<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended JUNE 30, 1998
-------------------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________________ to _______________________
Commission file number 33-69716
-------------------------------
GB PROPERTY FUNDING CORP.
GB HOLDINGS, INC.
GREATE BAY HOTEL AND CASINO, INC.
- --------------------------------------------------------------------------------
(Exact name of each Registrant as specified in its charter)
DELAWARE 75-2502290
DELAWARE 75-2502293
NEW JERSEY 22-2242014
- ----------------------------------------- -------------------------------------
(States or other jurisdictions of (I.R.S. Employer
incorporation or organization) Identification No.'s)
C/O SANDS HOTEL & CASINO
INDIANA AVENUE & BRIGHTON PARK, 9TH FLOOR
ATLANTIC CITY, NEW JERSEY 08401
- ----------------------------------------- -------------------------------------
(Address of principal executive offices) (Zip Code)
(Registrants' telephone number, including area code): (609) 441-0704
---------------------------
(NOT APPLICABLE)
- --------------------------------------------------------------------------------
(Former name, former address, and former fiscal year, if changed since last
report.)
Indicate by check mark whether each of the Registrants (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrants were required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. YES X NO
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the last practicable date.
<TABLE>
<CAPTION>
REGISTRANT CLASS OUTSTANDING AT AUGUST 17, 1998
- --------------------------------- ----------------------------- ------------------------------
<S> <C> <C>
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
</TABLE>
1
<PAGE>
PART I: FINANCIAL INFORMATION
- ------------------------------
INTRODUCTORY NOTES TO FINANCIAL STATEMENTS
- ------------------------------------------
The outstanding securities consist of 10 7/8% First Mortgage Notes (the "10
7/8% First Mortgage Notes") in the original principal amount of $185,000,000 due
January 15, 2004 issued by GB Property Funding Corp. ("GB Property Funding").
GB Property Funding's obligations are unconditionally guaranteed by GB Holdings,
Inc. ("Holdings"), a Delaware corporation with principal executive offices at
Indiana Avenue and Brighton Park, Atlantic City, New Jersey 08401, and by Greate
Bay Hotel and Casino, Inc. ("GBHC"), a New Jersey corporation and a wholly owned
subsidiary of Holdings with principal offices at 136 South Kentucky Avenue,
Atlantic City, New Jersey 08401.
GB Property Funding is wholly owned by Holdings. Holdings is a wholly owned
subsidiary of Pratt Casino Corporation ("PCC"), which is an indirect, wholly
owned subsidiary of Greate Bay Casino Corporation ("GBCC"). GBCC's common stock
is listed on the OTC Bulletin Board Service under the trading symbol "GEAAQ".
GB Property Funding was organized during September 1993 as a special purpose
subsidiary of Holdings for the purpose of borrowing funds through the issuance
of the 10 7/8% First Mortgage Notes for the benefit of GBHC. GBHC owns the
Sands Hotel and Casino located in Atlantic City, New Jersey (the "Sands") .
Substantially all of Holdings' assets and operations relate to the Sands.
On January 5, 1998, Holdings, GB Property Funding and GBHC (collectively, the
"Debtors") filed petitions for relief under Chapter 11 of the United States
Bankruptcy Code (the "Bankruptcy Code") in the United States Bankruptcy Court
for the District of New Jersey (the "Bankruptcy Court"). The prior Boards of
Directors resigned on January 2, 1998 and new Boards of Directors were elected
at that time. Each company continues to operate in the ordinary course of
business, as set forth in the Bankruptcy Code, and each company's executive
officers and directors as of the date of the filing remain in office, subject to
the jurisdiction of the Bankruptcy Court, other than the following: Richard
Knight resigned as a Director, President, and Chief Executive Officer of the
Debtors effective July 8, 1998; John P. Belisle was elected President and Chief
Executive Officer of GBHC on July 28, 1998; and J. Timothy Smith was elected as
a Director of the Debtors on August 3, 1998. On May 11, 1998, the Bankruptcy
Court extended the exclusive period during which only the Debtors may file a
plan of reorganization for 90 days until August 10, 1998. The Debtors filed a
motion with the Bankruptcy Court to extend the exclusivity period another 90
days and on August 10, 1998 the Bankruptcy Court reextended the period for
another 90 days from August 10, 1998.
New Jersey Management, Inc. ("NJMI"), which is also an indirect, wholly owned
subsidiary of PCC, was responsible for the operations of the Sands under a
management agreement dated August 19, 1987, as amended, with GBHC. On May 22,
1998, GBHC filed a motion with the Bankruptcy Court to reject the management
agreement. GBCC, NJMI, and certain of their affiliates, on one side, and the
Debtors, on the other, entered into an Agreement on June 27, 1998, which was
approved by the Bankruptcy Court on July 7, 1998, and by the New Jersey Casino
Control Commission on July 8, 1998 (the "Settlement Agreement"). Under the
Settlement Agreement, among other things, the management agreement was suspended
and replaced with a services agreement until a decision by the Bankruptcy Court
on the motion to reject the management agreement, which is presently scheduled
for September 28, 1998, and GBHC ceded ownership rights to an affiliate of GBCC
in, and obtained a perpetual license for, the software used in its operations
from the same affiliate of GBCC.
Historically, the Sands' gaming operations have been highly seasonal in
nature, with the peak activity occurring from May to September. Consequently,
the results of operations for the three and six month periods ended June 30,
1998 are not necessarily indicative of the operating results to be reported for
the full year.
2
<PAGE>
The financial statements of GB Property Funding and the consolidated
financial statements of Holdings as of June 30, 1998 and for the three and six
month periods ended June 30, 1998 and 1997 have been prepared without audit,
pursuant to the rules and regulations of the Securities and Exchange Commission.
In the opinion of management, their respective financial statements contain all
adjustments (consisting of only normal recurring adjustments) necessary to
present fairly their respective financial positions as of June 30, 1998, their
respective results of operations for the three and six month periods ended June
30, 1998 and 1997 and their respective cash flows for the six month periods
ended June 30, 1998 and 1997.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. These financial statements should be read in
conjunction with the financial statements and notes thereto included in GB
Property Funding, Holdings and GBHC's 1997 Annual Report on Form 10-K.
3
<PAGE>
GB PROPERTY FUNDING CORP.
(DEBTOR-IN-POSSESSION, WHOLLY OWNED BY GB HOLDINGS, INC.)
BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
ASSETS
JUNE 30, DECEMBER 31,
1998 1997
------------ ------------
<S> <C> <C>
Current asset:
Cash $ 1,000 $ 1,000
Interest receivable from affiliate 9,373,000 9,152,000
Note receivable from affiliate 182,500,000 182,500,000
------------ ------------
$191,874,000 $191,653,000
============ ============
LIABILITIES AND SHAREHOLDER'S EQUITY
Accrued interest payable, non-current $ - $ 9,152,000
------------ ------------
Long-term debt - 182,500,000
------------ ------------
Liabilities subject to compromise:
Accrued interest payable 9,373,000 -
Long-term debt 182,500,000 -
------------ ------------
191,873,000 -
------------ ------------
Shareholder's equity (Note 1):
Common stock, $1.00 par value per share,
1,000 shares authorized and outstanding 1,000 1,000
------------ ------------
$191,874,000 $191,653,000
============ ============
</TABLE>
The accompanying introductory notes and notes to financial statements
are an integral part of these balance sheets.
4
<PAGE>
GB PROPERTY FUNDING CORP.
(DEBTOR-IN-POSSESSION, WHOLLY OWNED BY GB HOLDINGS, INC.)
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
------------------------
1998 1997
----------- -----------
<S> <C> <C>
Revenues:
Interest income (Note 2) $ - $ 4,988,000
Expenses:
Interest expense (contractual interest of $4,961,000 in 1998) - 4,988,000
----------- -----------
Net income $ - $ -
=========== ===========
</TABLE>
The accompanying introductory notes and notes to financial statements
are an integral part of these financial statements.
5
<PAGE>
GB PROPERTY FUNDING CORP.
(DEBTOR-IN-POSSESSION, WHOLLY OWNED BY GB HOLDINGS, INC.)
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
------------------------
1998 1997
----------- -----------
<S> <C> <C>
Revenues:
Interest income (Note 2) $ 221,000 $10,018,000
Expenses:
Interest expense (contractual interest of $9,923,000 in 1998) 221,000 10,018,000
----------- -----------
Net income $ - $ -
=========== ===========
</TABLE>
The accompanying introductory notes and notes to financial statements
are an integral part of these financial statements.
6
<PAGE>
GB PROPERTY FUNDING CORP.
(DEBTOR-IN-POSSESSION, WHOLLY OWNED BY GB HOLDINGS, INC.)
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
----------------------
1998 1997
---------- ----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ - $ -
Adjustments to reconcile net income to net cash
provided by operating activities:
(Increase) decrease in interest receivable from affiliate (221,000) 125,000
Increase (decrease) in accrued interest payable 221,000 (125,000)
--------- ---------
Net cash provided by operating activities - -
Cash at beginning of period 1,000 1,000
--------- ---------
Cash at end of period $ 1,000 $ 1,000
========= =========
</TABLE>
The accompanying introductory notes and notes to financial statements
are an integral part of these financial statements.
7
<PAGE>
GB PROPERTY FUNDING CORP.
(DEBTOR-IN POSSESSION, WHOLLY OWNED BY GB HOLDINGS, INC.)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(1) ORGANIZATION AND OPERATIONS
GB Property Funding Corp. ("GB Property Funding"), a Delaware corporation,
was incorporated on September 29, 1993. GB Property Funding is a wholly owned
subsidiary of GB Holdings, Inc. ("Holdings"), a Delaware corporation which is an
indirect, wholly owned subsidiary of Greate Bay Casino Corporation ("GBCC").
Holdings was incorporated in September 1993 and, on February 17, 1994, acquired
through capital contributions by its parent, all of the outstanding capital
stock of Greate Bay Hotel and Casino, Inc. ("GBHC"), which owns the Sands Hotel
and Casino in Atlantic City, New Jersey (the "Sands"). GB Property Funding was
formed for the purpose of borrowing $185,000,000 for the benefit of GBHC; such
debt was issued during February 1994 at the rate of 10 7/8% per annum and the
proceeds were loaned to GBHC (see Note 2).
GB Property Funding has no operations and is dependent on the repayment of
its note to GBHC for servicing its debt obligations (see Note 2).
Administrative services for GB Property Funding are provided by GBHC at no
charge. The cost of such services is not significant.
The operation of an Atlantic City casino/hotel is subject to significant
regulatory control. Under provisions of the New Jersey Casino Control Act, GBHC
is required to maintain a nontransferable license to operate a casino in
Atlantic City.
The accompanying financial statements have been prepared in accordance with
Statement of Position No. 90-7, "Financial Reporting By Entities in
Reorganization Under the Bankruptcy Code," and include disclosure of liabilities
subject to compromise. On January 5, 1998, GB Property Funding, GBHC and
Holdings (collectively, the "Debtors") filed voluntary petitions for relief
under Chapter 11 of the United States Bankruptcy Code (the "Bankruptcy Code") in
the United States Bankruptcy Court for the District of New Jersey (the
"Bankruptcy Court"). GB Property Funding is dependent on repayment of its note
from GBHC to meet its debt obligations. Management is in the process of
developing a plan of reorganization that will be submitted to the Bankruptcy
Court and GB Property Funding's creditors for their approval. In the event the
plan of reorganization is accepted, continuation of the business thereafter is
dependent on GBHC's ability to achieve successful future operations. The
accompanying financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or the amounts and
classification of liabilities that might be necessary should GB Property Funding
be unable to continue as a going concern.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
8
<PAGE>
GB PROPERTY FUNDING CORP.
(DEBTOR-IN POSSESSION, WHOLLY OWNED BY GB HOLDINGS, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The Financial Accounting Standards Board has issued a new standard,
"Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 requires the
presentation and disclosure of comprehensive income, which is defined as the
change in a company's equity resulting from non-owner transactions and events.
SFAS 130 became effective December 15, 1997 and requires the restatement of all
prior periods presented. GB Property Funding has adopted the provisions of SFAS
130; however, the statement provides that an enterprise that has no items of
other comprehensive income for any period presented need only report net income.
GB Property Funding has no such other comprehensive income items for any period
presented; accordingly, the presentation and disclosure requirements of SFAS 130
are not applicable.
The financial statements as of June 30, 1998 and for the three and six month
periods ended June 30, 1998 and 1997 have been prepared by GB Property Funding
without audit. In the opinion of management, these financial statements contain
all adjustments (consisting of only normal recurring adjustments) necessary to
present fairly the financial position of GB Property Funding as of June 30,
1998, and the results of its operations for the three and six month periods
ended June 30, 1998 and 1997 and cash flows for the six month periods ended June
30, 1998 and 1997.
(2) LONG-TERM DEBT
On February 17, 1994, GB Property Funding issued $185,000,000 of non-
recourse first mortgage notes due January 15, 2004 (the "10 7/8% First Mortgage
Notes"). Interest on the notes accrues at the rate of 10 7/8% per annum, payable
semiannually commencing July 15, 1994. Interest only was payable during the
first three years. Commencing on July 15, 1997, semiannual principal payments of
$2,500,000 are due on each interest payment date with the balance due at
maturity. Such semiannual payments may be made in cash or by tendering to the
trustee 10 7/8% First Mortgage Notes previously purchased or otherwise acquired
by GB Property Funding. During May 1997, GB Property Funding acquired $2,500,000
face amount of 10 7/8% First Mortgage Notes which were used to make the July 15,
1997 required principal payment. As a result of the filing under Chapter 11,
debt service payments due in January and July 1998 were not made. The accrual of
interest on the 10 7/8% First Mortgage Notes for periods subsequent to the
filing has been suspended.
The indenture for the 10 7/8% First Mortgage Notes contains various
provisions which, among other things, restrict the ability of certain
subsidiaries of GBCC to pay dividends to GBCC, to merge, consolidate or sell
substantially all of their assets or to incur additional indebtedness beyond
certain limitations. In addition, the indenture requires the maintenance of
certain cash balances and requires minimum expenditures, as defined in the
indenture, for property and fixture renewals, replacements and betterments at
the Sands. The proceeds of the 10 7/8% First Mortgage Notes were loaned to GBHC
on the same terms and conditions.
No interest was paid or received with respect to the 10 7/8% First Mortgage
Notes and the loan to GBHC during the six month period ended June 30, 1998.
Interest paid and received amounted to $10,143,000 during the six month period
ended June 30, 1997. Interest receivable and payable with
9
<PAGE>
GB PROPERTY FUNDING CORP.
(DEBTOR-IN POSSESSION, WHOLLY OWNED BY GB HOLDINGS, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
respect to the notes are included on the accompanying balance sheet at June 30,
1998 in noncurrent assets and liabilities subject to compromise, respectively,
as such payments are subject to terms of a reorganization plan which requires
confirmation by the Bankruptcy Court. As a result of the Chapter 11 filing, any
claim for post-petition interest is unenforceable unless otherwise ordered by
the Bankruptcy Court. Accordingly GB Property Funding has ceased the accrual of
interest income as of the date of the Chapter 11 filing.
(3) INCOME TAXES
Prior to 1997, GB Property Funding was included in the consolidated federal
income tax return of Hollywood Casino Corporation ("HCC"), the parent company of
GBCC until HCC distributed the GBCC stock it owned to the shareholders of HCC as
a dividend on December 31, 1996. As a result of the Chapter 11 filing, and an
action instituted by GBHC in the Bankruptcy Court against GBCC, certain
affiliates of GBCC, Jack E. Pratt, Edward T. Pratt, Jr., and William D. Pratt,
former directors of GBHC and current directors of GBCC (collectively, the
"Defendants"), seeking to enjoin the Defendants from using the net operating
losses of the Debtors, whether the Debtors file a consolidated federal tax
return for 1997 with GBCC as members of a consolidated group is unresolved.
(4) LITIGATION
On January 5, 1998, the Debtors filed petitions for relief under Chapter 11
of the Bankruptcy Code in the Bankruptcy Court. The prior Boards of Directors
resigned on January 2, 1998 and new Boards of Directors were elected at that
time. Each company continues to operate in the ordinary course of business, as
set forth in the Bankruptcy Code, and each company's executive officers and
directors as of the date of the filing remain in office, subject to the
jurisdiction of the Bankruptcy Court, other than the following: Richard Knight
resigned as a Director, President, and Chief Executive Officer of the Debtors
effective July 8, 1998; John P. Belisle was elected President and Chief
Executive Officer of GBHC on July 28, 1998; and J. Timothy Smith was elected as
a Director of the Debtors on August 3, 1998. On May 11, 1998, the Bankruptcy
Court extended the exclusive period during which only the Debtors may file a
plan of reorganization for 90 days until August 10, 1998. The Debtors filed a
motion with the Bankruptcy Court to extend the exclusivity period another 90
days and on August 10, 1998 the Bankruptcy Court reextended the period for
another 90 days from August 10, 1998.
10
<PAGE>
GB HOLDINGS, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION, WHOLLY OWNED BY PRATT CASINO CORPORATION)
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
-------------- --------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 22,298,000 $ 13,871,000
Accounts receivable, net of allowances
of $12,791,000 and $14,955,000, respectively 7,040,000 7,794,000
Inventories 3,260,000 3,372,000
Due from affiliate 378,000 258,000
Refundable deposits and other current assets 4,100,000 2,793,000
------------- -------------
Total current assets 37,076,000 28,088,000
------------- -------------
Property and Equipment:
Land 38,093,000 38,093,000
Buildings and improvements 185,508,000 185,508,000
Operating equipment 96,745,000 94,501,000
Construction in progress 3,108,000 2,433,000
------------- -------------
323,454,000 320,535,000
Less - accumulated depreciation and
amortization (177,850,000) (172,819,000)
------------- -------------
Net property and equipment 145,604,000 147,716,000
------------- -------------
Other Assets:
Obligatory investments 8,779,000 7,910,000
Other assets 3,592,000 4,014,000
------------- -------------
Total other assets 12,371,000 11,924,000
------------- -------------
$ 195,051,000 $ 187,728,000
============= =============
</TABLE>
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated balance sheets.
11
<PAGE>
GB HOLDINGS, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION, WHOLLY OWNED BY PRATT CASINO CORPORATION)
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
LIABILITIES AND SHAREHOLDER'S DEFICIT
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
------------- -------------
<S> <C> <C>
Current Liabilities Not Subject to Compromise:
Current maturities of long-term debt $ 14,000 $ 14,000
Accounts payable 4,056,000 6,366,000
Accrued liabilities -
Salaries and wages 4,460,000 4,824,000
Interest - 4,000
Insurance 716,000 2,984,000
Other 7,467,000 6,510,000
Due to affiliates 772,000 456,000
Other current liabilities 2,913,000 3,959,000
------------ ------------
Total current liabilities 20,398,000 25,117,000
------------ ------------
Liabilities Subject to Compromise (Note 4) 228,242,000 -
------------ ------------
Accrued Interest Payable - 9,152,000
------------ ------------
Long-Term Debt 412,000 192,918,000
------------ ------------
Other Noncurrent Liabilities 1,345,000 1,187,000
------------ ------------
Due to Affiliates - 17,954,000
------------ ------------
Commitments and Contingencies
Shareholder's Deficit:
Common stock, $1.00 par value per share;
1,000 shares authorized and
outstanding 1,000 1,000
Additional paid-in capital 18,438,000 18,438,000
Accumulated deficit (73,785,000) (77,039,000)
------------ ------------
Total shareholder's deficit (55,346,000) (58,600,000)
------------ ------------
$195,051,000 $187,728,000
============ ============
</TABLE>
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated balance sheets.
12
<PAGE>
GB HOLDINGS, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION, WHOLLY OWNED BY PRATT CASINO CORPORATION)
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
--------------------------
1998 1997
------------ ------------
<S> <C> <C>
Revenues:
Casino $54,085,000 $61,823,000
Rooms 2,325,000 2,455,000
Food and beverage 6,146,000 8,457,000
Other 971,000 947,000
----------- -----------
63,527,000 73,682,000
Less - promotional allowances (5,074,000) (6,201,000)
----------- -----------
Net revenues 58,453,000 67,481,000
----------- -----------
Expenses:
Casino 46,233,000 51,396,000
Rooms 917,000 671,000
Food and beverage 2,441,000 2,881,000
Other 623,000 616,000
General and administrative 3,134,000 4,653,000
Depreciation and amortization 2,926,000 3,659,000
----------- -----------
Total expenses 56,274,000 63,876,000
----------- -----------
Income from operations 2,179,000 3,605,000
----------- -----------
Non-operating income (expense):
Interest income 181,000 453,000
Interest expense (contractual interest
of $5,799,000 in 1998) (11,000) (5,826,000)
Gain on disposal of assets - 17,000
----------- -----------
Total non-operating income (expense), net 170,000 (5,356,000)
----------- -----------
Income (loss) before income taxes, extraordinary and
other items 2,349,000 (1,751,000)
Income tax provision - -
----------- -----------
Income (loss) before extraordinary and other items 2,349,000 (1,751,000)
Reorganization and other related costs (1,730,000) -
----------- -----------
Income (loss) before extraordinary item 619,000 (1,751,000)
Gain on early extinguishment of debt - 310,000
----------- -----------
Net income (loss) $ 619,000 $(1,441,000)
=========== ===========
</TABLE>
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated statements.
13
<PAGE>
GB HOLDINGS, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION, WHOLLY OWNED BY PRATT CASINO CORPORATION)
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
----------------------------
1998 1997
------------- -------------
<S> <C> <C>
Revenues:
Casino $105,518,000 $120,153,000
Rooms 4,362,000 4,692,000
Food and beverage 11,795,000 16,377,000
Other 1,848,000 1,912,000
------------ ------------
123,523,000 143,134,000
Less - promotional allowances (9,457,000) (12,456,000)
------------ ------------
Net revenues 114,066,000 130,678,000
------------ ------------
Expenses:
Casino 88,013,000 100,405,000
Rooms 1,662,000 1,267,000
Food and beverage 4,806,000 5,220,000
Other 1,018,000 1,145,000
General and administrative 7,115,000 9,313,000
Depreciation and amortization 5,825,000 7,533,000
------------ ------------
Total expenses 108,439,000 124,883,000
------------ ------------
Income from operations 5,627,000 5,795,000
------------ ------------
Non-operating income (expense):
Interest income 709,000 825,000
Interest expense (contractual interest of $11,595,000 in 1998) (279,000) (11,656,000)
Gain on disposal of assets 28,000 24,000
------------ ------------
Total non-operating expense, net 458,000 (10,807,000)
------------ ------------
Income (loss) before income taxes, extraordinary and other items 6,085,000 (5,012,000)
Income tax provision - -
------------ ------------
Income (loss) before extraordinary and other items 6,085,000 (5,012,000)
Reorganization and other related costs (2,831,000) -
------------ ------------
Income (loss) before extraordinary item 3,254,000 (5,012,000)
Gain on early extinguishment of debt - 310,000
------------ ------------
Net income (loss) $ 3,254,000 $ (4,702,000)
============ ============
</TABLE>
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated statements.
14
<PAGE>
GB HOLDINGS, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION, WHOLLY OWNED BY PRATT CASINO CORPORATION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------------------
1998 1997
----------------- ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ 3,254,000 $(4,702,000)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Extraordinary item - (310,000)
Write-off reorganization-related costs 881,000 -
Depreciation and amortization 5,825,000 7,533,000
Gain on disposal of assets (28,000) (24,000)
Provision for doubtful accounts 742,000 1,559,000
Decrease (increase) in accounts receivable 12,000 (554,000)
Increase in accounts payable and accrued expenses 3,770,000 216,000
Net change in other current assets and liabilities (1,431,000) (1,313,000)
Net change in other noncurrent assets and liabilities - (474,000)
----------- -----------
Net cash provided by operating activities 13,025,000 1,931,000
----------- -----------
INVESTING ACTIVITIES:
Purchase of property and equipment (3,394,000) (1,279,000)
Proceeds from disposal of assets 28,000 24,000
Obligatory investments (1,226,000) (1,333,000)
----------- -----------
Net cash used in investing activities (4,592,000) (2,588,000)
----------- -----------
FINANCING ACTIVITIES:
Repayments on credit facilities - (2,000,000)
Borrowings from affiliates - 6,500,000
Repayments of long-term debt (6,000) (2,131,000)
----------- -----------
Net cash (used in) provided by financing activities (6,000) 2,369,000
----------- -----------
Net increase in cash and cash equivalents 8,427,000 1,712,000
Cash and cash equivalents at beginning of period 13,871,000 15,624,000
----------- -----------
Cash and cash equivalents at end of period $22,298,000 $17,336,000
=========== ===========
</TABLE>
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated statements.
15
<PAGE>
GB HOLDINGS, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION, WHOLLY OWNED BY PRATT CASINO CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) ORGANIZATION, BUSINESS AND BASIS OF PRESENTATION
GB Holdings, Inc. ("Holdings") is a Delaware corporation and a wholly owned
subsidiary of Pratt Casino Corporation ("PCC"), also a Delaware corporation.
PCC was incorporated during September 1993 and is wholly owned by PPI
Corporation, a New Jersey corporation and a wholly owned subsidiary of Greate
Bay Casino Corporation ("GBCC"). On February 17, 1994, Holdings acquired Greate
Bay Hotel and Casino, Inc. ("GBHC"), a New Jersey corporation, through a capital
contribution by its parent. GBHC's principal business activity is its ownership
of the Sands Hotel and Casino in Atlantic City, New Jersey (the "Sands"). GB
Property Funding Corp. ("GB Property Funding"), a Delaware corporation and a
wholly owned subsidiary of Holdings, was incorporated in September 1993 for the
purpose of borrowing funds through the issuance of $185,000,000 of ten-year,
nonrecourse first mortgage notes for the benefit of GBHC; such debt was issued
in February 1994 at the rate of 10 7/8% per annum and the proceeds were loaned
to GBHC (see Note 3). Holdings has no operating activities and its only
significant asset is its investment in GBHC. The accompanying consolidated
financial statements include the accounts and operations of Holdings, GBHC and
GB Property Funding; all significant intercompany balances and transactions have
been eliminated.
GBHC estimates that a significant amount of the Sands' revenues are derived
from patrons living in southeastern Pennsylvania, northern New Jersey and
metropolitan New York City. Competition in the Atlantic City gaming market is
intense and management believes that this competition will continue or intensify
in the future.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
The accompanying consolidated financial statements have been prepared in
accordance with Statement of Position No. 90-7, "Financial Reporting By Entities
in Reorganization under the Bankruptcy Code," and include disclosure of
liabilities subject to compromise (see Note 4). Holdings has experienced
significant losses over the last two years and has a net capital deficiency of
$55,346,000 at June 30, 1998. On January 5, 1998, Holdings, GBHC and GB Property
Funding (collectively, the "Debtors") filed petitions for relief under Chapter
11 of the United States Bankruptcy Code (the "Bankruptcy Code") in the United
States Bankruptcy Court for the District of New Jersey (the "Bankruptcy Court").
The prior Boards of Directors resigned on January 2, 1998 and new Boards of
Directors were elected at that time. Each company continues to operate in the
ordinary course of business, as set forth in the Bankruptcy Code, and each
company's executive officers and directors as of the date of the filing remain
in office, subject to the jurisdiction of the Bankruptcy Court, other than the
following: Richard Knight resigned as a Director, President, and Chief
Executive Officer of the Debtors effective July 8, 1998; John P. Belisle was
elected
16
<PAGE>
GB HOLDINGS, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION, WHOLLY OWNED BY PRATT CASINO CORPORATION)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
President and Chief Executive Officer of GBHC on July 28, 1998; and J.
Timothy Smith was elected as a Director of the Debtors on August 3, 1998. On
May 11, 1998, the Bankruptcy Court extended the exclusive period during which
only the Debtors may file a plan of reorganization for 90 days until August 10,
1998. The Debtors filed a motion with the Bankruptcy Court to extend the
exclusivity period another 90 days and on August 10, 1998 the Bankruptcy Court
reextended the period for another 90 days from August 10, 1998. Management is
in the process of developing a plan of reorganization that will be submitted to
the Bankruptcy Court and Holdings' creditors for their approval. In the event
the plan of reorganization is accepted, continuation of the business thereafter
is dependent on Holdings ability to achieve successful future operations. The
accompanying consolidated financial statements do not include any adjustments
relating to the recoverability and classification of recorded asset amounts or
the amounts and classification of liabilities that might be necessary should
Holdings be unable to continue a going concern.
New Jersey Management, Inc. ("NJMI"), also a wholly owned subsidiary of PCC,
was responsible for the operations of the Sands under a management agreement
dated August 19, 1987, as amended, with GBHC. On May 22, 1998, GBHC filed a
motion with the Bankruptcy Court to reject the management agreement. GBCC,
NJMI, and certain of their affiliates, on one side, and the Debtors, on the
other, entered into an Agreement on June 27, 1998, which was approved by the
Bankruptcy Court on July 7, 1998, and by the New Jersey Casino Control
Commission (the "Casino Commission") on July 8, 1998 (the "Settlement
Agreement"). Under the Settlement Agreement, among other things, the management
agreement was suspended and replaced with a services agreement until a decision
by the Bankruptcy Court on the motion to reject the management agreement, which
is presently scheduled for September 28, 1998, and GBHC ceded ownership rights
to an affiliate of GBCC in, and obtained a perpetual license for, the software
used in its operations from the same affiliate of GBCC.
GBHC is self insured for a portion of its general liability, certain health
care and other liability exposures. Accrued insurance includes estimates of
such accrued liabilities based on an evaluation of the merits of individual
claims and historical claims experience; accordingly, GBHC's ultimate liability
may differ from the amounts accrued.
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of"
requires, among other things, that an entity review its long-lived assets and
certain related intangibles for impairment whenever changes in circumstances
indicate that the carrying amount of an asset may not be fully recoverable.
As discussed above, GBHC filed for protection under the Bankruptcy Code and
management is currently preparing its plan of reorganization. Although
management has not made a determination whether an impairment of the carrying
value currently exists, future adjustments to the carrying amount of GBHC's
assets are possible with respect to the fresh-start reporting which would take
place at the confirmation date of a plan of reorganization approved by the
Bankruptcy Court.
17
<PAGE>
GB HOLDINGS, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION, WHOLLY OWNED BY PRATT CASINO CORPORATION)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The Financial Accounting Standards Board has issued a new standard,
"Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 requires the
presentation and disclosure of comprehensive income, which is defined as the
change in a company's equity resulting from non-owner transactions and events.
SFAS 130 became effective December 15, 1997 and requires the restatement of all
prior periods presented. Holdings has adopted the provisions of SFAS 130;
however, the statement provides that an enterprise that has no items of other
comprehensive income for any period presented need only report net income.
Holdings has no such other comprehensive income items for any period presented;
accordingly, the presentation and disclosure requirements of SFAS 130 are not
applicable.
The consolidated financial statements as of June 30, 1998 and for the three
and six month periods ended June 30, 1998 and 1997 have been prepared by
Holdings without audit. In the opinion of management, these consolidated
financial statements contain all adjustments (consisting of only normal
recurring adjustments) necessary to present fairly the consolidated financial
position of Holdings as of June 30, 1998, the results of its operations for the
three and six month periods ended June 30, 1998 and 1997 and cash flows for the
six month periods ended June 30, 1998 and 1997.
(2) SHORT-TERM CREDIT FACILITIES
GBHC had a bank line of credit which was guaranteed to the extent of
$2,000,000 by PCC, which pledged a certificate of deposit in the face amount of
$2,000,000 as collateral for the line of credit. The line of credit was repaid
upon maturity of the certificate of deposit during January 1997 with proceeds
from affiliate borrowings and the line of credit was cancelled.
(3) LONG-TERM DEBT AND PLEDGE OF ASSETS
Substantially all of Holdings' and GBHC's assets are pledged in connection
with their long-term indebtedness. On January 5, 1998, the Debtors filed
petitions for relief under Chapter 11 of the Bankruptcy Code in Bankruptcy
Court. The prior Boards of Directors resigned on January 2, 1998 and new Boards
of Directors were elected at that time. Each company continues to operate in
the ordinary course of business, as set forth in the Bankruptcy Code, and each
company's executive officers and directors as of the date of the filing remain
in office, subject to the jurisdiction of the Bankruptcy Court, other than the
following: Richard Knight resigned as a Director, President, and Chief
Executive Officer of the Debtors effective July 8, 1998; John P. Belisle was
elected President and Chief Executive Officer of GBHC on July 28, 1998; and J.
Timothy Smith was elected as a Director of the Debtors on August 3, 1998. On
May 11, 1998, the Bankruptcy Court extended the exclusive period during which
only the Debtors may file a plan of reorganization for 90 days until August 10,
1998. The Debtors filed a motion with the Bankruptcy Court to extend the
exclusivity period another 90 days and on August 10, 1998 the Bankruptcy Court
reextended the period for another 90 days from August 10, 1998.
18
<PAGE>
GB HOLDINGS, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION, WHOLLY OWNED BY PRATT CASINO CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
-------------- -------------
<S> <C> <C>
10 7/8% first mortgage notes, due 2004 (a) $ 182,500,000 $182,500,000
14 5/8% affiliate loan, due 2005 (b) 10,000,000 10,000,000
Other 426,000 432,000
------------- ------------
Total indebtedness 192,926,000 192,932,000
Less - current maturities (14,000) (14,000)
Less - debt subject to compromise (Note 4) (192,500,000) -
------------- ------------
Total long-term debt $ 412,000 $192,918,000
============= ============
</TABLE>
- --------------------------
(a) On February 17, 1994, the Sands obtained $185,000,000 from GB Property
Funding, which issued $185,000,000 of non-recourse first mortgage notes due
January 15, 2004 (the "10 7/8% First Mortgage Notes"). Interest on the
notes accrues at the rate of 10 7/8% per annum, payable semiannually
commencing July 15, 1994. Interest only was payable during the first three
years. Commencing on July 15, 1997, semiannual principal payments of
$2,500,000 are due on each interest payment date with the balance due at
maturity. Such semiannual payments may be made in cash or by tendering 10
7/8% First Mortgage Notes previously purchased or otherwise acquired by
Holdings. Holdings acquired $2,500,000 face amount of 10 7/8% First
Mortgage Notes at a discount during May 1997 which it used during June to
make its July 15, 1997 required principal payment. As a result of the
filing under Chapter 11, the debt service payments due in January and July
1998 were not made. The accrual of interest on the 10 7/8% First Mortgage
Notes for periods subsequent to the filing has been suspended.
The indenture for the 10 7/8% First Mortgage Notes contains various
provisions which, among other things, restrict the ability of certain
subsidiaries of GBCC to pay dividends to GBCC, to merge, consolidate or sell
substantially all of their assets or to incur additional indebtedness beyond
certain limitations. In addition, the indenture requires the maintenance of
certain cash balances and requires minimum expenditures, as defined in the
indenture, for property and fixture renewals, replacements and betterments
at the Sands.
(b) On February 17, 1994, GBHC issued a $10,000,000 subordinated promissory note
to an affiliate. The note bears interest at the rate of 14 5/8% per annum,
payable semiannually commencing August 17, 1994, subject to maintaining
average daily cash balances required by the indenture for the 10 7/8% First
Mortgage Notes, with the principal due in February 2005. As a result of
such payment restrictions, interest has been paid only through February 17,
1996. The accrual of interest on the affiliate loan for periods subsequent
to the filing under Chapter 11 has been suspended.
19
<PAGE>
GB HOLDINGS, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION, WHOLLY OWNED BY PRATT CASINO CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
As a result of the Chapter 11 filing, principal payments with respect to the
10 7/8% First Mortgage Notes and the affiliate loan are subject to a plan of
reorganization which requires confirmation by the Bankruptcy Court. Pending
such reorganization, the entire amount of the 10 7/8% First Mortgage Notes and
the affiliate loan are included in liabilities subject to compromise and in
long-term debt on the accompanying consolidated balance sheets at June 30, 1998
and December 31, 1997, respectively. Scheduled payments of long-term debt as of
June 30, 1998, exclusive of payments on the 10 7/8% First Mortgage Notes and the
affiliate loan, are set forth below:
<TABLE>
<CAPTION>
<S> <C>
1998 (six months) $ 8,000
1999 14,000
2000 16,000
2001 17,000
2002 19,000
Thereafter 352,000
--------
Total $426,000
========
</TABLE>
Interest paid amounted to $21,000 and $10,186,000, respectively, during the
six month periods ended June 30, 1998 and 1997. At December 31, 1997, accrued
interest on the 10 7/8% First Mortgage Notes in the amount of $9,152,000 is
presented as noncurrent accrued interest payable on the accompanying
consolidated balance sheet.
(4) LIABILITIES SUBJECT TO COMPROMISE
Liabilities subject to compromise under Holdings' reorganization proceedings
consist of the following at June 30, 1998:
<TABLE>
<CAPTION>
<S> <C>
Accounts payable and accrued liabilities $ 7,907,000
10 7/8% First Mortgage Notes (Note 3) 182,500,000
14 5/8% Affiliate Loan (Note 3) 10,000,000
Borrowings from affiliates (Note 6) 13,000,000
Accrued interest 14,364,000
Due to affiliate 471,000
------------
Total $228,242,000
============
</TABLE>
(5) INCOME TAXES
Prior to 1997, Holdings was included in the consolidated federal income tax
return of Hollywood Casino Corporation ("HCC"), the parent company of GBCC until
HCC distributed the GBCC stock it owned to the shareholders of HCC as a dividend
on December 31, 1996. As a result of the Chapter 11 filing, and the Action
described in Note 7 below relating to the net operating losses of the Debtors,
whether
20
<PAGE>
GB HOLDINGS, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION, WHOLLY OWNED BY PRATT CASINO CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
the Debtors file a consolidated federal tax return for 1997 with GBCC as members
of a consolidated group is unresolved.
Federal and state income tax provisions or benefits are based upon estimates
of the results of operations for the current period and reflect the
nondeductibility for income tax purposes of certain items, including certain
amortization, meals and entertainment and other expenses. Holdings made no
federal or state income tax payments during the six month periods ended June 30,
1998 and 1997.
Deferred income taxes result primarily from the use of the allowance method
rather than the direct write-off method for doubtful accounts, the use of
accelerated methods of depreciation for federal and state income tax purposes
and differences in the timing of deductions taken between tax and financial
reporting purposes for contributions of and adjustments to the carrying value of
certain investment obligations and for other accruals.
At June 30, 1998, Holdings and its subsidiaries have deferred tax assets
including net operating loss carryforwards ("NOL's"). The NOL's do not expire
before the year 2009 for federal tax purposes and the year 2001 for state tax
purposes. The availability of the NOL's and credit carryforwards will further
be subject to the tax consequences of a plan of reorganization approved by the
Bankruptcy Court. Statement of Financial Accounting Standards No. 109 ("SFAS
109") requires that the tax benefit of NOL's and deferred tax assets resulting
from temporary differences be recorded as an asset and, to the extent that
management can not assess that the utilization of all or a portion of such NOL's
and deferred tax assets is more likely than not, a valuation allowance should be
recorded. As a result of book and tax losses incurred in 1997 and the filing
under Chapter 11 by Holdings in January 1998, management is unable to determine
that realization of Holdings' deferred tax asset is more likely than not and,
thus, has provided a valuation allowance for the entire amount at June 30, 1998.
Sales or purchases of Holdings' common stock could cause a "change of
control", as defined in Section 382 of the Internal Revenue Code of 1986, as
amended, which would limit the ability of Holdings to utilize these loss
carryforwards in later tax periods. Should such a change of control occur, the
amount of annual loss carryforwards available for use would most likely be
substantially reduced. Future treasury regulations, administrative rulings or
court decisions may also effect Holdings' future utilization of its loss
carryforwards.
Prior to 1997, Holdings was included in the consolidated federal income tax
return of HCC. The Internal Revenue Service is currently examining the
consolidated federal income tax returns of HCC for the years 1993 and 1994 in
which Holdings' was included. Management believes that the results of such
examination will not have a material adverse effect on the consolidated
financial position or results of operations of Holdings.
21
<PAGE>
GB HOLDINGS, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION, WHOLLY OWNED BY PRATT CASINO CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(6) TRANSACTIONS WITH RELATED PARTIES
Prior to July 8, 1998, NJMI was responsible for the operations of the Sands
under a management agreement with GBHC. Under such agreement, NJMI was entitled
to receive annually (i) a basic consulting fee of 1.5% of "adjusted gross
revenues," as defined, and (ii) incentive compensation of between 5% and 7.5% of
gross operating profits in excess of certain stated amounts should annual "gross
operating profits," as defined, exceed $5,000,000. On May 22, 1998, GBHC filed
a motion with the Bankruptcy Court seeking to reject the existing management
agreement with NJMI (the "Rejection Motion"). The Settlement Agreement
partially resolving the Rejection Motion was entered into on June 27, 1998 and
was approved by the Bankruptcy Court on July 7, 1998 and by the Casino
Commission on July 8, 1998. Under the Settlement Agreement and effective as of
May 1, 1998, NJMI continues to provide certain agreed upon services to GBHC at a
monthly fee of $165,000 of which $122,000 will be paid on a monthly basis in
arrears and the remaining $43,000 per month will be deferred and paid upon
confirmation of GBHC's plan of reorganization by the Bankruptcy Court.
Fees under the management agreement and the Settlement Agreement are
included in general and administrative expenses on the accompanying consolidated
financial statements and amounted to $744,000 and $1,497,000, respectively,
during the three month periods ended June 30, 1998 and 1997 and $1,910,000 and
$2,802,000, respectively, during the six month periods ended June 30, 1998 and
1997. Amounts payable under the Settlement Agreement to NJMI and included in due
to affiliates on the accompanying consolidated balance sheet at June 30, 1998
amounted to $330,000 and an additional $22,000 calculated under the management
agreement for April 1, 1998 is subject to defenses reserved under the Settlement
Agreement. Management fees payable of $34,000 are included in due to affiliates
on the accompanying consolidated balance sheet at December 31, 1997 and are
subject to defenses reserved under the Settlement Agreement. Additional
management fees payable of $145,000 are included in liabilities subject to
compromise on the accompanying consolidated balance sheet at June 30, 1998 and
are subject to the defenses reserved under the Settlement Agreement.
GBHC's rights to the trade name "Sands" are derived from a license agreement
between GBCC and an unaffiliated third party. Amounts payable by the Sands for
these rights are equal to the amounts paid to the unaffiliated third party.
Such charges amounted to $70,000 and $73,000, respectively, for the three month
periods ended June 30, 1998 and 1997 and $131,000 and $140,000, respectively,
during the six month periods ended June 30, 1998 and 1997.
An advance from GBHC to another GBCC subsidiary in the amount of $5,672,000
was outstanding at both June 30, 1998 and December 31, 1997. Interest on the
advance accrues at the rate of 16.5% per annum. The advance, together with
accrued interest amounting to $4,446,000 and $3,978,000, respectively, are fully
reserved as collection of the receivables is uncertain.
22
<PAGE>
GB HOLDINGS, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION, WHOLLY OWNED BY PRATT CASINO CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
During the third quarter of 1996, GBCC borrowed a total of $6,500,000 from
HCC which it then loaned to GBHC to enable GBHC to make its debt service
obligations and a property tax payment. According to the terms of the
corresponding note, such borrowings accrue interest at the rate of 13 3/4% per
annum payable quarterly commencing October 1, 1996. During the first quarter of
1997, GBHC borrowed an additional $1,500,000 from GBCC on similar stated terms.
GBHC also borrowed $5,000,000 from another subsidiary of GBCC during January
1997 at the stated rate of 14 5/8% per annum payable semiannually commencing
July 15, 1997. At June 30, 1998 and December 31, 1997, interest accrued on such
loans amounted to $2,236,000 and $2,216,000, respectively, and is included in
liabilities subject to compromise and in noncurrent amounts due to affiliates,
respectively, on the accompanying consolidated balance sheets. Repayment of
such borrowings from GBCC and the payment of the related interest are subject to
approval of the Casino Commission and any setoffs and defenses available under
the Bankruptcy Code and applicable law and to the terms of a plan of
reorganization which requires approval by the Bankruptcy Court and approval by
the Casino Commission. The accrual of interest on the affiliate advances for
periods subsequent to the filing under Chapter 11 has been suspended.
Net interest expense incurred with respect to affiliate advances and
borrowings is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net advances $ - $227,000 $20,000 $410,000
Affiliate loan (Note 3) - 366,000 16,000 731,000
</TABLE>
Interest accrued on the Affiliate loan (Note 3) of $2,754,000 and
$2,738,000, respectively, is included in liabilities subject to compromise and
in noncurrent amounts due to affiliates, respectively, on the accompanying
consolidated balance sheets at June 30, 1998 and December 31, 1997.
GBHC performs certain services for other subsidiaries of GBCC and for HCC
and its subsidiaries and invoices those companies for the Sands' cost of
providing those services. Similarly, GBHC is charged for certain legal,
accounting and other expenses incurred by GBCC and HCC and their respective
subsidiaries that relate to the Sands' business. Such affiliate transactions are
summarized below:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- ----------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Billings to affiliates $ 68,000 $ 303,000 $ 138,000 $ 658,000
Charges from affiliates (160,000) (183,000) (391,000) (387,000)
</TABLE>
23
<PAGE>
GB HOLDINGS, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION, WHOLLY OWNED BY PRATT CASINO CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(7) LITIGATION
On January 5, 1998, the Debtors filed petitions for relief under Chapter 11
of the Bankruptcy Code in Bankruptcy Court. The prior Boards of Directors
resigned on January 2, 1998 and new Boards of Directors were elected at that
time. Each company continues to operate in the ordinary course of business, as
set forth in the Bankruptcy Code, and each company's executive officers and
directors as of the date of the filing remain in office, subject to the
jurisdiction of the Bankruptcy Court, other than the following: Richard Knight
resigned as a Director, President, and Chief Executive Officer of the Debtors
effective July 8, 1998; John P. Belisle was elected President and Chief
Executive Officer of GBHC on July 28, 1998; and J. Timothy Smith was elected as
a Director of the Debtors on August 3, 1998. On May 11, 1998, the Bankruptcy
Court extended the exclusive period during which only the Debtors may file a
plan of reorganization for 90 days until August 10, 1998. The Debtors filed a
motion with the Bankruptcy Court to extend the exclusivity period another 90
days and on August 10, 1998 the Bankruptcy Court reextended the period for
another 90 days from August 10, 1998.
On May 22, 1998, GBHC filed the Rejection Motion with the Bankruptcy Court.
The management agreement was suspended as a result of the Settlement Agreement
and was replaced with a services agreement until the decision on the Rejection
Motion, which is presently returnable September 28, 1998 (see Note 6).
On July 27, 1998, GBHC filed an action in the Bankruptcy Court (the
"Action") against GBCC, certain affiliates of GBCC, and Jack E. Pratt, Edward T.
Pratt Jr. and William D. Pratt, former directors of GBHC and current directors
of GBCC (collectively, the "Defendants"), alleging, inter alia, usurpation of
corporate opportunities of GBHC and breach of fiduciary duty with respect to
GBHC, in connection with the acquisition of an option for certain land parcels
and the acquisition of a land parcel on Pacific Avenue in Atlantic City, New
Jersey adjoining the Sands (the "Parcels"), and seeking, inter alia, an order
enjoining the Defendants from transferring the Parcels to third parties and
requiring the Defendants to convey the Parcels to GBHC. The Action also seeks to
enjoin the Defendants from using the NOL's of the Debtors (see Note 5). On
August 10, 1998, the Bankruptcy Court set a hearing date on the Action
commencing October 7, 1998, with the understanding that the defendants would not
transfer the Parcels prior to the hearing, and reserved August 24, 1998 to
consider an interim request for relief with respect to the NOL's unless resolved
by the parties prior thereto.
GBHC is a party in various legal proceedings with respect to the conduct of
casino and hotel operations. Although a possible range of loss can not be
estimated, in the opinion of management, based upon the advice of counsel,
settlement or resolution of these proceedings should not have a material adverse
impact upon the consolidated financial position or results of operations of
Holdings and GBHC. The accompanying consolidated financial statements do not
include any adjustments that might result from the outcome of the uncertainties
described above.
24
<PAGE>
GB HOLDINGS, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION, WHOLLY OWNED BY PRATT CASINO CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(8) RECLASSIFICATIONS
Certain reclassifications were made to operating expenses as originally set
forth in the consolidated statement of operations for the three month period
ended March 31, 1998 to conform to the June 30, 1998 financial statement
presentation.
25
<PAGE>
GB HOLDINGS, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION, WHOLLY OWNED BY PRATT CASINO CORPORATION)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This Quarterly Report on Form 10-Q contains forward-looking statements about
the business, financial condition and prospects of Holdings. The actual results
could differ materially from those indicated by the forward-looking statements
because of various risks and uncertainties including, among other things,
changes in competition, economic conditions, tax regulations, state regulations
applicable to the gaming industry in general or Holdings in particular, and
other risks indicated in Holdings' filings with the Securities and Exchange
Commission. Such risks and uncertainties are beyond management's ability to
control and, in many cases, can not be predicted by management. When used in
this Quarterly Report on Form 10-Q, the words "believes", "estimates",
"anticipates" and similar expressions as they relate to Holdings or its
management are intended to identify forward-looking statements.
LIQUIDITY AND CAPITAL RESOURCES
Holdings owns GBHC which owns the Sands Hotel and Casino in Atlantic City.
Prior to 1996, the Sands' cash flow was sufficient to meet debt service
obligations and fund a substantial portion of annual capital expenditures. The
Sands also used short-term borrowings to fund seasonal cash needs for certain
capital projects. Beginning in early 1996 and continuing through 1997, declines
in operating cash flow at the Sands resulted in the need for periodic financial
assistance from PCC and GBCC in order to meet debt service obligations.
Substantial additional financial assistance would have been required to make the
January 15, 1998 principal and interest payments due on the 10 7/8% First
Mortgage Notes.
GBHC was unable to obtain additional borrowings from affiliates or other
sources and, accordingly, on January 5, 1998, the Debtors filed petitions
seeking protection under Chapter 11 of the Bankruptcy Code in Bankruptcy Court.
The prior Boards of Directors resigned on January 2, 1998 and new Boards of
Directors were elected at that time. Each company continues to operate in the
ordinary course of business, as set forth in the Bankruptcy Code, and each
company's executive officers and directors as of the date of filing remain in
office, subject to the jurisdiction of the Bankruptcy Court, other than the
following: Richard Knight resigned as a Director, President, and Chief
Executive Officer of the Debtors effective July 8, 1998; John P. Belisle was
elected President and Chief Executive Officer of GBHC on July 28, 1998; and J.
Timothy Smith was elected as a Director of the Debtors on August 3, 1998. On
May 11, 1998, the Bankruptcy Court extended the exclusive period during which
only the Debtors may file a plan of reorganization for 90 days until August 10,
1998. The Debtors filed a motion with the Bankruptcy Court to extend the
exclusivity period another 90 days and on August 10, 1998 the Bankruptcy Court
reextended the period for another 90 days from August 10, 1998.
As a result of the filings, the Sands has sufficient cash flow to continue
normal operations while it seeks to develop a plan of reorganization for
submission to its creditors and the Bankruptcy Court. Capital expenditures,
other than normal recurring capital expenditures in the ordinary course of
business, will require prior approval of the Bankruptcy Court. There can be no
assurance at this time that GBHC's plan of reorganization, when submitted, will
be accepted by its creditors or the Bankruptcy Court.
26
<PAGE>
GB HOLDINGS, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION, WHOLLY OWNED BY PRATT CASINO CORPORATION)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
OPERATING ACTIVITIES
At June 30, 1998, GBHC had cash and cash equivalents of $22.3 million.
During the six month period ended June 30, 1998, net cash provided by operating
activities was $13 million compared with $1.9 million during the comparable 1997
period. The 1997 period includes the payment of $10.2 million in interest; the
payment of such interest was suspended in 1998 by the Chapter 11 filing. GBHC
utilized cash from operations, in part, during the first six months of 1998 to
fund capital additions totaling $3.4 million and to make obligatory investments
of $1.2 million.
FINANCING ACTIVITIES
Semiannual principal payments of $2.5 million which became due commencing in
July 1997 with respect to the 10 7/8% First Mortgage Notes have been suspended
as a result of the Chapter 11 filing. Exclusive of the 10 7/8% First Mortgage
Notes and the $10 million affiliate loan, which are subject to reorganization,
total scheduled maturities of long-term debt during the remainder of 1998 are
$8,000.
CAPITAL EXPENDITURES AND OBLIGATORY INVESTMENTS
Capital expenditures at the Sands during the six month period ended June 30,
1998 amounted to $3.4 million and management anticipates capital expenditures
during the remainder of 1998 will be approximately $7.4 million. In addition to
capital expenditures in the ordinary course of business totaling approximately
$2.9 million, capital expenditures during 1998 include approximately $7.9
million of a $13.6 million, two-year capital expenditure program approved by the
Bankruptcy Court. Such plan consists of approximately $7.1 million for rooms
renovations and $6.5 million for the replacement of slot machines.
The Sands is required by the New Jersey Casino Control Act to make certain
investments with the Casino Reinvestment Development Authority, a governmental
agency which administers the statutorily mandated investments made by casino
licensees. Deposit requirements for the first six months of 1998 totaled $1.2
million and are anticipated to be approximately $1.5 million during the
remainder of 1998.
SUMMARY
On January 5, 1998, Holdings, GB Property Funding and GBHC filed petitions
for relief under Chapter 11 of the United States Bankruptcy Code. Accordingly,
there is significant doubt about Holdings' ability to continue as a going
concern. Management is in the process of developing a reorganization plan that
will be submitted to the Bankruptcy Court and to the companies' creditors for
their approval. On May 11, 1998, the Bankruptcy Court extended the exclusive
period during which only the Debtors may file a plan of reorganization for 90
days until August 10, 1998. The Debtors filed a motion with the
27
<PAGE>
GB HOLDINGS, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION, WHOLLY OWNED BY PRATT CASINO CORPORATION)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Bankruptcy Court to extend the exclusivity period another 90 days and on August
10, 1998 the Bankruptcy Court reextended the period for another 90 days from
August 10, 1998. As a result of the filing, the debt service payments due in
January 1998 and July 1998 were not made and the accrual of interest on the 10
7/8% First Mortgage Notes and on affiliate loans for periods subsequent to the
filing has been suspended.
RESULTS OF OPERATIONS
GENERAL
The Sands earned income from operations of $2.2 million and $5.6 million,
respectively, during the three and six month periods ended June 30, 1998
compared to income from operations of $3.6 million and $5.8 million,
respectively, reported for the three and six month periods ended June 30, 1997.
Operating results during the second quarter of 1998 were negatively impacted by
lower table game and slot machine hold percentages; such percentages directly
impact casino revenues. The declines in casino revenues were somewhat offset by
operating efficiencies and by management's ongoing efforts to discontinue
certain marginally effective marketing programs. Although net revenues declined
for the three and six month periods ended June 30, 1998 to $58.5 million and
$114.1 million, respectively, from $67.5 million and $130.7 million,
respectively, during the corresponding 1997 periods, operating expenses also
decreased significantly by $7.6 million (11.9%) and $16.4 million (13.2%),
respectively. Such operating expense decreases are due to reductions in
salaries and related benefits costs of $2.1 million (9.1%) and $3.9 million
(8.4%) for the three and six month periods, respectively, and marketing and
advertising costs of $1.7 million (10.2%) and $5.5 million (17%), respectively,
resulting from management's efforts to control costs while maintaining positive
gross operating profit. The negative publicity surrounding the Sands' filing
for bankruptcy protection on January 5, 1998 could also have affected its
operating results for the 1998 periods.
28
<PAGE>
GB HOLDINGS, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION, WHOLLY OWNED BY PRATT CASINO CORPORATION)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
GAMING OPERATIONS
The following table sets forth certain unaudited financial and operating
data relating to the Sands' operations:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- ---------------------
1998 1997 1998 1997
--------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C>
REVENUES:
Slot machines $ 38,806 $ 41,370 $ 72,599 $ 79,370
Table games 14,574 19,665 31,527 39,156
Other (1) 705 788 1,392 1,627
-------- -------- -------- --------
Total $ 54,085 $ 61,823 $105,518 $120,153
======== ======== ======== ========
SLOT MACHINES:
Gross Wagering (Handle) (2) $480,924 $505,719 $891,044 $959,909
======== ======== ======== ========
Hold Percentages: (3, 4)
Sands 8.1% 8.2% 8.1% 8.3%
Atlantic City 8.4% 8.5% 8.3% 8.4%
TABLE GAMES:
Gross Wagering (Drop) (2) $107,634 $131,589 $203,279 $262,633
======== ======== ======== ========
Hold Percentages: (3, 4)
Sands 13.5% 14.9% 15.5% 14.9%
Atlantic City 14.9% 14.7% 15.2% 15.2%
</TABLE>
____________________________
(1) Consists of revenues from poker and simulcast horse racing wagering.
(2) Gross wagering consists of the total value of chips purchased for table
games (excluding poker) and keno wagering (collectively, the "drop") and
coins wagered in slot machines ("handle").
(3) Casino revenues consist of the portion of gross wagering that a casino
retains and, as a percentage of gross wagering, is referred to as the "hold
percentage".
(4) The Sands' hold percentages are reflected on an accrual basis. Comparable
data for the Atlantic City gaming industry is not available; consequently,
industry percentages have been calculated based on information made
available from the New Jersey Casino Control Commission.
29
<PAGE>
GB HOLDINGS, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION, WHOLLY OWNED BY PRATT CASINO CORPORATION)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Although the quantitative impact on wagering of GBHC's filing for protection
under Chapter 11 can not be estimated, management believes that the negative
publicity resulting from the filing has had an adverse effect on patron volume.
Slot machine handle decreased $24.8 million (4.9%) and $68.9 million (7.2%),
respectively, during the three and six month periods ended June 30, 1998
compared with the same periods of 1997. The Sands' decreases in slot machine
handle compare with increases of 3.8% and 4.8%, respectively, in handle for all
other Atlantic City casinos during the same time periods. As a result, the
Sands' slot machine market share (expressed as a percentage of the Atlantic City
industry aggregate slot machine handle) decreased to 5.7% and 5.4%,
respectively, during the three and six month periods ended June 30, 1998 from
6.2% and 6.1%, respectively, during the same periods of 1997. Gaming space and
the number of slot machines have decreased slightly at the Sands since the
second quarter of 1997. Expansions of other Atlantic City casinos resulted in
an increase of approximately 114,000 square feet of gaming space and 2,300
additional slot machines at June 30, 1998 compared to June 30, 1997. The below
industry-wide performance in handle experienced by the Sands is a result of
competitive pressures resulting from casino expansions and related marketing
campaigns at other properties as well as to management's efforts to control
costs by reducing "coin incentive programs" which directly impact slot handle.
As a result of such competitive pressures, the Sands has experienced a
significant decrease (20%) in the number of bus passengers, a market segment
which historically plays slot machines.
Table game drop at the Sands declined $24 million (18.2%) and $59.4 million
(22.6%), respectively, during the three and six month periods ended June 30,
1998 compared with the same periods of 1997. The Sands' decreases compare to
slight increases of 1.2% and 1.1%, respectively, in table drop for all other
Atlantic City casinos during the same periods. As a result, the Sands' table
game market share decreased to 5.7% and 5.5%, respectively, during the three and
six month periods ended June 30, 1998 from 7% and 7.1%, respectively, during the
same periods of 1997. The Sands' table game drop decreases are attributable to
declines in patron volume from the rated segment. The decline in table game
drop also reflects management's efforts to discontinue certain marginally
effective promotional activities directed toward less profitable market
segments. Other factors contributing to the decreases in table game drop
include a 9.1% decrease in the number of table games at the Sands as well as
additional competitive pressures resulting from the offering of special odds for
various table games and competitive pressures on specific market segments by
other Atlantic City casinos.
REVENUES
Casino revenues at the Sands, including poker and simulcast horse racing
wagering revenues, decreased by $7.7 million (12.5%) and $14.6 million (12.2%),
respectively, for the three and six month periods ended June 30, 1998 compared
with the same periods of 1997. Decreases in both slot machine and table game
wagering and slightly lower slot machine hold percentages were partially offset
by the overall improvement in the table game hold percentage to 15.5% from 14.9%
for the six month period.
30
<PAGE>
GB HOLDINGS, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION, WHOLLY OWNED BY PRATT CASINO CORPORATION)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Rooms revenue decreased $130,000 (5.3%) and $330,000 (7%), respectively,
during the three and six month periods 1998 compared to 1997. Such decreases
were primarily due to decreases in occupancy levels partially offset by
increases in the average daily rate charged on rooms. Food and beverage
revenues decreased $2.3 million (27.3%) and $4.6 million (28%), respectively,
during the three and six month periods ended June 30, 1998 compared with the
prior year periods as a result of reduced patron volume reflecting the
curtailment in food and beverage-related promotional programs. Other revenues
did not change significantly during either of the three or six month periods
ended June 30, 1998 compared to the prior year periods.
Promotional allowances represent the estimated value of goods and services
provided free of charge to casino customers under various marketing programs.
As a percentage of rooms, food and beverage and other revenues at the Sands,
these allowances increased to 53.7% during the three month period ended June 30,
1998 from 52.3%, during the same period of 1997. Such allowances decreased to
52.5% from 54.2% during the six month period ended June 30, 1998. The overall
year to year decrease is primarily attributable to reductions in certain
marketing programs and other promotional activities.
DEPARTMENTAL EXPENSES
Casino expenses at the Sands decreased $5.2 million (10%) and $12.4 million
(12.3%), respectively, during the three and six month periods ended June 30,
1998 compared with the same 1997 periods reflecting the respective 12.5% and
12.2% decreases in casino revenues during the corresponding periods. Such
decreases also reflect management's ongoing efforts to create operating
efficiencies as well as a reduction in the allocation of rooms, food and
beverage and other expenses to casino expense arising due to the aforementioned
reduction in promotional allowances.
Rooms expense increased $246,000 (36.7%) and $395,000 (31.2%), respectively,
during the three and six month periods ended June 30, 1998 compared to the same
periods of 1997. The increases result from a lower percentage of rooms being
sold on a complimentary basis which has reduced the allocation of room costs to
the casino department. Such increases have been partially offset by reduced
costs associated with lower occupancy rates. Food and beverage expense
decreased $440,000 (15.3%) and $414,000 (7.9%), respectively, during the three
and six month periods ended June 30, 1998 compared with the same periods of
1997. The decreases result from reductions in payroll and promotional expenses
during the second quarter in response to declines in patron volume. Such cost
savings have been partially offset by fewer costs being allocated to the casino
department due to reduced usage of food complimentaries. Other expenses did not
change significantly during the second quarter of 1998 compared to the prior
year, but decreased by $127,000 (11.1%) during the six month period ended June
30, 1998 compared to the 1997 period due to cost savings with respect to theater
entertainment.
31
<PAGE>
GB HOLDINGS, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION, WHOLLY OWNED BY PRATT CASINO CORPORATION)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
GENERAL AND ADMINISTRATIVE
General and administrative expenses decreased $1.5 million (32.6%) and $2.2
million (23.6%), respectively, during the three and six month periods ended June
30, 1998 compared to the same periods of 1997. Management fee expenses,
including service fees under the Settlement Agreement, incurred by the Sands
decreased by $753,000 (50.3%) and $892,000 (31.8%), respectively, relative to
management fees under the Management Agreement, during the three and six month
periods during 1998 compared to the prior year periods as a result of a
renegotiation of such fees due to the Chapter 11 filings. The remaining
decreases reflect reductions in payroll and related benefits and in equipment
rentals, all of which have resulted from management's ongoing efforts to create
operating efficiencies.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense decreased by $733,000 (20%) and $1.7
million (22.7%), respectively, during the three and six month periods ended June
30, 1998 compared to the same periods of 1997 as a significant portion of assets
acquired with respect to the Sands' expansion in 1994 became fully depreciated.
Also, amortization of loan fees has decreased during 1998 as a result of such
fees being written off at December 31, 1997 due to the bankruptcy filings.
INTEREST
Interest income decreased $272,000 (60%) and $116,000 (14.1%), respectively,
during the three and six month periods ended June 30, 1998 compared to the same
periods during 1997. Interest earned on cash balances accumulated as a result
of the Chapter 11 filing (i.e. from not making debt service payments) is
reflected on the accompanying consolidated financial statements as a reduction
to reorganization costs.
Interest expense decreased $5.8 million (99.8%) and $11.4 million (97.6%),
respectively, during the three and six months ended June 30, 1998 compared to
the same periods of the prior year. As discussed in Notes 3 and 6 to Holdings'
consolidated financial statements, GB Property Funding, Holdings, and GBHC filed
petitions for relief under Chapter 11 of the United States Bankruptcy Code on
January 5, 1998. As a result, the accrual of interest expense on the 10 7/8%
First Mortgage Notes, the affiliate loan and other affiliate advances for
periods subsequent to the filing has been suspended. Had the accrual of such
interest expense not been suspended, interest expense for the three and six
month periods ended June 30, 1998 would have been $5.8 million and $11.6
million, respectively; these amounts are not significantly different from the
corresponding amounts during the 1997 periods.
32
<PAGE>
GB HOLDINGS, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION, WHOLLY OWNED BY PRATT CASINO CORPORATION)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
INCOME TAX BENEFIT
Prior to 1997, Holdings was included in the consolidated federal income tax
return of Hollywood Casino Corporation ("HCC"), the parent company of GBCC until
HCC distributed the GBCC stock it owned to the shareholders of HCC as a dividend
on December 31, 1996. As a result of the Chapter 11 filing, and the Action
described in Note 7 to the accompanying Notes to Consolidated Financial
Statements of Holdings relating to the net operating losses of the Debtors,
whether the Debtors file a consolidated federal tax return for 1997 with GBCC as
members of a consolidated group is unresolved.
As of June 30, 1998, Holdings and its subsidiaries have deferred tax assets
including net operating loss carryforwards ("NOL's"). The NOL's do not expire
before the year 2009 for federal tax purposes and the year 2001 for state tax
purposes. Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes" ("SFAS 109") requires that the tax benefit of NOL's and deferred
tax assets resulting from temporary differences be recorded as an asset and, to
the extent that management can not assess that the utilization of all or a
portion of such NOL's and deferred tax assets is more likely than not, a
valuation allowance should be recorded. Due to the continued availability of
NOL's originating in prior years for federal and state tax purposes and the book
and tax losses sustained in 1998 to date, management is unable to determine that
the realization of such asset is more likely than not and, thus, has provided a
valuation allowance for the entire deferred tax asset at June 30, 1998.
REORGANIZATION AND OTHER RELATED COSTS
Reorganization and other related costs include costs associated with
Holdings' reorganization under Chapter 11, including, among other things,
professional fees, costs associated with the termination of agreements and other
administrative costs. Also, costs in the amount of $881,000 associated with a
planned re-theming of the Sands were expensed during the second quarter of 1998.
Due to the reorganization proceedings discussed above, this project has been
abandoned. As noted previously, interest income on cash accumulated during the
reorganization is reflected as a reduction to reorganization and other related
costs ($161,000 and $244,000, respectively, for the three and six months ended
June 30, 1998).
YEAR 2000 COMPLIANCE
In the year 2000, the Sands' computer programs that have date sensitive
software may recognize a date using "00" as the year 1900 rather than 2000.
Such an error could result in a system failure or miscalculations causing
disruptions of operations including, among other things, a temporary inability
to process transactions or engage in similar normal business activities.
Management has initiated a program to prepare the Sands' computer systems and
applications for the year 2000. The costs of testing and conversion are not
expected to be material. Management expects
33
<PAGE>
GB HOLDINGS, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION, WHOLLY OWNED BY PRATT CASINO CORPORATION)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
the Sands' 2000 date conversion projects to be completed on a timely basis.
However, there can be no assurance that the systems of other companies on whose
systems the Sands relies will be timely converted or that any such failure to
convert by another company would not have an adverse effect on the Sands'
systems.
INFLATION
Management believes that in the near term, modest inflation, together with
increasing competition within the gaming industry for qualified and experienced
personnel, will continue to cause increases in operating expenses, particularly
labor and employee benefits costs.
SEASONALITY
Historically, the Sands' operations have been highly seasonal in nature, with
the peak activity occurring from May to September. Consequently, the results of
Holdings' operations for the first and fourth quarters are traditionally less
profitable than the other quarters of the fiscal year. In addition, the Sands'
operations may fluctuate significantly due to a number of factors, including
chance. Such seasonality and fluctuations may materially affect Holdings'
casino revenues and profitability.
34
<PAGE>
PART II: OTHER INFORMATION
- ---------------------------
ITEM 1. LEGAL PROCEEDINGS
On January 5, 1998, Holdings, GB Property Funding and GBHC filed petitions
for relief under Chapter 11 of the Bankruptcy Code in Bankruptcy Court. The
prior Boards of Directors resigned on January 2, 1998 and new Boards of
Directors were elected at that time. Each company continues to operate in the
ordinary course of business, as set forth in the Bankruptcy Code, and each
company's executive officers and directors as of the date of the filing remain
in office, subject to the jurisdiction of the Bankruptcy Court, other than the
following: Richard Knight resigned as a Director, President, and Chief
Executive Officer of the Debtors effective July 8, 1998; John P. Belisle was
elected President and Chief Executive Officer of GBHC on July 28, 1998; and J.
Timothy Smith was elected as a Director of the Debtors on August 3, 1998. On
May 11, 1998, the Bankruptcy Court extended the exclusive period during which
only the Debtors may file a plan of reorganization for 90 days until August 10,
1998. The Debtors filed a motion with the Bankruptcy Court to extend the
exclusivity period another 90 days and on August 10, 1998 the Bankruptcy Court
reextended the period for another 90 days from August 10, 1998.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
As a result of the filings discussed in Item 1. above, $182,500,000 principal
amount of 10 7/8% First Mortgage Notes issued by GB Property Funding are in
default. Principal payments of $2,500,000 each due on January 15, 1998 and July
15, 1998 were not made. The accrual of interest on the 10 7/8% First Mortgage
Notes for periods subsequent to the filings has been suspended; such interest on
a contractual basis amounts to $21,667,000 as of August 17, 1998.
ITEM 6.(a) - EXHIBITS
10.1 Agreement by and among GBHC, Holdings, GB Property Funding and Advanced
Casino Systems International, Inc. ("ACSI"), on the one hand, and GBCC,
NJMI, PCC, PRT Funding Corp., PPI Corporation, ACSC and HCC, on the other,
dated June 27, 1998.
10.2 Software License Agreement by and between ACSC, ACSI, Computer Management
Systems International, Inc. and GBHC dated June 27, 1998.
ITEM 6.(b) - REPORTS ON FORM 8-K
The Registrants did not file any reports on Form 8-K during the quarter ended
June 30, 1998.
SIGNATURES
- ----------
Pursuant to the requirements of the Securities Exchange Act of 1934, each of
the Registrants has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GB HOLDINGS, INC.
GB PROPERTY FUNDING CORP.
------------------------------------
Registrants
Date: August 17, 1998 By:/s/ Timothy A. Ebling
--------------- ---------------------------------
Timothy A. Ebling
Executive Vice President, Chief
Financial Officer and Principal
Accounting Officer
35
<PAGE>
EXHIBIT 10.1
AGREEMENT
This Agreement (herein so called) is entered into this 27th day of June,
1998 by and among Greate Bay Hotel and Casino, Inc. ("GBHC"), GB Holdings, Inc.,
("GBH"), GB Property Funding Corp. ("GBPF") (collectively, the "Debtors"), and
Advanced Casino Systems International, Inc. ("ACSI"), on the one hand, and
Greate Bay Casino Corp., New Jersey Management, Inc., ("NJMI") Pratt Casino
Corporation ("PCC"), PRT Funding Corp. ("PRT"), PPI Corporation ("PPI"),
Advanced Casino Systems Corporation ("ACSC") (collectively, "GBCC"), and
Hollywood Casino Corporation ("HCC"), on the other.
R E C I T A L S
A. On January 5, 1998, the Debtors commenced proceedings under Chapter 11 of
Title 11 of the Unites States Code (the "Chapter 11 Proceedings") in the
United States Bankruptcy Court for the District of New Jersey, Camden
Vicinage.
B. On May 22, 1998, the Debtors filed a Motion (hereinafter so called) in the
Chapter 11 Proceedings seeking approval for the rejection of the Management
Services Agreement, dated August 19, 1987, as amended (the "NJMI
Agreement"), between GBHC and NJMI.
C. The parties desire to compromise and settle certain issues that have arisen
in connection with the Motion and as set forth in the Agreement.
NOW, THEREFORE, the Debtors, ACSI, GBCC, and where applicable, HCC
stipulate and agree as follows:
1. Except as provided in this paragraph one and in paragraph two below,
the management of the Debtors will be under the control of the existing Board of
Directors of the Debtors until the effective date of a plan of reorganization
for GBHC ("Plan Confirmation"). Until Plan Confirmation, GBCC, including any
newly created subsidiaries or affiliates, will not change the composition of the
Board of Directors of any of the Debtors except upon Order and subject to the
supervision and jurisdiction of the Bankruptcy Court.
2. Upon the effective date of this Agreement, Richard Knight will resign
his positions as Chairman, President and Chief Executive Officer of the Debtors
and their subsidiaries.
3. The second sentence of numbered paragraph 5 of that certain letter
agreement dated May 26, 1998 between GBCC and the Debtors will remain in effect,
and otherwise the letter agreement dated May 26, 1998 is superseded by this
Agreement upon the effective date of this Agreement.
4. Upon approval of this Agreement by the Bankruptcy Court, and, if
required, upon approval by the Casino Control Commission ("CCC") of the
provisions of this paragraph, the NJMI Agreement will be suspended from May 1,
1998 until entry of a Final Order deciding the Motion ("the Interim Period").
GBCC and HCC shall fully support an application to the Bankruptcy Court for
approval of this Agreement, and of any petition to the CCC. GBHC agrees to
adjourn the Motion until Monday September 28, 1998, or such earliest date
thereafter as may be accommodated by the Bankruptcy Court. GBHC and NJMI may
negotiate an agreement to adjourn the Motion to a later date, but any party
shall be free to terminate negotiations at any time, or to adopt any position in
the course of negotiation in its sole and unreviewable
<PAGE>
discretion, without incurring any liability whatsoever, and without breach of
this Agreement. During the Interim Period, NJMI shall have no other duties
except for those duties specified in this Agreement.
5. The Current and Deferred Fees (hereafter defined) that are applicable
during the Interim Period shall be in complete satisfaction of all claims
accruing in favor of NJMI under the NJMI Agreement during the Interim Period,
and shall not bind any of the parties hereto as to the reasonableness of the
fees contained in the NJMI Agreement. NJMI through HCC shall provide the
services set forth on Exhibit A (the "Services"), and the provision of such
Services or the payments therefor shall not be offered into evidence or used in
any manner in the hearing on the Motion or in any other proceeding except in
respect of proceeding(s) to enforce the payment thereof. Upon any granting of
the Motion and termination of the NJMI Agreement, NJMI and HCC agree to
cooperate reasonably with the Debtors in effecting a smooth transition of the
assumption of any Services by the Debtors and agree that such cooperation
includes providing access to or copying of any and all related records. During
the Interim Period, but in no event for any period after October 15, 1998, and
only for so long as GBHC requests such services, HCC agrees to make Knight
available as a consultant for (i) meetings at the Sands at mutually agreeable
times to equal six days on site a month provided that each on site trip shall be
a minimum of two days and (ii) at mutually agreeable times for reasonable
telephone conferences and consultations in the ordinary course of business at
the Sands ("Consulting Services"). During the Interim Period, GBHC agrees to
reimburse Hollywood Casino Aurora, Inc. ("HCA") for 30% of Knight's salary, and
to reimburse HCA for reasonable costs associated with the costs of performance
of the Consulting Services, e.g., telephone and telecopier expense,
transportation, meals, lodging, and similar expenses. To the extent that GBHC
requests, but Knight does not provide, six days' on-site services in any
calendar month, then GBHC's obligation to reimburse HCA for 30% of Knight's
salary shall be proportionately reduced. In consideration of providing the
Services and Consulting Services, and during the Interim Period, GBHC agrees to
pay NJMI a fee of $122,000 in arrears on the last business day of each month
(the "Current Fee") and a deferred fee in the amount of $43,000 per month (the
"Deferred Fee") at Plan Confirmation. Any Current Fee otherwise due upon the
effective date of this Agreement will be paid forthwith.
6. As requested by GBHC, ACSC agrees to continue to provide GBHC before
and after Plan Confirmation with support, maintenance, and upgrades of all of
the software or related hardware components presently supported, maintained, or
provided by or through ACSC for GBHC (such software or hardware, collectively,
the "Software") in accordance with the terms set forth on the agreement attached
hereto as Exhibit B, which is incorporated herein as if fully set forth. ACSC
will provide mailing services under the same terms and conditions as currently
in effect for so long as (a) ACSC provides such services to other customers, (b)
GBHC shall continue to request such services, and (c) GBHC has paid all fees and
expenses then due and owing to ACSC for services rendered after GBHC's initial
filing of a petition in the Chapter 11 Proceedings ("Post Petition") within 45
days of receipt of an invoice therefor and less any sums owed to GBHC by ACSC
for services provided or expenses incurred Post Petition on behalf of ACSC. For
the purpose of the preceding sentence, a customer includes HCA or HWCC - Tunica,
Inc.
7. With respect to that certain Trademark License Agreement between HCC
and GBHC with an Effective Date of July 8, 1997 (the "TLA"), HCC and GBHC
acknowledge that HCC has provided notice to GBHC of its rejection of GBHC's
notice of renewal in accordance with the TLA. Except as set forth in
subsections (d) and (e) of this paragraph 7, GBHC will phase out the use of the
Licensed Marks, and the Licensed Goods and Services, as such terms are defined
in the TLA, and the name "Hollywood" in connection with the use of the Licensed
Marks or in any signage under the TLA, within the six month period provided
under Article 8.1 of the TLA. Notwithstanding any other provision of the TLA to
the contrary, (a) GBHC shall be under no obligation to offer to sell to HCC any
memorabilia owned by GBHC, (b) based on its prior use, GBHC shall be free to
display memorabilia and the like within or on the
<PAGE>
premises of GBHC, except that nothing herein shall be deemed to have granted
GBHC any rights to operate in a manner or style which conflicts with proprietary
rights of HCC in any portion of GBHC's property provided that the "Epic Buffet",
the "Studio Store", and the "Studio Cafe" can be maintained as provided in
subsection (e) of this paragraph 7, (c) HCC shall, upon request of GBHC, deliver
at the transportation cost of GBHC any memorabilia owned by GBHC and stored by
HCC or its affiliates, (d) GBHC shall be free to use the Licensed Marks and
Licensed Goods and Services limited to the slot club for a phase out period
ending at the earlier to occur of June 30, 1999 or six months after Plan
Confirmation, and (e) for an additional two year phase out period beyond the six
month period otherwise provided, shall be free to continue to use the names
"Epic Buffet," "Studio Store" and/or "Studio Cafe" in connection with
restaurants or facilities bearing those names at GBHC, or in connection with
advertising or promotions related thereto provided that GBHC adheres to the
standards of quality control otherwise provided for in Article 2 of the TLA, and
complies with Articles 3, 4, and 5 of the TLA (except that a change of control
of the Sands resulting from either a sale or Plan Confirmation shall not require
the prior approval of HCC in respect of the continuation of operations at the
premises of the Sands otherwise provided herein), and GBHC may, at the
expiration of the extended phase out period, continue to operate such
restaurants and facilities by discontinuing the use of the words "Epic" and/or
"Studio" from such restaurants and facilities.
8. With respect to that certain License Agreement originally between
Hughes Properties, Inc. and Pratt Hotel Corporation dated May 19, 1987, relating
to the use of the Trademark as defined therein (the "LA"), neither GBCC nor
anyone acting in concert or on behalf of GBCC shall take any action seeking to
terminate the LA or the rights of GBHC under the LA or otherwise at anytime
before the earliest of December 15, 1998, Plan Confirmation, or 15 days prior to
opening by the Venetian (formerly known as the Sands Hotel & Casino in Las
Vegas, Nevada) of a hotel tower or casino for business. GBHC agrees that it
will not assert that, by agreeing to the foregoing, GBCC has waived whatever
right it may have to terminate the LA.
9. During the remaining or any renewal terms of their employment
contracts, neither HCC, nor GBCC, nor any of their affiliates, nor any of their
officers or directors, shall solicit Gary Luderitz, or Jack Przybylski to leave
their employment with GBHC or to provide services as employees, consultants or
otherwise, and none of the parties in this paragraph will object to a two year
extension of the employment contract of Gary Luderitz.
10. This Agreement is without prejudice to any party's rights with respect
to the NJMI Agreement or the Motion except as expressly set forth herein, may
not be amended or modified in any respect except with the written consent of the
parties hereto, is binding upon the successors and assigns of the parties and
their successors in interest, and shall be interpreted in accordance with New
Jersey law without regard to the conflicts of laws principles of New Jersey law.
11. This Agreement will be effective when executed by all of the parties
hereto and when approved by the Bankruptcy Court and by the CCC, if required, as
provided in paragraph 4 above. This Agreement may be executed in counterparts
by the parties and a
THE REMAINDER OF THIS PAGE LEFT INTENTIONALLY BLANK
<PAGE>
telecopied signature is as effective as an original.
ACCEPTED AND AGREED:
Greate Bay Casino Corporation PPI Corporation
BY: /s/ Edward T. Pratt III BY: /s/ Edward T. Pratt III
----------------------- ------------------------
Advanced Casino Systems Corp. Pratt Casino Corporation
BY: /s/ Edward T. Pratt III BY: /s/ Edward T. Pratt III
----------------------- ------------------------
PRT Funding Corp. New Jersey Management, Inc.
BY: /s/ Edward T. Pratt III BY: /s/ Edward T. Pratt III
----------------------- ------------------------
Hollywood Casino Corporation
BY: /s/ Edward T. Pratt III
-----------------------
Greate Bay Hotel and Casino, Inc GB Holdings, Inc.
BY: /s/ Timothy A. Ebling BY: /s/ Timothy A. Ebling
----------------------- ------------------------
Advanced Casino Systems
GB Property Funding Corp. International, Inc.
BY: /s/ Timothy A. Ebling BY: /s/ Timothy A. Ebling
----------------------- ------------------------
<PAGE>
EXHIBIT A - SERVICES
--------------------
A) Regular Quarterly and Annual SEC Reporting and Compliance
B) Chart of Accounts Maintenance
C) Federal and State Tax Return Review Services
D) Insurance Procurement Services - NJMI through HCC, shall procure and
maintain the following insurance for GBHC, at GBHC's sole cost and expense:
General Liability Property (including Business Interruption)
Tail Flood
Auto Liability Directors & Officers
Umbrella Liability Pension Trust Liability
Excess Liability Crime
Workers Compensation Media/Memorabilia
Non-owned Aviation Business Travel
E) Surveillance Consultation Services
F) 401K Services - Inclusion in the HCC and Subsidiaries Retirement Savings
Plan on the same basis as currently exists, recognizing that a transition
to a stand alone plan for GBHC must begin prior to September 30, 1998.
<PAGE>
EXHIBIT 10.2
--------------------------
SOFTWARE LICENSE AGREEMENT
--------------------------
This SOFTWARE LICENSE AGREEMENT ("Agreement") is entered into as of the
27th day of June, 1998, by and between ADVANCED CASINO SYSTEMS CORPORATION
("ACSC"), ADVANCED CASINO SYSTEMS INTERNATIONAL, INC. ("ACSI"), COMPUTERIZED
MANAGEMENT SYSTEMS INTERNATIONAL, INC. ("CMSI"), and GREATE BAY HOTEL AND
CASINO, INC., t/a "Sands Hotel & Casino" ("Greate Bay").
W I T N E S S E T H:
WHEREAS, ACSC is a corporation duly organized and existing under the laws
of the State of Delaware and maintains its principal place of business at 200
Decadon Drive, Egg Harbor Township, New Jersey 08234-3899; and,
WHEREAS, Greate Bay is a corporation duly organized and existing under the
laws of the State of New Jersey and maintains its principal place of business at
Indiana Avenue and Brighton Park, Atlantic City, New Jersey 08401; and
WHEREAS, ACSI and CMSI are wholly owned subsidiaries of Greate Bay; and
WHEREAS, ACSC presently licenses and Greate Bay presently utilizes a number
of custom software systems and interfaces including but not limited to the
following casino management systems: (i) an IBM AS/400 Casino Accounting and
Management Application ("the Casino Accounting & Management System"), (ii) an
IBM AS/400 Slot Accounting & Management Application (the "Slot Accounting
System"), (iii) a Casino Player Tracking System, (iv) a Casino Sales and
Marketing System, (v) a Table Marketing System, and (vi) a Slot Marketing System
consisting of certain software programs (the "SMS Software") and certain
proprietary hardware components ("the SMS Hardware") and intellectual property
rights in the configuration of the SMS Software with and into the SMS Hardware
and other commercially available hardware components ("the Configuration") (the
SMS Software and the SMS Hardware and the Configuration are collectively
referred to as the "the SMS"); and
WHEREAS, both ACSC and Greate Bay desire to formalize the licensing of the
systems as set forth below;
NOW, THEREFORE, in consideration of the foregoing recitals and the
promises, representations, warranties, and undertakings set forth in this
Agreement, and intending to be legally bound thereby, ACSC, ACSI, CMSI and
Greate Bay do hereby promise and agree as follows:
<PAGE>
1. DEFINITION OF THE SOFTWARE AND THE SMS. For purposes of this
Agreement, the "Software" shall consist of (i) the Casino Accounting &
Management System as generally described on Exhibit "A"; (ii) the Slot
Accounting System as generally described on Exhibit "B"; (iii) the Casino Player
Tracking System as generally described on Exhibit "C"; (iv) the Casino Sales and
Marketing System as generally described on Exhibit "D"; (v) the Table Marketing
System as generally described on Exhibit "E", (vi) all other software systems
and interfaces owned by ACSC and utilized by Greate Bay on its IBM AS/400 or on
other hardware platforms as of the date of this Agreement, including by way of
example and not limitation the Security Incident Reporting System, MIS Resource
Request System, Cross System Backup, Data Acquisition, Employee Time and
Attendance and Casino Analysis as generally described on Exhibit "F", and (vii)
any trade secret or confidential information in relation to the Software. For
purposes of this Agreement, "the SMS" shall consist of the SMS Software and the
SMS Hardware as generally described on Exhibit "G" and the Configuration, and
any and all communication protocol(s) now or hereafter developed by or on behalf
of or used by ACSC to enable, facilitate or improve communications between the
SMS and the slot machines of any and all slot machine manufacturers that are in
ACSC's possession or control and for which ACSC has the legal right to provide
to third parties ("the SMS Protocol"), and any trade secret or confidential
information in relation to the SMS. Any and all intellectual property rights in
the Software and the SMS, including any derivative modifications and extensions,
shall hereafter be collectively referred to as "the Intellectual Property
Rights". The Intellectual Property Rights expressly do not include Greate Bay's
rights in any internal controls developed or hereafter developed by Greate Bay
relating to the electronic drop feature of the SMS.
2. QUITCLAIM ASSIGNMENT/RELEASE. Greate Bay, CMSI and ACSI, on behalf of
themselves, their predecessors, successors and assigns (collectively, the
"Releasing Parties"), do hereby quitclaim and assign to ACSC any and all
ownership rights the Releasing Parties may have in the Intellectual Property
Rights, if any, without any warranty or covenants of title, and release ACSC and
all of its affiliates from any claims any of the Releasing Parties may have
related to the transfer by the Releasing Parties, or the assumption by ACSC, of
the Intellectual Property Rights. Further, the Releasing Parties will cooperate
with ACSC by communicating to ACSC any facts known to them regarding any such
rights in the Intellectual Property Rights and by executing additional documents
to evidence this assignment. The assignment and release in this Paragraph 2
shall survive the termination or breach of this Agreement.
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<PAGE>
3. LICENSE GRANT.
(a) License Rights Granted. Subject to the terms and conditions of
this Agreement, ACSC hereby grants to Greate Bay and Greate Bay hereby accepts a
perpetual, non-exclusive and transferable license under the Intellectual
Property Rights owned or otherwise licensable by ACSC to use the Software and
the SMS.
(b) Geographical Restriction. Except as set forth in this Paragraph
3(b), Greate Bay may only use the Software and the SMS on machines, gaming
equipment and computer equipment located and to be located, without limitation
as to number, at Greate Bay's casino/hotel and Greate Bay's associated
administrative properties in Atlantic City, New Jersey, as existing and
configured as of the date of this Agreement and/or as may be reconfigured,
added, expanded, constructed and/or reconstructed provided the same require not
more than one casino license to operate (without regard to any management
company) (collectively "the Licensed Facilities") from time to time during the
term of this Agreement, or, for backup and disaster recovery purposes, at either
a third party's location or a location controlled by Greate Bay, which location
may be outside of Atlantic City. Nothing in this Agreement shall prohibit
Greate Bay from using the Software and the SMS with alternate computer equipment
at alternate computer installations in the event of processing failure or for
the purpose of testing of such alternative computer equipment and installations
regardless of location. In addition, nothing in this Agreement shall preclude
Greate Bay from making a copy of the Software or the SMS Software and operating
it on alternative processors for program development and testing purposes.
(c) Responsibility of the Parties. Greate Bay shall be exclusively
responsible for the supervision, management and control of the use of the
Software and the SMS and any equipment in connection with which Greate Bay uses
the Software or the SMS.
4. TERM OF LICENSE/AGREEMENT. The license granted under this Agreement
is effective Nunc Pro Tunc from the first date ACSC or any predecessor in
interest to ACSC claimed to acquire any ownership or other interest in the
Intellectual Property Rights and shall remain in force in perpetuity. This
license is non-cancelable, in whole or in part, by ACSC or any successor, in
whole or in part, of the interest or business of ACSC, and any such successor
must, as a condition of succession, expressly assume the obligations of this
Agreement and, in the absence of an express assumption, any such successor will
be deemed to have made such an assumption. Greate Bay may terminate the license
granted under this Agreement and discontinue the use of the Software and/or the
SMS, in whole or in part, or may discontinue the use of the Software and/or the
SMS, or may elect not to use the services of ACSC, in whole or in part, as
described in Paragraphs 6(c) and 6(d) without obligation to ACSC.
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<PAGE>
5. OPERATING PROVISIONS. All use of the Software and the SMS (other
than by or on behalf of any gaming authority) will be solely by Greate Bay's
personnel or its agents or contractors, shall be subject to the obligations of
confidentiality as set forth in Paragraph 10 of this Agreement, and distribution
of the Software or the SMS, or any part thereof, or reference materials,
including derivative modifications or extensions of them, is expressly
prohibited, except for the Licensed Facilities and except as respects a gaming
authority or persons acting on behalf of a gaming authority. Greate Bay shall
not make or permit or otherwise allow others to print, copy, or divulge, in
whole or in part, the Software or the SMS Software or the Configuration, in any
form without the prior express written consent of ACSC.
6. PROVISION OF MATERIALS, UPDATES, HARDWARE, MAINTENANCE AND SUPPORT
SERVICES AND SUPPLIER LISTS/EQUITABLE REMEDIES.
(a) Terms for the period through Plan Confirmation/Sale. From the
date of the signing of this Agreement until the date of the Confirmation of a
Plan of Reorganization or a sale by Greate Bay of substantially all of its
assets in Greate Bay's currently pending Chapter 11 proceeding, Case No. B98-
10001 ("the Chapter 11 Proceeding"), ACSC agrees to continue to provide the
materials and updates as provided in paragraph 6(c), and hardware, and
maintenance and Support Services, as hereinafter defined in Paragraph 6(d), for
the Software and the SMS and such other requested services as are currently
being provided by or through ACSC under the same economic terms and conditions
as presently exist between ACSC and Greate Bay, so long as Greate Bay has paid
all fees and expenses then due and owing to ACSC for services rendered after
Greate Bay's initial filing of a petition in the Chapter 11 Proceeding ("Post
Petition") within 45 days of receipt of an invoice therefor and less any sums
owed to Greate Bay by ACSC for services provided or expenses incurred Post
Petition on behalf of ACSC.
(b) Terms for the period commencing with Plan Confirmation/Sale.
Commencing with the date a Plan of Reorganization in the Chapter 11 Proceeding
is confirmed by the Bankruptcy Court or an order is entered in the Chapter 11
Proceeding approving a sale by Greate Bay of substantially all its assets, ACSC
agrees, for so long as ACSC provides such services to third parties or any of
its affiliates, to provide the materials and updates, as hereinafter described
in Paragraph 6(c), and the hardware, maintenance and Support Services as
hereafter defined in paragraph 6(d), and the supplier lists described in
Paragraph 6(e) and such other services as may now or hereafter be provided by
ACSC to Greate Bay or affiliates or third parties as may be requested by Greate
Bay under economic terms the same as, and other terms and conditions no less
favorable than extended, in that certain Supplemental Agreement dated July 16,
1997 by and between Logical Solutions International, Inc. and Caesars World,
Inc. (the "Caesars Agreement") without regard to quantity and volume discounts
and without discrimination as to Greate Bay,
-4-
<PAGE>
and, if such services are not provided for in the Caesars Agreement, then on
terms no less favorable than would be offered by or through ACSC to ACSC's most
favored customer and without discrimination as to Greate Bay.
(c) Provision of Materials and Updates. Greate Bay may retain and,
upon the signing of this Agreement to the extent Greate Bay is not in
possession, ACSC shall provide Greate Bay with all basic materials,
documentation manuals in printed and magnetic format, source codes, including
but not limited to the source code for all systems and application programs
running on the AS/400 and in the "HASS" file servers, the "Gearbox" PC's, the
"Collector" Logic Board, and any other processor utilized in the SMS and the
Software, and other documentation integral to the SMS Protocol or to the source
codes or otherwise delineating and explaining the structure, organization,
sequencing and operation of the source codes relating to the Software and the
SMS (collectively the "Source Code") that are in ACSC's possession or control
and for which ACSC has the legal right to provide copies to third parties. All
Source Code will be provided in the highest form that allows modification.
Notwithstanding the foregoing, the Source Code for the Operating System of the
"Collector" Logic Board shall be placed in Escrow as provided in Paragraph 7 of
this Agreement. During the term of this Agreement, ACSC shall make available to
Greate Bay upon their completion copies of all modifications, improvements, or
updates ("Updates") to the Software and/or the SMS at the same time or prior to
the date on which ACSC makes such updates available to other customers of ACSC,
and shall further provide Greate Bay no later than 10 days after request by
Greate Bay, with copies of the Source Code for such Updates and revised copies
of the Source Code for the entire Software and SMS which includes the Source
Code for such Updates. Greate Bay shall have the right within the Licensed
Facilities or at other locations authorized under this Agreement to full and
unfettered use of the Source Code and may permanently install and maintain the
Source Code in its computer system for its own internal use.
(d) Provision of Hardware and Maintenance and Support Services.
During the term of this Agreement and as may be requested by Greate Bay from
time to time, ACSC shall provide Greate Bay, with SMS Hardware Components and
Support Services for Software and SMS. Support Services means providing
Updates, Required Additions and/or Changes (as defined below), providing Error
Corrections (as hereinafter defined) in the Software and/or SMS and/or in the
communication between the Software and/or SMS and other systems covered by this
Agreement or as may be mutually agreed upon the parties, providing telephone
support and providing programming and project management services and such other
services as may be required via telephone and at Licensed Facilities to install,
integrate, maintain and support the Software and SMS. The term Required
Additions and/or Changes means all changes and additions that must be made to
Software and/or SMS to keep it in compliance with statutory,
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<PAGE>
regulatory, and accounting practices changes. The term Error Correction means a
modification, change or improvement to the Software or SMS that corrects an
Error (as defined below). The term Error means a defect, deficiency or other
problem with the Software or SMS that causes the Software or SMS to fail to
operate in accordance with the documentation for the Software or SMS, to produce
incorrect results, to damage data, to incorrectly store, retrieve, sort, present
or calculate data, or to have a commercially unacceptable response time (i.e.
time from input to producing a response). ACSC agrees that when Greate Bay
reports an Error, ACSC will immediately commence work on an Error Correction and
provide an Error Correction (i) as soon as reasonably possible if no
commercially acceptable workaround is available to Great Bay or (ii) within a
reasonable period of time if a commercially acceptable workaround is available
or (iii) with the next Update or release of the Software or SMS if the Error is
cosmetic or not material to the use of the Software or the SMS. ACSC agrees to
provide Required Additions and/or Changes no later than two weeks prior to the
effective date of such statutory, regulatory and/or accounting practices
changes.
(e) Provision of Supplier Lists. Upon the signing of this Agreement,
ACSC shall provide Greate Bay with a list of SMS Hardware component suppliers
and shall, upon any addition or change to such supplier list, provide Greate Bay
with an updated list. In consideration of being provided with a list of SMS
Hardware component suppliers, Greate Bay promises not to purchase SMS Hardware
components directly from such suppliers absent a default by ACSC of its
obligations under this Paragraph 6.
(f) Equitable Remedies. The obligations of ACSC in this Paragraph 6
shall be specifically enforceable and ACSC agrees that (i) any breach of ACSC's
obligations under this Paragraph 6 would cause irreparable injury to Greate Bay;
(ii) Greate Bay would have an inadequate remedy at law for any such breach;
(iii) the balance of interests and hardships would favor an injunction in favor
of Greate Bay; (iv) the public interest would favor an injunction in favor of
Greate Bay, and (v) ACSC will make no legal arguments that equitable relief is
not an appropriate remedy in favor of Greate Bay in the event of a breach of
ACSC's obligations under this Paragraph.
7. ESCROW OF THE "COLLECTOR" LOGIC BOARD SOURCE CODE. The Escrow Agent
for the Source Code for the operating system of the "Collector" Logic Board
shall be Greate Bay's General Counsel. ACSC shall cause the Source Code for the
operating system of the "Collector" Logic Board to be deposited with the Escrow
Agent within seven (7) days of signing this Agreement. The Escrow Agent shall
acknowledge receipt of the Source Code and shall keep same in a safe secure
location. Except as set forth below, the Escrow Agent shall not allow or permit
any party or third party to have access to, copies of or information concerning
the Source Code held in escrow. Upon receipt of written certification
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<PAGE>
from Greate Bay's Vice President-MIS that ACSC has either ceased doing business
and there is no successor in interest that has assumed the obligations of ACSC
or that ACSC is in default of its obligations under this Agreement, the Escrow
Agent shall release the escrowed material to Greate Bay solely for the purpose
of allowing Greate Bay to provide itself with support services and to effect the
repair, replacement, maintenance and/or debugging of the "Collector" Logic Board
as determined by Greate Bay.
8. INTELLECTUAL PROPERTY WARRANTIES. INDEMNIFICATION. ACSC represents
and warrants that ACSC knows of no fact, circumstance or claim that the exercise
of rights pursuant to this Agreement would infringe any valid and subsisting
intellectual property right owned by any other persons. Greate Bay acknowledges
and understands that Greate Bay must obtain licenses for the serial or other
protocols from the respective game manufacturers necessary to interface the
Software and the SMS with the games of each manufacturer. ACSC will defend at
its expense or settle at its option, any action brought against Greate Bay to
the extent that it is based on a claim that the Software, the SMS Hardware or
the SMS Software or the Configuration, as used within the scope of this
Agreement, infringes any copyright or United States patent. ACSC will pay any
attorneys' fees, costs and damages awarded against or incurred by Greate Bay in
such actions which are attributable to such claim provided that Greate Bay
notifies ACSC in writing of the claim within five (5) calendar days of the
service or other notification of such claim upon Greate Bay and ACSC fully
controls the defense and settlement of such claims. Should the Software or the
SMS or the SMS Software or the Configuration become, or, in ACSC's opinion, be
likely to become the subject of a claim of infringement of a copyright or
patent, ACSC may procure for Greate Bay the right to continue using the
Software, the SMS or the SMS Software or the Configuration or replace or modify
the Software, the SMS or the SMS Software or the Configuration to make it non-
infringing, provided that no such replacement or modification shall decrease or
adversely change the performance of the Software or SMS or the Configuration and
further provided that no such replacement or modification shall cause Error.
ACSC shall have no liability for any claim of copyright or patent infringement
based on the use or combination of the Software, the SMS, SMS Software or the
Configuration with programs or data not supplied by ACSC. Any indemnity
provided herein shall not exceed and shall expressly be limited to Five Hundred
Thousand Dollars ($500,000.00).
9. WARRANTY AND LIMITATIONS.
(a) Warranty. ACSC warrants in favor of Greate Bay, SUBJECT TO THE
REMEDY LIMITATIONS AND WARRANTY LIMITATIONS SET FORTH BELOW, that the Software
or SMS
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<PAGE>
Software, for a period of one (1) year from the execution of this Agreement,
will conform to ACSC's published specifications and warrants that ACSC has no
knowledge that the Software or SMS Software has any programming errors or is
unfit or unsuitable for use by Greate Bay. Such warranty is referred to herein
as the "As-Documented Warranty." Greate Bay's sole remedies for any breach of
the As-Documented Warranty, TO THE EXCLUSION OF ALL OTHER REMEDIES THEREFOR, IN
CONTRACT, TORT, OR OTHERWISE, will be ACSC's obligation to modify the Software
or SMS Software for Greate Bay, at no charge, so that it conforms to the
published specifications.
(b) Warranty Limitations. ACSC's warranties are limited and apply as
follows:
- ACSC's warranties do not extend to operation of the Software or
the SMS on any hardware configuration, other than as supplied by
or on behalf of ACSC and other than AS/400 hardware and model
upgrades, provided the same are compatible with the AS/400 and
industrial personal computers and all hardware specifications of
ACSC for the SMS.
- ACSC's warranties do not extend to operation of the Software or
the SMS in conjunction with any computer program (e.g "terminate
and stay resident" utility programs) other than as supplied by
ACSC.
- Except as may be expressly agreed in writing by ACSC, ACSC's
warranties do not apply to any copy of the Software or the SMS
that is modified by any person other than ACSC; to use of the
Software or the SMS other than in accordance with the most
current operating instructions provided by ACSC; to inoperability
or bugs, in whole or in part, caused by defects, problems, or
failures of software or hardware not meeting the hardware
specifications of ACSC for the SMS or Software; or to bugs caused
by negligence of any person except ACSC or its contractors.
(c) Warranty Exclusions. Without limiting the generality of the
limitations set forth above, ACSC's warranties do not include any warranty:
- that the functions performed either by the Software or the SMS
will operate in the combinations that may be selected for use by
Greate Bay.
- that the operation of the Software and the SMS will be error free
in all circumstances.
- that all defects in the Software and the SMS that are not
material (as determined in the exercise of the good faith
business judgment of Greate Bay after
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<PAGE>
consultation with ACSC) with respect to the functionality thereof
will be corrected.
- that the operation of the Software and the SMS will not be
interrupted for short periods of time that do not exceed twenty-
four (24) consecutive hours by reason of defects therein or by
reason of default on the part of ACSC.
- of any of the Software or the SMS or any part thereof as to which
any person other than ACSC has made any modifications, without
the express and specific written permission of ACSC.
(d) Greate Bay Responsibilities. Without limiting the generality of
the foregoing exclusions and limitations, Greate Bay will be exclusively
responsible as between the parties for, AND ACSC MAKES NO WARRANTY OR
REPRESENTATION WITH RESPECT TO:
- determining whether the Software or the SMS will achieve the
results desired by Greate Bay, notwithstanding such ACSC
represents and warrants that it has no knowledge that the
Software or the SMS when delivered to Greate Bay had or has any
programming errors or is unfit or unsuitable for use by Greate
Bay.
- selecting, procuring, installing, operating, and maintaining
computer hardware to run the Software.
- ensuring the accuracy of any input data used with the Software or
the SMS.
- establishing adequate data backup provisions for backing up
Greate Bay's data.
- establishing adequate operational backup provisions (e.g.,
alternate manual operation plans) in the event of a defect or
malfunction that impedes the anticipated operation of the
Software or the SMS.
(e) Disclaimer of All Other Warranties and Representations. The
express warranties and express representations set forth in this Agreement are
in lieu of, and ACSC DISCLAIMS, ANY AND ALL OTHER WARRANTIES, CONDITIONS, OR
REPRESENTATIONS, EXPRESS OR IMPLIED, ORAL OR WRITTEN, WITH RESPECT TO THE
SOFTWARE OR THE SMS OR ANY PART THEREOF, INCLUDING ANY AND ALL IMPLIED
WARRANTIES OR CONDITIONS OF TITLE, NON-INFRINGEMENT, MERCHANTABILITY, OR FITNESS
OR SUITABILITY FOR ANY PURPOSE (WHETHER OR NOT ACSC KNOWS, HAS REASON TO KNOW,
HAS BEEN ADVISED, OR IS OTHERWISE IN FACT AWARE OF ANY SUCH PURPOSE), WHETHER
ALLEGED TO ARISE BY LAW, BY REASON OF CUSTOM OR USAGE IN THE TRADE, OR BY COURSE
OF
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<PAGE>
DEALING. IN ADDITION, ACSC EXPRESSLY DISCLAIMS ANY WARRANTY OR REPRESENTATION TO
ANY PERSON OTHER THAN GREATE BAY WITH RESPECT TO THE SOFTWARE OR THE SMS.
(f) Legal Compliance. ACSC agrees that it is responsible for
submitting the SMS Hardware and SMS Software to the applicable gaming
authorities in New Jersey having jurisdiction over the SMS for the approval of
the logic of all or any portion of the SMS Software or the logic of any SMS
Hardware components that are required prior to the installation of SMS or
derivative modifications or extensions at the Licensed Facilities, except as
provided in the next sentence. With respect to the Electronic Drop feature of
the SMS ("EDrop"), ACSC will submit the EDropcode for approval, provided the
applicable gaming authority has authorized implementation of EDrop on a
conceptual basis either by established policy or published regulation. If
approval of EDrop has been so authorized by the applicable gaming authority,
ACSC will conform the logic of the EDrop code to any applicable and generally
applied specifications of the gaming authority. Greate Bay agrees that it is
solely responsible for all testing and internal control compliance with respect
to the SMS, including, but not limited to, security of the computer system
external to the SMS; provided, however, that ACSC agrees to provide any
reasonable assistance requested of it by Greate Bay with respect to testing and
internal control compliance.
10. CONFIDENTIAL/PROPRIETARY INFORMATION.
(a) Confidential/Propriety Information. The parties acknowledge that
the Software, the SMS, the Source Code and all other information supplied by
ACSC in connection with this Agreement, including but not limited to any know-
how or expertise, (collectively, the "Confidential Information"), will be deemed
confidential/proprietary information of ACSC. Greate Bay agrees that it shall
maintain the Confidential Information under secure conditions, using reasonable
security measures and in any event not less than the same security procedures
used by Greate Bay for the protection of its own confidential/proprietary
information.
(b) Non-disclosure Obligation. Except as may be requested or
required by or on behalf of any gaming authority, Greate Bay shall not disclose
any Confidential Information to any third party without the prior written
consent of ACSC. Notwithstanding the foregoing, Greate Bay may make the
Software or the SMS Software available, without ACSC's prior express consent, to
any independent consultant or consulting group retained by Greate Bay solely for
purposes specifically related to Greate Bay's permitted use, operation and
application of the Software or the SMS, but only after such independent
consultant or consulting group has executed a written confidentiality agreement
pursuant to which it covenants to not use the Confidential Information except
for Greate Bay as permitted herein and to not
-10-
<PAGE>
disclose the Confidential Information under the same conditions of
confidentiality contained herein. Notwithstanding the foregoing, Greate Bay may
disclose appropriate portions of Confidential Information to those of its
personnel who have a need to know the specific information in question in
connection with Greate Bay's rights or the performance of obligations under this
Agreement. All such personnel will be instructed by Greate Bay that the
Confidential Information is subject to the obligation of confidentiality set
forth by this Agreement. Notwithstanding the foregoing, Greate Bay may disclose
Confidential Information to an entity that is not a competitor of ACSC and is
offering (i) a Plan of Reorganization in the Chapter 11 Proceeding or (ii) to
purchase control of Greate Bay, provided however, that any such entity shall
enter into a non-disclosure agreement that requires such entity to protect such
information in the same manner as is required by this Paragraph 10.
(c) Equitable Remedies. The obligations of Greate Bay in this
Paragraph 10 shall be specifically enforceable and Greate Bay agrees that (i)
any breach of Greate Bay's obligations under this Paragraph 10 would cause
irreparable injury to ACSC; (ii) ACSC would have an inadequate remedy at law for
any such breach; (iii) the balance of interests and hardships would favor an
injunction in favor of ACSC; (iv) the public interest would favor an injunction
in favor of ACSC, and (v) Greate Bay will make no legal arguments that equitable
relief is not an appropriate remedy in favor of ACSC in the event of a breach of
Greate Bay's obligations under this Paragraph.
11. EXCLUSION OF INCIDENTAL AND CONSEQUENTIAL DAMAGES. NEITHER PARTY WILL
BE LIABLE TO THE OTHER PARTY (NOR TO ANY PERSON CLAIMING RIGHTS DERIVED FROM THE
OTHER PARTY'S RIGHTS) FOR INCIDENTAL, CONSEQUENTIAL, SPECIAL, PUNITIVE, OR
EXEMPLARY DAMAGES OF ANY KIND, including lost profits or revenue, loss of
business, or other economic damage, and further including injury to property, AS
A RESULT OF BREACH OF ANY WARRANTY OR OTHER TERM OF THIS AGREEMENT, REGARDLESS
OF WHETHER THE PARTY LIABLE OR ALLEGEDLY LIABLE WAS ADVISED OR HAD OTHER REASON
TO KNOW OR IN FACT KNEW OF THE POSSIBILITY THEREOF. Independent of, severable
from, and to be enforced independently of any other enforceable or unenforceable
provision of this Agreement, IN NO EVENT SHALL ACSC's AGGREGATE LIABILITY TO
GREATE BAY (INCLUDING TO ANY PERSON OR PERSONS WHOSE CLAIM OR CLAIMS ARE BASED
ON OR DERIVED FROM A RIGHT OR RIGHT CLAIMED BY GREATE BAY), WITH RESPECT TO ANY
AND ALL CLAIMS AT ANY AND ALL TIMES ARISING FROM OR RELATED TO THE SUBJECT
MATTER OF THIS AGREEMENT, IN CONTRACT, TORT OR OTHERWISE, EXCEED ONE MILLION
DOLLARS ($1,000,000.00).
-11-
<PAGE>
12. SPECIFIC PERFORMANCE. The obligations of Greate Bay in this Agreement
shall be specifically enforceable by ACSC and Greate Bay agrees that (i) any
breach of Greate Bay's obligations under this Agreement would cause irreparable
injury to ACSC; (ii) ACSC would have an inadequate remedy at law for any such
breach; (iii) the balance of interests and hardships would favor an injunction
in favor of ACSC; (iv) the public interest would favor an injunction in favor of
ACSC, and (v) Greate Bay will make no legal arguments that equitable relief is
not an appropriate remedy in favor of ACSC in the event of a breach of Greate
Bay's obligations under this Agreement.
13. ASSIGNMENT. Greate Bay may not assign any right under this Agreement
and any purported assignment will be null and void and a breach of this
Agreement. Notwithstanding the preceding sentence, a change of control of
Greate Bay shall not constitute an assignment, and Greate Bay shall have the
right to assign its rights under this Agreement to any person or entity
acquiring substantially all of the assets of Greate Bay or at least 51 percent
of the equity of Greate Bay through purchase, merger, or reorganization and any
such person shall in turn have the right to assign to any other person coming
within the exception provided in this sentence. ACSC shall have the right to
assign its rights under this Agreement provided that any such assignee shall
expressly assume ACSC's obligations to Greate Bay pursuant to this Agreement and
that the assignment shall include sufficient Intellectual Property, personnel
and other know how such that ACSC can reasonably expect the Assignee to be able
to fulfill the obligations to Greate Bay under this Agreement.
14. AUTHORITY. Each party represents and warrants to the other that each
party respectively has full right, power and authority to enter into this
Agreement and the person executing this Agreement on its behalf has actual
authority to do so.
15. PARTIAL INVALIDITY. If any one or more of the provisions of this
Agreement should be ruled wholly or partly invalid or unenforceable by a court
or other government body of competent jurisdiction, the validity and
enforceability of all provisions of this Agreement not ruled to be invalid or
unenforceable will be unaffected.
16. NOTICES. Notices hereunder will be delivered and effective as
follows: Every notice required or contemplated by this Agreement to be given by
either party may be delivered in person or may be sent by a nationally
recognized overnight delivery courier, or by telecopier, or by express mail, or
by
-12-
<PAGE>
postage prepaid, certified or registered mail, addressed to the party whom it
is intended at the following address:
<TABLE>
<S> <C>
To Greate Bay, ACSI or CMSI: Greate Bay Hotel and Casino, Inc.
Indiana Avenue and Brighton Park
Atlantic City, New Jersey 08401
Attn: President
Telecopier: 609-441-4624
With copy to: Greate Bay Hotel and Casino, Inc.
Indiana Avenue and Brighton Park
Atlantic City, New Jersey 08401
Attn: Executive Vice President - General Counsel
Telecopier: 609-441-4937
To ACSC: Advanced Casino Systems Corporation
200 Decadon Drive
Egg Harbor Township, New Jersey 08234-3899
Attn: President
Telecopier:609-407-2473
With copy to: Greate Bay Casino Corporation
Two Galleria Tower, Suite 2200
Dallas, Texas 75240
Attn: President
Telecopier: 972-386-7411
</TABLE>
Either party may change its address for notice by giving notice to the other
party of the change. Any notice under this Agreement shall be deemed delivered
when personally delivered, the date telecopied, if electronic confirmation of
delivery is obtained and retained, the next business day after delivery to a
nationally recognized courier service or express mail for overnight delivery, or
three (3) days after any such notice is deposited with the United States Postal
Service.
17. CHOICE OF LAW/FORUM SELECTION. This Agreement will be interpreted and
enforced in accordance with the law of the State of New Jersey without regard to
the choice of law principles of the State of New Jersey. Any action arising
from this Agreement may only be instituted in the state or federal courts of the
State of New Jersey.
18. ATTORNEY'S FEES. Except as otherwise provided in Paragraph 8 of this
Agreement, in the event of any dispute arising out of or relating to this
Agreement, or the alleged
-13-
<PAGE>
breach thereof, each party will be responsible for and pay its own respective
attorney's fees and expenses.
19. WAIVER. None of the terms of this Agreement, including this Paragraph
19 or any term, right or remedy hereunder shall be deemed waived unless such
waiver is in writing and signed by party to be charged therewith and the parties
hereby waive any basis to assert waiver by reason of any delay in asserting any
such right or remedy or the benefit of any such term.
20. ENTIRE AGREEMENT/EFFECTIVE DATE. Except with respect to that certain
Agreement between Greate Bay Hotel and Casino, Inc., GB Holdings, Inc. GB
Property Funding Corp. and Advanced Casino Systems International, Inc., on one
hand, and Greate Bay Casino Corp., New Jersey Management, Inc., Pratt Casino
Corporation, PRT Funding Corp., PPI Corporation, Advanced Casino Systems
Corporation, and Hollywood Casino Corporation, on the other, to which a form of
this Agreement is an Exhibit ("the Settlement Agreement"), this Agreement
constitutes the entire agreement and understanding of the parties with respect
to the subject matter. No prior or contemporaneous representations,
inducements, promises or agreements, oral or otherwise, between the parties with
reference to the subject matter will be of any force or effect. No modification
or amendment to this Agreement, including this Paragraph 20, will be valid or
binding unless reduced to writing and duly executed by the party or parties to
be bound. This Agreement may be executed in counterparts and a telecopied
signature will be as effective as an original. This Agreement will be effective
only when signed by all of the parties hereto and only upon and after the
effective date of the Settlement Agreement, as set forth in Paragraph 11
thereof, and until such time all of the provisions of this Agreement will be
deemed part of settlement discussions and inadmissible against any of the
parties hereto.
[THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK]
-14-
<PAGE>
IN WITNESS WHEREOF AND INTENDING TO BE LEGALLY BOUND the parties have
executed this Agreement as of the date and year first above written.
Attest: ADVANCED CASINO SYSTEMS CORPORATION
/s/ Charles F. LaFrano III /s/ Lawrence C. Cole
- -------------------------- -----------------------------------
Secretary Lawrence C. Cole
President
Attest: GREATE BAY HOTEL AND CASINO, INC.
t/a "Sands Hotel & Casino"
/s/ Frederick H. Kraus /s/ Timothy A. Ebling
- -------------------------- -----------------------------------
Secretary
Attest: ADVANCED CASINO SYSTEMS INTERNATIONAL, INC.
/s/ Frederick H. Kraus /s/ Timothy A. Ebling
- -------------------------- -----------------------------------
Secretary
Attest: COMPUTERIZED MANAGEMENT SYSTEMS
INTERNATIONAL, INC..
/s/ Frederick H. Kraus /s/ Timothy A. Ebling
- -------------------------- -----------------------------------
Secretary
-15-
<PAGE>
EXHIBIT "A"
CASINO ACCOUNTING AND MANAGEMENT SYSTEM
CASINO MANAGEMENT
The casino management module provides both detailed and summarized
information to executive level, casino management and administration and
pit management. Through integration of the applications outlined as
follows, management has access to both real time and historical performance
information from a single source (or menu).
TABLE ACCOUNTING & CREDIT
This system integrates all aspects of table games and cage accounting in
addition to patron credit activity. Additional controls provide automated
and paper less casino credit account review via predefined "triggers" and
electronic communications with service providers of casino and credit
bureau information.
<PAGE>
EXHIBIT "B"
SLOT ACCOUNTING AND MANAGEMENT APPLICATION
SLOT ACCOUNTING & MANAGEMENT SYSTEM
The Slot system is comprised of three modules;
Slot Configuration - allows recording of individual game
specifications and is used to maintain the SMS slot network. Future
changes to floor configurations may be entered and activated as
required.
Slot Accounting - using the metered information received from SMS,
this module provides complete accounting for all coin, currency and
electronic fund transfers.
Slot Data - provides historical and analytical information regarding
game performance and may be accessed through numerous summary and
detailed selection criteria.
<PAGE>
EXHIBIT "C"
CASINO PLAYER TRACKING SYSTEM
SUB-SET-RATINGS & COMPLEMENTARIES
This application also performs as the primary information data bank of
information specific to individual patrons gaming activity and
profitability. Information from both table and slot activity is combined
with the ability to view this information and either combined or
independently. A complimentary decision process has been incorporated so
that improved customer service may result by removing the requirement for
executive decisions on all issuances.
<PAGE>
EXHIBIT "D"
CASINO SALES AND MARKETING SYSTEM
ACCOUNT MANAGEMENT
This module provides the "housekeeping" functions required to maintain an
accurate data bank of patron information for marketing purposes. It also
serves to reduce cost specifically for the direct mail marketing
application and purging of inactive patrons.
EXTRACT MANAGEMENT
This is a flexible and robust patron selection module used primarily to
target specific segments of patrons for various marketing and/or analysis
functions. The results of these extracts may be directed towards numerous
forms of processing.
GROUPS/INVITATION SYSTEM
The primary purpose of the group system is to enable the analysis of
profitability, both actual and potential, for up to twenty (20) user
defined groups or event types. Expenses and/or complementaries may be
charged direct to a patrons account or as a percentage of theoretical
across all players within the group. Groups may also include Branch
Offices and Junket Representatives with the ability to compute commissions.
Historical analysis by group type or monthly rep performance is provided.
The invitation module enables the booking of patrons responses to specific
events (i.e. Head liner shows). Blocking of an event enables analysis
based on invited segment(s).
SWEEPSTAKES SYSTEM
The sweepstakes system provided for the controlling and winner selection
electronically for various promotional sweepstakes. Entries earned by
patrons are automatically recorded with randomized winner selection based
on event, date and time of day. If required entries may require pre-
qualification. Linkage to the direct mail provides for notification of
entries.
<PAGE>
EXHIBIT "E"
TABLE MARKETING SYSTEM
TABLE MARKETING SYSTEM (TMS)
TMS was developed as an extension of the SMS for table games and utilizes
the same network and controller boards (with function keypads and mark
sense printers). The primary purposes of TMS consist of: a) control of
complementaries at the table games; b) access to patron information for
ratings, credit and tracking of cash transactions; and c) time and
attendance for pit personnel.
<PAGE>
EXHIBIT "F"
CASINO ANALYSIS
This system provides the analysis department with information on patrons
gaming history. Data extraction options allow flexibility in selecting
patron segments for analysis, and an interface to the Group system allows
group analysis. Data can be interpreted in report format, or downloaded to
a PC for analysis utilizing PC based software, i.e. Foxpro. Selections
from PC analysis can also be uploaded to the AS/400 to drive the Sales &
Marketing extract system.
MIS RESOURCE REQUEST SYSTEM
The MIS Resource Request system allows the entry and tracking of requests
for maintenance and new requests for Software, Hardware, and other services
provided by MIS. The system utilizes control files to allow flexibility in
establishing Application areas and allows tracking of the progress of a
request from initial request entry through completion. For Software
revisions, the system incorporates source and object movement to control
the development/testing cycle and movement to a production environment.
Tracking and reporting of man hours by request is also available.
SECURITY INCIDENT REPORTING SYSTEM
This system provides for the entry of Security Incident data to allow
tracking and reporting of various types of incidents. Incidents can be
tracked from initiation through closure, and some limited claim/settlement
tracking is provided.
CROSS SYSTEM BACKUP (CSB)
This application is used in a multiple CPU environment to provide a 'hot'
backup capability, for use in the event of a severe hardware failure. CSB
utilizes the Journaling feature of the AS/400 to capture changes to
designated application system files on a CPU, and transmits the changes to
another CPU, where the CSB application on this CPU applies the changes to
the application files residing on that CPU.
<PAGE>
EXHIBIT "G"
SMS
SMS/TM/ HARDWARE
1. NT SMS/TM/ slot Controller Board
256K Memory expandable to 1MB, 16TTL Inputs, 16 TTL Outputs
2. Card Reader
Capable of reading standard swipe tracks 1 & 2, with red LED lit throat.
Custom white exterior bezel.
3. Side Box (Optional)
Enclosure for: a) card reader, b) display, c) keypad and d) back lit custom
logo with tri-color LED. Additional mini fluorescent back lighting.
4. Keypad Overlay - Side Mount
Includes keys zero (0) through (9), Clear, $ (dollar sign), Service, Promo
(Promotion), and enter. Area for display and card reader precut. Area
under card reader for back lighting verbiage and arrows, area for logo with
back lighting, and additional area for verbiage with back lit miniature
fluorescent.
5. Keypad Overlay - Slant Top
Includes keys zero (0) through (9), Clear, $ (dollar sign), Service, Promo
(Promotion), and enter. Size 19 1/2" L x 7/8" H. Area for display and card
reader precut. Area above card reader for back lighting verbiage and
arrows, area for logo with back lighting.
6. Tri Color LED Board
1" x 1" square board with Red, Green, and Yellow LED's used for back
lighting logo.
7. Green LED Board
1/2" x 2 3/4" board controlled by card reader interface for back lighting
card insert verbiage.
8. Graphic Display
Overall dimensions 44.5mm H x 134.6 mm L, Dot matrix 64 x 256 pixels.
9. Base Top
Board containing two (2) six pin molex connectors and two (2) RJ
connections.
10. IBM Industrial Personal Computer(s) with arctic co-processor(s) -
"Gearbox(s)"
11. Optic Isolator(s) with RS232 to RS422 connectors
12. IBM Industrial Personal Computer(s) - "HAS(s)"
<PAGE>
SMS/TM/ SOFTWARE
1. SMS_NT - Controller logic board program which contains specific interface
logic based on game manufacturer specifications or ACSC proprietary bi-
directional serial communications logic. Additional logic includes: a) NT
Operating System, b) Security De-encryption, c) Peripheral device
interface, d) Personalization parameter storage and verification, e) User
diagnostics, f) Transaction recall, g) E-Drop/TM/, h) Marketing point
algorithms.
2. RIC_MAIN - Artic card logic which controls the polling and messaging of
transactions from and to slot machines and the IBM Industrial Personal
Computer(s).
3. SU_MAIN - Primary logic program which controls the messaging from the
network to the ARTIC ports. Additional logic includes: a) software
downloading, b) transaction backup, c) file servers for: 1) asset
configuration, 2) wiring configuration, and 3) transaction backup, d)
TCP/IP connectivity and recoverability, e) graphical monitor data source,
f) game metering, g) TCP/IP socket logic for sending and receiving
transactions.
4. HASTCPIP - File Server control program which is the primary "HUB" for
transactions within the network. Additional logic includes: a) network
status monitor display, b) Network protocol translator (if required in
LU6.2 environment), c) transaction backup file logic, d) in-house patron
memory mapping, e) network verification for critical transaction
processing, f) patron point transaction transfer logic.
5. PPS_SERV - File server logic which records and, as required computes points
and balance information. Receives and transfers transaction to the
HASTCPIP main server program. Performs time logic for patron being placed
into and removed from memory.
6. ENCRYPT.EXE - Stand alone routine which is applied for compiling and
encrypting SMS_NT programs which are subsequently downloaded to the NT
controller board. Employs M68000 C Compiler/Assembler languages. Embeds
encrypted passcode into the SMS_NT compiled program while simultaneously
communicating the AS/400 for NT program verification and security.
7. TCPMON - Graphical monitor program which provides the following levels: a)
Networked Gearboxes, b) Individual Gearbox and Artic ports, c) Individual
Artic port, d) Individual slot machines. Each level contains the
appropriate error conditions or interactive metered information.
8. AS/400 SMS/TM/ Application software for receiving, transmitting and
processing of transactions bi-directionally to gaming devices.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF GB PROPERTY FUNDING CORP. AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000912906
<NAME> GB PROPERTY FUNDING CORP.
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998
<PERIOD-START> APR-01-1998 JAN-01-1998
<PERIOD-END> JUN-30-1998 JUN-30-1998
<CASH> 1 1
<SECURITIES> 0 0
<RECEIVABLES> 0 0
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 1 1
<PP&E> 0 0
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 191,874 191,874
<CURRENT-LIABILITIES> 0 0
<BONDS> 182,500 182,500
0 0
0 0
<COMMON> 1 1
<OTHER-SE> 0 0
<TOTAL-LIABILITY-AND-EQUITY> 191,874 191,874
<SALES> 0 0
<TOTAL-REVENUES> 0 0
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> 0 0
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 0 0
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF GB HOLDINGS, INC. AND SUBSIDIARIES AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000912926
<NAME> GB HOLDINGS INC.
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998
<PERIOD-START> APR-01-1998 JAN-01-1998
<PERIOD-END> JUN-30-1998 JUN-30-1998
<CASH> 22,298 22,298
<SECURITIES> 0 0
<RECEIVABLES> 19,831 19,831
<ALLOWANCES> 12,791 12,791
<INVENTORY> 3,260 3,260
<CURRENT-ASSETS> 37,076 37,076
<PP&E> 323,454 323,454
<DEPRECIATION> 177,850 177,850
<TOTAL-ASSETS> 195,051 195,051
<CURRENT-LIABILITIES> 20,398 20,398
<BONDS> 192,912 192,912
0 0
0 0
<COMMON> 1 1
<OTHER-SE> (55,347) (55,347)
<TOTAL-LIABILITY-AND-EQUITY> 195,051 195,051
<SALES> 0 0
<TOTAL-REVENUES> 58,453 114,066
<CGS> 0 0
<TOTAL-COSTS> 49,821 94,757
<OTHER-EXPENSES> 7,790 15,743
<LOSS-PROVISION> 393 742
<INTEREST-EXPENSE> (170) (430)
<INCOME-PRETAX> 619 3,254
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 619 3,254
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 619 3,254
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF GB HOLDINGS, INC. AND SUBSIDIARIES AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<CIK> 0000912926
<NAME> GB HOLDINGS INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 19,705
<SECURITIES> 0
<RECEIVABLES> 21,462
<ALLOWANCES> 13,834
<INVENTORY> 3,248
<CURRENT-ASSETS> 33,554
<PP&E> 322,298
<DEPRECIATION> 175,340
<TOTAL-ASSETS> 192,640
<CURRENT-LIABILITIES> 18,561
<BONDS> 192,915
0
0
<COMMON> 1
<OTHER-SE> (55,966)
<TOTAL-LIABILITY-AND-EQUITY> 192,640
<SALES> 0
<TOTAL-REVENUES> 55,613
<CGS> 0
<TOTAL-COSTS> 44,936
<OTHER-EXPENSES> 7,953
<LOSS-PROVISION> 349
<INTEREST-EXPENSE> (260)
<INCOME-PRETAX> 2,635
<INCOME-TAX> 0
<INCOME-CONTINUING> 2,635
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,635
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
