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, 2000
-------------------------------------------------
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________________ to ______________________
Commission file number 33-69716
--------------------------------
GB PROPERTY FUNDING CORP.
GB HOLDINGS, INC.
GREATE BAY HOTEL AND CASINO, INC.
--------------------------------------------------------------------------------
(Exact name of each Registrant as specified in its charter)
DELAWARE 75-2502290
DELAWARE 75-2502293
NEW JERSEY 22-2242014
---------------------------------------- -----------------------------------
(States or other jurisdictions of (I.R.S. Employer
incorporation or organization) Identification No.'s)
c/o Sands Hotel & Casino
Indiana Avenue & Brighton Park
Atlantic City, New Jersey 08401
---------------------------------------- -----------------------------------
(Address of principal executive offices) (Zip Code)
(Registrants' telephone number, including area code): (609) 441-4517
---------------------------
(Not Applicable)
--------------------------------------------------------------------------------
(Former name, former address, and former fiscal year, if
changed since last report.)
Indicate by check mark whether each of the Registrants (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrants were required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes |X| No |_|
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the last practicable date.
<TABLE>
<CAPTION>
Registrant Class Outstanding at August 11, 2000
-------------------------------- ----------------------------- ------------------------------
<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 registered securities consist of 10 7/8% First Mortgage Notes (the
"First Mortgage Notes") in the original principal amount of $185,000,000 due
January 15, 2004 issued by GB Property Funding Corp. ("GB Property Funding"). GB
Property Funding's obligations are unconditionally guaranteed by GB Holdings,
Inc. ("Holdings"), a Delaware corporation with principal executive offices at
136 South Kentucky Avenue, Atlantic City, New Jersey 08401, and by Greate Bay
Hotel and Casino, Inc. ("GBHC"), a New Jersey corporation and a wholly owned
subsidiary of Holdings with principal executive offices at 136 South Kentucky
Avenue, Atlantic City, New Jersey 08401.
GB Property Funding is wholly owned by Holdings. Holdings was a wholly
owned subsidiary of Pratt Casino Corporation ("PCC") through December 31, 1998.
PCC in turn was a wholly owned subsidiary of PPI Corporation ("PPI"), which is
wholly owned by Greate Bay Casino Corporation ("GBCC"). Effective after December
31, 1998, PCC transferred 21% of its stock ownership in Holdings to PBV, Inc.
("PBV"), a newly formed entity, controlled by certain stockholders of GBCC.
GBCC's common stock is listed on the OTC Bulletin Board Service under the
trading symbol "GEAAQ". As a result of a certain confirmed plan of
reorganization of PCC and others in October 1999, the remaining 79% stock
interest of PCC in Holdings was transferred to Greate Bay Holdings, LLC, whose
sole member as a result of the same reorganization is PPI ("GBLLC").
GB Property Funding was organized in September 1993 as a special purpose
subsidiary of Holdings for the purpose of borrowing funds through the issuance
of the First Mortgage Notes for the benefit of GBHC. GBHC owns the Sands Hotel
and Casino located in Atlantic City, New Jersey (the "Sands"). Substantially all
of Holdings' assets and operations relate to the Sands.
On January 5, 1998, Holdings, GB Property Funding and GBHC (collectively,
the "Debtors") filed petitions for relief under Chapter 11 of the United States
Bankruptcy Code (the "Bankruptcy Code") in the United States Bankruptcy Court
for the District of New Jersey (the "Bankruptcy Court"). The prior Boards of
Directors resigned on January 2, 1998 and new Boards of Directors were elected
at that time. Each of the Debtor companies continues to operate in the ordinary
course of business as set forth in the Bankruptcy Code. Each company's executive
officers and directors as of the date of the filing remain in office, subject to
the jurisdiction of the Bankruptcy Court, other than the following: as required
by the Settlement Agreement as defined below, Richard Knight resigned as a
Director, President, and Chief Executive Officer of the Debtors effective July
8, 1998; John P. Belisle was elected President and Chief Executive Officer of
GBHC on July 28, 1998; and Jerome T. Smith was elected as a Director of the
Debtors on August 3, 1998. On November 1, 1999, John P. Belisle resigned as
President and Chief Executive Officer of GBHC. On November 5, 1999, Alfred J.
Luciani was elected President and Chief Executive Officer of GBHC. On November
11, 1999, Jerome T. Smith, the independent member of the Boards of Directors of
the Debtors, and one of the two independent members of the Audit Committee of
Holdings, citing a newly arisen potential conflict of interest, resigned.
Effective September 2, 1998, GBHC acquired the membership interests in
Lieber Check Cashing LLC ("Lieber"), a New Jersey limited liability company that
owns a land parcel adjacent to GBHC (the "Lieber Parcel"). GBHC acquired and
caused an option agreement on other adjacent land parcels (the "Option Parcels")
to be assigned to Lieber (the "Option Agreement"). On September 20, 1999, the
closing took place under the Option Agreement and Lieber, whose sole member is
GBHC, obtained title to the Option Parcels one of which was subject to a lease
(the "Lease") and a sub-lease for the operation of a "Gold Store" (the
"Sub-lease"). The
2
<PAGE>
Lieber Parcel and the Option Parcels provided GBHC with an expansion opportunity
and frontage on Pacific Avenue, the principal street running parallel and
closest to the Boardwalk in Atlantic City, New Jersey. Demolition of the
existing structures on the parcels was completed in 1999 and construction of the
new front entrance to the Sands' facility was completed in June 2000. GBHC
obtained the rights under the Lease on March 27, 2000 for $371,000 and on the
same date notified the operator of the Gold Store that GBHC had elected to
exercise a 90-day cancellation provision of the Sub-lease and tendered to the
sub-lessee a cancellation payment of approximately $30,000. GBHC obtained a
surrender of the Sub-lease effective June 10, 2000, demolished the Gold Store,
and incorporated the land as part of its new front entrance, which opened on
June 23, 2000. GBHC also entered into an agreement with the entities controlling
the Claridge Hotel and Casino (the "Claridge"), subject to Bankruptcy Court
approval, to acquire the Claridge Administration Building ("CAB"), which is
situated between GBHC's existing main entrance and the new Pacific Avenue
entrance. GBHC intends to demolish the CAB and incorporate the land as part of
the new front entrance. The purchase price was $3.5 million, consisting of $1.5
million in cash at closing with the remaining $2.0 million consideration
tendered through the elimination for 40 months of a $50,000 monthly license fee
paid by the Claridge to GBHC, under an agreement between the Claridge and GBHC
governing the development and operation of the "People Mover" leading from the
Boardwalk to the Sands and Claridge (the "PM Agreement"). GBHC and the Claridge
also sought Bankruptcy Court approval of the assumption of the PM Agreement as
modified. Additionally, after the elimination of the monthly license fee for the
40 months, the license fee will be reduced to $20,000 a month thereafter. On
April 5, 2000, the Bankruptcy Court approved the acquisition of the CAB for the
purposes described and approved the joint assumption of the PM Agreement as
modified. On April 17, 2000, the closing took place on the CAB.
On January 11, 1999, the exclusivity period during which only the Debtors
could file a plan of reorganization expired and, as a result, any party in
interest could file a plan of reorganization. On June 1, 1999, the Debtors filed
with the Bankruptcy Court a plan of reorganization and disclosure statement,
ultimately filing a third modified plan of reorganization (the "Plan") and third
modified disclosure statement. On October 4, 1999, the Bankruptcy Court approved
the adequacy of the disclosure statement and a confirmation hearing on the Plan
was scheduled for December 17, 1999 (the "Confirmation Hearing").
On November 3, 1999, the Debtors received notice from Merrill Lynch Asset
Management ("MLAM") that MLAM and Park Place Entertainment Corporation ("PPE")
had reached agreement on a term sheet under which PPE would sponsor a plan of
reorganization of GBHC (the "Term Sheet"). MLAM represented that it and PPE
controlled approximately 53% of the First Mortgage Notes. MLAM requested that
the Debtors agree to seek to adjourn the Confirmation Hearing, and accept a
revised Plan incorporating the provisions of the Term Sheet. The Debtors agreed
to seek the adjournment. On November 9, 1999, the Bankruptcy Court granted the
adjournment and set December 1, 1999 as a status conference for a report by the
Debtors on the status of their due diligence and evaluation of the provisions of
the Term Sheet. Following the December 1, 1999 status conference, the Bankruptcy
Court set December 22, 1999 as a final status conference for the Debtors to
report on their due diligence and evaluation of the Term Sheet. Entities
controlled by Carl Icahn ("Icahn") submitted a competing bid for a Plan of
Reorganization of the Debtors prior to the December 22, 1999 status conference.
The Bankruptcy Court decided at the status conference that PPE and Icahn should
submit competing Plans of Reorganization and Supplemental Disclosure Statements
with the Debtors submitting a Master Disclosure Statement by January 18, 2000,
and that the Bankruptcy Court would conduct a hearing on February 16, 2000 to
consider the adequacy of the Disclosure Statements. Icahn filed a joint Plan
with the Official Committee of Unsecured Creditors (the "Committee") on January
18, 2000, and PPE also filed a Plan on the same date. The Bankruptcy Court
conducted a hearing on the adequacy of the Disclosure Statements on February 16,
2000. The Bankruptcy Court directed Icahn and the Committee and PPE to file
amended Plans and Supplemental Disclosure Statements with their final economic
offers to the creditors by March 6, 2000, and scheduled a further adequacy
hearing for March 23, 2000.
3
<PAGE>
At that hearing, the Bankruptcy Court directed Icahn and the Committee and PPE
to make certain revisions to their amended Plans and Supplemental Disclosure
Statements and file them on March 31, 2000, and scheduled April 5, 2000 as a
hearing date for the Bankruptcy Court to determine if any further changes to the
Supplemental Disclosure Statements would be directed to be made by the
Bankruptcy Court. At the hearing on April 5, 2000, the Bankruptcy Court approved
the Debtors' Master Disclosure Statement, approved the Supplemental Disclosure
Statements of Icahn and the Committee and of PPE subject to their making certain
revisions, and established June 5, 2000 as the deadline for the creditors to
deliver their votes for or against the Plans and June 19, 2000 as the beginning
of the confirmation hearing. Subsequently, the Bankruptcy Court adjourned the
confirmation hearing to June 20, 2000. The hearing was conducted on June 20-23,
and 27-29, 2000. On July 28, 2000 the Bankruptcy Court issued an Opinion
deciding to confirm the Icahn/Committee Plan of Reorganization (the
"Confirmation").
A condition to the effective date of the Confirmation of the
Icahn/Committee Plan of Reorganization is the approval by the New Jersey Casino
Control Commission (the "Casino Commission"). The Casino Commission is presently
scheduled to consider approval at a hearing on September 13, 2000. There can be
no assurance at this time that the Plan will be approved by the Casino
Commission. In the event the plan is approved, continuation of the business
thereafter is dependent on GBHC's ability to achieve successful future
operations. The accompanying consolidated financial statements do not include
any adjustments relating to the recoverability and classification of recorded
asset amounts or the amounts and classification of liabilities that may be
necessary should GBHC be unable to continue as a going concern. Although
management has not made a determination whether an impairment of the carrying
value currently exists, future adjustments to the carrying amount of GBHC's
assets may be required with respect to the fresh-start reporting which would
take place on the effective date of the confirmation of the Plan.
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 months ended June 30, 2000 are not
necessarily indicative of the operating results to be reported for the full
year.
The financial statements of GB Property Funding and the consolidated
financial statements of Holdings as of June 30,2000 and for the three and six
months ended June 30, 2000 and 1999 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 only of normal recurring adjustments) necessary to
present fairly their respective financial positions as of June 30, 2000, and
their respective results of operations for the three and six month periods ended
June 30, 2000 and 1999, and their respective cash flows for the six month
periods ended June 30, 2000 and 1999.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. These financial statements should be
read in conjunction with the financial statements and notes thereto included in
GB Property Funding's, Holdings' and GBHC's 1999 Annual Report on Form 10-K.
4
<PAGE>
GB PROPERTY FUNDING CORP.
(Debtor-in-Possession, wholly owned by GB Holdings, Inc.)
BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
June 30, December 31,
2000 1999
------------ ------------
(Unaudited) (Audited)
<S> <C> <C>
Current Asset:
Cash $ 1,000 $ 1,000
Interest receivable from affiliate 9,373,000 9,373,000
Note receivable from affiliate 181,976,000 181,980,000
------------ ------------
$191,350,000 $191,354,000
============ ============
LIABILITIES AND SHAREHOLDER'S EQUITY
Liabilities Subject to Compromise:
Accrued interest payable $ 9,373,000 $ 9,373,000
Long-term debt 181,976,000 181,980,000
------------ ------------
191,349,000 191,353,000
Commitments and Contingencies
Shareholder's Equity:
Common stock, $1.00 par value per share,
1,000 shares authorized and outstanding 1,000 1,000
------------ ------------
$191,350,000 $191,354,000
============ ============
</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
Three Months Ended
June 30,
-------------------------------
2000 1999
-------------- --------------
(Unaudited) (Unaudited)
Revenues:
Interest income (Note 2) $ -- $ --
Expenses:
Interest expense (contractual interest of
$4,947,000 and $4,951,000, respectively,
for the six months ended June 30,
2000 and 1999) -- --
-------------- --------------
Net income $ -- $ --
============== ==============
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 OPERATIONS
Six Months Ended
June 30,
-------------------------------
2000 1999
-------------- --------------
(Unaudited) (Unaudited)
Revenues:
Interest income (Note 2) $ -- $ --
Expenses:
Interest expense (contractual interest of
$9,895,000 and $9,906,000, respectively,
for the six months ended June 30,
2000 and 1999) -- --
-------------- --------------
Net income $ -- $ --
============== ==============
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.)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
June 30,
---------------------------
2000 1999
------------ ----------
(Unaudited) (Unaudited)
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ -- $ --
Adjustments to reconcile net income to net cash
provided by operating activities:
Change in interest receivable from affiliate -- --
Change in accrued interest payable -- --
------------ ----------
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.
8
<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 in September 1993. GB Property Funding is a wholly owned
subsidiary of GB Holdings, Inc. ("Holdings"), a Delaware corporation. Holdings
was a wholly owned subsidiary of Pratt Casino Corporation ("PCC"), also a
Delaware corporation, through December 31, 1998. Effective after December 31,
1998, PCC transferred 21% of the stock ownership of Holdings to PBV, Inc.
("PBV"), a newly formed entity, controlled by certain stockholders of Greate Bay
Casino Corporation ("GBCC"). PCC was incorporated in September 1993 and was a
wholly owned subsidiary of PPI Corporation ("PPI"), a New Jersey corporation and
a wholly owned subsidiary of GBCC. As a result of a certain confirmed plan of
reorganization of PCC and others in October 1999, the remaining 79% stock
interest of PCC in Holdings was transferred to Greate Bay Holdings, LLC
("GBLLC"), whose sole member as a result of the same reorganization is PPI.
Holdings was incorporated in September 1993 and, on February 17, 1994, acquired,
through a capital contribution by its then parent, all of the outstanding
capital stock of Greate Bay Hotel and Casino, Inc. ("GBHC"), which owns the
Sands Hotel and Casino in Atlantic City, New Jersey (the "Sands"). GB Property
Funding was formed for the purpose of borrowing $185,000,000 of First Mortgage
Notes (the "First Mortgage Notes") for the benefit of GBHC; such debt was issued
in February 1994 bearing interest at the rate of 10 7/8% per annum. All of the
proceeds were loaned to GBHC (see Note 2).
GB Property Funding has no operations and is dependent on the repayment of
its note from GBHC for servicing its debt obligations (see Note 2).
Administrative services for GB Property Funding are provided by GBHC at no
charge. The cost of such services is not significant.
The operation of an Atlantic City casino/hotel is subject to significant
regulatory control. Under provisions of the Casino Act, GBHC is required to
maintain a non-transferable license to operate a casino in Atlantic City.
The accompanying financial statements have been prepared in accordance
with Statement of Position No. 90 -7, "Financial Reporting By Entities in
Reorganization Under the Bankruptcy Code," and include disclosure of liabilities
subject to compromise. On January 5, 1998, GB Property Funding, GBHC and
Holdings (collectively, the "Debtors") filed voluntary petitions for relief
under Chapter 11 of the United States Bankruptcy Code (the "Bankruptcy Code") in
the United States Bankruptcy Court for the District of New Jersey (the
"Bankruptcy Court"). Each company continues to operate in the ordinary course of
business as set forth in the Bankruptcy Code.
On June 1, 1999, the Debtors filed with the Bankruptcy Court a plan of
reorganization and disclosure statement, ultimately filing a third modified plan
of reorganization (the "Plan") and third modified disclosure statement. On
October 4, 1999, the Bankruptcy Court approved the adequacy of the Disclosure
Statement and a confirmation hearing on the Plan was scheduled for December 17,
1999 (the "Confirmation Hearing").
On November 3, 1999, the Debtors received notice from Merrill Lynch Asset
Management ("MLAM") that MLAM and Park Place Entertainment Corporation ("PPE")
had reached agreement on a term sheet under which PPE would sponsor a plan of
reorganization of GBHC (the "Term Sheet"). MLAM represented that it and
9
<PAGE>
GB PROPERTY FUNDING CORP.
(Debtor-in Possession, wholly owned by GB Holdings, Inc.)
NOTES TO FINANCIAL STATEMENTS (Continued)
(Unaudited)
PPE controlled approximately 53% of the First Mortgage Notes. MLAM requested
that the Debtors agree to seek to adjourn the Confirmation Hearing, and accept a
revised Plan incorporating the provisions of the Term Sheet. The Debtors agreed
to seek the adjournment. On November 9, 1999, the Bankruptcy Court granted the
adjournment and set December 1, 1999 as a status conference for a report by the
Debtors on the status of their due diligence and evaluation of the provisions of
the Term Sheet. Following the December 1, 1999 status conference, the Bankruptcy
Court set December 22, 1999 as a final status conference for the Debtors to
report on their due diligence and evaluation of the Term Sheet. Entities
controlled by Carl Icahn ("Icahn") submitted a competing bid for a Plan of
Reorganization of the Debtors prior to the December 22, 1999 status conference.
The Bankruptcy court decided at the status conference that PPE and Icahn should
submit competing Plans of Reorganization and Supplemental Disclosure Statements
with the Debtors submitting a Master Disclosure Statement by January 18, 2000,
and that the Bankruptcy Court would conduct a hearing on February 16, 2000 to
consider the adequacy of the Disclosure Statements. Icahn filed a joint Plan
with the Official Committee of Unsecured Creditors (the "Committee") on January
18, 2000, and PPE also filed a Plan on the same date. The Bankruptcy Court
conducted a hearing on the adequacy of the Disclosure Statements on February 16,
2000. The Bankruptcy Court directed Icahn and the Committee and PPE to file
amended Plans and Supplemental Disclosure Statements with their final economic
offers to the creditors by March 6, 2000, and scheduled a further adequacy
hearing for March 23, 2000. At that hearing, the Bankruptcy Court directed Icahn
and the Committee and PPE to make certain revisions to their amended Plans and
Supplemental Disclosure Statements and file them on March 31, 2000, and
scheduled April 5, 2000 as a hearing date for the Bankruptcy Court to determine
if any further changes to the Supplemental Disclosure Statements would be
directed to be made by the Bankruptcy Court. At the hearing on April 5, 2000,
the Bankruptcy Court approved the Debtors' Master Disclosure Statement, approved
the Supplemental Disclosure Statements of Icahn and the Committee and of PPE
subject to their making certain revisions, and established June 5, 2000 as the
deadline for creditors to deliver their votes for or against the Plans and June
19, 2000 as the beginning of the confirmation hearing. Subsequently, the
Bankruptcy Court adjourned the confirmation hearing to June 20, 2000. The
hearing was conducted on June 20-23, and 27-29, 2000. On July 28, 2000 the
Bankruptcy Court issued an Opinion deciding to confirm the Icahn/Committee Plan
of Reorganization (the "Confirmation").
A condition to the effective date of the Confirmation of the
Icahn/Committee Plan of Reorganization is the approval by the New Jersey Casino
Control Commission (the "Casino Commission"). The Casino Commission is presently
scheduled to consider approval at a hearing on September 13, 2000. There can be
no assurance at this time that the Plan of reorganization will be approved by
the Casino Commission. In the event the Plan of reorganization is confirmed,
continuation of the business thereafter is dependent on GBHC's ability to
achieve successful future operations. The accompanying financial statements do
not include any adjustments relating to the recoverability and classification of
recorded asset amounts or the amounts and classifications of liabilities that
might be necessary should GB Property Funding be unable to continue as a going
concern.
As discussed above, GB Property Funding was formed for the purpose of
issuing the First Mortgage Notes for the benefit of GBHC. GB Property Funding
loaned the proceeds from the First Mortgage Notes to GBHC and, at June 30, 2000,
has a note receivable, together with interest accrued through January 5, 1998,
due from GBHC totaling $191,349,000. GB Property Funding has no operations and
the note receivable and the accrued interest receivable represents virtually all
of GB Property Fundings' assets. As discussed above, on January 5, 1998, the
Debtors filed petitions for relief under Chapter 11 of the Bankruptcy Code. As a
result of the Chapter 11 filings,
10
<PAGE>
GB PROPERTY FUNDING CORP.
(Debtor-in Possession, wholly owned by GB Holdings, Inc.)
NOTES TO FINANCIAL STATEMENTS (Continued)
(Unaudited)
the First Mortgage Notes and related accrued interest payable have been
classified as liabilities subject to compromise in the accompanying balance
sheets. To the extent that any proceeds are ultimately realized from GBHC as a
result of the resolution of the bankruptcy proceedings, such amounts would be
offered in full satisfaction of the First Mortgage Notes. No provision for any
loss relating to the uncollectibility of these receivables has been reflected in
the accompanying financial statements.
New Jersey Management, Inc. ("NJMI"), also a wholly owned subsidiary of
PCC, was responsible for the operations of the Sands under a management
agreement dated August 19, 1987, as amended, with GBHC (the "Management
Agreement"). On May 22, 1998, GBHC filed a motion with the Bankruptcy Court to
reject the Management Agreement (the "Rejection Motion"). GBCC, NJMI, and
certain of their affiliates, on one side, and the Debtors, on the other, entered
into an agreement on June 27, 1998, which was approved by the Bankruptcy Court
on July 7, 1998, and by the Casino Commission on July 8, 1998 (the "Settlement
Agreement"). Under the Settlement Agreement, among other things, the Management
Agreement was suspended and replaced with a services agreement until a decision
by the Bankruptcy Court on the Rejection Motion, and GBHC ceded ownership rights
to an affiliate of GBCC in, and obtained a perpetual license from the same
affiliate for, the software used in its operations. On September 28, 1998, and
as a result of the Second Settlement Agreement, as defined below, the Bankruptcy
Court granted the Rejection Motion and, in conformity therewith, no further fees
will be paid under either the Management Agreement or the Settlement Agreement.
Effective September 2, 1998, GBHC acquired the membership interests in
Lieber Check Cashing LLC ("Lieber"), a New Jersey limited liability company
which owns a land parcel adjacent to GBHC (the "Lieber Parcel") and GBHC
acquired and caused an option agreement on other adjacent land parcels (the
"Option Parcels") to be assigned to Lieber (the "Option Agreement"). The Lieber
Parcel and the Option Parcels provided GBHC with an expansion opportunity and
frontage on Pacific Avenue, the principal street running parallel and closest to
the boardwalk in Atlantic City, New Jersey. On September 20, 1999, closing took
place under the Option Agreement and Lieber, whose sole member is GBHC, obtained
title to the Option Parcels. The demolition of the existing structures on the
parcels was completed in 1999 and construction of a new front entrance to the
Sands' facility was completed in June 2000.
On July 27, 1998, GBHC filed an adversary proceeding in the Bankruptcy
Court against GBCC, certain of its affiliates, and certain of the former
directors of GBHC (collectively the "Defendants") seeking to recover the Lieber
Parcel and the Option Agreement for the Option Parcels and to restrain the use
of its Net Operating Losses (the "NOL's"). Effective September 2, 1998, the
Debtors, on one side, and the Defendants, on the other, reached an agreement
resolving, among other things, the adversary proceeding (the "Second Settlement
Agreement"). Under the Second Settlement Agreement, among other things, the
Debtors agreed to be included in the consolidated federal income tax return of
GBCC for the years ended December 31, 1997 and 1998. GBCC agreed to allow the
Debtors to become deconsolidated from the GBCC group for federal income tax
purposes by causing PCC to transfer 21% of the stock ownership interest of PCC
in Holdings to a person other than any member of the GBCC group by December 31,
1998. In accordance with the Second Settlement Agreement and in order to effect
the deconsolidation of the Debtors from the GBCC group, effective after December
31, 1998, PCC transferred 21% of the stock ownership in Holdings to PBV. The
Second Settlement Agreement also resulted in the non-cash settlement of certain
outstanding intercompany transactions, the transfer of the membership interests
in Lieber to GBHC, and the assignment of the Option Agreement for the Option
Parcels to Lieber.
11
<PAGE>
GB PROPERTY FUNDING CORP.
(Debtor-in Possession, wholly owned by GB Holdings, Inc.)
NOTES TO FINANCIAL STATEMENTS (Continued)
(Unaudited)
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
The financial statements as of June 30, 2000 and for the three and six
month periods ended June 30, 2000 and 1999 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, 2000, and the results of its operations and cash flows for the three
and six month periods ended June 30, 2000 and 1999, and cash flows for the six
month periods ended June 30, 2000 and 1999.
(2) Long-Term Debt
On February 17, 1994, GB Property Funding issued the First Mortgage Notes
due January 15, 2004. Interest on the First Mortgage Notes accrued at the rate
of 10 7/8% per annum, payable semiannually. Interest only was payable during the
first three years. Thereafter, semiannual principal payments of $2,500,000 were
due on each interest payment date with the balance due at maturity. Such
semiannual payments could be made in cash or by tendering First Mortgage Notes
previously purchased or otherwise acquired by GB Property Funding. GB Property
Funding acquired $2,500,000 face mount of First Mortgage Notes that were used to
make the July 15, 1997 required principal payment. As a result of the filing
under Chapter 11, the debt service payments due subsequent to January 5, 1998
were not made. The accrual of interest on the First Mortgage Notes for periods
subsequent to the filing has been suspended.
The indenture for the First Mortgage Notes (the "Indenture") contains
various provisions which, among other things, restrict the ability of certain
subsidiaries of GBCC to pay dividends to GBCC, to merge, to consolidate, to sell
substantially all of their assets or to incur additional indebtedness beyond
certain limitations. In addition, the Indenture requires the maintenance of
certain cash balances and requires minimum expenditures, as defined in the
Indenture, for property and fixture renewals, replacements and betterments at
the Sands.
Under an order of the Bankruptcy Court, permitting the disposition of
furniture and equipment in the ordinary course of business, any payments
received by GBHC for the sale of such assets, which are part of the security for
the First Mortgage Notes, must be remitted to the Indenture Trustee for the
First Mortgage Notes (the "Indenture Trustee") as reductions to the outstanding
principal of the First Mortgage Notes. Proceeds from the sale of such assets
amounting to $4,000 and $263,000 for the six months ended June 30,2000 and the
year ended December 31, 1999, respectively, were remitted to the Indenture
Trustee.
No interest was paid or received with respect to the First Mortgage Notes
and the loan to GBHC during the six month periods ended June 30, 2000 and 1999.
Interest receivable and payable with respect to the notes of $9,373,000 are
included on the accompanying balance sheets in non-current assets and
liabilities subject to compromise, respectively, as such payments are subject to
terms of a reorganization Plan which has been confirmed and becomes effective.
12
<PAGE>
GB PROPERTY FUNDING CORP.
(Debtor-in Possession, wholly owned by GB Holdings, Inc.)
NOTES TO FINANCIAL STATEMENTS (Continued)
(Unaudited)
(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 part of the Second
Settlement Agreement, GB Property Funding was included in GBCC's consolidated
federal income tax return through the year ended December 31, 1998, and GBCC
agreed to allow the Debtors to become deconsolidated from the GBCC group after
that date. In accordance therewith, effective after December 31, 1998, PCC
transferred 21% of its stock ownership in Holdings to PBV, effecting the
deconsolidation of GB Property Funding from the GBCC group. As a result, for tax
years ending after 1998, GB Property Funding will file its federal income tax
return on a consolidated basis with Holdings and GBHC. GB Property Funding made
no federal or state income tax payments during the six month periods ended June
30, 2000 and 1999.
The Debtors are dependent upon receipt of information from HCC and GBCC as
to the operations of their affiliates and the impact of those operations on the
former HCC and GBCC consolidated tax returns.
(4) Legal Proceedings
On January 5, 1998, the Debtors filed petitions for relief under Chapter
11 of the Bankruptcy code in the Bankruptcy Court (see Note 1).
13
<PAGE>
GB HOLDINGS, INC. AND SUBSIDIARIES
(Debtors-in-Possession)
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
------------- -------------
(Unaudited) (Audited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 24,395,000 $ 20,897,000
Accounts receivable, net of allowances
of $10,428,000 and $11,413,000, respectively 8,751,000 9,864,000
Inventories 2,944,000 3,784,000
Due from affiliates 16,000 236,000
Deferred income taxes 3,478,000 3,478,000
Prepaid expenses and other current assets 2,437,000 2,266,000
------------- -------------
Total current assets 42,021,000 40,525,000
------------- -------------
Property and Equipment:
Land 54,578,000 50,777,000
Buildings and improvements 185,508,000 185,508,000
Operating equipment 111,767,000 108,260,000
Construction in progress 6,675,000 2,295,000
------------- -------------
358,528,000 346,840,000
Less - accumulated depreciation and
amortization (195,226,000) (189,805,000)
------------- -------------
Net property and equipment 163,302,000 157,035,000
------------- -------------
Other Assets:
Obligatory investments, net of allowances of
$9,442,000 and $9,122,000, respectively 8,904,000 8,386,000
Other assets 2,340,000 2,470,000
------------- -------------
Total other assets 11,244,000 10,856,000
------------- -------------
$ 216,567,000 $ 208,416,000
============= =============
</TABLE>
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated financial statements.
14
<PAGE>
GB HOLDINGS, INC. AND SUBSIDIARIES
(Debtors-in-Possession)
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDER'S DEFICIT
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
------------- -------------
(Unaudited) (Audited)
<S> <C> <C>
Current Liabilities Not Subject to Compromise:
Current maturities of long-term debt $ 82,000 $ 79,000
Accounts payable 4,963,000 4,849,000
Accrued liabilities -
Salaries and wages 4,117,000 3,458,000
Reorganization costs 2,438,000 1,843,000
Insurance 2,169,000 1,872,000
Other 6,378,000 5,879,000
Due to affiliates 956,000 1,099,000
Other current liabilities (Note 8) 5,924,000 4,322,000
------------- -------------
Total current liabilities 27,027,000 23,401,000
------------- -------------
Liabilities Subject to Compromise (Note 3) 216,581,000 217,028,000
------------- -------------
Long-Term Debt 797,000 839,000
------------- -------------
Deferred Taxes and Other Noncurrent Liabilities
(Note 8) 7,920,000 6,741,000
------------- -------------
Commitments and Contingencies
Shareholder's Deficit:
Common stock, $1.00 par value per share;
1,000 shares authorized and outstanding 1,000 1,000
Additional paid-in capital 27,946,000 27,946,000
Accumulated deficit (63,705,000) (67,540,000)
------------- -------------
Total shareholder's deficit (35,758,000) (39,593,000)
------------- -------------
$ 216,567,000 $ 208,416,000
============= =============
</TABLE>
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated financial statements.
15
<PAGE>
GB HOLDINGS, INC. AND SUBSIDIARIES
(Debtors-in-Possession)
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three Months Ended
June 30,
------------------------------
2000 1999
------------ ------------
(Unaudited) (Unaudited)
<S> <C> <C>
Revenues:
Casino $ 59,076,000 $ 60,032,000
Rooms 2,422,000 2,419,000
Food and beverage 6,740,000 6,733,000
Other 1,084,000 1,267,000
------------ ------------
69,322,000 70,451,000
Less - promotional allowances (5,717,000) (5,564,000)
------------ ------------
Net revenues 63,605,000 64,887,000
------------ ------------
Expenses:
Casino 48,850,000 49,510,000
Rooms 781,000 812,000
Food and beverage 2,200,000 2,658,000
Other 817,000 927,000
General and administrative 2,658,000 2,843,000
Depreciation and amortization 2,969,000 2,950,000
------------ ------------
Total expenses 58,275,000 59,700,000
------------ ------------
Income from operations 5,330,000 5,187,000
------------ ------------
Non-operating income (expense):
Interest income 160,000 117,000
Interest expense (contractual interest of $5,556,000
and $5,520,000, respectively, for the three months
ended June 30, 2000 and 1999) (114,000) (20,000)
Reorganization and other related costs (1,081,000) (405,000)
Gain/(loss) on disposal of assets -- 111,000
------------ ------------
Total non-operating expense, net (1,035,000) (197,000)
------------ ------------
Income before income taxes 4,295,000 4,990,000
Income tax provision (1,596,000) --
------------ ------------
Net income $ 2,699,000 $ 4,990,000
============ ============
</TABLE>
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated financial statements.
16
<PAGE>
GB HOLDINGS, INC. AND SUBSIDIARIES
(Debtors-in-Possession)
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Six Months Ended
June 30,
--------------------------------
2000 1999
------------- -------------
(Unaudited) (Unaudited)
<S> <C> <C>
Revenues:
Casino $ 113,921,000 $ 113,436,000
Rooms 4,591,000 4,438,000
Food and beverage 13,267,000 12,994,000
Other 2,164,000 2,681,000
------------- -------------
133,943,000 133,549,000
Less - promotional allowances (11,549,000) (10,735,000)
------------- -------------
Net revenues 122,394,000 122,814,000
------------- -------------
Expenses:
Casino 95,785,000 96,976,000
Rooms 1,458,000 1,577,000
Food and beverage 4,152,000 4,990,000
Other 1,626,000 1,881,000
General and administrative 5,070,000 5,526,000
Depreciation and amortization 6,058,000 5,807,000
------------- -------------
Total expenses 114,149,000 116,757,000
------------- -------------
Income from operations 8,245,000 6,057,000
------------- -------------
Non-operating income (expense):
Interest income 348,000 258,000
Interest expense (contractual interest of
$11,071,000 and $11,043,000, respectively,
for the six months ended June 30,
2000 and 1999) (187,000) (40,000)
Reorganization and other related costs (2,326,000) (934,000)
Gain on disposal of assets (10,000) 139,000
------------- -------------
Total non-operating expense, net (2,175,000) (577,000)
------------- -------------
Income before income taxes 6,070,000 5,480,000
Income tax provision (2,235,000) --
------------- -------------
Net income $ 3,835,000 $ 5,480,000
============= =============
</TABLE>
The accompanying introductory notes and notes to financial statements
are an integral part of these balance sheets.
17
<PAGE>
GB HOLDINGS, INC. AND SUBSIDIARIES
(Debtors-in-Possession)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
June 30,
------------------------------
2000 1999
------------ ------------
(Unaudited) (Unaudited)
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 3,835,000 $ 5,480,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 6,058,000 5,807,000
(Gain)/loss on disposal of assets 10,000 (139,000)
Provision for doubtful accounts 901,000 1,038,000
Decrease/(increase) in accounts receivable 212,000 (1,802,000)
Increase in accounts payable and accrued expenses 2,035,000 2,022,000
Net change in other current assets and liabilities 1,168,000 (996,000)
Net change in other noncurrent assets and liabilities 14,000 (700,000)
------------ ------------
Net cash provided by operating activities 14,233,000 10,710,000
------------ ------------
INVESTING ACTIVITIES:
Purchase of property and equipment (9,745,000) (5,196,000)
Proceeds from disposal of assets 13,000 139,000
Obligatory investments (960,000) (1,285,000)
------------ ------------
Net cash used in investing activities (10,692,000) (6,342,000)
------------ ------------
FINANCING ACTIVITIES:
Repayments of long-term debt (43,000) (179,000)
------------ ------------
Net cash used in financing activities (152,000) (179,000)
------------ ------------
Net increase in cash and cash equivalents 3,498,000 4,189,000
Cash and cash equivalents at beginning of period 20,897,000 23,844,000
------------ ------------
Cash and cash equivalents at end of period $ 24,395,000 $ 28,033,000
============ ============
</TABLE>
The accompanying introductory notes and notes to consolidated financial
statements are an integral part of these consolidated financial statements.
18
<PAGE>
GB HOLDINGS, INC. AND SUBSIDIARIES
(Debtors-in-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) Organization, Business and Basis of Presentation
GB Holdings, Inc. ("Holdings") is a Delaware corporation and was a wholly
owned subsidiary of Pratt Casino Corporation ("PCC") through December 31, 1998.
PCC, a Delaware corporation, was incorporated in September 1993 and was wholly
owned by PPI Corporation ("PPI"), a New Jersey corporation and a wholly owned
subsidiary of Greate Bay Casino Corporation ("GBCC"). Effective after December
31, 1998, PCC transferred 21% of the stock ownership in Holdings to PBV, Inc.
("PBV"), a newly formed entity controlled by certain stockholders of GBCC. As a
result of a certain confirmed plan of reorganization of PCC and others in
October 1999, the remaining 79% stock interest of PCC in Holdings was
transferred to Greate Bay Holdings, LLC, whose sole member as a result of the
same reorganization is PPI ("GBLLC"). In February 1994, Holdings acquired Greate
Bay Hotel and Casino, Inc. ("GBHC"), a New Jersey corporation, through a capital
contribution by its then parent. GBHC's principal business activity is its
ownership of the Sands Hotel and Casino in Atlantic City, New Jersey (the
"Sands"). GB Property Funding Corp. ("GB Property Funding"), a Delaware
corporation and a wholly owned subsidiary of Holdings, was incorporated in
September 1993 for the purpose of borrowing funds through the issuance of
$185,000,000 of ten-year, First Mortgage Notes for the benefit of GBHC; such
debt was issued in February 1994 at the rate of 10 7/8% per annum and the
proceeds were loaned to GBHC (see Note 2). Holdings has no operating activities
and its only significant asset is its investment in GBHC.
On January 5, 1998, GBHC, Holdings 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"). Accordingly, the
accompanying consolidated financial statements have been prepared in accordance
with Statement of Position No. 90-7, "Financial Reporting By Entities in
Reorganization under the Bankruptcy Code", and include disclosure of liabilities
subject to compromise (see Note 3).
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. Each company's
executive officers and directors as of the date of the filing also remain in
office, subject to the jurisdiction of the Bankruptcy Court, other than the
following: as required by the Settlement Agreement, as defined below, Richard
Knight resigned as a Director, President, and Chief Executive Officer of the
debtors effective July 8, 1998; John P. Belisle was elected President and Chief
Executive Officer of GBHC on July 28, 1998; and Jerome T. Smith was elected as a
Director of GBHC on August 3, 1998. On November 1, 1999, John P. Belisle
resigned as President and Chief Executive Officer of GBHC. On November 5, 1999,
Alfred J. Luciani was elected President and Chief Executive Officer of GBHC. On
November 11, 1999, Jerome T. Smith, the independent member of the Boards of
Directors of the Debtors and one of the two independent members of the Audit
Committee of Holdings, citing a newly arisen potential conflict of interest,
resigned.
Effective September 2, 1998, GBHC acquired the membership interests in
Lieber Check Cashing LLC ("Lieber"), a New Jersey limited liability company that
owns a land parcel adjacent to GBHC (the "Lieber Parcel"). GBHC also acquired
and/or caused an option agreement on other adjacent land parcels (the "Option
Parcels") to be assigned to Lieber (the "Option Agreement").
19
<PAGE>
GB HOLDINGS, INC. AND SUBSIDIARIES
(Debtors-in-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The accompanying consolidated financial statements include the accounts
and operations of Holdings, GBHC, GB Property Funding and Lieber. All
significant intercompany balances and transactions have been eliminated.
On September 20, 1999, closing took place under the Option Agreement and
Lieber, whose sole member is GBHC, obtained title to the Option Parcels. The
Lieber Parcel and the Option Parcels provide GBHC with an expansion opportunity
and frontage on Pacific Avenue, the principal street running parallel and
closest to the boardwalk in Atlantic City, New Jersey. The demolition of the
existing structures on the parcels was completed in 1999 and construction of the
new front entrance to the Sands' facility was completed in June 2000.
On January 11, 1999, the exclusivity period during which only the debtors
could file a plan of reorganization expired and, as a result, any party in
interest could file a plan of reorganization. On June 1, 1999, the Debtors filed
with the Bankruptcy Court a plan of reorganization and disclosure statement,
ultimately filing a third modified plan of reorganization (the "Plan") and third
modified disclosure statement. On October 4, 1999, the Bankruptcy Court approved
the adequacy of the disclosure statement and a confirmation hearing on the Plan
was scheduled for December 17, 1999 (the "Confirmation Hearing").
On November 3, 1999, the Debtors received notice from Merrill Lynch Asset
Management ("MLAM") that MLAM and Park Place Entertainment Corporation ("PPE")
had reached agreement on a term sheet under which PPE would sponsor a plan of
reorganization of GBHC (the "Term Sheet"). MLAM represented that it and PPE
controlled approximately 53% of the First Mortgage Notes. MLAM requested that
the Debtors agree to seek to adjourn the Confirmation Hearing, and accept a
revised Plan incorporating the provisions of the Term Sheet. The Debtors agreed
to seek the adjournment. On November 9, 1999, the Bankruptcy Court granted the
adjournment and set December 1, 1999 as a status conference for a report by the
Debtors on the status of their due diligence and evaluation of the provisions of
the Term Sheet. Following the December 1, 1999 status conference, the Bankruptcy
Court set December 22, 1999 as a final status conference for the Debtors to
report on their due diligence and evaluation of the Term Sheet. Entities
controlled by Carl Icahn ("Icahn") submitted a competing bid for a Plan of
Reorganization of the Debtors prior to the December 22, 1999 status conference.
The Bankruptcy court decided at the status conference that PPE and Icahn should
submit competing Plans of Reorganization and Supplemental Disclosure Statements
with the Debtors submitting a Master Disclosure Statement by January 18, 2000,
and that the Bankruptcy Court would conduct a hearing on February 16, 2000 to
consider the adequacy of the Disclosure Statements. Icahn filed a joint Plan
with the Official Committee of Unsecured Creditors (the "Committee") on January
18, 2000, and PPE also filed a Plan on the same date. The Bankruptcy Court
conducted a hearing on the adequacy of the Disclosure Statements on February 16,
2000. The Bankruptcy Court directed Icahn and the Committee and PPE to file
amended Plans and Supplemental Disclosure Statements with their final economic
offers to the creditors by March 6, 2000, and scheduled a further adequacy
hearing for March 23, 2000. At that hearing, the Bankruptcy Court directed Icahn
and the Committee and PPE to make certain revisions to their amended Plans and
Supplemental Disclosure Statements and file them on March 31, 2000, and
scheduled April 5, 2000 as a hearing date for the Bankruptcy Court to determine
if any further changes to the Supplemental Disclosure Statements would be
directed to be made by the Bankruptcy Court. At the hearing on April 5, 2000,
the Bankruptcy court approved the Debtors' Master Disclosure Statement, approved
the Supplemental Disclosure Statements of Icahn and the Committee and of PPE
subject to their making certain revisions, and established June 5, 2000 as the
deadline for creditors to deliver their votes for
20
<PAGE>
GB HOLDINGS, INC. AND SUBSIDIARIES
(Debtors-in-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
or against the Plans and June 19, 2000 as the beginning of the confirmation
hearing. Subsequently, the Bankruptcy Court adjourned the confirmation hearing
to June 20, 2000.The hearing was conducted on June 20-23, and 27-29, 2000. On
July 28, 2000, the Bankruptcy Court issued an Opinion deciding to confirm the
Icahn/Committee Plan of Reorganization (the "Confirmation").
A condition to the effective date of the Confirmation of the
Icahn/Committee Plan of Reorganization is the approval by the New Jersey Casino
Control Commission (the "Casino Commission"). The Casino Commission is presently
scheduled to consider approval at a hearing on September 13, 2000. There can be
no assurance at this time that the Plan will be approved by the Casino
Commission. In the event the Plan is approved, continuation of the business
thereafter is dependent on GBHC's ability to achieve successful future
operations. The accompanying consolidated financial statements do not include
any adjustments relating to the recoverability and classification of recorded
asset amounts or the amounts and classification of liabilities that might be
necessary should GBHC be unable to continue as a going concern. Although
management has not made a determination whether an impairment of the carrying
value currently exists, future adjustments to the carrying amount of GBHC's
assets may be required with respect to the fresh-start reporting which would
take place on the effective date of the confirmation of Plan.
A significant amount of the Sands' revenues are derived from patrons
living in northern New Jersey, southeastern Pennsylvania 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.
Prior to July 8, 1998, New Jersey Management, Inc. ("NJMI"), then a wholly
owned subsidiary of PCC, was responsible for the operations of the Sands under a
management agreement dated August 19, 1987, as amended, with GBHC (the
"Management Agreement"). On May 22, 1998, GBHC filed a motion with the
Bankruptcy Court to reject the Management Agreement (the "Rejection Motion").
GBCC, NJMI, and certain of their affiliates, on one side, and the Debtors, on
the other, entered into an agreement on June 27, 1998, which was approved by the
Bankruptcy Court on July 7, 1998, and by the Casino Commission on July 8, 1998
(the "Settlement Agreement"). Under the Settlement Agreement, among other
things, the Management Agreement was suspended and replaced with a services
agreement until a decision by the Bankruptcy Court on the Rejection Motion, and
GBHC ceded ownership rights to an affiliate of GBCC in, and obtained a perpetual
license from the same affiliate for, the computer software used in its
operations. On September 28, 1998, and as a result of the Second Settlement
Agreement, as defined below, the Bankruptcy Court granted the Rejection Motion
and, in conformity therewith, no further fees will be paid under either the
Management Agreement or the Settlement Agreement (see Note 5).
On July 27, 1998, GBHC filed an adversary proceeding in the Bankruptcy
Court against GBCC, certain of its affiliates, and certain of the former
directors of GBHC (collectively the "Defendants"), seeking to recover the Lieber
Parcel and the Option Agreement for the Option Parcels and to restrain the use
of its Net Operating Losses
21
<PAGE>
GB HOLDINGS, INC. AND SUBSIDIARIES
(Debtors-in-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(the "NOL's"). Effective September 2, 1998, the Debtors, on one side, and the
Defendants, on the other, reached an agreement resolving, among other things,
the adversary proceeding (the "Second Settlement Agreement"). Under the Second
Settlement Agreement, among other things, the Debtors agreed to be included in
the consolidated federal income tax return of GBCC for the years ended December
31, 1997 and 1998. GBCC agreed to allow the Debtors to become deconsolidated
from the GBCC group for federal income tax purposes and, in accordance
therewith, effective after December 31, 1998, PCC transferred 21% of the stock
ownership in Holdings to PBV, effecting the deconsolidation of the Debtors from
the GBCC group. The Second Settlement Agreement also resulted in the non-cash
settlement of certain outstanding intercompany transactions, the transfer of the
membership interests in Lieber to GBHC and the assignment of the Option
Agreement for the Option Parcels to Lieber (see Note 7).
GBHC is self insured for a portion of its general liability, certain
health care and other liability exposures. A third party insures losses over
prescribed levels. Accrued claims reserves represent estimates of such
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.
Although management has not made a determination whether an impairment of the
carrying value currently exists, future adjustments to the carrying amount of
GBHC's assets are possible with respect to the fresh-start reporting which would
take place on the effective date of the confirmation of a plan of
reorganization.
The consolidated financial statements for the six month periods ended June
30, 2000 and 1999 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, 2000, and the
results of its operations for the three and six month periods ended June 30,
2000 and 1999, and cash flows for the six month periods ended June 30, 2000 and
1999.
22
<PAGE>
GB HOLDINGS, INC. AND SUBSIDIARIES
(Debtors-in-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(2) Long-Term Debt and Pledge of Assets
Long-term debt is comprised of the following:
June 30, December 31,
2000 1999
------------- -------------
10 7/8% first mortgage, notes due 2004 (a) $ 181,976,000 $ 181,980,000
14 5/8% affiliate loan, due 2005 (b) 10,000,000 10,000,000
Lieber Mortgage (d) 482,000 513,000
Other 397,000 405,000
------------- -------------
Total 192,855,000 192,898,000
Less - current maturities (82,000) (79,000)
Less - debt subject to compromise (Note 3) (191,976,000) (191,980,000)
------------- -------------
Total long-term debt $ 797,000 $ 839,000
============= =============
----------
(a) On February 17, 1994, GBHC obtained the net proceeds from the sale by GB
Property Funding of $185,000,000 of First Mortgage Notes due January 15,
2004 (the "First Mortgage Notes"). Interest on the First Mortgage Notes
accrued at the rate of 10 7/8% per annum, payable semiannually. Interest
only was payable during the first three years. Thereafter, semiannual
principal payments of $2,500,000 were due on each interest payment date
with the balance due at maturity. Holdings acquired $2,500,000 face amount
of First Mortgage Notes at a discount in May 1997, which it used to make
its July 15, 1997 principal payment. As a result of the filing under
Chapter 11, the debt service payments due subsequent to January 5, 1998
were not made and the accrual of interest on the First Mortgage Notes for
periods subsequent to the filing has been suspended.
Subject to certain exceptions in the Security Agreement, substantially all
of Holdings' and GBHC's assets are pledged in connection with their
long-term indebtedness. GBHC filed a motion in the Bankruptcy Court,
seeking to use "Cash Collateral", as defined by 11 U.S.C. ss.363, in the
ordinary course of its business. By opinion filed April 3, 1998 (the
"Opinion"), the Bankruptcy Court granted GBHC the right to use "Cash
Collateral" subject to providing certain adequate protection in favor of
the Indenture Trustee for the First Mortgage Notes (the "Indenture
Trustee") and concluded, among other things, that the Indenture Trustee
did not have a perfected security interest in GBHC's deposit accounts or
cash generated from casino operations. An order was entered in conformity
with the Opinion on May 5, 1998. The Indenture Trustee took an appeal of
the order to the United States District Court for the District of New
Jersey. On March 19, 1999, the United States District Court for the
District of New Jersey affirmed the Bankruptcy Court's decision. The
Indenture Trustee filed an appeal with the United States Court of Appeals
for the Third Circuit, which affirmed the decision on January 31, 2000.
23
<PAGE>
GB HOLDINGS, INC. AND SUBSIDIARIES
(Debtors-in-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The Indenture for the First Mortgage Notes (the "Indenture") contains
various provisions which, among other things, restrict the ability of
certain subsidiaries of GBCC to pay dividends to GBCC, to merge, to
consolidate, to sell substantially all of their assets or to incur
additional indebtedness beyond certain limitations. In addition, the
Indenture requires the maintenance of certain cash balances and requires
minimum expenditures, as defined in the Indenture, for property and
fixture renewals, replacements and betterments at the Sands.
Under an order of the Bankruptcy Court, permitting the disposition of
furniture and equipment in the ordinary course of business, any payments
received by GBHC for the sale of such assets, which are part of the
security for the First Mortgage Notes, must be remitted to the Indenture
Trustee as reductions of the outstanding principal of the First Mortgage
Notes. Proceeds from the sale of such assets amounting to $4,000 and
$263,000, for the six months ended June 30, 2000 and the year ended
December 31, 1999, respectively, were remitted to the Indenture Trustee.
(b) On February 17, 1994, PRT Funding Corp. ("PRT"), then an affiliate, loaned
GBHC $10,000,000 under a promissory note (the "PRT Subordinated Note"),
which is subordinated to the First Mortgage Notes. The PRT Subordinated
Note is due on February 17, 2005 and bore interest at the rate of 14 5/8%
per annum, payable semiannually. Interest has been paid only through
February 17, 1996. Repayment of the PRT Subordinated Note and the payment
of the related interest are subject to any setoffs and defenses available
under the Bankruptcy Code and applicable law. The accrual of interest on
the PRT Subordinated Note for periods subsequent to the filing under
Chapter 11 has been suspended. As a result of the confirmation of a
certain plan of reorganization of PRT Funding Corp. in October 1999, the
PRT Subordinated Note was transferred to GBLLC, whose sole member is PPI.
(c) On September 2, 1998, and as part of the Second Settlement Agreement, GBHC
acquired the membership interests in Lieber (see Note 7) which owns the
Lieber Parcel. Principal mortgage indebtedness at the time of the
acquisition was $591,000 and the indebtedness bears interest at the rate
of 7% per annum. Principal and interest are paid monthly based on a
ten-year amortization schedule. The balance of the note is due in July
2001.
24
<PAGE>
GB HOLDINGS, INC. AND SUBSIDIARIES
(Debtors-in-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
As a result of the Chapter 11 filing, principal payments and accrued
interest with respect to the First Mortgage Notes and the PRT Subordinated Note
are subject to a Plan of Reorganization, which has been confirmed and becomes
effective. Pending such reorganization, the entire amount of the First Mortgage
Notes and the PRT Subordinated Note and accrued interest are included in
liabilities subject to compromise on the accompanying consolidated balance
sheets.
Scheduled payments of long-term debt as of June 30,2000, exclusive of
payments on the First Mortgage Notes and the PRT Subordinated Note, are set
forth below:
2000 (six months) $ 41,000
2001 467,000
2002 19,000
2003 21,000
2004 23,000
Thereafter 308,000
-------------
Total $ 879,000
=============
Interest paid amounted to $38,000 and $40,000, respectively, for the six
months ended June 30, 2000 and 1999. At June 30, 2000 and December 31, 1999,
accrued interest on the First Mortgage Notes in the amount of $9,373,000 is
included with liabilities subject to compromise on the accompanying consolidated
balance sheets.
(3) Liabilities Subject to Compromise
Liabilities subject to compromise under Holdings' reorganization
proceedings consist of the following:
June 30, December 31,
2000 1999
------------ ------------
Accounts payable and accrued liabilities $ 6,589,000 $ 6,811,000
First Mortgage Notes (Note 2) 181,976,000 181,980,000
PRT Subordinated Note (Note 2) 10,000,000 10,000,000
Borrowings from affiliate (Note 5) 5,000,000 5,000,000
Accrued interest (Notes 2 and 5) 12,855,000 12,855,000
Due to affiliates 161,000 382,000
------------ ------------
Total $216,581,000 $217,028,000
============ ============
25
<PAGE>
GB HOLDINGS, INC. AND SUBSIDIARIES
(Debtors-in-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(4) Income Taxes
Prior to 1997, Holdings was included in the consolidated federal income
tax return of Hollywood Casino Corporation ("HCC"). In accordance with the
Second Settlement Agreement (see Note 1), Holdings' operations were included in
GBCC's consolidated federal income tax returns for the years ended December 31,
1998 and 1997 but GBCC agreed to allow Holdings to become deconsolidated from
the GBCC group effective after December 31, 1998. In accordance therewith, PCC
transferred 21% of the stock ownership in Holdings to PBV, effecting the
deconsolidation of Holdings from the GBCC group for federal income tax purposes.
Accordingly, beginning in 1999, Holdings' provision for federal income taxes is
calculated and paid on a consolidated basis with GB Property Funding and GBHC.
Federal and state income tax provisions or benefits are based upon
estimates of the results of operations for the current period and reflect the
non-deductibility 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 three and six month periods
ended June 30, 2000. Holdings paid federal income taxes in the amount of $50,000
during the three and six months ended June 30, 1999. No state income taxes were
paid for the three and six months ended June 30, 1999.
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, 2000, Holdings and its subsidiaries have deferred tax assets
including State net operating losses and Federal credit carryforwards. The net
operating losses ("NOL's") do not expire before the year 2003 for state tax
purposes. A portion of the credit carryforwards, if not utilized, will expire in
the year 2000, and each year thereafter through 2004. The remaining credit
carryforwards do not expire until the year 2019. The availability of the NOL's
and credit carryforwards may be subject to the tax consequences of a plan of
reorganization that has been confirmed and becomes effective. In addition, as
provided in the Second Settlement Agreement GBCC may utilize NOL's of Holdings
and its subsidiaries through December 31, 1998 to federal taxable income
("Federal NOL's") of GBCC and other members of its consolidated tax group.
Representatives of HCC and GBCC originally advised Holdings in March 1999 that
Holdings should have approximately $13 million in Federal NOL's available
subsequent to December 31, 1998. Subsequent adjustments recognized by GBHC and
reported to GBCC attributable to the year ended December 31, 1997, reduced the
available Federal NOL'S. GBCC advised GBHC in February 2000 that a portion of
the Debtors' Federal NOL's were utilized in the 1998 GBCC group consolidated
federal income tax return. However, GBCC also notified GBHC in February 2000
that all of the Debtors' Federal NOL's attributable to periods prior to January
1, 1997 will be utilized to shield certain additional excess loss account
adjustments attributable to the Spin Off, which may result in available Federal
NOL's in 1999 being reduced to approximately $4.4 million. GBHC is in the
process of examining the propriety of the use of its pre-1997 NOL's. The Debtors
expect that these remaining Federal NOL's will be utilized in the 1999 federal
tax return of the Debtors. Statement of Financial Accounting Standards No. 109
("SFAS 109") requires that the tax benefit of NOL's and deferred tax assets
resulting from temporary
26
<PAGE>
GB HOLDINGS, INC. AND SUBSIDIARIES
(Debtors-in-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
differences be recorded as an asset and, to the extent that management can not
assess that the utilization of all or a portion of such NOL's and deferred tax
assets is more likely than not, requires the recording of a valuation allowance.
As a result of book and tax losses incurred in 1997 and the filing under Chapter
11 by Holdings in January 1998, management is unable to determine that
realization of Holdings' deferred tax asset is more likely than not and, thus,
has provided a valuation allowance for the entire amount at June 30, 2000.
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 its NOL's in later
tax periods. Should such a change of control occur, the amount of NOL's
available for use would most likely be substantially reduced. Future treasury
regulations, administrative rulings, or court decisions may also affect
Holdings' future utilization of its NOL's.
The Internal Revenue Service is currently examining the consolidated
federal income tax returns of HCC for the years 1993 through 1996 in which
Holdings' was included (the "Audit"). During 1998, HCC reported that it may be
required to file an amended federal tax return for calendar year 1996 and that
it may experience a material increase in income tax liability as a result of the
dividend by HCC to its shareholder of approximately 80% of the common stock of
GBCC (the "Spin Off"). However, as part of the Second Settlement Agreement, and
after use of any tax attributes available to members of the former HCC
consolidated group, HCC and GBCC agreed to pay any increased taxes due that are
attributable to the Spin Off without contribution from the Debtors.
Representatives of HCC advised GBHC that the HCC group's NOL's will first be
used to shield audit adjustments relating to the years 1993 through 1996 before
being used to offset excess loss account adjustments occurring at December 31,
1996. Representatives of GBCC and HCC also represented to the Debtors'
independent accountants in March 1999 that the results of the Audit should not
have a material adverse effect on the consolidated financial position or results
of operations of the Debtors. In March 2000, GBCC reported in its 1999 SEC Form
10-K that the allocation of tax attributes to the entities consolidated with HCC
cannot be determined until the Audit is completed. GBCC also reported that due
to the inclusion of Holdings and its subsidiaries in the consolidated returns an
as yet undetermined portion of any resulting tax liability to GBCC may be
recoverable from Holdings. Any such claim will be subject to the terms of the
Second Settlement Agreement. While this disclosure by GBCC is contrary to prior
representations made by HCC and GBCC to Holdings and its independent auditors,
such disclosure causes management to be presently unable to estimate the
ultimate impact of the Audit on the consolidated financial position or results
of operations of Holdings. The Debtors are dependent upon receipt of information
from HCC and GBCC as to the operations of their affiliates and the impact of
those operations on the former HCC and GBCC consolidated groups' Federal NOL's.
(5) Transactions with Related Parties
Prior to July 8, 1998, NJMI was responsible for the operations of the
Sands under a Management Agreement with GBHC. Under such agreement, NJMI was
entitled to receive annually (i) a basic consulting fee of 1.5% of "adjusted
gross revenues," as defined, and (ii) incentive compensation of between 5% and
7.5% of gross operating profits in excess of certain stated amounts should
annual "gross operating profits," as defined, exceed $5,000,000. On May 22,
1998, GBHC filed the Rejection Motion. The Settlement Agreement, partially
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,
27
<PAGE>
GB HOLDINGS, INC. AND SUBSIDIARIES
(Debtors-in-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
1998 and until decision on the Rejection Motion, NJMI agreed to provide certain
services to GBHC and GBHC agreed to pay a monthly fee of $165,000, which was
payable $122,000 on a monthly basis in arrears and $43,000 per month upon
confirmation of a plan of reorganization for the Debtors by the Bankruptcy
Court. On September 28, 1998, and as part of the Second Settlement Agreement,
the Bankruptcy Court approved the Rejection Motion. The current fees under the
Settlement Agreement have been paid and the deferred fees have been accrued. As
part of the Second Settlement Agreement, a rejection damages claim of NJMI was
preserved provided it was filed in the Bankruptcy Court within 30 days of the
entry of the order of the Bankruptcy Court on September 11, 1998 approving the
Second Settlement Agreement. The rejection damages claim was not filed and
expired along with the corresponding avoiding powers causes of action under the
Bankruptcy Code of GBHC, as provided in the Second Settlement Agreement.
Accordingly, other than the deferred fees, no further management fees will be
paid under either the Management Agreement or the Settlement Agreement except
that NJMI possessed a claim for pre-petition management fees, which was settled
for an unsecured claim in the amount of $75,000 and which was transferred to
GBLLC along with the claim for the deferred fees.
Amounts payable under the Settlement Agreement to NJMI, which have been
assigned to GBLLC, and included in due to affiliates on the accompanying
consolidated balance sheets at June 30,2000 and December 31, 1999, amounted to
$211,000. The $75,000 unsecured claim arising from the settlement in 1999 of the
pre-petition management fee claim under the Management Agreement is included in
liabilities subject to compromise on the accompanying consolidated balance
sheets at June 30, 2000 and December 31, 1999.
GBHC's rights to the trade name "Sands" (the "Trade Name") are derived
from a license agreement between GBCC and an unaffiliated third party. Amounts
payable by the Sands for these rights are equal to the amounts paid to the
unaffiliated third party. Such charges amounted to $72,000 and $73,000,
respectively, for the three month periods ended June 30, 2000 and 1999 and
$137,000 and $133,000, respectively, during the six month periods ended June 30,
2000 and 1999. Under the Settlement Agreement, GBCC agreed not to seek to cancel
the rights of GBHC to use the Trade Name prior to December 15, 1998, and GBHC
preserved its legal position that GBCC lacked the right to cancel the rights of
GBHC to use the Trade Name. GBCC filed a motion in the Bankruptcy Court seeking
relief from the automatic stay, pursuant to 11 U.S.C. ss.362(a), to send a
letter to the licensor, purporting to terminate the license agreement. GBHC
opposed the motion and the motion was denied by Order of the Bankruptcy Court
dated March 2, 1999. On March 10, 1999, GBCC took an appeal to the United States
District Court for the District of New Jersey. On June 10, 1999, the United
States District Court for the District of New Jersey affirmed the Bankruptcy
Court's decision. On July 13, 1999, GBCC filed an appeal with the United States
Court of Appeals for the Third Circuit. GBCC and GBHC filed a motion with the
Third Circuit on March 23, 2000, seeking an adjournment of the briefing schedule
in the appeal based on the belief that the likelihood of the confirmation of
either the Icahn/Committee or PPE Plan in the near future by the Bankruptcy
Court will eliminate the automatic stay by the effective date of a Plan, will
moot the issue raised by GBCC in the appeal and will permit GBCC to seek to
terminate the license agreement if it still chooses to do so. At the
Confirmation Hearing representatives of the Icahn/Committee Plan and the PPE
Plan each represented to the Bankruptcy Court in the presence of counsel for the
Trademark owner that agreements had been reached for the continuation of the
use of the Trade Name regardless of which plan were confirmed. In either case
the calculation of the license fee will be the same as under the present
arrangement.
28
<PAGE>
GB HOLDINGS, INC. AND SUBSIDIARIES
(Debtors-in-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
An advance from GBHC to another GBCC subsidiary in the amount of
$5,672,000 was outstanding at June 30, 2000, except that, under the Second
Settlement Agreement, GBHC agreed not to sue the entity receiving the advance
and its affiliates and reserved any rights it had to offset the advance against
the PRT Subordinated Note, and the PCC Subordinated Note, as hereafter defined
(collectively, the "Subordinated Notes"). Interest on the advance accrues at the
rate of 16.5% per annum. The advance, together with accrued interest amounting
to $6,318,000 and $5,850,000 at June 30, 2000 and December 31, 1999,
respectively, is fully reserved as collection of the receivable is uncertain.
During the third quarter of 1996, GBCC borrowed a total of $6,500,000 from
HCC, which GBCC then loaned to GBHC to enable GBHC to make its debt service
obligations and a property tax payment. According to the terms of the
corresponding note, such borrowings accrued interest at the rate of 13 3/4% per
annum payable quarterly commencing October 1, 1996. During the first quarter of
1997, GBHC borrowed an additional $1,500,000 from GBCC on similar stated terms.
As part of the Second Settlement Agreement, GBHC settled certain intercompany
obligations on a non-cash basis. This loan to GBHC from GBCC, totaling
$8,000,000 along with accrued interest totaling $1,508,000, and a deferred
federal tax asset of GBHC's, totaling $10,902,000, representing a claim against
an affiliate for the overpayment of federal income taxes under a previously
existing tax sharing agreement, were mutually released. As the deferred federal
tax asset had been previously fully reserved as required by SFAS 109, this
mutual release resulted in the recording of a capital contribution in the amount
of $9,508,000.
GBHC also borrowed $5,000,000 from another subsidiary of GBCC during
January, 1997 at the stated rate of 14 5/8% per annum payable semiannually
commencing July 15, 1997 and, as set forth in the terms of the corresponding
note, the loan is subordinated to the First Mortgage Notes and payment is
subject to certain conditions (the "PCC Subordinated Note"). Interest accrued on
the PCC Subordinated Note amounted to $728,000 at both June 30, 2000 and
December 31, 1999, and is included in liabilities subject to compromise on the
accompanying consolidated balance sheets. Repayment of the PCC Subordinated Note
and the payment of the related interest are subject to approval of the Casino
Commission and any setoffs and defenses available under the Bankruptcy Code and
applicable law and to the terms of a Plan, which requires confirmation by the
Bankruptcy Court and approval by the Casino Commission. The accrual of interest
on the PCC Subordinated Note for periods subsequent to the filing under Chapter
11 has been suspended. As a result of the confirmation of a certain plan of
reorganization of PCC in October 1999, the PCC Subordinated Note was transferred
to GBLLC.
Interest accrued on the PRT Subordinated Note (Note 2) of $2,754,000 is
included in liabilities subject to compromise on the accompanying consolidated
balance sheets at June 30, 2000 and December 31, 1999.
Effective September 2, 1998, GBHC acquired Lieber as part of the Second
Settlement Agreement and caused the Option Agreement for the Option Parcels to
be assigned to Lieber. The assignment of the Option Agreement for the Option
Parcels under the Second Settlement Agreement requires a confirmation payment of
$500,000 to be paid to a designated affiliate of GBCC upon confirmation of a
plan of reorganization. This obligation was transferred to GBLLC by GBCC and is
included in due to affiliates in the accompanying consolidated balance sheets at
June 30, 2000 and December 31, 1999.
29
<PAGE>
GB HOLDINGS, INC. AND SUBSIDIARIES
(Debtors-in-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
GBHC performed certain services for other subsidiaries of GBCC and for HCC
and its subsidiaries and invoiced those companies for the Sands' cost of
providing those services. Similarly, GBHC was charged for certain equipment and
other expenses incurred by GBCC and HCC and their respective subsidiaries that
relate to GBHC's business. Such affiliate transactions are summarized below:
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- ---------------------
2000 1999 2000 1999
-------- -------- -------- --------
Billings to affiliates $ -- $ -- $ -- $ 24,000
Charges from affiliates 140,000 274,000 279,000 587,000
(6) Legal Proceedings
On January 5, 1998, the Debtors filed petitions for relief under Chapter
11 of the Bankruptcy Code in the Bankruptcy Court (see Note 1).
On May 22, 1998, GBHC filed the Rejection Motion with the Bankruptcy
Court. The Management Agreement was suspended as a result of the Settlement
Agreement and was replaced with a service agreement until the decision on the
Rejection Motion. On September 28, 1998, and as part of the Second Settlement
Agreement, the Bankruptcy Court granted the Rejection Motion (see Note 1).
On July 27, 1998, GBHC filed an action in the Bankruptcy Court (the
"Action") against GBCC, certain affiliates of GBCC, and Jack E. Pratt, Edward T.
Pratt Jr. and William D. Pratt, former directors of GBHC (collectively, the
"Defendants"), alleging, inter alia, usurpation of corporate opportunities of
GBHC and breach of fiduciary duty with respect to GBHC in connection with the
acquisition of an option for certain land parcels and the acquisition of a land
parcel on Pacific Avenue in Atlantic City, New Jersey adjoining the Sands
(collectively, the "Parcels"), and seeking, inter alia, an order enjoining the
Defendants from transferring the Parcels to third parties and requiring the
Defendants to convey the Parcels to GBHC. The Action also sought to enjoin the
Defendants from using the NOL's of the Debtors (see Note 4). Effective September
2, 1998, the parties entered into the Second Settlement Agreement resolving,
among other things, the Action. The Second Settlement Agreement also resulted in
the dismissal of all applications in the Bankruptcy Court related to the Action.
The Debtors and the Defendants also entered into mutual and general releases
subject to certain exceptions described in the Second Settlement Agreement.
GBHC has filed tax appeals with the New Jersey Tax Court challenging the
amount of its real property assessment for calendar years 1996, 1997, 1998, 1999
and 2000. The City of Atlantic City has also appealed the amount of the
assessments for the same years.
GBHC is a party in various legal proceedings with respect to the conduct
of casino and hotel operations. Although a possible range of losses cannot 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
30
<PAGE>
GB HOLDINGS, INC. AND SUBSIDIARIES
(Debtors-in-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
consolidated financial position or results of operations of Holdings and GBHC.
The accompanying consolidated financial statements do not include any
adjustments that might result from the outcome of the uncertainties described
above.
(7) Acquisition of Lieber Check Cashing and the Agreement for the Option Parcels
Effective September 2, 1998, and as part of the Second Settlement
Agreement, (see Note 1), GBHC acquired the membership interests in Lieber from
affiliates of GBCC for $251,000. GBHC also caused Lieber to acquire the rights
under the Option Agreement for the Option Parcels from another affiliate of GBCC
for a payment of $1.3 million and a payment of $500,000 at confirmation of a
plan of reorganization. During September 1998, GBHC provided Lieber with $1
million, which Lieber paid to the owner of the Option Parcels to extend the
closing under the Option Agreement for the Option Parcels to September 30, 1999.
On April 20, 1999, GBHC filed a motion with the Bankruptcy Court seeking
approval to close on the Option Agreement for the Option Parcels (the "Closing
Motion"). In addition, on May 6, 1999, and subject to Bankruptcy Court approval,
Lieber entered into a second amendment to the Option Agreement to set the
closing date as September 20, 1999, to increase the down payment by $500,000,
and to provide for the right to seek certain state and local land use approvals
prior to the closing date without violation of the Option Agreement (the
"Amendment"). On May 10, 1999, the Bankruptcy Court granted the Closing Motion
and approved the Amendment. On May 10, 1999, $500,000 was paid to the Escrow
Agent under the Option Agreement as required by the Amendment. The purchase
price of the Option Parcels was $10 million, $2.5 million of which was paid
prior to closing and $7.5 million of which was due at closing. On September 20,
1999, closing took place under the Option Agreement and Lieber, whose sole
member is GBHC, obtained title to the Option Parcels. The demolition of the
existing structures was completed in 1999 and construction of the new front
entrance to the Sands' facility on Pacific Avenue was completed in June 2000.
(8) Acquisition of Claridge Administration Building
On April 5, 2000, GBHC entered into an agreement with the entities
controlling the Claridge Hotel and Casino, to acquire the Claridge
Administration Building. The purchase price was $3.5 million, consisting of $1.5
million in cash at closing and $2.0 million consideration tendered through the
elimination for 40 months of a $50,000 monthly license fee paid by the Claridge
to GBHC, under an agreement between the Claridge and GBHC governing the
development and operation of the "People Mover" leading from the boardwalk to
the Sands and the Claridge. The $2.0 million consideration has been recorded in
Other Current Liabilities and Other noncurrent Liabilities of the balance sheet.
31
<PAGE>
GB HOLDINGS, INC. AND SUBSIDIARIES
(Debtors-in-Possession)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
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, cannot 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
(the "Sands"). Prior to 1996, the Sands' cash flow from operations was
sufficient to meet debt service obligations and to fund a substantial portion of
annual maintenance capital expenditures. In addition, the Sands used short-term
borrowings as necessary to fund seasonal cash needs and for certain capital
projects. After 1995, however, the competitive position of the Sands became
impaired, which was due, in part, to insufficient capital expenditures
particularly compared to certain competing Atlantic City casinos. In 1996, due
to adverse weather in the first quarter, a decline in both table games and slot
hold percentages and increased industry competition resulting in higher
marketing expenditures, the Sands cash flow decreased significantly compared to
prior years. While cash flow improved in 1997, it remained significantly below
historical levels. These declines in operating cash flow at the Sands resulted
in the need for periodic financial assistance from PCC and GBCC in order for
GBHC to meet its debt service obligations. Substantial additional financial
assistance would have been required to make the January 15, 1998 principal and
interest payments due on the First Mortgage Notes.
GBHC was unable to obtain additional borrowings from affiliates or other
sources and, accordingly, on January 5, 1998, the Debtors filed petitions
seeking protection under Chapter 11 of the Bankruptcy Code. Each company
continues to operate in the ordinary course of business, as set forth in the
Bankruptcy Code. Each company's executive officers and directors as of the date
of filing remain in office, subject to the jurisdiction of the Bankruptcy Court,
other than the following: as required under the Settlement Agreement, Richard
Knight resigned as a Director, President, and Chief Executive Officer of the
Debtors effective July 8, 1998; John P. Belisle was elected President and Chief
Executive Officer of GBHC on July 28, 1998; and Jerome T. Smith was elected as a
Director of the Debtors on August 3, 1998. On November 1, 1999, John P. Belisle
resigned as President and Chief Executive Officer of GBHC. On November 5, 1999,
Alfred J. Luciani was elected President and Chief Executive Officer of GBHC. On
November 11, 1999, Jerome T. Smith, the independent member of the Boards of
Directors of the Debtors, and one of the two independent members of the Audit
Committee of Holdings, citing a newly arisen potential conflict of interest,
resigned.
On January 11, 1999, the exclusivity period during which only the Debtors
could file a plan of reorganization expired and, as a result, any party in
interest could file a plan of reorganization. On June 1, 1999, the Debtors filed
with the Bankruptcy Court a plan of reorganization and disclosure statement,
ultimately filing a third modified plan of reorganization (the "Plan") and third
modified disclosure statement. On October 4, 1999, the Bankruptcy Court approved
the adequacy of the Disclosure Statement and a confirmation hearing on the Plan
was scheduled for December 17, 1999 (the "Confirmation Hearing").
32
<PAGE>
GB HOLDINGS, INC. AND SUBSIDIARIES
(Debtors-in-Possession)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
On November 3, 1999, the Debtors received notice from Merrill Lynch Asset
Management ("MLAM") that MLAM and Park Place Entertainment Corporation ("PPE")
had reached agreement on a term sheet under which PPE would sponsor a plan of
reorganization of GBHC (the "Term Sheet"). MLAM represented that it and PPE
controlled approximately 53% of the First Mortgage Notes. MLAM requested that
the Debtors agree to seek to adjourn the Confirmation Hearing, and accept a
revised Plan incorporating the provisions of the Term Sheet. The Debtors agreed
to seek the adjournment. On November 9, 1999, the Bankruptcy Court granted the
adjournment and set December 1, 1999 as a status conference for a report by the
Debtors on the status of their due diligence and evaluation of the provisions of
the Term Sheet. Following the December 1, 1999 status conference, the Bankruptcy
Court set December 22, 1999 as a final status conference for the Debtors to
report on their due diligence and evaluation of the Term Sheet. Entities
controlled by Carl Icahn ("Icahn") submitted a competing bid for a Plan of
Reorganization of the Debtors prior to the December 22, 1999 status conference.
The Bankruptcy court decided at the status conference that PPE and Icahn should
submit competing Plans of Reorganization and Supplemental Disclosure Statements
with the Debtors submitting a Master Disclosure Statement by January 18, 2000,
and that the Bankruptcy Court would conduct a hearing on February 16, 2000 to
consider the adequacy of the Disclosure Statements. Icahn filed a joint Plan
with the Official Committee of Unsecured Creditors (the "Committee") on January
18, 2000, and PPE also filed a Plan on the same date. The Bankruptcy Court
conducted a hearing on the adequacy of the Disclosure Statements on February 16,
2000. The Bankruptcy Court directed Icahn and the Committee and PPE to file
amended Plans and Supplemental Disclosure Statements with their final economic
offers to the creditors by March 6, 2000, and scheduled a further adequacy
hearing for March 23, 2000. At that hearing, the Bankruptcy Court directed Icahn
and the Committee and PPE to make certain revisions to their amended Plans and
Supplemental Disclosure Statements and file them on June 30, 2000, and scheduled
April 5, 2000 as a hearing date for the Bankruptcy Court to determine if any
further changes to the Supplemental Disclosure Statements would be directed to
be made by the Bankruptcy Court. At the hearing on April 5, 2000, the Bankruptcy
Court approved the Debtors' Master Disclosure Statement, approved the
Supplemental Disclosure Statements of Icahn and the Committee and of PPE subject
to their making certain revisions, and established June 5, 2000 as the deadline
for creditors to deliver their votes for or against the Plans and June 19, 2000
as the beginning of the confirmation hearing. Subsequently, the Bankruptcy Court
adjourned the confirmation hearing to June 20, 2000. The hearing was conducted
on June 20-23, and 27-29, 2000. On July 28, 2000 the Bankruptcy Court issued an
Opinion deciding to confirm the Icahn/Committee Plan of Reorganization (the
"Confirmation").
A condition to the effective date of the Confirmation of the
Icahn/Committee Plan of Reorganization is the approval by the New Jersey Casino
Control Commission (the "Casino Commission"). The Casino Commission is presently
scheduled to consider approval at a hearing on September 13, 2000. There can be
no assurance at this time that the Plan will be approved by the Casino
Commission. In the event the Plan is confirmed, continuation of the business
thereafter is dependent on GBHC's ability to achieve successful future
operations. The accompanying consolidated financial statements do not include
any adjustments relating to the recoverability and classification of recorded
asset amounts or the amounts and classification of liabilities that might be
necessary should GBHC be unable to continue as a going concern. Although
management has not made a determination whether an impairment of the carrying
value currently exists, future adjustments to the carrying amount of GBHC's
assets may be required with respect to the fresh-start reporting which would
take place on the effective date of the confirmation of the Plan.
33
<PAGE>
GB HOLDINGS, INC. AND SUBSIDIARIES
(Debtors-in-Possession)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
Operating Activities
At June 30, 2000, GBHC had cash and cash equivalents of $24.4 million.
GBHC generated cash flow from operations of $14.2 million for the six months
ended June 30, 2000 compared to $10.7 million for the six months ended June
30,1999. During the first six months of 2000, GBHC utilized cash generated by
its operations to fund capital additions of $9.8 million and to make obligatory
investments of $1.3 million. At June 30, 2000 GBHC received cash in the amount
of $329,000 pertaining to redemption of bonds from the CRDA.
Financing Activities
Semiannual principal payments of $2.5 million, which became due commencing
in July 1997 with respect to the First Mortgage Notes, have been suspended as a
result of the Chapter 11 filing. Exclusive of the First Mortgage Notes and the
Subordinated Notes, which are subject to reorganization, the current portion of
long-term debt due during the remainder of 2000 is $41,000.
Under an order of the Bankruptcy Court, permitting the disposition of
furniture and equipment in the ordinary course of business, any payments
received by GBHC for the sale of such assets, which are part of the security for
the First Mortgage Notes, must be remitted to the Indenture Trustee as
reductions to the outstanding principal of the First Mortgage Notes. Proceeds
from the sale of such assets, amounting to $4,000 and $143,000 for the six
months ended June 30, 2000 and 1999, respectively, were remitted to the
Indenture Trustee.
Investing Activities
Capital expenditures for the six months ended June 30, 2000 amounted to
approximately $7.8 million, including $4.3 million for the construction of the
new front entrance to the Sands facility. Management anticipates that recurring
capital expenditures for the remainder of 2000 will be approximately $7.5
million.
In addition to the recurring capital expenditures the Sands spent $2
million for the six months ended June 30, 2000 for the acquisition of the Gold
Store and Claridge Administration Building. Management anticipates that an
additional $865,000 will be spent for the remainder of 2000 for the Gold Store
and Claridge Administration Building.
Effective September 2, 1998, and as part of the Second Settlement
Agreement, GBHC acquired the membership interests in Lieber from affiliates of
GBCC for $251,000. GBHC also caused Lieber to acquire the rights under the
Option Agreement for the Option Parcels from another affiliate of GBCC for
payment of $1.3 million and a payment of $500,000 at confirmation of a plan of
reorganization. During September 1998, GBHC provided Lieber with $1 million,
which Lieber paid to the owner of the Option Parcels to extend the closing under
the Option Agreement for the Option Parcels to September 30, 1999. On May 10,
1999, the Bankruptcy Court approved the Closing Motion filed by GBHC seeking
approval to close on the Option Agreement. On May 10, 1999, an additional
deposit of $500,000 was paid to the owner of the Option Parcels. The purchase
price of the Option Parcels was $10 million, $2.5 million of which was paid
prior to closing and $7.5 million of which was due at closing. On September 20,
1999, the closing took place under the Option Agreement and Lieber, whose sole
member is GBHC, obtained title to the
34
<PAGE>
GB HOLDINGS, INC. AND SUBSIDIARIES
(Debtors-in-Possession)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
Option Parcels one of which was subject to a lease (the "Lease") and a sub-lease
for the operation of a "Gold Store" (the "Sub-lease"). Demolition of the
existing structures was completed in 1999 and construction of the new front
entrance to the Sands' facility was completed in June 2000. GBHC obtained the
rights under the Lease on March 27, 2000 for $371,000 and on the same date
notified the operator of the Gold Store that GBHC had elected to exercise a
90-day cancellation provision of the Sub-lease and tendered to the sub-lessee a
cancellation payment of approximately $30,000. GBHC obtained a surrender of the
Sub-lease effective June 10, 2000, demolished the Gold Store, and incorporated
the land as part of its new front entrance, which opened on June 23, 2000.
GBHC also entered into an agreement with the entities controlling the
Claridge Hotel and Casino (the "Claridge"), subject to Bankruptcy Court
approval, to acquire the Claridge Administration Building ("CAB"), which is
situated between GBHC's existing main entrance and the new Pacific Avenue
entrance presently under construction. GBHC intends to demolish the CAB and
incorporate the land as part of the new front entrance. The purchase price was
$3.5 million, consisting of $1.5 million in cash at closing with the remaining
$2.0 million consideration tendered through the elimination for 40 months of a
$50,000 monthly license fee paid by the Claridge to GBHC under an agreement
between the Claridge and GBHC, governing the development and operation of the
"People Mover" leading from the Boardwalk to the Sands and Claridge (the "PM
Agreement"). GBHC and the Claridge also sought Bankruptcy Court approval of the
assumption of the PM Agreement as modified. Additionally, after the elimination
of the monthly license fee for the 40 months, the license fee will be reduced to
$20,000 a month thereafter. On April 5, 2000, the Bankruptcy Court approved the
acquisition of the CAB for the purpose described and approved the joint
assumption of the PM Agreement as modified. On April 17, 2000, the closing took
place on the CAB.
The Sands is required by the New Jersey Casino Control Act ("Casino Act")
to make certain quarterly deposits based on gross revenue with the Casino
Reinvestment Development Authority ("CRDA") in lieu of a certain investment
alternative tax. The deposits for the six months ended June 30, 2000 totaled
$1.3 million and are anticipated to be approximately $1.6 million during the
remainder of 2000. The Sands has agreed to donate certain of its future deposit
obligations to the CRDA in connection with the construction related to the
Atlantic City Boardwalk Convention Center. The projected total donation will
amount to approximately $7.0 million, which will be paid over the next 12 years
based on an estimate of certain of the Sands' future CRDA deposit obligations.
Summary
On January 5, 1998, Holdings, GB Property Funding and GBHC filed petitions
for relief under Chapter 11 of the United States Bankruptcy Code. As a result of
the Chapter 11 filing, the debt service payments due subsequent to January 5,
1998 were not made and the accrual of interest on both the First Mortgage Notes
and the Subordinated Notes for periods subsequent to the filing has been
suspended. On July 28, 2000, the Bankruptcy Court issued an Opinion deciding to
confirm the Icahn/Committee Plan of Reorganization (the "Confirmation"). A
condition to the effective date of the Confirmation of the Icahn/Committee Plan
of Reorganization is the approval by the Casino Commission. The Casino
Commission is presently scheduled to consider approval at a hearing on September
13, 2000. There can be no assurance at this time that the Plan will be approved
by the Casino Commission. In the event the Plan is approved continuation of the
business thereafter is dependent on GBHC's ability to achieve successful future
operations. Management believes that cash flows generated from operations during
2000 will be sufficient to meet its operating plan and provide for scheduled
capital expenditures.
35
<PAGE>
GB HOLDINGS, INC. AND SUBSIDIARIES
(Debtors-in-Possession)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
RESULTS OF OPERATIONS
Gaming Operations
The following sets forth certain unaudited financial and operating data
relating to the Sands' casino operations:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------------- ----------------------------------
2000 1999 2000 1999
-------------- ------------- -------------- ---------------
($000's, except for Units)
<S> <C> <C> <C> <C>
Units: (at end of quarter)
Table Games - Sands 91 100 96 100
- Atlantic City (ex. Sands) 1,228 1,271 1,235 1,273
Slot Machines - Sands 1,901 1,999 1,925 2,005
- Atlantic City 33,655 33,906 33,453 33,807
Gross Wagering (1)
Table Games - Sands $ 111,810 $ 113,688 $ 221,450 $ 216,426
- Atlantic City 1,780,550 1,803,888 3,473,531 3,391,974
Slot Machines - Sands 535,716 524,663 1,020,421 963,505
- Atlantic City 9,018,824 8,707,330 17,352,844 16,321,747
Hold Percentages (2)(3)
Table Games - Sands 14.9% 15.1% 15.1% 16.2%
- Atlantic City 16.4% 15.5% 16.0% 15.7%
Slot Machines - Sands 7.8% 8.0% 7.8% 8.0%
- Atlantic City 8.3% 8.3% 8.2% 8.2%
Revenues (2)
Table Games - Sands $ 16,666 $ 17,110 $ 33,325 $ 35,069
- Atlantic City 292,695 279,109 554,256 531,289
Slot Machines - Sands 41,640 42,108 79,030 76,858
- Atlantic City 746,066 722,043 1,425,465 1,345,135
Other (4) - Sands 770 814 1,566 1,509
- Atlantic City N/A N/A N/A N/A
</TABLE>
----------
(1) Gross wagering consists of the total value of coins wagered in slot
machines (the "handle") and the total value of chips purchased for table
games (the "drop") excluding poker.
(2) 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".
(3) The Sands' hold percentages are reflected on an accrual basis. Comparable
data for the Atlantic City gaming industry is not available; industry
percentages have been calculated based on information made available by
the Casino Commission and are possibly higher than if computed on the
accrual basis.
(4) Consists of revenues from poker and simulcast horse racing wagering.
36
<PAGE>
GB HOLDINGS, INC. AND SUBSIDIARIES
(Debtors-in-Possession)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
Patron Gaming Volume
Table game drop decreased by $1.9 million (1.7%), during the three month
period ended June 30, 2000 compared with the same period of 1999. However, table
game drop increased by $5.0 million (2.3%) during the six month period ended
June 30, 2000 compared with the same period of 1999. By comparison, according to
Casino Commission reports, table game drop at all other Atlantic City casinos
during the same periods reflected a decrease of 1.3% and increase of 2.4%,
respectively. As a result, the Sands table game market share (expressed as a
percentage of the Atlantic City gaming industry [the "industry"] aggregate table
game drop) remained unchanged at 5.9% and 6.0% for the three and six months
ended June 30, 2000 as compared to the same time periods in 1999. The Sands
table game drop increase for the six months ended June 30, 2000 is attributable
to an increased volume of play from patrons whose wagering is tracked and whose
level of play generally entitles them to a varying level of rewards, including
cash and/or complimentary rooms, food, beverage, entertainment and gifts ("rated
players").The Sands table game drop decrease for the three months ended June 30,
2000 is attributable to the "unrated players" segment. The number of table games
did not change significantly at the Sands. Aggregate gaming space at all other
Atlantic City casinos decreased by approximately 41,300 square feet at June 30,
2000 compared to 1999 due to the closure of a portion of a competing facility.
The amount of gaming space at the Sands remained virtually unchanged between
periods.
Slot machine handle increased $11.1 million (2.1%) and $56.9 million
(5.9%), respectively, during the three and six month periods ended June 30, 2000
compared with the same periods of 1999. By comparison, the percentage increase
in slot machine handle for all other Atlantic City casinos during the three and
six months ended June 30, 2000 was 3.6% and 6.3% compared with the same period
in 1999. As a result, the Sands' market share of slot machine handle as a
percentage of total industry slot handle remained virtually unchanged at 5.6%
for the six months ended June 30, 2000 and 1999. The Sands' market share of slot
machine handle as a percentage of total industry slot handle decreased slightly
for the three months ended June 30, 2000 compared to 1999 from 5.7% to 5.6%. The
increased Sands slot handle during 2000 is primarily attributable to an
increased volume of play from both rated and unrated players. The amount of
available gaming space did not change at the Sands from the second quarter of
1999 to the second quarter of 2000, but the number of slot machines decreased
slightly. On an industry-wide basis, the number of slot machines decreased
slightly in 2000 compared to 1999 due to the closure of a portion of a competing
casino. During the last half of 1998 and in 1999, approximately 700 older or
less popular slot machines were replaced with new and more popular machines as
part of the Sands capital expenditure program approved by the Bankruptcy Court
in March 1998.
37
<PAGE>
GB HOLDINGS, INC. AND SUBSIDIARIES
(Debtors-in-Possession)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
The following table sets forth the changes in operating revenues and
expenses (unaudited) for the three and six month periods ended June 30, 2000 and
1999:
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
----------------------------------------------- ---------------------------------------------
$ % $ %
2000 1999 Variance Change 2000 1999 Variance Change
---------- ---------- -------- ------ --------- --------- -------- ------
($000's)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Casino $ 59,076 $ 60,032 $ (956) (1.6) $ 113,921 $ 113,436 $ 485 0.4
Rooms 2,422 2,419 3 0.1 4,591 4,438 153 3.4
Food and Beverage 6,740 6,733 7 0.1 13,267 12,994 273 2.1
Other 1,084 1,267 (183) (14.4) 2,164 2,681 (517) (19.3)
Promotional Allowances 5,717 5,564 153 2.7 11,549 10,735 814 7.6
Costs and Expenses:
Casino 48,850 49,510 (660) (1.3) 95,785 96,976 (1,191) (1.2)
Rooms 781 812 (31) (3.8) 1,458 1,577 (119) (7.5)
Food and Beverage 2,200 2,658 (458) (17.2) 4,152 4,990 (838) (16.8)
Other 817 927 (110) (11.9) 1,626 1,881 (255) (13.6)
General and Administrative 2,658 2,843 (185) (6.5) 5,070 5,526 (456) (8.3)
Depreciation and Amortization 2,969 2,950 19 0.6 6,058 5,807 251 4.3
Income from Operations 5,330 5,187 143 2.8 8,245 6,057 2,188 36.1
Non-operating items, net 1,035 197 838 425.4 2,175 577 1,598 276.9
Income Tax Provision 1,596 -- 1,596 N/A 2,235 -- 2,235 N/A
</TABLE>
Revenues
Casino revenues decreased $956,000 due to decreased table and slot hold
percentages for the three months ended June 30, 2000 compared with the same
period in 1999. Casino revenues increased slightly for the six months ended June
30, 2000 compared to the same period in 1999 due to increased table drop and
slot handle, however the table drop and slot handle increases were offset by
decreased table and slot hold percentages
Rooms revenue increased $153,000 as a result of higher occupancy partially
offset by a decrease in the average daily room rate (ADR) for the six months
ended June 30, 2000 compared to the same period in 1999. Rooms revenue did not
change significantly during the three months ended June 30, 2000 compared to the
same period in 1999.
38
<PAGE>
GB HOLDINGS, INC. AND SUBSIDIARIES
(Debtors-in-Possession)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
Food and beverage revenues increased $273,000 for the six month period
ended June 30,2000 compared to 1999 due to an increase in revenue per cover
("average check"). Food and Beverage revenue did not change significantly during
the three month period ended June 30, 2000 compared to 1999.
Other revenues decreased $183,000 and $517,000 for the three and six month
periods ended June 30, 2000 compared with the same periods in 1999 as a result
of a decrease in the number of theatre entertainment offerings.
Promotional Allowances
Promotional allowances represent the estimated retail 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, these
allowances increased to 55.8% during the three month period ended June 30, 2000
from 53.4% during the same period of 1999. Such allowances increased to 57.7%
from 53.4% during the six month period ended June 30, 2000 as compared to the
same period of 1999. The increase is primarily attributable to additions to and
changes in marketing programs and other promotional activities that resulted in
the increased gaming volume from rated players and is offset by reductions in
casino expenses for marketing programs.
Departmental Expenses
Casino expenses decreased at the Sands during the three and six month
periods ended June 30, 2000 compared with the same periods in 1999 as a result
of management's ongoing efforts to create operating efficiencies in casino
marketing.
Rooms expense decreased during the three and six month periods ended June
30, 2000 compared with the same periods in 1999 in part from an increase in the
allocation of rooms expense to casino expense due to a higher percentage of
rooms being utilized on a complimentary bases. Also, rooms expense decreased due
to a decrease in operating costs being partially offset by an increase in
payroll and benefits
Food and beverage expense decreased during the three and six month periods
ended June 30, 2000 compared with the same periods in 1999. These decreases are
due to an increase in the allocation of food and beverage expense to casino
expense due to a higher percentage of food and beverage being provided on a
complimentary basis to rated players.
Other expenses decreased during the three and six month periods ended June
30, 2000 compared with the same periods in 1999 as a result of decreased costs
associated with theatre entertainment and payroll and benefits savings. Those
decreases were partially offset by a lower allocation of other expenses to
casino expense.
General and Administrative Expenses
General and administrative expenses decreased during the three and six
month periods ended June 30, 2000 compared with the same periods in 1999. The
decreases for the three and six months ended were due to higher than normal
repairs and maintenance costs in 1999 and reduced insurance and utility costs in
2000.
39
<PAGE>
GB HOLDINGS, INC. AND SUBSIDIARIES
(Debtors-in-Possession)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
Depreciation and Amortization
Depreciation and amortization expense increased as a result of capital
additions including the rooms renovations and 700 new slot machines which were
on line for the entire six months in 2000 vs. 1999.
Interest Income and Expense
Interest income increased during the three and six month periods June 30,
2000 compared to the same period in 1999. The increases were due to payments
received on obligatory investments that were previously reserved. Interest
earned on cash balances accumulated as a result of the Chapter 11 filing (i.e.,
from not making debt service payments) is recorded as a reduction of
reorganization costs.
Interest expense increased during the three and six month periods ended
June 30, 2000 compared to the same period in 1999. The increases were due
primarily to the recognition of interest expense on the future CRDA donation
liability. As a result of the Chapter 11 filing, the accrual of interest expense
on the First Mortgage Notes, the Subordinated Notes and other affiliate advances
for periods subsequent to the filing has been suspended.
Income Tax Provision
Prior to 1997, Holdings was included in the consolidated federal income
tax return of HCC, the parent company of GBCC until HCC distributed the GBCC
stock it owned to its shareholders as a dividend on December 31, 1996. As part
of the Second Settlement Agreement (see Note 1), Holdings' operations were
included in GBCC's consolidated federal income tax return for the years ended
December 31, 1997 and 1998. Effective after December 31, 1998, PCC transferred
21% of the stock ownership in Holdings to PBV, effecting the deconsolidation of
Holdings from the GBCC group for federal income tax purposes. Accordingly,
beginning in 1999, Holdings and its subsidiaries' provisions for federal income
taxes will be calculated and paid on a consolidated basis.
At June 30, 2000, GBHC has deferred tax assets including state net
operating losses and Federal credit carryforwards. The net operating losses
("NOL's") do not expire before the year 2003 for state tax purposes. A portion
of the credit carryforwards, if not utilized, will expire in the year 2000, and
each year thereafter through 2004. The remaining credit carryforwards do not
expire until the year 2019. The availability of the NOL's and credit
carryforwards will be subject to the tax consequences of the plan of
reorganization that has been confirmed and becomes effective. In addition, as
provided in the Second Settlement Agreement GBCC may utilize NOL's of GBHC
through December 31, 1998 to offset federal taxable income ("Federal NOL's") of
GBCC and other members of the consolidated tax group. Representatives of HCC and
GBCC originally advised GBHC in March 1999 that GBHC should have approximately
$13 million in Federal NOL's available subsequent to December 31, 1998.
Subsequent adjustments recognized by GBHC and reported to GBCC attributable to
the year ended December 31, 1997 reduced the available Federal NOL's. GBCC
advised GBHC in February 2000 that a portion of the Debtors' Federal NOL's were
utilized in the 1998 GBCC group consolidated federal income tax return. However,
GBCC also notified GBHC in February 2000 that all of the Debtors' Federal NOL's
attributable to periods prior to January 1, 1997 will be utilized to shield
certain additional excess loss account adjustments attributable to the Spin Off,
which may result
40
<PAGE>
GB HOLDINGS, INC. AND SUBSIDIARIES
(Debtors-in-Possession)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (Continued)
in available Federal NOL's in 1999 being reduced to approximately $4.4 million.
GBHC is in the process of examining the propriety of the use of its pre-1997
NOL's. GBHC expects that these remaining Federal NOL's will be utilized in the
1999 federal tax return. Statement of Financial Accounting Standards No. 109
("SFAS 109") requires that the tax benefit of NOL's and deferred tax assets
resulting from temporary differences be recorded as an asset and, to the extent
that management can not assess that the utilization of all or a portion of such
NOL's and deferred tax assets is more likely than not, requires the recording of
a valuation allowance. As a result of book and tax losses incurred in 1997 and
the filing under Chapter 11 by GBHC in January 1998, management is unable to
determine that realization of GBHC's deferred tax asset is more likely than not
and, thus, has provided a valuation allowance for the entire amount at June 30,
2000. The Debtors are dependent upon receipt of information from HCC and GBCC as
to the operations of their affiliates and the impact of those operations on the
former HCC and GBCC consolidated groups' Federal NOL's.
As part of the Second Settlement Agreement, GBHC settled certain
intercompany obligations on a non-cash basis. A loan to GBHC from GBCC, totaling
$8,000,000 along with accrued interest totaling $1,508,000, and a deferred
federal tax asset of GBHC's, totaling $10,902,000, representing a claim against
an affiliate for the overpayment of federal income taxes under a previously
existing tax sharing agreement, were mutually released. As the deferred federal
tax asset had been previously fully reserved as required by SFAS 109, this
mutual release resulted in the recording of a capital contribution in the amount
of $9,508,000.
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. As noted previously, interest income on cash
accumulated during the reorganization is reflected as a reduction to
reorganization and other related costs.
Inflation
Management believes that in the near term, modest inflation, together with
increasing competition within the gaming industry for qualified and experienced
personnel, will continue to cause increases in operating expenses, particularly
labor and employee benefits costs.
Seasonality
Historically, the Sands' operations have been highly seasonal in nature,
with the peak activity occurring from May to September. Consequently, the
results of 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 casino revenues
and profitability.
41
<PAGE>
PART II: OTHER INFORMATION
Item 1. Legal Proceedings
On January 5, 1998, Holdings, GB Property Funding, and GBHC (collectively,
the "Debtors") filed petitions for relief under Chapter 11 of the Bankruptcy
Code in the Bankruptcy Court. The prior Boards of Directors resigned on January
2, 1998 and new Boards of Directors were elected at that time. Each company
continues to operate in the ordinary course of business, as set forth in the
Bankruptcy Code, and each company's executive officers and directors as of the
date of the filing remain in office, subject to the jurisdiction of the
Bankruptcy Court, other than the following: as required under the Settlement
Agreement, Richard Knight resigned as a Director, President, and Chief Executive
Officer of the Debtors effective July 8, 1998; John P. Belisle was elected
President and Chief Executive Officer of GBHC on July 28, 1998; and Jerome T.
Smith was elected as a Director of the Debtors on August 3, 1998. On November 1,
1999, John P. Belisle resigned as President and Chief Executive Officer of GBHC.
On November 11, 1999, Jerome T. Smith, the independent member of the Boards of
Directors of the Debtors, and one of the two independent members of the Audit
Committee of Holdings, citing a newly arisen potential conflict of interest,
resigned. On November 5, 1999, Alfred J. Luciani was elected President and Chief
Executive Officer of GBHC.
On January 11, 1999, the exclusivity period during which only the Debtors
could file a plan of reorganization expired and, as a result, any party in
interest could file a plan of reorganization. On June 1, 1999, the Debtors filed
with the Bankruptcy Court a plan of reorganization and disclosure statement,
ultimately filing a third modified plan of reorganization and third modified
disclosure statement. On October 4, 1999, the Bankruptcy Court approved the
adequacy of the third modified disclosure statement and a confirmation hearing
on the Plan was scheduled for December 17, 1999(the "Confirmation Hearing").
On November 3, 1999, the Debtors received notice from Merrill Lynch Asset
Management ("MLAM") that MLAM and Park Place Entertainment Corporation ("PPE")
had reached an agreement on a term sheet under which PPE would sponsor a plan of
reorganization of GBHC (the "Term Sheet"). MLAM requested that the Debtors agree
to seek to adjourn the Confirmation Hearing. The Debtors agreed to seek the
adjournment. On November 9, 1999, the Bankruptcy Court granted the adjournment
and set December 1, 1999 as a status conference for a report by the Debtors on
the status of their due diligence and evaluation of the provisions of the Term
Sheet. Following the December 1, 1999 status conference , the Bankruptcy Court
set December 22, 1999 as a final status conference for the Debtors to report on
their due diligence and evaluation of the Term Sheet. Entities controlled by
Carl Icahn ("Icahn") submitted a competing bid for a Plan of Reorganization of
the Debtors prior to the December 22, 1999 status conference. The Bankruptcy
Court decided that PPE and Icahn should submit competing Plans of Reorganization
and Supplemental Disclosure Statements with the Debtors submitting a Master
Disclosure Statement by January 18, 2000 and that the Bankruptcy Court would
conduct a hearing on February 16, 2000 to consider the adequacy of the
Disclosure Statements. Ichan filed a joint plan with the Official Committee of
Unsecured Creditors (the "Committee") on January 18, 2000 and PPE also filed a
plan on the same date. The Bankruptcy Court conducted a hearing on the adequacy
of the Disclosure Statements on February 16, 2000. The Bankruptcy Court directed
Icahn and the Committee and PPE to file amended Plans and Supplemental
Disclosure Statements with their final economic offers to the creditors by March
6, 2000, and scheduled a further adequacy hearing for March 23, 2000. At that
hearing, the Bankruptcy Court directed Icahn and the Committee and PPE to make
certain revisions to their amended Plans and Supplemental Disclosure Statements
and file them by March 31, 2000, and scheduled April 5, 2000 as a hearing date
for the Bankruptcy Court to determine if any further changes to the Supplemental
Disclosure Statements would be directed to be made by the Bankruptcy Court. At
the hearing on April 5, 2000, the Bankruptcy Court approved the Debtors' Master
Disclosure Statement, approved the Supplemental Disclosure Statements of Icahn
and the Committee and of PPE subject to their making certain revisions, and
established June 5, 2000 as the deadline for creditors to deliver their votes
for or against the Plans and June 19, 2000 as the beginning of the confirmation
42
<PAGE>
hearing. Subsequently, the Bankruptcy Court adjourned the confirmation hearing
to June 20, 2000. The hearing was conducted on June 20-23, and 27-29, 2000. On
July 28, 2000 the Bankruptcy Court issued an Opinion deciding to confirm the
Icahn/Committee Plan of Reorganization (the "Confirmation").
Item 3. Defaults Upon Senior Securities
As a result of the filings discussed in Item 1. above, $182,500,000
principal amount of First Mortgage Notes issued by GB Property Funding are in
default. The debt service payments due subsequent to January 5, 1998 were not
made. Under an order of the Bankruptcy Court, permitting the disposition of
furniture and equipment in the ordinary course of business, any payments
received by GBHC for the sale of such assets, which are part of the security for
the First Mortgage Notes, must be remitted to the Indenture Trustee as
reductions to the outstanding principal of the First Mortgage Notes. Through
August 11, 2000, $524,000 has been remitted to the Indenture Trustee as the
proceeds on the sale of furniture and equipment. The accrual of interest on the
First Mortgage Notes for periods subsequent to the filings has been suspended;
such interest on a contractual basis amounts to $61,171,000 as of August 11,
2000.
Item 6.(a) - Exhibits
Item 6.(b) - Reports on Form 8-K
The Registrants did not file any reports on Form 8-K for the quarter ended
June 30, 2000.
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 14, 2000 By: /s/ Timothy A. Ebling
-------------------------- ------------------------------
Timothy A. Ebling
Executive Vice President, Chief
Financial Officer and Principal
Accounting Officer
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