competitive
pressures resulting from casino expansions and related marketing campaigns at
other properties. As a result of such competitive pressures, the Sands has
experienced a significant decrease (18.7%) in the number of bus passengers, a
market which historically plays slot machines. The below industry wide
performance experienced by the Sands during 1997 is a result of the same
competitive pressures resulting from casino expansions and related marketing
campaigns at other casino properties which lure the "mass" segment to the new
facility.
Table game drop at the Sands declined $97.7 million (18.6%) during 1998
compared with 1997 and $52.5 million (9.1%) during 1997 compared with 1996. The
Sands decreases compare with increases of 1% and 4%, respectively, in table game
drop for all other Atlantic City Casinos during the same periods. As a result,
the Sands table game market share decreased to 5.6% during 1998 from 6.8% during
1997 and from 7.7% during 1996. The Sands table game drop decreases during 1998
are attributable to declines in patron volume from the rated segment. This
decline reflects managements efforts to discontinue certain marginally effective
promotional activities directed toward less profitable market segments. During
1998, the number of table games decreased 16% at the Sands, compared with a
decrease of 2.3% at all other Atlantic City casinos. Also, competitive pressures
resulting from the offering of special odds for various table games and
competitive pressures on specific market segments by other Atlantic City casinos
have adversely effected drop for this period. The Sands decrease in table game
drop during 1997 as compared to 1996 is attributable to declines in patron
volume from both the rated and unrated segments. Expansions at 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.
Gaming space at the Sands remained virtually unchanged since mid 1996 and the
number of tables decreased 3.1%.
REVENUES
Casino revenues at the Sands decreased by $15.1 million (6.4%) during 1998
compared with 1997 and by $8.4 million (3.5%) during 1997 compared with 1996.
Decreases in both slot machine and table game wagering and a slight decrease in
slot machine hold percentage during 1998 and 1997 were partially offset by
improvements in the table game hold percentage.
Rooms revenue decreased $491,000 (5.1%) during 1998 compared with 1997.
Rooms revenue did not change significantly during 1997 compared to 1996. The
decrease during 1998 is a result of decreases in occupancy levels partially
offset by an increase in the average daily rate charged on rooms. Food and
beverage revenues decreased $7.6 million (23%) during 1998 compared with 1997
and did not change significantly during 1997 compared with 1996. The decrease in
1998 is a result of reduced patron volume reflecting the curtailment in food and
beverage related promotional programs. Other revenues
18
decreased $356,000 (8.6%) during 1998 compared with 1997 and $1.6 million
(27.9%) during 1997 compared with 1996. These decreases are a result of a
reduction in theater entertainment.
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 53.1% during 1998 from 53.4% during 1997 and 56.1%
during 1996. Such decreases are primarily attributable to reductions in certain
marketing programs and other promotional activities.
DEPARTMENTAL EXPENSES
Casino expenses at the Sands decreased $13.0 million (6.5%) during 1998
compared to 1997 and by $19.2 million (8.8%) during 1997 compared to 1996. The
1998 decrease is a result of managements' ongoing efforts to create operating
efficiencies as well as a reduction in the allocation in rooms, food and
beverage, and other expenses to casino expense due to a reduction of promotional
activity. The decrease in 1997 as compared to 1996 is due to an unprecedented
and highly aggressive industry wide attempt during 1996 to increase market share
which resulted in significantly higher costs with respect to coin incentive
packages.
Rooms expense increased $584,000 (22.5%) during 1998 compared to 1997 and
by $171,000 (7.1%) during 1997 compared to 1996. These increases result from a
lower percentage of rooms being sold on a complimentary basis which has reduced
the allocation of room costs to the casino department. Food and beverage expense
decreased $817,000 (7.6%) during 1998 compared to 1997 and did not change
significantly during 1997 compared to 1996. The 1998 decrease reflects a
reduction in payroll, operating costs and promotional expenses in response to
declines in patron volume. Such cost savings have been partially offset by fewer
costs being allocated to the casino department due to reduced use of food
complementaries. Other expenses decreased $157,000 (5.7%) in 1998 from 1997 and
by $502,000 (15.4%) in 1997 from 1996. These decreases are due to cost savings
with respect to theater entertainment.
GENERAL AND ADMINISTRATIVE
General and administrative expenses decreased $4.9 million (28.2%) during
1998 compared to 1997 and by $1.1 million (5.8%) during 1997 compared to 1996.
Management fee expenses, including service fees under the Settlement Agreement,
incurred by the Sands decreased by $3.0 million (56%) during 1998 as a result of
a renegotiation and subsequent rejection of such fees due to the Chapter 11
filings. Other decreases reflect reductions in payroll and related benefits and
in equipment rentals, all of which have resulted from management's ongoing
efforts to create operating efficiencies.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense during 1998 decreased by $1.3 million
(9%) compared to 1997 and decreased $5.2 million (27.2%) in 1997 compared to
1996. The decrease in 1998 is attributable to certain assets becoming fully
depreciated during 1998 and the amortization of loan fees that were fully
written off at December 31, 1997. These decreases were slightly offset by an
increase of $1.4 million in additional provision for valuation allowance during
1998 for certain CRDA bond investments due to the uncertainty of their
realizable value. The 1997 decrease was a result of revising the estimated
useful building life effective October 1, 1996 and to the completion of the
amortization with respect to certain long lived assets during 1997.
19
INTEREST
Interest income decreased by $719,000 (42.8%) during 1998 compared with
1997 following a slight increase of $90,000 (5.7%) during 1997 compared with
1996. Interest earned on cash balances accumulated as a result of the Chapter 11
filing (i.e., from not making debt service payments) is reflected on the
accompanying consolidated financial statements as a reduction of reorganization
costs.
Interest expense decreased $22.9 million (98.7%) in 1998 compared to 1997.
As a result of the Chapter 11 filing, the accrual of interest expense on the
First Mortgage Notes, the Subordinated Notes (as hereafter defined) and other
affiliate advances for periods subsequent to the filing has been suspended.
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.
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 $4.0 million as collection of the receivables was uncertain. The
$5.7 million advance as well as interest amounting to $4.9 million remain fully
reserved at December 31, 1998.
Also at December 31, 1997, the remaining deferred financing costs
associated with the First Mortgage Notes ($4.3 million) were written off as a
result of GBHC's Chapter 11 filing.
INCOME TAX BENEFIT (PROVISION)
As part of the Second Settlement Agreement, Holdings' operations are
included in GBCC's consolidated federal income tax return for the years ended
December 31, 1997 and 1998. In accordance with the Second Settlement agreement
and in order to effect the deconsolidation of the Debtors from the GBCC group
effective after December 31, 1998, PCC transferred 21% of the stock ownership in
Holdings to PBV. Prior to 1997, Holdings was included in the consolidated
federal income tax return of Hollywood Casino Corporation ("HCC"), the parent
company of GBCC until HCC distributed the GBCC stock it owned to the
shareholders of HCC as a dividend on December 31, 1996 (the "Spin Off").
At December 31, 1998, Holdings and its subsidiaries have deferred tax
assets including net operating loss carryforwards ("NOL's"). The NOL's do not
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 may be
subject to the tax consequences of a 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, requires the recording of a
valuation allowance. As a result of book and tax losses incurred in 1997 and the
Chapter 11 filing 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,
1998.
As part of the Second Settlement Agreement, GBHC settled certain
intercompany obligations on a noncash basis. Loans to GBHC from GBCC, totaling
$8,000,000 along with accrued interest totaling $1,508,000, and a deferred
federal tax asset of GBHC's, totaling $10,902,000, representing a claim against
20
an affiliate for the overpayment of federal income taxes under a previously
existing tax sharing agreement, were mutually released. As the deferred federal
tax asset had been previously fully reserved for as required by SFAS 109, this
mutual release resulted in the recording of a capital contribution in the amount
of $9,508,000 on the accompanying consolidated balance sheet at December 31,
1998.
EXTRAORDINARY ITEM
A subsidiary of Holdings acquired $2.5 million of 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
In the Year 2000, the Sands' computer programs that have date sensitive
software may recognize a date using "00" as the Year 1900 rather than 2000. Such
an error could result in a system failure or miscalculations causing disruptions
of operations including, among other things, a temporary inability to process
transactions or engage in similar normal business activities.
Management has initiated a program to prepare the Sands' computer systems
and applications for the Year 2000. The objective of this program is to
determine and assess the risks of the Year 2000 issue, and to plan and institute
mitigating actions to minimize those risks. The Sands has completed an
assessment and an inventory of its systems. Plans are in place and work is being
undertaken to test and implement changes where required. No significant
remediation has been identified. The appropriate vendors and suppliers have been
contacted as to their Year 2000 compliance. The costs of testing and conversion
have not been and are not expected to be material. All Year 2000 costs are
expected to be funded through operating cash flows. The Sands is in the process
of developing a contingency plan which includes the identification of
significant vendors which will be Year 2000 compliant to replace significant
vendors that will not be Year 2000 compliant. It is expected that this
contingency plan will be completed in a timely manner.
While management expects the Sands' 2000 date conversion projects to be
completed on a timely basis, the potential impact of systems outside of the
Sands' control, such as those of utility companies, phone and network systems,
and financial institutions, is difficult to assess. There can be no assurance
that the systems of other companies on whose systems the Sands relies will be
timely converted or that any such failure to convert by another company would
not have an adverse effect on the Sands' systems. The failure to correct a
material Year 2000 problem could result in an interruption in, or a failure of,
certain normal business activities or operations. Because of the general
uncertainty inherent in the Year 2000 problem, resulting in part from the
uncertainty of Year 2000 readiness of third party suppliers, the Sands is unable
to determine at this time whether the consequences of Year 2000 failures will
have a material impact on the Sands results of operations, liquidity, and
financial condition.
REORGANIZATION AND OTHER RELATED COSTS
Reorganization and other related costs include costs associated with
Holdings' reorganization under Chapter 11, including, among other things,
professional fees, costs associated with the termination of agreements, and
other administrative costs. Also, costs in the amount of $942,000 associated
with a planned retheming of the Sands were expensed during the second and third
quarters of 1998. Due to the reorganization proceedings discussed above, this
project has been abandoned. As noted previously, interest
21
income on cash accumulated during the reorganization is reflected as a reduction
to reorganization and other related costs.
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.
22
ITEM 8. INDEX TO FINANCIAL STATEMENTS
PAGE
----
GB PROPERTY FUNDING CORP
Report of Independent Public Accountants to GB Property
Funding Corp. .................................................. 24
Balance Sheets of GB Property Funding Corp. as of
December 31, 1998 and 1997 ..................................... 25
Statements of Operations of GB Property Funding Corp.
for the Years Ended December 31, 1998, 1997 and 1996 ........... 26
Statements of Cash Flows of GB Property Funding Corp.
for the Years Ended December 31, 1998, 1997 and 1996 ........... 27
Notes to Financial Statements of GB Property Funding Corp. ........ 28
GB HOLDINGS, INC. AND SUBSIDIARIES
Report of Independent Public Accountants to GB Holdings, Inc.
and Subsidiaries ............................................... 33
Consolidated Balance Sheets of GB Holdings, Inc.
and Subsidiaries as of December 31, 1998 and 1997 .............. 34
Consolidated Statements of Operations of GB Holdings, Inc. ........
and Subsidiaries for the Years Ended
December 31, 1998, 1997 and 1996 ............................... 36
Consolidated Statement of Changes in Shareholder's Equity (Deficit)
of GB Holdings, Inc. and Subsidiaries for
the Three Years Ended December 31, 1998 ........................ 37
Consolidated Statements of Cash Flows of GB Holdings, Inc.
and Subsidiaries for the Years Ended
December 31, 1998, 1997 and 1996 .............................. 38
Notes to Consolidated Financial Statements of GB Holdings, Inc.
and Subsidiaries ............................................... 39
23
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, 1998 and 1997,
and the related statements of operations and cash flows for each of the three
years in the period ended December 31, 1998. 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.
As discussed in Note 1, the Company was formed for the purpose of issuing
$185,000,000 of First Mortgage Notes for the benefit of Greate Bay Hotel and
Casino, Inc., an affiliated company ("GBHC"). The Company loaned the proceeds
from the First Mortgage Notes to GBHC and, at December 31, 1998, has a note
receivable and related accrued interest receivable due from GBHC totaling
$191,616,000. The Company has no operations and the note receivable, the accrued
interest receivable and the mortgage lien on the assets of GBHC represent
virtually all of the Company's assets. During 1998, the Company, GBHC and GB
Holdings, Inc., the parent company of both the Company and GBHC, filed voluntary
petitions for relief under Chapter 11 of the U.S. Bankruptcy Code (the
"Bankruptcy Code"). As a result of the Chapter 11 filings, the First Mortgage
Notes and related accrued interest payable have been classified as liabilities
subject to compromise. To the extent that any proceeds are ultimately realized
from GBHC as a result of the resolution of the bankruptcy proceedings, such
amounts would be offered in full satisfaction of the First Mortgage Notes. No
provision for any loss relating to the uncollectibility of these receivables has
been reflected in the accompanying financial statements.
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, 1998 and 1997, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1998 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 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 seeking sponsor(s)
for a plan of reorganization, which will require confirmation by the Bankruptcy
Court in accordance with the Bankruptcy Code and approval by the New Jersey
Casino Control Commission. 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
April 13, 1999
24
GB PROPERTY FUNDING CORP.
(DEBTOR-IN-POSSESSION, WHOLLY OWNED BY GB HOLDINGS, INC.)
BALANCE SHEETS
ASSETS
DECEMBER 31,
------------------------------
1998 1997
------------ ------------
Current asset:
Cash $ 1,000 $ 1,000
Interest receivable from affiliate 9,373,000 9,152,000
Note receivable from affiliate 182,243,000 182,500,000
------------ ------------
$191,617,000 $191,653,000
============ ============
LIABILITIES AND SHAREHOLDER'S EQUITY
Accrued interest payable, non-current $ -- $ 9,152,000
------------ ------------
Long-term debt -- 182,500,000
------------ ------------
Liabilities subject to compromise:
Accrued interest payable 9,373,000 --
Long-term debt 182,243,000 --
------------ ------------
191,616,000 --
------------ ------------
Commitments and Contingencies
Shareholder's equity (Note 1):
Common stock, $1.00 par value per share,
1,000 shares authorized and outstanding 1,000 1,000
------------ ------------
$191,617,000 $191,653,000
============ ============
The accompanying notes to financial statements
are an integral part of these balance sheets.
25
GB PROPERTY FUNDING CORP.
(DEBTOR-IN-POSSESSION, WHOLLY OWNED BY GB HOLDINGS, INC.)
STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
-------------------------------------------
1998 1997 1996
----------- ----------- -----------
Revenues:
Interest income (Note 2) $ 221,000 $19,941,000 $20,119,000
Expenses:
Interest expense (contractual interest
of $19,844,000 in 1998) 221,000 19,941,000 20,119,000
----------- ----------- -----------
Net income $ -- $ -- $ --
=========== =========== ===========
The accompanying notes to financial statements
are an integral part of these statements.
26
GB PROPERTY FUNDING CORP.
(DEBTOR-IN-POSSESSION, WHOLLY OWNED BY GB HOLDINGS, INC.)
STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
---------------------------------------
1998 1997 1996
--------- --------- ---------
OPERATING ACTIVITIES:
Net income $ -- $ -- $ --
Adjustments to reconcile net income to net
cash provided by operating activities:
(Increase) decrease in interest receivable from affiliate (221,000) 125,000 --
Increase (decrease) in accrued interest payable 221,000 (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 statements.
27
GB PROPERTY FUNDING CORP.
(DEBTOR-IN-POSSESSION, 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 was a
wholly owned subsidiary of Pratt Casino Corporation ("PCC") through December 31,
1998, also a Delaware corporation. Effective after December 31, 1998, PCC
transferred 21% of the stock ownership in Holdings to PBV, Inc. ("PBV"), a newly
formed entity, controlled by certain stockholders of Greate Bay Casino
Corporation ("GBCC"). PCC was incorporated during September 1993 and is wholly
owned by PPI Corporation, a New Jersey corporation and a wholly owned subsidiary
of 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 from GBHC for servicing its debt obligations (see Note 2).
Administrative services for GB Property Funding are provided by GBHC 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 in accordance with
Statement of Position No. 90-7, "Financial Reporting By Entities in
Reorganization Under the Bankruptcy Code," and include disclosure of liabilities
subject to compromise. On January 5, 1998, GB Property Funding, GBHC and
Holdings (collectively, the "Debtors") filed voluntary 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"). Management is in the process of seeking sponsor(s) for a
plan of reorganization which requires confirmation by the Bankruptcy Court in
accordance with the Bankruptcy Code and approval by the New Jersey Casino
Control Commission (the "Casino Commission"). There can be no assurance at this
time that any plan of reorganization, when submitted, will be confirmed by the
Bankruptcy Court or approved by the Casino Commission. In the event the plan of
reorganization is confirmed, 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.
As discussed above, GB Property Funding was formed for the purpose of
issuing $185,000,000 of First Mortgage Notes for the benefit of GBHC. GB
Property Funding loaned the proceeds from the First Mortgage Notes to GBHC and,
at December 31, 1998, has a note receivable and related accrued interest
receivable due from GBHC totaling $191,616,000. GB Property Funding has no
operations and the note receivable, the accrued interest receivable and the
mortgage lien on the assets of GBHC represent virtually all of the GB Property
Fundings' assets. As discussed above, during 1998 the Debtors filed voluntary
petitions for relief under Chapter 11 of the Bankruptcy Code. As a result of the
Chapter 11 filings, the
28
GB PROPERTY FUNDING CORP.
(DEBTOR-IN-POSSESSION, WHOLLY OWNED BY GB HOLDINGS, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
First Mortgage Notes and related accrued interest payable have been classified
as liabilities subject to compromise. To the extent that any proceeds are
ultimately realized from GBHC as a result of the resolution of the bankruptcy
proceedings, such amounts would be offered in full satisfaction of the First
Mortgage Notes. No provision for any loss relating to the uncollectibility of
these receivables has been reflected in the accompanying financial statements.
New Jersey Management, Inc. ("NJMI"), also a wholly owned subsidiary of
PCC, was responsible for the operations of the Sands under a management
agreement dated August 19, 1987, as amended, with GBHC (the "Management
Agreement"). On May 22, 1998, GBHC filed a motion with the Bankruptcy Court to
reject the Management Agreement (the "Rejection Motion"). GBCC, NJMI, and
certain of their affiliates, on one side, and the Debtors, on the other, entered
into an agreement on June 27, 1998, which was approved by the Bankruptcy Court
on July 7, 1998, and by the Casino Commission on July 8, 1998 (the "Settlement
Agreement"). Under the Settlement Agreement, among other things, the Management
Agreement was suspended and replaced with a services agreement until a decision
by the Bankruptcy Court on the Rejection Motion, and GBHC ceded ownership rights
to an affiliate of GBCC in, and obtained a perpetual license, from the same
affiliate, for the software used in its operations. On September 28, 1998, and
as a result of the Second Settlement Agreement, as defined below, the Bankruptcy
Court granted the Rejection Motion and, in conformity therewith, no further fees
will be paid under either the Management Agreement or the Settlement Agreement.
Effective September 2, 1998, GBHC acquired the membership interests in
Lieber Check Cashing LLC ("Lieber"), a New Jersey limited liability company
which owns a land parcel adjacent to GBHC (the "Lieber Parcel") and GBHC
acquired and caused an option agreement on other adjacent land parcels (the
"Option Parcels") to be assigned to Lieber (the "Option Agreement"). The Lieber
Parcel and the Option Parcels provide GBHC with an expansion opportunity and
frontage on Pacific Avenue, the principal street running parallel and closest to
the boardwalk in Atlantic City, New Jersey.
On July 27, 1998, GBHC filed an adversary proceeding in the Bankruptcy
Court against GBCC, certain of its affiliates, and certain of the former
directors of GBHC (collectively the "Defendants") seeking to recover the Lieber
Parcel and the Option Agreement for the Option Parcels and to restrain the use
of its Net Operating Losses (the "NOL's"). Effective September 2, 1998, the
Debtors, on one side, and the Defendants, on the other, reached an agreement
resolving, among other things, the adversary proceeding (the "Second Settlement
Agreement"). Under the Second Settlement Agreement, among other things, the
Debtors agreed to be included in the consolidated federal income tax return of
GBCC for the years ended December 31, 1997 and 1998. GBCC agreed to allow the
Debtors to become deconsolidated from the GBCC group for federal income tax
purposes by causing PCC to transfer 21% of the stock ownership interest of PCC
in Holdings to a person other than any member of the GBCC group by December 31,
1998. In accordance with the Second Settlement Agreement and in order to effect
the deconsolidation of the Debtors from the GBCC group, effective after December
31, 1998, PCC transferred 21% of the stock ownership in Holdings to PBV. The
Second Settlement Agreement also resulted in the non-cash settlement of certain
outstanding intercompany transactions, the transfer of the membership interests
in Lieber to GBHC, and the assignment of the Option Agreement for the Option
Parcels to Lieber.
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.
29
GB PROPERTY FUNDING CORP.
(DEBTOR-IN-POSSESSION, WHOLLY OWNED BY GB HOLDINGS, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The Financial Accounting Standards Board has issued a new standard,
"Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 requires the
presentation and disclosure of comprehensive income, which is defined as the
change in a company's equity resulting from non-owner transactions and events.
SFAS 130 became effective December 15, 1997 and requires the restatement of all
prior periods presented. GB Property Funding has adopted the provisions of SFAS
130. However, SFAS 130 provides that an enterprise that has no items of other
comprehensive income for any period presented need only report net income. GB
Property Funding has no such other comprehensive income items for any period
presented. Accordingly, the presentation and disclosure requirements of SFAS 130
are not applicable.
(2) LONG-TERM DEBT
On February 17, 1994, GB Property Funding issued $185,000,000 of first
mortgage notes due January 15, 2004 (the "First Mortgage Notes"). Interest on
the First Mortgage 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 were due on each interest payment date with the balance due at
maturity. Such semiannual payments may be made in cash or by tendering First
Mortgage Notes previously purchased or otherwise acquired by GB Property
Funding. GB Property Funding acquired $2,500,000 face amount of the First
Mortgage Notes which were used to make the July 15, 1997 required principal
payment. As a result of the filing under Chapter 11, debt service payments due
subsequent to January 5, 1998 were not made. The accrual of interest on the
First Mortgage Notes for periods subsequent to the filing has been suspended.
The indenture for the 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
First Mortgage Notes were loaned to GBHC on the same terms and conditions.
Under an order of the Bankruptcy Court, permitting the disposition of
furniture and equipment in the ordinary course of business, any payments
received by GBHC for the sale of such assets, which are part of the security for
the First Mortgage Notes, must be remitted to the Indenture Trustee of the First
Mortgage Notes as reductions to the outstanding principal of the First Mortgage
Notes. During the year ended December 31, 1998, $257,000 has been remitted to
the Indenture Trustee as the proceeds on the sale of assets.
No interest was paid or received with respect to the First Mortgage Notes
and the loan to GBHC during the year ended December 31, 1998. Interest paid and
received amounted to $20,066,000 and $20,119,000 for the years ended December
31, 1997 and 1996, respectively. Interest receivable and payable with respect to
the notes of $9,373,000 are included on the accompanying balance sheet at
December 31, 1998 in noncurrent assets and liabilities subject to compromise,
respectively, as such payments are subject to terms of a reorganization plan
which requires confirmation by the Bankruptcy Court. As a result of the Chapter
11 filing, any claim for post-petition interest is unenforceable unless
otherwise ordered by the Bankruptcy Court. Accordingly, GB Property Funding has
ceased the accrual of interest income as of the date of the Chapter 11 filing.
Accrued interest receivable and payable of $9,152,000 is included in the
accompanying balance sheet at December 31, 1997.
30
GB PROPERTY FUNDING CORP.
(DEBTOR-IN-POSSESSION, WHOLLY OWNED BY GB HOLDINGS, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(3) INCOME TAXES
As part of the Second Settlement Agreement, GB Property Funding is included
in GBCC's consolidated federal income tax return for the years ended December
31, 1998 and 1997. GBCC agreed to allow the Debtors to become deconsolidated
from the GBCC group for federal income tax purposes by causing PCC to transfer
21% of the stock ownership interest of PCC in Holdings to a person other than
any member of the GBCC group by December 31, 1998. In accordance with the Second
Settlement agreement and in order to effect the deconsolidation of the Debtors
from the GBCC group, effective after December 31, 1998, PCC transferred 21% of
the stock ownership in Holdings to PBV. Prior to 1997, GB Property Funding was
included in the consolidated federal income tax return of Hollywood Casino
Corporation ("HCC"), the parent company of GBCC until HCC distributed the GBCC
stock it owned to the shareholders of HCC as a dividend on December 31, 1996.
The Internal Revenue Service is currently examining the consolidated federal
income tax returns of HCC for the years 1993 through 1996 in which GB Property
Funding was included. Management believes that the results of such examination
will not have a material adverse effect on the financial position or results of
operations of GB Property Funding.
(4) LEGAL PROCEEDINGS
On January 5, 1998, the Debtors filed petitions for relief under Chapter 11
of the Bankruptcy Code in the Bankruptcy Court. The prior Boards of Directors
resigned on January 2, 1998 and new Boards of Directors were elected at that
time. Each company continues to operate in the ordinary course of business, as
set forth in the Bankruptcy Code, and each company's executive officers and
directors as of the date of the filing remain in office, subject to the
jurisdiction of the Bankruptcy Court, other than the following: as required by
the Settlement Agreement, Richard Knight resigned as a Director, President, and
Chief Executive Officer of the Debtors effective July 8, 1998; John P. Belisle
was elected President and Chief Executive Officer of GBHC on July 28, 1998; and
J. Timothy Smith was elected as a Director of the Debtors on August 3, 1998. On
May 11, 1998, August 10, 1998 and November 9, 1998, as a result of motions filed
by the Debtors, the Bankruptcy Court extended the exclusive period during which
only the Debtors may file a plan of reorganization for 90 days until August 10,
1998, for another 90 days until November 9, 1998, and for another 60 days until
January 11, 1999, respectively. On January 11, 1999, the exclusivity period
expired and, as a result, any party in interest may file a plan of
reorganization.
(5) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
Disclosure of the estimated fair value of financial instruments is required
under SFAS No 107, "Disclosure About Fair Value of Financial Instruments." The
fair value estimates are made at discrete points in time based on relevant
market information and information about the financial instruments. These
estimates may be subjective in nature and involve uncertainties and significant
judgment and therefore cannot be determined with precision.
Cash is valued at the carrying amount which is the fair value.
As a result of the Chapter 11 filing, the First Mortgage Notes and related
accrued interest payable are subject to compromise and the fair value cannot be
determined. The value of the First Mortgage Notes is subject to a determination
of the valuation of the business of Holdings which will be, but has not yet been
established in the Chapter 11 proceedings and will be subject to the terms of a
plan of reorganization. Accordingly, the fair value of the corresponding note
and interest receivable from affiliate can not be
31
GB PROPERTY FUNDING CORP.
(DEBTOR-IN-POSSESSION, WHOLLY OWNED BY GB HOLDINGS, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
determined at this time. At December 31, 1997, the fair value of the note
receivable from affiliate and First Mortgage Notes was estimated based on the
quoted market prices for recent trades of the issue prior to year end. That
external valuation was based on a prepetition basis and is not reflective of an
external valuation on a post petition basis. At December 31, 1997, the fair
value of the corresponding interest receivable and interest payable was
estimated at the carrying amount, as there was no available market price for
these items that could be used to report external valuations. See also Note 1.
The estimated carrying amounts and fair values of GB Property Funding's
financial instruments are as follows:
DECEMBER 31, 1998 DECEMBER 31, 1997
--------------------------- -----------------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
------------ ---------- ------------ ------------
Financial Assets:
Cash $ 1,000 $ 1,000 $ 1,000 $ 1,000
Interest receivable from
affiliate 9,373,000 n/a 9,152,000 9,152,000
Note receivable from
affiliate 182,243,000 n/a 182,500,000 152,388,000
Financial Liabilities:
Accrued interest payable 9,373,000 n/a 9,152,000 9,152,000
First Mortgage
Notes 182,243,000 n/a 182,500,000 152,388,000
(6) SUPPLEMENTAL CASH FLOW INFORMATION
During May 1997, GB Property Funding received 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
First Mortgage Notes to the trustee in June 1997 in settlement of its principal
payment obligation. Both the receipt and tendering of the notes are excluded
from the accompanying statement of cash flows as non-cash transactions.
Under an order of the Bankruptcy Court, permitting the disposition of
furniture and equipment in the ordinary course of business, any payments
received by GBHC for the sale of such assets, which are part of the security for
the First Mortgage Notes, must be remitted to the Indenture Trustee of the First
Mortgage Notes as reductions to the outstanding principal of the First Mortgage
Notes. For the year ending December 31, 1998, $257,000 has been remitted to the
Indenture Trustee as the proceeds on the sale of assets. This transaction has
also been excluded from the accompanying statement of cash flows as a non-cash
transaction.
32
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, 1998 and 1997, 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, 1998. 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, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998 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 during 1997 and 1996 and has a net capital
deficiency of $42,741,000 at December 31, 1998. 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 ("the 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 seeking sponsor(s) for a plan of reorganization, which will
require confirmation by the Bankruptcy Court in accordance with the Bankruptcy
Code and approval by the New Jersey Casino Control Commission. 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
April 13, 1999
33
GB HOLDINGS, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION, WHOLLY OWNED BY PRATT CASINO CORPORATION)
CONSOLIDATED BALANCE SHEETS
ASSETS
DECEMBER 31,
--------------------------------
1998 1997
------------- -------------
Current Assets:
Cash and cash equivalents $ 23,844,000 $ 13,871,000
Accounts receivable, net of allowances
of $11,920,000 and $14,955,000, respectively 7,428,000 7,794,000
Inventories 3,402,000 3,372,000
Due from affiliates 398,000 258,000
Refundable deposits and other current assets 3,502,000 2,793,000
------------- -------------
Total current assets 38,574,000 28,088,000
------------- -------------
Property and Equipment:
Land 38,929,000 38,093,000
Buildings and improvements 185,508,000 185,508,000
Operating equipment 99,854,000 94,501,000
Construction in progress 3,939,000 2,433,000
------------- -------------
328,230,000 320,535,000
Less - accumulated depreciation and
amortization (182,045,000) (172,819,000)
------------- -------------
Net property and equipment 146,185,000 147,716,000
------------- -------------
Other Assets:
Obligatory investments 8,098,000 7,910,000
Other assets 6,291,000 4,014,000
------------- -------------
Total other assets 14,389,000 11,924,000
------------- -------------
$ 199,148,000 $ 187,728,000
============= =============
The accompanying notes to consolidated financial statements
are an integral part of these consolidated balance sheets.
34
GB HOLDINGS, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION, WHOLLY OWNED BY PRATT CASINO CORPORATION)
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDER'S DEFICIT
DECEMBER 31,
--------------------------------
1998 1997
------------- -------------
Current Liabilities Not Subject to Compromise:
Current maturities of long-term debt $ 73,000 $ 14,000
Accounts payable 4,539,000 6,366,000
Accrued liabilities -
Salaries and wages 3,699,000 4,824,000
Interest -- 4,000
Reorganization costs 1,310,000 152,000
Insurance 1,037,000 2,984,000
Other 6,066,000 6,358,000
Due to affiliates 1,119,000 456,000
Other current liabilities 3,599,000 3,959,000
------------- -------------
Total current liabilities 21,442,000 25,117,000
------------- -------------
Liabilities Subject to Compromise (Note 5) 218,322,000 --
------------- -------------
Accrued Interest Payable -- 9,152,000
------------- -------------
Long-Term Debt 918,000 192,918,000
------------- -------------
Other Noncurrent Liabilities 1,207,000 1,187,000
------------- -------------
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 27,946,000 18,438,000
Accumulated deficit (70,688,000) (77,039,000)
------------- -------------
Total shareholder's deficit (42,741,000) (58,600,000)
------------- -------------
$ 199,148,000 $ 187,728,000
============= =============
The accompanying notes to consolidated financial statements
are an integral part of these consolidated balance sheets.
35
GB HOLDINGS, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION, WHOLLY OWNED BY PRATT CASINO CORPORATION)
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
---------------------------------------------------
1998 1997 1996
------------- ------------- -------------
Revenues:
Casino $ 219,368,000 $ 234,477,000 $ 242,889,000
Rooms 9,200,000 9,691,000 9,446,000
Food and beverage 25,381,000 32,968,000 34,638,000
Other 3,767,000 4,123,000 5,717,000
------------- ------------- -------------
257,716,000 281,259,000 292,690,000
Less - promotional allowances (20,372,000) (25,004,000) (27,929,000)
------------- ------------- -------------
Net revenues 237,344,000 256,255,000 264,761,000
------------- ------------- -------------
Expenses:
Casino 186,761,000 199,746,000 218,990,000
Rooms 3,174,000 2,590,000 2,419,000
Food and beverage 9,998,000 10,815,000 10,618,000
Other 2,599,000 2,756,000 3,258,000
General and administrative 12,497,000 17,409,000 18,486,000
Depreciation and amortization 12,795,000 14,062,000 19,310,000
------------- ------------- -------------
Total expenses 227,824,000 247,378,000 273,081,000
------------- ------------- -------------
Income (loss) from operations 9,520,000 8,877,000 (8,320,000)
------------- ------------- -------------
Non-operating income (expense):
Interest income 961,000 1,680,000 1,590,000
Interest expense (contractual interest of
$22,106,000 in 1998) (313,000) (23,260,000) (22,236,000)
Gain on disposal of assets 252,000 59,000 13,000
------------- ------------- -------------
Total non-operating income (expense), net 900,000 (21,521,000) (20,633,000)
------------- ------------- -------------
Income (loss) before income taxes,
extraordinary and other items 10,420,000 (12,644,000) (28,953,000)
Valuation provision on affiliate receivables -- (9,650,000) --
Write off deferred financing costs -- (4,265,000) --
Reorganization and other related costs (4,069,000) (505,000) --
------------- ------------- -------------
Income (loss) before income taxes and
extraordinary item 6,351,000 (27,064,000) (28,953,000)
Income tax provision -- (10,902,000) (2,417,000)
------------- ------------- -------------
Income (loss) before extraordinary item 6,351,000 (37,966,000) (31,370,000)
Extraordinary item:
Gain on early extinguishment of debt -- 310,000 --
------------- ------------- -------------
Net income (loss) $ 6,351,000 $ (37,656,000) $ (31,370,000)
============= ============= =============
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
36
GB HOLDINGS, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION, WHOLLY OWNED BY PRATT CASINO CORPORATION)
CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDER'S EQUITY (DEFICIT)
FOR THE THREE YEARS ENDED DECEMBER 31, 1998
COMMON STOCK ADDITIONAL
----------------------------- PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT
------------ ------------ ------------ ------------
BALANCE, JANUARY 1, 1996 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)
Capital contribution -- -- 9,508,000 --
Net income -- -- -- 6,351,000
------------ ------------ ------------ ------------
BALANCE, DECEMBER 31, 1998 1,000 $ 1,000 $ 27,946,000 $(70,688,000)
============ ============ ============ ============
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
37
GB HOLDINGS, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION, WHOLLY OWNED BY PRATT CASINO CORPORATION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
------------------------------------------------
1998 1997 1996
------------ ------------ ------------
OPERATING ACTIVITIES:
Net income (loss) $ 6,351,000 $(37,656,000) $(31,370,000)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Extraordinary item -- (310,000) --
Write off reorganization related costs 942,000 -- --
Valuation provision on affiliate receivable -- 9,650,000 --
Write off deferred financing costs -- 4,265,000 --
Depreciation and amortization 12,795,000 14,062,000 19,310,000
Net gain on disposal of assets (252,000) (59,000) (13,000)
Provision for doubtful accounts 1,667,000 3,195,000 2,167,000
Deferred income tax provision -- 10,902,000 2,417,000
Increase in accounts receivable (1,301,000) (877,000) (1,235,000)
Increase in accounts payable and accrued expenses 3,505,000 1,159,000 1,795,000
Net change in other current assets and liabilities (44,000) (1,155,000) 2,044,000
Net change in other noncurrent assets and liabilities (2,800,000) (943,000) (1,185,000)
------------ ------------ ------------
Net cash provided by (used in) operating activities 20,863,000 2,233,000 (6,070,000)
------------ ------------ ------------
INVESTING ACTIVITIES:
Purchases of property and equipment (7,972,000) (3,534,000) (5,505,000)
Purchase of Lieber Check Cashing (net of cash acquired) (245,000) -- --
Proceeds from disposition of assets 259,000 59,000 13,000
Obligatory investments (2,643,000) (2,876,000) (3,062,000)
------------ ------------ ------------
Net cash used in investing activities (10,601,000) (6,351,000) (8,554,000)
------------ ------------ ------------
FINANCING ACTIVITIES:
Net (repayments) borrowings on credit facilities -- (2,000,000) 2,000,000
Deferred financing costs -- -- (10,000)
Repayments of long-term debt (289,000) (2,135,000) (11,000)
Net borrowings from affiliates -- 6,500,000 6,500,000
------------ ------------ ------------
Net cash (used in) provided by financing activities (289,000) 2,365,000 8,479,000
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents 9,973,000 (1,753,000) (6,145,000)
Cash and cash equivalents at beginning of year 13,871,000 15,624,000 21,769,000
------------ ------------ ------------
Cash and cash equivalents at end of year $ 23,844,000 $ 13,871,000 $ 15,624,000
============ ============ ============
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
38
GB HOLDINGS, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION, 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") through December 31, 1998. PCC, a
Delaware corporation, 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"). Effective after December 31, 1998, PCC
transferred 21% of the stock ownership in Holdings to PBV, Inc., a newly formed
entity, controlled by certain stockholders of GBCC ("PBV"). 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"). 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, 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.
Effective September 2, 1998, GBHC acquired the membership interests in
Lieber Check Cashing LLC ("Lieber"), a New Jersey limited liability company
which owns a land parcel adjacent to GBHC (the "Lieber Parcel") and GBHC
acquired and caused an option agreement on other adjacent land parcels (the
"Option Parcels") to be assigned to Lieber (the "Option Agreement"). The Lieber
Parcel and the Option Parcels provide GBHC with an expansion opportunity and
frontage on Pacific Avenue, the principal street running parallel and closest to
the boardwalk in Atlantic City, New Jersey (see Note 10). The accompanying
consolidated financial statements include the accounts and operations of
Holdings, GBHC, GB Property Funding, and, as of September 2, 1998, Lieber. All
significant intercompany balances and transactions have been eliminated.
GBHC estimates that a significant amount of the Sands' revenues are derived
from patrons living in southeastern Pennsylvania, 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 in
accordance with Statement of Position No. 90-7, "Financial Reporting By Entities
in Reorganization under the Bankruptcy Code," and include disclosure of
liabilities subject to compromise (see Note 5). Holdings has experienced
significant losses and has a net capital deficiency of $42,741,000 at December
31, 1998. On January 5, 1998, Holdings, GBHC and GB Property Funding
(collectively, the "Debtors") 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"). The
prior Boards of Directors resigned on January 2, 1998 and new Boards of
Directors were elected at that time. Each company continues to operate in the
ordinary course of business, as set forth in the Bankruptcy Code, and each
company's executive officers and directors as of the date of the filing remain
in office, subject to the jurisdiction of the Bankruptcy Court, other than the
following: as required by the Settlement Agreement,
39
GB HOLDINGS, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION, WHOLLY OWNED BY PRATT CASINO CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
as defined below, Richard Knight resigned as President, and Chief Executive
Officer of the Debtors effective July 8, 1998; John P. Belisle was elected
President and Chief Executive Officer of GBHC on July 28, 1998; and J. Timothy
Smith was elected as a Director of the Debtors on August 3, 1998. On May 11,
1998, August 10, 1998 and on November 9, 1998, as a result of motions filed by
the Debtors, the Bankruptcy Court extended the exclusive period during which
only the Debtors may file a plan of reorganization for 90 days until August 10,
1998, for another 90 days until November 9, 1998, and for another 60 days until
January 11, 1999, respectively. On January 11, 1999, the exclusivity period
expired and, as a result, any party in interest may file a plan of
reorganization. Management is in the process of seeking sponsor(s) for a plan of
reorganization which requires confirmation by the Bankruptcy Court in accordance
with the Bankruptcy Code and approval by the New Jersey Casino Control
Commission ("the Casino Commission"). There can be no assurance at this time
that any plan of reorganization, when submitted, will be confirmed by the
Bankruptcy Court and approved by the Casino Commission. In the event the plan of
reorganization is confirmed, 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 as a going concern.
New Jersey Management, Inc. ("NJMI"), also a wholly owned subsidiary of
PCC, was responsible for the operations of the Sands under a management
agreement dated August 19, 1987, as amended, with GBHC (the "Management
Agreement"). On May 22, 1998, GBHC filed a motion with the Bankruptcy Court to
reject the Management Agreement (the "Rejection Motion"). GBCC, NJMI, and
certain of their affiliates, on one side, and the Debtors, on the other, entered
into an agreement on June 27, 1998, which was approved by the Bankruptcy Court
on July 7, 1998, and by the Casino Commission on July 8, 1998 (the "Settlement
Agreement"). Under the Settlement Agreement, among other things, the Management
Agreement was suspended and replaced with a services agreement until a decision
by the Bankruptcy Court on the Rejection Motion, and GBHC ceded ownership rights
to an affiliate of GBCC in, and obtained a perpetual license, from the same
affiliate, for the software used in its operations. On September 28, 1998, and
as a result of the Second Settlement Agreement, as defined below, the Bankruptcy
Court granted the Rejection Motion and, in conformity therewith, no further fees
will be paid under either the Management Agreement or the Settlement Agreement
(see Note 7).
On July 27, 1998, GBHC filed an adversary proceeding in the Bankruptcy
Court against GBCC, certain of its affiliates, and certain of the former
directors of GBHC (collectively the "Defendants") seeking to recover the Lieber
Parcel and the Option Agreement for the Option Parcels and to restrain the use
of its Net Operating Losses (the "NOL's"). Effective September 2, 1998, the
Debtors, on one side, and the Defendants, on the other, reached an agreement
resolving, among other things, the adversary proceeding (the "Second Settlement
Agreement"). Under the Second Settlement Agreement, among other things, the
Debtors agreed to be included in the consolidated federal income tax return of
GBCC for the years ended December 31, 1997 and 1998. GBCC agreed to allow the
Debtors to become deconsolidated from the GBCC group for federal income tax
purposes by causing PCC to transfer 21% of the stock ownership interest of PCC
in Holdings to a person other than any member of the GBCC group by December 31,
1998. In accordance with the Second Settlement Agreement and in order to effect
the deconsolidation of the Debtors from the GBCC group, effective after December
31, 1998 PCC transferred 21% of the stock ownership in Holdings to PBV. The
Second Settlement Agreement also resulted in the non-cash settlement
40
of certain outstanding intercompany transactions (see Note 11), the transfer of
the membership interests in Lieber to GBHC, and the assignment of the Option
Agreement for the Option Parcels to Lieber (see Note 10).
(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, 1998, 1997 and 1996 were as
follows:
1998 1997 1996
----------- ----------- -----------
Rooms $ 5,120,000 $ 5,617,000 $ 6,170,000
Food and Beverage 21,872,000 28,144,000 29,357,000
Other 2,934,000 2,991,000 4,435,000
----------- ----------- -----------
$29,926,000 $36,752,000 $39,962,000
=========== =========== ===========
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 $1,667,000, $3,195,000 and $2,167,000 were made during the years
ended December 31, 1998, 1997 and 1996, respectively.
INVENTORIES -
Inventories are stated at the lower of cost (on a first-in, first-out
basis) or market.
41
GB HOLDINGS, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION, WHOLLY OWNED BY PRATT CASINO CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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
Interest costs related to property and equipment acquisitions are
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, were 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. Amortization of such costs
was $714,000 and $729,000 for the years ended December 31, 1997 and 1996,
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 seeking sponsor(s) for a plan of reorganization.
Although management has not made a determination whether 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.
ACCRUED INSURANCE -
GBHC is self insured for a portion of its general liability, certain health
care and other liability exposures. Amounts over prescribed levels are insured
by a third party. 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 -
As part of the Second Settlement Agreement (see Note 1), Holdings'
operations are included in GBCC's consolidated federal income tax returns for
the years ended December 31, 1997 and 1998. In accordance with the Second
Settlement Agreement and in order to effect the deconsolidation of the Debtors
from the GBCC group, effective after December 31, 1998 PCC transferred 21% of
the stock ownership in Holdings to PBV. Prior to 1997, Holdings was included in
the consolidated federal income tax return
42
GB HOLDINGS, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION, WHOLLY OWNED BY PRATT CASINO CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
of Hollywood Casino Corporation ("HCC"), the parent company of GBCC until HCC
distributed the GBCC stock it owned to the shareholders of HCC as a dividend on
December 31, 1996 (the "Spin Off").
COMPREHENSIVE INCOME -
The Financial Accounting Standards Board has issued a new standard,
"Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 requires the
presentation and disclosure of comprehensive income, which is defined as the
change in a company's equity resulting from non-owner transactions and events.
SFAS 130 became effective December 15, 1997 and requires the restatement of all
prior periods presented. However, SFAS 130 provides that an enterprise that has
no items of other comprehensive income for any period presented need only report
net income. Holdings has no such other comprehensive income items for any period
presented. Accordingly, the presentation and disclosure requirements of SFAS 130
are not applicable.
RECLASSIFICATIONS -
Certain reclassifications have been made to prior years' consolidated
financial statements to conform to the 1998 consolidated financial statement
presentation.
(3) SHORT-TERM CREDIT FACILITIES
GBHC had a bank line of credit which was 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 and the line of credit was canceled.
(4) LONG-TERM DEBT AND PLEDGE OF ASSETS
Long term debt is comprised of the following:
DECEMBER 31,
--------------------------------
1998 1997
------------- -------------
10-7/8% first mortgage notes, due 2004 (a) $ 182,243,000 $ 182,500,000
14-5/8% affiliate loan, due 2005 (b) 10,000,000 10,000,000
Lieber Mortgage (c) 572,000 --
Other 419,000 432,000
------------- -------------
Total indebtedness 193,234,000 192,932,000
Less - current maturities (73,000) (14,000)
Less - debt subject to compromise (Note 5) (192,243,000) --
------------- -------------
Total long-term debt $ 918,000 $ 192,918,000
============= =============
- ----------
(a) On February 17, 1994, the Sands obtained $185,000,000 from GB Property
Funding, which issued $185,000,000 of first mortgage notes due January 15,
2004 (the "First Mortgage Notes"). Interest on the First Mortgage Notes
accrued 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
43
GB HOLDINGS, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION, WHOLLY OWNED BY PRATT CASINO CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
on July 15, 1997, semiannual principal payments of $2,500,000 were due on
each interest payment date with the balance due at maturity. Such
semiannual payments could be made in cash or by tendering First Mortgage
Notes previously purchased or otherwise acquired by Holdings. Holdings
acquired $2,500,000 face amount of First Mortgage Notes at a discount
during May 1997, which it used during June 1997 to make its July 15, 1997
required principal payment. As a result of the filing under Chapter 11, the
debt service payments due subsequent to January 5, 1998 were not made. The
accrual of interest on the First Mortgage Notes for periods subsequent to
the filing has been suspended.
Subject to certain exceptions in the Security Agreement, substantially all
of Holdings' and GBHC's assets are pledged in connection with their
long-term indebtedness. On January 5, 1998, the Debtors filed petitions for
relief under Chapter 11 of the Bankruptcy Code in the Bankruptcy Court (see
Note 1). GBHC filed a motion in the Bankruptcy Court, seeking to use "Cash
Collateral", as defined by 11 U.S.C. SS.363. By opinion filed April 3, 1998
(the "Opinion"), the Bankruptcy Court granted GBHC the right to use "Cash
Collateral" subject to providing certain adequate protection in favor of
the Indenture Trustee and concluded, among other things, that the Indenture
Trustee did not have a perfected security interest in GBHC's deposit
accounts or cash generated from casino revenues. An order was entered in
conformity with the Opinion dated May 5, 1998. The Indenture Trustee took
an appeal of the order to the United States District Court for the District
of New Jersey. On March 19, 1999, the United States District Court for the
District of New Jersey affirmed the Bankruptcy Court's decision. The
Debtors' have not been informed whether the Trustee intends to seek further
review of the decision.
The Indenture for the 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, to consolidate or to 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.
Under an order of the Bankruptcy Court, permitting the disposition of
furniture and equipment in the ordinary course of business, any payments
received by GBHC for the sale of such assets, which are part of the
security for the First Mortgage Notes, must be remitted to the Indenture
Trustee of the First Mortgage Notes as reductions to the outstanding
principal of the First Mortgage Notes. For the year ending December 31,
1998, $257,000 has been remitted to the Indenture Trustee as the proceeds
on the sale of assets.
(b) On February 17, 1994, GBHC issued to PRT Funding Corp., an affiliate, a
$10,000,000 promissory note, which is subordinated to the First Mortgage
Notes (the "PRT Subordinated Note"). The PRT Subordinated Note is due on
February 17, 2005 and bore interest at the rate of 14-5/8% per annum, which
was payable semiannually commencing August 17, 1994, and payment was
subject to certain conditions including the maintenance of average daily
cash balances required by the indenture for the First Mortgage Notes. As a
result of such payment restrictions, interest has been paid only through
February 17, 1996. Repayment of the PRT Subordinated Note and the payment
of the related interest are subject to any setoffs and defenses available
under the Bankruptcy Code and applicable law and to the terms of a plan of
reorganization which requires approval of the Bankruptcy Court and approval
by the Casino Commission. The accrual of interest on the PRT Subordinated
Note for periods subsequent to the filing under Chapter 11 has been
suspended.
44
GB HOLDINGS, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION, WHOLLY OWNED BY PRATT CASINO CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(c) On September 2, 1998, and as part of the Second Settlement Agreement, GBHC
acquired the membership interests in Lieber (see Note 10) which owns the
Lieber Parcel. Principal mortgage indebtedness outstanding at the time of
acquisition was $587,000 and bears interest at the rate of 7% per annum.
Principal and interest are paid monthly based on a ten year payment
schedule. The balance of the note is due in July, 2001.
As a result of the Chapter 11 filing, principal payments with respect to
the First Mortgage Notes and the PRT Subordinated Note are subject to a plan of
reorganization, which requires confirmation by the Bankruptcy Court in
accordance with the Bankruptcy Code and approval by the Casino Commission.
Pending such reorganization, the entire amount of the First Mortgage Notes and
the PRT Subordinated Note are included in liabilities subject to compromise and
in long-term debt on the accompanying consolidated balance sheets at December
31, 1998 and December 31, 1997, respectively. Scheduled payments of long-term
debt as of December 31, 1998, exclusive of payments on the First Mortgage Notes
and the PRT Subordinated Note, are set forth below:
1999 $ 73,000
2000 80,000
2001 468,000
2002 19,000
2003 21,000
Thereafter 330,000
----------
Total $ 991,000
==========
Interest paid amounted to $56,000, $20,128,000 and $21,086,000,
respectively, during the years ended December 31, 1998, 1997 and 1996. At
December 31, 1998, accrued interest on the First Mortgage Notes in the amount of
$9,373,000 is presented with liabilities subject to compromise on the
accompanying consolidated balance sheet. At December 31, 1997, accrued interest
on the First Mortgage Notes in the amount of $9,152,000 is presented as accrued
interest payable on the accompanying consolidated balance sheet.
(5) LIABILITIES SUBJECT TO COMPROMISE
Liabilities subject to compromise under Holdings' reorganization
proceedings consist of the following at December 31, 1998:
Accounts payable and accrued liabilities $ 7,751,000
First Mortgage Notes (Note 4) 182,243,000
PRT Subordinated Note (Note 4) 10,000,000
Borrowings from affiliate (Note 7) 5,000,000
Accrued interest (Notes 4 and 7) 12,855,000
Due to affiliates 473,000
------------
Total $218,322,000
============
45
GB HOLDINGS, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION, WHOLLY OWNED BY PRATT CASINO CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(6) INCOME TAXES
Components of the provision for income taxes consisted of the following:
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1998 1997 1996
------------ ------------ ------------
Federal income tax (provision) benefit:
Current $ (1,729,000) $ 4,330,000 $ 7,412,000
Deferred (390,000) 3,814,000 657,000
State income tax (provision) benefit:
Current (458,000) 1,228,000 2,156,000
Deferred (159,000) 1,141,000 187,000
Valuation allowance 2,736,000 (21,415,000) (12,829,000)
------------ ------------ ------------
$ -- $(10,902,000) $ (2,417,000)
============ ============ ============
As part of the Second Settlement Agreement (see Note 1), Holdings'
operations are included in GBCC's consolidated federal income tax return for the
years ended December 31, 1997 and 1998. GBCC agreed to allow the Debtors to
become deconsolidated from the GBCC group for federal income tax purposes by
causing PCC to transfer 21% of the stock ownership interest of PCC in Holdings
to a person other than any member of the GBCC group by December 31, 1998. In
accordance with the Second Settlement Agreement and in order to effect the
deconsolidation of the Debtors from the GBCC group, effective after December 31,
1998 PCC transferred 21% of the stock ownership in Holdings to PBV. Prior to
1997, Holdings was included in the consolidated federal income tax return of HCC
until the Spin Off.
Federal and state income tax provisions or benefits are based upon
estimates of the results of operations for the current period and reflect the
nondeductibility for income tax purposes of certain items, including certain
amortization, meals and entertainment and other expenses. Holdings made no
federal or state income tax payments during the years ended December 31, 1998,
1997 and 1996.
At December 31, 1998, Holdings and its subsidiaries have deferred tax
assets including net operating loss carryforwards ("NOL's"). The NOL's do not
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 may be
subject to the tax consequences of a plan of reorganization approved by the
Bankruptcy Court. In addition, the Second Settlement Agreement provides that
GBCC may utilize NOL's of Holdings and its subsidiaries through December 31,
1998 to offset taxable income of GBCC and other members of the consolidated tax
group. Representatives of GBCC have indicated to Holdings that it should have
approximately $13 million in NOL's available subsequent to December 31, 1998.
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
46
GB HOLDINGS, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION, WHOLLY OWNED BY PRATT CASINO CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
utilization of all or a portion of such NOL's and deferred tax assets is more
likely than not, requires the recording of a valuation allowance. 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, 1998 and 1997.
As part of the Second Settlement Agreement, GBHC settled certain
intercompany obligations on a noncash basis. Loans to GBHC from GBCC, totaling
$8,000,000 along with accrued interest totaling $1,508,000, and a deferred
federal tax asset of GBHC's, totaling $10,902,000, representing a claim against
an affiliate for the overpayment of federal income taxes under a previously
existing tax sharing agreement, were mutually released. As the deferred federal
tax asset had been previously fully reserved for as required by SFAS 109, this
mutual release resulted in the recording of a capital contribution in the amount
of $9,508,000 on the accompanying consolidated balance sheet at December 31,
1998.
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.
Prior to 1997, Holdings was included in the consolidated federal income tax
return of HCC. The Internal Revenue Service is currently examining the
consolidated federal income tax returns of HCC for the years 1993 through 1996
in which Holdings' was included. Management believes that the results of such
examination will not have a material adverse effect on the consolidated
financial position or results of operations of Holdings. In addition, during
1998 HCC reported that it may be required to file an amended federal tax return
for calender year 1996 and that it may experience a material increase in income
tax liability as a result of the Spin Off. However, as part of the Second
Settlement Agreement, and after use of any tax attributes available to members
of the former HCC consolidated group, HCC and GBCC agreed to pay any increased
taxes due, without contribution from the Debtors, that is attributable to the
Spin Off.
47
GB HOLDINGS, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION, WHOLLY OWNED BY PRATT CASINO CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A reconciliation between the calculated tax benefit based on the statutory
rates in effect and the effective tax rates follows:
YEAR ENDED DECEMBER 31,
------------------------------------------------
1998 1997 1996
------------ ------------ ------------
Calculated income tax (provision) benefit at 34% $ (2,159,000) $ 9,096,000 $ 9,844,000
Amortization of excess purchase price -- -- (601,000)
Disallowance of meals and entertainment (160,000) (144,000) (337,000)
State income taxes (407,000) 1,564,000 1,546,000
Utilization of tax credits -- -- 99,000
Write off of deferred tax asset (10,902,000) -- --
Adjustment to prior year taxes -- -- (134,000)
Valuation allowance change 13,638,000 (21,413,000) (12,829,000)
Other (10,000) (5,000) (5,000)
------------ ------------ ------------
Tax provision as shown on
consolidated statements of operations $ -- $(10,902,000) $ (2,417,000)
============ ============ ============
(7) TRANSACTIONS WITH RELATED PARTIES
Prior to July 8, 1998, NJMI was responsible for the operations of the Sands
under a Management Agreement with GBHC. Under such agreement, NJMI was entitled
to receive annually (i) a basic consulting fee of 1.5% of "adjusted gross
revenues," as defined, and (ii) incentive compensation of between 5% and 7.5% of
gross operating profits in excess of certain stated amounts should annual "gross
operating profits," as defined, exceed $5,000,000. On May 22, 1998, GBHC filed
the Rejection Motion. The Settlement Agreement, partially resolving the
Rejection Motion, was entered into on June 27, 1998 and was approved by the
Bankruptcy Court on July 7, 1998 and by the Casino Commission on July 8, 1998.
Under the Settlement Agreement and effective as of May 1, 1998 and until
decision on the Rejection Motion, NJMI agreed to provide certain services to
GBHC and GBHC agreed to pay a monthly fee of $165,000, which was payable
$122,000 on a monthly basis in arrears and $43,000 per month upon confirmation
of GBHC's plan of reorganization by the Bankruptcy Court. On September 28, 1998,
and as part of the Second Settlement Agreement, the Bankruptcy Court approved
the Rejection Motion. The current fees under the Settlement Agreement have been
paid and the deferred fees have been accrued. As part of the Second Settlement
Agreement, a rejection damages claim of NJMI was preserved provided it was filed
in the Bankruptcy Court within 30 days of the entry of the order of the
Bankruptcy Court on September 11, 1998 approving the Second Settlement
Agreement. The rejection damages claim was not filed and expired along with the
corresponding avoiding powers causes of action under the Bankruptcy Code of
GBHC, as provided in the Second Settlement Agreement. Accordingly, other than
the deferred fees, no further management fees will be paid under either the
Management Agreement or the Settlement Agreement except that NJMI possesses a
disputed claim for prepetition management fees.
Fees under the Management Agreement and the Settlement Agreement are
included in general and administrative expenses in the accompanying consolidated
financial statements and amounted to
48
GB HOLDINGS, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION, WHOLLY OWNED BY PRATT CASINO CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
$2,388,000, $5,430,000, $4,644,000 during the years ended December 31, 1998,
1997 and 1996, respectively. Amounts payable under the Settlement Agreement to
NJMI are included in due to affiliates on the accompanying consolidated balance
sheet at December 31, 1998 and amounted to $199,000. Fees payable under the
Management Agreement of $34,000 are included in due to affiliates on the
accompanying consolidated balance sheet at December 31, 1998, and are subject to
defenses and offsets reserved under the Second Settlement Agreement. Fees
payable under the Management Agreement of $145,000 are included in liabilities
subject to compromise on the accompanying consolidated balance sheet at December
31, 1998, and are subject to the defenses and offsets reserved under the Second
Settlement Agreement.
GBHC's rights to the trade name "Sands" (the "Trade Name") are derived from
a license agreement between GBCC and an unaffiliated third party. Amounts
payable by the Sands for these rights are equal to the amounts paid to the
unaffiliated third party. Such charges amounted to $275,000, $290,000 and
$283,000 for the years ended December 31, 1998, 1997 and 1996, respectively.
Under the Settlement Agreement, GBCC agreed not to seek to cancel the rights of
GBHC to use the Trade Name prior to December 15, 1998, and GBHC preserved its
legal position that GBCC lacked the right to cancel the rights of GBHC to use
the Trade Name. GBCC filed a motion in the Bankruptcy Court seeking relief from
the automatic stay, pursuant to 11 U.S.C. ss.362(a), to send a letter to the
licensor, purporting to terminate the license agreement. GBHC opposed the motion
and the motion was denied by Order of the Bankruptcy Court dated March 2, 1999.
On March 10, 1999, GBCC took an appeal to the United States District Court for
the District of New Jersey.
An advance from GBHC to another GBCC subsidiary in the amount of $5,672,000
was outstanding at both December 31, 1998 and December 31, 1997, except that,
under the Second Settlement Agreement, GBHC agreed not to sue the entity
receiving the advance and its affiliates and reserved any rights it had to
offset the advance against the PRT Subordinated Note, and the PCC Subordinated
Note, as hereafter defined (collectively, the "Subordinated Notes"). Interest on
the advance accrues at the rate of 16.5% per annum. The advance, together with
accrued interest amounting to $4,914,000 and $3,978,000 at December 31, 1998 and
December 31, 1997, respectively, are fully reserved as collection of the
receivables is uncertain.
During the third quarter of 1996, GBCC borrowed a total of $6,500,000 from
HCC which GBCC then loaned to GBHC to enable GBHC to make its debt service
obligations and a property tax payment. According to the terms of the
corresponding note, 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 stated terms.
Interest accrued on such loans amounted to $1,496,000 at December 31, 1997 and
is included in noncurrent amounts due to affiliates on the accompanying
consolidated balance sheet. As part of the Second Settlement Agreement, GBHC
settled certain intercompany obligations on a noncash basis. These loans to GBHC
from GBCC, totaling $8,000,000 along with accrued interest totaling $1,508,000,
and a deferred federal tax asset of GBHC's, totaling $10,902,000, representing a
claim against an affiliate for the overpayment of federal income taxes under a
previously existing tax sharing agreement, were mutually released. As the
deferred federal tax asset had been previously fully reserved for as required by
SFAS 109, this mutual release resulted in the recording of a capital
contribution in the amount of $9,508,000 on the accompanying consolidated
balance sheet at December 31, 1998.
GBHC also borrowed $5,000,000 from another subsidiary of GBCC during
January, 1997 at the stated rate of 14-5/8% per annum payable semiannually
commencing July 15, 1997 and, as set forth in the
49
GB HOLDINGS, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION, WHOLLY OWNED BY PRATT CASINO CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
terms of the corresponding note, the loan is subordinated to the First Mortgage
Notes and payment is subject to certain conditions (the "PCC Subordinated
Note"). At December 31, 1998 and 1997, interest accrued on the PCC Subordinated
Note amounted to $728,000 and $720,000, respectively, and is included in
liabilities subject to compromise and in noncurrent amounts due to affiliates,
respectively, on the accompanying consolidated balance sheets. Repayment of the
PCC Subordinated Note and the payment of the related interest are subject to
approval of the Casino Commission and any setoffs and defenses available under
the Bankruptcy Code and applicable law and to the terms of a plan of
reorganization which requires confirmation by the Bankruptcy Court and approval
by the Casino Commission. The accrual of interest on the PCC Subordinated Note
for periods subsequent to the filing under Chapter 11 has been suspended.
Interest income (expense) incurred with respect to affiliate advances and
borrowings is as follows:
YEAR ENDED DECEMBER 31,
---------------------------------------------
1998 1997 1996
---------- ----------- -----------
Net Advances $ (20,000) $ (870,000) $ 525,000
PRT Subordinated Note (Note 4) (16,000) (1,463,000) (1,463,000)
Interest accrued on the PRT Subordinated Note (see Note 4) of $2,754,000
and $2,738,000, respectively, is included in liabilities subject to compromise
and in noncurrent amounts due to affiliates, respectively, on the accompanying
consolidated balance sheets at December 31, 1998 and 1997, respectively.
Effective September 2, 1998, GBHC acquired Lieber as part of the Second
Settlement Agreement and caused the Option Agreement for the Option Parcels to
be assigned to Lieber. The assignment of the Option Agreement for the Option
Parcels under the Second Settlement Agreement requires a confirmation payment of
$500,000 to be paid to a designated affiliate of GBCC upon confirmation of a
plan of reorganization. This amount is included in due to affiliates in the
accompanying consolidated balance sheet at December 31, 1998.
GBHC performed certain services for other subsidiaries of GBCC and for HCC
and its subsidiaries and invoiced those companies for the Sands' cost of
providing those services. Similarly, GBHC is charged for certain legal,
accounting, equipment and other expenses incurred by GBCC and HCC and their
respective subsidiaries that relate to GBHC's business. Such affiliate
transactions are summarized below:
YEAR ENDED DECEMBER 31,
----------------------------------------
1998 1997 1996
---------- ---------- ----------
Billings to affiliates $ 213,000 $1,080,000 $1,594,000
Charges from affiliates 983,000 917,000 1,178,000
50
GB HOLDINGS, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION, WHOLLY OWNED BY PRATT CASINO CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(8) 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. The
plenary license issued to the Sands was renewed by the Casino Commission in
September, 1996 and extended through September 30, 2000, subject to review of
the Sands' financial stability during 1997 and to the submission of financial
projections in 1998 and 1999 for calendar years 1999 and 2000, respectively. The
1997 review took place and the 1999 financial projections were filed and the
Sands license will be up for renewal in 2000. Terms of the current license
require GBHC to comply with weekly and monthly financial reporting requirements
and to obtain prior Casino Commission approval of certain cash transactions with
affiliates. The Casino Commission may reopen licensing hearings at any time. 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.
The Casino Act requires casino licensees to pay an investment alternative
tax of 2.5% of Gross Revenue (the "2.5% Tax") or to make quarterly deposits of
1.25% of quarterly Gross Revenue with the CRDA (the "Deposits"). The Deposits
are then used to purchase bonds at below-market interest rates from the CRDA or
to make qualified investments approved by the CRDA. The CRDA administers the
statutorily mandated investments made by casino licensees and is required to
expend the monies received by it for eligible projects as defined in the Casino
Act. The Sands has elected to make the Deposits with the CRDA rather than pay
the 2.5% Tax.
As of December 31, 1998 and 1997, the Sands had purchased bonds totaling
$6,707,000 and $6,500,000, respectively. In addition, the Sands had remaining
funds on deposit and held in escrow by the CRDA at December 31, 1998 and 1997 of
$9,919,000 and $6,981,000, 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, 1998 and 1997 are net of accumulated
valuation allowances of $8,528,000 and $5,571,000, respectively, based upon the
estimated realizable values of the investments. Provisions for valuation
allowances for 1998 amounted to $2,724,000. This amount includes an additional
valuation allowance of $1,380,000 due to the uncertainty of the realizibility of
certain bond investments. Provisions for valuation allowances during the years
ended December 31, 1997 and 1996 amounted to $1,241,000 and $1,344,000,
respectively.
The Sands has, from time to time, contributed certain amounts held in
escrow by the CRDA to fund CRDA sponsored projects. In consideration thereof,
the CRDA granted the Sands waivers of certain of its Deposit obligations in
future periods. GBHC made such donations of Deposits during the years ended
December 31, 1998, 1997 and 1996 totaling $146,000, $147,000 and $1,500,000,
respectively, resulting in waivers granted by the CRDA during 1998 and 1997
totaling $74,000 and $75,000, respectively. No such waivers were granted during
1996; however, the donations were designated for projects expected to benefit
the community. Accordingly, intangible assets aggregating $2,386,000 and
$2,905,000, respectively, have been recognized on the accompanying consolidated
balance sheets at December 31, 1998 and 1997, and will be amortized over a
period of ten years effective with the completion of the projects.
51
GB HOLDINGS, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION, WHOLLY OWNED BY PRATT CASINO CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Amortization of intangible assets totaled $203,000 and $200,000 during the years
ended December 31, 1998 and 1997, respectively.
(9) LEGAL PROCEEDINGS
On January 5, 1998, the Debtors filed petitions for relief under Chapter 11
of the Bankruptcy Code in the Bankruptcy Court. The prior Boards of Directors
resigned on January 2, 1998 and new Boards of Directors were elected at that
time. Each company continues to operate in the ordinary course of business, as
set forth in the Bankruptcy Code, and each company's executive officers and
directors as of the date of the filing remain in office, subject to the
jurisdiction of the Bankruptcy Court, other than the following: as required by
the Settlement Agreement, Richard Knight resigned as a Director, President, and
Chief Executive Officer of the Debtors effective July 8, 1998; John P. Belisle
was elected President and Chief Executive Officer of GBHC on July 28, 1998; and
J. Timothy Smith was elected as a Director of the Debtors on August 3, 1998. On
May 11, 1998, August 10, 1998 and on November 9, 1998, as a result of motions
filed by the Debtors, the Bankruptcy Court extended the exclusive period during
which only the Debtors may file a plan of reorganization for 90 days until
August 10, 1998, for another 90 days until November 9, 1998, and for another 60
days until January 11, 1999, respectively. On January 11, 1999 the exclusivity
period expired and, as a result, any party in interest may file a plan of
reorganization.
On May 22, 1998, GBHC filed the Rejection Motion with the Bankruptcy Court.
The Management Agreement was suspended as a result of the Settlement Agreement
and was replaced with a services agreement until the decision on the Rejection
Motion. On September 28, 1998, and as part of the Second Settlement Agreement,
the Bankruptcy Court granted the Rejection Motion (see Note 1).
On July 27, 1998, GBHC filed an action in the Bankruptcy Court (the
"Action") against GBCC, certain affiliates of GBCC, and Jack E. Pratt, Edward T.
Pratt Jr. and William D. Pratt, former directors of GBHC and current directors
of GBCC (collectively, the "Defendants"), alleging, inter alia, usurpation of
corporate opportunities of GBHC and breach of fiduciary duty with respect to
GBHC, in connection with the acquisition of an option for certain land parcels
and the acquisition of a land parcel on Pacific Avenue in Atlantic City, New
Jersey adjoining the Sands (collectively, the "Parcels"), and seeking, inter
alia, an order enjoining the Defendants from transferring the Parcels to third
parties and requiring the Defendants to convey the Parcels to GBHC. The Action
also sought to enjoin the Defendants from using the NOL's of the Debtors (see
Note 6). Effective September 2, 1998, the parties entered into the Second
Settlement Agreement resolving, among other things, the Action. Under the Second
Settlement Agreement, among other things, GBHC agreed to be included in the
consolidated federal income tax return of GBCC for the years ended December 31,
1997 and 1998. GBCC agreed to allow the Debtors to become deconsolidated from
the GBCC group for federal income tax purposes by causing PCC to transfer 21% of
the stock ownership interest of PCC in Holdings to a person other than any
member of the GBCC group by December 31, 1998. In accordance with the Second
Settlement Agreement and in order to effect the deconsolidation of the Debtors
from the GBCC group, effective after December 31, 1998 PCC transferred 21% of
the stock ownership in Holdings to PBV. The agreement also resulted in the
non-cash settlement of certain outstanding intercompany transactions (see Note
11), and the transfer of the membership interests in Lieber to GBHC and the
assignment of the Option Agreement for the Option Parcels to Lieber (see Note
10). The Second Settlement Agreement also resulted in the dismissal of all
applications in the Bankruptcy Court related to the Action. The Debtors and the
Defendants also entered into mutual and general releases subject to certain
exceptions described in the Second Settlement Agreement.
52
GB HOLDINGS, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION, WHOLLY OWNED BY PRATT CASINO CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
GBHC is a party in various legal proceedings with respect to the conduct of
casino and hotel operations. Although a possible range of losses 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 accompanying consolidated financial statements do not
include any adjustments that might result from the outcome of the uncertainties
described above.
(10) ACQUISITION OF LIEBER CHECK CASHING AND THE AGREEMENT FOR THE
OPTION PARCELS
Effective September 2, 1998, and as part of the Second Settlement Agreement
(see Note 1), GBHC acquired the membership interests in Lieber from affiliates
of GBCC for $251,000. GBHC also caused Lieber to acquire the rights under the
Option Agreement for the Option Parcels from another affiliate of GBCC for a
payment of $1.3 million and a payment of $500,000 at confirmation of a plan of
reorganization. During September 1998, GBHC provided Lieber with $1 million
which Lieber paid to the owner of the Option Parcels to extend the closing under
the Option Agreement for the Option Parcels to September 30, 1999. Principal
mortgage indebtedness outstanding at the acquisition date was $587,000 (see Note
4). The assets, liabilities, and results of operations of Lieber at the date of
acquisition are not material to the consolidated financial statements.
Accordingly, pro forma financial information has not been provided. These
transactions were accounted for by the purchase method of accounting, and,
therefore, the accompanying consolidated financial statements include the
results of operations of Lieber since September 2, 1998.
(11) SUPPLEMENTAL CASH FLOW INFORMATION
As part of the Second Settlement Agreement, GBHC settled certain
intercompany obligations on a noncash basis. Loans to GBHC from GBCC, totaling
$8,000,000 along with accrued interest totaling $1,508,000, and a deferred
federal tax asset of GBHC's, totaling $10,902,000, representing a claim against
an affiliate for the overpayment of federal income taxes under a previously
existing tax sharing agreement, were mutually released. As the deferred federal
tax asset had been previously fully reserved for as required by SFAS 109, this
mutual release resulted in the recording of a capital contribution in the amount
of $9,508,000 on the accompanying consolidated balance sheet at December 31,
1998. The effects of this settlement have been excluded from the accompanying
statement of cash flows as noncash transactions.
(12) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
Disclosure of the estimated fair value of financial instruments is required
under SFAS No 107, "Disclosure About Fair Value of Financial Instruments." The
fair value estimates are made at discrete points in time based on relevant
market information and information about the financial instruments. These
estimates may be subjective in nature and involve uncertainties and significant
judgment and therefore cannot be determined with precision.
Cash and cash equivalents are valued at the carrying amount. The carrying
amount approximates the fair value of cash equivalents because of the short
maturity of these instruments.
Obligatory investments are valued at the carrying amount as this
approximates fair value as a result of an allowance reflecting the below market
interest rate associated with such investments.
53
GB HOLDINGS, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION, WHOLLY OWNED BY PRATT CASINO CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
As a result of the Chapter 11 filing, the First Mortgage Notes, the
affiliate borrowings, the PRT Subordinated Note and related accrued interest
payable are subject to compromise and the fair value cannot be determined. The
value of the First Mortgage Notes, PCC Subordinated Note and PRT Subordinated
Note is subject to a determination of the valuation of the business of Holdings
which will be, but has not yet been established in the Chapter 11 proceedings
and will be subject to the terms of a plan of reorganization. At December 31,
1997, the fair value of the First Mortgage Notes was estimated based on the
quoted market prices for recent trades of the issue prior to year end. That
external valuation was based on a prepetition basis and is not reflective of an
external valuation on a post petition basis. At December 31, 1997, the fair
value of the affiliate borrowings, the PRT Subordinated Note, the interest
payable on the First Mortgage Notes and interest payable on affiliate debt was
estimated at the carrying amount, as there was no available market price for
these items that could be used to report external valuations. See also Note 1.
Other debt obligations with a short remaining maturity are valued at the
carrying amount.
The estimated carrying amounts and fair values of Holdings' financial
instruments at December 31, 1998 and 1997 are as follows:
DECEMBER 31, 1998 DECEMBER 31, 1997
----------------------------- -----------------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
------------ ------------ ------------ ------------
Financial Assets
Cash and cash equivalents $ 23,844,000 $ 23,844,000 $ 13,871,000 $ 13,871,000
Obligatory investments 8,098,000 8,098,000 7,910,000 7,910,000
Financial Liabilities
Interest payable 9,373,000 n/a 9,156,000 9,156,000
Borrowings from affiliates 5,000,000 n/a 13,000,000 13,000,000
PRT Subordinated Note 10,000,000 n/a 10,000,000 10,000,000
Interest on affiliate borrowings 3,482,000 n/a 4,954,000 4,954,000
First Mortgage Notes 182,243,000 n/a 182,500,000 152,388,000
Lieber Mortgage 572,000 572,000 -- --
Other notes payable 419,000 419,000 432,000 432,000
(13) SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
QUARTER
---------------------------------------------------------------------
FIRST SECOND THIRD FOURTH
------------ ------------ ------------ -------------
YEAR ENDED DECEMBER 31, 1998:
Net revenues $ 55,613,000 $ 58,453,000 $ 65,835,000 $ 57,443,000
============ ============ ============ =============
Net income (loss) $ 2,635,000 $ 619,000 $ 3,960,000 $ (862,000)
============ ============ ============ ==============
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)
============ ============ ============ =============
54
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
Prior to the Chapter 11 filings, directors of GB Property Funding, Holdings
and GBHC were elected annually to serve until the next annual meeting of
stockholders or until their successors were duly elected and qualified. After
the Chapter 11 filing, and due to the terms of the Security Agreement, Holdings
was unable to vote the stock of GBHC or GB Property Funding to change the
directors of GBHC and GB Property Funding. In addition, and as set forth in the
Settlement Agreement, GBCC for itself and its subsidiaries agreed not to change
the Boards of Directors of Holdings, GBHC, and GB Property Funding without an
Order of the Bankruptcy Court. As a result, the only changes in the Boards of
Directors of Holdings, GBHC, and GB Property Funding have been as a result of
the existing directors to fill vacancies. See Note 1.
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
- ---------------------- --- -------------------------------------
John P. Belisle (1) 45 President and Chief Executive Officer
Frederick H. Kraus (2) 49 Executive Vice President, General
Counsel, and Director
Timothy A. Ebling (3) 41 Executive Vice President, Chief
Financial Officer, Principal
Accounting Officer and Director
J. Timothy Smith (4) 46 Director
- ----------
(1) John P. Belisle was appointed President and Chief Executive Officer of GBHC
on July 28, 1998. Previously, Mr. Belisle served as President of Trump
Communications for the Trump Organization in Atlantic City. During his term
with the Trump Organization, Mr. Belisle served as President and Chief
Operating Officer and Executive Vice President of Operations of Trump
Marina Hotel Casino. Mr. Belisle also served as Executive Vice President
and Chief Operating Officer of Merv Griffin's Resorts Casino Hotel in
Atlantic City ("Resorts"). He also served as Senior Vice President of
Casino Operations and Vice President of Marketing of Resorts.
(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.
55
(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.
(4) J. Timothy Smith was elected Director of the Debtors on August 3, 1998. He
is currently the Vice President of Finance and Administration for Gold
Transportation, an unrelated company to the registrant. From 1993 through
1995, Mr. Smith served as Executive Vice President and Chief Operating
Officer of American Gaming, Inc., a publicly traded company and in
connection, therewith, served as an officer of two of its subsidiaries,
AMGAM Associates ("AMGAM") and American Gaming and Resorts of Mississippi,
Inc ("AGRM"). On May 5, 1995 an involuntary Chapter 7 Bankruptcy petition
was filed as to AMGAM and AMGAM converted the involuntary to a voluntary
Chapter 11 under the United States Bankruptcy Code. In June 1995, AGRM
filed for protection under Chapter 11 of the United States Bankruptcy Code.
All actions were filed in the United States Bankruptcy Court for the
Southern District of Mississippi, Southern Division.
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION
Neither Holdings nor GB Property Funding pays 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, 1998, 1997 and 1996.
ANNUAL COMPENSATION LONG-TERM
-------------------------------------- COMPENSATION
OTHER ANNUAL AWARDS/ ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION OPTIONS COMPENSATION (1)
--------------------------- ---- -------- ------- ------------ ------------- ----------------
John Belisle 1998 $201,923 -- -- -- --
Chief Executive Officer 1997 -- -- -- -- --
and President 1996 -- -- -- -- --
Frederick H. Kraus 1998 235,800 -- -- -- $ 4,000
Executive Vice President, 1997 214,133 -- -- -- 3,500
General Counsel, Secretary 1996 210,800 $ 25,000 -- -- 1,980
and Director of GBHC
Timothy A. Ebling 1998 198,400 -- -- -- 3,668
Executive Vice President, 1997 189,186 -- -- -- 3,500
Chief Financial Officer 1996 173,400 -- -- -- 1,980
and Director of GBHC
Gary Luderitz (2) 1998 183,761 -- -- -- 3,982
Senior Vice President of 1997 176,494 -- -- -- 3,500
Casino Operations 1996 173,400 -- -- -- 3,195
Signe C. Huff (3) 1998 183,761 -- -- -- 3,186
Senior Vice President of 1997 179,666 -- -- -- 3,002
Hotel Operations 1996 173,400 -- -- -- 3,093
Richard D. Knight (4) 1998 237,250 -- -- -- 4,000
Formerly Chief Executive Officer, 1997 -- -- -- -- --
Chairman of the Board and President 1996 -- -- -- -- --
56
(1) Includes matching contributions by GBHC to The Hollywood Casino Corporation
and Subsidiaries Retirement Savings Plan on behalf of the named executive
officer.
(2) Gary Luderitz has served as Senior Vice President of Casino Operations
since 1995. From 1993 to 1995 Mr. Luderitz served as an executive in a
developmental role for an affiliate of GBHC. Prior to 1993 Mr. Luderitz
held various senior casino operating positions with GBHC.
(3) Signe C. Huff has served as Senior Vice President of Hotel Operations since
1995. From 1989 to 1995 Ms. Huff served as Vice President of Hotel
Operations. Prior to 1989, Ms. Huff held various senior hotel operating
positions with GBHC.
(4) Richard D. Knight concurrently served as Executive Vice President of HCC
and as Executive Vice President and Chief Operating Officer of two of HCC's
subsidiaries. Mr. Knight's Compensation during 1997 and 1996 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. On July 8, 1998, Mr. Knight
resigned as a Director, President, and Chief Executive Officer of the
Debtors.
OPTION GRANTS IN LAST FISCAL YEAR
None of the Companies has a stock option plan.
EMPLOYMENT CONTRACTS
John Belisle, President and Chief Executive Officer of GBHC, is under an
employment agreement dated July 28, 1998 in such capacity through July 27, 1999.
The terms of the agreement provide for an annual base salary of $450,000,
subject to annual increases in accordance with GBHC's regular policies therefor.
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.
Gary Luderitz, Senior Vice President of Casino Operations, is under an
employment agreement, amended as of June 12, 1998, in such capacity through
November 30, 2000. The terms of the agreement provide for an annual base salary
of $165,000, 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.
Signe C. Huff, Senior Vice President of Hotel Operations, is under an
employment agreement, amended as of March 11, 1998, in such capacity through
November 30, 2000. The terms of the agreement
57
provide for an annual base salary of $165,000, 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.
EMPLOYEE RETIREMENT SAVINGS PLAN
GBHC participated 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 through December 31, 1998. 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 $1.0 million for the year
ended December 31, 1998
Effective January 1, 1999, GBHC administers and participates in the Sands
Retirement Plan, a qualified defined contribution plan for the benefit of all of
GBHC's employees with the same requirements and benefits of predecessor plans.
Except for the change in name, this plan remains substantially unchanged.
COMPENSATION OF DIRECTORS
Nonemployee Directors of GBHC receive an annual fee of $10,000 for service
on the Board of Directors and a fee of $500 for each meeting attended. The Board
of Directors held 17 meetings either in person or by unanimous consent during
the year ended December 31, 1998. 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 Holdings also has an Audit Committee. The
external members of the Audit Committee received an annual fee of $5,000 for
service on the committee and a fee of $500 for each meeting attended. There is
no Compensation Committee of the Boards of Directors; such function is performed
by the Board as a whole.
58
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 1998, the Audit Committee was comprised of Mr. J.
Timothy Smith, Mr. Frederick H. Kraus, and Ms. Barbara Lang.
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 were owned by Pratt Casino Corporation
until December 31, 1998. Effective after December 31, 1998, PCC transferred 21%
of the stock ownership in Holdings to PBV.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Prior to July 8, 1998, NJMI was responsible for the operations of the Sands
under a Management Agreement with GBHC. Under such agreement, NJMI was entitled
to receive annually (i) a basic consulting fee of 1.5% of "adjusted gross
revenues," as defined, and (ii) incentive compensation of between 5% and 7.5% of
gross operating profits in excess of certain stated amounts should annual "gross
operating profits," as defined, exceed $5,000,000. On May 22, 1998, GBHC filed
the Rejection Motion. The Settlement Agreement, partially resolving the
Rejection Motion, was entered into on June 27, 1998 and was approved by the
Bankruptcy Court on July 7, 1998 and by the Casino Commission on July 8, 1998.
Under the Settlement Agreement and effective as of May 1, 1998 and until
decision on the Rejection Motion, NJMI agreed to provide certain services to
GBHC and GBHC agreed to pay a monthly fee of $165,000, which was payable
$122,000 on a monthly basis in arrears and $43,000 per month upon confirmation
of GBHC's plan of reorganization by the Bankruptcy Court. On September 28, 1998,
and as part of the Second Settlement Agreement, the Bankruptcy Court approved
the Rejection Motion. The current fees under the Settlement Agreement have been
paid and the deferred fees have been accrued. As part of the Second Settlement
Agreement, a rejection damages claim of NJMI was preserved provided it was filed
in the Bankruptcy Court within 30 days of the entry of the order of the
Bankruptcy Court on September 11, 1998 approving the Second Settlement
Agreement. The rejection damages claim was not filed and expired along with the
corresponding avoiding powers causes of action under the Bankruptcy Code of
GBHC, as provided in the Second Settlement Agreement. Accordingly, other than
the deferred fees, no further management fees will be paid under either the
Management Agreement or the Settlement Agreement except that NJMI possesses a
disputed claim for prepetition management fees. Such fees
59
amounted to $2,388,000 during the year ended December 31, 1998. Amounts payable
under the Settlement Agreement at December 31, 1998 were $199,000. Additional
fees payable under the Management Agreement of $145,000 are subject to
compromise at December 31, 1998 and are subject to the defenses and offsets
reserved under the Second Settlement Agreement.
GBHC rights to the trade name "Sands" are derived from a license agreement
between GBCC and an unaffiliated third party. Amounts payable by the Sands for
these rights are equal to the amounts paid to the unaffiliated third party. Such
charges amounted to $275,000 for the year ended December 31, 1998.
An advance to a GBCC subsidiary in the amount of $5,672,000 was outstanding
as of December 31, 1998 which accrued interest at the rate of 16.5% per annum.
The advance, together with accrued interest amounting to $4,914,000, was fully
reserved for as of December 31, 1998 as collection of the receivables is
uncertain.
During the third quarter of 1996, GBCC borrowed a total of $6,500,000 from
HCC which GBCC then loaned to GBHC to enable GBHC to make its debt service
obligations and a property tax payment. According to the terms of the
corresponding note, such borrowings accrued 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 stated terms.
As part of the Second Settlement Agreement, GBHC settled certain intercompany
obligations on a noncash basis. These loans to GBHC from GBCC, totaling
$8,000,000 along with accrued interest totaling $1,508,000, and a deferred
federal tax asset of GBHC's, totaling $10,902,000, representing a claim against
an affiliate for the overpayment of federal income taxes under a previously
existing tax sharing agreement, were mutually released. As the deferred federal
tax asset has been previously fully reserved for as required by SFAS 109, this
mutual release resulted in the recording of a capital contribution in the amount
of $9,508,000.
GBHC also borrowed $5,000,000 from another subsidiary of GBCC during
January, 1997 at the stated rate of 14 5/8% per annum payable semiannually
commencing July 15, 1997 and, as set forth in the terms of the corresponding
note, the loan is subordinated to the First Mortgage Notes and payment is
subject to certain conditions. At December 31, 1998, interest accrued amounted
to $728,000. Repayment is subject to approval of the Casino Commission and any
setoffs and defenses available under the Bankruptcy Code and applicable law and
to the terms of a plan of reorganization which requires confirmation by the
Bankruptcy Court and approval by the Casino Commission. The accrual of interest
for periods subsequent to the filing under Chapter 11 has been suspended.
On February 17, 1994, GBHC issued to PRT Funding Corp., an affiliate, a
$10,000,000 promissory note, which is subordinated to the First Mortgage Notes.
The note is due on February 17, 2005 and bore interest at the rate of 14 5/8%
per annum, which was payable semiannually commencing August 17, 1994, and
payment was subject to certain conditions including the maintenance of average
daily cash balances required by the indenture for the First Mortgage Notes. As a
result of such payment restrictions, interest has been paid only through
February 17, 1996. Repayment of the note and the payment of the related interest
are subject to any setoffs and defenses available under the Bankruptcy Code and
applicable law and to the terms of a plan of reorganization which requires
confirmation of the Bankruptcy Court and approval by the Casino Commission. The
accrual of interest for periods subsequent to the filing under Chapter 11 has
been suspended.
GBHC performed certain services for other subsidiaries of GBCC and for HCC
and its subsidiaries and invoiced those companies for the Sands' cost of
providing those services. Similarly, GBHC is charged for certain legal,
accounting, equipment and other expenses incurred by GBCC and HCC and their
respective subsidiaries that relate to the Sands' business. Total billings to
affiliates amounted to $213,000 during the year ended December 31, 1998. Total
charges from affiliates amounted to $983,000 during the year ended December 31,
1998.
60
As part of the Second Settlement Agreement, Holdings' operations are
included in GBCC's consolidated federal income tax returns for the years ended
December 31, 1997 and 1998. In accordance with the Second Settlement Agreement
and in order to effect the deconsolidation of the Debtors from the GBCC group,
effective after December 31, 1998 PCC transferred 21% of the stock ownership in
Holdings to PBV. Prior to 1997, Holdings was included in the consolidated
federal income tax return of Hollywood Casino Corporation ("HCC"), the parent
company of GBCC until HCC distributed the GBCC stock it owned to the
shareholders of HCC as a dividend on December 31, 1996.
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 24.
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
-- Notes 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 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)
61
*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 -- First and Second Amendments to Employment Agreement dated as
of March 11, 1998, between GBHC and Signe C. Huff.
++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.
(Exhibit 10.4)
+++10.5 -- First and Second Amendments to Employment Agreement dated as
of January 1, 1998, between GBHC and Timothy A. Ebling.
(Exhibit 10.5)
+10.6 -- Deed dated November 27, 1978, from Colony Associates, L.P. to
GBHC. (Exhibit 10.13)
10.7 -- Employment Agreement dated as of July 28, 1998, between GBHC
and John P. Belisle
++++10.8 -- Settlement Agreement dated as of September 2, 1998 by and
among Greate Bay Hotel and Casino, Inc., GB Holdings, Inc., GB
Property Funding Corp., on one side, and Greate Bay Casino
Corporation, PHC Acquisition Corp., Lieber Check Cashing,
LLC, Jack E, Pratt, William D. Pratt Jr., and Edward T.
Pratt, Jr., and Hollywood Casino Corporation, on the other.
(Exhibit 10.1)
+++++10.9 -- Agreement by and among GBHC, Holdings, GB Property Funding and
Advanced Casino Systems International, Inc. ("ACSI"), on the
one hand, and GBCC, NJMI, PCC, PRT Funding Corp., PPI
Corporation, ACSC and HCC, on the other, dated June 27, 1998.
(Exhibit 10.1)
+++++10.10 -- Software License Agreement by and between ACSC, ACSI, Computer
Management Systems International, and GBHC dated June 27,
1998. (Exhibit 10.2)
10.11 -- First amendment to employment agreement dated as of June 12,
1998 between GBHC and Gary Luderitz.
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 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.
62
+++ Incorporated by reference from the exhibit shown in parenthesis
to GB Property Funding's Annual report on Form 10-K for the year
ended December 31, 1997.
++++ Incorporated by reference from the exhibit shown in parenthesis
to GB Property Funding's Quarterly report on Form 10-Q for the
quarter ended September 30, 1998.
+++++ Incorporated by reference from the exhibit shown in parenthesis
to GB Property Funding's Quarterly report on Form 10-Q for the
quarter ended June 30, 1998.
* 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, 1998. 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.
63
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 April 14, 1999.
GB PROPERTY FUNDING CORP.
By: /s/ TIMOTHY A. EBLING
-------------------------------
Timothy A. Ebling
Chief Financial 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/ FREDERICK H. KRAUS Executive Vice President, April 14, 1999
- ------------------------- General Counsel, Secretary
Frederick H. Kraus and Director
/s/ TIMOTHY A. EBLING Executive Vice President, April 14, 1999
- ------------------------- Chief Financial Officer,
Timothy A. Ebling Principal Accounting Officer,
and Director
/s/ J. TIMOTHY SMITH Director April 14, 1999
- -------------------------
J. Timothy Smith
64
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 April 14, 1999.
GB HOLDINGS, INC.
By: /s/ TIMOTHY A. EBLING
-------------------------------
Timothy A. Ebling
Chief Financial 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/ FREDERICK H. KRAUS Executive Vice President, April 14, 1999
- ------------------------- General Counsel, Secretary
Frederick H. Kraus and Director
/s/ TIMOTHY A. EBLING Executive Vice President, April 14, 1999
- ------------------------- Chief Financial Officer,
Timothy A. Ebling Principal Accounting Officer,
and Director
/s/ J. TIMOTHY SMITH Director April 14, 1999
- -------------------------
J. Timothy Smith
65
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
- Notes to Parent Company Financial Statements
- Schedule II; Valuation and Qualifying Accounts
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 April 13, 1999. 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
April 13, 1999
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,
------------------------------
1998 1997
------------ ------------
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 $ 42,741,000 $ 58,600,000
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 27,946,000 18,438,000
Accumulated deficit (70,688,000) (77,039,000)
------------ ------------
Total shareholder's deficit (42,741,000) (58,600,000)
------------ ------------
Total liabilities and shareholder's deficit $ 1,000 $ 1,000
============ ============
The accompanying notes to consolidated financial statements
are an integral part of this schedule.
SCHEDULE 1
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,
-----------------------------------------------
1998 1997 1996
------------ ------------ ------------
Equity in income (loss) of consolidated
subsidiaries $ 6,351,000 $(37,656,000) $(31,370,000)
------------ ------------ ------------
Net income (loss) $ 6,351,000 $(37,656,000) $(31,370,000)
============ ============ ============
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,
-----------------------------------------------
1998 1997 1996
----------- -------------- ------------
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 and has a net capital
deficiency of $42,741,000 at December 31, 1998. As discussed below, on January
5, 1998, Holdings filed a petition 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"). Management is in
the process of seeking sponsor(s) for a plan of reorganization which requires
confirmation by the Bankruptcy Court and approval by the New Jersey Casino
Control Commission. 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, GB Property Funding and Greate Bay Hotel and
Casino, Inc. ("GBHC"), both wholly owned subsidiaries of Holdings, (collectively
the "Debtors"), 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. The prior Boards of Directors
resigned on January 2, 1998 and new Boards of Directors were elected at that
time. Each company continues to operate in the ordinary course of business, as
set forth in the Bankruptcy Code, and each company's officer and directors as of
the date of the filing remain in office, subject to the jurisdiction of the
Bankruptcy Court, other than the following: as required by the Settlement
Agreement, Richard Knight resigned as Director, President, and Chief Executive
Officer of the Debtors effective July 8, 1998; John P. Belisle was elected
President and Chief Executive Officer of GBHC on July 28, 1998; and J. Timothy
Smith was elected as a Director of the Debtors on August 3, 1998. On May 11,
1998, August 10, 1998 and on November 9, 1998, as a result of motions filed by
the Debtors, the Bankruptcy Court extended the exclusive period during which
only the Debtors may file a plan of reorganization for 90 days until August 10,
1998, for another 90 days until November 9, 1998, and for another 60 days until
January 11, 1999, respectively. On January 11, 1999, the exclusivity period
expired and, as a result, any party in interest may file a plan of
reorganization.
SCHEDULE II
GB HOLDINGS, INC. AND SUBSIDIARIES
(WHOLLY OWNED BY PRATT CASINO CORPORATION)
VALUATION AND QUALIFYING ACCOUNTS
ADDITIONS
------------------------------
AMOUNTS
BALANCE AT CHARGED TO AMOUNTS BALANCE
BEGINNING COSTS AND CHARGED TO AT END
OF PERIOD EXPENSES OTHER ACCOUNTS DEDUCTIONS OF PERIOD
------------ ------------ -------------- ------------ ------------
YEAR ENDED DECEMBER 31, 1998:
Allowance for doubtful
accounts receivable $ 14,955,000 $ 1,667,000 $ -- $ (4,769,000)(1) $ 11,853,000
Allowance on
affiliate receivables 9,650,000 936,000 -- -- 10,586,000
Allowance for obligatory
investments 5,571,000 2,724,000 305,000(2) (72,000)(3) 8,528,000
------------ ------------ ------------ ------------ ------------
$ 30,176,000 $ 5,327,000 $ 305,000 $ (4,841,000) $ 30,967,000
============ ============ ============ ============ ============
YEAR ENDED DECEMBER 31, 1997:
Allowance for doubtful
accounts receivable $ 15,524,000 $ 3,195,000 -- $ (3,764,000)(1) $ 14,955,000
Allowance on
affiliate receivables -- 9,650,000 -- -- 9,650,000
Allowance for obligatory
investments 4,401,000 1,241,000 -- (71,000)(3) 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)(3) 4,401,000
------------ ------------ ------------ ------------ ------------
$ 20,286,000 $ 3,511,000 $ -- $ (3,872,000) $ 19,925,000
============ ============ ============ ============ ============
- ----------
(1) Represents net write-offs of uncollectible accounts.
(2) Represents allowance on return of unused funds by the Casino Reinvestment
Development Authority for a specific project.
(3) Represents write-offs of obligatory investments in connection with the
contribution of certain obligatory investments to the Casino Reinvestment
Development Authority.