SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended JUNE 30, 1998
-------------------------------------------------
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
-------------------------------
GB PROPERTY FUNDING CORP.
GB HOLDINGS, INC.
GREATE BAY HOTEL AND CASINO, INC.
- --------------------------------------------------------------------------------
(Exact name of each Registrant as specified in its charter)
DELAWARE 75-2502290
DELAWARE 75-2502293
NEW JERSEY 22-2242014
- ----------------------------------------- -------------------------------------
(States or other jurisdictions of (I.R.S. Employer
incorporation or organization) Identification No.'s)
C/O SANDS HOTEL & CASINO
INDIANA AVENUE & BRIGHTON PARK, 9TH FLOOR
ATLANTIC CITY, NEW JERSEY 08401
- ----------------------------------------- -------------------------------------
(Address of principal executive offices) (Zip Code)
(Registrants' telephone number, including area code): (609) 441-0704
---------------------------
(NOT APPLICABLE)
- --------------------------------------------------------------------------------
(Former name, former address, and former fiscal year, if changed since last
report.)
Indicate by check mark whether 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
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the last practicable date.
REGISTRANT CLASS OUTSTANDING AT AUGUST 17, 1998
- --------------------------------- ----------------------------- ------------------------------
GB Property Funding Corp. Common stock, $1.00 par value 1,000 shares
GB Holdings, Inc. Common stock, $1.00 par value 1,000 shares
Greate Bay Hotel and Casino, Inc. Common stock, no par value 100 shares
1
PART I: FINANCIAL INFORMATION
- ------------------------------
INTRODUCTORY NOTES TO FINANCIAL STATEMENTS
- ------------------------------------------
The outstanding securities consist of 10 7/8% First Mortgage Notes (the "10
7/8% First Mortgage Notes") in the original principal amount of $185,000,000 due
January 15, 2004 issued by GB Property Funding Corp. ("GB Property Funding").
GB Property Funding's obligations are unconditionally guaranteed by GB Holdings,
Inc. ("Holdings"), a Delaware corporation with principal executive offices at
Indiana Avenue and Brighton Park, Atlantic City, New Jersey 08401, and by Greate
Bay Hotel and Casino, Inc. ("GBHC"), a New Jersey corporation and a wholly owned
subsidiary of Holdings with principal offices at 136 South Kentucky Avenue,
Atlantic City, New Jersey 08401.
GB Property Funding is wholly owned by Holdings. Holdings is a wholly owned
subsidiary of Pratt Casino Corporation ("PCC"), which is an indirect, wholly
owned subsidiary of Greate Bay Casino Corporation ("GBCC"). GBCC's common stock
is listed on the OTC Bulletin Board Service under the trading symbol "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 10 7/8% First Mortgage Notes for the benefit of GBHC. GBHC owns the
Sands Hotel and Casino located in Atlantic City, New Jersey (the "Sands") .
Substantially all of Holdings' assets and operations relate to the Sands.
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: 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, 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. The Debtors filed a
motion with the Bankruptcy Court to extend the exclusivity period another 90
days and on August 10, 1998 the Bankruptcy Court reextended the period for
another 90 days from August 10, 1998.
New Jersey Management, Inc. ("NJMI"), which is also an indirect, 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. On May 22,
1998, GBHC filed a motion with the Bankruptcy Court to reject the management
agreement. 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 New Jersey Casino
Control 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 motion to reject the management agreement, which is presently scheduled
for September 28, 1998, 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.
Historically, the Sands' gaming operations have been highly seasonal in
nature, with the peak activity occurring from May to September. Consequently,
the results of operations for the three and six month periods ended June 30,
1998 are not necessarily indicative of the operating results to be reported for
the full year.
2
The financial statements of GB Property Funding and the consolidated
financial statements of Holdings as of June 30, 1998 and for the three and six
month periods ended June 30, 1998 and 1997 have been prepared without audit,
pursuant to the rules and regulations of the Securities and Exchange Commission.
In the opinion of management, their respective financial statements contain all
adjustments (consisting of only normal recurring adjustments) necessary to
present fairly their respective financial positions as of June 30, 1998, their
respective results of operations for the three and six month periods ended June
30, 1998 and 1997 and their respective cash flows for the six month periods
ended June 30, 1998 and 1997.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. These financial statements should be read in
conjunction with the financial statements and notes thereto included in GB
Property Funding, Holdings and GBHC's 1997 Annual Report on Form 10-K.
3
GB PROPERTY FUNDING CORP.
(DEBTOR-IN-POSSESSION, WHOLLY OWNED BY GB HOLDINGS, INC.)
BALANCE SHEETS
(UNAUDITED)
ASSETS
JUNE 30, 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 182,500,000 182,500,000
------------ ------------
$191,874,000 $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 182,500,000 -
------------ ------------
191,873,000 -
------------ ------------
Shareholder's equity (Note 1):
Common stock, $1.00 par value per share,
1,000 shares authorized and outstanding 1,000 1,000
------------ ------------
$191,874,000 $191,653,000
============ ============
The accompanying introductory notes and notes to financial statements
are an integral part of these balance sheets.
4
GB PROPERTY FUNDING CORP.
(DEBTOR-IN-POSSESSION, WHOLLY OWNED BY GB HOLDINGS, INC.)
STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED
JUNE 30,
------------------------
1998 1997
----------- -----------
Revenues:
Interest income (Note 2) $ - $ 4,988,000
Expenses:
Interest expense (contractual interest of $4,961,000 in 1998) - 4,988,000
----------- -----------
Net income $ - $ -
=========== ===========
The accompanying introductory notes and notes to financial statements
are an integral part of these financial statements.
5
GB PROPERTY FUNDING CORP.
(DEBTOR-IN-POSSESSION, WHOLLY OWNED BY GB HOLDINGS, INC.)
STATEMENTS OF OPERATIONS
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
------------------------
1998 1997
----------- -----------
Revenues:
Interest income (Note 2) $ 221,000 $10,018,000
Expenses:
Interest expense (contractual interest of $9,923,000 in 1998) 221,000 10,018,000
----------- -----------
Net income $ - $ -
=========== ===========
The accompanying introductory notes and notes to financial statements
are an integral part of these financial statements.
6
GB PROPERTY FUNDING CORP.
(DEBTOR-IN-POSSESSION, WHOLLY OWNED BY GB HOLDINGS, INC.)
STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
----------------------
1998 1997
---------- ----------
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 period 1,000 1,000
--------- ---------
Cash at end of period $ 1,000 $ 1,000
========= =========
The accompanying introductory notes and notes to financial statements
are an integral part of these financial statements.
7
GB PROPERTY FUNDING CORP.
(DEBTOR-IN POSSESSION, WHOLLY OWNED BY GB HOLDINGS, INC.)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(1) ORGANIZATION AND OPERATIONS
GB Property Funding Corp. ("GB Property Funding"), a Delaware corporation,
was incorporated on September 29, 1993. GB Property Funding is a wholly owned
subsidiary of GB Holdings, Inc. ("Holdings"), a Delaware corporation which is an
indirect, wholly owned subsidiary of Greate Bay Casino Corporation ("GBCC").
Holdings was incorporated in September 1993 and, on February 17, 1994, acquired
through capital contributions by its parent, all of the outstanding capital
stock of Greate Bay Hotel and Casino, Inc. ("GBHC"), which owns the Sands Hotel
and Casino in Atlantic City, New Jersey (the "Sands"). GB Property Funding was
formed for the purpose of borrowing $185,000,000 for the benefit of GBHC; such
debt was issued during February 1994 at the rate of 10 7/8% per annum and the
proceeds were loaned to GBHC (see Note 2).
GB Property Funding has no operations and is dependent on the repayment of
its note to GBHC for servicing its debt obligations (see Note 2).
Administrative services for GB Property Funding are provided by 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"). GB Property Funding is dependent on repayment of its note
from GBHC to meet its debt obligations. Management is in the process of
developing a plan of reorganization that will be submitted to the Bankruptcy
Court and GB Property Funding's creditors for their approval. In the event the
plan of reorganization is accepted, continuation of the business thereafter is
dependent on GBHC's ability to achieve successful future operations. The
accompanying financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or the amounts and
classification of liabilities that might be necessary should GB Property Funding
be unable to continue as a going concern.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
8
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, the statement 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.
The financial statements as of June 30, 1998 and for the three and six month
periods ended June 30, 1998 and 1997 have been prepared by GB Property Funding
without audit. In the opinion of management, these financial statements contain
all adjustments (consisting of only normal recurring adjustments) necessary to
present fairly the financial position of GB Property Funding as of June 30,
1998, and the results of its operations for the three and six month periods
ended June 30, 1998 and 1997 and cash flows for the six month periods ended June
30, 1998 and 1997.
(2) LONG-TERM DEBT
On February 17, 1994, GB Property Funding issued $185,000,000 of non-
recourse first mortgage notes due January 15, 2004 (the "10 7/8% First Mortgage
Notes"). Interest on the notes accrues at the rate of 10 7/8% per annum, payable
semiannually commencing July 15, 1994. Interest only was payable during the
first three years. Commencing on July 15, 1997, semiannual principal payments of
$2,500,000 are due on each interest payment date with the balance due at
maturity. Such semiannual payments may be made in cash or by tendering to the
trustee 10 7/8% First Mortgage Notes previously purchased or otherwise acquired
by GB Property Funding. During May 1997, GB Property Funding acquired $2,500,000
face amount of 10 7/8% First Mortgage Notes which were used to make the July 15,
1997 required principal payment. As a result of the filing under Chapter 11,
debt service payments due in January and July 1998 were not made. The accrual of
interest on the 10 7/8% First Mortgage Notes for periods subsequent to the
filing has been suspended.
The indenture for the 10 7/8% First Mortgage Notes contains various
provisions which, among other things, restrict the ability of certain
subsidiaries of GBCC to pay dividends to GBCC, to merge, consolidate or sell
substantially all of their assets or to incur additional indebtedness beyond
certain limitations. In addition, the indenture requires the maintenance of
certain cash balances and requires minimum expenditures, as defined in the
indenture, for property and fixture renewals, replacements and betterments at
the Sands. The proceeds of the 10 7/8% First Mortgage Notes were loaned to GBHC
on the same terms and conditions.
No interest was paid or received with respect to the 10 7/8% First Mortgage
Notes and the loan to GBHC during the six month period ended June 30, 1998.
Interest paid and received amounted to $10,143,000 during the six month period
ended June 30, 1997. Interest receivable and payable with
9
GB PROPERTY FUNDING CORP.
(DEBTOR-IN POSSESSION, WHOLLY OWNED BY GB HOLDINGS, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
respect to the notes are included on the accompanying balance sheet at June 30,
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.
(3) INCOME TAXES
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. As a result of the Chapter 11 filing, and an
action instituted by GBHC in the Bankruptcy Court against GBCC, certain
affiliates of GBCC, Jack E. Pratt, Edward T. Pratt, Jr., and William D. Pratt,
former directors of GBHC and current directors of GBCC (collectively, the
"Defendants"), seeking to enjoin the Defendants from using the net operating
losses of the Debtors, whether the Debtors file a consolidated federal tax
return for 1997 with GBCC as members of a consolidated group is unresolved.
(4) LITIGATION
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: 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, 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. The Debtors filed a
motion with the Bankruptcy Court to extend the exclusivity period another 90
days and on August 10, 1998 the Bankruptcy Court reextended the period for
another 90 days from August 10, 1998.
10
GB HOLDINGS, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION, WHOLLY OWNED BY PRATT CASINO CORPORATION)
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
JUNE 30, DECEMBER 31,
1998 1997
-------------- --------------
Current Assets:
Cash and cash equivalents $ 22,298,000 $ 13,871,000
Accounts receivable, net of allowances
of $12,791,000 and $14,955,000, respectively 7,040,000 7,794,000
Inventories 3,260,000 3,372,000
Due from affiliate 378,000 258,000
Refundable deposits and other current assets 4,100,000 2,793,000
------------- -------------
Total current assets 37,076,000 28,088,000
------------- -------------
Property and Equipment:
Land 38,093,000 38,093,000
Buildings and improvements 185,508,000 185,508,000
Operating equipment 96,745,000 94,501,000
Construction in progress 3,108,000 2,433,000
------------- -------------
323,454,000 320,535,000
Less - accumulated depreciation and
amortization (177,850,000) (172,819,000)
------------- -------------
Net property and equipment 145,604,000 147,716,000
------------- -------------
Other Assets:
Obligatory investments 8,779,000 7,910,000
Other assets 3,592,000 4,014,000
------------- -------------
Total other assets 12,371,000 11,924,000
------------- -------------
$ 195,051,000 $ 187,728,000
============= =============
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated balance sheets.
11
GB HOLDINGS, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION, WHOLLY OWNED BY PRATT CASINO CORPORATION)
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
LIABILITIES AND SHAREHOLDER'S DEFICIT
JUNE 30, DECEMBER 31,
1998 1997
------------- -------------
Current Liabilities Not Subject to Compromise:
Current maturities of long-term debt $ 14,000 $ 14,000
Accounts payable 4,056,000 6,366,000
Accrued liabilities -
Salaries and wages 4,460,000 4,824,000
Interest - 4,000
Insurance 716,000 2,984,000
Other 7,467,000 6,510,000
Due to affiliates 772,000 456,000
Other current liabilities 2,913,000 3,959,000
------------ ------------
Total current liabilities 20,398,000 25,117,000
------------ ------------
Liabilities Subject to Compromise (Note 4) 228,242,000 -
------------ ------------
Accrued Interest Payable - 9,152,000
------------ ------------
Long-Term Debt 412,000 192,918,000
------------ ------------
Other Noncurrent Liabilities 1,345,000 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 18,438,000 18,438,000
Accumulated deficit (73,785,000) (77,039,000)
------------ ------------
Total shareholder's deficit (55,346,000) (58,600,000)
------------ ------------
$195,051,000 $187,728,000
============ ============
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated balance sheets.
12
GB HOLDINGS, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION, WHOLLY OWNED BY PRATT CASINO CORPORATION)
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED
JUNE 30,
--------------------------
1998 1997
------------ ------------
Revenues:
Casino $54,085,000 $61,823,000
Rooms 2,325,000 2,455,000
Food and beverage 6,146,000 8,457,000
Other 971,000 947,000
----------- -----------
63,527,000 73,682,000
Less - promotional allowances (5,074,000) (6,201,000)
----------- -----------
Net revenues 58,453,000 67,481,000
----------- -----------
Expenses:
Casino 46,233,000 51,396,000
Rooms 917,000 671,000
Food and beverage 2,441,000 2,881,000
Other 623,000 616,000
General and administrative 3,134,000 4,653,000
Depreciation and amortization 2,926,000 3,659,000
----------- -----------
Total expenses 56,274,000 63,876,000
----------- -----------
Income from operations 2,179,000 3,605,000
----------- -----------
Non-operating income (expense):
Interest income 181,000 453,000
Interest expense (contractual interest
of $5,799,000 in 1998) (11,000) (5,826,000)
Gain on disposal of assets - 17,000
----------- -----------
Total non-operating income (expense), net 170,000 (5,356,000)
----------- -----------
Income (loss) before income taxes, extraordinary and
other items 2,349,000 (1,751,000)
Income tax provision - -
----------- -----------
Income (loss) before extraordinary and other items 2,349,000 (1,751,000)
Reorganization and other related costs (1,730,000) -
----------- -----------
Income (loss) before extraordinary item 619,000 (1,751,000)
Gain on early extinguishment of debt - 310,000
----------- -----------
Net income (loss) $ 619,000 $(1,441,000)
=========== ===========
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated statements.
13
GB HOLDINGS, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION, WHOLLY OWNED BY PRATT CASINO CORPORATION)
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
----------------------------
1998 1997
------------- -------------
Revenues:
Casino $105,518,000 $120,153,000
Rooms 4,362,000 4,692,000
Food and beverage 11,795,000 16,377,000
Other 1,848,000 1,912,000
------------ ------------
123,523,000 143,134,000
Less - promotional allowances (9,457,000) (12,456,000)
------------ ------------
Net revenues 114,066,000 130,678,000
------------ ------------
Expenses:
Casino 88,013,000 100,405,000
Rooms 1,662,000 1,267,000
Food and beverage 4,806,000 5,220,000
Other 1,018,000 1,145,000
General and administrative 7,115,000 9,313,000
Depreciation and amortization 5,825,000 7,533,000
------------ ------------
Total expenses 108,439,000 124,883,000
------------ ------------
Income from operations 5,627,000 5,795,000
------------ ------------
Non-operating income (expense):
Interest income 709,000 825,000
Interest expense (contractual interest of $11,595,000 in 1998) (279,000) (11,656,000)
Gain on disposal of assets 28,000 24,000
------------ ------------
Total non-operating expense, net 458,000 (10,807,000)
------------ ------------
Income (loss) before income taxes, extraordinary and other items 6,085,000 (5,012,000)
Income tax provision - -
------------ ------------
Income (loss) before extraordinary and other items 6,085,000 (5,012,000)
Reorganization and other related costs (2,831,000) -
------------ ------------
Income (loss) before extraordinary item 3,254,000 (5,012,000)
Gain on early extinguishment of debt - 310,000
------------ ------------
Net income (loss) $ 3,254,000 $ (4,702,000)
============ ============
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated statements.
14
GB HOLDINGS, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION, WHOLLY OWNED BY PRATT CASINO CORPORATION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
-------------------------------
1998 1997
----------------- ------------
OPERATING ACTIVITIES:
Net income (loss) $ 3,254,000 $(4,702,000)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Extraordinary item - (310,000)
Write-off reorganization-related costs 881,000 -
Depreciation and amortization 5,825,000 7,533,000
Gain on disposal of assets (28,000) (24,000)
Provision for doubtful accounts 742,000 1,559,000
Decrease (increase) in accounts receivable 12,000 (554,000)
Increase in accounts payable and accrued expenses 3,770,000 216,000
Net change in other current assets and liabilities (1,431,000) (1,313,000)
Net change in other noncurrent assets and liabilities - (474,000)
----------- -----------
Net cash provided by operating activities 13,025,000 1,931,000
----------- -----------
INVESTING ACTIVITIES:
Purchase of property and equipment (3,394,000) (1,279,000)
Proceeds from disposal of assets 28,000 24,000
Obligatory investments (1,226,000) (1,333,000)
----------- -----------
Net cash used in investing activities (4,592,000) (2,588,000)
----------- -----------
FINANCING ACTIVITIES:
Repayments on credit facilities - (2,000,000)
Borrowings from affiliates - 6,500,000
Repayments of long-term debt (6,000) (2,131,000)
----------- -----------
Net cash (used in) provided by financing activities (6,000) 2,369,000
----------- -----------
Net increase in cash and cash equivalents 8,427,000 1,712,000
Cash and cash equivalents at beginning of period 13,871,000 15,624,000
----------- -----------
Cash and cash equivalents at end of period $22,298,000 $17,336,000
=========== ===========
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated statements.
15
GB HOLDINGS, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION, WHOLLY OWNED BY PRATT CASINO CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) ORGANIZATION, BUSINESS AND BASIS OF PRESENTATION
GB Holdings, Inc. ("Holdings") is a Delaware corporation and a wholly owned
subsidiary of Pratt Casino Corporation ("PCC"), also a Delaware corporation.
PCC was incorporated during September 1993 and is wholly owned by PPI
Corporation, a New Jersey corporation and a wholly owned subsidiary of Greate
Bay Casino Corporation ("GBCC"). On February 17, 1994, Holdings acquired Greate
Bay Hotel and Casino, Inc. ("GBHC"), a New Jersey corporation, through a capital
contribution by its parent. GBHC's principal business activity is its ownership
of the Sands Hotel and Casino in Atlantic City, New Jersey (the "Sands"). GB
Property Funding Corp. ("GB Property Funding"), a Delaware corporation and a
wholly owned subsidiary of Holdings, was incorporated in September 1993 for the
purpose of borrowing funds through the issuance of $185,000,000 of ten-year,
nonrecourse first mortgage notes for the benefit of GBHC; such debt was issued
in February 1994 at the rate of 10 7/8% per annum and the proceeds were loaned
to GBHC (see Note 3). Holdings has no operating activities and its only
significant asset is its investment in GBHC. The accompanying consolidated
financial statements include the accounts and operations of Holdings, GBHC and
GB Property Funding; all significant intercompany balances and transactions have
been eliminated.
GBHC estimates that a significant amount of the Sands' revenues are derived
from patrons living in southeastern Pennsylvania, northern New Jersey and
metropolitan New York City. Competition in the Atlantic City gaming market is
intense and management believes that this competition will continue or intensify
in the future.
The 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.
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 4). Holdings has experienced
significant losses over the last two years and has a net capital deficiency of
$55,346,000 at June 30, 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: Richard Knight resigned as a Director, President, and Chief
Executive Officer of the Debtors effective July 8, 1998; John P. Belisle was
elected
16
GB HOLDINGS, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION, WHOLLY OWNED BY PRATT CASINO CORPORATION)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
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, 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. The Debtors filed a motion with the Bankruptcy Court to extend the
exclusivity period another 90 days and on August 10, 1998 the Bankruptcy Court
reextended the period for another 90 days from August 10, 1998. Management is
in the process of developing a plan of reorganization that will be submitted to
the Bankruptcy Court and Holdings' creditors for their approval. In the event
the plan of reorganization is accepted, continuation of the business thereafter
is dependent on Holdings ability to achieve successful future operations. The
accompanying consolidated financial statements do not include any adjustments
relating to the recoverability and classification of recorded asset amounts or
the amounts and classification of liabilities that might be necessary should
Holdings be unable to continue a going concern.
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. On May 22, 1998, GBHC filed a
motion with the Bankruptcy Court to reject the management agreement. 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 New Jersey Casino Control
Commission (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 motion to reject the management agreement, which
is presently scheduled for September 28, 1998, 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.
GBHC is self insured for a portion of its general liability, certain health
care and other liability exposures. Accrued insurance includes estimates of
such accrued liabilities based on an evaluation of the merits of individual
claims and historical claims experience; accordingly, GBHC's ultimate liability
may differ from the amounts accrued.
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and 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 above, GBHC filed for protection under the Bankruptcy Code and
management is currently preparing its 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.
17
GB HOLDINGS, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION, WHOLLY OWNED BY PRATT CASINO CORPORATION)
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. Holdings has adopted the provisions of SFAS 130;
however, the statement 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.
The consolidated financial statements as of June 30, 1998 and for the three
and six month periods ended June 30, 1998 and 1997 have been prepared by
Holdings without audit. In the opinion of management, these consolidated
financial statements contain all adjustments (consisting of only normal
recurring adjustments) necessary to present fairly the consolidated financial
position of Holdings as of June 30, 1998, the results of its operations for the
three and six month periods ended June 30, 1998 and 1997 and cash flows for the
six month periods ended June 30, 1998 and 1997.
(2) 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 cancelled.
(3) LONG-TERM DEBT AND PLEDGE OF ASSETS
Substantially all of Holdings' and GBHC's assets are pledged in connection
with their long-term indebtedness. On January 5, 1998, the Debtors filed
petitions for relief under Chapter 11 of the Bankruptcy Code in 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: 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, 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. The Debtors filed a motion with the Bankruptcy Court to extend the
exclusivity period another 90 days and on August 10, 1998 the Bankruptcy Court
reextended the period for another 90 days from August 10, 1998.
18
GB HOLDINGS, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION, WHOLLY OWNED BY PRATT CASINO CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
JUNE 30, DECEMBER 31,
1998 1997
-------------- -------------
10 7/8% first mortgage notes, due 2004 (a) $ 182,500,000 $182,500,000
14 5/8% affiliate loan, due 2005 (b) 10,000,000 10,000,000
Other 426,000 432,000
------------- ------------
Total indebtedness 192,926,000 192,932,000
Less - current maturities (14,000) (14,000)
Less - debt subject to compromise (Note 4) (192,500,000) -
------------- ------------
Total long-term debt $ 412,000 $192,918,000
============= ============
- --------------------------
(a) On February 17, 1994, the Sands obtained $185,000,000 from GB Property
Funding, which issued $185,000,000 of non-recourse first mortgage notes due
January 15, 2004 (the "10 7/8% First Mortgage Notes"). Interest on the
notes accrues at the rate of 10 7/8% per annum, payable semiannually
commencing July 15, 1994. Interest only was payable during the first three
years. Commencing on July 15, 1997, semiannual principal payments of
$2,500,000 are due on each interest payment date with the balance due at
maturity. Such semiannual payments may be made in cash or by tendering 10
7/8% First Mortgage Notes previously purchased or otherwise acquired by
Holdings. Holdings acquired $2,500,000 face amount of 10 7/8% First
Mortgage Notes at a discount during May 1997 which it used during June to
make its July 15, 1997 required principal payment. As a result of the
filing under Chapter 11, the debt service payments due in January and July
1998 were not made. The accrual of interest on the 10 7/8% First Mortgage
Notes for periods subsequent to the filing has been suspended.
The indenture for the 10 7/8% First Mortgage Notes contains various
provisions which, among other things, restrict the ability of certain
subsidiaries of GBCC to pay dividends to GBCC, to merge, consolidate or sell
substantially all of their assets or to incur additional indebtedness beyond
certain limitations. In addition, the indenture requires the maintenance of
certain cash balances and requires minimum expenditures, as defined in the
indenture, for property and fixture renewals, replacements and betterments
at the Sands.
(b) On February 17, 1994, GBHC issued a $10,000,000 subordinated promissory note
to an affiliate. The note bears interest at the rate of 14 5/8% per annum,
payable semiannually commencing August 17, 1994, subject to maintaining
average daily cash balances required by the indenture for the 10 7/8% First
Mortgage Notes, with the principal due in February 2005. As a result of
such payment restrictions, interest has been paid only through February 17,
1996. The accrual of interest on the affiliate loan for periods subsequent
to the filing under Chapter 11 has been suspended.
19
GB HOLDINGS, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION, WHOLLY OWNED BY PRATT CASINO CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
As a result of the Chapter 11 filing, principal payments with respect to the
10 7/8% First Mortgage Notes and the affiliate loan are subject to a plan of
reorganization which requires confirmation by the Bankruptcy Court. Pending
such reorganization, the entire amount of the 10 7/8% First Mortgage Notes and
the affiliate loan are included in liabilities subject to compromise and in
long-term debt on the accompanying consolidated balance sheets at June 30, 1998
and December 31, 1997, respectively. Scheduled payments of long-term debt as of
June 30, 1998, exclusive of payments on the 10 7/8% First Mortgage Notes and the
affiliate loan, are set forth below:
1998 (six months) $ 8,000
1999 14,000
2000 16,000
2001 17,000
2002 19,000
Thereafter 352,000
--------
Total $426,000
========
Interest paid amounted to $21,000 and $10,186,000, respectively, during the
six month periods ended June 30, 1998 and 1997. At December 31, 1997, accrued
interest on the 10 7/8% First Mortgage Notes in the amount of $9,152,000 is
presented as noncurrent accrued interest payable on the accompanying
consolidated balance sheet.
(4) LIABILITIES SUBJECT TO COMPROMISE
Liabilities subject to compromise under Holdings' reorganization proceedings
consist of the following at June 30, 1998:
Accounts payable and accrued liabilities $ 7,907,000
10 7/8% First Mortgage Notes (Note 3) 182,500,000
14 5/8% Affiliate Loan (Note 3) 10,000,000
Borrowings from affiliates (Note 6) 13,000,000
Accrued interest 14,364,000
Due to affiliate 471,000
------------
Total $228,242,000
============
(5) INCOME TAXES
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. As a result of the Chapter 11 filing, and the Action
described in Note 7 below relating to the net operating losses of the Debtors,
whether
20
GB HOLDINGS, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION, WHOLLY OWNED BY PRATT CASINO CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
the Debtors file a consolidated federal tax return for 1997 with GBCC as members
of a consolidated group is unresolved.
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 six month periods ended June 30,
1998 and 1997.
Deferred income taxes result primarily from the use of the allowance method
rather than the direct write-off method for doubtful accounts, the use of
accelerated methods of depreciation for federal and state income tax purposes
and differences in the timing of deductions taken between tax and financial
reporting purposes for contributions of and adjustments to the carrying value of
certain investment obligations and for other accruals.
At June 30, 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 will further
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, a valuation allowance should be
recorded. As a result of book and tax losses incurred in 1997 and the filing
under Chapter 11 by Holdings in January 1998, management is unable to determine
that realization of Holdings' deferred tax asset is more likely than not and,
thus, has provided a valuation allowance for the entire amount at June 30, 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 and 1994 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.
21
GB HOLDINGS, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION, WHOLLY OWNED BY PRATT CASINO CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(6) 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
a motion with the Bankruptcy Court seeking to reject the existing management
agreement with NJMI (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, NJMI continues to provide certain agreed upon services to GBHC at a
monthly fee of $165,000 of which $122,000 will be paid on a monthly basis in
arrears and the remaining $43,000 per month will be deferred and paid upon
confirmation of GBHC's plan of reorganization by the Bankruptcy Court.
Fees under the management agreement and the Settlement Agreement are
included in general and administrative expenses on the accompanying consolidated
financial statements and amounted to $744,000 and $1,497,000, respectively,
during the three month periods ended June 30, 1998 and 1997 and $1,910,000 and
$2,802,000, respectively, during the six month periods ended June 30, 1998 and
1997. Amounts payable under the Settlement Agreement to NJMI and included in due
to affiliates on the accompanying consolidated balance sheet at June 30, 1998
amounted to $330,000 and an additional $22,000 calculated under the management
agreement for April 1, 1998 is subject to defenses reserved under the Settlement
Agreement. Management fees payable of $34,000 are included in due to affiliates
on the accompanying consolidated balance sheet at December 31, 1997 and are
subject to defenses reserved under the Settlement Agreement. Additional
management fees payable of $145,000 are included in liabilities subject to
compromise on the accompanying consolidated balance sheet at June 30, 1998 and
are subject to the defenses reserved under the Settlement Agreement.
GBHC's 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 $70,000 and $73,000, respectively, for the three month
periods ended June 30, 1998 and 1997 and $131,000 and $140,000, respectively,
during the six month periods ended June 30, 1998 and 1997.
An advance from GBHC to another GBCC subsidiary in the amount of $5,672,000
was outstanding at both June 30, 1998 and December 31, 1997. Interest on the
advance accrues at the rate of 16.5% per annum. The advance, together with
accrued interest amounting to $4,446,000 and $3,978,000, respectively, are fully
reserved as collection of the receivables is uncertain.
22
GB HOLDINGS, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION, WHOLLY OWNED BY PRATT CASINO CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
During the third quarter of 1996, GBCC borrowed a total of $6,500,000 from
HCC which it 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.
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. At June 30, 1998 and December 31, 1997, interest accrued on such
loans amounted to $2,236,000 and $2,216,000, 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
such borrowings from GBCC 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 approval by the Bankruptcy Court and approval by
the Casino Commission. The accrual of interest on the affiliate advances for
periods subsequent to the filing under Chapter 11 has been suspended.
Net interest expense incurred with respect to affiliate advances and
borrowings is as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ------------------
1998 1997 1998 1997
-------- -------- -------- --------
Net advances $ - $227,000 $20,000 $410,000
Affiliate loan (Note 3) - 366,000 16,000 731,000
Interest accrued on the Affiliate loan (Note 3) 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 June 30, 1998 and December 31, 1997.
GBHC performs certain services for other subsidiaries of GBCC and for HCC
and its subsidiaries and invoices those companies for the Sands' cost of
providing those services. Similarly, GBHC is charged for certain legal,
accounting and other expenses incurred by GBCC and HCC and their respective
subsidiaries that relate to the Sands' business. Such affiliate transactions are
summarized below:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- ----------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
Billings to affiliates $ 68,000 $ 303,000 $ 138,000 $ 658,000
Charges from affiliates (160,000) (183,000) (391,000) (387,000)
23
GB HOLDINGS, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION, WHOLLY OWNED BY PRATT CASINO CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(7) LITIGATION
On January 5, 1998, the Debtors filed petitions for relief under Chapter 11
of the Bankruptcy Code in 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: 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, 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. The Debtors filed a
motion with the Bankruptcy Court to extend the exclusivity period another 90
days and on August 10, 1998 the Bankruptcy Court reextended the period for
another 90 days from August 10, 1998.
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, which is presently returnable September 28, 1998 (see Note 6).
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 (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 seeks to
enjoin the Defendants from using the NOL's of the Debtors (see Note 5). On
August 10, 1998, the Bankruptcy Court set a hearing date on the Action
commencing October 7, 1998, with the understanding that the defendants would not
transfer the Parcels prior to the hearing, and reserved August 24, 1998 to
consider an interim request for relief with respect to the NOL's unless resolved
by the parties prior thereto.
GBHC is a party in various legal proceedings with respect to the conduct of
casino and hotel operations. Although a possible range of loss can not be
estimated, in the opinion of management, based upon the advice of counsel,
settlement or resolution of these proceedings should not have a material adverse
impact upon the consolidated financial position or results of operations of
Holdings and GBHC. The accompanying consolidated financial statements do not
include any adjustments that might result from the outcome of the uncertainties
described above.
24
GB HOLDINGS, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION, WHOLLY OWNED BY PRATT CASINO CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(8) RECLASSIFICATIONS
Certain reclassifications were made to operating expenses as originally set
forth in the consolidated statement of operations for the three month period
ended March 31, 1998 to conform to the June 30, 1998 financial statement
presentation.
25
GB HOLDINGS, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION, WHOLLY OWNED BY PRATT CASINO CORPORATION)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This Quarterly Report on Form 10-Q contains forward-looking statements about
the business, 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 Quarterly Report on Form 10-Q, the words "believes", "estimates",
"anticipates" and similar expressions as they relate to Holdings or its
management are intended to identify forward-looking statements.
LIQUIDITY AND CAPITAL RESOURCES
Holdings owns GBHC which owns the Sands Hotel and Casino in Atlantic City.
Prior to 1996, the Sands' cash flow was sufficient to meet debt service
obligations and fund a substantial portion of annual capital expenditures. The
Sands also used short-term borrowings to fund seasonal cash needs for certain
capital projects. Beginning in early 1996 and continuing through 1997, 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 10 7/8% 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 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: 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, 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. The Debtors filed a motion with the Bankruptcy Court to extend the
exclusivity period another 90 days and on August 10, 1998 the Bankruptcy Court
reextended the period for another 90 days from August 10, 1998.
As a result of the filings, the Sands has sufficient cash flow to continue
normal operations while it seeks to develop a plan of reorganization for
submission to its creditors and the Bankruptcy Court. Capital expenditures,
other than normal recurring capital expenditures in the ordinary course of
business, will require prior approval of the Bankruptcy Court. There can be no
assurance at this time that GBHC's plan of reorganization, when submitted, will
be accepted by its creditors or the Bankruptcy Court.
26
GB HOLDINGS, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION, WHOLLY OWNED BY PRATT CASINO CORPORATION)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
OPERATING ACTIVITIES
At June 30, 1998, GBHC had cash and cash equivalents of $22.3 million.
During the six month period ended June 30, 1998, net cash provided by operating
activities was $13 million compared with $1.9 million during the comparable 1997
period. The 1997 period includes the payment of $10.2 million in interest; the
payment of such interest was suspended in 1998 by the Chapter 11 filing. GBHC
utilized cash from operations, in part, during the first six months of 1998 to
fund capital additions totaling $3.4 million and to make obligatory investments
of $1.2 million.
FINANCING ACTIVITIES
Semiannual principal payments of $2.5 million which became due commencing in
July 1997 with respect to the 10 7/8% First Mortgage Notes have been suspended
as a result of the Chapter 11 filing. Exclusive of the 10 7/8% First Mortgage
Notes and the $10 million affiliate loan, which are subject to reorganization,
total scheduled maturities of long-term debt during the remainder of 1998 are
$8,000.
CAPITAL EXPENDITURES AND OBLIGATORY INVESTMENTS
Capital expenditures at the Sands during the six month period ended June 30,
1998 amounted to $3.4 million and management anticipates capital expenditures
during the remainder of 1998 will be approximately $7.4 million. In addition to
capital expenditures in the ordinary course of business totaling approximately
$2.9 million, capital expenditures during 1998 include approximately $7.9
million of a $13.6 million, two-year capital expenditure program approved by the
Bankruptcy Court. Such plan consists of approximately $7.1 million for rooms
renovations and $6.5 million for the replacement of slot machines.
The Sands is required by the New Jersey Casino Control Act to make certain
investments with the Casino Reinvestment Development Authority, a governmental
agency which administers the statutorily mandated investments made by casino
licensees. Deposit requirements for the first six months of 1998 totaled $1.2
million and are anticipated to be approximately $1.5 million during the
remainder of 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 developing a reorganization plan that
will be submitted to the Bankruptcy Court and to the companies' creditors for
their approval. On May 11, 1998, 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. The Debtors filed a motion with the
27
GB HOLDINGS, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION, WHOLLY OWNED BY PRATT CASINO CORPORATION)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Bankruptcy Court to extend the exclusivity period another 90 days and on August
10, 1998 the Bankruptcy Court reextended the period for another 90 days from
August 10, 1998. As a result of the filing, the debt service payments due in
January 1998 and July 1998 were not made and the accrual of interest on the 10
7/8% First Mortgage Notes and on affiliate loans for periods subsequent to the
filing has been suspended.
RESULTS OF OPERATIONS
GENERAL
The Sands earned income from operations of $2.2 million and $5.6 million,
respectively, during the three and six month periods ended June 30, 1998
compared to income from operations of $3.6 million and $5.8 million,
respectively, reported for the three and six month periods ended June 30, 1997.
Operating results during the second quarter of 1998 were negatively impacted by
lower table game and slot machine hold percentages; such percentages directly
impact casino revenues. The declines in casino revenues were somewhat offset by
operating efficiencies and by management's ongoing efforts to discontinue
certain marginally effective marketing programs. Although net revenues declined
for the three and six month periods ended June 30, 1998 to $58.5 million and
$114.1 million, respectively, from $67.5 million and $130.7 million,
respectively, during the corresponding 1997 periods, operating expenses also
decreased significantly by $7.6 million (11.9%) and $16.4 million (13.2%),
respectively. Such operating expense decreases are due to reductions in
salaries and related benefits costs of $2.1 million (9.1%) and $3.9 million
(8.4%) for the three and six month periods, respectively, and marketing and
advertising costs of $1.7 million (10.2%) and $5.5 million (17%), respectively,
resulting from management's efforts to control costs while maintaining positive
gross operating profit. The negative publicity surrounding the Sands' filing
for bankruptcy protection on January 5, 1998 could also have affected its
operating results for the 1998 periods.
28
GB HOLDINGS, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION, WHOLLY OWNED BY PRATT CASINO CORPORATION)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
GAMING OPERATIONS
The following table sets forth certain unaudited financial and operating
data relating to the Sands' operations:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- ---------------------
1998 1997 1998 1997
--------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PERCENTAGES)
REVENUES:
Slot machines $ 38,806 $ 41,370 $ 72,599 $ 79,370
Table games 14,574 19,665 31,527 39,156
Other (1) 705 788 1,392 1,627
-------- -------- -------- --------
Total $ 54,085 $ 61,823 $105,518 $120,153
======== ======== ======== ========
SLOT MACHINES:
Gross Wagering (Handle) (2) $480,924 $505,719 $891,044 $959,909
======== ======== ======== ========
Hold Percentages: (3, 4)
Sands 8.1% 8.2% 8.1% 8.3%
Atlantic City 8.4% 8.5% 8.3% 8.4%
TABLE GAMES:
Gross Wagering (Drop) (2) $107,634 $131,589 $203,279 $262,633
======== ======== ======== ========
Hold Percentages: (3, 4)
Sands 13.5% 14.9% 15.5% 14.9%
Atlantic City 14.9% 14.7% 15.2% 15.2%
____________________________
(1) Consists of revenues from poker and simulcast horse racing wagering.
(2) Gross wagering consists of the total value of chips purchased for table
games (excluding poker) and keno wagering (collectively, the "drop") and
coins wagered in slot machines ("handle").
(3) Casino revenues consist of the portion of gross wagering that a casino
retains and, as a percentage of gross wagering, is referred to as the "hold
percentage".
(4) The Sands' hold percentages are reflected on an accrual basis. Comparable
data for the Atlantic City gaming industry is not available; consequently,
industry percentages have been calculated based on information made
available from the New Jersey Casino Control Commission.
29
GB HOLDINGS, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION, WHOLLY OWNED BY PRATT CASINO CORPORATION)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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.
Slot machine handle decreased $24.8 million (4.9%) and $68.9 million (7.2%),
respectively, during the three and six month periods ended June 30, 1998
compared with the same periods of 1997. The Sands' decreases in slot machine
handle compare with increases of 3.8% and 4.8%, respectively, in handle for all
other Atlantic City casinos during the same time periods. As a result, the
Sands' slot machine market share (expressed as a percentage of the Atlantic City
industry aggregate slot machine handle) decreased to 5.7% and 5.4%,
respectively, during the three and six month periods ended June 30, 1998 from
6.2% and 6.1%, respectively, during the same periods of 1997. Gaming space and
the number of slot machines have decreased slightly at the Sands since the
second quarter of 1997. Expansions of other Atlantic City casinos resulted in
an increase of approximately 114,000 square feet of gaming space and 2,300
additional slot machines at June 30, 1998 compared to June 30, 1997. The below
industry-wide performance in handle experienced by the Sands is a result of
competitive pressures resulting from casino expansions and related marketing
campaigns at other properties as well as to management's efforts to control
costs by reducing "coin incentive programs" which directly impact slot handle.
As a result of such competitive pressures, the Sands has experienced a
significant decrease (20%) in the number of bus passengers, a market segment
which historically plays slot machines.
Table game drop at the Sands declined $24 million (18.2%) and $59.4 million
(22.6%), respectively, during the three and six month periods ended June 30,
1998 compared with the same periods of 1997. The Sands' decreases compare to
slight increases of 1.2% and 1.1%, respectively, in table drop for all other
Atlantic City casinos during the same periods. As a result, the Sands' table
game market share decreased to 5.7% and 5.5%, respectively, during the three and
six month periods ended June 30, 1998 from 7% and 7.1%, respectively, during the
same periods of 1997. The Sands' table game drop decreases are attributable to
declines in patron volume from the rated segment. The decline in table game
drop also reflects management's efforts to discontinue certain marginally
effective promotional activities directed toward less profitable market
segments. Other factors contributing to the decreases in table game drop
include a 9.1% decrease in the number of table games at the Sands as well as
additional 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.
REVENUES
Casino revenues at the Sands, including poker and simulcast horse racing
wagering revenues, decreased by $7.7 million (12.5%) and $14.6 million (12.2%),
respectively, for the three and six month periods ended June 30, 1998 compared
with the same periods of 1997. Decreases in both slot machine and table game
wagering and slightly lower slot machine hold percentages were partially offset
by the overall improvement in the table game hold percentage to 15.5% from 14.9%
for the six month period.
30
GB HOLDINGS, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION, WHOLLY OWNED BY PRATT CASINO CORPORATION)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Rooms revenue decreased $130,000 (5.3%) and $330,000 (7%), respectively,
during the three and six month periods 1998 compared to 1997. Such decreases
were primarily due to decreases in occupancy levels partially offset by
increases in the average daily rate charged on rooms. Food and beverage
revenues decreased $2.3 million (27.3%) and $4.6 million (28%), respectively,
during the three and six month periods ended June 30, 1998 compared with the
prior year periods as a result of reduced patron volume reflecting the
curtailment in food and beverage-related promotional programs. Other revenues
did not change significantly during either of the three or six month periods
ended June 30, 1998 compared to the prior year periods.
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 increased to 53.7% during the three month period ended June 30,
1998 from 52.3%, during the same period of 1997. Such allowances decreased to
52.5% from 54.2% during the six month period ended June 30, 1998. The overall
year to year decrease is primarily attributable to reductions in certain
marketing programs and other promotional activities.
DEPARTMENTAL EXPENSES
Casino expenses at the Sands decreased $5.2 million (10%) and $12.4 million
(12.3%), respectively, during the three and six month periods ended June 30,
1998 compared with the same 1997 periods reflecting the respective 12.5% and
12.2% decreases in casino revenues during the corresponding periods. Such
decreases also reflect management's ongoing efforts to create operating
efficiencies as well as a reduction in the allocation of rooms, food and
beverage and other expenses to casino expense arising due to the aforementioned
reduction in promotional allowances.
Rooms expense increased $246,000 (36.7%) and $395,000 (31.2%), respectively,
during the three and six month periods ended June 30, 1998 compared to the same
periods of 1997. The 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. Such increases have been partially offset by reduced
costs associated with lower occupancy rates. Food and beverage expense
decreased $440,000 (15.3%) and $414,000 (7.9%), respectively, during the three
and six month periods ended June 30, 1998 compared with the same periods of
1997. The decreases result from reductions in payroll and promotional expenses
during the second quarter 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 usage of food complimentaries. Other expenses did not
change significantly during the second quarter of 1998 compared to the prior
year, but decreased by $127,000 (11.1%) during the six month period ended June
30, 1998 compared to the 1997 period due to cost savings with respect to theater
entertainment.
31
GB HOLDINGS, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION, WHOLLY OWNED BY PRATT CASINO CORPORATION)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
GENERAL AND ADMINISTRATIVE
General and administrative expenses decreased $1.5 million (32.6%) and $2.2
million (23.6%), respectively, during the three and six month periods ended June
30, 1998 compared to the same periods of 1997. Management fee expenses,
including service fees under the Settlement Agreement, incurred by the Sands
decreased by $753,000 (50.3%) and $892,000 (31.8%), respectively, relative to
management fees under the Management Agreement, during the three and six month
periods during 1998 compared to the prior year periods as a result of a
renegotiation of such fees due to the Chapter 11 filings. The remaining
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 decreased by $733,000 (20%) and $1.7
million (22.7%), respectively, during the three and six month periods ended June
30, 1998 compared to the same periods of 1997 as a significant portion of assets
acquired with respect to the Sands' expansion in 1994 became fully depreciated.
Also, amortization of loan fees has decreased during 1998 as a result of such
fees being written off at December 31, 1997 due to the bankruptcy filings.
INTEREST
Interest income decreased $272,000 (60%) and $116,000 (14.1%), respectively,
during the three and six month periods ended June 30, 1998 compared to the same
periods during 1997. 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
to reorganization costs.
Interest expense decreased $5.8 million (99.8%) and $11.4 million (97.6%),
respectively, during the three and six months ended June 30, 1998 compared to
the same periods of the prior year. As discussed in Notes 3 and 6 to Holdings'
consolidated financial statements, GB Property Funding, Holdings, and GBHC filed
petitions for relief under Chapter 11 of the United States Bankruptcy Code on
January 5, 1998. As a result, the accrual of interest expense on the 10 7/8%
First Mortgage Notes, the affiliate loan and other affiliate advances for
periods subsequent to the filing has been suspended. Had the accrual of such
interest expense not been suspended, interest expense for the three and six
month periods ended June 30, 1998 would have been $5.8 million and $11.6
million, respectively; these amounts are not significantly different from the
corresponding amounts during the 1997 periods.
32
GB HOLDINGS, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION, WHOLLY OWNED BY PRATT CASINO CORPORATION)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
INCOME TAX BENEFIT
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. As a result of the Chapter 11 filing, and the Action
described in Note 7 to the accompanying Notes to Consolidated Financial
Statements of Holdings relating to the net operating losses of the Debtors,
whether the Debtors file a consolidated federal tax return for 1997 with GBCC as
members of a consolidated group is unresolved.
As of June 30, 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. Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes" ("SFAS 109") requires that the tax benefit of NOL's and deferred
tax assets resulting from temporary differences be recorded as an asset and, to
the extent that management can not assess that the utilization of all or a
portion of such NOL's and deferred tax assets is more likely than not, a
valuation allowance should be recorded. Due to the continued availability of
NOL's originating in prior years for federal and state tax purposes and the book
and tax losses sustained in 1998 to date, management is unable to determine that
the realization of such asset is more likely than not and, thus, has provided a
valuation allowance for the entire deferred tax asset at June 30, 1998.
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 $881,000 associated with a
planned re-theming of the Sands were expensed during the second quarter of 1998.
Due to the reorganization proceedings discussed above, this project has been
abandoned. As noted previously, interest income on cash accumulated during the
reorganization is reflected as a reduction to reorganization and other related
costs ($161,000 and $244,000, respectively, for the three and six months ended
June 30, 1998).
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 costs of testing and conversion are not
expected to be material. Management expects
33
GB HOLDINGS, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION, WHOLLY OWNED BY PRATT CASINO CORPORATION)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
the Sands' 2000 date conversion projects to be completed on a timely basis.
However, 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.
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.
34
PART II: OTHER INFORMATION
- ---------------------------
ITEM 1. LEGAL PROCEEDINGS
On January 5, 1998, Holdings, GB Property Funding and GBHC filed petitions
for relief under Chapter 11 of the Bankruptcy Code in 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: 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, 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. The Debtors filed a motion with the Bankruptcy Court to extend the
exclusivity period another 90 days and on August 10, 1998 the Bankruptcy Court
reextended the period for another 90 days from August 10, 1998.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
As a result of the filings discussed in Item 1. above, $182,500,000 principal
amount of 10 7/8% First Mortgage Notes issued by GB Property Funding are in
default. Principal payments of $2,500,000 each due on January 15, 1998 and July
15, 1998 were not made. The accrual of interest on the 10 7/8% First Mortgage
Notes for periods subsequent to the filings has been suspended; such interest on
a contractual basis amounts to $21,667,000 as of August 17, 1998.
ITEM 6.(a) - EXHIBITS
10.1 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.
10.2 Software License Agreement by and between ACSC, ACSI, Computer Management
Systems International, Inc. and GBHC dated June 27, 1998.
ITEM 6.(b) - REPORTS ON FORM 8-K
The Registrants did not file any reports on Form 8-K during the quarter ended
June 30, 1998.
SIGNATURES
- ----------
Pursuant to the requirements of the Securities Exchange Act of 1934, each of
the Registrants has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GB HOLDINGS, INC.
GB PROPERTY FUNDING CORP.
------------------------------------
Registrants
Date: August 17, 1998 By:/s/ Timothy A. Ebling
--------------- ---------------------------------
Timothy A. Ebling
Executive Vice President, Chief
Financial Officer and Principal
Accounting Officer
35