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 September 30, 1999
------------------
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
Atlantic City, New Jersey 08401
- ------------------------------------------------ -----------------------------
(Address of principal executive offices) (Zip Code)
(Registrants' telephone number, including area code): (609) 441-4517
--------------
(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 November 12, 1999
- -------------------------------- ------------------------------ --------------------------------
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 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 were unconditionally guaranteed by GB Holdings,
Inc. ("Holdings"), a Delaware corporation with principal executive offices at
136 S. 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 was a wholly owned subsidiary of PPI Corporation ("PPI") which is wholly
owned by 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". As a result of a certain confirmed plan of reorganization of PCC
and others in October, 1999, the remaining 79% stock interest of PCC in Holdings
was transferred to Greate Bay Holdings, LLC, whose sole member as a result of
the same reorganization is PPI ("GBLLC").
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.
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 in Note 1 to Holdings financial
statements, 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
Jerome T. Smith was elected as a Director of the Debtors on August 3, 1998. On
November 1, 1999, John P. Belisle resigned as President and Chief Executive
Officer of GBHC. On November 5, 1999, Alfred J. Luciani was elected President
and Chief Executive Officer of GBHC. On November 11, 1999, Jerome T. Smith, the
independent member of the Boards of Directors of the Debtors, and one of the two
independent members of the Audit Committee of Holdings , citing a newly arisen
potential conflict of interest, resigned. On January 11, 1999, the exclusivity
period during which only the Debtors could file a plan of reorganization expired
and, as a result, any party in interest can file a plan of reorganization.
On June 1, 1999, the Debtors filed with the Bankruptcy Court a plan of
reorganization and disclosure statement, ultimately filing a third modified plan
of reorganization and third modified disclosure statement (the "Plan"), which
provides for, among other things, the pro rata distribution to holders of the
First Mortgage Notes by GB Property Funding of $80,000,000 principal amount of
new First Mortgage Notes and 100% of new common stock of Holdings. The Plan also
provides that all the outstanding common stock of the Debtors will be cancelled
and that new common stock of GB Property Funding and GBHC will be issued to
Holdings. On October 4, 1999, the Bankruptcy Court approved the adequacy of the
third modified disclosure statement and a confirmation hearing on the Plan was
scheduled for December 17, 1999 (the "Confirmation Hearing").
2
On November 3, 1999, the Debtors received notice from Merrill Lynch Asset
Management ("MLAM") that MLAM and Park Place Entertainment Corporation ("PPE")
had reached agreement on a term sheet under which PPE would sponsor a plan of
reorganization of the Debtors (the "Term Sheet"). MLAM represented that it and
PPE controlled approximately 53% of the First Mortgage Notes. Under the Term
Sheet, and if a plan incorporating the Term Sheet is confirmed, (i) PPE would
make a $30,000,000 capital contribution and would receive an approximate 58%
equity interest, (ii) First Mortgage Holders would receive a pro rata share of
new first mortgage notes in the principal amount of $128 million (the "New
Notes") and the remaining approximate 42% equity interest ("New Equity"), (iii)
PPE would offer to exchange New Notes for New Equity at a stated exchange rate,
(iv) MLAM would accept such exchange offer and receive no New Equity under the
Term Sheet (the "MLAM Exchange"), (v) PPE would receive approximately 80.1% of
the New Equity as a result of its capital contribution, its pro rata share of
New Equity, and the MLAM Exchange, (vi) PPE would enter into a certain
management agreement for GBHC, and (vii) all other classes of creditors would
receive the same treatment as specified under the Plan. MLAM requested that the
Debtors agree to seek to adjourn the Confirmation Hearing, and accept a revised
Plan incorporating the provisions of the Term Sheet. The Debtors agreed to seek
the adjournment. On November 9, 1999, the Bankruptcy Court granted the
adjournment and set December 1, 1999 as a status conference for a report by the
Debtors on the status of their due diligence and evaluation of the provisions of
the Term Sheet.
A plan of reorganization requires confirmation by the Bankruptcy Court and
approval by the New Jersey Casino Control Casino 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 a 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
classifications of liabilities that might be necessary should Holdings be unable
to continue as a going concern. 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 effective date of a plan of
reorganization confirmed by the Bankruptcy Court.
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 nine month periods ended September
30, 1999 are not necessarily indicative of the operating results to be reported
for the full year.
The financial statements of GB Property Funding and the consolidated
financial statements of Holdings as of September 30, 1999 and for the three and
nine month periods ended September 30, 1999 and 1998 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 September
30, 1999, their respective results of operations for the three and nine month
periods ended September 30, 1999 and 1998, and their respective cash flows for
the nine month periods ended September 30, 1999 and 1998.
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's, Holdings' and GBHC's 1998 Annual Report on Form 10-K.
3
GB PROPERTY FUNDING CORP.
(Debtor-in-Possession, wholly owned by GB Holdings, Inc.)
BALANCE SHEETS
(Unaudited)
ASSETS
September 30, December 31,
1999 1998
------------- ------------
Current Asset:
Cash $ 1,000 $ 1,000
Interest Receivable from Affiliate 9,373,000 9,373,000
Note Receivable from Affiliate 182,098,000 182,243,000
------------- ------------
$ 191,472,000 $191,617,000
============ ============
LIABILITIES AND SHAREHOLDER'S EQUITY
Liabilities Subject to Compromise:
Accrued interest payable $ 9,373,000 $ 9,373,000
Long-term debt 182,098,000 182,243,000
------------- ------------
191,471,000 191,616,000
============ ============
Commitments and Contingncies
Shareholder's Equity:
Common stock, $1.00 par value per share,
1,000 shares authorized and outstanding 1,000 1,000
------------- ------------
$ 191,472,000 $191,617,000
============ ============
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
September 30,
-------------------
1999 1998
-------- -------
Revenues:
Interest income (Note 2) $ -- $ --
Expenses:
Interest expense (contractual
interest of $4,951,000 and
$4,962,000, respectively, for the
three months ended September 30,
1999 and 1998)
-- --
-------- -------
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)
Nine Months Ended
September 30,
---------------------
1999 1998
-------- --------
Revenues:
Interest income (Note 2) $ -- $221,000
Expenses
Interest expense
(contractual interest of
$14,857,000 and $14,885,000,
respectively, for the nine months
ended September 30, 1999 and
1998) -- 221,000
-------- --------
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)
Nine Months Ended
September 30,
--------------------
1999 1998
--------- --------
OPERATING ACTIVITIES:
Net income $ -- $ --
Adjustments to reconcile net income to net cash
provided by operating activities:
Increase in interest receivable from affiliate -- (221,000)
Increase in accrued interest payable -- 221,000
--------- ---------
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. Holdings
was a wholly owned subsidiary of Pratt Casino Corporation ("PCC"), also a
Delaware corporation, through December 31, 1998. Effective after December 31,
1998, PCC transferred 21% of the stock ownership of 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 was
a wholly owned subsidiary of PPI Corporation ("PPI"), a New Jersey corporation
and a wholly owned subsidiary of GBCC. As a result of a certain confirmed plan
of reorganization of PCC and others in October, 1999, the remaining 79% stock
interest of PCC in Holdings was transferred to Greate Bay Holdings, LLC, whose
sole member as a result of the same reorganization is PPI ("GBLLC"). 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 of first mortgage notes (the
"First Mortgage Notes") 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"). Each company continues to operate in the ordinary course of
business as set forth in the Bankruptcy Code.
On June 1, 1999, the Debtors filed with the Bankruptcy Court a plan of
reorganization and disclosure statement, ultimately filing a third modified plan
of reorganization and third modified disclosure statement (the "Plan"), which
provides for, among other things, the pro rata distribution to holders of the
First Mortgage Notes of $80,000,000 principal amount of new First Mortgage Notes
by GB Property Funding and 100% of new common stock of Holdings. The Plan also
provides that all the outstanding common stock of the Debtors will be cancelled
and that new common stock of GB Property Funding and GBHC will be issued to
Holdings. On October 4,
8
GB PROPERTY FUNDING CORP.
(Debtor-in-Possession, wholly owned by GB Holdings, Inc.)
NOTES TO FINANCIAL STATEMENTS (Continued)
1999, the Bankruptcy Court approved the adequacy of the third modified
disclosure statement and a confirmation hearing on the Plan was scheduled for
December 17, 1999 (the "Confirmation Hearing").
A plan of reorganization requires confirmation by the Bankruptcy Court 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 a plan of reorganization is confirmed, continuation of
the business thereafter is dependent on GBHC 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 classifications 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 the First Mortgage Notes for the benefit of GBHC. GB Property Funding
loaned the proceeds from the First Mortgage Notes to GBHC and, at September 30,
1999, has a note receivable and related accrued interest receivable due from
GBHC totaling $191,471,000. GB Property Funding has no operations and the note
receivable and the accrued interest receivable represents virtually all of GB
Property Fundings' assets. As discussed above, during 1998 the Debtors filed
petitions for relief under Chapter 11 of 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.
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 financial statements as of September 30, 1999 and for the three and
nine month periods ended September 30, 1999 and 1998 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 September 30, 1999, and the results of its operations for the
three and nine month periods ended September 30, 1999 and 1998 and cash flows
for the nine month periods ended September 30, 1999 and 1998.
9
GB PROPERTY FUNDING CORP.
(Debtor-in-Possession, wholly owned by GB Holdings, Inc.)
NOTES TO FINANCIAL STATEMENTS (Continued)
(2) Long-Term Debt
On February 17, 1994, GB Property Funding issued the 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 GB Property Funding. GB Property Funding acquired $2,500,000 face
amount of First Mortgage Notes which were used to make the 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.
The indenture for the First Mortgage Notes (the "Indenture") contains
various provisions which, among other things, restrict the ability of certain
subsidiaries of GBCC to pay dividends to GBCC, to merge, to consolidate, 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 for the
First Mortgage Notes (the "Indenture Trustee") as reductions to the outstanding
principal of the First Mortgage Notes. Payments amounting to $145,000 and
$257,000 for the nine and twelve month periods ending September 30, 1999 and
December 31, 1998, respectively, have 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 nine month periods ended September 30, 1999 and
1998. Interest receivable and payable with respect to the notes of $9,373,000
are included on the accompanying balance sheet at September 30, 1999 and
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.
(3) Income Taxes
As part of an agreement settling an adversary proceeding between the
Debtors, on one side, and GBCC, certain of its affiliates, and certain former
directors of GBHC on the other, GB Property Funding was included in GBCC's
consolidated federal income tax return for the years ended December 31, 1997 and
1998. As part of this same agreement, GBCC agreed to allow the Debtors to become
deconsolidated from the GBCC group for federal income tax purposes and, in
accordance therewith, effective after December 31, 1998 PCC transferred 21% of
the stock ownership in Holdings to PBV, effecting the deconsolidation of
Holdings from the GBCC group
10
GB PROPERTY FUNDING CORP.
(Debtor-in-Possession, wholly owned by GB Holdings, Inc.)
NOTES TO FINANCIAL STATEMENTS (Continued)
for federal income tax purposes. Accordingly, beginning in 1999, Holdings and
its subsidiaries' provisions for federal income taxes is calculated and paid on
a stand alone basis. 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. GB Property Funding made
no federal or state income tax payments during the three and nine month periods
ended September 30, 1999 and 1998.
(4) Legal Proceedings
On January 5, 1998, the Debtors filed petitions for relief under Chapter
11 of the Bankruptcy Code in the Bankruptcy Court (see Note 1).
11
GB HOLDINGS, INC. AND SUBSIDIARIES
(Debtors-in-Possession)
CONSOLIDATED BALANCE SHEETS
(Unaudited)
ASSETS
September 30, December 31,
1999 1998
------------- -------------
Current Assets:
Cash and cash equivalents $ 25,333,000 $ 23,844,000
Accounts receivable, net of allowances
of $11,362,000 and $11,920,000, respectively 7,947,000 7,428,000
Inventories 3,493,000 3,402,000
Due from affiliates 237,000 398,000
Deferred income taxes 3,928,000 726,000
Prepaid expenses and other current assets 3,532,000 2,776,000
------------- -------------
Total current assets 44,470,000 38,574,000
------------- -------------
Property and Equipment:
Land 49,766,000 38,929,000
Buildings and improvements 185,508,000 185,508,000
Operating equipment 105,315,000 99,854,000
Construction in progress 3,209,000 3,939,000
------------- -------------
343,798,000 328,230,000
Less - accumulated depreciation and
amortization (187,255,000) (182,045,000)
------------- -------------
Net property and equipment 156,543,000 146,185,000
------------- -------------
Other Assets:
Obligatory investments 8,262,000 8,098,000
Other assets 3,291,000 6,291,000
------------- -------------
Total other assets 11,553,000 14,389,000
------------- -------------
$ 212,566,000 $ 199,148,000
============= =============
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)
CONSOLIDATED BALANCE SHEETS
(Unaudited)
LIABILITIES AND SHAREHOLDER'S DEFICIT
September 30, December 31,
1999 1998
------------- -------------
Current Liabilities Not Subject to Compromise:
Current maturities of long-term debt $ 78,000 $ 73,000
Accounts payable 5,591,000 4,539,000
Accured liabilities -
Salaries and wages 4,847,000 3,699,000
Reorganization costs 1,707,000 1,310,000
Insurance 1,654,000 1,037,000
Other 6,203,000 6,066,000
Due to affiliates 1,272,000 1,119,000
Other current liabilities 2,820,000 3,599,000
------------- -------------
Total current liabilities 24,172,000 21,442,000
------------- -------------
Liabilities Subject to Compromise (Note 3) 217,662,000 218,322,000
------------- -------------
Long-Term Debt 859,000 918,000
------------- -------------
Deferred Taxes and Other Noncurrent Liabilities 6,810,000 1,207,000
------------- -------------
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 27,946,000
Accumulated deficit (64,884,000) (70,688,000)
------------- -------------
Total shareholder's deficit (36,937,000) (42,741,000)
------------- -------------
$ 212,566,000 $ 199,148,000
============= =============
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated balance sheets.
13
GB HOLDINGS, INC. AND SUBSIDIARIES
(Debtors-in-Possession)
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
September 30,
------------------------------
1999 1998
------------ ------------
Revenues:
Casino $ 61,746,000 $ 60,995,000
Rooms 2,444,000 2,606,000
Food and beverage 7,857,000 7,142,000
Other 1,818,000 892,000
------------ ------------
73,865,000 71,635,000
Less - promotional allowances (6,988,000) (5,800,000)
------------ ------------
Net revenues 66,877,000 65,835,000
------------ ------------
Expenses:
Casino 52,496,000 50,723,000
Rooms 572,000 779,000
Food and beverage 2,888,000 2,786,000
Other 1,146,000 796,000
General and administrative 2,744,000 2,992,000
Depreciation and amortization, including
write off of CRDA obligations 6,420,000 2,760,000
------------ ------------
Total expenses 66,266,000 60,836,000
------------ ------------
Income from operations 611,000 4,999,000
------------ ------------
Non-operating income (expense):
Interest income 262,000 134,000
Interest expense (contractual interest of $5,519,000
and $5,524,000, respectively, for the three months
ended September 30, 1999 and 1998) (181,000) (14,000)
Reorganization and other related costs (486,000) (1,159,000)
Gain on disposal of assets 118,000 --
------------ ------------
Total non-operating expense, net (287,000) (1,039,000)
------------ ------------
Income before income taxes 324,000 3,960,000
Income tax provision -- --
------------ ------------
Net income $ 324,000 $ 3,960,000
============ ============
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)
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Nine Months Ended
September 30,
--------------------------------
1999 1998
------------- -------------
Revenues:
Casino $ 175,182,000 $ 166,513,000
Rooms 6,882,000 6,968,000
Food and beverage 20,851,000 18,937,000
Other 4,499,000 2,740,000
------------- -------------
207,414,000 195,158,000
Less - promotional allowances (17,723,000) (15,257,000)
------------- -------------
Net revenues 189,691,000 179,901,000
------------- -------------
Expenses:
Casino 149,472,000 138,737,000
Rooms 2,149,000 2,441,000
Food and beverage 7,878,000 7,592,000
Other 3,027,000 1,814,000
General and administrative 8,270,000 10,107,000
Depreciation and amortization, including
write off of CRDA obligations 12,227,000 8,585,000
------------- -------------
Total expenses 183,023,000 169,276,000
------------- -------------
Income from operations 6,668,000 10,625,000
------------- -------------
Non-operating income (expense):
Interest income 520,000 843,000
Interest expense (contractual interest of $16,562,000
and $16,577,000, respectively, for the nine
months ended September 30, 1999 and 1998) (221,000) (293,000)
Reorganization and other related costs (1,420,000) (3,990,000)
Gain on disposal of assets 257,000 28,000
------------- -------------
Total non-operating expense, net (864,000) (3,412,000)
------------- -------------
Income before income taxes 5,804,000 7,213,000
Income tax provision -- --
------------- -------------
Net income $ 5,804,000 $ 7,213,000
============= =============
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)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
September 30,
------------------------------
1999 1998
------------ ------------
OPERATING ACTIVITIES:
Net income $ 5,804,000 $ 7,213,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Write-off reorganization related costs -- 942,000
Depreciation and amortization 12,227,000 8,585,000
Gain on disposal of assets (257,000) (28,000)
Provision for doubtful accounts 1,696,000 1,251,000
Increase in accounts receivable (2,215,000) (1,379,000)
Increase in accounts payable and accrued expenses 3,093,000 5,487,000
Net change in other current assets and liabilities (1,537,000) (1,461,000)
Net change in other noncurrent assets and liabilities (220,000) (2,300,000)
------------ ------------
Net cash provided by operating activities 18,591,000 18,310,000
------------ ------------
INVESTING ACTIVITIES:
Purchase of property and equipment (15,146,000) (5,216,000)
Purchase of Lieber Check Cashing (net of cash acquired) -- (245,000)
Proceeds from disposal of assets 257,000 28,000
Obligatory investments (2,014,000) (1,881,000)
------------ ------------
Net cash used in investing activities (16,903,000) (7,314,000)
------------ ------------
FINANCING ACTIVITIES:
Repayments of long-term debt (199,000) (42,000)
------------ ------------
Net cash used in financing activities (199,000) (42,000)
------------ ------------
Net increase in cash and cash equivalents 1,489,000 10,954,000
Cash and cash equivalents at beginning of period 23,844,000 13,871,000
------------ ------------
Cash and cash equivalents at end of period $ 25,333,000 $ 24,825,000
============ ============
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated statements.
16
GB HOLDINGS, INC. AND SUBSIDIARIES
(Debtors-in-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) Organization, Business and Basis of Presentation
GB Holdings, Inc. ("Holdings") is a Delaware corporation and was a wholly
owned subsidiary of Pratt Casino Corporation ("PCC") through December 31, 1998.
PCC, a Delaware corporation, was incorporated during September 1993 and was
wholly owned by PPI Corporation ("PPI"), 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"). As a result of a certain confirmed plan of reorganization of PCC and
others in October, 1999, the remaining 79% stock interest of PCC in Holdings was
transferred to Greate Bay Holdings, LLC, whose sole member as a result of the
same reorganization is PPI ("GBLLC"). 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 2). 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"). On
September 20, 1999, closing took place under the Option Agreement and Lieber,
whose sole member is GHBC, obtained title to the Option Parcels (see Note 7).
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. The
demolition of the existing structures has commenced which will provide for a new
front entrance to the Sands' facility. 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 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.
17
GB HOLDINGS, INC. AND SUBSIDIARIES
(Debtors-in-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
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 3). Holdings had experienced
significant losses and has a net capital deficiency of $36,937,000 at September
30, 1999. 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, 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 Jerome T. Smith was elected as a
Director of the Debtors on August 3, 1998. On November 1, 1999, John P. Belisle
resigned as President and Chief Executive Officer of GBHC. On November 5, 1999,
Alfred J. Luciani was elected President and Chief Executive Officer of GBHC. On
November 11, 1999, Jerome T. Smith, the independent member of the Boards of
Directors of the Debtors, and one of the two independent members of the Audit
Committee of Holdings, citing a newly arisen potential conflict of interest,
resigned. On January 11, 1999, the exclusivity period during which only the
Debtors could file a plan of reorganization expired and, as a result, any party
in interest can file a plan of reorganization.
On June 1, 1999, the Debtors filed with the Bankruptcy Court a plan of
reorganization and disclosure statement, ultimately filing a third modified plan
of reorganization and third modified disclosure statement (the "Plan"), which
provides for, among other things, the pro rata distribution to holders of the
First Mortgage Notes of $80,000,000 principal amount of new First Mortgage Notes
and 100% of new common stock of Holdings. The Plan also provides that all the
outstanding common stock of the Debtors will be cancelled and that new common
stock of GB Property Funding and GBHC will be issued to Holdings. On October 4,
1999, the Bankruptcy Court approved the adequacy of the Plan and a confirmation
hearing on the third modified disclosure statement was scheduled for December
17, 1999 (the "Confirmation Hearing").
On November 3, 1999, the Debtors received notice from Merrill Lynch Asset
Management ("MLAM") that MLAM and Park Place Entertainment Corporation ("PPE")
had reached agreement on a term sheet under which PPE would sponsor a plan of
reorganization of the Debtors (the "Term Sheet"). MLAM represented that it and
PPE controlled approximately 53% of the First Mortgage Notes. Under the Term
Sheet, and if a plan incorporating the Term Sheet is confirmed, (i) PPE would
make a $30,000,000 capital contribution and would receive an approximate 58%
equity interest, (ii) First Mortgage Holders would receive a pro rata share of
new first mortgage notes in the principal amount of $128 million (the "New
Notes") and the remaining approximate 42% equity interest ("New Equity"), (iii)
PPE would offer to exchange New Notes for New Equity at a stated exchange rate,
(iv) MLAM would accept such exchange offer and receive no New Equity under the
Term Sheet (the "MLAM Exchange"), (v) PPE would receive approximately 80.1% of
the New Equity as a result of its capital contribution, its pro rata share of
New Equity, and the MLAM Exchange, (vi) PPE would enter into a certain
management agreement for GBHC, and (vii) all other classes of creditors would
receive the same treatment as specified under the Plan. MLAM requested that the
Debtors agree to seek to adjourn the Confirmation Hearing, and accept a revised
Plan incorporating the provisions of the Term Sheet. The Debtors agreed to seek
the adjournment. On November 9, 1999, the
18
GB HOLDINGS, INC. AND SUBSIDIARIES
(Debtors-in-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Bankruptcy Court granted the adjournment and set December 1, 1999 as a status
conference for a report by the Debtors on the status of their due diligence and
evaluation of the provisions of the Term Sheet.
The Plan requires confirmation by the Bankruptcy Court and approval by the
New Jersey Casino Control Commission (the "Casino Commission"). There can be no
assurance at this time that a plan will be confirmed by the Bankruptcy Court and
approved by the Casino Commission. In the event a plan is confirmed,
continuation of the business thereafter is dependent on GBHC'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 Holdings be unable to continue as a
going concern. 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 on the effective date of the confirmation of
the Plan.
Prior to July 8, 1998, New Jersey Management, Inc. ("NJMI"), then 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 5).
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 December 31, 1998. GBCC agreed to
allow the Debtors to become deconsolidated from the GBCC group for federal
income tax purposes and, in accordance therewith, effective after December 31,
1998, PCC transferred 21% of the stock ownership in Holdings to PBV, effecting
the deconsolidation of Holdings from the GBCC group for federal income tax
purposes. The Second Settlement Agreement also resulted in the non-cash
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 (see Note 7).
19
GB HOLDINGS, INC. AND SUBSIDIARIES
(Debtors-in-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
GBHC is self insured for a portion of its general liability, and 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.
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.
The consolidated financial statements as of September 30, 1999 and for the
three and nine month periods ended September 30, 1999 and 1998 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 September 30, 1999, the results of its
operations for the three and nine month periods ended September 30, 1999 and
1998 and cash flows for the nine month periods ended September 30, 1999 and
1998.
(2) Long-Term Debt and Pledge of Assets
Long-term debt is comprised of the following:
September 30, December 31,
1999 1998
------------- -------------
10 7/8% first mortgage, notes due 2004 (a) $ 182,098,000 $ 182,243,000
14 5/8% affiliate loan, due 2005 (b) 10,000,000 10,000,000
Lieber Mortgage (c) 528,000 572,000
Other 409,000 419,000
------------- -------------
Total indebtedness 193,035,000 193,234,000
Less - current maturities (78,000) (73,000)
Less - debt subject to compromise (Note 3) (192,098,000) (192,243,000)
------------- -------------
Total long-term debt $ 859,000 $ 918,000
============= =============
- ----------
(a) On February 17, 1994, GBHC 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
on July 15, 1997, semiannual principal payments of $2,500,000 were due on
each interest payment date with the balance due
20
GB HOLDINGS, INC. AND SUBSIDIARIES
(Debtors-in-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
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. 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 for the First
Mortgage Notes (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 on 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 Indenture Trustee has now filed an
appeal with the United States Court of Appeals for the Third Circuit.
The Indenture for the First Mortgage Notes (the "Indenture") contains
various provisions which, among other things, restrict the ability of
certain subsidiaries of GBCC to pay dividends to GBCC, to merge, to
consolidate, 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 as reductions to the outstanding principal of the First Mortgage
Notes. Payments amounting to $145,000 and $257,000 for the nine and twelve
month periods ending September 30, 1999 and December 31, 1998,
respectively, have 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., then 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. 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 the Plan, which
requires confirmation
21
GB HOLDINGS, INC. AND SUBSIDIARIES
(Debtors-in-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
by 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. As a result of the
confirmation of a certain plan of reorganization of PRT Funding Corp. in
October, 1999, the PRT Subordinated Note was transferred to GBLLC, whose
sole member is PPI.
(c) On September 2, 1998, and as part of the Second Settlement Agreement, GBHC
acquired the membership interests in Lieber (see Note 7) which owns the
Lieber Parcel. Principal mortgage indebtedness at the time of acquisition
was $591,000 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 the Plan,
which requires confirmation by the Bankruptcy Court 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 on the accompanying consolidated balance sheets at September 30, 1999
and December 31, 1998. Scheduled payments of long-term debt as of September 30,
1999, exclusive of payments on the First Mortgage Notes and the PRT Subordinated
Note, are set forth below:
1999 (three months) $ 18,000
2000 80,000
2001 468,000
2001 19,000
2003 21,000
Thereafter 331,000
--------
Total $937,000
========
Interest paid amounted to $60,000 and $35,000, respectively, for the nine
month periods ended September 30, 1999 and 1998. At September 30, 1999 and
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.
22
GB HOLDINGS, INC. AND SUBSIDIARIES
(Debtors-in-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(3) Liabilities Subject to Compromise
Liabilities subject to compromise under Holdings' reorganization
proceedings consist of the following:
September 30, December 31,
1999 1998
------------- ------------
Accounts payable and accrued liabilities $ 7,326,000 $ 7,751,000
First Mortgage Notes (Note 2) 182,098,000 182,243,000
PRT Subordinated Note (Note 2) 10,000,000 10,000,000
Borrowings from affiliate (Note 5) 5,000,000 5,000,000
Accrued interest (Notes 2 and 5) 12,855,000 12,855,000
Due to affiliates 383,000 473,000
------------- ------------
Total $ 217,662,000 $218,322,000
============= ============
4) Income Taxes
As part of the Second Settlement Agreement (see Note 1), Holdings'
operations were 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 and,
in accordance therewith, effective after December 31, 1998 PCC transferred 21%
of the stock ownership in Holdings to PBV, effecting the deconsolidation of
Holdings from the GBCC group for federal income tax purposes. Accordingly,
beginning in 1999, Holdings and its subsidiaries' provisions for federal income
taxes is calculated and paid on a stand alone basis. 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").
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 paid federal
income taxes in the amount of $255,000 during the nine month period ended
September 30, 1999. No federal taxes were paid during the nine month period
ended September 30, 1998. Holdings made no state tax payments during the nine
month period ended September 30, 1999 and 1998, respectively.
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
23
GB HOLDINGS, INC. AND SUBSIDIARIES
(Debtors-in-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
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 September 30, 1999, 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 advised Holdings that Holdings should have
approximately $13 million in NOL's available subsequent to December 31, 1998.
The Debtors expect that these remaining NOL's will be utilized in the 1999
federal tax return of the Debtors, and if not utilized therein, any remaining
NOL's will be eliminated as a result of a confirmation of a plan of
reorganization. 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
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
September 30, 1999.
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. Representatives of HCC have advised Holdings
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 calendar 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 are
attributable to the Spin Off.
(5) 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
24
GB HOLDINGS, INC. AND SUBSIDIARIES
(Debtors-in-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
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 possessed a
claim for prepetition management fees, which was settled for an unsecured claim
in the amount of $75,000 and which was transferred to GBLLC along with the claim
for the deferred fees.
Fees under the Management Agreement are included in general and
administrative expenses on the accompanying consolidated financial statements
and amounted to $479,000 and $2,388,000, respectively, during the three and nine
month periods ended September 30, 1998. As a result of the Second Settlement
Agreement and the Rejection Motion, no such fees were incurred for the three and
nine month periods ended September 30, 1999. Amounts payable under the
Settlement Agreement to NJMI, which have been assigned to GBLLC, and included in
due to affiliates on the accompanying consolidated balance sheet at September
30, 1999 amounted to $211,000. The $75,000 unsecured claim arising from the
settlement of the prepetition management fee claim under the Management
Agreement is included in liabilities subject to compromise on the accompanying
consolidated balance sheet at September 30, 1999.
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 $73,000 and $78,000,
respectively, for the three month periods ended September 30, 1999 and 1998 and
$206,000 and $209,000, respectively, during the nine month periods ended
September 30, 1999 and 1998. 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. On June 10, 1999, the
United States District Court for the District of New Jersey affirmed the
Bankruptcy Court's decision. On July 13, 1999, GBCC filed an appeal with the
United States Court of Appeals for the Third Circuit.
25
GB HOLDINGS, INC. AND SUBSIDIARIES
(Debtors-in-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
An advance from GBHC to another GBCC subsidiary in the amount of
$5,672,000 was outstanding at September 30, 1999, 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 $5,615,000 and $4,914,000 at September 30, 1999 and December 31, 1998,
respectively, are fully reserved as collection of the receivable 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. This loan 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 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 both September
30, 1999 and December 31, 1998, interest accrued on the PCC Subordinated Note
amounted to $728,000, respectively, and is included in liabilities subject to
compromise 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 the Plan, 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. As a result of the
confirmation of a certain plan of reorganization of PCC in October, 1999, the
PCC Subordinated Note was transferred to GBLLC.
Net interest expense incurred with respect to affiliate advances and
borrowings is as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1999 1998 1999 1998
-------- ------- -------- -------
Net Borrowings/(Advances) $ -- $ -- $ -- $20,000
PRT Subordinated Note (Note 2) -- -- -- 16,000
26
GB HOLDINGS, INC. AND SUBSIDIARIES
(Debtors-in-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Interest accrued on the PRT Subordinated Note (Note 2) of $2,754,000 is
included in liabilities subject to compromise on the accompanying consolidated
balance sheets at September 30, 1999 and December 31, 1998.
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 was transferred to GBLLC and is included in
due to affiliates in the accompanying consolidated balance sheets at September
30, 1999, and 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 was charged for certain 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:
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ---------------------
1999 1998 1999 1998
-------- -------- -------- --------
Billings to affiliates $ -- $ 61,000 $ 24,000 $199,000
Charges from affiliates 194,000 172,000 781,000 579,000
(6) Legal Proceedings
On January 5, 1998, the Debtors filed petitions for relief under Chapter
11 of the Bankruptcy Code in the Bankruptcy Court (see Note 1).
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 service 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 4). Effective September 2, 1998, the parties entered into the Second
Settlement Agreement resolving, among other things, the
27
GB HOLDINGS, INC. AND SUBSIDIARIES
(Debtors-in-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Action. 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.
GBHC has filed tax appeals with the New Jersey Tax Court challenging the
amount of its real property assessment for calendar years 1996, 1997, 1998, and
1999. The City of Atlantic City has also appealed the amount of the assessment
of its assessor.
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.
(7) 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.
On April 20, 1999, GBHC filed a motion with the Bankruptcy Court seeking
approval to close on the Option Agreement for the Option Parcels (the "Closing
Motion"). In addition, on May 6, 1999, and subject to Bankruptcy Court approval,
Lieber entered into a second amendment to the Option Agreement to set the
closing date as September 20, 1999, to increase the down payment by $500,000,
and to provide for the right to seek certain state and local land use approvals
prior to the closing date without violation of the Option Agreement (the
"Amendment"). On May 10, 1999, the Bankruptcy Court granted the Closing Motion
and approved the Amendment. On May 10, 1999, $500,000 was paid to the Escrow
Agent under the Option Agreement as required by the Amendment. The purchase
price of the Option Parcels was $10 million, $2.5 million of which was paid
prior to closing and $7.5 million of which was due at closing. On September 20,
1999, closing took place under the Option Agreement and Lieber, whose sole
member is GBHC, obtained title to the Option Parcels. The demolition of the
existing structures has commenced which will provide for a new front entrance to
the Sands' facility. The new front entrance is expected to be completed by the
first half of 2000.
Principal mortgage indebtedness of Lieber outstanding at the acquisition
date of the Lieber membership interests was $591,000 (see Note 2). The assets,
liabilities, and results of operations of Lieber at the date of such 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,
28
GB HOLDINGS, INC. AND SUBSIDIARIES
(Debtors-in-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
and, as such, the accompanying consolidated financial statements include results
of operations of Lieber as of September 2, 1998.
(8) Reclassifications
Certain reclassifications have been made to prior year's consolidated
financial statements to conform to the 1999 consolidated financial statement
presentation.
29
GB HOLDINGS, INC. AND SUBSIDIARIES
(Debtors-in-Possession)
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 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. 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
Jerome T. Smith was elected as a Director of the Debtors on August 3, 1998. On
November 1, 1999, John P. Belisle resigned as President and Chief Executive
Officer of GBHC. On November 5, 1999, Alfred J. Luciani was elected President
and Chief Executive Officer of GBHC. On November 11, 1999, Jerome T. Smith, the
independent member of the Boards of Directors of the Debtors, and one of the two
independent members of the Audit Committee of Holdings, citing a newly arisen
potential conflict of interest, resigned. On January 11, 1999, the exclusivity
period during which only the Debtors could file a plan of reorganization expired
and, as a result, any party in interest can file a plan of reorganization.
On June 1, 1999, the Debtors filed with the Bankruptcy Court a plan of
reorganization and disclosure statement, ultimately filing a third modified plan
of reorganization and third modified disclosure statement (the "Plan"), which
provides for, among other things, the pro rata distribution to holders of First
Mortgage Notes for
30
GB HOLDINGS, INC. AND SUBSIDIARIES
(Debtors-in-Possession)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
the benefit of GBHC issued by GB Property Funding of $80,000,000 principal
amount of new first mortgage notes and 100% of new common stock of Holdings. The
Plan also provides that all the outstanding common stock of the Debtors will be
cancelled and that new common stock of GB Property Funding and GBHC will be
issued to Holdings. On October 4, 1999, the Bankruptcy Court approved the
adequacy of the third modified disclosure statement and a confirmation hearing
on the Plan was scheduled for December 17, 1999 (the "Confirmation Hearing").
On November 3, 1999, the Debtors received notice from Merrill Lynch Asset
Management ("MLAM") that MLAM and Park Place Entertainment Corporation ("PPE")
had reached agreement on a term sheet under which PPE would sponsor a plan of
reorganization of the Debtors (the "Term Sheet"). MLAM represented that it and
PPE controlled approximately 53% of the First Mortgage Notes. Under the Term
Sheet, (i) PPE would make a $30,000,000 capital contribution and would receive
an approximate 58% equity interest, (ii) First Mortgage Holders would receive a
pro rata share of new first mortgage notes in the principal amount of $128
million (the "New Notes") and the remaining approximate 42% equity interest
("New Equity"), (iii) PPE would offer to exchange New Notes for New Equity at a
stated exchange rate, (iv) MLAM would accept such exchange offer and receive no
New Equity under the Term Sheet (the "MLAM Exchange"), (v) PPE would receive
approximately 80.1% of the New Equity as a result of its capital contribution,
its pro rata share of New Equity, and the MLAM Exchange, (vi) PPE would enter
into a certain management agreement for GBHC, and (vii) all other classes of
creditors would receive the same treatment as specified under the Plan. MLAM
requested that the Debtors agree to seek to adjourn the Confirmation Hearing,
and accept a revised Plan incorporating the provisions of the Term Sheet. The
Debtors agreed to seek the adjournment. On November 9, 1999, the Bankruptcy
Court granted the adjournment and set December 1, 1999 as a status conference
for a report by the Debtors on the status of their due diligence and evaluation
of the provisions of the Term Sheet.
A plan requires confirmation by the Bankruptcy Court and approval by the
Casino Commission. There can be no assurance at this time that a plan will be
confirmed by the Bankruptcy Court and approved by the Casino Commission. As a
result of the filings, GBHC has sufficient cash flow to continue normal
operations while it pursues a plan of reorganization. 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 rooms and hotel suites has commenced and
GBHC expects to complete the renovations in 2000. The replacement and upgrading
of slot machines has commenced and is substantially completed, with the
remaining slot machines to be replaced by the end of 1999.
Operating Activities
At September 30, 1999, GBHC had cash and cash equivalents of $25.3
million. During the nine month period ended September 30, 1999, net cash
provided by operating activities was $18.6 million compared with net cash
provided by operating activities of $18.3 million during the same period in
1998. GBHC utilized cash
31
GB HOLDINGS, INC. AND SUBSIDIARIES
(Debtors-in-Possession)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
from operations, in part, during the first nine months of 1999 to fund capital
additions totaling $7.2 million, to close on the Option Agreement and obtain the
Option Parcels in the amount of $8.0 million, and to make obligatory investments
of $2.0 million.
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 and the
Subordinated Notes, which are subject to reorganization, total scheduled
maturities of long-term debt during the remainder of 1999 are $18,000.
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 as
reductions to the outstanding principal of the First Mortgage Notes. During the
current nine month period, $145,000 has been remitted to the Indenture Trustee
as the proceeds on the sale of equipment.
Investing Activities
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. On May 10,
1999, the Bankruptcy Court approved the Closing Motion filed by GBHC seeking
approval to close on the Option Agreement. On May 10, 1999, $500,000 was paid to
the owner of the Option Parcels to accelerate the closing on the Option Parcels
to September 20, 1999. The purchase price of the Option Parcels was $10 million,
$2.5 million of which was paid prior to closing and $7.5 million of which was
due at closing. On September 20, 1999, closing took place under the Option
Agreement and Lieber, whose sole member is GBHC, obtained title to the Option
Parcels. The demolition of the existing structures has commenced which will
provide for a new front entrance to the Sands' facility. The new front entrance
is expected to be completed by the first half of 2000.
Capital expenditures at the Sands during the nine month period ended
September 30, 1999 amounted to $15.2 million and management anticipates capital
expenditures during the remainder of 1999 will be approximately $3.7 million. In
addition to capital expenditures in the ordinary course of business totaling
approximately $3.7 million, capital expenditures during 1999 will include
approximately $6.7 million of a $13.6 million, two-year capital expenditure
program approved by the Bankruptcy Court. Of this $6.7 million, it is
anticipated that $4.0 million will be expended on the ongoing room and suite
renovations and $2.7 million will be expended for slot machines and related
equipment. Capital expenditures during 1999 also include $8.0
32
GB HOLDINGS, INC. AND SUBSIDIARIES
(Debtors-in-Possession)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
million for the acquisition of the Option Parcels. It is anticipated that
approximately $1.8 will be expended on the new front entrance to the Sands
facility during the remainder of 1999.
The Sands is required by the New Jersey Casino Control Act ("Casino Act")
to make certain deposits with the Casino Reinvestment Development Authority
("CRDA"), a governmental agency which administers the deposits required by
casino licensees under the Casino Act. Deposit requirements for the first nine
months of 1999 totaled $2.0 million and are anticipated to be approximately
$753,000 during the remainder of 1999. The Sands has agreed to donate certain of
its future investment obligations to the CRDA in connection with the
construction of the Atlantic City Boardwalk Convention Center. The projected
total donation will amount to $7.0 million which will be paid over the next 12
years based on the Sands future CRDA obligations.
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. A plan of reorganization requires confirmation by the Bankruptcy Court
and approval by the Casino Commission. As a result of the filing, the debt
service payments due subsequent to January 5, 1998 were not made and the accrual
of interest on the First Mortgage Notes and on the Subordinated 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.
33
GB HOLDINGS, INC. AND SUBSIDIARIES
(Debtors-in-Possession)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
RESULTS OF OPERATIONS
Gaming Operations
The following table sets forth certain unaudited financial and operating
data relating to the Sands' operations:
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- --------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
(in thousands, except percentages)
Revenues:
Slot machines $ 44,447 $ 43,981 $ 121,304 $ 116,580
Table games 16,479 16,223 51,548 47,750
Other (1) 820 791 2,330 2,183
---------- ---------- ---------- ----------
Total $ 61,746 $ 60,995 $ 175,182 $ 166,513
========== ========== ========== ==========
Slot machines:
Gross Wagering (Handle) (2) $ 563,563 $ 552,164 $1,527,068 $1,443,208
========== ========== ========== ==========
Hold Percentages: (3, 4)
Sands 7.9% 8.0% 7.9% 8.1%
Atlantic City 8.3% 8.5% 8.3% 8.4%
Table games:
Gross Wagering (Drop)(2) $ 126,773 $ 115,511 $ 343,198 $ 318,790
========== ========== ========== ==========
Hold Percentages: (3, 4)
Sands 13.0% 14.0% 15.0% 14.9%
Atlantic City 15.1% 15.6% 15.5% 15.3%
- ----------
(1) Consists of revenues from poker and simulcast horse racing wagering.
(2) Gross wagering consists of the total value of coins wagered in slot
machines (the "handle") and the total value of chips purchased for table
games (the "drop"), excluding poker. Gross wagering for 1998 also includes
drop for Keno wagering, however, Keno was discontinued in September of
1998.
(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; industry
percentages have been calculated based on information made available from
the Casino Commission.
34
GB HOLDINGS, INC. AND SUBSIDIARIES
(Debtors-in-Possession)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
Slot machine handle increased $11.4 million (2.1%) and $83.9 million
(5.8%), respectively, during the three and nine month periods ended September
30, 1999 compared with the same periods in 1998. The Sands' increases in slot
machine handle compares with increases of 7.9% and 6.2%, respectively, in handle
for all other Atlantic City casinos during the same time period. The Sands' slot
machine market share (expressed as a percentage of the Atlantic City industry
aggregate slot machine handle) remained unchanged at 5.6% for the nine month
period ended September 30, 1999 and 1998. The Sands' slot machine market share
decreased to 5.6% from 5.9% during the three month period ended September 30,
1999 as compared to the same period in 1998. The number of slot machines have
decreased slightly at the Sands since the third quarter of 1998. Expansions of
other Atlantic City casinos resulted in an increase of approximately 15,000
square feet of gaming space and approximately 667 additional slot machines
compared to September 30, 1998. While the number of slot machines has decreased
slightly at the Sands, beginning in 1998 and continuing into 1999 older slot
machines have been replaced with new and more popular machines as part of the
Sands capital expenditure plan, which was approved by the Bankruptcy Court, and
which has had a positive impact on slot machine handle.
Table game drop at the Sands increased $11.3 million (9.7%) and $24.4
million (7.7%), respectively, during the three and nine month periods ended
September 30, 1999 compared with the same periods in 1998. The Sands' increases
compare to an increase of 1.9% for the three month period ended September 30,
1999, and a decrease of .8% for the nine month period ended September 30, 1999
in table drop for all other Atlantic City casinos. As a result, the Sands' table
game market share increased to 5.9% and 6.0% during the three and nine month
periods ended September 30, 1999 from 5.5%, during the same periods in 1998. The
Sands' table game drop increases are attributable to increases in patron volume
from both the rated and the unrated market segment. Management believes that the
increase in the rated segment patron volume is a result of managements focus on
the "mid" to "high" end patron through increased marketing programs directed at
this segment, including increased headliner entertainment and events, and image
positioning efforts through direct advertising campaigns and that the increase
in the unrated segment is a result of managements efforts to cultivate new
players through revue show entertainment and aggressive advertising campaigns.
Revenues
Casino revenues at the Sands, including poker and simulcast horse racing
wagering revenues, increased by $751,000 (1.2%) and $8.7 million (5.2%) for the
three and nine month periods ended September 30, 1999 compared with the same
periods in 1998. Increases in slot machine and table game wagering were offset
slightly by the decrease in slot machine hold percentage for the three and nine
months period and table game hold percentage for the three month period as
compared to last year.
Rooms revenue did not change significantly during the nine month period
ended September 30, 1999 compared with the same period in 1998. Rooms revenue
decreased $162,000 (6.2%) during the three month period ended September 30, 1999
compared with the same period in 1998 due to a decrease in the average daily
rate charged on rooms, which was partially offset by an increase in occupancy
levels. Food and beverage revenues increased $715,000 (10%) and $1.9 million
(10.1%), respectively, during the three and nine month periods ended
35
GB HOLDINGS, INC. AND SUBSIDIARIES
(Debtors-in-Possession)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
September 30, 1999 compared with the prior year periods. This increase is a
result of increased banquet activity and the reopening of a previously closed
gourmet buffet outlet, as well as increased volume due to increased casino
patronage. Other revenues increased $926,000 (103.8%) and $1.8 million (64.2%)
during the three and nine month periods ended September 30, 1999 compared to the
prior year periods as a result of an increase in theater entertainment revenue
primarily due to review shows, and the opening of a gift shop.
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 57.7% during the three month period ended September 30,
1999 from 54.5% during the same period in 1998. Such allowances increased to
55.0% from 53.3% during the nine month period ended September 30, 1999 as
compared to the same period of 1998. The overall year to year increase is
primarily attributable to an increase in marketing programs and other
promotional activities directed at increasing patron volume.
Departmental Expenses
Casino expenses at the Sands increased $1.8 million (3.5%) and $10.7
million (7.7%), respectively, during the three and nine month periods ended
September 30, 1999 compared with the same periods in 1998. This increase is
primarily due to an increase in marketing and advertising expenses during 1999.
This increased marketing activity also resulted in an increase in the allocation
of rooms, food and beverage and other expenses to casino expense.
Rooms expense decreased $207,000 (26.6%) and $292,000 (12.0%),
respectively, during the three and nine month periods ended September 30, 1999
compared with the same periods in 1998. These decreases are a result of the
increase in the allocation of rooms expense to casino expense due to a higher
percentage of rooms being sold on a complimentary basis. Food and beverage
expenses increased $102,000 (3.7%) and $286,000 (3.8%), respectively, for the
three and nine month periods ended September 30, 1999 compared with the same
periods in 1998. These increases are due to increased food and beverage volume
and related expenses due to increased casino patronage. These increases were
offset by the increase in the allocation of food and beverage expense to casino
expense. Other expenses increased $350,000 (44.0%) and $1.2 million (66.9%),
respectively, during the three and nine month periods ended September 30, 1999
compared to the same periods of 1998 period due to increased costs with respect
to theater entertainment and additional costs of goods sold associated with the
new gift shop.
General and Administrative
General and administrative expenses decreased $248,000 (8.3%) and $1.8
million (18.2%), respectively, during the three and nine month periods ended
September 30, 1999 compared to the same periods in 1998. Management fee expenses
incurred by the Sands decreased by $2.4 million (100%) for nine months ended
September 30, 1999 compared to the prior year period as a result of the filing
of the Rejection Motion and the Settlement Agreement and Second Settlement
Agreement. This decrease was offset slightly by increases in operating expenses
due to increased repair and maintenance activity to the property.
36
GB HOLDINGS, INC. AND SUBSIDIARIES
(Debtors-in-Possession)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
Depreciation and Amortization
Depreciation and amortization expense increased $3.7 million (132.6%) and
$3.6 million (42.4%), respectively, during the three and nine month periods
ended September 30, 1999 compared to the same periods in 1998. This increase was
due to the expense associated with the recognition of a future donation
liability to the CRDA. This liability represents the present value of the future
cash donations committed to the CRDA.
Interest
Interest income increased $128,000 (95.5%) during the three month period
ended September 30, 1999 compared to the same period in 1998 due to interest
earned on the option payments on the Option Parcels. Interest income decreased
$323,000 (38.3%) during the nine month period ended September 30, 1999 compared
to the same period in 1998, due to interest earned during 1998 included a one
time interest payment received on obligatory investments.
Interest expense increased $167,000 (1,192.9%) during the three month
period ended September 30, 1999 compared with the same period in 1998. This
increase is due to the recognition of interest expense on the future CRDA
donation liability. Interest expense decreased $72,000 (24.6%) during the nine
months ended September 30, 1999 compared with the same period in 1998. As
discussed in Notes 2 and 5 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 First Mortgage Notes, the Subordinated Notes
and other affiliate advances for periods subsequent to the filing has been
suspended.
Income Tax
Prior to 1997, Holdings was included in the consolidated federal income
tax return of 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
required by the Second Settlement Agreement, and effective after December 31,
1998, PCC transferred 21% of the stock ownership in Holdings to PBV, effecting
the deconsolidation of Holdings from the GBCC group for federal income tax
purposes. Accordingly, beginning in 1999, Holdings and its subsidiaries'
provisions for federal income taxes are calculated and paid on a stand alone
basis. 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.
At September 30, 1999, Holdings and its subsidiaries have deferred tax
assets including 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 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 it's
subsidiaries through December 31, 1998 to offset taxable income of GBCC and
other members of the consolidated tax group. Representatives of GBCC have
advised Holdings that Holdings should have
37
GB HOLDINGS, INC. AND SUBSIDIARIES
(Debtors-in-Possession)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
approximately $13 million in NOL's available subsequent to December 31, 1998.
The Debtors expect that these remaining NOL's will be utilized in the 1999
federal tax return of the Debtors, and if not utilized therein, any remaining
NOL's will be eliminated as a result of a confirmation of a plan of
reorganization. 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 September 30,
1999.
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.
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.
38
GB HOLDINGS, INC. AND SUBSIDIARIES
(Debtors-in-Possession)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
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.
39
GB HOLDINGS, INC. AND SUBSIDIARIES
(Debtors-in-Possession)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
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 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 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 Jerome T. Smith was elected as a Director of the
Debtors on August 3, 1998. On November 1, 1999, John P. Belisle resigned as
President and Chief Executive Officer of GBHC. On November 5, 1999, Alfred J.
Luciani was elected President and Chief Executive Officer of GBHC. On November
11, 1999, Jerome T. Smith, the independent member of the Boards of Directors of
the Debtors, and one of the two independent members of the Audit Committee of
Holdings, citing a newly arisen potential conflict of interest, resigned. On
January 11, 1999, the exclusivity period during which only the Debtors could
file a plan of reorganization expired and, as a result, any party in interest
can file a plan of reorganization. On June 1, 1999, the Debtors filed with the
Bankruptcy Court a plan of reorganization and disclosure statement, ultimately
filing a third modified plan of reorganization and third modified disclosure
statement. On October 4, 1999, the Bankruptcy Court approved the adequacy of the
third modified disclosure statement and a confirmation hearing on the Plan was
scheduled for December 17, 1999.
Item 3. Defaults Upon Senior Securities
As a result of the filings discussed in Item 1. above, $182,500,000
principal amount of First Mortgage Notes issued by GB Property Funding are in
default. The debt service payments due subsequent to January 5, 1998 were not
made. 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 as
reductions to the outstanding principal of the First Mortgage Notes. Through
November 11, 1999, $404,000 has been remitted to the Indenture Trustee as the
proceeds on the sale of equipment. The accrual of interest on the First Mortgage
Notes for periods subsequent to the filings has been suspended; such interest on
a contractual basis amounts to $46,329,000 as of November 11, 1999.
Item 6.(a) - Exhibits
2.1 Third modified plan of reorganization dated October 4, 1999.
Item 6.(b) - Reports on Form 8-K
The Registrants did not file any reports on Form 8-K for the quarter ended
September 30, 1999
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: November 15, 1999 By: /s/ Timothy A. Ebling
----------------------- --------------------------------
Timothy A. Ebling
Executive Vice President, Chief
Financial Officer and Principal
Accounting Officer
40